DEF 14A 1 noc-2020xdef14adraft.htm DEF 14A Document





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
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Preliminary Proxy Statement
  
 
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  
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Definitive Proxy Statement
  
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Definitive Additional Materials
  
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Soliciting Material Pursuant to §240.14a-12
  
Northrop Grumman Corporation
 
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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April 3, 2020
On behalf of the Board of Directors and management team, we cordially invite you to attend Northrop Grumman Corporation's 2020 Annual Meeting of Shareholders. This year's meeting is scheduled to be held on Wednesday, May 20, 2020 at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042 beginning at 8:00 a.m., Eastern Daylight Time.
We look forward to meeting those of you who are able to attend the meeting. For those who are unable to attend, live coverage of the meeting will be available on the Northrop Grumman website at www.northropgrumman.com. At this meeting, shareholders will vote on matters set forth in the accompanying Notice of 2020 Annual Meeting of Shareholders and Proxy Statement. We will also provide a report on our Company.
We are currently monitoring the situation regarding COVID-19 and our thoughts go out to all those who have been impacted. In the event that we determine that it is not advisable to hold our Annual Meeting in person, we will announce alternative arrangements as described in the accompanying Notice of 2020 Annual Meeting of Shareholders and Proxy Statement.
2019 was a strong year for our Company. In addition to total shareholder return of 42.7%, sales rose 12%, operating income increased 5% and segment operating income* increased 13%. Sales and segment operating income* growth reflect a full year of Innovation Systems sector (the former Orbital ATK) and continued profitable growth at Aerospace Systems and Mission Systems. In 2019, we captured more than $45 billion in new business, and our total backlog increased 21% to nearly $65 billion. Our businesses generated $4.3 billion in cash and our free cash flow* increased 18% to more than $3.0 billion.
Our strong cash generation continues to enable value-creating capital deployment. We invested $1.3 billion in capital expenditures to drive innovation and affordability for our customers. We reduced debt by $500 million, made voluntary contributions to our pension funds, and distributed $1.6 billion to our shareholders through dividends and share repurchases. We increased our quarterly dividend 10% and reduced our weighted average share count by 3%.
We took strategic actions to align further with our customers' priorities. Effective January 1, 2020, we have a new structure that more closely aligns our capabilities with our customers' priority investment areas of space, missiles, hypersonics and stealth. Our realigned sectors are Aeronautics Systems, Defense Systems, Mission Systems and Space Systems. Our new Space Systems sector unifies our significant space and launch capabilities in a single organization for accelerated development of innovative and affordable offerings.
We also introduced our new "Defining Possible" brand to reinforce the value we are providing through performance and innovation. Discovery and innovation are at the heart of what we do. We show our customers what is possible through a performance framework and culture that balance agility and affordability with quality and safety. We continue to strengthen our culture through leading environmental, social and governance practices. Female representation on our Board has increased to more than 30%. During the period from 2010 to 2020, women on our senior executive team increased from 8% to 58%, and at the vice president level from 15% to 30%. DiversityInc named us one of their Top 50 Companies for Diversity for the tenth year in a row; Indeed ranked us in 2019 as one of the 50 Top-Rated Workplaces; we were included for the fourth consecutive year in the Dow Jones Sustainability Index for North America; and we maintained our leadership score in CDP's 2019 climate change program for an eighth consecutive year. We continue to be actively engaged with our shareholders to ensure our governance, compensation and sustainability practices are well designed to support long-term profitable growth and value creation for our shareholders, customers and employees.
Your vote is important. Your proxy or voting instruction card includes specific information regarding the several ways to vote your shares. We encourage you to vote as soon as possible. You may vote over the internet, by telephone or mobile device, by mailing a proxy or voting instruction card or in person at the Annual Meeting.
Thank you for your support and continued interest in Northrop Grumman Corporation.
Kathy Warden
Donald E. Felsinger
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Chairman, Chief Executive Officer and President
Lead Independent Director
    
 * This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."    

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I



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Notice of 2020 Annual
Meeting of Shareholders

Wednesday, May 20, 2020
8:00 a.m., Eastern Daylight Time
Northrop Grumman Corporation, Principal Executive Office
2980 Fairview Park Drive, Falls Church, Virginia 22042

The 2020 Annual Meeting of Shareholders (Annual Meeting) of Northrop Grumman Corporation (Company) will be held on Wednesday, May 20, 2020 at 8:00 a.m., Eastern Daylight Time, at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042.
Shareholders of record at the close of business on March 24, 2020 are entitled to vote at the Annual Meeting. The following items are on the agenda:
1.
The election of the 12 nominees named in the accompanying Proxy Statement;
2.
A proposal to approve, on an advisory basis, the compensation of our Named Executive Officers;
3.
A proposal to ratify the appointment of Deloitte & Touche LLP as our Independent Auditor for the year ending December 31, 2020;
4.
A shareholder proposal that the Company assess and report on potential human rights impacts that could result from governments' use of our products and services, including in conflict-affected areas;
5.
A shareholder proposal to move to a 3% ownership threshold for shareholders to request action by written consent; and
6.
Any other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.
All shareholders of record at the close of business on March 24, 2020 are invited to attend the Annual Meeting. To be admitted you will need proof of stock ownership. If your broker holds your shares in "street name," you will also need proof of beneficial ownership of Northrop Grumman common stock. If you are acting as a proxy for a shareholder, you will need proof of your proxy power and proof of share ownership (as of the Annual Meeting record date) for the shareholders for whom you are acting as proxy. Admission to the meeting will be limited to shareholders and beneficial owners who held their shares as of the Annual Meeting record date and to persons acting as proxies of those shareholders. All persons attending the meeting will need a form of government-issued photo identification.
While we currently intend to hold our Annual Meeting in person, we are monitoring the situation regarding COVID-19 (Coronavirus) and are sensitive to the public health and travel concerns our shareholders may have and the protocols that federal, state and local governments may impose. In the event we conclude it is not advisable to hold our Annual Meeting in person, we will announce alternative arrangements for the meeting as promptly as practicable, which may include holding the meeting solely by means of remote communication. Please monitor the Investor Relations section of our website (www.northropgrumman.com) and www.edocumentview.com/noc for updated information. If you are planning to attend the Annual Meeting, please check the website prior to the meeting date.

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT l    



We encourage all shareholders to vote on the matters described in the accompanying Proxy Statement prior to the Annual Meeting. Please see the section entitled "Questions and Answers About the Annual Meeting" on page 75 for information about voting over the internet, by telephone or mobile device, by mailing a proxy or voting instruction card or by attending in person at the Annual Meeting.
By order of the Board of Directors,
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Jennifer C. McGarey
Corporate Vice President and Secretary
April 3, 2020 
Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to be held on May 20, 2020: The Proxy Statement for the 2020 Annual Meeting of Shareholders and the Annual Report for the year ended December 31, 2019 are available at: www.edocumentview.com/noc.

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT l  


TABLE OF CONTENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I i


TABLE OF CONTENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




ii I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROXY STATEMENT SUMMARY



This summary highlights information contained elsewhere in this Proxy Statement, reflecting business, compensation and corporate governance highlights. For additional information about these topics, please refer to the discussions contained in this Proxy Statement and in our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) on January 30, 2020. This Proxy Statement contains certain non-GAAP financial measures, which are identified with asterisks. For more information, including definitions, reconciliations to the most directly comparable GAAP (accounting principles generally accepted in the United States of America) measure and why we believe these measures may be useful to investors, see "Appendix A - Use of Non-GAAP Financial Measures." We intend to mail a Notice of Internet Availability of Proxy Materials to shareholders of record and to make this Proxy Statement and accompanying materials available on the internet on or about April 3, 2020.
2019 Performance Highlights (page 38)
Our focus on performance, portfolio and capital deployment continues to strengthen our foundation for long-term profitable growth and create value for our shareholders, customers and employees.
2019 was a strong year for our Company. We generated strong financial results and took strategic actions to ensure our Company remains well positioned for the future. In addition to a total shareholder return of 42.7%, sales rose 12%, operating income increased 5%, segment operating income* increased 13%, earnings per share were $13.22 and MTM-adjusted earnings per share* totaled $21.21. Sales growth reflects a full year of our new Innovation Systems sector (the former Orbital ATK) as well as continued growth at our legacy Aerospace Systems and Mission Systems sectors. We captured more than $45 billion in new business, 1.3 times 2019 sales, and our total backlog increased 21% to approximately $65 billion. Cash provided by operating activities increased $470 million, to $4.3 billion and free cash flow* increased to more than $3.0 billion.
Our strong cash generation enabled us to continue deploying cash for the benefit of our customers, shareholders and employees. In 2019, our capital expenditures totaled $1.3 billion, and we invested $953 million in R&D. We are investing to strengthen the foundation for long-term profitable growth and drive affordability for our customers. We returned $1.6 billion to our shareholders through dividends and share repurchases. We increased our quarterly dividend by 10% to $1.32 per share, and reduced our weighted average share count by 3%.
On January 1, 2019, after robust and extended succession planning, Kathy Warden succeeded Wes Bush as CEO, and in August 2019 Ms. Warden became Chairman of the Board of Directors, upon Mr. Bush's retirement.
 
42.7% 2019 Total Shareholder Return 
 
12% Sales increase to $33.8 billion

Total backlog increases 21% to ~$65 billion
 
Share repurchases and dividends total $1.6 billion;
10% increase in quarterly dividend per share
 
$1.3 billion Capital Expenditures

Internal R&D spending of $953 million
 
$4.3 billion Cash Provided by Operations

$3 billion Free Cash Flow*
 
 
 
 
 
 
 
 
 
* This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 1


PROXY STATEMENT SUMMARY



2019 Executive Compensation Highlights (page 37)
We are committed to performance-based executive compensation programs that align with shareholders' interests and our strategy of investing for and delivering long-term profitable growth.
Due to strong financial performance in 2019, our 2019 Annual Incentive Plan (AIP) payout increased to 167%, from 160% in 2018. Our 2019 Long-Term Incentive Plan (LTIP) payout is 119% compared to 115% in 2018 for named executive officers (NEOs). We ranked in the 40th percentile for three-year TSR performance relative to the 2017 Performance Peer Group identified on page 42, ranked in the 59th percentile for three-year TSR performance relative to the S&P Industrials and exceeded our target for Cumulative Free Cash Flow* (Cumulative FCF*). Following are some governance principles of our 2019 executive compensation programs:
70% of Annual LTIP Equity Grant Performance-Based
 
Stock Ownership Guidelines for All Officers:
CEO 7x
Other NEOs 3x
 
3-Year Mandatory
Holding Period for 50% of Vested Shares
 
Recoupment Policy 
on Cash and Equity Incentive Payouts
 
No Individual Change in Control Agreements

Board Nominees (pages 6-12)
Name
Age (1)
Director
since
Professional Background
Committee Memberships
Other Public
Company Boards
Audit
Comp
Gov
Policy
Marianne C. Brown
61
03/2015
Former Chief Operating Officer, Global Financial Solutions, Fidelity National Information Services, Inc.
 
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2
Donald E. Felsinger
72
02/2007
Lead Independent Director, Northrop Grumman Corporation; Former Chairman and CEO, Sempra Energy
 
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1
Ann M. Fudge
68
03/2016
Former Chairman and Chief Executive Officer, Young & Rubicam Brands
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1
Bruce S. Gordon
74
10/2008
Former President, Retail Markets Group, Verizon Communications Inc.; Former President and CEO, NAACP
 
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William H. Hernandez
72
09/2013
Former Senior Vice President and CFO, PPG Industries, Inc.
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1
Madeleine A. Kleiner
68
10/2008
Former Executive Vice President and General Counsel, Hilton Hotels Corporation
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1
Karl J. Krapek
71
09/2008
Former President and COO, United Technologies Corporation
 
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2
Gary Roughead
68
02/2012
Retired Admiral, United States Navy and Former Chief of Naval Operations
 
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Thomas M. Schoewe
67
08/2011
Former Executive Vice President and CFO, Wal-Mart Stores, Inc.
 
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2
James S. Turley
64
02/2015
Former Chairman and Chief Executive Officer, Ernst & Young
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3
Kathy J. Warden
48
07/2018
Chairman, Chief Executive Officer and President, Northrop Grumman Corporation
1
Mark A. Welsh III
66
12/2016
Dean of the Bush School of Government and Public Service, Texas A&M University; Retired General, United States Air Force and Former Chief of Staff, United States Air Force
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(1)
Age as of April 3, 2020. iconcblkwhitebkgd.jpg = Chair iconnocblkwhitebkgd.jpg = Member

2 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROXY STATEMENT SUMMARY



Board Nominee Highlights
The charts below reflect the tenure, independence and broad experience of our board nominees.
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NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 3


PROXY STATEMENT SUMMARY



Governance Highlights (pages 13-25)
We are committed to high standards of corporate governance and have a robust corporate governance program intended to promote the long-term success of our Company. Some highlights of our corporate governance practices are listed below.
Board Structure and Governance
 
The Board is approximately 92% independent.
 
Each of the Audit, Compensation, Governance and Policy Committees is comprised entirely of independent directors.
 
Our policy limits the number of boards on which our directors serve (no more than three other public company boards without special approval) to avoid overboarding.
 
The independent directors regularly hold both executive sessions led by our Chairman and independent sessions led by our Lead Independent Director.
 
Our Lead Independent Director, appointed annually by the independent directors, is empowered with a robust set of responsibilities and provides additional independent oversight of senior management and Board leadership.
 
All directors are elected annually based on a majority voting standard in uncontested elections, with a director resignation policy if a director fails to receive a majority of votes cast "for" his or her election.
 
The Board nominees reflect a balanced mix of directors with deep Company and industry knowledge, and fresh and diverse perspectives, with an average director tenure of 7.3 years.
 
The Board and each Committee annually conduct a thorough self-assessment process focused on Board or Committee performance, respectively. In addition, each director completes an individual director evaluation for each of the other directors and receives feedback on his or her own performance.
 
We are committed to Board refreshment and have a director retirement policy for directors who reach the age of 75; we have added five new directors to the Board since the beginning of 2015.
 
 
 
 
Shareholder Rights
 
The Board has long adopted a progressive governance structure that includes a proxy access bylaw provision, allowing eligible shareholders to include their own director nominees in the Company's proxy materials.
 
Shareholders holding at least 25% of our common stock also have the right to call a special meeting.
 
Shareholders holding at least 25% of our common stock also have the right to take action by written consent.
 
Shareholders have the ability to communicate and meet directly with our management and directors as needed.
 
 
 
 
Corporate Responsibility and Sustainability
 
We have a strong ethics program with standards of business conduct that help guide and promote good governance, responsible business practices and the highest standards of integrity throughout the Company.
 
We have a strong corporate culture, focused on ethics, trusted relationships, respect, diversity and inclusion, performance, innovation and delivering extraordinary results.
 
We have extensive and long-standing programs to fulfill our commitment to diversity and inclusion throughout the Company and support diverse communities, especially in the area of STEM education.
 
We have a robust corporate responsibility and sustainability program and publish an annual report highlighting numerous aspects of our social, environmental and governance performance, with an independent external review panel engaged to provide feedback and advice.
 
We integrate our environmental program into our organizational culture, minimizing our environmental footprint and driving affordability. Our executive officers are accountable for achieving environmental sustainability goals, which are one of our seven non-financial corporate performance metrics.
 
We disclose our political contributions policy and various trade association memberships on our website.
 
We have a robust recoupment policy which provides the Board of Directors with the ability to recoup the incentive compensation of elected officers under various circumstances.
 
 
 
 
Stock Ownership
 
We have stock ownership guidelines of 7x base salary for the CEO and 3x base salary for other named executive officers, as well as stock holding requirements of three years from the vesting date.
 
We have stock ownership guidelines of 5x the annual cash retainer for our non-employee directors.

