UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.)

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One H&R Block Way

Kansas City, Missouri 64105

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 30, 2010

 

 

The annual meeting of shareholders of H&R Block, Inc., a Missouri corporation (the “Company”), will be held at the Copaken Stage of the Kansas City Repertory Theatre in the H&R Block Center located at One H&R Block Way (corner of 13th Street and Walnut), Kansas City, Missouri, on Thursday, September 30, 2010, at 9:00 a.m. central time. Shareholders attending the meeting are asked to park in the H&R Block Center parking garage located beneath the H&R Block Center (enter the parking garage from Walnut or Main Street). The meeting will be held for the following purposes:

 

 

 

 

 

 

 

 

 

 

The foregoing items of business are more fully described in the proxy statement accompanying this notice. The Board of Directors has fixed the close of business on July 27, 2010 as the record date for determining shareholders of the Company entitled to notice of and to vote at the meeting.

 

WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, WE URGE YOU TO VOTE YOUR SHARES VIA THE TOLL-FREE TELEPHONE NUMBER OR OVER THE INTERNET, AS PROVIDED IN THE ENCLOSED MATERIALS. IF YOU REQUESTED A PROXY CARD BY MAIL, YOU MAY SIGN, DATE AND MAIL THE PROXY CARD IN THE ENVELOPE PROVIDED.

 

By Order of the Board of Directors
ANDREW J. SOMORA
Secretary

 

Kansas City, Missouri

August 13, 2010

 

H&R BLOCK, INC.

PROXY STATEMENT

FOR THE 2010 ANNUAL MEETING OF SHAREHOLDERS

 

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING –

 

The Board of Directors (the “Board of Directors” or “Board”) of H&R Block, Inc., a Missouri corporation (“H&R Block” or the “Company”) solicits the enclosed proxy for use at the annual meeting of shareholders of the Company to be held at 9:00 a.m. central time, on Thursday, September 30, 2010, at the Copaken Stage of the Kansas City Repertory Theatre in the H&R Block Center located at One H&R Block Way (corner of 13th Street and Walnut), Kansas City, Missouri. This proxy statement contains information about the matters to be voted on at the meeting and the voting process, as well as information about our directors and executive officers.

 

WHY DID I RECEIVE A NOTICE IN THE MAIL REGARDING THE INTERNET AVAILABILITY OF PROXY MATERIALS INSTEAD OF A FULL SET OF PRINTED PROXY MATERIALS?

 

Pursuant to rules adopted by the Securities and Exchange Commission (“SEC”) in 2007, the Company is making this Proxy Statement and its 2010 Annual Report available to shareholders electronically via the Internet. On or before August 20, 2010, we mailed to our shareholders of record the “Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on September 30, 2010” (the “Notice”). All shareholders will be able to access this Proxy Statement and our 2010 Annual Report on the website referred to in the Notice or request to receive printed copies of the proxy materials. Instructions on how to access the proxy materials on the Internet or to request a printed copy may be found in the Notice.

 

HOW CAN I ELECTRONICALLY ACCESS THE PROXY MATERIALS?

 

The Notice will provide you with instructions on how to view our proxy materials for the annual meeting on the Internet. The website on which you will be able to view our proxy materials will also allow you to choose to receive future proxy materials electronically by email, which will save us the cost of printing and mailing documents to you. If you choose to receive future proxy statements by email, you will receive an email next year with instructions containing a link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it.

 

HOW CAN I OBTAIN A FULL SET OF PRINTED PROXY MATERIALS?

 

The Notice will provide you with instructions on how to request to receive printed copies of the proxy materials. You may request printed copies up until one year after the date of the meeting.

 

WHAT AM I VOTING ON?

 

You are voting on ten items of business at the annual meeting:

 

 

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WHO IS ENTITLED TO VOTE?

 

Shareholders of record as of the close of business on July 27, 2010 are entitled to vote at the annual meeting. Each share of H&R Block Common Stock is entitled to one vote.

 

WHAT ARE THE VOTING RECOMMENDATIONS OF THE BOARD OF DIRECTORS?

 

Our Board of Directors recommends that you vote your shares “FOR” the proposed slate of directors named in this proxy standing for election to the Board, “FOR” the advisory proposal on executive pay-for-performance compensation policies and procedures, “FOR” the amendment to the 2003 Long-Term Executive Compensation Plan, “FOR” the approval of the material terms of the performance goals under the Executive Performance Plan, “FOR” the shareholder proposal, “FOR” the amendments to the Company’s Amended and Restated Articles of Incorporation, and “FOR” the ratification of Deloitte & Touche LLP as our independent accountants.

 

WHAT IS THE DIFFERENCE BETWEEN HOLDING SHARES AS A SHAREHOLDER OF RECORD AND AS A BENEFICIAL OWNER?

 

If your shares are registered directly in your name with the Company’s transfer agent, Wells Fargo Shareowner Services (known as a “registered shareholder”), you are considered, with respect to those shares, the “shareholder of record”, and the Notice was sent to you directly by the Company. If you are a shareholder of record, you may vote in person at the annual meeting.

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of shares held in street name, and that organization forwarded the Notice to you. As the beneficial owner, you have the right to direct your broker, bank or nominee holding your shares how to vote and are also invited to attend the annual meeting. However, since you are not a shareholder of record, you may not vote these shares in person at the annual meeting unless you bring with you a legal proxy from the shareholder of record.

 

HOW DO I VOTE?

 

If you are a registered shareholder, there are four ways to vote:

 

 

Your shares will be voted as you indicate. If you do not indicate your voting preferences, the appointed proxies (Richard C. Breeden, David Baker Lewis and L. Edward Shaw, Jr.) will vote your shares FOR items 1 through 10. If your shares are owned in joint names, all joint owners must vote by the same method and if joint owners vote by mail, all of the joint owners must sign the proxy card.

 

If your shares are held in a brokerage account in your broker’s name (this is called street name), you may also vote as set forth above, and your broker or nominee should vote your shares as you have directed. Again, you must have a legal proxy from the shareholder of record in order to vote the shares in person at the annual meeting.

 

If your shares are held through the H&R Block Retirement Savings Plan, you may also vote as set forth above, except that Plan participants may not vote their Plan shares in person at the Annual Meeting. If you provide voting instructions by Internet, telephone or written proxy card, Fidelity Management Trust Company, the Plan’s Trustee, should vote your shares as you have directed. If you do not provide specific voting instructions, the Trustee will vote your shares in the same proportion as shares for which the Trustee has received instructions. Please note that you must submit voting instructions to the Trustee by no later than September 27, 2010 at 11:59 p.m. Eastern time in order for your shares to be voted by the Trustee at the Annual Meeting.

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MAY I ATTEND THE MEETING?

 

All shareholders, properly appointed proxy holders, and invited guests of the Company may attend the annual meeting. Shareholders who plan to attend the meeting must present a valid photo identification. If you hold your shares in street name, please also bring proof of your share ownership, such as a broker’s statement showing that you owned shares of the Company on the record date of July 27, 2010, or a legal proxy from your broker or nominee (a legal proxy is required if you hold your shares in street name and you plan to vote in person at the annual meeting). Shareholders of record will be verified against an official list available at the registration area. The Company reserves the right to deny admittance to anyone who cannot adequately show proof of share ownership as of the record date.

 

WHAT ARE BROKER NON-VOTES AND HOW ARE THEY COUNTED?

 

Broker non-votes occur when nominees, such as brokers and banks holding shares on behalf of the beneficial owners, are prohibited from exercising discretionary voting authority for beneficial owners who have not provided voting instructions at least ten days before the annual meeting date. If no instructions are given within that time frame, the nominees may vote those shares on matters deemed “routine” by the New York Stock Exchange. On non-routine matters, nominees cannot vote without instructions from the beneficial owner, resulting in so-called “broker non-votes.” Broker non-votes are not counted for the purposes of determining the number of shares present in person or represented by proxy on a voting matter.

 

MAY I CHANGE MY VOTE?

 

You may revoke your proxy and change your vote at any time before the final vote at the annual meeting. You may vote again on a later date on the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the annual meeting will be counted), or by signing and returning a new proxy card or voting instruction form with a later date, or by attending the annual meeting and voting in person. However, your attendance at the annual meeting will not automatically revoke your proxy unless you vote again at the annual meeting or specifically request in writing that your prior proxy be revoked.

 

WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?

 

For all matters to be voted upon at the annual meeting, shareholders may vote “for,” “against,” or “abstain” on such matters.

 

For Items 1, 2, 3, 4, 5 and 10 on the form of proxy, the affirmative vote of a majority of shares present in person or represented by proxy, and entitled to vote on the matter, is necessary for election or approval. Shares represented by a proxy that directs that the shares abstain from voting or that a vote be withheld on a matter are deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the proposal.

 

For Items 6-9 on the form of proxy (amendments to the Company’s Amended and Restated Articles of Incorporation), the affirmative vote of a majority of the outstanding shares entitled to vote at the annual meeting of shareholders is necessary for approval. Shares represented by a proxy that directs that the shares abstain from voting or that a vote be withheld on a matter are deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the proposal. Shares not voted are not deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the proposal.

 

DO SHAREHOLDERS HAVE CUMULATIVE VOTING RIGHTS WITH RESPECT TO THE ELECTION OF DIRECTORS?

 

No. Shareholders do not have cumulative voting rights with respect to the election of directors.

 

WHAT CONSTITUTES A QUORUM?

 

As of the record date, 313,298,569 shares of the Company’s Common Stock were issued and outstanding. A majority of the outstanding shares entitled to vote at the annual meeting, represented in person or by proxy, will constitute a quorum. Shares represented by a proxy that directs that the shares abstain from voting or that a vote be withheld on a matter will be included at the annual meeting for quorum purposes. Shares represented by proxy as to which no voting instructions are given will also be included at the annual meeting for quorum purposes.

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WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE “IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON SEPTEMBER 30, 2010”?

 

It means your shares are held in more than one account. You should vote all your proxy shares.

 

HOW MUCH DID THIS PROXY SOLICITATION COST?

 

The Company has retained Mellon Investor Services LLC to assist in the solicitation of proxies on behalf of the Board of Directors for a fee of $8,500 plus reimbursement of reasonable expenses. Further, brokers and other custodians, nominees and fiduciaries will be requested to forward the Notice and printed proxy materials to their principals, and the Company will reimburse them for the expense of doing so.

 

WHAT IS THE COMPANY’S WEB ADDRESS?

 

The Company’s home page is www.hrblock.com. The Company’s filings with the Securities and Exchange Commission are available free of charge via a link from this website.

 

WILL ANY OTHER MATTERS BE VOTED ON?

 

As of the date of this proxy statement, our management knows of no other matter that will be presented for consideration at the meeting other than those matters discussed in this proxy statement. If any other matters properly come before the meeting and call for a vote of the shareholders, validly executed proxies in the enclosed form will be voted in accordance with the recommendation of the Board of Directors.

 

 

ITEM 1 –

 

ELECTION OF DIRECTORS –

 

The Company’s Amended and Restated Articles of Incorporation (the “Articles”) and Amended and Restated Bylaws (the “Bylaws”) provide that the number of directors to constitute the Board of Directors shall not be fewer than 7 nor more than 12, with the exact number to be fixed by a resolution adopted by the affirmative vote of a majority of the entire Board. The Articles and Bylaws also provide that all of the directors shall be elected at each annual meeting of shareholders to hold office until the next succeeding annual meeting of shareholders or until such director’s successor has been elected and qualified, and subject to prior death, resignation, retirement or removal from office of a director. Any vacancy on the Board may be filled by a majority of the surviving or remaining directors then in office.

 

At the annual meeting of shareholders to be held on September 30, 2010, ten directors will be elected to hold office until the next annual meeting of shareholders or until their successors are elected and shall have qualified. The Board has nominated Alan M. Bennett, Richard C. Breeden, William C. Cobb, Robert A. Gerard, Len J. Lauer, David Baker Lewis, Bruce C. Rohde, Tom D. Seip, L. Edward Shaw, Jr. and Christianna Wood for election as directors of the Company.

 

Information with respect to each nominee for election as a director of the Company is set forth below. The number of shares of Common Stock beneficially owned by each nominee for director is listed under the heading “Security Ownership of Directors and Management” on page 55 of this proxy statement.

 

 

NOMINEES FOR ELECTION AT THIS MEETING:

 

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Unless otherwise instructed, the proxy holders will vote the proxy cards received by them for each of the nominees named above. All nominees have consented to serve if elected. The Board of Directors has no reason to believe that any of the nominees would be unable to accept the office of director. If such contingency should arise, it is the intention of the proxies to vote for such person or persons as the Board of Directors may recommend.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE NOMINEES NAMED ABOVE, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

BOARD OF DIRECTORS’ MEETINGS AND COMMITTEES – The Board of Directors is responsible for managing the property and business affairs of the Company. The Board of Directors reviews significant developments affecting the Company and acts on matters requiring Board approval. During the 2010 fiscal year, the Board of Directors held 7 meetings and the standing Board committees held 27 meetings. Each of the incumbent directors attended at least 75% of the aggregate total number of meetings of the Board of Directors and Board committees of which he or she was a member.

 

The standing committees of the Board are the Audit Committee, the Compensation Committee, the Finance Committee and the Governance and Nominating Committee. The Company’s Corporate Governance Guidelines, Code of Business Ethics and Conduct, the Board of Directors Independence Standards and charters for the Audit,

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Compensation, and Governance and Nominating Committees are available on the Company’s website at www.hrblock.com under the “Company” link and then under the heading “Investor Relations” and then under “Corporate Governance.” These documents are also available in print to shareholders upon written request to: Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105. Set forth below is a description of the duties of each committee and its members.

 

The members of the Audit Committee are Mr. Lewis (Chairman), Mr. Seip and Ms. Wood. Mr. Bennett was a member of the Audit Committee during fiscal year 2010 and until his appointment as President and Chief Executive Officer of the Company on July 7, 2010. On that date Mr. Bennett ceased to be independent, and hence was no longer eligible to serve as a member of the Audit Committee. The Board of Directors adopted a revised charter for the Audit Committee on April 22, 2010, a copy of which is available on the Company’s website as described above. The functions of the Committee are described in the Audit Committee Charter and include making recommendations to the Board of Directors with respect to the appointment of the Company’s independent accountants, evaluating the independence and performance of such accountants, reviewing the scope of the annual audit, and reviewing and discussing with management and the independent accountants the audited financial statements and accounting principles. See the “Audit Committee Report” on page 28. All of the members of the Audit Committee are independent under regulations adopted by the Securities and Exchange Commission, New York Stock Exchange listing standards and the Board of Directors Independence Standards. The Board has determined that Mr. Lewis and Ms. Wood are audit committee financial experts, pursuant to the criteria prescribed by the Securities and Exchange Commission. The Audit Committee held nine meetings during fiscal year 2010.

