The Director Compensation Project: Cardinal Health

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence .  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Cardinal Health’s (NYSE:CAH) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Total ($)
Colleen F. Arnold	199,164
Glenn A. Britt	288,557
Carrie S. Cox	164,706
Calvin Darden	199,486
Bruce L. Downey	290,344
John F. Finn	267,347
Philip L. Francis**	26,723
Gregory B. Kenny	221,986
J. Michael Losh**	20,505
John B. McCoy*	288,263
James J. Mongan	154,023
Richard C. Notebaert	224,606
Michael D. O’Halleran**	14,473
David W. Raisbeck	209,081
Jean G. Spaulding	197,986

* Mr. McCoy retired from the Board on July 1, 2009.

** Messrs. Francis, Losh and O’Halleran resigned from the Board on August 31, 2009, and joined the CareFusion Board of Directors (after the spin-off of CareFusion).

Director Compensation.  During fiscal year 2010, Cardinal Health held four regular meetings and four special meetings.  Each director attended 75% or more of the meetings of the Board and Board Committees on which he or she served.  All members of the Board  attended the 2009 annual meeting.  Beginning July 1, 2010, the Compensation Committee engaged Pay Governance LLC to provide executive compensation consulting services.

Director Tenure.  The Cardinal Health Board of Directors currently consists of twelve members, five of whom joined the board during fiscal year 2010.  Mr. Finn, on the board since 1994, is currently the longest-serving director.  He also serves on the boards of J.P. Morgan Funds and Greif, Inc.  All but four directors also sit on other boards.  Mr. Britt is Chair, President and CEO of Time Warner Cable, Inc. and sits on its board; he is also on the board of Xerox Corporation.  Mr. Darden is on the boards of Target and Coca-Cola.  Cardinal Health appoints an independent director to serve as a “presiding director,” and Mr. Notebaert served in that role until his brother became an executive for a customer.  Mr. Finn has been the Presiding Director since September 1, 2009.

CEO Compensation. Following the August 31, 2009 spin-off, Cardinal Health acquired a new management team and four new non-management board members.  In this transitional period, the Compensation Committee agreed with the recommendation of management that Cardinal Health’s executive officers receive no annual merit salary increases for fiscal year 2010.  R. Kelly Clark retired as Chair and Chief Executive Officer following the spin-off, and Mr. George Barrett took over.  Cardinal Health revised its comparator group for executive compensation following the spin-off, and the CEO received total direct compensation in the amount of $9,960,000, a decrease of 28% from fiscal year 2009.  The Chief Financial Officer, Mr. Jeffrey Henderson, received $3,640,000, a 13% decrease from fiscal year 2009. In fiscal years 2008 and 2009, the Compensation Committee established three-year performance cycles for fiscal years 2008 to 2010 and fiscal years 2009 to 2011, respectively, under a long-term incentive cash program.  Although awards were canceled in August 2009, and the Committee did not expect the company to meet minimum performance goals for the 2009-2011 period, the Committee nevertheless approved payments of $121,874 and $105,000 to Messrs. Barrett and Henderson, with other named executives also receiving payments.