4 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROXY STATEMENT SUMMARY



Shareholder Engagement
We regularly engage with our shareholders to understand their perspectives on our Company, including our strategies, performance, and executive compensation, as well as our cash deployment and our environmental, social and governance practices. This ongoing dialogue, in which both members of management and directors participate, has helped inform the Board's decision-making and ensure we remain well-aligned as we work to promote the long-term interests of our shareholders.
Since our 2019 annual meeting, we have offered to engage on governance-related and other sustainability topics with shareholders representing approximately 65% of our outstanding shares. We have engaged with shareholders representing more than 35% of our outstanding shares to learn their perspectives on the Company and these topics. While a number of our shareholders declined engagement, we believe it is a best practice to offer engagement to shareholders representing a majority of our shares outstanding. These efforts are in addition to normal course outreach conducted by our Investor Relations team and members of senior management with portfolio managers and analysts. We also meet with shareholders at investor conferences held throughout the year.
The Company has a substantial record of adopting provisions or modifying practices with the benefit of, and to reflect, shareholder input. Examples include provisions regarding proxy access, the right of shareholders to call a special meeting and the right of shareholders to act by written consent, as well as the use of full value shares and performance-based long-term incentives for our executives.
Annual Shareholders' Meeting
Time:  May 20, 2020, 8:00 a.m., Eastern Daylight Time
Record Date:  You can vote if you were a shareholder of record at the close of business on March 24, 2020.
Place:  Northrop Grumman Corporation
             2980 Fairview Park Drive
             Falls Church, Virginia 22042
Admission:  You will need proof of stock ownership and a form of government-issued photo identification. All recording devices are prohibited in the meeting.
Voting Matters and Board Recommendations
 
Board Vote Recommendation
Page Reference

Proposal One: Election of Directors
FOR each Director Nominee
6

Proposal Two: Advisory Vote on Compensation of Named Executive Officers
FOR
35

Proposal Three: Ratification of Appointment of Independent Auditor
FOR
67

Proposal Four: Shareholder Proposal That the Company Assess and Report on Potential Human Rights Impacts That Could Result from the Governments' Use of Our Products and Services, Including in Conflict-Affected Areas
AGAINST
70

Proposal Five: Shareholder Proposal to Move to a 3% Ownership Threshold for Shareholders to Request Action by Written Consent
AGAINST
73



NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 5


PROPOSAL ONE: ELECTION OF DIRECTORS



2020 Nominees for Director
Our Board has nominated 12 directors for election at the Annual Meeting. Each of the director nominees has consented to serve, and we do not know of any reason why any of them would be unable to serve, if elected. If a nominee becomes unavailable or unable to serve before the Annual Meeting (for example, due to serious illness), the Board may determine to leave the position vacant, reduce the number of authorized directors or designate a substitute nominee. If any nominee becomes unavailable for election to the Board, an event which is not anticipated, the proxyholders will have full discretion and authority to vote, or refrain from voting, for any other nominee in accordance with their judgment.
The following pages contain biographical and other information about each of the nominees. In addition, we have provided information regarding some of the particular experiences, qualifications, attributes and skills that led the Board to conclude that each nominee should serve as a director.
Unless instructed otherwise, the proxyholders will vote the proxies received by them "FOR" the election of the director nominees listed below.
KATHY J. WARDEN, 48
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Chairman, Chief Executive Officer and President, Northrop Grumman Corporation.
 
Director since July 2018

 
 
 
Ms. Kathy J. Warden has served as Chairman since August 2019 and as Chief Executive Officer and President of the Company since January 2019. She has served on the Board of Directors since July 2018. Prior to becoming CEO, Ms. Warden served as President and Chief Operating Officer of the Company from January 2018 through December 2018, as Corporate Vice President and President of the Company's Mission Systems Sector from 2016 through 2017, as Corporate Vice President and President of the Company's former Information Systems Sector from 2013 to 2015, and as Vice President of the Company's Cyber Intelligence Division from 2011 to 2012. Prior to joining the Company in 2008, Ms. Warden held leadership roles at General Dynamics and Veridian Corporation. Earlier, she was a principal in a venture internet firm and also spent nearly a decade with General Electric Company working in commercial industries. Ms. Warden is a member of the Board of Directors of Merck & Co., Inc. She is also the Chair of the Board of Directors of the Federal Reserve Bank of Richmond and a member of the Board of Visitors of James Madison University.
Attributes, Skills and Qualifications
    Extensive experience in operational leadership, strategy, performance and business development in government and commercial markets, including cyber expertise
    Prior leadership positions within Northrop Grumman (including as President, Chief Operating Officer and President of two business sectors)
    Significant aerospace and defense industry experience


6 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROPOSAL ONE: ELECTION OF DIRECTORS



MARIANNE C. BROWN, 61
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Former Chief Operating Officer, Global Financial Solutions, Fidelity National Information Services, Inc., a financial services technology solutions provider.

Director since March 2015

Member of the Compensation Committee and Policy Committee
 
 
 
Ms. Marianne C. Brown served as the Chief Operating Officer of Fidelity National Information Services, Inc.'s (FIS) Global Financial Solutions organization from January 2018 until June 2019. Prior to that, Ms. Brown served as Chief Operating Officer, Institutional and Wholesale Business of FIS since December 2015, when it acquired SunGard Financial Systems. Ms. Brown was the Chief Operating Officer of SunGard Financial Systems, a software and IT services provider, from February 2014 to November 2015. Prior to that, Ms. Brown was the CEO and president of Omgeo, a global financial services technology company, from March 2006 to February 2014. Before joining Omgeo, she was the CEO of the Securities Industry Automation Corporation. Ms. Brown began her career at Automatic Data Processing (ADP) and progressed through a series of positions of increasing responsibility culminating in her role as general manager of ADP’s Brokerage Processing Services business, which was subsequently spun off to become Broadridge Financial Solutions. Ms. Brown serves on the Boards of Directors of Akamai Technologies, Inc. and VMWare, Inc.
Attributes, Skills and Qualifications
    Substantial business experience as Chief Operating Officer and as a former Chief Executive Officer
    Significant experience in IT goods and services and business management
    Community and philanthropic leader

DONALD E. FELSINGER, 72
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Lead Independent Director of the Board of Directors, Northrop Grumman Corporation.

Former Chairman and Chief Executive Officer, Sempra Energy, an energy services holding company.

Director since February 2007

Member of the Compensation Committee and Governance Committee
 
 
 
Mr. Donald E. Felsinger is the former Chairman and Chief Executive Officer of Sempra Energy. From July 2011 through his retirement in November 2012, he served as Executive Chairman of the Board of Directors of Sempra Energy, and from February 2006 through June 2011, he was Sempra's Chairman and CEO. Prior to that, Mr. Felsinger was President and Chief Operating Officer of Sempra Energy from January 2005 to February 2006 and a member of the Board of Directors. From 1998 through 2004, he was Group President and CEO of Sempra Global. Prior to the merger that formed Sempra Energy, he served as President and Chief Operating Officer of Enova Corporation, the parent company of San Diego Gas & Electric (SDG&E). Prior positions included President and Chief Executive Officer of SDG&E, Executive Vice President of Enova Corporation and Executive Vice President of SDG&E. Mr. Felsinger is a member of the Board of Directors of Archer-Daniels-Midland (Lead Independent Director) and served as a director of Gannett Co., Inc. during the last five years.
Attributes, Skills and Qualifications
    Extensive business experience as Chief Executive Officer, a board member and Chairman of other Fortune 500 companies in regulated industries
    Significant experience in corporate governance and strategy, and as Lead Independent Director of a Fortune 250 company
    In-depth knowledge of executive compensation and benefits


NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 7


PROPOSAL ONE: ELECTION OF DIRECTORS



ANN M. FUDGE, 68
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Former Chairman and Chief Executive Officer, Young & Rubicam Brands, a marketing communications company.
 
Director since March 2016
 
Member of the Audit Committee and Governance Committee
 
 
 
Ms. Ann M. Fudge served as Chairman and Chief Executive Officer of Young & Rubicam Brands at WPP Group PLC from May 2003 to December 2006. Prior to that, she served in various leadership positions at Kraft Foods from 1986 to 2001, including President of Beverages, Desserts and Post Divisions, and President of Maxwell House Coffee and Kraft General Foods. From 1977 to 1986, Ms. Fudge held a variety of marketing positions at General Mills. She is a director of Novartis AG, and served as a director of General Electric Company and Unilever during the last five years. Ms. Fudge is the Chair of the Board of Trustees of WGBH Public Media and a trustee of the Brookings Institution.
Attributes, Skills and Qualifications
    Extensive business experience as former Chief Executive Officer and former president of leading consumer products business units
    Substantial international experience through service as an executive and director of a large multinational company and a director of other large multinational companies
    Significant public company board experience
    Experience with talent development and acquisition

BRUCE S. GORDON, 74
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Former President, Retail Markets Group, Verizon Communications Inc., a telecommunications company, and Former President & CEO, NAACP.
 
Director since October 2008
 
Member of the Compensation Committee and Policy Committee
 
 
 
 
Mr. Bruce S. Gordon served as President and Chief Executive Officer of the National Association for the Advancement of Colored People from June 2005 to March 2007. In 2003, Mr. Gordon retired from Verizon Communications Inc., where he had served as President, Retail Markets Group since 2000. Prior to that, Mr. Gordon served as Group President of the Enterprise Business Unit, President of Consumer Services, Vice President of Marketing and Sales and Vice President of Sales for Bell Atlantic Corporation (Verizon's predecessor). He is a member of the board of directors of the Newport Festival Foundation and a member of the Executive Leadership Council. Mr. Gordon served as a director of CBS Corporation and as the Non-Executive Chair of The ADT Corporation during the last five years. He currently serves as a diversity consultant to several Fortune 500 companies.
Attributes, Skills and Qualifications
    Extensive leadership and business skills acquired from his experience with corporate and non-profit enterprises
    National leader on issues of diversity and inclusion
    Significant board experience, including as non-executive chair


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PROPOSAL ONE: ELECTION OF DIRECTORS



WILLIAM H. HERNANDEZ, 72
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Former Senior Vice President and Chief Financial Officer, PPG Industries, Inc., a manufacturer of chemical and industrial products.
 
Director since September 2013
 
Member of the Audit Committee (Chair) and Governance Committee 
 
 
 
Mr. William H. Hernandez served as Senior Vice President, Finance, and Chief Financial Officer of PPG Industries, Inc. (PPG), from 1995 until his retirement in 2009. Prior to that, he was PPG's corporate controller from 1990 to 1994. Mr. Hernandez previously held a number of positions with Borg-Warner Corporation and Ford Motor Company. Mr. Hernandez is a certified management accountant and has taught finance and management courses at Marietta College. He is a member of the Board of Directors of Albemarle Corporation and served as a director of Black Box Corporation and USG Corporation during the last five years.
Attributes, Skills and Qualifications
    Extensive experience and expertise in areas of finance, accounting and business management acquired as Chief Financial Officer of PPG Industries
    Significant experience in areas of risk management
    Audit committee financial expert

MADELEINE A. KLEINER, 68
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Former Executive Vice President and General Counsel, Hilton Hotels Corporation, a hotel and resort company.
 
Director since October 2008
 
Member of the Audit Committee and Governance Committee (Chair)
 
 
 
 
Ms. Madeleine A. Kleiner served as Executive Vice President, General Counsel and Corporate Secretary for Hilton Hotels Corporation from January 2001 until February 2008. From 1999 through 2001, she served as a director of a number of Merrill Lynch mutual funds operating under the Hotchkis and Wiley name. Ms. Kleiner served as Senior Executive Vice President, Chief Administrative Officer and General Counsel of H.F. Ahmanson & Company and its subsidiary, Home Savings of America, until the company was acquired in 1998, and prior to that was a partner at the law firm of Gibson, Dunn and Crutcher where she advised corporations and their boards primarily in the areas of mergers and acquisitions, corporate governance and securities transactions and compliance. Ms. Kleiner currently serves on the Board of Directors of Jack in the Box Inc.
Attributes, Skills and Qualifications
    Expertise in corporate governance, Sarbanes-Oxley controls, risk management, securities transactions and mergers and acquisitions
   Significant experience from past roles as general counsel for two public companies, outside counsel to numerous public companies and through service on another public company board
    Audit committee financial expert


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PROPOSAL ONE: ELECTION OF DIRECTORS



KARL J. KRAPEK, 71
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Former President and Chief Operating Officer, United Technologies Corporation, an aerospace and building systems company.
 
Director since September 2008
 
Member of the Compensation Committee and Governance Committee
 
 
 
 
Mr. Karl J. Krapek served as President and Chief Operating Officer of United Technologies Corporation from 1999 until his retirement in January 2002. At United Technologies Corporation, he served for 20 years in various leadership positions, including as Executive Vice President and director in 1997, President and Chief Executive Officer of Pratt & Whitney in 1992, Chairman, President and Chief Executive Officer of Carrier Corporation in 1990 and President of Otis Elevator Company in 1989. Prior to joining United Technologies Corporation, he was Manager of Car Assembly Operations for the Pontiac Motor Car Division of General Motors Corporation. In 2002, Mr. Krapek became a co-founder of The Keystone Companies, which develops residential and commercial real estate. He serves on the Board of Directors of Trinity Health of New England. Mr. Krapek is a member of the the Boards of Directors of Prudential Financial, Inc. and Pensare Acquisition Corp.
Attributes, Skills and Qualifications
    Extensive industry experience and leadership skills
    Deep operational experience in aerospace and defense, domestic and international business operations and technology and lean manufacturing
    Significant public company board experience, including serving as Lead Independent Director

GARY ROUGHEAD, 68
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Admiral, United States Navy (Ret.) and Former Chief of Naval Operations.
 
Director since February 2012
 
Member of the Compensation Committee and Policy Committee (Chair)
 
 
 
 
Admiral Gary Roughead retired from his position as the 29th Chief of Naval Operations in September 2011, after serving in that position for four years. The Chief of Naval Operations is the senior military position in the United States Navy. As Chief of Naval Operations, Admiral Roughead stabilized and accelerated ship and aircraft procurement plans and the Navy's capability and capacity in ballistic missile defense and unmanned air and underwater systems. He restructured the Navy to address the challenges and opportunities in cyber operations. Prior to becoming the Chief of Naval Operations, he held six operational commands (including commanding both the Atlantic and Pacific Fleets). Admiral Roughead is a Robert and Marion Oster Distinguished Military Fellow at the Hoover Institution. He is a director of Maersk Line, Limited and Chairman of the Board of Directors of Fincantieri Marinette Marine Corporation. He also serves as a trustee of the Dodge and Cox Funds. In addition, Admiral Roughead is a trustee of Johns Hopkins University and serves on the Board of Managers of the Johns Hopkins University Applied Physics Laboratory.
Attributes, Skills and Qualifications
    Extensive career as a senior military officer with the United States Navy, including numerous operational commands, as well as leadership positions, most recently as the 29th Chief of Naval Operations
    Significant expertise in national security, information warfare, cyber operations and global security issues
    Broad experience in leadership and matters of global relations, particularly in the Pacific region, Europe and the Middle East
    Experience with talent development and management


10 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROPOSAL ONE: ELECTION OF DIRECTORS



THOMAS M. SCHOEWE, 67
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Former Executive Vice President and Chief Financial Officer, Wal-Mart Stores, Inc., an operator of retail stores.
 
Director since August 2011
 
Member of the Compensation Committee (Chair) and Policy Committee
 
 
 
Mr. Thomas M. Schoewe was Executive Vice President and Chief Financial Officer of Wal-Mart Stores Inc. from 2000 to 2011. Prior to his employment with Wal-Mart, he held several roles at the Black and Decker Corporation, including Senior Vice President and Chief Financial Officer from 1996 to 1999, Vice President and Chief Financial Officer from 1993 to 1999, Vice President of Finance from 1989 to 1993 and Vice President of Business Planning and Analysis from 1986 to 1989. Before joining Black and Decker, Mr. Schoewe worked for Beatrice Companies, where he was Chief Financial Officer and Controller of one of its subsidiaries, Beatrice Consumer Durables Inc. Mr. Schoewe serves on the Boards of Directors of General Motors Corporation and KKR & Co. Inc. Mr. Schoewe also serves on the board of the Ladies Professional Golf Association.
Attributes, Skills and Qualifications
    Extensive financial experience acquired through positions held as the Chief Financial Officer of large public companies, as well as expertise in Sarbanes-Oxley controls, risk management and mergers and acquisitions
    Significant international experience through his service as an executive of large public companies with substantial international operations
    Experience at Wal-Mart and Black and Decker on large-scale transformational enterprise information technology implementations
    Extensive experience as a member of the audit, risk, compensation and policy committees of other public companies

JAMES S. TURLEY, 64
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Former Chairman and Chief Executive Officer, Ernst & Young, a professional services organization.
 
Director since February 2015
 
Member of the Audit Committee and Governance Committee
 
 
 
Mr. James S. Turley served as Chairman and Chief Executive Officer of Ernst & Young from 2001 until his retirement in 2013. Mr. Turley joined Ernst & Young in 1977 and held various positions there until being named regional managing partner for the Upper Midwest in 1994, and for New York in 1998. He was named Deputy Chairman in 2000. He currently serves on the Boards of Directors of Citigroup, Emerson Electric Company and Precigen, Inc. He also serves on the Board of Directors of the Boy Scouts of America. Mr. Turley is a board member of Kohler Co. and the St. Louis Trust Company and serves as Non-Executive Chair of Sita Capital Partners LLP.
Attributes, Skills and Qualifications
    Extensive experience and expertise in areas of finance, accounting and business management acquired over 36-year career at Ernst & Young, including serving as Chairman and Chief Executive Officer of Ernst & Young
    Significant experience in areas of risk management
    Extensive experience as a member of the audit committee of other public companies
    Audit committee financial expert


NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 11


PROPOSAL ONE: ELECTION OF DIRECTORS



MARK A. WELSH III, 66
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Dean of the Bush School of Government and Public Service, Texas A&M University; General, United States Air Force (Ret.); Former Chief of Staff, United States Air Force.
 