 

The members of the Compensation Committee are Mr. Seip (Chairman), Ms. Wood and Messrs. Lauer and Shaw. The Board of Directors adopted a revised charter for the Compensation Committee on June 12, 2010, a copy of which is available on the Company’s website as described above. The functions of the Committee primarily include reviewing and approving the compensation of the executive officers of the Company and its subsidiaries, recommending to the Board of Directors the compensation of the Company’s chief executive officer, and administering the Company’s long-term incentive compensation plans. See the “Compensation Discussion and Analysis” beginning on page 30. All of the members of the Compensation Committee are independent under the New York Stock Exchange listing standards and the Board of Directors Independence Standards. The Compensation Committee held 11 meetings during fiscal year 2010.

 

The members of the Finance Committee are Mr. Lauer (Chairman) and Messrs. Breeden, Bennett, Bloch and Gerard. The primary duties of the Finance Committee are to provide advice to management and the Board of Directors concerning the financial structure of the Company, the funding of the operations of the Company and its subsidiaries, and the investment of Company funds. The Finance Committee held four meetings during fiscal year 2010.

 

The members of the Governance and Nominating Committee are Mr. Gerard (Chairman) and Messrs. Breeden, Lewis and Shaw. The Governance and Nominating Committee is responsible for corporate governance matters, the initiation of nominations for election as a director of the Company, the evaluation of the performance of the Board of Directors, and the determination of compensation of outside directors of the Company. All of the members of the Governance and Nominating Committee are independent under the New York Stock Exchange listing standards and the Board of Directors Independence Standards. The Governance and Nominating Committee held three meetings during fiscal year 2010.

 

DIRECTOR COMPENSATION – The Board considers and determines outside director compensation each year, taking into account recommendations from the Governance and Nominating Committee. The Governance and Nominating Committee formulates its recommendation based on its review of director compensation practices at other companies. The Governance and Nominating Committee may delegate its authority to such subcommittees as it deems appropriate in the best interest of the Company and its shareholders. Management assists the Governance and Nominating Committee in its review by accumulating and summarizing market data pertaining to director compensation levels and practices.

 

During fiscal year 2010, directors who were not employed by the Company or its subsidiaries were paid a retainer at an annual rate of $40,000. In addition, non-employee directors received meeting fees of $2,000 for each Board meeting attended (subject to a maximum of 10 Board meetings per fiscal year) and $1,200 for each committee meeting attended (subject to a maximum of 10 committee meetings per fiscal year for each committee). The chairman of each Board committee receives an annual committee chairman’s fee as follows: Audit Committee — $15,000 (or $7,500 per co-chairman); Compensation Committee — $10,000 (or $5,000 per co-chairman); Governance and Nominating Committee — $10,000 (or $5,000 per co-chairman); and Finance

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Committee — $10,000 (or $5,000 per co-chairman). The non-executive Chairman of the Board receives an annual retainer in the form of deferred stock units valued at $150,000 under the 2008 Deferred Stock Unit Plan for Outside Directors, as more fully described below.

 

The 2008 Deferred Stock Unit Plan for Outside Directors (the “2008 Stock Unit Plan”) was approved by the Governance and Nominating Committee and the Board of Directors on June 11, 2008, and was approved by the Company’s shareholders on September 4, 2008. The 2008 Stock Unit Plan provides for the grant of deferred stock units to directors of the Company or its subsidiaries who are not employees of the Company or any of its subsidiaries. The Plan specifies that the Board of Directors may make grants of deferred stock units to outside directors in its sole discretion. The number of deferred stock units credited to an outside director’s account pursuant to an award is determined by dividing the dollar amount of the award by the average current market value per share of the Company’s Common Stock for the ten consecutive trading dates ending on the date the deferred stock units are granted to the outside director. The current market value generally is the closing sales price as reported on the New York Stock Exchange. If an outside director terminates service with the Company for reason other than death, deferred stock units will be paid to such outside director, in shares of Common Stock, in one lump sum on the six month anniversary date of the termination of service. If an outside director dies prior to the payment in full of all amounts due such outside director under the Plan, the balance of the outside director’s deferred stock unit account will be paid to the outside director’s beneficiary, in shares of Common Stock, in a lump sum within 90 days following the outside Director’s death. The maximum number of shares of Common Stock that may be paid out under the Plan is 300,000.

 

On September 24, 2009, $100,000 in value of deferred stock units for the one-year period beginning September 24, 2009, were approved for Ms. Wood and Messrs. Bennett, Bloch, Breeden, Gerard, Lauer, Lewis, Seip and Shaw. The grant date of these awards was November 2, 2009. On June 8, 2009, $150,000 in value of deferred stock units was approved for Mr. Breeden for serving as the non-executive Chairman of the Board. The grant date of this award was July 1, 2009.

 

The Company also offers to its non-employee directors free business travel insurance in connection with Company-related travel. In addition, the H&R Block Foundation will match gifts by non-employee directors to any 501(c)(3) organization up to an annual aggregate limit of $5,000 per director per calendar year.

 

The Board has adopted stock ownership guidelines regarding stock ownership by Board members. The Board member ownership guidelines provide for non-employee directors to own shares of Company stock with an aggregate value generally exceeding five times the annual retainer paid to them.

 

 

DIRECTOR COMPENSATION TABLE –

 

The following table sets forth director compensation for non-employee directors for fiscal year 2010.

 

 

NOTES:

 

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CORPORATE GOVERNANCE – Our Board of Directors operates under Corporate Governance Guidelines (the “Guidelines”) to assist the Board in exercising its responsibilities. The Guidelines reflect the Board’s commitment to monitor the effectiveness of policy and decision-making both at the Board level and management level, with a view to enhancing shareholder value over the long term. The Guidelines also assure that the Board will have the necessary authority and practices in place to review and evaluate the Company’s business operations as needed and to make decisions that are independent of the Company’s management. The Guidelines are not intended to be a static statement of the Company’s policies, principles and guidelines, but are subject to continual assessment and refinement as the Board may determine advisable or necessary in the view of the best interests of the Company and its shareholders.

 

It is the Board’s policy, and the Company’s Articles require, that the Chairman of the Board be an independent director who has not previously served as an executive officer of the Company. As Chairman, Mr. Breeden leads all meetings of the Board, including executive sessions of the non-employee directors held at each regular meeting of the Board.

 

As further described in the Guidelines, the Board believes that a substantial majority of the Board should consist of directors who are independent under the New York Stock Exchange listing standards. As described below, nine of the Board’s eleven current directors are independent directors within the meaning of the Company’s Board of Directors Independence Standards (the “Independence Standards”) and the New York Stock Exchange listing standards.

 

The New York Stock Exchange listing standards provide that a director does not qualify as independent unless the Board affirmatively determines that the director has no material relationship with the Company. The listing standards permit the Board to adopt and disclose standards to assist the Board in making determinations of independence. Accordingly, the Board has adopted the Independence Standards to assist the Board in determining whether a director has a material relationship with the Company.

 

In June 2010, the Board conducted an evaluation of director independence regarding the current directors and nominees for director, based on the Independence Standards and the New York Stock Exchange listing standards. In connection with this review, the Board evaluated commercial, charitable, consulting, familial and other relationships between each director or immediate family member and the Company and its subsidiaries. As a result of this evaluation, the Board affirmatively determined that Messrs. Breeden, Gerard, Lauer, Lewis, Seip and Shaw and Ms. Wood are independent and that Mr. Bloch was not independent. At that time, the Board also determined that Mr. Bennett was independent; however, Mr. Bennett ceased to be independent upon his appointment as President and Chief Executive Officer of the Company on July 7, 2010.

 

Finally, all directors, officers and employees of the Company must act ethically and in accordance with the policies comprising the H&R Block Code of Business Ethics and Conduct (the “Code”). The Code includes guidelines relating to the ethical handling of actual or potential conflicts of interest, compliance with laws, accurate financial reporting, and procedures for promoting compliance with, and reporting violations of, the Code. The Company intends to post any amendments to or waivers of the Code (to the extent applicable to the Company’s Chief Executive Officer, Chief Financial Officer or Principal Accounting Officer) on our website.

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BOARD LEADERSHIP STRUCTURE – The Company’s Articles require that the Chairman of the Board not simultaneously be Chief Executive Officer or President of the Company, not have previously served as an executive officer of the Company, and be an independent director pursuant to the New York Stock Exchange listing standards. As such, the Board is led by an independent Chairman, Mr. Breeden. In addition, the Company’s Corporate Governance Guidelines require that independent directors constitute a substantial majority of the Board. Our Chief Executive Officer, Mr. Bennett, and Mr. Bloch, are the only two members of the Board who are not independent.

 

We strongly believe that this structure creates a better balance in leadership and accountability, as the functions of Chief Executive Officer and Board Chairman are significantly different. In addition to balancing responsibilities, this structure enhances the accountability of the Chief Executive Officer to the Board and strengthens the Board’s independence from management. In addition, separating the roles of Board Chairman and Chief Executive Officer allows the Chief Executive Officer to focus his efforts on running our business and managing the Company in the best interests of our shareholders. At the same time, Mr. Breeden as Chairman handles the separate responsibilities of Board and Committee scheduling, Board agendas and other Board organizational tasks, as well as serving on occasion as spokesman for the Board. Mr. Breeden’s experience on other public company boards helps him fulfill his Board leadership duties.

 

BOARD’S ROLE IN RISK OVERSIGHT – Management is responsible for the Company’s day to day risk management activities, and the Board has oversight responsibility for managing risk, focusing on the adequacy of the Company’s risk management and mitigation processes. In fulfilling this oversight role, the Board works with the Company’s Chief Executive Officer and Chief Financial Officer to determine the Company’s risk tolerance and works to ensure that management is identifying, evaluating, and managing the overall risk profile of the Company.

 

In addition to the discussion of risk at the Board level, the Board’s standing committees also focus on risk exposure as part of their on-going responsibilities:

 

 

Each of the committee chairs regularly reports to the full Board concerning the activities of the committee, the significant issues it has discussed, and the actions taken by that committee.

 

The Company has also established a Risk Management Committee to support the Board and senior management in fulfilling their oversight responsibilities. The Risk Management Committee reports to the Chief Financial Officer and is made up of key management-level employees. The Company’s risk management team and Risk Management Committee assists the Board in its oversight of risk management by creating and facilitating a process to identify, prioritize, monitor and report on risks and mitigation strategies, overseeing regular reporting of risks to the Board, identifying additional risk mitigation strategies as appropriate, and monitoring emerging risks.

 

DIRECTOR NOMINATION PROCESS – The entire Board of Directors is responsible for nominating members for election to the Board and for filling vacancies on the Board that may occur between annual meetings of the shareholders. The Governance and Nominating Committee is responsible for identifying, screening and recommending candidates to the entire Board for Board membership. The Governance and Nominating Committee works with the Board to determine the appropriate characteristics, skills and experience for the Board as a whole and its individual members. In evaluating the suitability of individual Board members, the Board takes into account many factors such as general understanding of various business disciplines (e.g., marketing,

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finance, information technology), the Company’s business environment, educational and professional background, ability to work well with other Board members, analytical ability and willingness to devote adequate time to Board duties. The Board evaluates each individual in the context of the Board as a whole with the objective of retaining a group with diverse and relevant experience that can best perpetuate the Company’s success and represent shareholder interests through sound judgment.

 

Although there is no formal policy on diversity of director nominees, both the Board of Directors and the Governance and Nominating Committee believe that diversity of skills, perspectives and experiences among Board members, in addition to the factors discussed above, promotes improved monitoring and evaluation of management on behalf of the shareholders and produces more creative thinking and solutions by the Board. The Governance and Nominating Committee considers, though not exclusively, the distinctive skills, perspectives and experiences that candidates who are diverse in gender, ethnic background, geographic origin and professional experience have to offer.

 

The Governance and Nominating Committee may seek the input of the other members of the Board and management in identifying candidates who meet the criteria outlined above. In addition, the Governance and Nominating Committee may use the services of consultants or a search firm. The Committee will consider recommendations by the Company’s shareholders of qualified director candidates for possible nomination by the Board. Shareholders may recommend qualified director candidates by writing to the Company’s Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105. Submissions should include information regarding a candidate’s background, qualifications, experience, and willingness to serve as a director. Based on a preliminary assessment of a candidate’s qualifications, the Governance and Nominating Committee may conduct interviews with the candidate and request additional information from the candidate. The Committee uses the same process for evaluating all candidates for nomination by the Board, including those recommended by shareholders. The Company’s Bylaws permit persons to be nominated as directors directly by shareholders under certain conditions. To do so, shareholders must comply with the advance notice requirements outlined in the “Shareholder Proposals and Nominations” section of this proxy statement.

 

COMMUNICATIONS WITH THE BOARD – Shareholders and other interested parties wishing to communicate with the Board of Directors, the non-management directors, or with an individual Board member concerning the Company may do so by writing to the Board, to the non-management directors, or to the particular Board member, and mailing the correspondence to: Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105. Please indicate on the envelope whether the communication is from a shareholder or other interested party. All such communications will be forwarded to the director or directors to whom the communication is addressed.

 

DIRECTOR ATTENDANCE AT ANNUAL MEETINGS – Although the Company has no specific policy regarding director attendance at its annual meeting, all directors are encouraged to attend. Board and Committee meetings are held immediately preceding and following the annual meeting. All of the Company’s then current directors attended last year’s annual meeting.

 

 

ITEM 2 –

 

THE APPROVAL OF AN ADVISORY PROPOSAL ON THE COMPANY’S EXECUTIVE PAY-FOR-PERFORMANCE COMPENSATION POLICIES AND PROCEDURES –

 

We believe that our compensation programs and policies reflect an overall pay for performance culture which is strongly aligned to the interests of our shareholders. We are committed to developing a mix of incentive compensation programs that will reward success in achieving the Company’s financial objectives and growing value for shareholders. In accordance with the Company’s Amended and Restated Bylaws, the Board is providing H&R Block’s shareholders with an annual opportunity to endorse or not endorse our executive compensation program, commonly known as a “Say on Pay” proposal.