Director since December 2016
 
Member of the Audit Committee and Policy Committee
 
 
 
General Mark A. Welsh III has been the Dean of the Bush School of Government and Public Service at Texas A&M University since August 2016. Prior to his current position, General Welsh served as Chief of Staff of the United States Air Force, the senior uniformed Air Force officer responsible for the organization, training and equipping of active-duty, Guard, Reserve and civilian forces serving in the United States and overseas. During his long career, General Welsh also served as a member of the Joint Chiefs of Staff, Commander of the United States Air Forces in Europe and Commander of NATO's Air Command, Associate Director for Military Affairs at the Central Intelligence Agency and Commandant of the United States Air Force Academy. General Welsh is a member of the Board of Managers of Peak NanoSystems, LLC. He is also a director of the Air Force Association.
Attributes, Skills and Qualifications
    Extensive career as a senior military officer and member of the Joint Chiefs of Staff, having held leadership positions at the highest levels of the United States Air Force
    Extensive experience and in-depth knowledge of issues related to global security and the intelligence community
    Broad leadership experience and international experience, particularly in Europe
    Experience with talent development and management
Vote Required
To be elected, a nominee must receive more votes cast "for" than votes cast "against" his or her election. Abstentions and broker non-votes will have no effect on this proposal. If a nominee is not re-elected, he or she will remain in office until a successor is elected or until his or her earlier resignation or removal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" THE 12 NOMINEES FOR DIRECTOR LISTED ABOVE.

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CORPORATE GOVERNANCE


Overview
We are committed to maintaining high standards of corporate governance, aligned with our focus on performance and long-term, profitable growth, and our core values of ethics and integrity. With strong oversight from the Board, our corporate governance regime is intended to promote the long-term success of our Company to benefit our shareholders, customers, employees, communities and suppliers.
  
Our Company has adopted Principles of Corporate Governance and Standards of Business Conduct to
help guide and promote our good corporate governance and responsible business practices.
Our Principles of Corporate Governance outline the role and responsibilities of our Board and the high standards our directors maintain. They set forth additional independence requirements for our directors and provide guidelines for Board leadership and Board and Committee membership, among other items. The Board reviews these principles at least annually and considers opportunities for improvement and modification.
Our Standards of Business Conduct reflect and reinforce our commitment to ethics and integrity in all we do. They apply to our directors, officers and employees.
Among other things, our Standards of Business Conduct:    
require high ethical standards in all aspects of our business;
require strict adherence to all applicable laws and regulations;
reflect our commitment to maintaining a culture that values and promotes diversity and inclusion;
reinforce our commitment to being a responsible corporate citizen;
reflect our commitment to our work environment and the global communities where we live, work and serve;
reflect our broad and deep commitment to sustainability;
require a focus on performance and the consistent production of quality results;
reflect our commitment to the safety of our people and products; and
call upon all employees to raise any questions or issues of concern (including on an anonymous basis).
We report amendments to provisions of our Standards of Business Conduct on our website.
Role of the Board
The primary responsibility of our Board is to foster the long-term success of the Company, promoting the interests of our shareholders. Our directors exercise their business judgment in a manner they reasonably believe to be in the best interests of the Company and our shareholders and in a manner consistent with their fiduciary responsibilities. The responsibilities of the Board include, but are not limited to, the following:
oversee our long-term business strategies, operations and performance;
execute robust succession planning, including selecting the Chief Executive Officer, and electing officers of the Company;
oversee management of each of our major risks and the enterprise risk management processes overall, including audit functions;
oversee human capital strategy;
ensure a strong culture;
ensure an effective corporate governance practice;
elect directors to fill vacant positions between Annual Meetings;
review and approve executive compensation;
review and approve significant corporate actions;

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review and enhance Board performance;
oversee our ethics and compliance programs;
oversee our diversity and inclusion programs;
oversee effective management of cyber and other security risks;
oversee a strong focus on sustainability; and
provide advice to management.
Board's Role in Risk Oversight
As noted above, the Board is responsible for overseeing our enterprise risk management activities, among other duties. Each of our Board committees assists the Board in this role.
The Audit and Risk Committee focuses on risks tied most directly to our financial performance, and those related to the environment, disasters and security, including cybersecurity. The Audit and Risk Committee is also responsible for assisting the Board in its oversight of enterprise risk management overall. The Audit and Risk Committee receives multiple regular reports, including (1) from the Chief Financial Officer and members of the Finance Department addressing our financial risk management processes, systems and internal controls, the nature of the material financial risks the Company faces and how the Company responds to and mitigates these risks; (2) from our General Counsel on legal and other compliance risks and how the Company is addressing and mitigating those risks; (3) from our Chief Compliance Officer on the Company's compliance program overall; (4) from the Vice President, Global Corporate Responsibility on complaints filed with the Company's OpenLine; and (5) from the Company's Vice President and Chief Information Security Officer, among others.
The Compensation Committee reviews at least annually a risk assessment of the Company's compensation programs and, together with its independent compensation consultant, evaluates the mix of at-risk compensation linked to stock appreciation. The Compensation Committee reviews the Company's diversity and inclusion program, and oversees management of its human capital risk.
The Policy Committee assists the Board in identifying and evaluating global security, political, budgetary and technological issues and trends that could impact the Company's business. The Policy Committee reviews the Company's external relations and receives regular reports from the Vice President, Global Corporate Responsibility on the Company’s ethics and corporate responsibility programs. The Policy Committee reviews and oversees the Company's commitment to environmental and social aspects of sustainability, including the Company's human rights policy.
The Governance Committee regularly reviews the Company's policies and practices on issues of corporate governance, and considers issues of succession and composition of the Board, recommending proposed changes to the full Board for approval. The Governance Committee oversees and reviews the Company's management of its governance related risks, including risks related to corporate culture.
The Board and its Committees provide oversight of the Company's risk management processes, including the Enterprise Risk Management Council (ERMC). The ERMC is comprised of all members of the Executive Leadership Team, the Chief Accounting Officer, Chief Compliance Officer, Corporate Secretary, head of Internal Audit and Treasurer. The ERMC seeks to ensure that the Company has identified the most significant risks and implemented effective mitigation plans for each. The full Board has ultimate responsibility for the Company's oversight of risk, and receives updates from each of the committees, as well as periodic reports from management addressing the various risks, including those related to financial and other performance, cybersecurity and culture.
Board Leadership Structure
Chairman of the Board
Our Bylaws provide that our directors will designate a Chairman of the Board from among its members. The Chairman presides at all Board and shareholder meetings. The Chairman interacts directly with all members of the Board and assists the Board to fulfill its responsibilities. As the Principles of Corporate Governance provide, the Board believes it is in the best interests of the Company and the shareholders for the Board to have flexibility to determine the best director to serve as Chairman of the Board at the time, based on consideration of all relevant factors.

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In July 2019, the Board elected Ms. Warden, our Chief Executive Officer and President, to serve as Chairman, effective August 1, 2019. Ms. Warden succeeded Mr. Bush, who had served as Chairman since July 2011 and had also served as Chief Executive Officer of the Company from January 2010 through December 2018. Mr. Bush retired from the Company and resigned from the Board on July 31, 2019.
At least once every year, the Board considers who will best serve as Chairman, and whether that person should be an independent director, given the environment and needs of the Company. The Board has concluded that having Ms. Warden, our Chief Executive Officer, serve as Chairman is the most appropriate leadership structure for the Company and best positions the Company to be innovative, compete successfully, present one face to our customer and advance shareholder interests in today's environment. The Board believes that Ms. Warden's deep understanding of the Company's business, day-to-day operations, growth opportunities, challenges and risk management practices gained through various leadership positions enables her to provide strong and effective leadership to the Board and to ensure that the Board is informed of important issues facing the Company. The Board consists entirely of independent directors, other than Ms. Warden, and continues to exercise a strong, independent oversight function, with fully independent Board Committees and a strong Lead Independent Director with clearly articulated responsibilities. The Board will continue to review and discuss the leadership structure of the Board and determine the leadership structure, including the Chairman, that best meets the needs of the Company.
Lead Independent Director
If the Chairman is not independent, the independent directors will designate annually from among them a Lead Independent Director. Following our 2019 Annual Meeting, the independent directors designated Mr. Felsinger as Lead Independent Director.
Our Principles of Corporate Governance set forth specific duties and responsibilities of the Lead Independent Director, which include the following:
preside at meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors, and advise the Chairman and CEO on decisions reached and suggestions made;
advise the Chairman on and approve meeting agendas and information sent to the Board;
advise the Chairman on and approve the schedule of Board meetings, assuring there is sufficient time for discussion of all agenda items;
provide the Chairman with input as to the preparation of Board and committee meeting agendas, taking into account the requests of the other Board and committee members;
interview, along with the Chairman and the Chairman of the Governance Committee, Board candidates and make recommendations to the Governance Committee and the Board;
call meetings of the independent directors;
support and facilitate engagement between the Chairman and the independent directors; and
if requested by major shareholders, ensure that he or she is available for consultation and direct communication.
Our Lead Independent Director is empowered to and does actively engage with our Chairman and Chief Executive Officer to help enable a strong and effective Board of Directors.
Committees of the Board of Directors
The Board has four standing committees: the Audit and Risk Committee, the Compensation Committee, the Governance Committee and the Policy Committee. The membership of these committees is typically determined at the organizational meeting of the Board held in conjunction with the annual meeting. All the committees are composed entirely of independent directors. The primary responsibilities of each of the committees, as of the date of this Proxy Statement, are summarized below, together with a table listing the membership and Chairman of each committee. The charters for each standing committee can be found on the Investor Relations section of our website (www.northropgrumman.com).

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Audit and Risk Committee
Roles and Responsibilities
Committee Members
Assist the Board in overseeing the Company's financial and enterprise-related risk activities by :
William H. Hernandez (chair)
Ann M. Fudge
Madeleine A. Kleiner
James S. Turley
Mark A. Welsh III
 
Number of meetings in 2019: 8
 
Independence, Financial Literacy and Audit Committee Financial Experts
  
All members are independent and financially literate
 
Ms. Kleiner and Messrs. Hernandez and Turley each qualifies as an Audit Committee Financial Expert

    assisting the Board in its oversight of enterprise risk management (including through the different board committees), including reviewing at least annually the overall risk management process at the Company level
    appointing, retaining, overseeing, evaluating and terminating, if necessary, the independent auditor
    reviewing and pre-approving audit and permitted non-audit services and related fees for the independent auditor
    reviewing and discussing the Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q
    reviewing and discussing management's assessment of, and report on, the effectiveness of the Company's internal control over financial reporting at least annually and the independent auditor's related report
    reviewing and discussing with the independent auditor any critical audit matters identified by the independent auditor, the Company's critical accounting policies, and material written communications with management
    reviewing with the General Counsel, at least annually, the status of significant pending litigation and various other significant legal, compliance or regulatory matters
    reviewing with the Chief Compliance Officer, at least annually, the Company's compliance program, and implementation of global compliance policies, practices and programs
    providing oversight and reviewing periodically the Company's management of its financial risks, as well as the Company's management of its risks related to cybersecurity, insurance, supplier, nuclear, natural and environmental matters
    reviewing any significant issues raised by the internal audit function and, as appropriate, management's actions for remediation
    establishing and periodically reviewing and discussing with management the Company's procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters
Compensation Committee
Roles and Responsibilities
Committee Members
Assist the Board in overseeing the Company's compensation policies and practices by:
Thomas M. Schoewe (chair)
Marianne C. Brown
Donald E. Felsinger
Bruce S. Gordon
Karl J. Krapek
Gary Roughead
 
Number of meetings in 2019: 5
 
Independence
 
All members are independent
    overseeing and reviewing at least annually a risk assessment of the Company's compensation plans
    approving the compensation for elected officers (other than the Chief Executive Officer, whose compensation is recommended by the Committee and approved by all the independent directors)
    administering incentive and equity compensation plans and approving payments or grants under these plans for elected officers (other than the Chief Executive Officer, whose payments or grants are recommended by the Committee and approved by all the independent directors)
    recommending for approval compensation for the non-employee directors, after consultation with the independent compensation consultant
    overseeing and reviewing the Company's management of its human capital risk
    reviewing and monitoring the Company's diversity and inclusion programs
    conducting an annual evaluation of the compensation consultant and reporting results of the evaluation to the Board
    producing an annual report on executive compensation for inclusion in the proxy statement
 
    establishing stock ownership guidelines and reviewing ownership levels on an annual basis
 


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Governance Committee
Roles and Responsibilities
Committee Members
Assist the Board in overseeing the Company's corporate governance practices by:
Madeleine A. Kleiner (chair)
Donald E. Felsinger
Ann M. Fudge
William H. Hernandez
Karl J. Krapek
James S. Turley
 
Number of meetings in 2019: 5
 
Independence
 
All members are independent

    overseeing and reviewing the Company's management of governance-related risks, including the risks related to corporate culture
    regularly reviewing the Company's corporate governance policies and practices, including the Company's Bylaws and other corporate documents
    regularly reviewing and considering corporate governance developments, emerging trends and best practices and recommending changes to the Board
    reviewing and making recommendations to the Board with respect to the corporate governance section of the annual proxy statement, including proposed responses to shareholder proposals
    meeting with shareholders and proxy advisory groups, as needed, to discuss issues of corporate governance
    regularly reviewing and making recommendations to the Board regarding the composition and size of the Board and the criteria for Board membership, which should include, among other things, diversity, experience and integrity
    providing effective board succession planning, identifying and recommending to the Board qualified potential candidates to serve on the Board and its committees and, if applicable, meeting with proxy access nominees nominated through the Company's proxy access bylaw provision
    reviewing and determining whether a director's service on another board or elsewhere is likely to interfere with the director's duties and responsibilities as a member of the Board
    reviewing and recommending board, director and committee evaluation processes and coordinating the process for the Board to evaluate its performance
Policy Committee
Roles and Responsibilities
Committee Members
Assist the Board in overseeing policy, government relations and corporate responsibility by:
Gary Roughead (chair)
Marianne C. Brown
Bruce S. Gordon
Thomas M. Schoewe
Mark A. Welsh III
  
Number of meetings in 2019: 4
  
Independence
 
All members are independent
   identifying and evaluating global security, political, budgetary, technological and other issues and trends that could impact the Company's business activities and performance
    reviewing and providing oversight of the Company's programs regarding environmental and social aspects of sustainability, including environmental matters, human rights, health and safety
    reviewing and providing oversight over the Company's ethics and corporate social responsibility policies and programs
    reviewing the Company's public relations strategy
    reviewing and monitoring the Company's government relations strategy and political action committee
    reviewing the Company's community relations and charitable activities

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Board Meetings and Executive Sessions
The Board meets no fewer than nine times each year (including via telephonic meetings). Special meetings of the Board may be called from time to time as appropriate. On an annual basis, the Board holds an extended meeting to review our long-term strategy.
The Board holds its meetings at Company locations other than our corporate headquarters on a regular basis to provide the directors with a first-hand view of different elements of our business and an opportunity to interact with local management and employees at various levels.
The Board meets in executive session (with the directors only and then with the independent directors only) following each in-person Board meeting and on other occasions as needed. The non-executive Chairman or the Lead Independent Director presides over the executive sessions of the independent directors. The Audit and Risk Committee meets in executive session at each in-person Audit and Risk Committee meeting, and regularly requests separate executive sessions with representatives of our independent auditor and our senior management, including our Chief Financial Officer, General Counsel and our Vice President, Internal Audit. The Compensation Committee also meets in executive session from time to time and regularly receives a report from the Compensation Committee's independent compensation consultant. The Governance and Policy Committees also meet in executive session as they deem necessary.
Meeting Attendance
During 2019, the Board held nine meetings. Each incumbent director serving in 2019 attended 75% or more of the total number of Board and committee meetings he or she was eligible to attend. Board members are expected to attend each annual meeting, except where the failure to attend is due to unavoidable circumstances. All of our then-serving directors attended the 2019 Annual Meeting.
Director Independence
The Board and the Governance Committee annually review the relevant relationships or arrangements between the Company and our directors or parties related to the directors in determining whether such directors are independent. No director is considered independent unless the Board has determined that the director meets the independence requirements under applicable New York Stock Exchange (NYSE) and SEC rules and under our categorical independence standards, which are described in our Principles of Corporate Governance. For a director to be considered independent, the Board must determine that a director has no material relationship with the Company other than as a director.
Our Principles of Corporate Governance provide that a director may be found not to qualify as an independent director if the director:
has within the prior three years been a director, executive officer or trustee of a charitable organization that received annual contributions from the Company exceeding the greater of $1 million or 2% of the charitable organization's annual gross revenues, where the gifts were not normal matching charitable gifts, did not go through normal corporate charitable donation approval processes or were made "on behalf of" a director;
has, or has an immediate family member who has, within the prior three years been employed by, a partner in or otherwise affiliated with any law firm or investment bank in which the director's or the immediate family member's compensation was contingent on the services performed for the Company or in which the director or the immediate family member personally performed services for the Company and the annual fees paid by the Company during the preceding fiscal year exceeded the greater of $1 million or 2% of the gross annual revenues of such firm; or
has, or has an immediate family member who has, within the prior three years owned, either directly or indirectly as a partner, shareholder or officer of another company, more than 5% of the equity of an organization that has a material business relationship with (including significant purchasers of goods or services), or more than 5% ownership in, the Company.

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Independence Determination
In connection with their annual independence review, the Board and Governance Committee considered the following relationships with organizations to which we have made payments or from which we have received payments in the usual course of our business in 2019.
Ms. Brown's service as a member of the Board of Directors of VMWare;
Ms. Fudge's service as a trustee of the Brookings Institution;
Mr. Gordon's service as a member of the Executive Leadership Council;
Mr. Hernandez's service as a member of the Board of Directors of Albemarle Corporation;
Admiral Roughead's service as a trustee of Johns Hopkins University and a member of the Board of Managers of Johns Hopkins University Applied Physics Laboratory;
Mr. Schoewe's service as a member of the Board of Directors of General Motors;
Mr. Turley's service as a member of the Board of Directors of Citigroup and Emerson Electric; and
General Welsh's service as a member of the Board of Directors of the Air Force Association.
The Board of Directors considered that Ms. Fudge, Mr. Gordon, Admiral Roughead and General Welsh served as members of the boards of organizations to which the Company made contributions during 2019 in the usual course of our charitable contributions program, as well as in connection with our matching gifts program (which limits the contributions to $10,000 per year per director). The amounts paid were below the applicable thresholds under NYSE rules and our Principles of Corporate Governance.
Following its review and the recommendation of the Governance Committee, the Board affirmatively determined that all of the directors, except Ms. Warden, are independent. The independent directors constitute approximately 92% of the members of our Board. The Board previously determined that Wesley G. Bush, who served as Chairman of the Board until his retirement from the Company and resignation from the Board on July 31, 2019, was not independent during the time he was a director.
Director Election Process
Our Bylaws and Certificate of Incorporation provide for the annual election of directors. Each director will hold office until the next annual meeting of shareholders or until his or her earlier resignation or removal. Generally, in order to be elected, a director must receive more votes cast "for" than "against" his or her election, unless one or more shareholders provide notice of an intention to nominate one or more candidates to compete with the Board's nominees for election in accordance with the procedures set forth in the Company's corporate governance documents.
Board Composition and Director Nominations
The Governance Committee actively considers the composition and diversity of the Board to ensure it is well positioned to serve the best interests of the Company and its shareholders. The Governance Committee regularly assesses what skills, experiences and other attributes can best contribute to the effective operation of the Board, particularly in light of the evolving needs of the Company. The Committee also seeks to balance experience and new perspectives. The Governance Committee identifies director candidates from a wide range of sources and may employ a third-party search firm to assist in the process.  
The Governance Committee evaluates potential director candidates on the basis of the candidate's background, qualifications and experience. The Governance Committee carefully considers whether each potential candidate would be able to fulfill his or her duties to the Company consistent with Delaware law and the Company’s governing documents, including the Principles of Corporate Governance and security requirements. The Committee recommends to the full Board nominees for election.
Shareholders may recommend director candidates for consideration by the Governance Committee pursuant to our Principles of Corporate Governance. The Governance Committee considers such director candidates recommended by shareholders similarly to other potential director candidates brought to the attention of the Governance Committee. Shareholder recommendations for director candidates under our Principles of Corporate Governance must be addressed to the Governance Committee in care of the Corporate Secretary. In addition, and as discussed immediately below, shareholders may also directly nominate director candidates in accordance with our Bylaws.

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Proxy Access 
Several years ago, the Board carefully considered the issue of proxy access. The Board and management engaged extensively with shareholders and monitored developments and best practices regarding proxy access. Management solicited and received input from shareholders, our customers and other stakeholders. The Board amended our Bylaws to provide our shareholders the right to proxy access, reflecting this extensive consideration and input.
Under the Company’s proxy access bylaws, a shareholder, or a group of up to 20 shareholders, that has maintained continuous ownership of 3% or more of the Company's outstanding common stock for at least three years may include in the Company's proxy materials director nominees constituting up to the greater of two nominees or nominees constituting 20% of the number of directors in office. Director nominees may receive compensation from third parties for their candidacy, up to the total annual compensation paid to directors of the Company, as well as reimbursement for reasonable expenses, provided there is full disclosure of such compensation. Under the Company’s bylaw provisions, directors are treated similarly, whether nominated through proxy access or otherwise, and held to the same high fiduciary standards to serve all shareholders. 
The Company's Bylaws provide our shareholders with broad and meaningful access to the Company’s proxy materials while enhancing transparency, protecting the interests of all shareholders and ensuring good governance. The terms of the Company’s proxy access bylaw provisions are also broadly consistent with the terms of proxy access bylaws adopted by other Fortune 500 companies, reflecting best practices.  
Director Qualifications
The Governance Committee is responsible for establishing the criteria for Board membership. In nominating directors, the Governance Committee bears in mind that the foremost responsibility of a director is to represent the interests of our shareholders as a whole. The activities and associations of candidates are reviewed for any legal impediment, conflict of interest or other consideration that might prevent or interfere with service on our Board.
In evaluating candidates, the Governance Committee considers:
the personal integrity and the professional reputation of the individual;
the education, professional background and particular skills and experience most beneficial to service on our Board;
how the nominee brings diversity, experience and skills valuable to the Company and Board at the time; and
whether a director candidate is willing to submit to and obtain a background check necessary for obtaining and retaining a top secret security clearance.
In evaluating director candidates, the Governance Committee aims to foster diversity of thought on our Board. The Governance Committee seeks to ensure diversity, including in race and gender, as well as in perspective, professional experience, education, skill and other qualities that contribute to our Board and the long-term interests of our Company and shareholders.
Director Orientation and Continuing Education
All new directors to the Board receive in-person orientation and training that is individually tailored, taking into account the director's experience, background, education and committee assignments. The orientation program is led by members of senior management and covers a review of our strategy and operating plans, financial statements, corporate governance and key policies and practices, as well as the roles and responsibilities of our directors.
All directors receive regular in-person training regarding our Company policies and procedures, and broad exposure to our operations and the teams. Members of senior management review with the Board the operating plan for each of our business sectors and the Company as a whole. The Board also conducts periodic site visits to our facilities as part of its regularly scheduled Board meetings. These visits allow directors to interact with a broader group of our executives and employees and gain firsthand insights into our operations.
Directors may also attend outside director and other continuing education programs to assist them in staying current on developments in corporate governance, our industry, the global environment and issues critical to the operation of public company boards.

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Board Membership and External Relationships
Directors are required to ensure that their other commitments, including for example, other board memberships, employment, partnerships and consulting arrangements, do not interfere with their duties and responsibilities as members of the Board. Directors provide notice to the General Counsel prior to accepting an invitation to serve on the board of any other organization or agreeing to other new commitments that could interfere with their duties and responsibilities as a member of the Board, and the General Counsel advises the Chairman of the Governance Committee (or the Chairman of the Board, if notice is from the Chairman of the Governance Committee). A director should not accept the new commitment until advised by the Chairman of the Governance Committee (or Chairman of the Board, as appropriate) that such engagement will not unacceptably create conflicts of interest or regulatory issues, conflict with Company policies or otherwise interfere with the director's duties and responsibilities as a member of the Board. Directors are also required promptly to inform the General Counsel if a conflict of interest arises, or they are concerned that a conflict may arise or circumstances could otherwise interfere with their duties and responsibilities as a director. Directors are required to seek to avoid even an appearance of an improper conflict of interest.
Directors may not serve on more than three other boards of publicly traded companies in addition to our Board without the written approval of the Chairman of the Governance Committee (or Chairman of the Board, as appropriate). A director who is a full-time employee of our Company may not serve on the board of more than one other public company unless approved by the Board. When a director's principal occupation or business association changes substantially during his or her tenure as a director, the Board expects the director to tender his or her resignation for consideration by the Governance Committee, which subsequently will recommend to the Board what action to take.
We have a retirement policy whereby a director will retire at the annual meeting following his or her 75th birthday, unless the Board determines, based on special circumstances, that it is in the Company's best interest to request that the director serve beyond such date.
Effect of Failure to Receive the Required Vote or Obtain and Retain Security Clearance
Each director is required to tender a resignation that will be effective upon (i) the failure to receive the required vote at any future meeting at which such director faces re-election, the failure to obtain top secret security clearance within 12 months of election or appointment to the Board or the failure to retain a top secret security clearance once obtained and (ii) the Board's acceptance of such resignation. If an incumbent director fails to receive the required vote for re-election or fails to obtain and retain a top secret security clearance, the Governance Committee will consider whether the Board should accept the director's resignation and will submit a recommendation for prompt consideration by the Board. The Board will decide whether to accept or reject a resignation within 90 days, unless the Board determines that compelling circumstances require additional time. The Governance Committee and the Board may consider any factor they deem relevant in deciding whether to accept a resignation, including, without limitation, any harm to our Company that may result from accepting the resignation, and the underlying reasons for the action at issue.
Board Self-Evaluation
The Board conducts annually thorough self-assessment processes at the full board level, within each committee, and at the individual director level. These processes are intended to ensure and enhance the effective operation of the Board.
The self-assessment of the full Board is overseen by the Governance Committee. As part of this assessment, the Lead Independent Director and Chairman of the Governance Committee facilitate a broad discussion of Board performance, held in executive session. Among other topics, the Board considers:
the Board's effectiveness in evaluating and monitoring the Company's business plan, long-term strategy and risks;
whether strategic and critical issues are being addressed by the Board in a timely manner;
whether the Board’s expectations and concerns are openly communicated to and discussed with the Chief Executive Officer;
whether there is adequate contact between the Board and members of senior management;
whether the directors collectively operate effectively as a Board;
whether the individual directors have the appropriate mix of attributes and skills to fulfill their duties as directors of the Company;

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CORPORATE GOVERNANCE


whether there are adequate opportunities to raise questions and comments on issues, both inside and outside of Board meetings;
whether the Board has focused adequately on succession planning; and
whether the Board is adequately responsive to shareholder communication.
Following this review, the Board discusses the results and identifies opportunities for improvement, including any necessary steps to implement such improvements.
Each of the Committees also conducts an annual self-assessment. During an executive session led by the Committee chairperson, each Committee discusses, among other topics: whether the quality of participation and discussion at the Committee meetings is effective in facilitating the Committee’s obligations under its charter; the opportunity to engage in strategic discussion; and whether the Committee is covering the right topics in the right amount of detail. Following this discussion, the Committee develops and implements a list of action items, as appropriate.
Also as part of the annual self-assessment process, each non-employee director completes an individual director evaluation for each of the other non-employee directors. These assessments include, among other topics, each non-employee director’s:
understanding of the Company’s overall business and risk profile and its significant financial opportunities and plans;
engagement during meetings and other Board functions;
analysis of benefits and risks of courses of action considered by the Board; and
appropriate respect for the views of other Board members.
The Lead Independent Director or the Chairman of the Governance Committee meets with each non-employee director individually to discuss the results of his or her assessment, including comments provided by other non-employee directors. The Lead Independent Director or the Chairman of the Governance Committee reports generally on the overall results of these discussions to the Board in executive session. These evaluations also assist the Governance Committee with its recommendation for directors to be renominated for election to the Board of Directors.
Succession Planning
The Board believes that providing for strong and effective continuity of leadership is critical to the success of our Company. The Board commits significant resources to succession planning, with processes in place for the Board:
to evaluate the Chief Executive Officer annually based on a specific set of performance objectives;
to work with the Chief Executive Officer to support and ensure the development of potential succession candidates for the Chief Executive Officer and other leadership positions;
to discuss with the Chief Executive Officer annually an assessment of persons considered potential successors to various senior management positions; and
robustly to consider, plan for and ensure successful transitions of leadership.
Departure and Election of Directors
Mr. Bush retired from the Company on July 31, 2019, and, consistent with the requirements of the Company's Principles of Corporate Governance, he resigned from the Board of Directors at the time of his retirement from the Company. Ms. Warden, the Company's Chief Executive Officer and President, succeeded Mr. Bush as Chairman of the Board immediately following Mr. Bush's retirement. The size of the Board was reduced from 13 to 12 directors effective upon Mr. Bush's resignation.


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Communications with the Board of Directors
Any interested person may communicate with any of our directors, our Board as a group, our non-employee directors as a group or our Lead Independent Director through the Corporate Secretary by writing to the following address: Office of the Corporate Secretary, Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042. The Corporate Secretary will forward correspondence to the director or directors to whom it is addressed, except for job inquiries, surveys, business solicitations or advertisements and other inappropriate material. The Corporate Secretary may forward certain correspondence elsewhere within our Company for review and possible response.
The Board has met with, and looks forward to the opportunity to meet with, interested shareholders to address concerns and to receive input.
Interested persons may also report any concerns relating to accounting matters, internal accounting controls or auditing matters to non-management directors (including anonymously) by writing directly to the Chairman of the Audit Committee, Northrop Grumman Board of Directors c/o Corporate Ethics Office, 2980 Fairview Park Drive, Falls Church, Virginia 22042.
Corporate Responsibility and Sustainability
Corporate responsibility and sustainability are critical to our business and long-term value creation for our shareholders, customers, employees, communities and suppliers. Our strong culture — founded in ethics, integrity, diversity and inclusion, and focused on enduring performance, innovation, accountability and long-term profitable growth — enables our success. Strong environmental, social and governance (ESG) programs and practices help us attract and retain the best talent, perform for our customers, serve as responsible corporate citizens in the communities we operate, and create long-term value for our stakeholders.
Our Board of Directors provides leadership and oversight with respect to ESG practices, and regularly receives reports from management on these issues. The Policy Committee reviews, monitors and provides oversight of the Company's policies and programs for ethics and standards of business conduct, corporate responsibility, environmental matters, human rights, employee health and safety, and corporate citizenship and charitable programs. The Governance Committee oversees matters related to corporate governance, the board and shareholder rights, and our corporate culture. The Compensation Committee provides oversight of compensation programs and the Company's management of its human capital, including the Company's focus on diversity and inclusion. The full Board regularly receives reports from the Committees and management, meets with employees across our business, and addresses in depth a full range of issues referred to broadly as sustainability.
Our commitment to strong corporate responsibility and sustainability is demonstrated by the incorporation of non-financial ESG performance metrics into our annual incentive compensation program. See page 45 in the Compensation Discussion and Analysis section. We engage with a variety of stakeholders -- including shareholders, employees, customers and community advocates -- and regularly obtain feedback on our ESG performance.
Our Sustainability Report provides our stakeholders detailed information on various ESG programs, goals, and achievements. The report, our ESG Performance Data Matrix, and other ESG-related disclosures are available at https://www.northropgrumman.com/corporate-responsibility/reports-disclosures/.
We are proud that our corporate responsibility and sustainability programs received various notable recognitions in 2019. They include:
Dow Jones Sustainability North America Index for the fourth consecutive year;
an AA rating from MSCI for environmental, social and governance management and performance;
named as one of Corporate Responsibility Magazine's 100 Best Corporate Citizens;
one of DiversityInc's Top 50 Companies for Diversity for the tenth year in a row and number one for both veterans and people with disabilities;
received the highest ranking for the fifth year in a row on the Disability Equality Index and named a “Best Place to Work For Disability Inclusion;”
achieved a perfect score on the Corporate Equality Index and designated a “Best Place to Work for LGBTQ Equality;”
a leadership score of A- in CDP’s 2019 climate change program for the eighth consecutive year; and
a ranking by Indeed as one of the 50 Top-Rated Workplaces.