 

The Compensation Committee of the Board has overseen the development of a compensation program designed to achieve pay-for-performance and alignment with shareholder interests, as described more fully in the “Compensation Discussion and Analysis” beginning on page 30. The compensation program was designed in a manner that we believe delivers appropriate recognition in compensation for contributing to current business results, while at the same time motivating and retaining executives to enhance future business results.

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As further evidence of our commitment to a pay-for-performance compensation philosophy and to recognize our failure to meet our pre-established performance targets for fiscal year 2010, we implemented the following actions in our executive compensation program:

 

 

These actions are not a one-time event; the Company will continue to take the necessary steps to link executive compensation awards to annual business performance to exemplify our full commitment to a pay-for-performance compensation philosophy.

 

In addition, the Compensation Committee continually reviews best practices in executive compensation in order to insure that H&R Block’s executive compensation program achieves the desired goals of pay-for-performance and alignment with shareholder interests. As a result of this review process, the Compensation Committee and the Board revised H&R Block’s executive compensation practices during the Company’s 2010 and 2011 fiscal years by:

 

 

For the reasons discussed above, the Board recommends that shareholders vote in favor of the following “Say on Pay” resolution:

 

“Resolved, that the shareholders approve the overall executive pay-for-performance compensation policies and procedures employed by the Company, as described in the Compensation Discussion and Analysis and the tabular disclosure regarding named executive officer compensation (together with the accompanying narrative disclosure) in this Proxy Statement.”

 

Because your vote is advisory, it will not be binding upon the Board. However, the Compensation Committee will take into account the outcome of the vote when considering future executive compensation arrangements.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE PAY-FOR-PERFORMANCE COMPENSATION POLICIES AND PROCEDURES EMPLOYED BY THE COMPENSATION COMMITTEE, AS DESCRIBED IN THE COMPENSATION DISCUSSION AND ANALYSIS, AND THE TABULAR DISCLOSURE REGARDING NAMED EXECUTIVE OFFICER COMPENSATION (TOGETHER WITH THE ACCOMPANYING NARRATIVE DISCLOSURE) IN THIS PROXY STATEMENT, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 3 –

 

ADOPTION OF AMENDMENT TO THE 2003 LONG-TERM EXECUTIVE COMPENSATION PLAN –

 

THE PROPOSAL – The Board of Directors has adopted an amendment to the 2003 Long-Term Executive Compensation Plan, as amended (the “2003 Plan”), to increase by 10,000,000 the aggregate number of shares the Company is authorized to issue under such Plan. As more fully described below this would increase the number of shares authorized to be issued under the 2003 Plan from 14,000,000 to 24,000,000.

 

BACKGROUND – The 2003 Plan was adopted by the Board of Directors of the Company on July 1, 2002 to replace the 1993 Long-Term Executive Compensation Plan. The 2003 Plan was approved by the shareholders of the Company on September 11, 2002 and became effective on July 1, 2003.

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The purpose of the 2003 Plan is to provide long-term incentives and rewards to senior executives and key employees responsible for the growth of the Company and creation of value for shareowners. The Board of Directors believes that incentive stock options, nonqualified stock options, restricted shares of the Company’s Common Stock (“Common Stock”) and other awards available for grant under the 2003 Plan provide a form of incentive that, if properly designed, can align the economic interests of management and other key employees with those of the Company’s shareholders.

 

Currently, the 2003 Plan authorizes the Company to issue up to 14,000,000 shares of Common Stock pursuant to awards made under the Plan. The Board may make equitable adjustments to such aggregate number in the event of any changes to the capital structure of the Company, including but not limited to a change resulting from a stock dividend or split-up, or combination or reclassification of shares. The aggregate number of shares of Common Stock authorized for issuance reflects the two-for-one Common Stock split effected August 22, 2005. Additionally, at the Company’s annual meeting of shareholders held on September 24, 2009, the shareholders approved an amendment to increase the aggregate number of shares of Common Stock issuable under the 2003 Plan by 4,000,000 (from 10,000,000 to 14,000,000).

 

MATERIAL FEATURES OF THE 2003 PLAN – The material features of the 2003 Plan are summarized below. The only aspect of the Plan being changed by the proposed amendment is the number of shares available for issuance. All other provisions of the Plan described herein would remain as already in effect. The summary is qualified in its entirety by reference to the specific provisions of the 2003 Plan, as proposed to be amended, the full text of which is set forth as Appendix A to this proxy statement.

 

ADMINISTRATION – The 2003 Plan is administered by the Compensation Committee of the Board of Directors of the Company (the “Committee”). All members of the Committee are non-employee directors of the Company and such members are not eligible to participate in the 2003 Plan. The Committee has the authority to determine, within the limits of the express provisions of the 2003 Plan, the individuals to whom awards will be granted, the nature, amount and terms of such awards and the objectives and conditions for earning such awards. The Committee may delegate to the Chief Executive Officer of the Company the authority to make such determinations, provided that any authority so delegated may not apply to awards to executive officers of the Company and may be exercised only in accordance with the 2003 Plan and any guidelines, rules and limitations which the Committee may prescribe.

 

ELIGIBLE PARTICIPANTS AND PLAN SHARES – The Committee may grant awards to any employee of the Company or its direct or indirect subsidiaries, or to the Company’s non-executive Chairman of the Board. The highest number of persons employed by subsidiaries of the Company during the fiscal year ended April 30, 2010, including seasonal employees, was approximately 105,739. The Company anticipates that for the foreseeable future participation in the 2003 Plan will not include part time or seasonal employees. There are today approximately 8,000 full time employees. Such number may increase with acquisitions by the Company or through internal growth. No ISO may be granted to an employee owning more than 10% of the combined voting power of all classes of stock of the Company.

 

Currently, an aggregate of 14,000,000 shares of Common Stock is authorized for issuance under the 2003 Plan. Under the proposed amendment, the aggregate number of shares authorized for issuance under the 2003 Plan would be increased by 10,000,000 shares, to a total of 24,000,000 shares. Shares of Common Stock not actually issued (as a result, for example, of the lapse of an option, the failure of a recipient to earn an award, the payment of an award in cash or a combination of cash and Common Stock or the payment in respect of an award through cashless exercise) are available for issuance pursuant to further grants. Each year, some awards made under 2003 Plan in previous years expire, are cancelled or are forfeited, and the shares of Common Stock underlying those awards again become available for issuance under the Plan. If the amendment to the 2003 Plan to increase by 10,000,000 the number of shares authorized for issuance is passed by the shareholders, this increase should provide sufficient shares for grants through fiscal year 2013 based on past and anticipated grants.

 

TYPES OF AWARDS – Awards under the 2003 Plan may include shares of Common Stock, Restricted Shares, nonqualified stock options, incentive stock options (“ISOs”), stock appreciation rights (“SARs”), performance shares, performance units, performance cash, as well as other types of awards that the Committee in its discretion may determine are consistent with the objectives and limitations of the 2003 Plan. Shares of Common Stock to be delivered or purchased under the 2003 Plan may be either authorized but unissued Common Stock or treasury shares.

 

Restricted Shares are shares of Common Stock issued to a recipient subject to such terms and conditions, including, without limitation, forfeiture or resale to the Company, and to such restrictions against sale, transfer or other disposition, as the Committee may determine at the time of issuance. A SAR is the right to receive cash,

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Common Stock or both based on the increase in the market value of the shares of Common Stock covered by such SAR from the initial date of the performance period for such SAR to the date of exercise. A “performance share” is the right to receive, upon satisfying designated performance goals within a performance period, cash, Common Stock or both based on the market value of shares of Common Stock covered by such performance shares at the close of the performance period. A “performance unit” is the right to receive cash, Common Stock or both upon satisfying designated performance goals within a performance period. “Performance cash” is the right to receive, upon satisfying designated performance goals within a performance period, cash at the close of the performance period.

 

The Committee may determine that all or a portion of an award may be deferred, that it may be vested at such times and upon such terms as the Committee may select, or that a recipient must be an employee at the time the award is paid or exercised. An employee may be granted multiple awards in any one calendar year, provided that the aggregate number of shares of Common Stock subject to such awards under the 2003 Plan may not exceed 1,000,000. The 2003 Plan provides that ISOs may be granted to a recipient during a calendar year only if the aggregate fair market value (determined as of the time an ISO is granted) of Common Stock with respect to which ISOs are exercisable for the first time by such recipient during any calendar year under the 2003 Plan and any other “incentive stock option plans” maintained by the Company does not exceed $100,000. No ISO is exercisable later than ten years after the date it is granted.

 

Neither the Company nor any subsidiary receives from the recipient of an award any monetary consideration for the granting of the award.

 

ASSIGNABILITY – No award granted pursuant to the 2003 Plan is transferable or assignable by its recipient other than by will or the laws of descent and distribution; provided, however, that a recipient who was granted an award in consideration for serving as the Company’s non-executive Chairman of the Board may transfer or assign an award to an entity that is or was a shareholder of the Company at any time during which the recipient served as the Company’s non-executive Chairman of the Board (a “Shareholder Entity”) if (i) the recipient is affiliated with the manager of the investments made by such Shareholder Entity or otherwise serves on the Company’s Board of Directors at the Shareholder Entity’s direction or request, and (ii) pursuant to the Shareholder Entity’s governance documents or any regulatory, contractual or other requirement, any consideration the recipient may receive as compensation for serving as a director of the Company must be transferred, assigned, surrendered or otherwise paid to the Shareholder Entity.

 

ANTI-DILUTION PROTECTION – In the event of any changes in the capital structure of the Company, including a change resulting from a stock dividend or stock split, or combination or reclassification of shares, the Board of Directors is empowered to make such equitable adjustments with respect to awards or any provisions of the 2003 Plan as it deems necessary and appropriate, including, if necessary, any adjustments in the maximum number of shares of Common Stock subject to the Plan, the number of shares of Common Stock subject to an outstanding award, or the maximum number of shares that may be subject to one or more awards granted to any one recipient during a calendar year.

 

MARKET VALUE RESTRICTIONS – The amounts of certain awards are based on the market value of a share of Common Stock at a specified point in time. The exercise price per share of Common Stock under each nonqualified stock option or ISO granted under the 2003 Plan, which is paid to the Company at the time of the exercise, shall be determined by the Committee, but may not be less than the market value of such Common Stock on the date of grant of such option. The exercise price for each option will remain constant during the life of the option, subject to adjustment pursuant to the anti-dilution provisions of the 2003 Plan described above. The market value of a share of Common Stock on the date an SAR is granted shall be the base value of such SAR. On August 9, 2010, the last reported sale price of the Company’s Common Stock on the New York Stock Exchange was $14.78 per share.

 

AMENDMENTS AND TERMINATIONS – The Board of Directors may at any time terminate or amend the 2003 Plan, provided that no such action may be taken that adversely affects any rights or obligations with respect to any awards theretofore made under the Plan without the consent of the recipient. No amendment may be made that would increase the maximum number of shares of Common Stock that may be issued under the 2003 Plan (unless such increase is a result of a change in the capital structure of the Company), change the termination date of the 2003 Plan, or delete or amend the market value restrictions contained in the 2003 Plan on the stock option exercise price or the base value of an SAR without the prior approval of the holders of a majority of the outstanding shares of Common Stock represented in person or by proxy at a duly constituted meeting of shareholders. The Committee may grant Awards at any time prior to July 1, 2013, on which date the 2003 Plan will terminate except as to Awards then outstanding thereunder, which Awards shall remain in effect until they have expired according to their terms or until July 1, 2023, whichever first occurs.

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NEW PLAN BENEFITS – The table below sets forth awards that will be made under the 2003 Plan if the shareholders approve this amendment to increase the amount of shares issuable under the Plan for (i) the Named Executive Officers (excluding Messrs. Smyth, Woram and Gokey and Ms. Shulman, each of whom are no longer with the Company and did not receive contingent awards under the 2003 Plan), (ii) all current executive officers as a group, and (iii) all employees, including all current officers who are not executive officers, as a group. No contingent awards under the 2003 Plan have been made to any current director or nominee for election as a director. The Company is not aware of any associate of a Named Executive Officer, current executive officer or director, or nominee for election as a director who have received contingent option awards under the 2003 Plan.

 

 

NOTES:

 

 

STOCK OPTION AWARDS – The table below identifies each person who received an option award of 5% or more of the total options awarded (based on the dollar value of the option awards) under the 2003 Plan contingent upon shareholder approve of this amendment to increase the amount of shares issuable under the Plan.

 

 

NOTES:

 

 

FEDERAL INCOME TAX CONSEQUENCES – The federal income tax consequences of the issuance and/or exercise of awards under the 2003 Plan are described below. The following information is not a definitive explanation of the tax consequences of the awards, and recipients should consult with their own tax advisors with respect to the tax consequences inherent in the ownership and/or exercise of the awards, and the ownership and disposition of any underlying securities.

 

Common Stock Awards – The recipient of a Common Stock award will recognize ordinary income for federal income tax purposes at the time of receipt of Common Stock in an amount equal to the fair market value of the

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Common Stock received. The Company will be entitled to a deduction for such amount as and when the ordinary income is recognized by the recipient. Upon disposition of any Common Stock received, the recipient will recognize long-term or short-term capital gain or loss, depending upon the period for which the recipient has held the shares, in an amount equal to the excess of the selling price over the fair market value of such shares on the date of receipt.

 

Restricted Shares – A recipient will not be taxed on the date of an award of Restricted Shares, but will be taxed at ordinary income rates on the fair market value of any restricted shares as of the date that the restrictions lapse, unless the recipient, within 30 days after transfer of such Shares to the recipient, elects under Section 83(b) of the Code to include in income the fair market value of the Restricted Shares as of the date of such transfer. The Company will be entitled to a corresponding deduction. Any disposition of shares after restrictions lapse will be subject to the regular rules governing long-term and short-term capital gains and losses, with the basis for this purpose equal to the fair market value of the shares at the end of the restricted period (or on the date of the transfer of the restricted shares, if the employee elects to be taxed on the fair market value upon such transfer).