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Human Rights
Northrop Grumman is committed to maintaining a strong culture with a deep respect for individuals and human rights. We have adopted numerous policies, procedures and practices to reflect and implement this broad commitment. The Company recently enhanced its Human Rights Policy to reflect better the Company's commitment. (The Policy is available on the Company's website at https://www.northropgrumman.com/corporate-responsibility/northrop-grumman-human-rights-policy/). The Company has also established a Human Rights Working Group to help ensure our human rights program is being implemented effectively and achieving our goals.
The Board of Directors oversees the Company's commitment to human rights. The Policy Committee has specific responsibility to provide oversight of the Company's human rights program, including reviewing and making recommendations for enhancements, as appropriate. The Policy Committee receives reports from our Vice President, Global Corporate Responsibility, who is also chair of the Human RIghts Working Group, on how we are implementing our Human Rights Policy and to discuss any areas of concern.
The Company’s Human Rights Policy starts with our culture and core values, including our commitment to ethics and integrity, treating everyone with respect, valuing diversity and fostering safe and inclusive environments. We work hard to nurture a culture in which each person can thrive. The Human Rights Policy makes clear our commitment to people, including our respect for the rights of employees to work in a positive work environment that treats employees with respect and dignity. As an employer, the Company strives to provide a culture where the differing points of view that we each bring to the workplace challenge us to think more broadly and enhance the overall results. The Company has 13 employee resource networks with 22,000 diverse colleagues participating that inform and implement strategies and initiatives that align with the Company's business goals and its values. The Company does not tolerate any discrimination in employment based on an individual’s protected status. We do not tolerate the use of child labor, forced labor, bonded labor, human trafficking or any other such violations of human rights. We respect the privacy of employees and business partners who trust us with their personal information.
The Human Rights Policy addresses explicitly the Company's supply chain, making clear both that we treat our suppliers with respect and dignity, and that we require our suppliers to follow similar policies protecting human rights. We require suppliers to adhere to a detailed Supplier Code of Conduct, which articulates our requirement for ethical conduct and social responsibility at all tiers of our supply base. The Supplier Code of Conduct specifically requires our suppliers to protect the rights of workers and prohibits the use of forced labor of any kind. Before entering into supply agreements, we undertake due diligence on potential suppliers to assess whether they will be able to meet our requirements, and we continue to monitor their performance during the contract period.
The Human Rights Policy also addresses various processes the Company follows to consider a wide range of potential risks - including risks to human rights - as it develops products and determines whether to undertake certain business opportunities. For example, the Company has robust procedures to help ensure we do not do business in countries or sell products to customers that are not properly approved by our government, or, even if permissible, where the risk - to human rights or, more broadly, the reputation of the Company - is too significant.
For Northrop Grumman and its employees, being a good corporate citizen means improving the lives of the people in the communities where we live and work. As the Human RIghts Policy makes clear, we invest in our communities, supporting a wide range of activities and causes around the globe. Our current efforts are focused on issues of education/STEM, diversity and inclusion, human dignity, veterans and environmental stewardship, to name a few.
As noted above, the Human RIghts Policy provides for a Human Rights Working Group, tasked to help ensure that our Human Rights Policy is being implemented effectively and achieving our goals . The Working Group is led by the Office of Global Corporate Responsibility and includes senior representatives from, among others, Global Supply Chain, Human Resources, Legal, Strategy, Investor Relations, Contracts, EHS, Business Development and Operations.
The Human Rights Policy provides employees with various well-defined reporting channels when they believe there may have been a violation of the Policy. Concerns are investigated and corrective actions are taken.
The Policy is also reinforced through communications and with robust training. Our Sustainability Report provides additional background and information on our human rights programs.
Company Culture
We have a strong corporate culture, which is founded in ethics and integrity and respect. We value diversity and inclusion and generate trust. We work together to deliver on our commitments to our customers, employees, shareholders and those with whom we work. Our culture is focused on breaking barriers and doing what others think is impossible. We are responsible environmental stewards and seek to give back to the communities in which we operate. Our culture enables long-term profitable growth and value creation for our shareholders and other stakeholders, while also maintaining a focus on safety and sustainability.

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We all have a shared responsibility to maintain and enhance our culture. We work to ensure our employees feel that it is safe to speak up, to challenge how things are done and raise concerns without fear of retribution. There are many avenues to report concerns, including through one's manager, to ethics officers or members of our human resource and law departments, or through the OpenLine reporting system, which give employees, business partners, suppliers and other stakeholders resources to seek guidance on ethics questions or report suspected violations of law or Company policy.

The Company promotes giving back to the community. The Company continually strives to be a good corporate citizen and encourages volunteerism, including honoring employees who have demonstrated commitment to volunteerism. The Company annually contributes to numerous charitable organizations, including those with a focus on STEM education and veterans.

Management establishes and reinforces the Company's culture, and our Board and its Committees are actively engaged in providing oversight. The Board is committed to sustaining and enhancing the Company's strong culture with an engaged, diverse and inclusive workforce. The Company conducts an annual employee engagement survey, which gives our employees the opportunity to provide feedback on our Company culture. This survey is managed by a third-party vendor to encourage candor and solicit feedback on many aspects of engagement, including how our employees perceive Company leadership, and issues of accountability, inclusion and career development. The results of this survey are reported to and discussed with the full Board annually. The Board also meets regularly with employees at all levels to reaffirm the health of our culture. The Board meets with employees during site visits that are critical part of Board meetings, and also during "Sector Days," when our directors visit the operations without members of senior leadership present. Members of our Board also often share their time by generously participating as speakers in Company leadership programs.

The Committees of the Board oversee elements of the Company's culture associated with their respective area of responsibility. The Audit and Risk Committee reviews and discusses the Company's global compliance policies and programs with our General Counsel and Chief Compliance Officer, including the tone set by leaders throughout the organization, and meets quarterly with our Vice President, Global Corporate Responsibility to receive a report on issues that are received through the Company's OpenLine reporting system. The Compensation Committee reviews with the Chief Human Resources Officer the Company's human capital management, monitors policies and practices with respect to diversity and equal employment opportunity, and reviews a risk assessment of the Company's compensation programs. The Governance Committee provides the board oversight of the Company's corporate culture, with a focus on governance-related risks. The Policy Committee receives at least annually a report from our Vice President, Global Corporate Responsibility regarding our ethics and corporate responsibility programs, including our Standards of Business Conduct, and reviews and monitors practices with respect to sustainability and environmental matters, human rights, health and safety, and charitable organizations.

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COMPENSATION OF DIRECTORS


The Compensation Committee, with the assistance of its independent compensation consultant, is responsible for reviewing and recommending for approval the compensation of the non-employee directors. At the request of the Compensation Committee, the independent compensation consultant prepares annually a comprehensive benchmarking of our non-employee director compensation program against the compensation programs offered by our Target Industry Peer Group (the same peer group against which executive compensation is compared). Consistent with this benchmarking, the overarching approach for non-employee director compensation is to target approximately the 50th percentile of the Target Industry Peer Group and to align our director compensation with our shareholders' interests.
In May 2019, the Compensation Committee recommended to the Board, and the Board approved, the current non-employee director fee structure, effective May 15, 2019. The table below lists the annual fees payable to our non-employee directors from January 1, 2019 to May 14, 2019 under the prior fee structure and the annual fees payable under the current fee structure effective May 15, 2019.
Compensation Element
 
Amount ($)
(1/1/19- 5/14/19)
 
Amount ($)
(5/15/19 - 12/31/19)
 
Annual Cash Retainer
 
127,500
 
130,000
 
Lead Independent Director Retainer
 
35,000
 
35,000
 
Audit Committee Retainer
 
10,000
 
10,000
 
Audit Committee Chair Retainer
 
20,000
 
20,000
 
Compensation Committee Chair Retainer
 
20,000
 
20,000
 
Governance Committee Chair Retainer
 
20,000
 
20,000
 
Policy Committee Chair Retainer
 
20,000
 
20,000
 
Annual Equity Grant (1)
 
155,000
 
160,000
 
 
 
 
 
 
(1)
The annual equity grant is deferred into a stock unit account pursuant to the 2011 Long-Term Incentive Stock Plan (2011 Plan) as described below. The Northrop Grumman Equity Grant Program for Non-Employee Directors (Director Program) sets forth the terms and conditions of the equity awards granted to non-employee directors under the 2011 Plan.
 

Retainer fees are paid on a quarterly basis at the end of each quarter. To encourage directors to have a direct and material investment in shares of our common stock, non-employee directors are awarded an annual equity grant of $160,000 in the form of deferred stock units (Automatic Stock Units).
The Director Program was amended and restated effective January 1, 2016 (the Amended Director Program). Directors received an annual equity grant of Automatic Stock Units on May 16, 2018, which vested on May 16, 2019, and received an annual equity grant of Automatic Stock Units on May 15, 2019 which will vest on May 15, 2020. Under the Amended Director Program, directors may elect to have all or any portion of their Automatic Stock Units paid on (A) the earlier of (i) the beginning of a specified calendar year after the vesting date or (ii) their separation from service as a member of the Board, or (B) the vesting date. Directors may elect to defer to a later year all or a portion of their remaining cash retainer or committee retainer fees into a stock unit account as Elective Stock Units or in alternative investment options. Elective Stock Units are awarded on a calendar quarterly basis. Directors may elect to have all or a portion of their Elective Stock Units paid on the earlier of (i) the beginning of a specified calendar year or (ii) their separation from service as a member of the Board. Stock units awarded under the Amended Director Program will be paid out in an equivalent number of shares of our common stock. Deferral elections are made prior to the beginning of the year for which the retainer fees will be paid. Directors are credited with dividend equivalents in connection with the accumulated stock units until the shares of common stock related to such stock units are issued.
Non-employee directors are eligible to participate in our Matching Gifts Program for Education. Under this program, the Northrop Grumman Foundation matches director contributions, up to $10,000 per year per director, to eligible educational programs in accordance with the program.


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COMPENSATION OF DIRECTORS


Stock Ownership Requirements and Anti-Hedging and Pledging Policy
Non-employee directors are required to own common stock of the Company in an amount equal to five times the annual cash retainer, with such ownership to be achieved within five years of the director's election to the Board. Deferred stock units and Company stock owned outright by the director count towards this requirement.
Anti-Hedging and Pledging Policy
Company policy prohibits our directors, NEOs, other elected and appointed officers, designated employees who are subject to specific preclearance procedures under the Company’s insider trading policy and any other employees who receive performance-based compensation, from engaging in hedging, pledging or other specified transactions.  Specifically, this policy prohibits such persons from: engaging in hedging or derivative transactions, such as “cashless” collars, forward contracts, equity swaps or other similar or related transactions, entering into margin transactions involving Company stock; pledging Company securities as collateral for loans or other transactions; trading in puts, calls, options, warrants or other similar derivative instruments involving Company securities; or engaging in short sales of Company securities.
None of the shares of Company common stock held by our directors are pledged or subject to any hedging transaction.

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COMPENSATION OF DIRECTORS


2019 Director Compensation
The table below provides information on the compensation of our non-employee directors for the year ended December 31, 2019.
Name
 
Fees Earned or Paid in Cash (1)
($)
 
Stock
Awards (2)
($)
 
All Other
Compensation (3)
($)
 
Total
($)
Marianne C. Brown
 
129,050
 
160,000
 
10,840
 
299,890
Donald E. Felsinger
 
164,050
 
160,000
 
28,399
 
352,449
Ann M. Fudge
 
139,050
 
160,000
 
10,433
 
309,483
Bruce S. Gordon
 
129,050
 
160,000
 
22,019
 
311,069
William H. Hernandez
 
159,050
 
160,000
 
11,256
 
330,306
Madeleine A. Kleiner
 
159,050
 
160,000
 
16,767
 
335,817
Karl J. Krapek
 
129,050
 
160,000
 
25,193
 
314,243
Gary Roughead
 
149,050
 
160,000
 
3,155
 
312,205
Thomas M. Schoewe
 
149,050
 
160,000
 
4,042
 
313,092
James S. Turley
 
139,050
 
160,000
 
10,626
 
309,676
Mark A. Welsh III
 
139,050
 
160,000
 
211
 
299,261

(1)
Amounts reflect the annual cash retainer paid to each director, including any applicable annual committee and committee chair retainers and any applicable Lead Independent Director or Chairman retainer. As described above, a director may elect to defer all or a portion of his or her annual cash retainer into a deferred stock unit account. Amounts deferred as Elective Stock Units or deferred into alternative investment options are reflected in this column.
(2)
Amounts represent the target value of Automatic Stock Units awarded to each of our non-employee directors in 2019 under the 2011 Plan pursuant to the Amended Director Program. The amount reported for each director reflects the aggregate fair value of the Automatic Stock Units on the grant date, as determined under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation, excluding any assumed forfeitures. The grant date fair value assumes the value of dividend equivalents accrued directly on the awarded units. The aggregate number of Automatic Stock Units and Elective Stock Units held by each director as of December 31, 2019 is provided in the Deferred Stock Units table below.
(3)
Amounts reflect (i) the estimated dollar value of additional stock units credited to each non-employee director as a result of dividend equivalents earned, directly or indirectly, on reinvested dividend equivalents as such amounts are not assumed in the grant date fair value of the Automatic Stock Units shown in the "Stock Awards" column, and (ii) matching contributions made through our Matching Gifts Program for Education discussed above as follows: Ms. Brown, $10,000; Ms. Fudge, $10,000; Mr. Gordon, $10,000; Mr. Hernandez, $10,000; Ms. Kleiner, $5,000; Mr. Krapek, $10,000; and Mr. Turley, $10,000.
Mr. Wesley G. Bush, a former member of the Board of Directors, retired as executive Chairman of the Company in July 2019. At that time, he also resigned from the Board of Directors. All compensation received by Mr. Bush was for his role as an employee of the Company; he did not receive any compensation specifically for his role as a member of the Board of Directors.







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COMPENSATION OF DIRECTORS


Deferred Stock Units
As of December 31, 2019, the non-employee directors had the following aggregate number of deferred stock units accumulated in their deferral accounts for all years of service as a director, including additional stock units credited as a result of dividend equivalents earned on the stock units.
Name
 
Automatic Stock
Units
 
Elective Stock
Units
 
Total
Marianne C. Brown
 
3,368
 
1,999
 
5,367
Donald E. Felsinger
 
21,351
 
15,130
 
36,481
Ann M. Fudge
 
2,400
 
490
 
2,890
Bruce S. Gordon
 
17,892
 
 
17,892
William H. Hernandez
 
5,020
 
 
5,020
Madeleine A. Kleiner
 
16,874
 
 
16,874
Karl J. Krapek
 
17,936
 
4,887
 
22,823
Gary Roughead
 
8,315
 
 
8,315
Thomas M. Schoewe
 
9,550
 
 
9,550
James S. Turley
 
3,439
 
 
3,439
Mark A. Welsh III
 
1,964
 
 
1,964
 
 
 
 
 
 
 
 



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TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS


Related Person Transactions
The Company has a written policy approved by the Board, for the review, approval and ratification of transactions between our Company and our directors, executive officers and other related persons (Related Person Transactions Policy). A copy of the policy is available on the Investor Relations section of our website (www.northropgrumman.com). The policy provides for related person transactions to be reviewed in advance and approved or ratified, as applicable, by the Board of Directors, the Governance Committee or the Chairman of the Governance Committee. A related person transaction may be approved if, after reviewing the relevant facts and circumstances, the reviewing party concludes that approving the related person transaction is in the best interests of the Company and its shareholders.
The policy defines a related person transaction as any transaction in which the Company was, is or will be a participant, where the amount involved exceeds $120,000, and in which a related person had, has or is expected to have a direct or indirect material interest. A "related person" includes:
any of our directors or executive officers;
any person who is known to be the beneficial owner of more than 5% of our common stock;
an immediate family member of any such persons; or
any firm, corporation, or other entity controlled by any such persons.
The Corporate Secretary may determine that, based on facts and circumstances, a transaction in an amount less than $120,000 should nonetheless be deemed a related person transaction. If this occurs, the transaction would be submitted for review and approval or ratification in accordance with the policy. Under exceptional circumstances, if a related person transaction has not been approved in advance, the Governance Committee will recommend to the Board of Directors such action as the Governance Committee deems appropriate, including ratification, amendment or termination of the transaction.
The policy requires each director and executive officer to complete an annual questionnaire to identify his or her related interests and to notify the Corporate Secretary of any changes in their information.
During 2019, the Company employed one family member of an executive officer who received compensation in excess of the reporting threshold. The spouse of our Corporate Vice President and President, Enterprise Services, Shawn Purvis, was employed by the Company as a Consulting Computer Systems Architect in our Technology Services sector. He received cash compensation (base salary and bonus) of approximately $263,000 and participated in the Company’s benefit plans, commensurate with his position at the Company.
State Street Corporation (State Street), acting in various fiduciary capacities, filed a Schedule 13G with the SEC reporting that as of December 31, 2019, State Street and certain of its subsidiaries collectively were the beneficial owners of more than 5% of our outstanding common stock. A subsidiary of State Street is the trustee for various Northrop Grumman defined benefit and defined contribution plan trusts. Two other State Street subsidiaries provide investment management services. During 2019, those State Street subsidiaries received approximately $6.05 million for such services, with over 99% of that amount paid by the plan trusts.
BlackRock, Inc. (BlackRock) filed a Schedule 13G/A with the SEC reporting that as of December 31, 2019, BlackRock and certain of its subsidiaries collectively were the beneficial owners of more than 5% of our outstanding common stock. A subsidiary of BlackRock provides investment management services for the Northrop Grumman Rabbi Trust II and certain assets within various Northrop Grumman defined benefit and defined contribution plan trusts. During 2019, the trusts paid that BlackRock subsidiary approximately $1.73 million for such services.
At the request of our Chief Executive Officer and as authorized by the Board of Directors, Wesley G. Bush, who retired as our Chairman on July 31, 2019, agreed to provide limited consulting service to the Company after his retirement for an initial period of five years. Consulting fees are not expected to exceed $200,000 per year. In 2019, the Company paid Mr. Bush $66,680 under this agreement.
    