 

Incentive Stock Options – The 2003 Plan qualifies as an incentive stock option plan within the meaning of Section 422 of the Internal Revenue Code. A recipient who is granted an ISO will not recognize any taxable income for federal income tax purposes on either the grant or the exercise of the ISO.

 

If the recipient disposes of the shares purchased pursuant to the ISO more than two years after the date of grant and more than one year after the transfer of the shares to him (the required statutory “holding period”), (a) the recipient will recognize long-term capital gain or loss, as the case may be, equal to the difference between the selling price and the option price; and (b) the Company will not be entitled to a deduction with respect to the shares of stock so issued.

 

If the holding period requirements are not met, any gain realized upon disposition will be taxed as ordinary income to the extent of the excess of the lesser of (i) the excess of the fair market value of the shares at the time of exercise over the option price, or (ii) the gain on the sale. The Company will be entitled to a deduction in the year of disposition in an amount equal to the ordinary income recognized by the recipient. Any additional gain will be taxed as short-term or long-term capital gain depending upon the holding period for the stock. A sale for less than the option price results in a capital loss.

 

The excess of the fair market value of the shares on the date of exercise over the option price is a minimum tax addition. A corresponding minimum tax subtraction is allowed in the year in which the shares are disposed. See “Alternative Minimum Tax,” below.

 

Nonqualified Stock Options – The recipient of a nonqualified stock option under the 2003 Plan will not recognize any income for federal income tax purposes on the grant of the option. Generally, on the exercise of the option, the recipient will recognize taxable ordinary income equal to the excess of the fair market value of the shares on the exercise date over the option price for the shares. The Company generally will be entitled to a deduction on the date of exercise in an amount equal to the ordinary income recognized by the recipient. Upon disposition of the shares purchased pursuant to the stock option, the recipient will recognize long-term or short-term capital gain or loss, as the case may be, equal to the difference between the amount realized on such disposition and the basis for such shares, which basis includes the amount previously recognized by the recipient as ordinary income.

 

Stock Appreciation Rights – A recipient who is granted stock appreciation rights will not recognize any taxable income on the receipt of the SARs. Upon the exercise of a SAR, (a) the recipient will recognize ordinary income equal to the amount received (the increase in the fair market value of one share of the Company’s Common Stock from the date of grant of the SAR to the date of exercise) and (b) the Company will be entitled to a deduction on the date of exercise in an amount equal to the ordinary income recognized by the recipient.

 

Performance Shares and Performance Units – A recipient of performance shares or performance units will not recognize any income for federal income tax purposes on the date of the grant of the right to receive performance shares or units. The recipient will recognize ordinary income for federal income tax purposes at the time of receipt of cash and/or Common Stock with respect to the performance shares or units in an amount equal to the excess, if any, of the fair market value of the performance shares or units on the date received over the price of the performance shares or units on the date of grant. The Company will be entitled to a deduction on the date of receipt of the performance shares by the recipient in an amount equal to the ordinary income recognized by the recipient. Upon disposition of any stock received, the recipient will recognize long-term or short-term capital gain

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or loss depending upon the period for which he or she has held the stock in an amount equal to the difference between the amount realized and the fair market value of the stock on the date of receipt.

 

Performance Cash – A recipient of performance cash will not recognize any income for federal income tax purposes on the date of grant of the right to receive performance cash. The recipient will recognize ordinary income for federal income tax purposes at the time of receipt of the performance cash. The Company will be entitled to a deduction on the date of receipt of the performance cash by the recipient in an amount equal to the ordinary income recognize by the recipient.

 

ALTERNATIVE MINIMUM TAX – In addition to the federal income tax consequences described above, a recipient may be subject to the alternative minimum tax (“AMT”), which is payable only to the extent it exceeds the recipient’s regular tax liability. The AMT is assessed on the recipient’s alternative minimum taxable income in excess of an exemption amount that varies by filing status. For purposes of computing the AMT, the alternative minimum taxable income is equal to taxable income (1) increased by tax preference items and (2) increased or reduced by certain AMT “adjustments.” Federal law currently provides for a minimum tax credit that may be applied against the recipient’s regular tax liability in years following a year in which the recipient is subject to AMT. The minimum tax credit is limited to the excess, if any, of the regular tax over the tentative AMT for the year. Any credit not used because of the limitation may be carried forward indefinitely.

 

EFFECTIVE DATE – The amendment to the 2003 Plan shall be effective immediately on the date of its approval by shareholders. If the amendment is not approved by such shareholders, the 2003 Plan will remain in effect as it currently exists, without the increase in available shares that the proposed amendment would authorize.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS – See “Equity Compensation Plans” on page 54.

 

APPROVAL REQUIREMENTS – The affirmative vote of a majority of shares present in person or represented by proxy, and entitled to vote on this proposal, is necessary for the approval of the amendment to the 2003 Plan. Shares represented by a proxy which directs that the shares abstain from voting or that a vote be withheld on the proposal are deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the proposal. Broker non-votes will have no effect on the outcome of the vote for this proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE AMENDMENT TO THE 2003 LONG-TERM EXECUTIVE COMPENSATION PLAN. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 4 –

 

APPROVAL OF THE MATERIAL TERMS OF PERFORMANCE GOALS UNDER THE EXECUTIVE PERFORMANCE PLAN –

 

INTRODUCTION – We are asking the shareholders to re-approve the material terms of the performance goals under the H&R Block Executive Performance Plan (the “Executive Performance Plan”). The shareholders originally approved the Executive Performance Plan at the 1996 Annual Meeting and most recently reapproved the Executive Performance Plan, as amended, at the 2005 Annual Meeting. Section 162(m) of the Internal Revenue Code of 1986, as amended (“Code”), requires that the shareholders re-approve the material terms of the performance goals every five years.

 

The Executive Performance Plan allows the Company to include in the compensation package of an executive officer a bonus component intended to qualify as performance-based compensation under Section 162(m). Section 162(m) provides that compensation in excess of $1 million paid for any tax year to a corporation’s named executive officers (“Covered Employees”) at the end of such year will not be deductible by the corporation for federal income tax purposes unless certain conditions are met. In order to qualify as “performance-based compensation,” the shareholders of the corporation must approve the material terms of the performance goals under which such compensation is to be paid.

 

SUMMARY OF THE PLAN – The primary features of the Executive Performance Plan are summarized below. The summary is qualified in its entirety by reference to the specific provisions of the Executive Performance Plan, the full text of which is set forth as Appendix B to this proxy statement.

 

The Executive Performance Plan is administered by the Compensation Committee, which is composed entirely of “outside directors” within the meaning of Section 162(m) of the Code. The Compensation Committee has

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authority to determine the terms and conditions of awards granted to eligible persons under the Executive Performance Plan. Awards under the Executive Performance Plan are paid in cash and may be granted only to employees of the Company or its subsidiaries who are at the level of Assistant Vice President or a more senior level and who are selected for participation by the Compensation Committee. The Compensation Committee may grant annual performance-based awards with respect to each fiscal year of the Company, or a portion thereof (a “Performance Period”). Within 90 days after the beginning of a Performance Period, the Compensation Committee establishes performance goals for the Company and its subsidiaries for the Performance Period and specific target awards for each participant selected by the Committee. The Compensation Committee specifies the performance goals applicable to each participant for each Performance Period, as well as the portion of the target award to which each performance goal applies. Awards are nontransferable other than by will or by the laws of descent and distribution.

 

The Executive Performance Plan specifies that performance goals established by the Compensation Committee each year must be based on one or more of the following business criteria: (a) earnings, (b) revenues, (c) sales of products, services or accounts, (d) numbers of income tax returns prepared, (e) margins, (f) earnings per share, (g) return on equity, (h) return on capital, and (i) total shareholder return. For any Performance Period, performance goals may be measured on an absolute basis or relative to internal goals, or relative to levels attained in fiscal years prior to the Performance Period. In addition, a participant must remain continuously employed by the Company or one or more of its subsidiaries through the end of a Performance Period to be eligible to receive payment of an award. The Executive Performance Plan grants the Committee discretion to pay in full or on a prorated basis an award determined in accordance with the Executive Performance Plan to a participant whose employment terminates during the Performance Period due to death, disability or retirement.

 

Following the end of a Performance Period, the Committee certifies the extent to which each performance goal has been achieved and then, to arrive at the actual award payout, determines a performance percentage for each goal to be multiplied by the portion of the target award to which the goal relates. The Compensation Committee has the discretion to establish with respect to each performance target and each Performance Period a schedule or other objective method (“Performance Schedule”) of determining the applicable performance percentage to be used in arriving at the actual award payout. The Compensation Committee is required to establish the Performance Schedule within 90 days after the beginning of the Performance Period. Any Performance Schedule established by the Committee may not provide for a performance percentage in excess of 200%.

 

The Executive Performance Plan provides that the aggregate amount of all awards under the Executive Performance Plan to any one participant for any Performance Period may not exceed $2,000,000. Payment of awards takes place as soon as possible following certification by the Compensation Committee of the extent to which performance goals have been achieved and the determination of the actual awards payable.

 

In the event of a recapitalization, reorganization, merger, acquisition, divestiture, consolidation, spin-off, split-off, combination, liquidation, dissolution, sale of assets, or other similar corporate transaction or event; changes in applicable tax laws or accounting principles; or any unusual, extraordinary or nonrecurring events involving the Company that distort the performance criteria applicable to any performance goal, the Committee must adjust the calculation of the performance criteria and the applicable performance goals as necessary to prevent reduction or enlargement of participants’ awards under the Executive Performance Plan for the Performance Period attributable to such transaction or event.

 

The Executive Performance Plan is not exclusive. The Company may pay other bonuses and other compensation to the participants under other plans and under other authority of the Board of Directors of the Company and applicable law.

 

The Company may deduct from any payments under the Executive Performance Plan any applicable taxes required to be withheld with respect to the payments.

 

The Board of Directors of the Company may at any time and from time to time alter, amend, suspend or terminate the Executive Performance Plan in whole or in part, without shareholder approval.

 

BENEFITS UNDER THE EXECUTIVE PERFORMANCE PLAN – Because this proposal relates only to re-approval of the material terms of the performance goals under the Executive Performance Plan, the re-approval will not result in any new benefits being provided to participants in the Executive Performance Plan. Performance-based awards granted under the Executive Performance Plan, if any, are subject to the discretion of the Compensation Committee and to the achievement of certain performance targets as established by the Compensation Committee during a Performance Period. Amounts that may be received by officers of the

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Company eligible to participate in the Executive Performance Plan are not presently determinable. The following chart describes the amounts that the indicated participants were awarded under the Executive Performance Plan for fiscal year 2010. Non-employee directors of the Company are not eligible to participate in the Executive Performance Plan. None of our Named Executive Officers or other executive officers received performance based awards under the Plan for fiscal year 2010. Approximately 78 persons are eligible to participate in the Executive Performance Plan.

 

 

The Board believes that approval of the Executive Performance Plan will benefit the Company in the manner specified above and, as a result, will promote the interests of the Company and its shareholders.

 

THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE MATERIAL TERMS OF THE PERFORMANCE GOALS UNDER THE EXECUTIVE PERFORMANCE PLAN. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 5 –

 

SHAREHOLDER PROPOSAL REQUESTING THAT OUR BOARD TAKE THE STEPS NECESSARY TO CHANGE EACH SHAREHOLDER VOTING REQUIREMENT IN THE COMPANY’S CHARTER AND BYLAWS THAT CALLS FOR A GREATER THAN SIMPLE MAJORITY VOTE TO A SIMPLE MAJORITY VOTE –

 

William Steiner, 112 Abbottsford Gate, Piermont, NY 10968, the beneficial owner of 6,000 shares of the Company’s Common Stock, has notified the Company that he intends to have a representative present the following proposal at the annual meeting. The proposal as submitted, reads as follows:

 

“5 — Adopt Simple Majority Vote”

 

“RESOLVED, Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against the proposal to the fullest extent permitted by law. This includes each 80% supermajority provision in our charter and/or bylaws.

 

Currently a 1%-minority can frustrate our 79%-shareholder majority. Also our supermajority vote requirements can be almost impossible to obtain when one considers abstentions and broker non-votes. Supermajority requirements are arguably most often used to block initiatives supported by most shareowners but opposed by management. Even a Goodyear (GT) management proposal for annual election of each director failed to pass although 90% of votes cast were yes-votes.

 

This proposal topic won from 74% to 88% support at these companies in 2009: Weyerhaeuser (WY), Alcoa (AA), Waste Management (WM), Goldman Sachs (GS), FirstEnergy (FE), McGraw-Hill (MHP) and Macy’s (M). The proponents included Nick Rossi, William Steiner and James McRitchie.

 

The merit of this Simple Majority Vote proposal should also be considered in the context of the need for improvement in our company’s 2010 reported corporate governance status:

 

The Corporate Library www.thecorporatelibrary.com, an independent investment research firm, had concerns in the area of our executive pay. Equity-based pay was awarded at our board’s discretion. This type of pay policy does little to align executive and shareholder interests and does not base pay on actual long-term company performance. Performance shares had a three-year performance period. The Corporate Library was hesitant to consider three years as long-term.

 

Furthermore, stock options and restricted stock vest solely on the passage of time. Stock ownership guidelines required our CEO to hold only 200,000 shares. In 2009, our CEO received 900,000 stock options. Considering those equity grants, 200,000 shares is a low target. Finally, Russell P. Smyth was CEO for only three quarters of fiscal 2009 but received a full bonus that was more than 100% of his base salary. His “all other compensation” included a $200,000 lump-sum cash relocation payment. The amount was difficult to justify in terms of shareholder benefit.

 

Two of our directors were inside-related which is an independence concern: Alan Bennett and Thomas Bloch. Our board was the only significant directorship for five of our ten directors. This could indicate a significant lack of current transferable director experience for 50% of our directors.

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We had no shareholder right to vote on our executives’ pay, to call a special meeting unless approved by an overwhelming majority of shareholders, act by written consent or use cumulative voting. Shareholder proposals to address each of these topics received majority votes at other companies.

 

The above concerns shows there is need for improvement. Please encourage our board to respond positively to this proposal: Adopt Simple Majority Vote — Yes on 5.”

 

H&R BLOCK’S RESPONSE – The Board of Directors of the Company has carefully considered the shareholder proposal and recommends that shareholders vote “for” the proposal for the following reasons.

 

Currently (and as described more fully below in Items 6-9), under the Company’s Amended and Restated Articles of Incorporation (the “Articles”) and Amended and Restated Bylaws (the “Bylaws”), the affirmative vote of the holders of 80% of the outstanding shares of the Company entitled to vote in an election of directors is required to: (i) call a special meeting of the Company’s shareholders; (ii) remove directors from the Company’s Board of Directors; (iii) amend certain provisions of the Articles and any provision of the Bylaws (unless the amendment is first adopted by 80% of the Board); and (iv) approve certain “Business Transactions” with “Related Persons.”

 

These supermajority voting requirements were approved by the shareholders and included in the Company’s governing documents many years ago in order to ensure that broad shareholder support exists before significant changes can be implemented and to afford minority shareholders protection against self-interested transactions with one or more other shareholders. At the time shareholders approved these provisions, they represented customary and accepted corporate governance practices. Provisions such as these continue to be common in the articles of incorporation and bylaws of many publicly-traded corporations, although they are by no means universal.

 

The Board of Directors recognizes that views regarding best governance practices evolve, and that elimination of supermajority voting requirements enjoys the broad support of institutional shareholders and key proxy advisory firms. The Board is aware of a growing view that supermajority voting provisions may violate the principle that a majority should be all that is necessary to effect certain changes in the Board or to take other shareholder actions. The Board wishes to provide our shareholders with a more meaningful role in votes on matters related to critical shareholder interests. Indeed, during recent years the Company (i) terminated its “shareholder rights” plan, or “poison pill”; (ii) eliminated its staggered board; and (iii) established term limits for directors to improve the Company’s responsiveness to shareholders. In addition, the Board does in fact provide the Company’s shareholders with the annual opportunity to endorse or not endorse our executive compensation programs through a “Say on Pay” proposal. The Board views this shareholder proposal consistent with these earlier steps to improve governance.

 

The shareholder proposal is advisory in nature and only constitutes a recommendation to the Board to take action in the future. Adoption of the shareholder proposal by the shareholders would, by itself, not eliminate the supermajority voting requirements contained in the Company’s Articles and Bylaws.

 

The Board of Directors is committed to observing good corporate governance practices, and has determined that removal of the supermajority voting requirements is in the best interests of the shareholders. In order to remove the supermajority provisions prior to the 2011 annual meeting of shareholders, the Board of Directors has voluntarily taken the steps necessary to allow the shareholders to implement such action at this annual meeting by proposing Items 6-9 below to amend the Company’s Articles and Bylaws accordingly.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE SHAREHOLDER PROPOSAL TO TAKE NECESSARY ACTION TO REDUCE THE SUPERMAJORITY REQUIREMENTS, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

INTRODUCTION TO ITEMS 6 THROUGH 9 –

 

As discussed above, Item 5 is a shareholder proposal which requests that the Board take the steps necessary so that each shareholder voting requirement in the Company’s Articles and Bylaws is changed to a majority of the votes cast “to the fullest extent permitted by law.” The Board has passed resolutions to implement such changes to the extent possible under Missouri law.

 

Missouri law imposes minimum voting standards for certain corporate governance matters. Section 351.265 of the General and Business Corporation Law of Missouri (the “GBCL”) generally requires approval by “a majority of shares entitled to vote on the subject matter and represented in person or by proxy at a meeting at which a quorum

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is present,” unless a larger vote is required by law, or by the corporation’s bylaws or articles of incorporation. The GBCL requires that several actions receive greater approval than “a majority of the votes cast.” We refer to these provisions as the “statutory minimum approval requirements.” For instance, an amendment of a corporation’s articles of incorporation (Section 351.090.2(3)) and approval of control share voting rights (Section 351.407.5(2)) must be approved by the affirmative vote of a majority of the outstanding shares entitled to vote thereon. In addition, the GBCL requires that specified actions, such as a sale of substantially all the corporation’s assets (Section 351.400(3)), a merger (Section 351.425) and a dissolution (Section 351.464.5), be approved by two-thirds of a corporation’s outstanding shares entitled to vote. Section 351.270 of the GBCL provides that a corporation’s articles of incorporation or bylaws may require the approval of a greater, but not a lesser, percentage than required by the GBCL.

 

As described below in each proposal, although a “majority of votes cast” standard is not permissible for the statutory minimum approval requirement provisions, Items 6 through 9 seek to implement item 5 “to the fullest extent permitted by law.”

 

 

ITEM 6 –

 

ADOPTION OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SUPERMAJORITY REQUIREMENT TO CALL A SPECIAL MEETING –

 

REASONS FOR AMENDMENT – Article 14 of the Articles and Section 5 of the Bylaws provide that the written request of holders of at least 80% of the stock of the Company entitled to vote in an election of directors is necessary to call a special meeting of the Company’s shareholders. A “majority of the votes cast” standard as urged by the proponent is not feasible for the calling of a special meeting, because by definition no meeting has been held and no votes have yet been cast.

 

The Board has determined that the Articles should be amended to modify and restate Article 14 to decrease the percentage required to call a special meeting to a majority of the outstanding shares of stock of the Company entitled to vote at an annual meeting (the “Special Meeting Article Amendment”), and has unanimously adopted a resolution approving the Special Meeting Article Amendment, declaring its advisability and recommending approval of the Special Meeting Article Amendment to our shareholders.

 

The Board has passed a resolution amending the Bylaws of the Company to decrease the required percentage to call a special meeting of the shareholders to a majority of shares outstanding (the “Special Meeting Bylaw Amendment”), to be effective at the time the Special Meeting Article Amendment becomes effective following approval by our shareholders and upon the filing of a certificate of amendment with the Missouri Secretary of State implementing the Special Meeting Article Amendment.

 

EFFECT OF AMENDMENT – If the shareholders approve the Special Meeting Article Amendment, a majority of outstanding shares will have the right to call a special meeting by written request. In addition, a majority of the Board, and each of the Chairman of the Board and the President, individually, will continue to have the authority to call a special meeting of the shareholders.

 

TEXT OF AMENDMENT – The text of the Special Meeting Article Amendment is attached as Appendix C to this proxy statement. The text of the Special Meeting Bylaw Amendment is attached as Appendix D to this proxy statement.

 

APPROVAL REQUIREMENTS – The Board examined the arguments for and against permitting a lesser percentage of shareholders to call a special meeting, and determined that permitting a majority of the outstanding shares to call a special meeting would be in the best interests of the Company. The Special Meeting Article Amendment has been unanimously adopted by the members of the Board. Therefore, approval of the Special Meeting Article Amendment requires the affirmative vote of at least a majority of the outstanding shares entitled to vote, or approximately 156,649,285 shares.

 

If the shareholders approve the Special Meeting Article Amendment, the amendment will become effective upon the filing of a certificate of amendment to the Articles with the Missouri Secretary of State. The Company plans to file a certificate of amendment to the Articles promptly after the requisite shareholder vote is obtained.

 

If the shareholders approve the Special Meeting Article Amendment, Section 5 of the Bylaws will also be amended to be consistent with the Special Meeting Article Amendment. The Special Meeting Bylaw Amendment has been approved by the Board subject to the approval by the shareholders of the Special Meeting

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Article Amendment and does not require separate approval by the shareholders. The Special Meeting Bylaw Amendment will become effective concurrently with the effectiveness of the Special Meeting Article Amendment.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADOPTION OF AN AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SUPERMAJORITY REQUIREMENT TO CALL A SPECIAL MEETING, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 7 –

 

ADOPTION OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SUPERMAJORITY REQUIREMENT RELATING TO THE REMOVAL OF DIRECTORS –

 

REASONS FOR AMENDMENT – Article 6(D) of the Articles and Section 15(b) of the Bylaws provide that the entire Board may be removed only upon the affirmative vote of the holders of 80% or more of the outstanding shares of each class of the Company’s stock. The lowest voting standard permitted by Missouri law for the removal of directors is a majority of the outstanding shares of a corporation’s voting stock.

 

The Board believes that the holders of a majority of the Company’s shares should be able to remove the directors. The Board has determined that the Articles should be amended to modify and restate Article 6(D) to decrease the percentage required to remove a director to provide that directors may be removed by the affirmative vote of a majority of the Company’s outstanding stock, and clarify that the provision applies to individual directors in addition to the Board as a whole (the “Director Removal Article Amendment”). Accordingly, the Board has unanimously adopted a resolution approving the Director Removal Article Amendment, declaring its advisability and recommending approval of the Director Removal Article Amendment to our shareholders.

 

The Board has also passed a resolution amending the Bylaws of the Company to decrease the percentage required to remove a director to a majority of the outstanding shares of stock of the Company entitled to elect one or more directors at a meeting of the shareholders called for such purpose (the “Director Removal Bylaw Amendment”).

 

EFFECT OF AMENDMENT – If the shareholders approve the Director Removal Article Amendment, a majority of the outstanding shares of the Company’s stock will have the authority to remove any director, or the entire Board, before the end of a one-year term at a special meeting of the shareholders called for that purpose.

 

TEXT OF AMENDMENT – The text of the Director Removal Article Amendment is attached as Appendix E to this proxy statement. The text of the Director Removal Bylaw Amendment is attached as Appendix F to this proxy statement.

 

APPROVAL REQUIREMENTS – The Board examined the arguments for and against reducing the supermajority requirement to remove members of the Board, and determined that permitting a majority of the outstanding shares to remove a director during his or her term would be in the best interests of the Company. The Director Removal Article Amendment has been unanimously adopted by the members of the Board. Therefore, approval of the Director Removal Article Amendment requires the affirmative vote of at least a majority of the outstanding shares entitled to vote, or approximately 156,649,285 shares.

 

If the shareholders approve the Director Removal Article Amendment, the amendment will become effective upon the filing of a certificate of amendment to the Articles with the Missouri Secretary of State. The Company plans to file a certificate of amendment to the Articles promptly after the requisite shareholder vote is obtained.

 

If the shareholders approve the Director Removal Article Amendment, Section 15(b) of the Bylaws will also be amended to be consistent with the Director Removal Article Amendment. The Director Removal Bylaw Amendment has been approved by the Board subject to the approval by the shareholders of the Director Removal Article Amendment and does not require separate approval by the shareholders. The Director Removal Bylaw Amendment will become effective concurrently with the effectiveness of the Director Removal Article Amendment.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADOPTION OF AN AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SUPERMAJORITY REQUIREMENT TO REMOVE MEMBERS OF THE BOARD, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

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ITEM 8 –

 

ADOPTION OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SUPERMAJORITY REQUIREMENT RELATING TO AMENDMENTS TO THE ARTICLES AND BYLAWS –

 

REASONS FOR AMENDMENT – Article 16 of the Articles and Section 47(b) of the Bylaws provide that the affirmative vote of the holders of 80% or more of the outstanding shares of the Company’s stock is required to amend certain provisions of the Articles and any provision of the Bylaws, unless the amendment is first adopted by 80% of the Board, in which case the affirmative vote of a majority of the votes entitled to be cast is required. The provisions in the Articles requiring approval by an 80% supermajority for amendment are: Article 3 (authorized shares), Article 6 (number, election and removal of directors), Article 14 (calling of special meetings), Article 15 (approval of certain related party transactions), and Article 16 (amendment to the Articles and Bylaws). Section 351.090.2 of the GBCL provides that, unless a greater percentage is required elsewhere in the GBCL or by the corporation’s articles of incorporation, a proposed amendment to the articles of incorporation must be approved by the affirmative vote of a majority of the outstanding shares entitled to vote thereon. The GBCL permits amendments to the Bylaws to be approved by a majority of shares entitled to vote and represented in person or by proxy at a meeting at which a quorum is present.

 

The Board has determined that the Articles should be amended to modify and restate Article 16 to decrease the percentage required to amend the Articles to a majority of the outstanding shares of stock of the Company entitled to vote generally in the election of directors, and to amend the Bylaws to a majority of shares entitled to vote and represented in person or by proxy at a meeting at which a quorum is present (the “Governing Document Article Amendment”), and has unanimously adopted a resolution approving the Governing Document Article Amendment, declaring its advisability and recommending approval of the Governing Document Article Amendment to our shareholders.

 

The Board has passed a resolution amending the Bylaws of the Company to decrease the percentage required to amend the Bylaws to a majority of shares entitled to vote and represented in person or by proxy at a meeting at which a quorum is present (the “Governing Document Bylaw Amendment”), to be effective at the time the Governing Document Article Amendment becomes effective following approval by our shareholders and upon the filing of a certificate of amendment with the Missouri Secretary of State implementing the Governing Document Article Amendment.

 

EFFECT OF AMENDMENT – If the shareholders approve the Governing Document Article Amendment, the approval of a majority of outstanding shares will be necessary to approve an amendment to the Articles and the approval of a majority of shares entitled to vote and represented in person or by proxy at a meeting at which a quorum is present will be necessary to amend the Bylaws.

 

TEXT OF AMENDMENT – The text of the Governing Document Article Amendment is attached as Appendix G to this proxy statement. The text of the Governing Document Bylaw Amendment is attached as Appendix H to this proxy statement.

 

APPROVAL REQUIREMENTS – The Board examined the arguments for and against reducing the supermajority requirement to amend the Articles and Bylaws, and determined that permitting a majority of the outstanding shares to amend the Articles and a majority of shares entitled to vote and represented in person or by proxy at a meeting at which a quorum is present to amend the Bylaws would be in the best interests of the Company. The Governing Document Article Amendment has been unanimously adopted by the members of the Board. Therefore, approval of the Governing Document Article Amendment requires the affirmative vote of at least a majority of the outstanding shares entitled to vote, or approximately 156,649,285 shares.

 

If the shareholders approve the Governing Document Article Amendment, the amendment will become effective upon the filing of a certificate of amendment to the Articles with the Missouri Secretary of State. The Company plans to file a certificate of amendment to the Articles promptly after the requisite shareholder vote is obtained.