Compensation Committee Interlocks and Insider Participation
During 2019, Ms. Brown and Messrs. Felsinger, Gordon, Krapek, Roughead and Schoewe served as members of the Compensation Committee. During 2019, no member of the Compensation Committee had a relationship with the Company or any of our subsidiaries, other than as directors and shareholders, and no member was an officer or employee of the Company or any of our subsidiaries, a participant in a related person transaction or an executive officer of another entity, where one of our executive officers serves on the board of directors that would constitute a related person transaction or raise concerns of a Compensation Committee interlock.

30 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS


Indemnification Agreements
Our Bylaws require us generally to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. Additionally, as permitted by Delaware law, we have entered into indemnification agreements with each of our directors and elected officers. Under the indemnification agreements, we have agreed to hold harmless and indemnify each indemnitee, generally to the fullest extent permitted by Delaware law, against expenses, liabilities and loss incurred in connection with threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative to which the indemnitee is made a party by reason of the fact that the indemnitee is or was a director or officer of the Company or any other entity at our request, provided however, that the indemnitee acted in good faith and in a manner reasonably believed to be in the best interests of our Company.

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 31


VOTING SECURITIES AND PRINCIPAL HOLDERS


Stock Ownership of Certain Beneficial Owners
The following entities beneficially owned, to the best of our knowledge, more than five percent of the outstanding common stock as of the dates indicated in the footnotes below. All information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on the dates indicated in the footnotes below.
Name and Address of Beneficial Owner
 
Amount and Nature of
Beneficial Ownership of
Common Stock
 
Percent
of  Class
State Street Corporation
One Lincoln Street, Boston, MA 02111
 
16,948,859
(1)
 
10.1%
Capital International Investors
11100 Santa Monica Boulevard, 16th Floor,
Los Angeles, CA 90025
 
16,795,547
(2)
 
10.0%
The Vanguard Group
100 Vanguard Blvd., Malvern, PA 19355
 
13,283,416
(3)
 
7.9%
BlackRock, Inc.
55 East 52nd Street, New York, NY 10055
 
10,720,381
(4)
 
6.4%

(1)
This information was provided by State Street Corporation (State Street) in a Schedule 13G filed with the SEC on February 14, 2020. According to State Street, as of December 31, 2019, State Street had shared voting power over 16,531,907 shares and shared dispositive power over 16,947,262 shares. This total includes 10,590,567 shares held as of December 31, 2019 in the Defined Contribution Plans Master Trust for the Northrop Grumman Savings Plan and the Northrop Grumman Financial Security and Savings Program, for which State Street Bank and Trust Company acts as trustee and State Street Global Advisors Trust Company acts as investment manager.
(2)
This information was provided by Capital International Investors (Capital International), a division of Capital Research and Management Company, in a Schedule 13G/A filed with the SEC on March 10, 2020. According to Capital International, as of February 28, 2020, Capital International had sole voting power over 16,618,821 shares and sole dispositive power over 16,795,547 shares.
(3)
This information was provided by The Vanguard Group (Vanguard) in a Schedule 13G/A filed with the SEC on February 12, 2020. According to Vanguard, as of December 31, 2019, Vanguard had sole voting power over 237,465 shares, shared voting power over 40,919 shares, sole dispositive power over 13,015,840 shares and shared dispositive power over 267,576 shares.
(4)
This information was provided by BlackRock, Inc. (BlackRock) in a Schedule 13G/A filed with the SEC on February 5, 2020. According to BlackRock, as of December 31, 2019, BlackRock had sole voting power over 9,753,571 shares and sole dispositive power over 10,720,381 shares.
  

32 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


VOTING SECURITIES AND PRINCIPAL HOLDERS


Stock Ownership of Officers and Directors
The following table shows beneficial ownership of our common stock as of March 24, 2020 by each of our current directors, our named executive officers and all directors and executive officers as a group. As of March 24, 2020, there were 167,293,201 shares of our common stock outstanding. None of the persons named below beneficially owns in excess of 1% of our outstanding common stock. Unless otherwise indicated, each individual has sole investment power and sole voting power with respect to the shares owned by such person.
 
 
Shares of Common  Stock
Beneficially Owned
 
 
Share
Equivalents (1)
 
Total
 
Non-Employee Directors
 
 
 
 
 
 
 
 
Marianne C. Brown
 
 
 
5,387
 
5,387
 
Donald E. Felsinger
 
 
 
36,615
 
36,615
 
Ann M. Fudge
 
93
 
 
2,900
 
2,993
 
Bruce S. Gordon
 
  
 
17,958
 
17,958
 
William H. Hernandez
 
1,000
 
 
5,039
 
6,039
 
Madeleine A. Kleiner
 
  
 
16,936
 
16,936
 
Karl J. Krapek
 
6,569
  
 
21,187
 
27,756
 
Gary Roughead
 
  
 
8,346
 
8,346
 
Thomas M. Schoewe
 
3,160
  
 
9,585
 
12,745
 
James S. Turley
 
635
 
 
2,814
 
3,449
 
Mark A. Welsh III
 
 
 
1,971
 
1,971
 
Named Executive Officers
 
 
 
 
 
 
 
 
Kathy J. Warden (2)
 
102,728
 
 
 
102,728
 
Kenneth L. Bedingfield
 
21,012
 
 
 
21,012
 
Mark A. Caylor
 
14,415
 
 
36
 
14,451
 
Christopher T. Jones
 
69,016
 
 
1,729
 
70,745
 
Janis G. Pamiljans
 
7,473
 
 
6,573
 
14,046
 
Other Executive Officers
 
81,943
  
 
8,152
 
90,095
 
All Directors and Executive Officers as a Group (26 persons)
 
308,044
  
 
145,228
 
453,272
(3)

(1)
Share equivalents for directors represent non-voting deferred stock units acquired under the 2011 Plan, some of which are paid out in shares of common stock at the conclusion of a director-specified deferral period, and others are paid out upon termination of the director's service on the Board. Certain of the NEOs hold share equivalents with pass-through voting rights in the Northrop Grumman Savings Plan or the Northrop Grumman Financial Security and Savings Program.
(2)
Ms. Warden also serves on the Company's Board of Directors.
(3)
Total represents 0.27% of the outstanding common stock as of March 24, 2020. 

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 33


EQUITY COMPENSATION PLAN INFORMATION



We currently maintain two equity compensation plans: the 2011 Plan and the 1993 Stock Plan for Non-Employee Directors, as amended (1993 Directors Plan). Each of these plans has been approved by our shareholders.
The following table sets forth the number of shares of our common stock to be issued upon payout of outstanding awards and the number of shares remaining available for future award grants under these equity compensation plans as of December 31, 2019.
Plan category
 
Number of shares  of
common stock to be
issued upon exercise
of outstanding options and
payout of outstanding
awards (1)
(#)
 
Weighted-average
exercise price of
outstanding options (2)
($)
 
Number of shares of 
common stock remaining available for future issuance under equity compensation plans (excluding shares reflected in the first column) (3)
(#)
 
Equity compensation plans approved by shareholders
 
1,520,130
 
N/A
 
5,528,835
  
Equity compensation plans not approved by shareholders
 
N/A
 
N/A
 
N/A
  
Total
 
1,520,130
 
N/A
 
5,528,835
(4)

(1)
This number includes 701,553 shares that were subject to outstanding stock awards granted under the 2011 Plan, 368,715 awards earned at year end but pending distribution subject to final performance adjustments, 130,615 shares subject to outstanding stock unit credited under the 2011 Plan and 1993 Directors Plan, and additional performance shares of 319,247, which reflect the number of shares deliverable under payment of outstanding restricted performance stock rights, assuming maximum performance criteria have been achieved.
(2)
There were no options outstanding as of December 31, 2019.
(3)
Of the aggregate number of shares that remained available for future issuance, 5,528,835 were available under the 2011 Plan as of December 31, 2019. No new awards may be granted under the 1993 Directors Plan.
(4)
After giving effect to our February 2020 awards, the number of shares of common stock remaining available for future issuance would be 5,148,130 (assuming maximum payout of such awards).


34 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


PROPOSAL TWO: ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS

Consistent with Section 14A of the Exchange Act, we are providing our shareholders with the opportunity to cast a non-binding, advisory vote on the compensation of our NEOs. This advisory vote, commonly known as "say-on-pay," gives our shareholders the opportunity to express their view on our 2019 executive compensation programs and policies for our NEOs. The vote does not address any specific item of compensation and is not binding on the Board; however, as an expression of our shareholders' views, the Compensation Committee seriously considers the vote when making future executive compensation decisions. The Board has adopted a policy of providing for annual advisory votes on the compensation of our NEOs.
We believe our compensation programs reflect responsible, measured practices that effectively incentivize our executives to dedicate themselves fully to value creation for our shareholders, customers and employees. Our pay practices are aligned with our shareholders' interests and with leading industry practice and are governed by a set of strong policies. Examples include:
Double-trigger provisions for change in control situations, and no excise tax gross-ups for payments upon termination after a change in control;
A recoupment policy applicable to cash and equity incentive compensation payments;
Stock ownership guidelines of 7x base salary for the CEO and 3x base salary for other NEOs, and stock holding requirements of three years from the vesting date for equity awards; and
Prohibitions on hedging or pledging of Company stock.
For a more extensive list of our best practices, refer to page 37 of this Proxy Statement. In addition, our Compensation Discussion and Analysis (CD&A) provides a detailed discussion of our performance-based approach to executive compensation. We encourage you to read the CD&A, the rest of this Proxy Statement and our 2019 Form 10-K, which describes our business and 2019 results in more detail.
Recommendation
The compensation of our executives is aligned to performance, is sensitive to shareholder returns, appropriately motivates and retains our executives, and is a competitive advantage in attracting and retaining the high caliber talent necessary to drive our business forward and build sustainable value for our shareholders. Accordingly, the Board recommends that shareholders approve the following resolution:
"RESOLVED, that, as an advisory matter, the shareholders of Northrop Grumman Corporation approve the compensation paid to the Company's named executive officers as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion."
Vote Required
Approval of this proposal requires that the votes cast "for" the proposal exceed the votes cast "against" the proposal. Abstentions and broker non-votes will have no effect on this proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL TWO.
 

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 35


COMPENSATION DISCUSSION AND ANALYSIS


Compensation Discussion and Analysis
In this CD&A, we provide an overview of our executive compensation programs and the underlying philosophy used to develop the programs. We describe the material components of our executive compensation programs for our 2019 NEOs and explain how and why our Board's Compensation Committee arrived at certain specific compensation policies and decisions. We refer to certain non-GAAP financial measures, which are identified with asterisks. For more information, including definitions, reconciliations to the most directly comparable GAAP (accounting principles generally accepted in the United States of America) measure and why we believe these measures may be useful to investors, see "Appendix A - Use of Non-GAAP Financial Measures." 2019 NEO compensation is in the Summary Compensation Table on page 53 and other compensation tables contained in this Proxy Statement.
2019 NEOs
KATHY J. WARDEN
KENNETH L. BEDINGFIELD
MARK A. CAYLOR
CHRISTOPHER T. JONES
JANIS G. PAMILJANS

36 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY



Summary of Our Executive Compensation Programs
Our executive compensation philosophy is to provide our NEOs with attractive, flexible and market-based total compensation tied to annual and long-term performance and aligned with the interests of our shareholders. The key elements of our compensation programs for our NEOs are summarized below.
 
 
Compensation Element
 
Purpose
 
Key Characteristics
 
 
 
 
 
 
 
Fixed Component
 
Base Salary
 
Compensate fairly and competitively
 
Determined by level of responsibility, competitive market pay assessment and individual performance
 
 
 
 
 
 
 
Long-Term Incentive Plan (LTIP) Restricted Stock Rights (RSRs)
 
Link the interests of our executive officers to shareholders and retain executive talent
 
30% of annual LTIP grant
Three-year cliff vesting
 
 
 
 
 
 
 
Performance-based Component
 
Annual Incentive Plan (AIP)
 
Motivate and reward achievement of annual business objectives
 
Financial Metrics
35% Pension-adjusted Cash Flow from Operations*
35% Segment Operating Income* Growth
15% Pension-adjusted Net Income* Growth
15% Pension-adjusted Operating Margin (OM) Rate*
Subject to downward adjustment for failure to achieve non-financial objectives
 
 
 
 
 
 
 
LTIP Restricted Performance Stock Rights (RPSRs)
 
Link the interests of our executive officers to shareholders, motivate and reward achievement of long-term strategic goals and retain executive talent
 
70% of annual LTIP grant
Three-year performance period
Actual shares earned are weighted equally to relative TSR, Cumulative Free Cash Flow* (Cumulative FCF*) and Operating Return on Net Assets* (Operating RONA*)
* This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."
Our Compensation Pay Practices (pages 40 - 51)
Our compensation programs incorporate best practices, including the following:
Best Practices
 
 
 
 
 
   Pay for Performance
   Above-Target Annual Incentive Payouts Only When We Outperform Our Peer Benchmarks
   Long-Term Incentives Focused on Performance
   Cap on Annual Bonuses and Performance-Based Long-Term Incentive Share Payouts
   Compensation Elements Benchmarked at Market Median
 
   Annual Peer Group Review
   Independent Consultant Reports Directly to Compensation Committee
   Double Trigger Provisions for Change in Control
    No Individual Change in Control Agreements
   No Excise Tax Gross-ups for Payments Received Upon Termination After a Change in Control
 
   No Hedging or Pledging of Company Stock
   Dividends Paid Upon Vesting
   Recoupment Policy on Cash and Equity Incentive Compensation Payments
   Stock Ownership Guidelines and Stock Holding Requirements
   Regular Risk Assessments Performed
   No Employment Contracts for CEO or other NEOs

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 37


COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY


2019 Performance Highlights
We continued to generate strong financial results in 2019, including higher sales, operating income, segment operating income*, cash provided by operating activities and free cash flow*. 2019 diluted earnings per share were $13.22 and 2019 mark-to-market (MTM)-adjusted diluted earnings per share* were $21.21. Our strong cash generation allowed us to invest $1.3 billion in our business and return approximately $1.6 billion to our shareholders through share repurchases and dividends.
Earnings Per Share
chart-0571e6d9492878c6c7da18.jpg
* This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."
3-Year Total Shareholder Return
chart-e27cebaa4d9b60c02b2a18.jpg


38 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY



Management and the Compensation Committee believe our executive compensation programs are competitive and support achieving strong financial performance while investing for profitable growth and value creation over the long-term. A 96% shareholder majority approved last year's say-on-pay proposal, and our ongoing shareholder engagement indicates continued support for the structure and elements of our executive incentive compensation programs.
Compensation Mix and Incentive Metrics
We have a balanced pay for performance compensation structure that places an appropriate level of compensation at risk, based on our financial and non-financial performance measures and relative TSR. The following charts show performance-based compensation elements at target values.
ceodonutchartjan.jpg

For AIP, following are the results for 2019 performance, which have been adjusted, as applicable, to exclude Orbital ATK transaction-related expenses and certain impacts related to the MTM method of accounting for the Company's pension and other postretirement benefit (OPB) plans as detailed in "Appendix A - Use of Non-GAAP Financial Measures":
Pension-adjusted Cash Flow from Operations*: $4.5B
Segment Operating Income* Growth: $3.9B
Pension-adjusted Net Income* Growth: $2.9B
Pension-adjusted OM Rate*: 11.2%
For the LTIP, our score covering the three-year 2017-2019 performance period was weighted 50% to relative TSR and 50% to Cumulative FCF*, maintaining strong alignment to shareholder interest and increased emphasis on operational performance. The combined weighted score for the metrics generated an overall performance score of 119%.

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 39


COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES


Compensation Philosophy and Objectives
We provide an attractive, flexible and market-based total compensation program tied to performance and aligned with the interests of our shareholders. Our objective is to recruit and retain the caliber of executives and other key employees capable of achieving top performance and generating value for our shareholders, customers and employees.
Our goal is to lead our industry in sustainable performance, while maintaining strong, enduring values. The targets, thresholds and payout levels of our AIP are benchmarked against peers and the market. Our 2019 LTIP metrics are based on (1) TSR relative to our Performance Peer Group and the S&P Industrials, (2) Cumulative FCF* and (3) Operating RONA*. For each plan, we selected metrics that drive shareholder value and benchmark our performance against our peers and the market. Our executive compensation and benefit programs are guided by the following principles:
Pay for Performance
      Our incentive plans are based on peer and market benchmarked performance metrics.
      Above-target incentive payouts are only awarded when we outperform our peer and market benchmarks.
 