 

If the shareholders approve the Governing Document Article Amendment, Section 47(b) of the Bylaws will also be amended to be consistent with the Governing Document Article Amendment. The Governing Document Bylaw Amendment has been approved by the Board subject to the approval by the shareholders of the Governing Document Article Amendment and does not require separate approval by the shareholders. The Governing

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Document Bylaw Amendment will become effective concurrently with the effectiveness of the Governing Document Article Amendment.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADOPTION OF AN AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SUPERMAJORITY REQUIREMENT TO AMEND THE ARTICLES AND BYLAWS, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 9 –

 

ADOPTION OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SUPERMAJORITY REQUIREMENT RELATING TO THE RELATED PERSON TRANSACTION PROVISION –

 

REASONS FOR AMENDMENT – Article 15 of the Articles and Section 45 of the Bylaws provide that the affirmative vote of the holders of 80% or more of the outstanding shares of the Company’s stock is required to approve any “Business Transaction” with any “Related Person.” The definitions of “Business Transaction” and “Related Person” are discussed below.

 

A “related person” (or “fair price”) provision is a measure designed to help companies defend against certain kinds of tender offers, known as coercive, two-tiered tender offers. In this type of takeover, a potential acquirer will offer one price for the shares needed to gain control of a target company and then offer a lower price or other less favorable consideration for the remaining shares, thereby creating pressure for shareholders to tender their shares for the tender offer price, regardless of their value. Standard fair price provisions encourage a potential acquirer to negotiate with a company’s board of directors by requiring the potential acquirer to pay a “fair price” for all shares unless the acquirer’s offer has satisfied specified board or shareholder approval requirements.

 

Section 351.459 of the GBCL contains provisions that provide similar protection to those under Article 15 of the Articles.

 

The Board has determined that the Articles should be amended to modify and restate the first paragraph of Article 15 to decrease the percentage required to approve a transaction with a related person to a majority of outstanding shares of the Company entitled to vote on the matter and represented in person or by proxy at a meeting at which a quorum is present, subject to any higher standards that may be required by Missouri law (the “Related Person Article Amendment”). The Board has unanimously adopted a resolution approving the Related Person Article Amendment, declaring its advisability and recommending approval of the Related Person Article Amendment to our shareholders.

 

The Board has also passed a resolution amending Section 45 of the Bylaws of the Company to decrease the percentage required to approve a transaction with a related person to a majority of outstanding shares of the Company entitled to vote on the matter and represented in person or by proxy at a meeting at which a quorum is present, subject to any higher standards that may be required by Missouri law (the “Related Person Bylaw Amendment”).

 

EFFECT OF AMENDMENT – Article 15 of the Articles, which is sometimes referred to as a “related person” or “fair price” provision, currently requires the affirmative vote of the holders of at least 80% of the Company’s outstanding voting stock entitled to vote in an election of directors to approve certain transactions involving any person or group that beneficially owns at least 15% of the Company’s outstanding voting stock (a “Related Person”). The current requirements of Article 15 apply to the following transactions between a Related Person and the Company:

 

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This 80% voting requirement does not apply to (a) transactions approved by a majority of the Continuing Directors (generally directors who were directors prior to the time that the Related Person became a Related Person or who were recommended for election by such directors) or (b) transactions in which certain price requirements are met.

 

If the shareholders approve the Related Person Article Amendment, the approval of a majority of shares entitled to vote and represented in person or by proxy at a meeting at which a quorum is present will be sufficient to approve a transaction with a Related Person, unless the GBCL requires a higher voting threshold for the transaction in question.

 

The Company will continue to be subject to Section 351.459 of the GBCL without regard to whether this proposed amendment to the Articles is approved. Section 351.459 contains provisions that are similar, but not identical, to those under Article 15 of the Articles in the event that an interested shareholder proposes a business combination with the Company. Specifically, Section 351.459 prohibits the Company from engaging in a transaction constituting a “business combination” (within the meaning of Section 351.459) with an “interested shareholder” for a period of five years following the date on which the person became an interested shareholder unless prior to such date, the board of directors approved either the business combination or the transaction that resulted in the person becoming an interested shareholder.

 

In addition, the Company would be prohibited from engaging in a business combination with an interested shareholder at any time unless:

 

 

TEXT OF AMENDMENT – The text of the Related Person Article Amendment is attached as Appendix I to this proxy statement. The text of the Related Person Bylaw Amendment is attached as Appendix J to this proxy statement.

 

APPROVAL REQUIREMENTS – The Board examined the arguments for and against reducing the supermajority requirement in the related person transaction provision, and determined that permitting a majority of the outstanding shares entitled to vote and represented in person or by proxy at a meeting at which a quorum is present to approve a transaction with a related person would be in the best interests of the Company. The Related Person Article Amendment has been unanimously adopted by the members of the Board. Therefore, approval of the Related Person Article Amendment requires the affirmative vote of at least a majority of the outstanding shares entitled to vote, or approximately 156,649,285 shares.

 

If the shareholders approve the Related Person Article Amendment, the amendment will become effective upon the filing of a certificate of amendment to the Articles with the Missouri Secretary of State. The Company plans to file a certificate of amendment to the Articles promptly after the requisite shareholder vote is obtained.

 

If the shareholders approve the Related Person Article Amendment, Section 45 of the Bylaws will also be amended to be consistent with the Related Person Article Amendment. The Related Person Bylaw Amendment has been approved by the Board subject to the approval by the shareholders of the Related Person Article Amendment and does not require separate approval by the shareholders. The Related Person Bylaw Amendment will become effective concurrently with the effectiveness of the Related Person Article Amendment.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADOPTION OF AN AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SUPERMAJORITY REQUIREMENT TO APPROVE TRANSACTIONS WITH RELATED

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PERSONS, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 10 –

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS –

 

The Board of Directors has appointed Deloitte & Touche LLP (“Deloitte”) as independent accountants to audit the Company’s financial statements for the fiscal year ending April 30, 2011. A representative of Deloitte is expected to attend the annual meeting to respond to appropriate questions and will have an opportunity to make a statement if they so desire. For additional information regarding the Company’s relationship with Deloitte, please refer to the “Audit Committee Report” below.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

AUDIT COMMITTEE REPORT –

 

The Company’s management is responsible for preparing financial statements in accordance with generally accepted accounting principles and the financial reporting process, including the Company’s disclosure controls and procedures and internal control over financial reporting. The Company’s independent accountants are responsible for (i) auditing the Company’s financial statements and expressing an opinion as to their conformity to accounting principles generally accepted in the United States and (ii) auditing management’s assessment of the Company’s internal control over financial reporting and expressing an opinion on such assessment. The Audit Committee of the Board of Directors, composed solely of independent directors, meets periodically with management, the independent accountants and the internal auditor to review and oversee matters relating to the Company’s financial statements, internal audit activities, disclosure controls and procedures and internal control over financial reporting and non-audit services provided by the independent accountants.

 

The Audit Committee has reviewed and discussed with management and Deloitte & Touche LLP (“Deloitte”), the Company’s independent accountants, the Company’s audited financial statements for the fiscal year ended April 30, 2010. The Audit Committee has also discussed with Deloitte the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T, relating to communication with audit committees. In addition, the Audit Committee has received from Deloitte the written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board regarding Deloitte’s communications with the Audit Committee concerning independence; has discussed with Deloitte their independence from the Company and its management; and has considered whether Deloitte’s provision of non-audit services to the Company is compatible with maintaining the auditor’s independence.

 

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors of the Company that the Company’s audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2010, for filing with the Securities and Exchange Commission.

 

AUDIT COMMITTEE

David Baker Lewis, Chairman

Alan M. Bennett

Tom D. Seip

Christianna Wood

 

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AUDIT FEES –

 

The following table presents fees for professional services rendered by Deloitte & Touche LLP for the audit of the Company’s annual financial statements for the years ended April 30, 2010 and 2009 and fees billed for other services rendered by Deloitte & Touche LLP for such years. Fees disclosed below include fees actually billed and expected to be billed for services relating to the applicable fiscal year. Amounts previously disclosed for fiscal 2009 fees have been adjusted to reflect actual billings for certain services rather than previous estimates.

 

 

Audit Fees consist of fees for professional services rendered for the audit of the Company’s financial statements and review of financial statements included in the Company’s quarterly reports and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements.

 

Audit-Related Fees are fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the independent auditor. Amounts included above consist of fees incurred relating to comfort letter procedures for registration statement filings and other audit-related services.

 

Tax Fees consist of fees for the preparation of original and amended tax returns, claims for refunds and tax payment-planning services for tax compliance, tax planning, tax consultation and tax advice. Amounts included above consist of fees incurred relating to transfer pricing studies and other tax advisory services.

 

All other fees are fees billed for professional services that were not the result of an audit or review.

 

The Audit Committee has adopted policies and procedures for pre-approving audit and non-audit services performed by the independent auditor so that the provision of such services does not impair the auditor’s independence. Under the Audit Committee’s pre-approval policy, the terms and fees of the annual audit engagement require specific Audit Committee approval. Other types of service are eligible for general pre-approval. Unless a type of service to be provided by the independent auditor has received general pre-approval, it will require specific Audit Committee pre-approval. In addition, any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee.

 

General pre-approval granted under the Audit Committee’s pre-approval policy extends to the fiscal year next following the date of pre-approval. The Audit Committee reviews and pre-approves services that the independent auditor may provide without obtaining specific Audit Committee pre-approval on an annual basis and revises the list of general pre-approved services from time to time. In determining whether to pre-approve audit or non-audit services (regardless of whether such approval is general or specific pre-approval), the Audit Committee will consider whether such services are consistent with the Securities and Exchange Commission’s rules on auditor independence. The Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and efficient service and whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. All such factors will be considered as a whole and no one factor should necessarily be determinative. The Audit Committee will also consider the relationship between fees for audit and non-audit services in deciding whether to pre-approve any such services. The Audit Committee may determine for each fiscal year the appropriate ratio between fees for Audit Services and fees for Audit-Related Services, Tax Services and All Other Services.

 

The Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

The Audit Committee has concluded that the provision of non-audit services provided to the Company by its independent accountant during the 2010 fiscal year was compatible with maintaining the independent accountant’s independence.

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EXECUTIVE COMPENSATION –

 

COMPENSATION DISCUSSION AND ANALYSIS

 

INTRODUCTION – We are committed to increasing shareholder value through profitable growth and the execution of specific strategies for our businesses. Superior performance by our executive officers and management team is essential to achieving that goal. To that end, we have designed our executive compensation program to attract, retain, motivate and reward a high-performing executive team.

 

For the fiscal year ended April 30, 2010, our named executive officers (“NEOs”) consisted of the following:

 

 

 

EXECUTIVE COMPENSATION PHILOSOPHY AND CORE PRINCIPLES – Our philosophy is to link executive compensation closely to changes in shareholder value. This linkage is based on financial, operational, and individual measures that we believe ultimately drive shareholder value as well as underlying changes in our stock price. We establish performance objectives, consistent with our business planning process, that reflect meaningful progress toward strategy execution and shareholder value creation. Our executive compensation programs are designed to achieve pay for performance and alignment with shareholder interests.

 

When determining the type and amount of executive compensation, we emphasize the direct elements of pay (cash compensation – base salary and annual incentives, and long-term, equity-based compensation) as opposed to other, more indirect pay programs (i.e., executive benefits and perquisites). We combine these components in a manner we believe delivers the appropriate reward for contributing to current business results, while at the same time motivating our executives to enhance future business results. We determine the mix between cash compensation and long-term, equity-based compensation based on market competitiveness and what we believe will motivate our executive team to achieve both our short-term and long-term business objectives.

 

The Compensation Committee works with external compensation consultants to define the appropriate market for executive compensation and benchmark our executive compensation program against that market each year. We benchmark pay relative to a specific group of peer companies (the “Peer Group”) based on publicly disclosed information. We also review pay data from multiple survey sources, reflective of general industry pay levels for companies of relevant size based on market capitalization and total revenue for each of the NEOs. For fiscal year 2010, these survey sources were the Hewitt TCM Executive Survey, the Mercer Benchmark Database Survey, and the Towers Perrin CDB Executive Survey. The Compensation Committee reviews summary market data to confirm that the market references are appropriate for our business and the industries in which we compete for executive talent.

 

Generally, our philosophy is for targeted total compensation (base pay plus targeted annual incentive plus long-term incentive grant values) to approximate the market median with a significant portion of pay tied to performance, although individual executive officers may have targeted total pay above or below market median to reflect factors such as experience, role, performance, etc. The Compensation Committee generally sets performance objectives so that targeted total compensation levels can be achieved only when targeted business performance objectives are met. Consequently, executives may receive total compensation above or below targeted levels depending upon business performance.

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PEER GROUP – The Compensation Committee reviews the Peer Group annually and revises the Peer Group as circumstances warrant. Based on this review, the Peer Group was reduced from 40 companies in fiscal year 2009 to 30 companies in fiscal year 2010. For this review, we used an objective process to identify service-oriented companies (as opposed to companies in manufacturing, energy, financial services, health care, materials, utilities, media and gaming categories) of relevant size. More specifically, we identified members of the S&P 1500 that fall within service-oriented categories under the Global Industry Classification Standards (“GICS”) and then narrowed this group to the 30 companies immediately adjacent to us in terms of annual revenue and/or market capitalization (15 larger and 15 smaller), subject to certain additional constraints. The resulting Peer Group represents a broad spectrum of companies in service and service-related industries. The Peer Group for fiscal year 2010 consisted of the following companies:

 

 

USE OF EXTERNAL CONSULTANTS – For fiscal 2010 executive compensation, the Compensation Committee retained Semler Brossy Consulting Group, LLC (“Semler Brossy”) as its external compensation consultant for objective advice and assistance on executive compensation matters. Semler Brossy advised the Committee on issues pertaining to executive compensation, including the assessment of market based compensation levels, our pay positioning relative to the market, the mix of pay, incentive plan design, and other executive employment terms. Semler Brossy provided its advice based in part on prevailing and emerging market practices, as well as our specific business context. In fiscal year 2010, Semler Brossy performed no other services for the Company. It is the general policy of the Board that external compensation consultants for the Compensation Committee must serve the Committee exclusively, and may not perform any other services for the Company at any time.

 

During fiscal year 2010, the Compensation Committee conducted its periodic review of external executive compensation consultancy firms and chose to retain Frederic W. Cook & Co., Inc. as its external compensation consultant beginning March 30, 2010.

 

EXECUTIVE EVALUATION PROCESS – Our Compensation Committee reviews our CEO’s performance each year against the financial, strategic and individual objectives established previously by the Board of Directors. Based upon its review and with assistance from its external compensation consultant, the Compensation Committee makes recommendations to the Board of Directors regarding the CEO’s compensation. The Board then determines the CEO’s compensation, taking into account the Compensation Committee’s recommendation and their own review of the CEO’s performance. The CEO does not play a role in determining his own compensation, other than discussing his annual performance review with the Chairman of the Board. Mr. Smyth was hired in fiscal 2009 and his compensation for 2009 was established during the course of negotiating his employment arrangement, and thus was not subject to our normal CEO evaluation process. The evaluation process was performed for Mr. Smyth’s fiscal 2010 compensation. Alan M. Bennett, the Company’s current CEO, was hired in July 2010 and his compensation for fiscal year 2011 was established during the course of negotiating his employment arrangement.

 

Our Compensation Committee assesses the performance of other executive officers and approves the compensation of such officers, taking into account recommendations of the CEO and input from its external compensation consultant. Our CEO and senior vice president of human resources assist the Compensation Committee in reaching compensation decisions regarding executives other than the CEO and the senior vice president of human resources. In addition, the CEO (with input from other senior executives) develops

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recommendations for the Board’s approval regarding performance goals under our incentive compensation programs. Executive officers do not play a role in determining their own compensation, other than discussing their annual performance reviews with their supervisor.

 

Messrs. Andrews, Woram and Turtledove were hired during fiscal 2010 and their compensation was established during the course of negotiating their employment arrangements.

 

ANNUAL COMPENSATION PROGRAM REVIEW – Once each year, our Compensation Committee reviews all components of compensation for our CEO and other highly compensated executive officers. This review encompasses all forms of compensation, including base salary, short-term incentives, long-term incentives, and other vested benefit payouts, as well as amounts pursuant to retirement and non-qualified deferred compensation plans. As a part of this process, the Compensation Committee also reviews tally sheets of executive termination costs for each of these executive officers, including potential payments upon any “change of control.” Based on the fiscal year 2010 review, we believe our executive termination costs are reasonable and conservative relative to market practice. Further information regarding payments upon a change of control and other termination scenarios is provided on pages 50 through 52 in this proxy statement.

 

ELEMENTS OF EXECUTIVE COMPENSATION PROGRAM – Our executive compensation program consists of the following elements: base salary, short-term incentives, long-term incentives and benefits and perquisites. Each of our compensation elements fulfills one or more of our objectives of attracting, retaining, motivating and rewarding a high-performing executive team. These elements are evaluated by our Compensation Committee, which has authority to approve certain matters and makes recommendations to the Board regarding matters requiring Board approval (such as the compensation of our CEO and certain actions under plans in which the CEO participates). The Board takes these recommendations into account in making determinations.

 

Base Salary – We establish base salaries at levels designed to enable us to attract and retain talented executives and to reward these executives for consistent high performance over a sustained time period. We determine executive base salaries based on the executive’s role, experience and individual performance, as well as market data for similar positions within our industry.

 

For fiscal year 2010, base salaries for our NEOs were as follows:

 

 

In light of the Company’s performance in fiscal year 2009 and the economic climate, no increases in base salary were awarded to any of our NEOs for fiscal year 2010. Base salaries for Messrs. Andrews, Woram and Turtledove were determined during the negotiation of their employment arrangements. Mr. Gokey received normal payments of his base salary until his employment terminated on August 31, 2009.

 

No salary increases for fiscal year 2011 were awarded to any of our NEOs who are current executive officers due to a combination of the Company’s fiscal year 2010 performance, the current economic climate and market data.

 

Short-Term Incentive Compensation – Our short-term incentive (“STI”) compensation program is designed to reward executives for achieving pre-established annual financial and strategic goals. The financial performance goals are based on our fiscal year business plan. They are proposed by the CEO in consultation with other senior executives, and then reviewed by the Compensation Committee and, after any changes that are considered appropriate, are recommended to the Board for approval. These financial performance goals in general are tied directly to the business plan. Threshold and maximum performance goals are set below and above the target goals to establish an appropriate relationship between actual performance and changes in pay.

 

We pay STI compensation following completion of our fiscal year, and generally pay STI compensation only to the extent the Company (or applicable business unit) has met the applicable threshold financial and strategic

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performance objectives. Prior to payment, the Compensation Committee reviews and approves the STI compensation payouts for senior executives, and recommends the CEO’s STI compensation payout to the Board for approval. STI compensation payouts for fiscal year 2010 could range from 0% to 200% of the targeted award based on actual performance against previously established objectives. However, for fiscal year 2011 and beyond, such payouts can range from 0% to 175% of the targeted award based on actual performance against previously established objectives.

 

STI compensation payouts generally are paid in cash. Any payouts in excess of 150% of the targeted payouts are paid in restricted shares of our Common Stock under terms and restrictions identical to those of restricted stock awarded as long-term incentive compensation as described below. The amount of restricted stock awarded is calculated by dividing the cash value of the applicable incentive compensation by the last reported closing price for our Common Stock as of the later of June 30 or the third trading day following our announcement of earnings for the most recently completed fiscal year (the date on which we historically have awarded restricted stock each year). We pay a portion of our STI payouts with restricted stock to provide for a sustained high level of performance over an extended period of time and to provide executives with an economic interest in increasing overall shareholder value, thereby aligning executive and shareholder interests.

 

Actions Pertaining to Fiscal Year 2010 STI Compensation.  In July 2009, the Compensation Committee recommended and the Board approved the fiscal year 2010 STI performance criteria and objectives for corporate-level executive officers:

 

 

These criteria were selected because they were believed to represent the key business drivers of shareholder value for fiscal year 2010.

 

As President of RSM McGladrey, the Committee determined that Mr. Andrews’s STI performance criteria should be linked to both Company and RSM results. Accordingly, his 2010 criteria were set as follows:

 

 

The table below shows the target-level payouts under our 2010 STI program for our NEOs:

 

 

Mr. Smyth’s target opportunity was set under the terms of his Employment Agreement. For fiscal year 2010, Mr. Smyth, Ms. Shulman, and Mr. Turtledove received no short-term incentive payouts because the Company failed to meet pre-established goals under the Company’s Executive Performance Plan. In July of 2009, because of the contract negotiations between RSM McGladrey and McGladrey & Pullen, LLP, the outcome of which was uncertain at that time, the Board authorized a guaranteed minimum STI payment to Mr. Andrews for fiscal year 2010 of 80% of his target opportunity. The terms of Mr. Woram’s employment arrangement guaranteed him an STI payment of at least 50% of his annual target opportunity for his initial year of employment.

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Actions Pertaining to Fiscal Year 2011 STI Compensation.  At their July 2010 meetings, the Compensation Committee recommended and the Board approved fiscal year 2011 target STI opportunities for our senior executives including the following NEOs as follows:

 

 

These target opportunities are intended to place a significant portion of our NEOs’ fiscal year 2011 total cash compensation at risk with company performance, thereby aligning our NEOs’ compensation with shareholder interests. These target opportunities are also intended to provide competitive total compensation opportunities within our pay positioning context discussed above.

 

Fiscal year 2011 STI performance criteria for our NEOs will focus on corporate net earnings and client growth, except for Mr. Andrews, whose criteria will focus on RSM McGladrey pretax earnings, RSM McGladrey revenue and corporate net earnings. These criteria were selected as the key business drivers of shareholder value and are similar to the fiscal year 2010 STI performance criteria for our NEOs. The performance targets are established at levels such that our NEOs will receive a target-level payout when we meet our fiscal year 2011 business plan goals.

 

Long-Term Incentive Compensation – We pay equity-based compensation to encourage stock ownership by our executive officers and to provide executives an economic interest in increasing shareholder value over the longer term, thereby aligning executive and shareholder interests. We also use equity-based compensation to encourage retention by providing for equity-based compensation to vest over multi-year periods. We believe that our equity-based compensation is effective in attracting, retaining, and rewarding executives and key employees.

 

Equity-based compensation is awarded at the Board’s discretion, taking into account the Compensation Committee’s recommendations. We historically have awarded equity-based compensation on an annual basis as of the later of June 30 or the third trading day following our announcement of earnings for the most recently completed fiscal year; however, for fiscal year 2011, those equity-based compensation awards will be made on October 1, 2010, subject to shareholder approval of the amendment to the 2003 Long-Term Executive Compensation Plan to increase the aggregate number of shares issuable under the Plan, as described above on page 14. From time to time we award equity-based compensation as part of an employment offer or promotion or, in certain limited instances, as a special award. The amount of equity-based compensation awarded is based on the executive’s level of job responsibility, individual performance and long-term potential. The award amount is also guided by market data for positions of similar scope and responsibility.

 

In fiscal 2010, our NEOs received equity-based compensation in the form of stock options and restricted stock. Prior to fiscal 2010, our NEOs received an equity compensation mix that provided for performance shares with a three-year performance cycle. The Committee discontinued the practice of awarding performance shares to senior executives in fiscal year 2010, and instead awarded restricted stock with restrictions that lapse after a specified time, as more fully described below. The Committee moved to restricted stock grants because of the difficulty of identifying appropriate three-year performance measures. As discussed in detail below, Mr. Andrews also received a long-term incentive award at his date of hire comprised of both stock options and performance cash, both of which vest over a three-year cycle.

 

Our NEOs received a mix of equity-based compensation consisting of (i) approximately 80% of value in stock options and 20% of value in restricted stock in 2010. This mix will remain the same in 2011. The Compensation Committee weighted the mix of these awards to be consistent with our objective of providing compensation that is appropriately balanced. We weight the mix of equity-based compensation so that our NEOs receive a greater portion of long-term value in stock options to ensure that payouts from our equity programs are directly aligned with Company performance and shareholder value.

 

The forms of long-term compensation in 2010, which are awarded pursuant to our 2003 Long-Term Executive Compensation Plan, are as follows:

 

Stock Options – We have historically granted stock options annually as of the later of June 30 or the third trading day following our announcement of earnings for the most recently completed fiscal year. However, as discussed above, those grants for fiscal year 2011 will be made on October 1, 2010. In cases of grants for new hires, promotions and special awards, options are awarded as of the first trading day of the month following the month

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during which the hiring, promotion or special award occurred. Option exercise prices are set at the closing price of the stock on the date of grant and the options expire after ten years. We have not re-priced previously granted options.

 

Restricted Stock – Restricted stock has historically been granted annually as of the later of June 30 or the third trading day following our announcement of earnings for the most recently completed fiscal year. However, as discussed above, those grants for fiscal year 2011 will be made on October 1, 2010. In certain cases, upon hiring or promotion or as a special award, restricted stock is also awarded. Prior to the lapse of restrictions, restricted stock may not be transferred and is in most cases forfeited upon cessation of employment. Restricted stock recipients receive cash dividends on unvested restricted stock on the same basis as if such stock were unrestricted. However, beginning with grants made in fiscal year 2011 and beyond, restricted stock recipients will not receive cash dividends on any unvested restricted stock grants. Restricted stock recipients may vote unvested restricted stock shares at shareholder meetings.

 

Performance Cash – Pursuant to Mr. Andrews’ offer letter, he was provided with (i) an initial target long-term performance cash award of $562,500 and (ii) the right to receive subsequent annual long-term performance cash awards. This long-term performance cash award was granted on Mr. Andrews’ date of hire and was deemed instrumental in attracting him to the Company.

 

Mr. Andrews has the opportunity to receive a long-term performance cash payout in the range of 0%-300% of the target award based on RSM McGladrey’s cumulative earnings over a three-year performance period, as follows: (i) maximum long-term performance cash payout (300% of target) for cumulative earnings for fiscal years 2010-2012 of at least $481.7 million, (ii) target long-term performance cash payout (100% of target) for cumulative earnings for fiscal years 2010-2012 of at least $437.9 million, and (iii) no long-term performance cash payout for cumulative earnings for fiscal years 2010-2012 of less than $394.1 million. We believe that using a performance metric specific to RSM McGladrey for this purpose is more appropriate than using a corporate level performance metric because Mr. Andrews’ responsibilities, as President of RSM McGladrey, relate exclusively to RSM McGladrey and not to the Company’s other businesses.

 

Mr. Andrews’ long-term performance cash award vests after three years (pursuant to performance against the RSM McGladrey cumulative earnings objective) and will be pro-rated if Mr. Andrews’ employment is terminated before the end of the three-year performance period. The award will be linearly interpolated for performance between the minimum and maximum payouts described above.

 

For fiscal 2010, our NEOs (except for Mr. Gokey) were granted stock options and restricted stock in the following amounts (see above for details regarding Mr. Andrews’ long-term performance cash award):

 

 

 

Mr. Smyth’s awards were granted on October 1, 2009, after shareholder approval of the amendment and share reserve replenishment to our 2003 Long-Term Executive Compensation Plan. The stock options were to vest ratably over four years and the restricted stock was to vest in full on the fourth anniversary of the grant date. Mr. Smyth resigned as President and Chief Executive Officer effective July 7, 2010. In connection with his resignation, Mr. Smyth forfeited his fiscal year 2010 stock option and restricted stock awards. Ms. Shulman’s (i) stock options were awarded in June 2009, and were to vest in one-third annual increments beginning on the first anniversary date of grant, and (ii) restricted stock was awarded in June 2009 and was to vest in full on the third anniversary of the grant date. As discussed below on page 48, we entered into a Separation Agreement with Ms. Shulman pursuant to which the vesting of a portion of these stock options was accelerated and the remaining portion of the stock options and all of the restricted shares were forfeited. Mr. Andrews’, Mr. Woram’s and Mr. Turtledove’s awards were negotiated in connection with their hiring and were granted on the first trading day of the month following their employment. Mr. Andrews’ options vest in one-third annual increments, commencing one year after the date of grant. Mr. Woram’s options and restricted stock were to vest in one-fourth annual

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increments, commencing one year after the date of grant. Mr. Woram resigned as Senior Vice President and Chief Legal Officer of the Company effective July 2, 2010. In connection with his resignation, Mr. Woram forfeited his fiscal year 2010 stock option and restricted stock awards. Mr. Turtledove’s restricted stock vests in one-fourth annual increments, commencing one year after the date of grant.