Leadership Recruitment, Retention and Succession
      Compensation is designed to be competitive within our industry and retain top talent.
      Programs are designed to recruit, motivate and reward NEOs for delivering operational and strategic performance over time.
 
Sustainable Performance
      Our AIP includes both financial and non-financial metrics to ensure we are building a strong foundation for long-term sustainable performance and shareholder value creation.
 
Alignment with Shareholder Interests
      Our compensation structure places an appropriate amount of compensation at risk based on annual and long-term results.
      At-risk compensation is based on financial and non-financial performance measures and relative TSR.
      A significant portion of compensation is delivered in equity, the vesting and value of which provides alignment with shareholder returns.
      Stock ownership guidelines, holding requirements for equity awards and our recoupment policy further align executive and shareholder interests.
 
Benchmarking
      Compensation program provisions and financial objectives are evaluated on an annual basis and modified in accordance with industry and business conditions.
      We seek to outperform our peers (a group of top global defense companies identified as the Performance Peer Group on page 42).
      We use a Target Industry Peer Group (identified on page 43) for broader market executive compensation analyses that includes companies based on a peer-of-peers analysis.
 
Compensation Risk Management
      The Compensation Committee, together with its independent compensation consultant, conducts an annual assessment of the compensation programs to determine if there are potential material risks to the Company.
      Both the Compensation Committee and its independent compensation consultant evaluate the mix of variable compensation linked to financial and non-financial performance, as well as shareholder returns.
     The assessment is to confirm there is an appropriate balance in the executive compensation programs, practices and policies.

40 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES


How We Make Compensation Decisions
Role of the Compensation Committee
The Compensation Committee is responsible for overseeing our compensation policies, incentive and equity compensation plans and approving payments or grants under these plans for elected officers (other than the CEO). The Compensation Committee recommends the compensation for our CEO to the independent directors of the Board for approval and approves the compensation for the other NEOs. In performing its duties, the Compensation Committee:
receives advice from an independent compensation consultant who reports directly to the Compensation Committee and is discussed further below;
reviews market data and other input from its independent compensation consultant;
reviews and approves incentive goals and objectives (CEO goals and objectives are reviewed and approved by the independent directors);
evaluates and approves executive benefit and perquisite programs;
evaluates the competitiveness of each elected officer's total compensation package; and
conducts an annual evaluation of the independent compensation consultant.
In addition, the Compensation Committee annually reviews and discusses with management the CD&A and provides a Compensation Committee Report for inclusion in the proxy statement.
For more information regarding the composition of the Compensation Committee and its duties and responsibilities, see "Corporate Governance – Committees of the Board of Directors – Compensation Committee."
Role of the Independent Compensation Consultant
The Compensation Committee retains an independent compensation consultant, Frederic W. Cook & Co. (the Compensation Consultant). The Compensation Consultant reports directly to the Compensation Committee, and the Compensation Committee may replace the Compensation Consultant or hire additional consultants at any time. A representative of the Compensation Consultant regularly participates in meetings of the Compensation Committee and communicates with the Compensation Committee Chairperson between meetings as needed; however, the Compensation Committee and the independent directors of the Board make final decisions on the compensation actions for the NEOs. The Compensation Consultant also participates in executive session with the Compensation Committee. Other than the fees paid to the Compensation Consultant pursuant to its engagement by the Compensation Committee for its advice on executive and director compensation, the Compensation Consultant does not receive any fees or income from the Company.
The roles of the Compensation Consultant include:
providing a review of market data and advising the Compensation Committee on the levels and structure of our executive compensation policies and procedures, including compensation matters for NEOs;
reviewing and advising the Compensation Committee on our total compensation philosophy, peer groups and target competitive positioning;
identifying market trends and practices and advising the Compensation Committee on program design implications;
providing proactive advice to the Compensation Committee on best practices for Board governance of executive compensation, compensation-related risk management, and any areas for program design to most appropriately support the Company's business strategy and organizational values; and
serving as a resource to the Compensation Committee Chairperson on setting agenda items for Compensation Committee meetings and undertaking special projects.
In February 2020, the Compensation Committee determined that there were no relationships between the Compensation Consultant and the Company or any of the Company's directors or executive officers that raised a conflict of interest.
Role of Management
Our CEO makes compensation-related recommendations for elected officers, other than the CEO, to the Compensation Committee for its review and approval. The CEO's evaluation is based on each officer's compensation relative to market and the overall framework, philosophy and objectives for our executive compensation programs set by the Compensation Committee.

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 41


COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES


The recommendations for elected officers are based on an assessment of each executive's performance, skills and industry knowledge, market compensation benchmarks, and succession and retention considerations. The Chief Human Resources Officer provides a summary of historical compensation and benefits-related data when compensation decisions are considered by the Compensation Committee to ensure compensation decisions are made within our total compensation framework.
Management also provides recommendations to the Compensation Committee regarding executive incentive and benefit plan designs and strategies. These recommendations include financial and non-financial operational goals and criteria for our annual and long-term incentive plans.
Use of Competitive Data
Performance Peer Group: Set Performance Targets and Evaluate Performance
The Compensation Committee uses the Performance Peer Group for purposes of setting performance targets and evaluating performance for our AIP and LTIP. The Performance Peer Group encompasses many of the largest global defense companies by government revenues within the aerospace and defense market space. AIP goals for 2019 and goals for the LTIP grants made during 2019 that will vest in 2021 were established based on the 2019 Performance Peer Group.
2019 PERFORMANCE PEER GROUP
BAE Systems
L3Harris Technologies, Inc. (1)
Raytheon Company
The Boeing Company
Leidos Holdings, Inc.
Thales Group
Booz Allen Hamilton Holding Corporation
Leonardo
 
General Dynamics Corporation
Lockheed Martin Corporation
 
(1) L3 Technologies, Inc. merged with Harris Corporation in 2019, forming L3Harris Technologies, Inc.
Performance targets for the LTIP grants for the three-year performance period vesting in 2019 were established in 2017, based on the 2017 Performance Peer Group.
2017 PERFORMANCE PEER GROUP
BAE Systems
L3Harris Technologies, Inc. (1)
Raytheon Company
The Boeing Company
Leidos Holdings, Inc.
Thales Group
Booz Allen Hamilton Holding Corporation
Leonardo
 
General Dynamics Corporation
Lockheed Martin Corporation
 
(1) L3 Technologies, Inc. merged with Harris Corporation in 2019, forming L3Harris Technologies, Inc.
Target Industry Peer Group: Benchmark Executive Compensation Practices
The Compensation Committee benchmarks our executive compensation levels and practices against a Target Industry Peer Group of 14 companies, including a subset containing six direct peers. Prior to the beginning of the year, the Compensation Committee sets the Target Industry Peer Group used to benchmark compensation for the following year. To identify peer companies for compensation benchmarking purposes, the Compensation Consultant employed an objective criteria-based methodology where:
the company was identified as a peer by at least two aerospace and defense peers or proxy advisory services;
the company participated in the annual Aon Hewitt executive compensation study; and
revenues, total employees and market capitalization of the company were broadly similar to those of the Company.

42 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES


While the Target Industry Peer Group is reviewed annually by the Compensation Committee with the Compensation Consultant, our goal is to keep it as consistent as reasonably possible on a year-over-year basis. The companies that comprise the 2019 Target Industry Peer Group are listed in the following table:
2019 TARGET INDUSTRY PEER GROUP
3M Company
Johnson Controls International
The Boeing Company (1)
L3Harris Technologies, Inc. (1) (2)
Caterpillar, Inc.
Lockheed Martin Corporation (1)
Eaton Corporation
Parker-Hannifin Corporation (3)
Emerson Electric Company
Raytheon Company (1)
General Dynamics Corporation (1)
Textron, Inc.
Honeywell International, Inc. (1)
United Technologies Corporation (4)
(1) Included in the subset of six direct peers also used for compensation benchmarking
(2) L3 Technologies, Inc. merged with Harris Corporation in 2019, forming L3Harris Technologies, Inc.
(3) Added in 2019
(4) United Technologies Corporation acquired Rockwell Collins, Inc. in 2018
It is the Company's pay philosophy to provide the CEO a compensation package that comprises competitive elements of base salary and target variable pay relative to the Target Industry Peer Group. In 2019, the CEO's target total direct compensation approximated the median of the Target Industry Peer Group.
Another element of the Company's pay philosophy is to tie a significant portion of the CEO's pay to performance. As a result, the CEO's actual compensation may differ from this market median based on the Company's actual performance.
In determining the base salary and target variable pay elements for the other NEOs, the Compensation Committee does not set any specific benchmark relative to the Target Industry Peer Group; rather, the Compensation Committee considers several factors in determining their compensation, including executive compensation levels and practices of the Target Industry Peer Group, NEO individual experience, growth in job as demonstrated through sustained performance, leadership impact, retention and pay relative to the CEO. Actual annual incentive awards and long-term incentive award opportunities reflect these factors, as well as Company performance.


NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 43


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


Annual Incentive Compensation
Under our shareholder-approved 2002 Incentive Compensation Plan (the Plan), the Compensation Committee approves the annual incentive compensation target payout percentage for each NEO other than the CEO. For the CEO, such percentage is approved by the independent directors of the Board.
The target incentive award (target bonus) represents a percentage of each NEO's base salary. Following the completion of the fiscal year, the target bonus is used by the Compensation Committee, together with its assessment of Company performance against pre-determined performance criteria, to determine the final bonus award amount.
2019 Annual Incentive
The 2019 target bonus for the CEO was 180% of base salary, which was unchanged from 2018. For each of the other NEOs, the 2019 target bonus was 100% of base salary, which was also unchanged from 2018.
Final bonus awards for each NEO were determined by multiplying the Northrop Grumman Company Performance Factor (CPF) by the target bonus. The CPF can range from 0% to 200%.
Annual Incentive Formula for 2019:

Base Salary

X

Target Payout %

=

Target Bonus

 
 
 
 
 

Target Bonus

X

CPF

=

Final Bonus Award

Annual performance evaluations are conducted by the CEO for each NEO, other than the CEO, and reviewed with the Compensation Committee. The Compensation Committee considers this performance information as well as the comparison to market data.
The Compensation Committee approves bonus amounts for all NEOs except the CEO, whose annual bonus is recommended by the Compensation Committee to the independent members of the Board for approval. The Compensation Committee has discretion to make adjustments to the annual bonus payouts for NEOs, except the CEO, if it determines such adjustment is warranted. For example, in instances where Company performance has been impacted by unforeseen or unusual events, the Compensation Committee has exercised its authority to increase the final awards as necessary to preserve the intended incentives and benefits. The Compensation Committee has also adjusted payouts downward in the past, despite performance targets having been met, when it determined that particular circumstances had a negative impact on the Company but were not reflected in the performance calculation.

44 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


2019 Annual Incentive Goals and Results
For the AIP, we use a mix of financial and non-financial metrics to measure our performance. Our AIP metrics reflect our commitment to investing for and achieving long-term profitable growth; maintaining alignment with shareholders' interests; and incentivizing top performance against our industry peers. For 2019, the Compensation Committee selected Pension-adjusted Cash Flow from Operations*, weighted at 35% and Pension-adjusted Net Income* Growth and Pension-adjusted OM Rate*, each weighted at 15%. The Committee also added Segment Operating Income* Growth as a fourth metric, weighted at 35%. The metrics are defined as follows:
Pension-adjusted Cash Flow from Operations*: calculated as cash provided by operating activities before the after-tax impact of discretionary pension contributions*. This metric emphasizes the importance of converting earnings into cash and enables management to make capital investment decisions that support long-term profitable growth without impacting performance-based incentive compensation.
Segment Operating Income* Growth: calculated as segment operating income* multiplied by a market-based growth rate. This metric incentivizes management to focus on profitable growth and enables management to evaluate the financial performance and operational trends of our sectors.
Pension-adjusted Net Income* Growth: calculated as net income before the after-tax impact of the total net FAS/CAS pension adjustment multiplied by a market-based growth rate. This metric incentivizes management to achieve relative long-term profitable growth greater than a projected industry growth rate.
Pension-adjusted OM Rate*: calculated as OM rate (operating margin divided by sales) before net FAS (service)/CAS pension adjustment. This metric establishes high program performance expectations for the Company.
In addition to these financial goals, we use non-financial goals to align our objectives with all our stakeholders. Performance against non-financial metrics can result only in a downward adjustment to the financial metric score. For 2019, we selected the following non-financial metrics, including a new seventh metric to assess Operational Efficiency:
Quality: measured using program-specific objectives, including defect rates, process quality, supplier quality, planning quality or other appropriate criteria for program type and phase.
Customer Satisfaction: measured in terms of customer feedback, including customer-generated performance scores, award fees and verbal and written feedback.
Engagement & Inclusion: measured based on performance at or above the global high performing norm for engagement and inclusion indices.
Operational Efficiency: measured in terms of taking action to streamline processes and ensure decisions and accountability are at the right levels to enable speed and agility while preserving superior performance.
Diversity: measured in terms of representation of females and people of color in all management level positions with respect to internal and external benchmarks.
Environmental Sustainability: measured in terms of reductions in absolute greenhouse gas emissions and potable water use consumption, and improvement in solid waste diversion (i.e., waste diverted from landfill disposal).
Safety: measured by total case rate, defined as the number of Occupational Safety & Health Administration recordable injuries as well as by lost work day rate associated with those injuries.
Our AIP provides for payout levels from 0% to 200% of target. The minimum, target and maximum performance levels are derived based on an analysis of the past performance of our Performance Peer Group (Pension-adjusted Net Income* Growth is based on projected market growth rates). Specific values are identified for each metric at selected points in the range between minimum and maximum and other values are determined by linear interpolation between these points. No payout is made if performance is below the minimum. Above-target payout can be earned only if the Company’s performance exceeds the performance threshold noted in the table on the following page. The maximum 200% payout is based upon top quartile past performance of the Performance Peer Group. This structure rewards superior performance by aligning above-target payouts to outperforming our peer benchmarks and provides reduced awards for below target performance.

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 45


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


In determining the CPF, both financial and non-financial performance against goals is assessed. The 2019 Company financial performance for the four metrics shown in the table below was 172%. As approved by the Compensation Committee, Company performance calculations exclude Orbital ATK transaction-related expenses and certain impacts related to the MTM method of accounting for the Company's pension and OPB plans as detailed in "Appendix A - Use of Non-GAAP Financial Measures".
Metric/Goal
Weighting
Performance to Achieve Target Payout
2019 Performance
2019 Financial Score
Pension-adjusted Cash Flow from Operations*
35%
$3.6B
$4.5B
70%
Segment Operating Income* Growth
35%
$3.8B
$3.9B
50%
Pension-adjusted Net Income* Growth
15%
$2.5B
$2.9B
30%
Pension-adjusted OM Rate*
15%
10.6%
11.20%
22%
 

 
 
172%
* This metric is a non-GAAP financial measure. For more information, see "Appendix A - Use of Non-GAAP Financial Measures."
Performance against the annual non-financial metrics cannot exceed 100% and can result only in a downward adjustment to the financial performance score. The Company demonstrated strong performance in 2019 overall against the non-financial goals, and the Compensation Committee approved a non-financial score of 97%. In consideration of both the financial and non-financial performance, the 2019 Company Performance Factor was determined to be 167%.
Decisions for 2019
In February 2020, the Compensation Committee recommended, and the independent members of our Board approved, a 2019 annual incentive award of $4,509,000 for the CEO, Ms. Warden. Based on the CPF, Ms. Warden recommended, and the Compensation Committee approved, the other NEOs' annual incentive awards.
Name
 
Target Payout 
% of Salary
 
Payout Range
% of Salary
 
Actual Payout
% of Salary
 
Actual Payout (1)
Kathy J. Warden
 
180%
 
0% - 360%
 
301%
 
$4,509,000
Kenneth L. Bedingfield
 
100%
 
0% - 200%
 
167%
 
$1,401,000
Mark A. Caylor
 
100%
 
0% - 200%
 
167%
 
$1,428,000
Christopher T. Jones
 
100%
 
0% - 200%
 
167%
 
$1,278,000
Janis G. Pamiljans
 
100%
 
0% - 200%
 
167%
 
$1,428,000
(1) The potential range of bonus payouts based on 2019 performance is disclosed in the Grants of Plan-Based Awards Table. Actual bonus payouts for 2019 performance are disclosed above and in the Summary Compensation Table.