 

In July 2010, our current NEOs were awarded long-term incentive compensation grants of $800,000 (Mr. Andrews) and $225,000 (Mr. Turtledove). Mr. Andrews’ award is allocated between options ($160,000) and performance cash ($640,000). Mr. Turtledove’s award is allocated between restricted stock ($45,000) and stock options ($180,000). Each of the equity awards will be granted on October 1, 2010 and will be contingent upon shareholder approval of the amendment to the 2003 Long-Term Executive Compensation Plan to increase the aggregate number of shares issuable under the Plan, as described above on page 14. Mr. Andrews’ performance cash award has a grant date of October 1, 2010. The actual amount of shares of restricted stock provided to Messrs. Andrews and Turtledove will be determined by dividing the dollar value of the award by the closing price of the Company’s stock on the grant date of October 1, 2010. The actual number of options awarded to Mr. Turtledove will be determined based on a four to one conversion ratio of options to shares. The restricted stock and stock options will vest in one-fourth annual increments beginning on the first anniversary date of grant. The performance cash terms for Mr. Andrews provide vesting after three years, with the actual amount of performance cash Mr. Andrews will ultimately receive depending on RSM McGladrey’s cumulative earnings for the three fiscal years ending April 30, 2013. Each of Mr. Andrews’ and Mr. Turtledove’s fiscal year 2011 long-term incentive compensation grants were increased slightly beyond their fiscal year 2010 hiring awards to recognize their fiscal year 2010 contributions and to be more aligned with market data for their respective roles. Maintaining alignment with market is a critical factor in the on-going retention of key executives.

 

Compensation “Clawback” Policy – In the event of a restatement of our financial results, the Board has the authority to seek reimbursement of any portion of performance-based or incentive compensation paid, vested or awarded in any previous year that is greater than would have been paid or awarded if calculated based on the restated financial results. It is the policy of the Board that it will seek such reimbursement in the event any such situation should arise.

 

Benefits – We provide certain benefits to all full-time employees such as: employer matching contributions to our qualified retirement plan; an employee stock purchase plan that permits purchases of our Common Stock at a discount; life insurance; and health and welfare benefit programs. Benefits for executives generally are the same as benefits for all other full-time employees, except that executive officers and certain key employees may participate in our executive life insurance plan and our deferred compensation plan. We believe our executive benefit program is conservative relative to market practice, which is consistent with our philosophy to emphasize the direct elements of our executive compensation program.

 

In order to attract and retain executives, we offer an executive life insurance plan that provides death benefits up to three times the participating executive’s salary. The death benefits are payable to beneficiaries designated by the participating executives.

 

Our deferred compensation plan is designed to build retirement savings by offering participants the opportunity to defer salary and short-term incentive compensation. Gains or losses are posted to a participant’s account pursuant to his or her selection of various investment alternatives. The plan benefits are paid following termination of employment, with a six month delay to fully comply with Internal Revenue Code Section 409A, except in cases of disability or hardship. This plan does not provide for any Company match.

 

In connection with his hiring, Mr. Woram was provided with an “early retirement” provision that provides for an extended stock option exercise window after eight years of employment with the Company. Specifically, this provision provided that as of the date of Mr. Woram’s retirement following eight years of employment, any vested stock options would have been exercisable until the earlier of five years after Mr. Woram’s retirement or the expiration term of the option.

 

Perquisites – We generally provide minimal perquisites to our senior executive officers. These perquisites consist primarily of reimbursements for tax preparation fees. We believe our overall executive perquisites are conservative relative to broader market practice.

 

In connection with their hiring, Mr. Woram and Mr. Turtledove received $112,000 and $31,609, respectively, for relocation expenses. Mr. Woram repaid $61,600 of his relocation expenses pursuant to Company policy because he resigned prior to working for one full year.

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EMPLOYMENT, TERMINATION OF EMPLOYMENT AND SEVERANCE ARRANGEMENTS –

 

Employment Agreements – In the past the Company has generally entered into employment agreements with its NEOs, including Mr. Smyth, that provide for compensation, severance and other benefits. The Company made the decision to move away from employment agreements for any new hires from fiscal year 2010 forward to standardize employment terms under other comprehensive agreements.

 

Mr. Smyth entered into an Employment Agreement in connection with his hiring in fiscal 2009. This Employment Agreement and Mr. Smyth’s resignation as President and Chief Executive Officer of the Company effective July 7, 2010 are described in more detail below under Employment Agreements, Change of Control and Other Arrangements, beginning on page 47.

 

Employment Arrangements – In connection with the fiscal year 2010 hiring of Messrs. Andrews, Turtledove and Woram, we included certain information regarding their initial compensation in their respective offer letters. Additional information about these offer letters and Mr. Woram’s resignation as Senior Vice President and Chief Legal Officer of the Company effective July 2, 2010 are set forth below under Employment Agreements, Change of Control and Other Arrangements on page 47.

 

Severance Plans – In the past we provided severance compensation and health and welfare benefits under the H&R Block Severance Plan (the “Severance Plan”) to certain executives whose employment was involuntarily terminated in certain instances. During fiscal 2010, the Severance Plan was applicable to Ms. Shulman and Mr. Gokey. The respective terms of Ms. Shulman’s separation and Mr. Gokey’s separation from the Company are discussed below.

 

In connection with the Company’s movement from executive employment agreements to standardized employment terms and agreements, in May 2009, the Company adopted the H&R Block Executive Severance Plan (“Executive Severance Plan”). Messrs. Andrews and Turtledove are participants in this plan and Mr. Woram was a participant in this plan during fiscal year 2010. The Executive Severance Plan generally provides for severance and 12 months of health and welfare benefits to be paid upon termination without cause or in the event of a change of control. The Executive Severance Plan also establishes provisions for vesting of equity awards. The Executive Severance Plan is discussed in more detail below under Employment Agreements, Change of Control and Other Arrangements. We believe the benefits our NEOs would receive under various severance scenarios are conservative relative to the market. A table showing potential severance payments is located on page 51 in this proxy statement.

 

Separation Agreements – Historically, in addition to our severance plans, the Company has entered into separation agreements with NEOs upon their resignation. These separation agreements detail the benefits they are to receive, both in connection with any existing employment agreements or severance plans and other matters in the discretion of the Compensation Committee or the Board, as applicable.

 

During fiscal year 2010 we entered into a Separation Agreement with Mr. Gokey and on May 4, 2010 we entered into a Separation Agreement with Ms. Shulman. Additional information about these Separation Agreements is set forth below under Employment Agreements, Change of Control and Other Arrangements on page 48 and 49.

 

Change of Control Provisions – In the past, our NEOs were parties to employment agreements that provided for payment of compensation and benefits in certain instances upon a change of control. As we have moved away from employment agreements for any new hires from fiscal year 2010 forward, change of control provisions are now set forth in the Executive Severance Plan, discussed above, and below on page 49 under Employment Agreements, Change of Control and Other Arrangements. We provide these “change of control” benefits as a means to attract and retain talented executives, who could have other job alternatives that may appear more attractive absent these benefits. In addition, by providing financial protection in the event that a transaction results in the loss of employment, the change of control program helps to ensure the independence and objectivity of our executives when reviewing potential transactions. The Company does not provide for any gross-up payments to offset tax liabilities that result from change of control payments, which are only paid following both a change of control and the subsequent loss of employment by the NEO (considered a “double trigger”).

 

In addition, in connection with equity awards granted pursuant to our 2003 Long-Term Executive Compensation Plan, our current NEOs have entered into award agreements with the Company that contain provisions accelerating the vesting of equity awards upon certain changes of control and the subsequent loss of employment following the business transaction. All equity provisions following a change of control are discussed below under Employment Agreements, Change of Control and Other Arrangements on page 50.

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OTHER AWARDS – We occasionally offer sign-on awards as a means to attract executives. These awards are typically offered in negotiating employment terms and generally are in the form of guaranteed short-term incentive bonuses in the initial year of employment, grants of long-term performance cash or long-term equity-based compensation, including stock options or restricted stock. As noted above, Mr. Andrews (equity-based compensation and long-term performance cash), Mr. Woram (minimum guaranteed short-term incentive bonus for fiscal year 2010 and equity-based compensation) and Mr. Turtledove (equity-based compensation) each received such awards during fiscal year 2010 for their initial year of employment.

 

STOCK OWNERSHIP GUIDELINES – We believe that our executive officers should have a significant financial stake in the Company to ensure that their interests are aligned with those of our shareholders. To that end, we have adopted stock ownership guidelines that define ownership expectations for certain executive officers. Under these guidelines, executive officers are expected to own shares at the following minimum levels within five years of employment (taking into account direct and indirect ownership of shares and share equivalents held in Company plans):

 

 

Executive officers subject to the Company’s executive stock ownership guidelines generally are in compliance, or are progressing toward compliance, with the guidelines. Of our current NEOs, each of whom has been with the Company for less than two years, Mr. Andrews is in compliance with the guidelines and Mr. Turtledove is progressing toward compliance with the guidelines. In instances where an executive fails to comply with stock ownership guidelines levels within five years, our CEO may prohibit the executive from selling shares acquired through the vesting of restricted stock or performance shares and may require the executive to utilize net cash bonuses to purchase shares. The Compensation Committee and our CEO review annually each executive’s progress toward meeting the stock ownership guidelines.

 

Beginning in fiscal year 2011, the stock ownership guidelines will change to reflect the more common practice of determining ownership levels as a multiple of base pay. In addition, executives will now be required to hold any equity that vests or is exercised (net of taxes) until ownership requirements are met. The new requirement levels are as follows:

 

 

ACCOUNTING FOR STOCK-BASED COMPENSATION – We recognize stock-based compensation expense for the issuance of stock options, restricted stock, and performance shares, as well as stock purchased under our employee stock purchase plan pursuant to FASB Accounting Standards Codification Topic 718 (formerly referred to as FAS 123(R)), “Share-Based Payment.” Under this accounting methodology, we recognize stock-based compensation expense for the issuance of stock options, restricted stock, performance shares and shares under our employee stock purchase plan on a straight-line basis over applicable vesting periods.

 

TAX CONSIDERATIONS – We believe it is in our shareholders’ best interest to maximize tax deductibility when appropriate. Section 162(m) of the Internal Revenue Code limits to $1 million our federal income tax deduction for compensation paid to any of our NEOs (other than our Chief Financial Officer), subject to certain exceptions, including for performance-based compensation. We have designed the H&R Block Executive Performance Plan and portions of our equity-based compensation so that such compensation would be deductible under Section 162(m), although individual exceptions may occur when the Compensation Committee and Board believe it is in our shareholders’ best interest, balancing tax efficiency with long-term strategic objectives. If necessary to comply with Section 162(m), certain compensation matters will be approved by the Company’s “outside” directors, as such term is defined under Section 162(m).

 

EMPLOYMENT OF ALAN M. BENNETT AS PRESIDENT AND CHIEF EXECUTIVE OFFICER – In response to Mr. Smyth’s resignation as President, Chief Executive Officer and as a Director of the Company effective July 7, 2010, the Board asked Mr. Bennett to return as President and Chief Executive Officer effective July 7, 2010. A copy

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of the letter describing the terms of Mr. Bennett’s employment was filed by the Company with the SEC under a Current Report on Form 8-K on August 12, 2010. The terms of Mr. Bennett’s employment are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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As discussed above, Mr. Bennett’s employment terms include a limited, one-year excise tax gross-up provision relating to a change in control. Following Mr. Smyth’s resignation, the Board determined that it was desirable to appoint a new Chief Executive Officer promptly so that planning for the 2011 tax season could be continued without interruption. The Board also concluded that Mr. Bennett’s extensive knowledge of the Company’s business derived from his prior experience as interim Chief Executive Officer in 2007-2008 and his continuing service on the Company’s Board of Directors made him well suited for the position. Because of the manner in which excise taxes are determined under IRS rules, the Board recognized that Mr. Bennett was more likely to face potential excise taxes in the initial year of employment, and that such a consequence could create an economic disincentive to support potential transactions that may be in shareholders’ best interests. Consequently, the Board believed that the provision of a limited tax gross-up was appropriate in light of these circumstances and for several other reasons, including (i) the fact that Mr. Bennett will not receive cash severance compensation if his employment terminates following a change in control, (ii) the fact that the gross-up will only apply if the total value of change in control payments exceeds by at least $100,000 the IRS “safe harbor” (i.e., the amount of parachute payment below which no excise tax would apply), and (iii) the limited time and scope of Mr. Bennett’s gross-up relative to typical gross-up provisions.

 

The Company has historically avoided the use of excise tax gross-up provisions relating to a change in control and has no gross-up obligations in place with respect to any other Company executives. Mr. Bennett’s gross-up provision provides benefits substantially reduced from gross-up provisions used by many other companies. Most importantly, Mr. Bennett’s gross-up provision expires approximately one year from the date of Mr. Bennett’s hire (July 7, 2011), compared to the multi-year terms or indefinite expiration dates used by many other companies. Consistent with the Company’s historical practice, in the future we intend to refrain from providing excise tax gross-up provisions relating to a change in control.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis. Based on its review and discussion with management, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2010 proxy statement.

 

COMPENSATION COMMITTEE

Tom D. Seip, Chairman

Len J. Lauer

L. Edward Shaw, Jr.

Christianna Wood

 

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION –

 

The following non-employee directors serve on the Compensation Committee of the Board of Directors: Tom D. Seip (Chairman), Len J. Lauer, L. Edward Shaw, Jr. and Christianna Wood. No director serving on the Compensation Committee during fiscal year 2010 (a) was or was formerly an officer or employee of the Company or any of its subsidiaries, or (b) had any relationships requiring disclosure in the proxy statement.

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SUMMARY COMPENSATION TABLE –

 

The following table sets forth for the fiscal year ended April 30, 2010 the compensation paid to or earned by the Company’s principal executive officer and principal financial officer, each of the Company’s three highest paid executive officers (other than the principal executive officer and principal financial officer) who were serving as an executive officer of the Company at the end of such fiscal year, and one additional executive officer (Mr. Gokey) who would have been included as one of the three other highest paid executive officers, but for the fact he was not serving as an executive officer as of April 30, 2010 (collectively, the “Named Executive Officers”).

 

 

NOTES:

 

 

 

 

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GRANTS OF PLAN-BASED AWARDS TABLE –

 

The following table provides information about non-equity incentive plan awards, equity incentive plan awards, and stock awards granted to our Named Executive Officers during the fiscal year ended April 30, 2010. The compensation plans under which the grants in the following table were made are described on pages 34 through 36 in this proxy statement.

 

 

NOTES:

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE –

 

The following table summarizes the equity awards made to our Named Executive Officers which are outstanding as of April 30, 2010.