46 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


Long-Term Incentive Compensation
2019 Long-Term Incentive Program
In determining the amount of the individual long-term incentive award for our NEOs (other than the CEO), the Compensation Committee considers an elected officer's individual performance during the preceding year, growth in job as demonstrated through sustained performance, leadership impact, retention and pay relative to the CEO, as well as market data for the elected officer's position based on the Target Industry Peer Group analysis.
In 2019, after determining the award value for the NEOs as described above, the Compensation Committee granted awards in the form of RPSRs to ensure sustainability and achievement of business goals over time and RSRs to provide retention value. The awards were comprised of 70% RPSRs and 30% RSRs. The Compensation Committee determined this long-term incentive mix would appropriately motivate and reward the NEOs to achieve our long-term objectives and further reinforce the link between their interests and the interests of our shareholders.
The RPSRs will vest and be distributed following the completion of the three-year performance period (commencing January 1, 2019 and ending December 31, 2021) if goals are met. The RSRs generally vest 100% after three years. Earned RPSRs and RSRs may be paid in shares, cash or a combination of shares and cash at the Compensation Committee's discretion. An executive generally must remain employed through the vesting period to earn an award. Vesting for termination due to death, disability, retirement or change in control is discussed in the "Termination Payments and Benefits" section on page 64. Dividend equivalents accrue on both RPSR and RSR awards earned and will be paid upon distribution of the RPSRs and RSRs.
The Compensation Committee evaluates RPSR performance requirements each year to ensure they are aligned with our business objectives. For the 2019 RPSR grant, the Compensation Committee determined that for the NEOs, performance metrics will continue to be relative TSR and Cumulative FCF*; however, in order to increase management's focus on the operational metrics that drive long-term shareholder value creation, Operating RONA* was added as a third metric. The metrics are equally weighted at 1/3. The current metrics and weightings reflect the Company's continued emphasis on operational performance directly impacted by management decisions and behaviors, while maintaining strong alignment with shareholder interests. Based on the performance against these metrics, shares earned for 2019 RPSR grants can vary from 0% to 150% of the rights awarded.
TSR is measured by comparing cumulative stock price appreciation with reinvestment of dividends over the three-year period to the Performance Peer Group (50% of relative TSR portion of award) and to the S&P Industrials (50% of relative TSR portion of award), which comprises companies within the S&P 500 classified as Industrials, reflecting the range of similar investment alternatives available to our shareholders. To smooth volatility in the market, the TSR calculation is based on the average of the three-year returns for each of the 30 calendar days immediately following the grant date. The maximum relative TSR payout is capped at 100% of target shares if the absolute TSR is negative, even if the relative TSR would have resulted in a higher score.
Cumulative FCF* focuses on cash generation after capital investments and is calculated as the aggregate free cash flow before the after-tax impact of total pension funding* over a three-year period. Free cash flow* includes funds available to create shareholder value after investing in the business through capital expenditures.
Operating RONA* drives operational productivity through the efficient use of capital resources (operating assets). The metric is calculated as adjusted Net Operating Profit After-Tax* (adjusted NOPAT*) divided by the two-year average of net operating assets.
Recently Completed RPSR Performance Period (20172019)
In February 2017, when granting RPSRs to NEOs who were elected officers at the time of the grant, the Compensation Committee selected relative TSR and Cumulative FCF*, equally weighted at 50%, as the performance metrics for the awards and established the performance criteria for the awards as set forth in the table below.
 
Performance Required to Score
 
 
Metric/Goal
Weighting
0%
100%
150%
2019 Actual Performance
2019 Score
Relative TSR - 2017 Performance Peer Group
25%
25th
50th
80th
40th
15%
Relative TSR - S&P Industrials
25%
25th
50th
80th
59th
29%
Cumulative FCF*
50%
$4.8B
$6.0B
$6.5B
$7.0B
75%
RPSR Performance Factor
 
 
 
 
 
119%

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 47


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


In February 2020, the Compensation Committee reviewed performance for the January 1, 2017 to December 31, 2019 RPSR performance period. The combined weighted score for the metrics generated an overall performance score of 119% (excluding the impact of Innovation Systems as detailed in "Appendix A - Use of Non-GAAP Financial Measures").
In February 2020, the NEOs received payouts in stock with respect to the outstanding RPSR awards that were granted in February 2017 for the three-year performance period ending December 31, 2019 (as described further in footnote 3 to the Outstanding Equity Awards Table on page 56).
Other Benefits
This section describes other benefits the NEOs receive. These benefits are not performance related and are designed to provide a competitive package for purposes of attracting and retaining the executive talent needed to achieve our business objectives. These benefits include retirement benefits, certain perquisites and severance arrangements.
Retirement Benefits
We maintain tax-qualified retirement plans (both defined benefit pension plans and defined contribution savings plans) that cover most of our workforce, including the NEOs. We also maintain nonqualified retirement plans that are available to our NEOs, which are designed to restore benefits that were limited under the tax-qualified plans or to provide supplemental benefits. Compensation, age and years of service factor into the amount of benefits provided under the plans. Thus, the plans are structured to reward and retain employees of long service and recognize higher performance levels as evidenced by increases in annual pay. Additional information about these retirement plans and the NEO benefits under these plans can be found in the Pension Benefits Table and Nonqualified Deferred Compensation Table, on pages 58 and 62, respectively.
The Compensation Committee assesses aggregate benefits available to the NEOs and has previously imposed an overall cap, generally limited to no more than 60% of final average pay, on pension benefits for the NEOs (except for small variations due to contractual restrictions under the plans). The nonqualified supplemental defined benefit plans in which our NEOs participate were frozen as to pay and service as of December 31, 2014.
Perquisites
Our NEOs are eligible for certain limited executive perquisites that include financial planning, income tax preparation, physical exams and personal liability insurance. The Compensation Committee believes these perquisites are common within the competitive market for total compensation packages for executives and are useful in attracting, retaining and motivating talented executives. Perquisites provided to the NEOs in 2019 are detailed in the Summary Compensation Table on page 53.
Security Arrangements
Given the nature of our business, we maintain a comprehensive security program. As a component of that program, we provide residential and/or travel protection that we consider necessary to address our security requirements. In selecting the level and form of protection, we and the Board consider security risks faced by those in our industry in general and security risks specific to our Company and its individuals. Based on security threat information obtained and an ongoing dialogue with law enforcement and security specialists, the Board has required that Ms. Warden and other NEOs receive varying levels of residential and travel protection.
Since we require this protection under a comprehensive security program and it is not designed to provide a personal benefit (other than the intended security), we do not view these security arrangements as compensation to the individuals. We report these security arrangements as perquisites as required under applicable SEC rules. In addition, we report them as taxable compensation to the individuals if they are not excludable from income as working condition fringe benefits under Section 132 of the Internal Revenue Code.
The Board has determined that the CEO should avoid traveling by commercial aircraft for purposes of security, rapid availability and communications connectivity during travel, and should use Company-provided aircraft for all air travel. If, as a result, the CEO uses Company-provided aircraft for personal travel, the costs of such travel are imputed as income and are subject to the appropriate tax reporting according to Internal Revenue Code regulations.
We regularly review the nature of the security threat and associated vulnerabilities with law enforcement and security specialists and will continue to revise our security program as appropriate.

48 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


Severance Benefits
We maintain the Severance Plan for Elected and Appointed Officers of Northrop Grumman Corporation (Severance Plan), which is available to Ms. Warden and other NEOs who qualify and are approved to receive such benefits. The purpose of the Severance Plan is to help bridge the gap in an executive's income and health coverage during a period of unemployment following termination, and to ensure certain benefits for the Company.
We do not maintain any change in control severance plans. In addition, we do not provide excise tax gross-ups for any payments received upon termination after a change in control.
Upon a "qualifying termination" (defined below) the Company will provide severance benefits to eligible NEOs under the Severance Plan. Provided the NEO signs a release and agrees to certain restrictions, he or she may receive: (i) a lump sum severance benefit equal to one and one-half times annual base salary and target bonus, (ii) a prorated performance bonus for the year of termination, (iii) continued medical and dental coverage for the eighteen-month severance period, (iv) income tax preparation/financial planning fees for the year of termination and the following year and (v) outplacement expenses up to 15% of salary, all subject to management approval. The cost of providing continued medical and dental coverage is based upon current premium costs. The cost of providing income tax preparation and financial planning is capped for the year of termination and for the year following termination. The annual cap for the CEO is $30,000 and for the rest of the NEOs is $18,500.
A "qualifying termination" includes one of the following:
involuntary termination, other than for cause or mandatory retirement; or
election to terminate in lieu of accepting a downgrade to a non-officer position (i.e., good reason).
Change in Control Benefits
We do not maintain separate change in control programs or agreements. The only change in control benefits available to the NEOs are those described in the terms and conditions of the grants under the 2011 Long-Term Incentive Stock Plan (2011 Plan).
Policies and Procedures
Stock Ownership Guidelines
We maintain stock ownership guidelines for our NEOs to further promote alignment of management and shareholder interests. These guidelines require that NEOs own Company stock with a value denominated as a multiple of their annual salaries, which can be accumulated over a five-year period from the date of hire or promotion into an elected officer position.
The guidelines are as follows:
Position
Stock Value as a Multiple of Base Salary
Chairman and Chief Executive Officer
7x base salary
Other NEOs
3x base salary
Shares that satisfy the stock ownership guidelines include:
Company stock owned outright;
unvested RSRs; and
the value of shares held in the Northrop Grumman Savings Plan or Northrop Grumman Financial Security and Savings Program.
Unvested RPSRs are not included in calculating ownership until they are converted to actual shares owned.
The Compensation Committee reviews compliance with our stock ownership guidelines on an annual basis. As of December 31, 2019, all NEOs were in compliance with the ownership guidelines. The Compensation Committee continues to monitor compliance and will conduct a full review again in 2020.
Stock Holding Requirements
We have a holding period requirement for payouts from long-term incentive grants, further emphasizing the importance of sustainable performance and appropriate risk-management behaviors. Under this policy, NEOs are required to hold, for a period of three years, 50% of their net after-tax shares received from RPSR distributions and RSR vestings. These restrictions generally continue following termination and retirement; however, shares acquired from RPSR distributions following termination or retirement occurring more than one year after separation from the Company are not subject to the holding requirement.

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 49


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


Anti-Hedging and Pledging Policy
Company policy prohibits our NEOs and other elected officers from hedging or entering into margin transactions involving Company stock, and pledging Company securities as collateral for loans or other transactions. Additional information about our policy can be found in "Compensation of Directors - Stock Ownership Requirements and Anti-Hedging and Pledging Policy."
Recoupment Policy
The Company's recoupment policy provides that:
the Board has discretion to recoup incentive compensation paid to an elected officer in the event of a restatement or if an elected officer engages in illegal conduct that causes significant financial or reputational harm to the Company;
the Board has discretion to recoup incentive compensation paid to the elected officer in the event the elected officer fails to report such misconduct of another, or is grossly negligent in fulfilling his or her supervisory responsibilities to prevent such misconduct; and
the CEO has discretion to recoup under similar circumstances incentive compensation provided to non-elected officers or other employees.
The Company’s recoupment policy applies to a three-year look back of performance-based short- or long-term, cash or equity incentive payments. It provides for certain disclosure in the event of recoupment, consistent with SEC and other legal requirements.
Risk Management
The Compensation Committee annually reviews our compensation program and together with the independent compensation consultant assesses potential compensation-related risks to the Company. Based on this assessment for 2019, the Compensation Committee determined that the risk profile is appropriate and substantial risk management features are incorporated into our compensation program. This determination reflects the following conclusions from the detailed risk assessment:
there is appropriate balance to mitigate compensation-related risk in the executive compensation program's design between fixed and variable pay, cash and stock components, short- and long-term measures, financial and non-financial measures, and formulaic and discretionary decisions;
there are appropriate policies in place to mitigate compensation-related risk, including the Compensation Committee's and its advisor's independence, transparent disclosure, officer stock ownership guidelines and holding period requirements, and hedging and recoupment policies; and
there are no incentive or commission arrangements below the executive level that potentially encourage excessive risk-taking behavior.
Grant Date for Equity Awards
Annual grant cycles for equity awards occur in February at the same time salary increases and annual incentive targets are determined. This timing allows the Compensation Committee to make decisions on each of these compensation components at the same time, utilizing a total compensation philosophy. The Compensation Committee reviews and approves annual long-term incentive grants during its scheduled meeting, which occurs following the announcement of our year-end financial results. Equity grants may also be granted on an interim basis throughout the year for special situations, such as new executive hires, promotions or retention.
Tax Deductibility of Pay
Under prior law, Section 162(m) of the Internal Revenue Code generally limited the annual tax deduction to $1 million per person for compensation paid to the Company's CEO and the next three highest-paid NEOs, other than the Chief Financial Officer (collectively, covered employees). Certain compensation, including qualified performance-based compensation, was not subject to the deduction limit if certain requirements were met.
The 2017 Tax Act enacted on December 22, 2017, modified Section 162(m). The 2017 Tax Act expanded the definition of covered employees to include the Company's Chief Financial Officer and any employee who was a covered employee for any taxable year beginning after December 31, 2016. The 2017 Tax Act also repealed the performance-based compensation exception to the deduction limit. These amendments, effective January 1, 2018, do not apply to compensation paid pursuant to a written binding contract in effect on November 2, 2017, that was not materially modified after such date.

50 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTS OF OUR PROGRAMS


Say-on-Pay
Our shareholders are asked annually to approve, on an advisory basis, the compensation paid to our NEOs. We regularly engage with our shareholders to understand their concerns regarding executive compensation. The Compensation Committee annually reviews and discusses the results of the say-on-pay vote. In 2019, our executive compensation programs continued to receive strong support from shareholders with 96% approval at our 2019 Annual Meeting of Shareholders. Based on its review and feedback from shareholder engagement, the Compensation Committee determined that our programs are effective and aligned with shareholder interests, and no substantive changes were required.

NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT I 51


COMPENSATION COMMITTEE REPORT

The Compensation Committee reviewed and discussed the CD&A with management. Based on such review and discussion, the Compensation Committee recommended to the Board that the CD&A be included in this Proxy Statement. The Board has approved the recommendation.
COMPENSATION COMMITTEE
THOMAS M. SCHOEWE, CHAIRPERSON
MARIANNE C. BROWN
DONALD E. FELSINGER
BRUCE S. GORDON
KARL J. KRAPEK
GARY ROUGHEAD


52 I NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT


COMPENSATION TABLES | SUMMARY COMPENSATION TABLE


2019 Summary Compensation Table
Name & Principal Position
Year
 
Salary (1)
($)
 
Bonus
($)
 
Stock
Awards (2)
($)
 
Non-Equity Incentive Plan Compensation (3)
($)
 
Change in Pension Value and Non-Qualified Deferred Compensation Earnings (4)
($)
 
All Other Compensation (5)
($)
 
Total
($)
Kathy J. Warden
2019
 
1,488,462
 
 
13,000,159
 
4,509,000
 
687,615
 
622,758
 
20,307,994
Chairman, Chief Executive Officer and President
2018
 
963,462
 
 
9,999,869
 
1,920,000
 
 
458,976
 
13,342,307
2017
 
807,116
 
 
3,499,993
 
1,061,000
 
388,015
 
206,548
 
5,962,672
Kenneth L. Bedingfield (6)
2019
 
834,385
 
 
3,499,779
 
1,401,000
 
 
296,756
 
6,031,920
Corporate Vice President and
Chief Financial Officer
2018
 
811,154
 
 
3,500,008
 
1,304,000
 
 
312,214
 
5,927,376
2017
 
790,192
 
 
3,250,106
 
1,041,000
 
 
351,426
 
5,432,724
Mark A. Caylor (7)
2019
 
850,192
 
 
3,499,779
 
1,428,000
 
886,646
 
129,727
 
6,794,344
Corporate Vice President and President, Mission Systems
2018
 
790,577
 
 
3,900,096
 
1,328,000
 
 
127,017
 
6,145,690
 
 

 

 

 

 

 

 

Christopher T. Jones (8)
2019
 
760,673
 
 
3,000,163
 
1,278,000
 
762,993
 
226,203
 
6,028,032
Corporate Vice President and President, Technology Services
 
 

 
 
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Janis G. Pamiljans
2019
 
850,192
 
 
3,499,779
 
1,428,000
 
1,088,160
 
356,125
 
7,222,256
Corporate Vice President and President, Aerospace Systems
2018
 
826,154
 
 
3,500,008
 
1,328,000
 
 
241,318
 
5,895,480
2017
 
702,623
 
100,000
 
3,499,941
 
861,000
 
369,399
 
1,032,397
 
6,565,360
(1)
Includes amounts deferred under qualified savings and nonqualified deferred compensation plans.
(2)
Represents the grant date aggregate fair value of RPSRs and RSRs granted during the periods presented. The fair value of awards was computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, excluding any assumed forfeitures. Assumptions used in the calculation of these amounts are disclosed in Note 14 of the Company's 2019 Form 10-K. The maximum grant date fair values of the 2019 RPSRs are as follows, noting the grants assume a 150% maximum payout: