DEF 14A 1 lcah2020_def14a.htm CARDINAL HEALTH INC - DEF 14A CardinalHealth2020ProxyStatement

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

SCHEDULE 14A

 

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

 

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CARDINAL HEALTH, INC.

 

 

(Name of Registrant as Specified in its Charter)

 

N/A

 

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Letter to Cardinal Health Shareholders

Gregory B. Kenny

Chairman of the Board

September  23 , 2020

 
 

 

Over the past year, it is more apparent than ever that Cardinal Health plays a critical role in the healthcare supply chain. I, along with the rest of the Cardinal Health Board of Directors, have been actively engaged as we navigate these unprecedented times, and we remain focused on both strong governance and long-term value creation. I will share the Board’s perspective on the year and the initiatives underway to create value now and in the future.

Our Fiscal 2020 Performance

In fiscal 2020, the company grew non-GAAP operating earnings and exceeded our non-GAAP diluted earnings per share guidance range. We also surpassed our enterprise cost savings target and furthered initiatives that will optimize our operations, drive sustained savings, and enable value creation for years to come. At the same time, we increased investments and partnerships in our Specialty pharmaceutical and Cardinal Health at-Home businesses, among other areas.

Additionally, the Board continued to evaluate the company’s portfolio and take a balanced and disciplined capital approach that prioritizes reinvesting in the business, maintaining a strong balance sheet and returning cash to shareholders through dividends. In fiscal 2020, we paid down $1.4 billion of debt, increased the dividend by 1%, and sold the remainder of our equity interest in naviHealth.

Our COVID-19 Response

As the global pandemic continues to unfold, we continue to be fully dedicated to the health and safety of our employees so we can fulfill our mission of delivering critical products and solutions to frontline healthcare workers around the world. We have implemented additional safety and cleaning measures in all locations, and we have maintained operations in all our distribution facilities, nuclear pharmacies, and global manufacturing plants. The Board, as well as the management team, are humbled by the efforts of our employees. We provided additional compensation to our frontline teams to demonstrate our gratitude for their unwavering commitment to our customers and to public health.

As the company responded to the challenges presented by the pandemic, the Board also transitioned to a remote work model. We are holding virtual Board meetings and this year’s Annual Meeting of Shareholders will be virtual as well.

Our Commitment to Diversity and Inclusion

Our Chief Executive Officer, Mike Kaufmann, and our management team remain deeply committed to fostering a culture where every employee brings 100% of themselves to work every day and this includes actively facilitating conversations regarding diversity and inclusion. In the fall of 2019, management began these discussions through an all employee meeting focused specifically on this topic, and in the winter, the team organized a group tour of the National Memorial for Peace and Justice and Legacy Museum in Montgomery, Alabama. Upon their return, Mike shared his reflections on this deeply moving experience in a message to all employees.

Following this experience, and in the aftermath of events in the U.S. throughout this spring and summer, the management team has elevated attention to racial equity and social injustice. In May, they engaged 400 vice presidents and above across the company in a frank discussion on this topic and encouraged these leaders to do the same with their teams. Mike also formed a Diversity and Inclusion Steering Council of senior leaders throughout the company to identify and discuss diversity and inclusion barriers, opportunities, and successes.

Corporate culture has been, and remains, important to the Board. To further reinforce this commitment, we embedded culture and diversity and inclusion metrics in the company’s incentive plan goals for fiscal 2020, and we are following the progress of these initiatives with regular management reports and a scorecard. The scorecard included the most recent employee engagement survey results, which showed significant improvements.

Our Board Membership

In addition, the Board itself cultivates a culture of open, direct, and respectful dialogue among our members, who bring an array of skills, backgrounds, and expertise. Mike supports this culture with his open and direct engagement, including executive sessions at the beginning and end of each Board meeting. Over the years, our Board evaluation process, which includes individual director evaluations, has made important contributions to Board culture and this year, to continuously evolve this process, we used a new facilitator to gain additional insights regarding our strengths and improvement opportunities.

We also continue to evolve this culture as we refresh our Board membership. This year, we added two new directors to further diversify our expertise and perspectives. Our most recent addition was Sheri Edison, who joins with extensive global experience both as a senior legal executive in the medical device and global packaging industries and as a board member for large for-profit and non-profit organizations. Earlier this summer, we also welcomed Dave Evans, who served as Chief Financial Officer of Scotts Miracle-Gro for many years and brings decades of financial experience.

In addition, Colleen Arnold is leaving the Board after years of valuable service. On behalf of the full Board, I would like to thank her for her many contributions, including her leadership regarding the company’s strategic use of information and technology, and we wish her well.

These changes will bring the total number of directors to 13, 12 of whom are independent.

 

 

Cardinal Health | 2020 Proxy Statement    1


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Our Ongoing Response to the Opioid Epidemic

I will briefly address our ongoing work regarding the opioid epidemic. The Board and the company continue to recognize the significant challenges that opioid misuse presents to our society, and the company remains vigilant in our work to detect and deter diversion of controlled substances. The Board and our Ad Hoc Committee on opioids is active in overseeing the company’s anti-diversion work as well as the company’s efforts to defend and resolve opioid litigation.

Last October, the company agreed in principle to a global settlement framework with a group of state attorneys general that aims to resolve all pending and future opioid lawsuits by states and political subdivisions. This settlement framework would deliver important resources to the communities that need them most. The company, with oversight of our Ad Hoc Committee and the Board, continues to be active in settlement discussions.

Looking Forward

In fiscal 2020, we demonstrated our adaptability in the face of unprecedented change. Going forward, our engaged Board, our strong management team, and our dedicated employees are well-positioned to build upon our operational momentum. On behalf of our Board, I thank you for your share ownership and for your continued support of the company. Together, we will enable Cardinal Health to perform our essential role in healthcare now and into the future.

Sincerely,

 

Gregory B. Kenny
Chairman of the Board

 

www.cardinalhealth.com

Cardinal Health | 2020 Proxy Statement    2


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Notice of Annual Meeting of Shareholders

Due to the public health impact of the coronavirus (“COVID-19”) pandemic and to support the health and well-being of our employees and shareholders, this year’s Annual Meeting of Shareholders (“Annual Meeting”) will be conducted exclusively online without an option for physical attendance. You will be able to participate in the virtual meeting online, vote your shares electronically, and submit questions during the meeting by visiting www.virtualshareholdermeeting.com/CAH2020.

Date

 

Wednesday, November 4, 2020

Time

 

10:00 a.m. Eastern Time

Virtual Meeting

 

This year’s meeting is a virtual shareholder meeting at www.virtualshareholdermeeting.com/CAH2020.

Record Date

 

September 8, 2020. Only shareholders of record at the close of business on the record date are entitled to receive notice of, and to vote at, the Annual Meeting.

Proxy Voting

 

Make your vote count. Please vote your shares promptly to ensure the presence of a quorum during the Annual Meeting. Voting your shares now via the Internet, by telephone, or by signing, dating, and returning the enclosed proxy card or voting instruction form will save the expense of additional solicitation. If you wish to vote by mail, we have enclosed an addressed envelope with postage prepaid if mailed in the United States. Submitting your proxy now will not prevent you from voting your shares during the Annual Meeting, as your proxy is revocable at your option. We are requesting your vote to:

Items of Business

 

(1)

Elect the 13 director nominees named in the proxy statement;


 

(2)

Ratify the appointment of Ernst & Young LLP as our independent auditor for the fiscal year ending June 30, 2021;


 

(3)

Approve, on a non-binding advisory basis, the compensation of our named executive officers;


 

(4)

Approve an amendment to our Restated Code of Regulations to reduce the share ownership threshold for calling a special meeting of shareholders;


 

(5)

Vote on two shareholder proposals described in the accompanying proxy statement, if properly presented at the meeting; and


 

(6)

Transact such other business as may properly come before the meeting or any adjournment or postponement.

Meeting Details

 

See “Proxy Summary” and “Other Matters” for details.

 

Important notice regarding the availability of proxy materials for the Annual Meeting to be held on November 4, 2020: The Notice of Annual Meeting of Shareholders, the accompanying proxy statement and our 2020 Annual Report to Shareholders are available at www.proxyvote.com. These proxy materials are first being sent or made available to shareholders commencing on September 23 , 2020.

 

By Order of the Board of Directors.

 

John M. Adams, Jr.
Senior Vice President, Associate General Counsel and Secretary
September 23 , 2020

 

 

 

Cardinal Health | 2020 Proxy Statement    3


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Proxy Summary

This summary highlights certain information contained elsewhere in our proxy statement. This summary does not contain all the information that you should consider, and you should carefully read the entire proxy statement and our 2020 Annual Report to Shareholders before voting. References to our fiscal years in the proxy statement mean the fiscal year ended or ending on June 30 of such year. For example, “fiscal 2020” refers to the fiscal year ended June 30, 2020.

About Us

Headquartered in Dublin, Ohio, we are a global integrated healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories, physician offices and patients in the home. We distribute pharmaceuticals and medical products and provide cost-effective solutions that enhance supply chain efficiency. We connect patients, providers, payers, pharmacists and manufacturers for integrated care coordination and better patient management. We manage our business and report our financial results in two segments: Pharmaceutical and Medical.

Fiscal 2020 Highlights

During fiscal 2020, we grew non-GAAP operating earnings, exceeded our non-GAAP diluted earnings per share (“EPS”) guidance range, surpassed our enterprise cost savings target, and strengthened our balance sheet, all while continuing to execute on our long-term strategic priorities in a rapidly changing environment.

We achieved fiscal 2020 results as we adapted our operations to address the unique challenges presented by COVID-19. In response to the pandemic, we continued to maintain operations in all our distribution facilities, nuclear pharmacies and global manufacturing plants and successfully transitioned our office employees to a remote work model. Through all of this, our focus remained on delivering critical products and services to our customers, while protecting the health and safety of our employees.

Fiscal 2020 highlights include:

Revenue was $152.9 billion, up 5% from the prior year.

GAAP operating loss was $(4.1) billion due to an opioid litigation charge and non-GAAP operating earnings were $2.4 billion, a 1% increase over the prior year. Non-GAAP operating earnings grew despite an estimated net negative impact of approximately $100 million from COVID-19.

We returned over $900 million to shareholders in dividends ($569 million) and share repurchases ($350 million) and repaid $1.4 billion of long-term debt.

Our Pharmaceutical segment’s performance exceeded our expectations. Revenue grew 6% to $137.5 billion. Segment profit decreased 4% to $1.8 billion, reflecting the expected adverse impact of Pharmaceutical Distribution customer contract renewals.

Our Medical segment’s revenue decreased 1% percent to $15.4 billion due to the adverse impact from COVID-19. Segment profit increased 15% to $663 million largely due to cost savings and the favorable year-over-year impact of a supplier charge taken last year, partially offset by the negative impact of COVID-19.

We surpassed our enterprise cost savings target, with significant savings contributions from the Medical segment’s global manufacturing and supply chain organization.

We completed the divestiture of our successful investment in naviHealth.

We agreed in principle to a global settlement framework designed to resolve all opioid lawsuits and claims by states and political subdivisions and continue to work with state attorneys general and representatives of political subdivisions to achieve a global settlement.

Our generic pharmaceuticals program performed better than expected with a slight favorable impact on Pharmaceutical segment profit after several years of a negative impact.

We launched “Our Path Forward” outlining the plans and initiatives underway to advance our corporate culture objectives. We added new culture goals (including a diversity and inclusion goal) to our annual cash incentive and performance share unit (“PSU”) programs.

See Annex A for reconciliations to the comparable financial measures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the reasons why we use non-GAAP financial measures.

 

www.cardinalhealth.com

Cardinal Health | 2020 Proxy Statement    4

 


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Response to COVID-19

As a global manufacturer and distributor of medical and laboratory supplies and a distributor of pharmaceutical products, we are an essential and critical link in the healthcare supply chain. During the COVID-19 pandemic, our mission has been more important than ever as we have worked to quickly get critical medicines and medical supplies into the hands of our healthcare provider customers who need them.

Given the unprecedented surge in demand for certain personal protective equipment (“PPE”), supporting delivery of these critical products has been a priority, and we continue to work to address the increased demand. In furtherance of this goal, we worked with U.S. and foreign trade authorities to speed shipments of product, we acquired additional equipment to expand our own production of PPE, and we evaluated additional suppliers to expand and diversify critical product options.

Protecting the health and safety of our employees and their families throughout this pandemic has been vital. Because we are part of a critical infrastructure industry, our employees have continued their important work in our distribution centers, manufacturing sites, pharmacies and other clinical sites. Their efforts have been essential to the healthcare system.

To prevent the spread of COVID-19 and protect the safety of our critical frontline employees, all facilities are thoroughly cleaned regularly, and we have implemented worksite hygiene practices in accordance with the Centers for Disease Control and Prevention and World Health Organization guidelines. And to recognize the important contributions made by our frontline employees, we provided them additional compensation.

All employees who have been able to work remotely have been working from home. We expanded our technology infrastructure to help our employees around the globe perform their duties and continue to support customers, patients and our frontline associates. We also put policies in place to allow employees who are sick with or who have been exposed to COVID-19 to take time off without impacting their paid-time-off days.

Our Board of Directors (“Board”) has been highly engaged with management about the impact of COVID-19 and the company’s response and plans. The Board has held regular informational calls with management about COVID-19, covering employees and operations, financial impact, product supply, media engagement, and related legal and regulatory matters.

Governance and Board Highlights

12 of our 13 director nominees are independent Independent, non-executive Chairman of the Board Ongoing Board refreshment: four new experienced directors added in the last 12 months Six of our director nominees are gender or ethnically diverse Director nominees with diverse business experiences, backgrounds and expertise in a wide range of fields, including nine with significant healthcare experience Significant Board engagement on strategy and capital deployment (page 21) Board oversight and engagement relating to the company’s work during the COVID-19 pandemic (page 21) Board monitors corporate culture through annual review of cross-functional culture scorecard (page 23) Directors interact with key talent through Board discussions, informal events and planned one-on-one sessions (page 21) Ad Hoc Committee assists the Board in its oversight of opioid-related issues (page 20) Surgical Gown Recall Oversight Committee assists the Board in its oversight of the surgical gown recall announced in January 2020 (page 20) Long-standing, proactive shareholder engagement program (page 25) Well-developed Board and individual director evaluation process (page 24) Annual election of directors with majority voting Director service on other public company boards is limited to three or just their own board if a director is an executive of another public company

 

 

Cardinal Health | 2020 Proxy Statement    5


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Our 2020 Board Nominees

       
Carrie S. Cox Calvin Darden Bruce L. Downey Sheri H. Edison
Retired EVP and President,
Global Pharmaceuticals,
Schering-Plough and retired
Chairman and CEO,
Humacyte, Inc.
Age: 63
Director since 2009
Independent
Committees: H, AH
Retired SVP of
U.S. Operations, UPS
Age: 70
Director since 2005
Independent
Committees: H, AH
Retired Chairman and CEO,
Barr Pharmaceuticals and
Partner, NewSpring Health
Capital II, L.P.
Age: 72
Director since 2009
Independent
Committees: N, AH
EVP and General Counsel,
Amcor
Age: 63
Director since 2020
Independent
       
 
       
David C. Evans Patricia A. Hemingway Hall Akhil Johri  
Retired CFO, Scotts
Miracle-Gro and Battelle
Memorial Institute
Age: 57
Director since 2020
Independent
Retired President and CEO,
Health Care Service Corp.
Age: 67
Director since 2013
Independent
Committees: H, N
Retired EVP and CFO,
United Technologies
Age: 59
Director since 2018
Independent
Committees: A, S
 
       
 
       
Michael C. Kaufmann Gregory B. Kenny Nancy Killefer  
CEO, Cardinal Health
Age: 57
Director since 2018
Retired President and CEO,
General Cable
Age: 67
Director since 2007
Independent
Chairman of the Board
Committees: N, AH, S
Retired Senior Partner,
Public Sector Practice, McKinsey
Age: 66
Director since 2015
Independent
Committees: H, S
 
       
 
       
J. Michael Losh Dean A. Scarborough John H. Weiland  
Retired EVP and CFO,
General Motors
Age: 74
Director since 2018
Independent
Committees: A
Retired Chairman and CEO,
Avery Dennison
Age: 64
Director since 2019
Independent
Committees: A
Retired President and
Chief Operating Officer,
C. R. Bard
Age: 64
Director since 2019
Independent
Committees: A, S
 

 

A: Audit  AH: Ad Hoc  H: Human Resources and Compensation  N: Nominating and Governance  S: Surgical Gown Recall Oversight


 

www.cardinalhealth.com

Cardinal Health | 2020 Proxy Statement    6

 


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Addressing the Opioid Epidemic

We care deeply about the opioid epidemic and take seriously our commitment, in cooperation with other participants in the prescription drug supply chain, to find and support solutions to this national challenge.

As a distributor and an intermediary in the supply chain, we provide a secure channel to deliver all kinds of medications from the hundreds of manufacturers that make them to the thousands of our hospital and pharmacy customers licensed to dispense them to their patients, and we work diligently to identify, stop and report to regulators any suspicious orders of controlled substances. As threats evolve, we constantly adapt our system to prevent the diversion and misuse of medications.

Global Settlement Framework

In October 2019, following review and extensive engagement with both the Ad Hoc Committee and the Board, we agreed in principle with a leadership group of state attorneys general to a global settlement framework designed to resolve all pending and future opioid lawsuits and claims by states and political subdivisions.

We remain committed to being part of the solution to this epidemic, and we continue to actively work with the state attorneys general and representatives of political subdivisions to achieve a global settlement.

Board Oversight

The Board remains active in overseeing our response to the opioid epidemic. The Board’s Ad Hoc Committee comprised of independent directors Cox, Darden, Downey and Kenny assists the Board in its oversight of opioid-related issues. The Ad Hoc Committee, which was formed in February 2018, continues to meet twice per quarter and engage with the other directors on opioid-related issues at every Board meeting.

The Ad Hoc Committee is receiving regular updates on progress toward a global settlement as well as updates on the status of litigation and government investigations, our anti-diversion program, legislative and regulatory developments, and shareholder engagement.

Anti-Diversion Program

We are always vigilant in combating the diversion of controlled substances for improper use. We have continually upgraded our program to make sure it is robust and effective in a context of evolving risks. Our team includes investigators, data analysts, former law enforcement officers, pharmacists, and compliance officers.

We carefully evaluate pharmacies before they become customers, including taking steps to understand their business and historical prescription drug ordering patterns. We use this information, along with statistical models and other criteria, to establish pharmaceutical distribution thresholds specific to each customer. When a customer’s order exceeds an established threshold, the order is held, reviewed further, and typically canceled. Canceled orders are reported to the U.S. Drug Enforcement Administration and any required state regulators. We also have a team of experienced investigators who conduct regular site visits to customers across the country to look for any visible signs of diversion.

 

Our Efforts to Fight Prescription Opioid Misuse

We have invested millions of dollars in fighting prescription opioid misuse. This work began with Generation Rx, an evidence-informed prevention education and awareness program designed for anyone to use to educate people of all ages about safe medication practices and the potential dangers of misusing prescription medications. Generation Rx was founded at The Ohio State University College of Pharmacy and has partnered with the Cardinal Health Foundation since 2009. To date, its medication safety messages have reached more than two million people across the country.

In the last three years, we have awarded grants to more than 70 organizations to build awareness, expand drug takeback initiatives, and support healthcare systems as they work to reduce the number of opioids their providers prescribe. We have partnered with Kroger to host biannual drug take-back events at more than 200 pharmacy locations across the country. And we launched an online training for all U.S. employees to help them better understand the epidemic, our commitment to fighting it, and how they can support the work.

 

 

Cardinal Health | 2020 Proxy Statement    7


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Virtual Annual Meeting of Shareholders

Time and Date Wednesday, November 4, 2020 10:00 a.m. Eastern Time Place Virtual Meeting www.virtualshareholdermeeting.com/CAH2020 Record Date September 8, 2020

 

Due to COVID-19, this year’s Annual Meeting will be conducted exclusively online without an option for physical attendance. You will be able to participate in the virtual Annual Meeting online, vote your shares electronically, and submit questions during the meeting by visiting www.virtualshareholdermeeting.com/CAH2020 and entering the 16-digit control number included in the Notice of Internet Availability of Proxy Materials, voting instruction form or proxy card that was sent to you with this proxy statement.

If you do not have a 16-digit control number, you may still attend the meeting as a guest in listen-only mode. To attend as a guest, please visit www.virtualshareholdermeeting.com/CAH2020 and enter the information requested on the screen to register as a guest. Please note that you will not have the ability to vote or ask questions during the meeting if you participate as a guest.

For further information on how to attend and participate in the virtual Annual Meeting, please see “Other Information” on page 58 in this proxy statement.

Roadmap to Voting Matters

Shareholders will be asked to vote on the following proposals at the Annual Meeting:

Proposal

Board Recommendation

Page Reference

Proposal 1: to elect the 13 director nominees named in this proxy statement

FOR each director nominee

9

Proposal 2: to ratify the appointment of Ernst & Young LLP as our independent auditor for the fiscal year ending June 30, 2021

FOR

28

Proposal 3: to approve, on a non-binding advisory basis, the compensation of our named executive officers

FOR

30

Proposal 4: to approve an amendment to our Restated Code of Regulations to reduce the share ownership threshold for calling a special meeting of shareholders

FOR

52

Proposal 5: shareholder proposal to reduce the share ownership threshold for calling a special meeting of shareholders

AGAINST

53

Proposal 6: shareholder proposal to adopt a policy that the chairman of the board be an independent director

AGAINST

54

How to Vote in Advance of the Annual Meeting

You can return voting instructions in advance of the Annual Meeting by any of the means set forth below. Internet or telephone voting is available until Wednesday, November 3, 2020 at 11:59 p.m. Eastern Time.

Internet Visit 24/7 www.proxyvote.com Telephone Call the toll-free number 1-800-690-6903 within the United States, U.S. territories or Canada and follow the instructions provided by the recorded message Mail Mark, sign and date your proxy card and return it by mail in the enclosed postage-paid envelope

 

www.cardinalhealth.com

Cardinal Health | 2020 Proxy Statement    8

 


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Corporate Governance

Election of Directors

Our Board currently has 14 members. Thirteen of our directors are standing for election at the Annual Meeting to serve until the next Annual Meeting of Shareholders and until their successor is elected and qualified or until their earlier resignation, removal from office or death. Colleen F. Arnold, a director since 2007, has decided not to stand for re-election at the Annual Meeting. The size of the Board will be reduced to 13 at that time.

Each director nominee agreed to be named in this proxy statement and to serve if elected. If, due to death or other unexpected occurrence, one or more of the director nominees is not available for election, proxies will be voted for the election of any substitute nominee the Board selects.

The Board recommends that you vote FOR the election of the nominees listed on pages 10 through 16.

 

Board Membership Criteria: What we look for

The Nominating and Governance Committee considers and reviews with the Board the appropriate skills and characteristics for Board members in the context of the Board’s current composition and objectives. Criteria for identifying and evaluating candidates for the Board include:

business experience, qualifications, attributes and skills, such as relevant industry knowledge (including pharmaceutical, medical device and other healthcare industry knowledge), accounting and finance, operations, technology and international markets;

leadership experience as a chief executive officer, senior executive or leader of a significant business operation or function;

financial and accounting experience as a chief financial officer;

independence (including independence from the interests of any single group of shareholders);

judgment and integrity;

ability to commit sufficient time and attention to the activities of the Board;

diversity of age, gender and ethnicity; and

absence of potential conflicts with our interests.

Our Director Nominees

The Board seeks members that possess the experience, skills and diverse backgrounds to perform effectively in overseeing our current and evolving business and strategic direction and to properly perform the Board’s oversight responsibilities. All director nominees bring to the Board a wealth of executive leadership experience derived from their diverse professional backgrounds and areas of expertise. As a group, they have business acumen, healthcare and global business experience and financial expertise, as well as public company board experience. In addition, six of the thirteen director nominees are gender or ethnically diverse. Each director nominee has sound judgment and integrity and is able to commit sufficient time and attention to the activities of the Board. All director nominees other than our Chief Executive Officer are independent.

 

 

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Age 63

 

Director since 2009

 

Board Committees:

Human Resources and Compensation, Ad Hoc

 

Independent Director

 

CARRIE S. COX

Executive Vice President and President of Global Pharmaceuticals, Schering-Plough Corporation (retired); Chairman and Chief Executive Officer of Humacyte, Inc. (retired)

Background

Ms. Cox served as Chairman and Chief Executive Officer of Humacyte, Inc., a privately held, development stage company focused on regenerative medicine, from 2010 to 2018 and as its Executive Chairman from 2018 to 2019. She was Executive Vice President and President of Global Pharmaceuticals at Schering-Plough Corporation, a multinational branded pharmaceutical manufacturer, from 2003 until its merger with Merck & Co. in 2009. She was Executive Vice President and President of the Global Prescription business of Pharmacia Corporation, a pharmaceutical and biotechnology company, from 1997 to 2003.

Qualifications

Through her roles as an executive of Schering-Plough, President of Pharmacia’s Global Prescription business and Chief Executive Officer of Humacyte and as a licensed pharmacist, Ms. Cox brings to the Board substantial expertise in healthcare, particularly the branded pharmaceutical and international aspects. She draws on this experience in discussions relating to Pharmaceutical segment strategy, healthcare compliance and the opioid epidemic, including in meetings of the Board’s Ad Hoc Committee. Ms. Cox worked in the global branded pharmaceutical industry for over 30 years, giving her relevant experience with large, multinational healthcare companies in the areas of regulatory compliance, global markets and manufacturing operations. She also brings to the Board and to her role chairing our Human Resources and Compensation Committee, valuable perspectives and insights from her service on the boards of directors of Selecta Biosciences and Texas Instruments and prior service on the Array BioPharma, Celgene and electroCore boards. She currently serves as Chairman of the Board at Selecta Biosciences and previously served as Chairman of the Board at Array BioPharma and Lead Director at Texas Instruments. She also currently sits on Selecta Biosciences’ and Texas Instruments’ Compensation Committees and previously sat on Celgene’s Compensation and Development Committee.

Other public company boards

Current

Selecta Biosciences, Inc.

Texas Instruments Incorporated

Within last five years

Array BioPharma Inc.

Celgene Corporation

electroCore, Inc.

       

 

 

Age 70

 

Director since 2005

 

Board Committees:

Human Resources and Compensation, Ad Hoc

 

Independent Director

 

CALVIN DARDEN

Senior Vice President of U.S. Operations of United Parcel Service, Inc. (retired)

Background

Mr. Darden was Senior Vice President of U.S. Operations of United Parcel Service, Inc. (“UPS”), an express carrier and package delivery company, from 2000 until 2005. During his 33-year career with UPS, he served in a number of senior leadership positions, including developing the corporate quality strategy for UPS and leading the business and logistics operations for its Pacific Region, the largest region of UPS at that time.

Qualifications

A former executive of UPS, Mr. Darden has expertise in supply chain networks and logistics that contributes to the Board’s understanding of these important aspects of our business. He has over 30 years of relevant experience in the areas of operations, distribution and supply chain, efficiency and quality control, human resources and labor relations. He also brings to the Board valuable perspectives and insights from his service on the boards of directors of Aramark and Target, including their respective Compensation Committees, as well as his prior service on the board of directors of Coca-Cola Enterprises, including service on its Human Resources and Compensation Committee.

Other public company boards

Current

Aramark Corporation

Target Corporation

Within last five years

Coca-Cola Enterprises, Inc.

       

 

www.cardinalhealth.com

Cardinal Health | 2020 Proxy Statement    10


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Age 72

 

Director since 2009

 

Board Committees:

Nominating and

Governance, Ad Hoc

 

Independent Director

 

BRUCE L. DOWNEY

Chairman and Chief Executive Officer of Barr Pharmaceuticals, Inc. (retired); Partner of NewSpring Health Capital II, L.P.

Background

Mr. Downey was Chairman and Chief Executive Officer of Barr Pharmaceuticals, Inc., a global generic pharmaceutical manufacturer, from 1994 until 2008 when the company was acquired by Teva Pharmaceutical Industries Ltd. Mr. Downey has served on a part-time basis as a Partner of NewSpring Health Capital II, L.P., a venture capital firm, since 2009. Before his career at Barr Pharmaceuticals, Mr. Downey was a practicing attorney for 20 years, having worked in both private practice and with the U.S. Department of Justice.

Qualifications

Having spent 14 years as Chairman and Chief Executive Officer of Barr Pharmaceuticals, Mr. Downey brings to the Board substantial global experience in the areas of healthcare, regulatory compliance, manufacturing operations, finance, human resources and corporate governance. He offers valuable experience in the pharmaceutical and international aspects of our businesses, and he draws on his extensive legal and healthcare experience in chairing the Ad Hoc Committee and leading Board discussions related to opioid litigation and the opioid epidemic. Mr. Downey also brings to the Board valuable perspectives and insights from his service on the board of directors of Momenta Pharmaceuticals, including service as its independent chair, and former service on the board of directors of Melinta Therapeutics.

Other public company boards

Current

Momenta Pharmaceuticals, Inc.

Within last five years

Melinta Therapeutics, Inc.

       

 

 

Age 63

 

Director since

September 2020

 

Board Committees:

Not yet determined

 

Independent Director

 

 

 

SHERI H. EDISON

Executive Vice President and General Counsel of Amcor plc

Background

Ms. Edison has served as Executive Vice President and General Counsel of Amcor plc, a global packaging company, since 2019. Prior to that, she served as Senior Vice President, Chief Legal Officer and Secretary of Bemis Company, Inc., also a global packaging company, from 2017 until Bemis was acquired by Amcor in 2019. Ms. Edison had also served as Vice President, General Counsel and Secretary of Bemis from 2010 to 2016. She came to Bemis from Hill-Rom Holdings Inc., a global medical device company, where she had served as Senior Vice President and Chief Administrative Officer from 2007 to 2010 and Vice President, General Counsel and Secretary from 2004 to 2007. Ms. Edison began her career in private legal practice.

Qualifications

Having served in general counsel roles at publicly traded manufacturing companies in industries such as medical devices and packaging, Ms. Edison brings to the Board substantial experience in the areas of healthcare, legal, regulatory compliance, corporate governance and international markets. She also brings prior private legal practice experience, which further bolsters her understanding of a dynamic legal and regulatory environment. Ms. Edison also brings to the Board valuable perspectives and insights from her former service on the board of directors of AK Steel.

Other public company boards

Current

None

Within last five years

AK Steel Holding Corporation

       

 

 

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Age 57

 

Director since

July 2020

 

Board Committees:

Not yet determined

 

Independent Director

 

DAVID C. EVANS

Chief Financial Officer of The Scotts Miracle-Gro Company and Battelle Memorial Institute (retired)

Background

Mr. Evans was Executive Vice President and Chief Financial Officer of Battelle Memorial Institute, a private research and development organization, from 2013 to 2018. Prior to that, he was Chief Financial Officer of The Scotts Miracle-Gro Company, a consumer lawn and garden products company, from 2006 until 2013 and Executive Vice President, Strategy and Business Development of Scotts from 2011 until 2013. In all, he spent 20 years in various managerial roles at Scotts. Most recently, Mr. Evans was Cardinal Health’s interim Chief Financial Officer from September 1, 2019 through May 25, 2020, after a transition role beginning July 29, 2019.

Qualifications

We elected Mr. Evans to the Board based on his deep financial background as Chief Financial Officer at Scotts Miracle-Gro and Battelle. Having spent 25 years in financial leadership positions with these organizations, Mr. Evans brings to the Board substantial experience in the areas of finance and accounting, investor relations, capital markets, strategy, tax and information technology. He also provides valuable insights in the areas of financial reporting and internal controls. Through his experience with Scotts Miracle-Gro, he provides a deep understanding of the financial aspects of, and capital deployment for, a publicly traded company. His service in an interim executive role at Cardinal Health brings company and industry knowledge to the Board. Mr. Evans also brings valuable perspectives and insights from his service on the board of directors of Scotts Miracle-Gro, including service on its Audit and Compensation and Organization Committees.

Other public company boards

Current

The Scotts Miracle-Gro Company

Within last five years

None

       

 

 

Age 67

 

Director since 2013

 

Board Committees:

Human Resources and Compensation,

Nominating and

Governance

 

Independent Director

 

PATRICIA A. HEMINGWAY HALL

President and Chief Executive Officer of Health Care Service Corporation (retired)

Background

Ms. Hemingway Hall served as President and Chief Executive Officer of Health Care Service Corporation, a mutual health insurer (“HCSC”), from 2008 until 2016. Previously, she held several executive leadership positions at HCSC, including President and Chief Operating Officer from 2007 to 2008 and Executive Vice President of Internal Operations from 2006 to 2007.

Qualifications

As retired President and Chief Executive Officer of HCSC, the largest mutual health insurer in the United States operating through several state Blue Cross and Blue Shield Plans, Ms. Hemingway Hall brings to the Board valuable experience regarding evolving healthcare payment models and the industry’s regulatory environment. She worked in healthcare for over 30 years, first as a registered nurse and later in health insurance, and has relevant experience in the areas of healthcare reform, regulatory compliance, government relations, finance, information technology and human resources. Ms. Hemingway Hall also brings to the Board and to her roles chairing our Nominating and Governance Committee and being a member of our Human Resources and Compensation Committee, valuable perspectives and insights from her service on the boards of directors of Halliburton and ManpowerGroup and former service on Celgene’s board of directors. She chairs ManpowerGroup’s Nominating and Governance Committee and sits on its Audit Committee and sits on Halliburton’s Compensation and Nominating and Corporate Governance Committees.

Other public company boards

Current

Halliburton Company

ManpowerGroup Inc.

Within last five years

Celgene Corporation

       

 

www.cardinalhealth.com

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Age 59

 

Director since 2018

 

Board Committees:

Audit, Surgical Gown

Recall Oversight

 

Independent Director

 

AKHIL JOHRI

Executive Vice President and Chief Financial Officer, United Technologies Corporation (retired)

Background

Mr. Johri served as Executive Vice President and Chief Financial Officer of United Technologies Corporation (“UTC”), a provider of high technology products and services to the building systems and aerospace industries, from 2015 to November 2019 and retired from UTC in April 2020. From 2013 to 2014, he served as Chief Financial Officer and Chief Accounting Officer of Pall Corporation, a global supplier of filtration, separations and purifications products, and from 2011 to 2013, he was Vice President of Finance and Chief Financial Officer of UTC Propulsion & Aerospace Systems, which included Pratt & Whitney and UTC Aerospace Systems. Mr. Johri’s prior roles with UTC include leading investor relations, as well as holding senior financial roles with global business units, including 12 years in the Asia Pacific Region.

Qualifications

Having spent more than 25 years in financial leadership positions with UTC and Pall Corporation, Mr. Johri brings to the Board substantial experience in the areas of global finance and accounting, investor relations, capital markets, mergers and acquisitions, tax, information technology and international markets. He also provides valuable insights in the areas of financial reporting and internal controls. Through his experience in senior leadership roles with UTC’s businesses, he provides a deep understanding of the financial aspects of, and capital deployment for, a publicly traded multinational company. Mr. Johri also brings to the Board valuable perspectives and insights from his service on Boeing’s board of directors, including service on its Audit Committee.

Other public company boards

Current

The Boeing Company

Within last five years

None

       

 

 

Age 57

 

Director since 2018

 

MICHAEL C. KAUFMANN

Chief Executive Officer, Cardinal Health, Inc.

Background

Mr. Kaufmann has served as Chief Executive Officer of Cardinal Health since January 2018. From November 2014 to December 2017, he served as our Chief Financial Officer and from August 2009 to November 2014, he served as our Chief Executive Officer — Pharmaceutical Segment. Prior to that, he held a range of other senior leadership roles here spanning operations, sales and finance, including in both our Pharmaceutical and Medical segments.

Qualifications

As our Chief Executive Officer and having spent almost 30 years at Cardinal Health, Mr. Kaufmann draws on his deep knowledge of our daily operations and our industry, customers, suppliers, employees and shareholders to provide the Board with a unique and very important perspective on our business and a conduit for information from management. Prior leadership positions across the company provide him with expertise in the areas of healthcare, distribution operations, finance, international markets, mergers and acquisitions and regulatory compliance. He also provides the Board with an understanding of the strategic and financial implications of business, regulatory and economic factors impacting our company from having played an important role in key strategic initiatives, including the Red Oak Sourcing joint venture with CVS Health. In addition, Mr. Kaufmann brings relevant experience and perspectives to the Board from his service on the board of directors of MSC Industrial Direct, including service on its Audit and Compensation Committees.

Other public company boards

Current

MSC Industrial Direct Co., Inc.

Within last five years

None

       

 

 

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Age 67

 

Director since 2007

 

Board Committees:

Nominating and

Governance, Ad Hoc,

Surgical Gown Recall

Oversight

 

Independent Chairman

of the Board

 

GREGORY B. KENNY

President and Chief Executive Officer of General Cable Corporation (retired)

Background

Mr. Kenny served as President and Chief Executive Officer of General Cable Corporation, a global manufacturer of aluminum, copper and fiber-optic wire and cable products, from 2001 until 2015. Prior to that, he was President and Chief Operating Officer of General Cable from 1999 to 2001 and Executive Vice President and Chief Operating Officer from 1997 to 1999. Mr. Kenny previously served in executive level positions at Penn Central Corporation, where he was responsible for corporate business strategy, and in diplomatic service as a Foreign Service Officer with the U.S. Department of State.

Qualifications

Mr. Kenny has been our Chairman of the Board since November 2018 and was independent Lead Director from 2014 to 2018. He brings to the Board significant experience in the areas of board leadership, corporate governance, manufacturing operations, international markets, finance and human resources. He also draws upon his board governance and leadership experience previously chairing our Nominating and Governance and Human Resources and Compensation Committees and chairing Ingredion’s board of directors and its Corporate Governance and Nominating Committee. Both in his current role as Chairman of the Board and his prior role as independent Lead Director, Mr. Kenny has promoted strong independent Board leadership and a robust, deliberative decision-making process among independent directors. Mr. Kenny also brings to the Board valuable perspectives and insights from his former service on AK Steel’s board of directors.

Other public company boards

Current

Ingredion Incorporated

Within last five years

AK Steel Holding Corporation

       

 

 

Age 66

 

Director since 2015

 

Board Committees:

Human Resources and Compensation,

Surgical Gown Recall

Oversight

 

Independent Director

 

NANCY KILLEFER

Senior Partner, Public Sector Practice, McKinsey & Company, Inc. (retired)

Background

Ms. Killefer served as Senior Partner of McKinsey & Company, Inc., a global management consulting firm, from 1992 until 2013. She joined McKinsey in 1979 and held a number of key leadership roles, including serving as a member of the firm’s governing board. Ms. Killefer founded McKinsey’s Public Sector Practice in 2007 and served as its managing partner until her retirement. She also served as Assistant Secretary for Management, Chief Financial Officer and Chief Operating Officer for the U.S. Department of Treasury from 1997 to 2000.

Qualifications

Having served in key leadership positions in both the public and private sectors and provided strategic counsel to healthcare and consumer-based companies during her 30 years with McKinsey, Ms. Killefer brings to the Board substantial experience in the areas of strategic planning, including healthcare strategy, and marketing and brand-building. Her extensive experience as managing partner of McKinsey’s Public Sector Practice and as a chief financial officer of a government agency provides valuable insights in the areas of government relations, public policy and finance. Ms. Killefer also brings to the Board valuable perspectives and insights from her service on the board of directors of Facebook (including chairing its Privacy Committee), Natura (including service on its Organization and People Committee), and Taubman Centers, and her prior service on the boards of directors of Avon Products, CSRA, Inc. (including service as its independent chair), Computer Sciences Corporation and The Advisory Board.

Other public company boards

Current

Facebook, Inc.

Natura &Co Holding S.A.

Taubman Centers, Inc.

Within last five years

Avon Products, Inc.

CSRA, Inc.

Computer Sciences Corporation

The Advisory Board Company

       

 

www.cardinalhealth.com

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Age 74

 

Director since 2018

(previously 1996 –

2009)

 

Board Committees:

Audit

 

Independent Director

 

J. MICHAEL LOSH

Executive Vice President and Chief Financial Officer of General Motors Corporation (retired)

Background

Mr. Losh served as Executive Vice President and Chief Financial Officer of General Motors Corporation, a global automobile manufacturer, from 1994 to 2000. He spent 36 years in various capacities with General Motors. Mr. Losh also previously served as our interim Chief Financial Officer from July 2004 to May 2005 and was a director of Cardinal Health from 1996 through our spin-off of CareFusion Corporation in 2009.

Qualifications

We elected Mr. Losh to the Board in December 2018 due to his immediate ability to chair our Audit Committee based on his financial expertise and prior service on our Board. He brings a deep financial background, industry knowledge from his prior service on our and CareFusion’s boards, and extensive public company board experience in a variety of industries. He is former Chief Financial Officer of General Motors, chairs Aon’s Audit Committee and previously chaired the Audit Committees at Prologis and other public companies. He also currently chairs Masco’s board of directors.

Other public company boards

Current

Amesite Inc.

Aon plc

Masco Corporation

Within last five years

H.B. Fuller Corporation

Prologis, Inc.

       

 

 

Age 64

 

Director since 2019

 

Board Committees:

Audit

 

Independent Director

 

DEAN A. SCARBOROUGH

Chairman and Chief Executive Officer, Avery Dennison Corporation (retired)

Background

Mr. Scarborough served as Chairman and Chief Executive Officer of Avery Dennison Corporation, a packaging and labeling solutions company, from 2014 to 2016. Prior to that, he served as Avery Dennison’s Chairman, President and Chief Executive Officer from 2010 to 2014 and as its President and Chief Executive Officer from 2005 to 2010. After stepping down as Chief Executive Officer, Mr. Scarborough remained Chairman of the Board through April 2019. Having joined Avery Dennison in 1983, Mr. Scarborough served in a series of leadership roles both in the United States and abroad until he was appointed Chief Operating Officer in 2000 and later Chief Executive Officer.

Qualifications

Having served as Avery Dennison’s Chief Executive Officer for 11 years, Mr. Scarborough brings to the Board substantial experience in manufacturing and distribution operations. As a former public company chief executive officer, he has relevant experience in finance, human resources and corporate governance. He also brings a global business and manufacturing perspective, having led Avery Dennison’s Label and Packaging Materials Europe business while he was based in the Netherlands. Mr. Scarborough also brings to the Board valuable perspectives and insights from his service on the board of directors of Graphic Packaging Holding Company, including service on its Audit Committee, and prior service on Mattel, Inc.’s board of directors.

Other public company boards

Current

Graphic Packaging Holding Company

Within last five years

Avery Dennison Corporation

Mattel, Inc.

       

 

 

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Age 64

 

Director since 2019

 

Board Committees:

Audit, Surgical Gown

Recall Oversight

 

Independent Director

 

JOHN H. WEILAND

President and Chief Operating Officer, C. R. Bard, Inc. (retired)

Background

Mr. Weiland served as President and Chief Operating Officer of medical device company C. R. Bard, Inc. from 2003 until 2017, when Bard was acquired by Becton, Dickinson and Company. He also served on Bard’s board of directors from 2005 to 2017, becoming Vice Chairman of the Board in 2016. Mr. Weiland joined Bard in 1996 and held the position of Group President, with global responsibility for several Bard divisions and its worldwide manufacturing operations prior to becoming President and Chief Operating Officer. Prior to Bard, he held senior management positions at Dentsply International, American Hospital Supply, Baxter Healthcare and Pharmacia AB.

Qualifications

Mr. Weiland brings over 40 years of healthcare industry experience to the Board, including executive leadership at a medical device company and significant international business experience. He has relevant experience in regulatory compliance, global markets and manufacturing operations. Mr. Weiland also brings to the Board valuable perspectives and insights from his service on the board of directors of Celgene Corporation, including service on its Audit Committee, and prior service on West Pharmaceutical Services’ board of directors, including chairing its Compensation and Finance Committees.

Other public company boards

Current

None

Within last five years

Celgene Corporation

C. R. Bard, Inc.

West Pharmaceutical Services, Inc.

       

 

Director Skills Matrix

Our director nominees possess relevant skills and experience that contribute to a well-functioning Board that effectively oversees our strategy and management.

Director Nominee Skills and

Experience

 

Cox

 

Darden

 

Downey

 

Edison

 

Evans

 

Hemingway

Hall

 

Johri

 

Kaufmann

 

Kenny

 

Killefer

 

Losh

 

Scarborough

 

Weiland

Board leadership as a board chair, lead director or committee chair equips directors to lead our Board and its Committees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial expertise as a finance executive or CEO brings valuable experience to the Board and our management team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare expertise as a leader of a healthcare company or a consulting firm with a healthcare practice provides industry experience

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations experience increases the Board’s understanding of our distribution and manufacturing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory/legal/public policy experience helps the Board assess and respond to an evolving business and healthcare regulatory environment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International experience brings critical insights into the opportunities and risks of our international businesses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Information technology experience contributes to the Board’s understanding of the information technology aspects of our business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Our Board’s Composition and Structure

Our Board Leadership Structure

Mr. Kenny has served as the independent, non-executive Chairman of the Board since November 2018, when we separated the Chairman and Chief Executive Officer roles. Prior to that, he served as independent Lead Director (elected annually by the independent directors) since November 2014.

In addition to serving as a liaison between the Board and management, key responsibilities of the Chairman include:

calling meetings of the Board and independent directors;

setting the agenda for Board meetings in consultation with the other directors, the Chief Executive Officer, and the corporate secretary;

reviewing Board meeting schedules to ensure that there is sufficient time for discussion of all agenda items;

reviewing and approving Board meeting materials before circulation and providing guidance to management on meeting presentations;

chairing Board meetings, including the executive sessions of the independent directors;

participating in the annual Chief Executive Officer performance evaluation;

conferring with the Chief Executive Officer on matters of importance that may require Board action or oversight;

as a member of the Nominating and Governance Committee, evaluating potential director candidates, assisting with director recruitment, recommending committee chairs and membership, and recommending updates to the company’s Corporate Governance Guidelines; and

holding governance discussions with large investors.

The Board considered a wide range of factors in determining that its current leadership structure is the most appropriate arrangement at the present time, including current market practice and the views of shareholders. The Nominating and Governance Committee periodically reviews, assesses and makes recommendations to the Board regarding the Board’s leadership structure.

Board Diversity

Our Corporate Governance Guidelines provide that the Board should be diverse, engaged and independent. In identifying and evaluating candidates for the Board, the Nominating and Governance Committee considers the diversity of the Board, including diversity of skills, experience and backgrounds, as well as ethnic and gender diversity. We believe that our Board nominees reflect an appropriate mix of skills, experience and backgrounds and strike the right balance of longer serving and newer directors.

 

*

Does not include Mr. Losh’s prior service on our Board from 1996 to 2009.

 

 

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How We Identify, Add and On-Board New Directors

The Nominating and Governance Committee is responsible for identifying, reviewing and recommending director candidates, and our Board is responsible for selecting candidates for election as directors based on the Nominating and Governance Committee’s recommendations.

Ms. Hemingway Hall and Mr. Kenny recommended Mr. Evans, and Mr. Kenny recommended Ms. Edison, as potential candidates for consideration by the Nominating and Governance Committee. Mr. Evans has previous public company chief financial officer experience and served as our interim Chief Financial Officer for nine months through May 2020. Ms. Edison has extensive experience as a senior legal executive at public companies in the medical device and packaging industries. Both have previous public company board experience and are independent directors.

New directors typically participate in a comprehensive, full-day director orientation program, which includes meetings with senior management. This orientation program helps new directors become familiar with our business and strategy, significant financial matters, ethics and compliance program, corporate governance practices and risk management and human resources functions.

 

Director Attendance

The Board held nine meetings during fiscal 2020. Each director attended 75% or more of the meetings of the Board and Board committees on which he or she served during the fiscal year. Average director attendance at all Board and Board committee meetings was 96%.

All of our directors at the time attended the 2019 Annual Meeting of Shareholders. Absent unusual circumstances, each director is expected to attend the Annual Meeting of Shareholders.

Board Committees

The Board has an Audit Committee, a Nominating and Governance Committee and a Human Resources and Compensation Committee (the “Compensation Committee”). Each member of these committees is independent under our Corporate Governance Guidelines and under applicable committee independence rules.

The charter for each of these committees is available on our website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Board Committees and Charters.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.

The Board also has an Ad Hoc Committee of independent directors formed in 2018 to assist the Board in its oversight of opioid-related issues and a Surgical Gown Recall Oversight Committee of independent directors formed in 2020 to assist the Board in oversight of a surgical gown recall.

Audit Committee

Members:

 

J. Michael Losh (Chair)

Colleen F. Arnold(1)

Akhil Johri

Dean A. Scarborough(2)

John H. Weiland(2)

 

Meetings in fiscal 2020: 6

 

The Audit Committee’s primary duties are to:

oversee the integrity of our financial statements, including reviewing annual and quarterly financial statements and earnings releases and the effectiveness of our internal and disclosure controls;

appoint the independent auditor and oversee its qualifications, independence and performance, including pre-approving all services by the independent auditor;

review our internal audit plan and oversee our internal audit department;

approve the appointment of our Chief Legal and Compliance Officer and oversee our ethics and compliance program and our compliance with applicable legal and quality and regulatory requirements; and

oversee our major financial and information technology risk exposures and our process for assessing and managing risk through our enterprise risk management program.

The Board has determined that each of Messrs. Johri, Losh and Scarborough is an “audit committee financial expert” for purposes of the U.S. Securities and Exchange Commission (“SEC”) rules.

 

(1)

Ms. Arnold has decided not to stand for re-election at the Annual Meeting and her term will expire at that time.

(2)

Messrs. Scarborough and Weiland became members of the Audit Committee in September 2019.

 

www.cardinalhealth.com

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Nominating and Governance Committee

Members:

 

Patricia A. Hemingway Hall (Chair)

Bruce L. Downey

Gregory B. Kenny

 

Meetings in fiscal 2020: 4

The Nominating and Governance Committee’s primary duties are to:

identify, review and recommend candidates for the Board, including recommending criteria to the Board for potential Board candidates and assessing the qualifications, attributes, skills, contributions and independence of individual directors and director candidates;

oversee the Board’s succession planning;

make recommendations to the Board concerning the structure, composition and functions of the Board and its Committees, including Board leadership and leadership structure;

review our Corporate Governance Guidelines and governance practices and recommend changes;

oversee our environmental sustainability and other corporate citizenship activities, including our policies and practices regarding political and lobbying activities and expenditures; and

conduct the annual Board evaluation and oversee the process for the evaluation of each director.

 

Human Resources and Compensation Committee

Members:

 

Carrie S. Cox (Chair)

Calvin Darden

Patricia A. Hemingway Hall

Nancy Killefer

 

Meetings in fiscal 2020: 7

The Compensation Committee’s primary duties are to:

approve compensation for the Chief Executive Officer, establish relevant performance goals and evaluate his performance;

approve compensation for our other executive officers and oversee their evaluations;

make recommendations to the Board with respect to the adoption of equity and incentive compensation plans and policies, administer such plans and policies and determine whether to recoup compensation;

review our non-management directors’ compensation program and recommend changes to the Board;

oversee the management succession process for the Chief Executive Officer and senior executives;

oversee and advise the Board about human capital management strategies and policies, including with respect to attracting, developing, retaining and motivating management and employees, workplace diversity and inclusion initiatives and progress, employee relations and workplace safety and culture;

oversee and assess material risks related to compensation arrangements; and

assess the independence of Compensation Committee’s consultant and evaluate its performance.

The Compensation Discussion and Analysis, which begins on page 31, discusses how the Compensation Committee makes compensation-related decisions regarding our named executive officers.

 

 

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Ad Hoc Committee

Members:

 

Bruce L. Downey (Chair)

Carrie S. Cox

Calvin Darden

Gregory B. Kenny

 

Meetings in fiscal 2020: 9

The Ad Hoc Committee assists the Board in its oversight of the company’s response to the nationwide problem of prescription opioid abuse. It receives and discusses regular reports from management and the company’s external advisors on our initiatives and other developments and provides management input and direction. It also provides advice, regular reports and recommendations to the Board. The Ad Hoc Committee receives updates regarding, among other things:

progress of the global settlement framework designed to resolve all pending and future opioid lawsuits by states and political subdivisions;

investigations and litigation;

anti-diversion and controlled substance reporting programs;

risks posed to the company by the opioid epidemic and related litigation from a legal, financial and reputational perspective;

changes in the regulatory and legislative environment;

the company’s support of solutions to help address the opioid epidemic; and

engagement with shareholders, employees and other key stakeholders.

 

Surgical Gown Recall Oversight Committee

Members:

 

John H. Weiland (Chair)

Akhil Johri

Gregory B. Kenny

Nancy Killefer

 

Meetings in fiscal 2020: 7

The Surgical Gown Recall Oversight Committee assists the Board in overseeing and engaging with management regarding the company’s surgical gown recall announced in January 2020.(1) It receives and discusses reports from management and the company’s external advisors and provides management input and direction. It also provides advice, reports and recommendations to the Board. Since its formation, the Surgical Gown Recall Oversight Committee has discussed, among other things:

the status of the recall and field actions;

regulatory aspects of the recall and field actions;

the impact on customers and the business;

our quality assurance processes and business practices; and

media and reputational impacts.

 

(1)

As disclosed in our fiscal 2020 Form 10-K, in January 2020, we issued a voluntary recall for 9.1 million AAMI Level 3 surgical gowns and two voluntary field actions (a recall of some packs and a corrective action allowing overlabeling of other packs) for 2.9 million Presource Procedure Packs containing affected gowns. These recalls were necessary because we discovered in December 2019 that one of our FDA registered suppliers in China had shifted production of some gowns to unapproved sites with uncontrolled manufacturing environments. Because of this, we could not assure sterility of the gowns. In connection with these recalls, we recorded total charges of $85 million during fiscal 2020.

 

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Our Board’s Primary Role and Responsibilities and Processes

Our Board’s Primary Role and Responsibilities

Our Corporate Governance Guidelines provide that our Board serves as the representative of, and acts on behalf of, all the shareholders of Cardinal Health. In that regard, some primary functions of the Board include:

reviewing, evaluating and, where appropriate, approving our major business strategies, capital deployment and long-term plans and reviewing our performance;

planning for and approving management succession; and

overseeing our policies and procedures for assessing and managing compliance and risk.

How Our Board Oversees Our Strategy and Capital Deployment

The Board receives updates on company performance and regularly discusses our strategy considering the competitive environment, developments in the rapidly changing healthcare industry, and the global business and economic environment. The Board reviews and approves capital deployment, including dividends, financing and share repurchase plans, and significant acquisitions and divestitures.

At least annually, the Board conducts a dedicated strategy session with in-depth discussions of our industry, specific businesses and new business opportunities. At these sessions, the Board discusses risks related to our strategies, including risks resulting from possible actions by competitors, disrupters, customers and suppliers. The Board also considers various elements of strategy at each regular quarterly meeting. The collective backgrounds, skills and experiences of our directors, including broad industry experience, contribute to robust discussions of strategy and the related risks.

The Board has supported our goal to deploy capital in a balanced and disciplined manner that prioritizes reinvesting in the business, maintaining a strong balance sheet, and returning cash to shareholders through dividends. Reinvestment in the business through capital expenditures remains a critical priority. Another priority is maintaining a strong balance sheet through our focus on our credit rating and the corresponding metrics. We paid down $1.4 billion in debt during fiscal 2020. Our board also approved a 1% increase in our dividend during fiscal 2020.

Engagement on COVID-19

During fiscal 2020, the Board was highly engaged with the Chief Executive Officer and other management about the impact of COVID-19 and the company’s response and plans. Management held regular informational calls with Board members throughout the spring and summer covering employees and operations, financial impact, product supply, media engagement, and related legal and regulatory matters. Management also is engaged with the Board on identifying and addressing strategic risks and opportunities arising out of COVID-19. During the pandemic, we adjusted our planned in-person Board meetings to hold them virtually to ensure continued effective functioning of the Board.

How Our Board Engages in Management Succession

The Compensation Committee and the Board are actively engaged in our talent management program. The Compensation Committee oversees the process for succession planning for the Chief Executive Officer and other senior executives, and management provides an organizational update at each quarterly Compensation Committee meeting.

The full Board holds a formal succession planning and talent review session annually, which includes succession planning for the Chief Executive Officer and other senior executives. These sessions include identification of internal candidates and desired leadership skills and key capabilities and experience considering our current and evolving business and strategic direction.

Directors interact with our leaders through Board presentations and discussions, as well as through informal events and planned one-on-one sessions.

The Board maintains an emergency succession plan, as well as a long-term succession plan for the position of Chief Executive Officer.

During fiscal 2020, our succession planning process helped Mr. Kaufmann complete his executive leadership team with Jason Hollar, an experienced new hire for the Chief Financial Officer role. Mr. Hollar joined us from automotive products company Tenneco Inc. and his experience spans multiple industries and geographies. In addition to serving as Chief Financial Officer of Tenneco and Sears Holding Corporation before that, Mr. Hollar has held senior finance roles at other large multinational companies.

 

 

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How Our Board Oversees Risk

A summary of the allocation of general risk oversight functions among management, the Board and its Committees is as follows:

 

Management has day-to-day responsibility for assessing and managing risks, and the Board is responsible for risk oversight. Management has developed and administers an enterprise risk management program, which the Audit Committee oversees. Through this process, management identifies and prioritizes enterprise risks and develops systems to assess, monitor and mitigate those risks. Management reviews and discusses with the Board significant risks identified through this program.

The Audit Committee is responsible for discussing with management major financial risk exposures, our ethics and compliance program and compliance with legal and quality and regulatory requirements. The Board and Audit Committee receive regular updates on our ethics and compliance and cybersecurity programs.

In connection with its risk oversight role, the Audit Committee meets regularly with representatives from our independent auditor and with our Chief Financial Officer, Chief Legal and Compliance Officer and the head of our internal audit function.

The Ad Hoc Committee assists the Board in its oversight of our response to the opioid epidemic. The Ad Hoc Committee receives updates and assesses the implications for Cardinal Health of, among other things, the risks posed by the opioid epidemic and related litigation from a legal, financial and reputational perspective.

The Surgical Gown Recall Oversight Committee assists the Board in its oversight of the company’s surgical gown recall announced in January 2020 and related activities and risks.

COVID-19 Risks

Since the beginning of the COVID-19 pandemic, management has kept the Board apprised of its efforts to assess strategic risks and opportunities arising from structural shifts in the industry resulting from COVID-19. Management has developed and is implementing plans in connection with this assessment and regularly updates the Board on their progress.

Our Ethics and Compliance Program

Our Board has adopted written Standards of Business Conduct that outline our corporate values and standards of integrity and behavior. The Standards of Business Conduct are designed to foster a culture of integrity, drive compliance with legal and regulatory requirements, and protect and promote the reputation of our company. The full text of the Standards of Business Conduct is posted on our website at www.cardinalhealth.com under “About Us — Who we are — Ethics and Compliance.” This information also is available in print (free of charge) to any shareholder who requests it from our Investor Relations department.

Our Chief Legal and Compliance Officer has the responsibility to implement and maintain an effective ethics and compliance program. She provides quarterly updates on our ethics and compliance program to the Audit Committee and an update to the full Board at least once a year, or more frequently as needed. She reports to the Chairman of the Audit Committee and to the Chief Executive Officer and meets in executive session quarterly with the Audit Committee.

The Board’s Role in Oversight of Corporate Citizenship

The Nominating and Governance Committee is charged with overseeing our environmental sustainability and other corporate citizenship activities, including our policies and practices regarding political and lobbying activities and expenditures. Our corporate citizenship reports are available on our website at www.cardinalhealth.com under “About Us — Corporate Citizenship.”

 

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Corporate Citizenship during Fiscal 2020

In the past year, management formally chartered a cross-functional ESG Steering Committee to meet regularly to consider environmental, social and governance (“ESG”) issues. We also worked with an external partner to help us identify ESG priorities that are most relevant to our company and our stakeholders and identified the following seven ESG priorities: response to the opioid crisis; ethics and compliance; product quality and safety; human capital management; data privacy and security; environmental emissions and impact; and supply chain management. Each is discussed in our 2019 Corporate Citizenship Report.

Focus on Diversity and Inclusion

As we emphasized in the 2019 Corporate Citizenship Report, diversity and inclusion — in our workplaces and in our communities — is an important priority to us. By respecting and appreciating diversity of thought, experience and background, we are becoming more innovative, increasing employee engagement and improving customer and shareholder value. Managers are required to seek out a slate of candidates that includes women and minorities for any job or promotion. Four of eight leaders reporting to our Chief Executive Officer are women and one is an African American male. Women comprise 44% of our executive management and ethnically diverse persons comprise 17% .

We required unconscious bias training of every incentive eligible leader during fiscal 2020 and, as discussed in Compensation Discussion and Analysis on page 34, we introduced a corporate culture goal for our fiscal 2020 annual cash incentive program for completion of unconscious bias training.

We have an internal D&I Steering Council of senior business leaders charged with helping to lead internal conversations about diversity and inclusion. And last year, our Chief Executive Officer held our first ever D&I Town Hall with a panel of senior leaders.

More recently, our Chief Executive Officer formed a cabinet of African American and Black leaders within the company to help educate our senior leaders on racial equity issues and advise on actions we can take.

The Board’s Role in Oversight of Corporate Culture

The Board continues to assess and monitor corporate culture at Cardinal Health and how it fosters our business strategies. To inform the Board about human capital and cultural health, we have developed and annually share with the Board a cross-functional culture scorecard that includes employee engagement survey data, employee retention and turnover data, diverse employee and management representation, audit and accounting findings, employee cybersecurity awareness results and employee health and safety data.

Our Path Forward

As part of our broader strategic and financial plans, we began fiscal 2020 by launching “Our Path Forward” (see graphic below), which outlines both the plans and initiatives we have underway to advance our objectives and the key competitive advantages and values that will be vital to our success.

As discussed in Compensation Discussion and Analysis beginning on page 34, the Compensation Committee added new culture goals to our annual cash incentive and PSU grants during fiscal 2020 to align with these important strategic initiatives. The culture goals for the annual incentive program focused on performance management, change management and diversity and inclusion, while the culture goal for the PSUs focused on leadership score improvement from our employee engagement survey. We plan to continue to develop these culture goals.

Management Behaviors

For the fiscal 2020 performance management process, we introduced new management “behaviors” in line with Our Path Forward. They are:

invites curiosity (explores possibilities for the future);

inspires commitment (pursues results with passion);

builds partnerships (seeks connections for the greater good); and

develops self and others (inspires others to grow to our full potential).

 

 

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Our Board Evaluation Process

Each year, our Board conducts a rigorous self-evaluation process, which includes individual director evaluations. This process is overseen by the Nominating and Governance Committee, led by our Nominating and Governance Committee Chair, and conducted by an outside facilitator with corporate governance experience. The outside facilitator interviews each director to obtain anonymous feedback regarding Board performance and effectiveness and reviews the feedback during an executive session of the Board. This feedback helps the Board identify follow-up items and provide feedback to management.

The Board evaluation process includes an assessment of both Board process and substance, including:

the Board’s effectiveness, structure, composition, succession and culture;

the quality of Board discussions;

the Board’s performance in oversight of business performance, strategy, succession planning, risk management, ethics and compliance and other key areas; and

agenda topics for future meetings.

The outside facilitator also obtains feedback regarding each individual director, which is provided to the director in an individual discussion. The Board believes that this annual evaluation process supports its effectiveness and continuous improvement.

In addition to the full Board’s evaluation process, each of the Audit, Compensation and Nominating and Governance Committees annually review their charters and conduct their own Committee self-evaluation.

Director Independence

The Board has established director independence standards based on the New York Stock Exchange (“NYSE”) rules. These standards can be found in our Corporate Governance Guidelines on our website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Corporate Governance Documents.” These standards address, among other things, employment and compensation relationships, relationships with our auditor and customer and business relationships.

The Board assesses director independence at least annually, based on the recommendations of the Nominating and Governance Committee. The Board has determined that each of Messrs. Darden, Downey, Evans, Johri,

 

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Kenny, Losh, Scarborough and Weiland, and each of Mses. Arnold, Cox, Edison, Hemingway Hall and Killefer, is independent.

In reaching the determination that Mr. Evans is independent, the Board considered that, following the unexpected departure of our Chief Financial Officer early in fiscal 2020, Mr. Evans was hired to serve as interim Chief Financial Officer for less than a year while we conducted a search for a permanent Chief Financial Officer, and he received fixed cash compensation in that interim role.

Shareholder Engagement

It has been our long-standing practice to actively engage with our shareholders throughout the year so that management and the Board can better understand shareholder perspectives on governance, executive compensation and other topics. We strive for a collaborative approach to engagement and value shareholders’ perspectives.

During the summer of 2020, we again engaged with governance professionals from our largest shareholders. Our engagement discussions covered, among other topics, our response to the COVID-19 pandemic, Board oversight of our response to the opioid epidemic, including the global settlement framework and related litigation, the surgical gown recall, Board composition and refreshment, and our Chief Financial Officer transition. We also have continued to hold constructive discussions with members of the Investors for Opioid and Pharmaceutical Accountability coalition.

A general overview of our annual engagement process is below.

 

After considering feedback from shareholders in recent years, we have taken the following actions:

limited director service on other public company boards to three or just their own board if the director is an executive of another public company;

expanded the Compensation Committee’s responsibilities to oversee and advise the Board about human capital management strategies and policies;

adopted a policy to explain the exclusion of certain legal and compliance costs from our incentive performance metrics;

expanded the Nominating and Governance Committee’s oversight to include environmental sustainability and other corporate citizenship activities as well as lobbying activities and expenditures;

changed the long-term incentive compensation mix for executives, increasing the proportion of PSUs to 60% and eliminating stock options;

enhanced our executive compensation clawback provision;

added a chairman’s letter to our proxy statement;

increased our communications about the Ad Hoc Committee and the Board’s oversight of opioid-related issues; and

separated the Chairman of the Board and Chief Executive Officer roles.

 

 

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Director Compensation

Overview

Our non-management director compensation program is approved by our Board based on the recommendation of the Compensation Committee. The Compensation Committee receives comparative market data and recommendations from its compensation consultant with regard to the structure and amounts of our director compensation. Total director compensation is targeted at the median amount among our Comparator Group, which is discussed on page 37.

Following the Compensation Committee’s review of director compensation in May 2019, and based on the recommendation of its compensation consultant, the Compensation Committee recommended to the Board, and the Board approved, increases to the annual retainers and restricted share unit (“RSU”) grants effective in November 2019. The compensation changes aligned with our target of the median director compensation for the Comparator Group. There were no changes made to director compensation for fiscal 2021.

 

Compensation Arrangements

The table below shows the elements and amount of compensation that we paid to our non-management directors during fiscal 2020.

Compensation Element

Amount until November 5, 2019

($)

Amount on and after November 6, 2019

($)

Annual retainer(1)

105,000

115,000

RSUs(2)

175,000

185,000

Committee chair annual retainer(1)

 

 

Audit Committee

25,000

25,000

Compensation Committee

20,000

20,000

Nominating and Governance Committee

15,000

15,000

Non-executive Chairman of the Board compensation

 

 

Annual retainer(1)

125,000

125,000

Annual RSUs

125,000

125,000

(1)

Retainer amounts are paid in cash in quarterly installments.

(2)

Each new non-management director receives an initial RSU grant and an annual RSU grant on the date of our Annual Meeting of Shareholders. The initial grant is prorated to reflect service between the election date and the one-year anniversary of the prior year’s Annual Meeting of Shareholders. We value the RSUs based on the closing share price on the grant date. RSUs vest one year from the grant date (or, for annual grants, on the date of the next Annual Meeting of Shareholders, if earlier) and settle in common shares. We accrue cash dividend equivalents that are payable upon vesting of the RSUs. All unvested RSUs become fully vested upon a “change of control” (as defined under “Potential Payments on Termination of Employment and Change of Control” on page 50) unless the director is asked to continue to serve on the board of directors of the surviving entity or its affiliates and receives a qualifying replacement award.

Directors may receive additional compensation for performing duties assigned by the Board or its committees that are considered beyond the scope of the ordinary responsibilities of directors or committee members. Messrs. Darden and Kenny and Ms. Cox receive $10,000 per year for service on the Ad Hoc Committee and Mr. Downey receives $25,000 per year for chairing the Ad Hoc Committee.

Directors may elect to defer payment of their cash retainers into the Cardinal Health Deferred Compensation Plan (“DCP”). For directors, deferred balances under the DCP are paid in cash upon termination from Board service, death or disability in a single lump sum or annual installment payments over a period of five or ten years. A director also may defer receipt of common shares that otherwise would be issued on the date that RSUs vest until termination from Board service.

Our directors may participate in our matching gift program. Under this program and subject to certain restrictions, the Cardinal Health Foundation (our philanthropic affiliate) will match contributions for eligible non-profit organizations.

 

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Director Compensation for Fiscal 2020

The non-management directors received the following compensation during fiscal 2020:

Name

Fees Earned or

Paid in Cash

($)

 

Stock Awards

($)

(1) 

All Other

Compensation

($)

 

Total

($)

Colleen F. Arnold

111,522

 

184,999

 

 

296,521

Carrie S. Cox

141,522

 

184,999

 

2,000

(2)

328,521

Calvin Darden

121,522

 

184,999

 

2,000

(2)

308,521

Bruce L. Downey

136,522

 

184,999

 

 

321,521

Patricia A. Hemingway Hall

126,522

 

184,999

 

 

311,521

Akhil Johri

111,522

 

184,999

 

 

296,521

Gregory B. Kenny

246,522

 

310,024

 

2,000

(2)

558,546

Nancy Killefer

111,522

 

184,999

 

 

296,521

J. Michael Losh

136,522

 

184,999

 

2,000

(2)

323,521

Dean A. Scarborough

93,832

 

217,113

(3)

2,000

(2)

312,945

John H. Weiland

93,832

 

217,113

(3)

 

310,945

(1)

These awards are RSUs granted under the Amended Cardinal Health, Inc. 2011 Long-Term Incentive Plan (the “2011 LTIP”). We valued the RSUs by multiplying the closing price of our common shares on the NYSE on the grant date by the number of RSUs awarded. As of June 30, 2020, the aggregate number of shares underlying unvested RSUs held by each director serving on that date was as follows: Ms. Arnold — 3,424 shares; Ms. Cox — 3,424 shares; Mr. Darden — 3,424 shares; Mr. Downey — 3,424 shares; Ms. Hemingway Hall — 3,424 shares; Mr. Johri — 3,424 shares; Mr. Kenny — 5,738 shares; Ms. Killefer — 3,424 shares; Mr. Losh — 3,424 shares; Mr. Scarborough — 4,090; and Mr. Weiland — 4,090.

(2)

Represents a company match attributable to a charitable contribution under our matching gift program.

(3)

Includes initial RSU grants made in September 2019.

Related Person Transactions Policy and Process

Related Person Transactions Policy

We have a written policy that the Audit Committee must approve or ratify any “related person transactions” (transactions exceeding $120,000 in which we are a participant and any related person has a direct or indirect material interest). “Related persons” include our directors, nominees for election as a director, persons controlling over 5% of our common shares, executive officers and the immediate family members of each of these individuals.

Once a related person transaction is identified, the Audit Committee will review all the relevant facts and circumstances and determine whether to approve the transaction. The Audit Committee will take into account such factors as it considers appropriate, including the material terms of the transaction, the nature of the related person’s interest in the transaction, the significance of the transaction to the related person and us, the nature of the related person’s relationship with us and whether the transaction would be likely to impair the judgment of a director or executive officer to act in our best interest.

If advance approval of a transaction is not feasible, the Audit Committee will consider the transaction for ratification at its next regularly scheduled meeting. The Audit Committee Chairman may pre-approve or ratify any related person transactions in which the aggregate amount is expected to be less than $1 million.

Related Person Transactions

Since July 1, 2019, there have been no transactions, and there are no currently proposed transactions, involving an amount exceeding $120,000 in which we were or are to be a participant and in which any related person had or will have a direct or indirect material interest.

 

 

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Audit Committee Matters

Ratification of Appointment of Ernst & Young LLP as Independent Auditor

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of our independent auditor and approves the audit engagement with Ernst & Young LLP and its audit fees. The Audit Committee has appointed Ernst & Young LLP as our independent auditor for fiscal 2021 and believes that the continued retention of Ernst & Young LLP as our independent auditor is in the best interest of Cardinal Health and its shareholders. Ernst & Young LLP has served as our independent auditor since 2002. In accordance with SEC rules, lead audit partners are subject to rotation requirements, which limit the number of consecutive years an individual partner may serve us. The Audit Committee oversees the rotation of the audit partners. The Audit Committee Chairman interviews candidates for audit partner and the Audit Committee discusses them.

While not required by law, we are asking our shareholders to ratify the appointment of Ernst & Young LLP as our independent auditor for fiscal 2021 at the Annual Meeting as a matter of good corporate governance. If shareholders do not ratify this appointment, the Audit Committee will consider whether it is appropriate to appoint another audit firm. Even if the appointment is ratified, the Audit Committee in its discretion may appoint a different audit firm at any time during the fiscal year if it determines that such a change would be in the best interest of Cardinal Health and its shareholders. Our Audit Committee approved, and our shareholders ratified with 99% support, the appointment of Ernst & Young LLP as our independent auditor for fiscal 2020.

We expect representatives of Ernst & Young LLP to attend the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and to respond to appropriate questions from shareholders.

The Board recommends that you vote FOR the proposal to ratify the appointment of Ernst & Young LLP as our independent auditor for fiscal 2021.

 

Audit Committee Report

The Audit Committee is responsible for overseeing: the integrity of Cardinal Health’s financial statements; the independent auditor’s qualifications, independence and performance; Cardinal Health’s internal audit function; Cardinal Health’s ethics and compliance program and its compliance with legal and regulatory requirements; and Cardinal Health’s processes for assessing and managing risk. As of the date of this report, the Audit Committee consists of five members of the Board of Directors. The Board of Directors has determined that each of Messrs. Johri, Losh and Scarborough is an “audit committee financial expert” for purposes of the SEC rules and that each Committee member is independent. The Audit Committee’s activities are governed by a written charter, which is available on Cardinal Health’s website at www.cardinalhealth.com under “About Us — Corporate — Investor Relations — Corporate Governance — Board Committees and Charters.”

Management has primary responsibility for the financial statements and for establishing and maintaining the system of internal control over financial reporting. Management also is responsible for reporting on the effectiveness of Cardinal Health’s internal control over financial reporting. Cardinal Health’s independent auditor, Ernst & Young LLP, is responsible for performing an independent audit of Cardinal Health’s consolidated financial statements and for issuing a report on the financial statements and a report on the effectiveness of Cardinal Health’s internal control over financial reporting based on its audit.

The Audit Committee reviewed and discussed the audited financial statements for the fiscal year ended June 30, 2020 with management and with Ernst & Young LLP. The Audit Committee also reviewed and discussed with management and Ernst & Young LLP the effectiveness of Cardinal Health’s internal control over financial reporting as well as management’s report and Ernst & Young LLP’s report on the subject. The Audit Committee discussed with Ernst & Young LLP the matters related to the conduct of its audit that are required to be communicated by auditors to audit committees under applicable requirements of the Public Company Accounting Oversight Board (the “PCAOB”) and the SEC and matters related to Cardinal Health’s financial statements, including critical accounting estimates and judgments. The Audit Committee received from Ernst & Young LLP the written disclosures and letter required by the applicable requirements of the PCAOB regarding Ernst & Young LLP’s communications with the Audit Committee concerning independence and discussed with Ernst & Young LLP its independence.

The Audit Committee meets regularly with Ernst & Young LLP, with and without management present, to review the overall scope and plans for Ernst & Young LLP’s audit work and to discuss the results of its examinations, the evaluation of Cardinal Health’s internal control over financial reporting, and the overall quality of Cardinal Health’s accounting and financial reporting. In addition, the Audit Committee annually considers the performance of Ernst & Young LLP.

 

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In reliance on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements for the fiscal year ended June 30, 2020 be included in Cardinal Health’s Annual Report on Form 10-K for filing with the SEC.

Submitted by the Audit Committee of the Board of Directors on August 12, 2020.

J. Michael Losh, Chairman
Colleen F. Arnold
Akhil Johri
Dean A. Scarborough
John H. Weiland

Fees Paid to Ernst & Young LLP

The following table sets forth the fees billed to us by Ernst & Young LLP for services in fiscal 2020 and 2019.

 

Fiscal 2020

($)

Fiscal 2019

($)

Audit fees(1)

13,538,845

13,380,007

Audit-related fees(2)

3,488,545

2,168,768

Tax fees(3)

684,174

730,995

All other fees

TOTAL FEES

17,711,564

16,279,770

(1)

Audit fees include fees paid to Ernst & Young LLP related to the annual audit of consolidated financial statements, the annual audit of the effectiveness of internal control over financial reporting, the review of financial statements included in Quarterly Reports on Form 10-Q and statutory audits of various international subsidiaries. Audit fees also include fees for services performed by Ernst & Young LLP that are closely related to the audit and in many cases could only be provided by the independent auditor, such as comfort letters and consents related to SEC registration statements.

(2)

Audit-related fees include fees for services related to acquisitions and divestitures, audit-related research and assistance, service auditor’s examination reports and employee benefit plan audits.

(3)

Tax fees include fees for tax compliance and other tax-related services. The aggregate fees billed to us by Ernst & Young LLP for tax compliance for fiscal 2020 and 2019 were $267,468 and $724,560, respectively.

Policy on Pre-Approval of Services Provided by Ernst & Young LLP

The Audit Committee must pre-approve the audit and permissible non-audit services performed by our independent accountants in order to help ensure that the accountants remain independent of Cardinal Health. The Audit Committee has adopted a policy governing this pre-approval process.

Under the policy, the Audit Committee annually pre-approves certain services and assigns specific dollar thresholds for these types of services. If a proposed service is not included in the annual pre-approval, the Audit Committee must separately pre-approve the service before the engagement begins.

The Audit Committee has delegated pre-approval authority to the Audit Committee Chairman for proposed services up to $500,000. Proposed services exceeding $500,000 require full Audit Committee approval.

All audit and non-audit services provided for us by Ernst & Young LLP for fiscal 2020 and 2019 were pre-approved by the Audit Committee.

 

 

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Executive Compensation

Advisory Vote to Approve the Compensation of Our Named Executive Officers

In accordance with Section 14A of the Securities Exchange Act of 1934 (the “Exchange Act”), we are asking our shareholders to approve, on a non-binding advisory basis, the compensation of our named executive officers, as disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and the related compensation tables, notes and narrative in this proxy statement.

We urge shareholders to read the Compensation Discussion and Analysis beginning on the next page of this proxy statement, which describes in more detail how our executive compensation program operates and is designed to achieve our compensation objectives, as well as the Summary Compensation Table and related compensation tables, notes and narrative appearing on pages 40 through 50, which provide detailed information on the compensation of our named executive officers.

Although this advisory vote is not binding on the Board, the Board and the Compensation Committee will review and consider the voting results when evaluating our executive compensation program.

The Board has adopted a policy providing for annual say-on-pay advisory votes. Accordingly, the next say-on-pay advisory vote will be held at our 2021 Annual Meeting of Shareholders.

The Board recommends that you vote FOR the approval, on a non-binding advisory basis, of the compensation of our named executive officers, as disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and the related compensation tables, notes and narrative in this proxy statement.

 

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Compensation Discussion and Analysis

Executive Summary

This Compensation Discussion and Analysis focuses on the fiscal 2020 compensation of the following current and former executive officers (the “named executive officers” or “named executives”) and describes the executive compensation program and the Compensation Committee’s decisions under it.

 

 

Michael C. Kaufmann

Chief Executive Officer

 

 

Jason M. Hollar

Chief Financial Officer

 

 

Victor L. Crawford

Chief Executive Officer Pharmaceutical Segment

 

 

Stephen M. Mason

Chief Executive Officer Medical Segment

 

 

Jessica L. Mayer

Chief Legal and Compliance Officer

 

 

David C. Evans

Former Interim Chief Financial Officer

 

 

Jorge M. Gomez

Former Chief Financial Officer

 

 

Fiscal 2020 Highlights

During fiscal 2020, we grew non-GAAP operating earnings, exceeded our non-GAAP EPS guidance range, surpassed our enterprise cost savings target, and strengthened our balance sheet, all while continuing to execute on our long-term strategic priorities in a rapidly-changing environment.

We achieved fiscal 2020 results as we adapted our operations to address the unique challenges presented by COVID-19. In response to the pandemic, we continued to maintain operations in all our distribution facilities, nuclear pharmacies and global manufacturing plants and successfully transitioned our office employees to a remote work model. Through all of this, our focus remained on delivering critical products and services to our customers, while protecting the health and safety of our employees.

Fiscal 2020 highlights include:

Revenue was $152.9 billion, up 5% from the prior year.

GAAP operating loss was $(4.1) billion due to an opioid litigation charge and non-GAAP operating earnings were $2.4 billion, a 1% increase over the prior year. Non-GAAP operating earnings grew despite an estimated net negative impact of approximately $100 million from COVID-19.

GAAP diluted loss per share was $(12.61) due to the opioid litigation charge and non-GAAP EPS was $5.45, a 3% increase over the prior year.

We returned over $900 million to shareholders in dividends ($569 million) and share repurchases ($350 million) and repaid $1.4 billion of long-term debt.

Our Pharmaceutical segment performance exceeded our expectations. Revenue grew 6% to $137.5 billion. Segment profit decreased 4% to $1.8 billion, reflecting the expected adverse impact of Pharmaceutical Distribution customer contract renewals.

Our Medical segment revenue decreased 1% percent to $15.4 billion due to the adverse impact from COVID-19. Segment profit increased 15% to $663 million largely due to cost savings and the favorable year-over-year impact of a supplier charge taken last year, partially offset by the negative impact of COVID-19.

We surpassed our enterprise cost savings target, with significant savings contributions from the Medical segment’s global manufacturing and supply chain organization .

We completed the divestiture of our successful investment in naviHealth.

We agreed in principle to a global settlement framework designed to resolve all opioid lawsuits and claims by states and political subdivisions and continue to work with state attorneys general and representatives of political subdivisions to achieve a global settlement.

Our generic pharmaceuticals program performed better than expected with a slight favorable impact on Pharmaceutical segment profit after several years of a negative impact.

Our Medical segment managed a voluntary recall for surgical gowns and three voluntary field actions for Presource surgical procedure packs containing affected surgical gowns.

We launched “Our Path Forward” outlining the plans and initiatives underway to advance our corporate culture objectives. We added new culture goals (including a diversity and inclusion goal) to our annual cash incentive and PSU programs.

Non-GAAP operating earnings growth and strong performance against new strategic measures for cost savings and culture drove a fiscal 2020 annual cash incentive funding of 120% at the enterprise level.

Our non-GAAP EPS performance over the past three years has negatively impacted our named executives’ long-term incentive pay. We had a 19% payout for the PSUs that vested in fiscal 2020 and no PSU payouts in fiscal 2018 and 2019.

See Annex A for reconciliations to the comparable GAAP financial measures and the reasons why we use non-GAAP financial measures.

Compensation and Benefit Actions in Response to COVID-19

During the pandemic, we took actions to help our employees, including allowing those who are sick with or who have been exposed to COVID-19 to take time off without impacting their paid-time-off days, expanding availability of child and elder back-up care, and increasing communications

 

 

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to employees of the variety of well-being resources available to them, with an emphasis on mental health. We also provided additional compensation to frontline employees who continued to work during the pandemic, keeping our distribution centers, manufacturing plants and other sites running and supporting our healthcare provider customers.

For fiscal 2021, considering the performance uncertainties related to COVID-19, we decided that employees at the Vice President level and above (including our named executives) will not receive base salary increases, while non-supervisory (including frontline) employees will receive standard merit base salary increases.

Even with the unexpected negative impact of COVID-19 (approximately $100 million), we did not adjust either our annual incentive or PSU performance goals or results to remove this impact.

CFO Transitions

Jason Hollar became Chief Financial Officer on May 26, 2020. He was formerly Chief Financial Officer of Tenneco Inc. To address compensation forfeited at his former employer, we provided Mr. Hollar with initial long-term incentive grants of $1.0 million in PSUs and $1.0 million in RSUs and a $1.55 million cash sign-on bonus. He also received a $200,000 lump sum payment for relocation.

Mr. Hollar replaced David Evans who had served as our interim Chief Financial Officer from September 1, 2019 to May 25, 2020. In his interim role, Mr. Evans received cash compensation of $220,000 per month during his employment and did not participate in our annual or long-term incentive plans or our Senior Executive Severance Plan.

Former Chief Financial Officer Jorge Gomez left the company in August 2019 to pursue another opportunity. He did not receive severance and forfeited his annual incentive and unvested long-term incentive awards.

Other Executive Transitions

Stephen Mason was promoted to Chief Executive Officer — Medical Segment in August 2019. Mr. Mason, a 21-year veteran of Cardinal Health, previously led the Cardinal Health at-Home business within the Medical segment.

Shareholder Engagement and Consideration of 2019 “Say-on-Pay” Vote

At the 2019 Annual Meeting of Shareholders, our “say-on-pay” advisory vote received 93% support, our eighth straight year of over 90% shareholder support. The Compensation Committee considered this vote as well as shareholder feedback from our shareholder engagement as demonstrating strong support for our executive compensation program.

It has been our long-standing practice to engage with our shareholders throughout the year so that management and the Board can better understand shareholder perspectives on topics like executive compensation. During fiscal 2020, we again engaged with governance professionals from our largest shareholders. (See page 25 for further detail about shareholder engagement.)

Compensation Philosophy and Practices

Our compensation program is designed to support our long-term growth, with accountability for key annual results. It has the following key objectives:

Reward performance. We tie our executive pay to financial, operational and individual performance.

Emphasize long-term, stock-based incentive compensation. We emphasize performance and retention using long-term, stock-based incentive compensation, which supports sustainable long-term shareholder return. Combined with stock ownership guidelines, it provides executives with meaningful ownership stakes and aligns their interests with shareholders.

Maintain a competitive program that will attract and retain critical talent. We have designed our compensation program to be competitive in the marketplace and to invest in and reward talent, driving our long-term growth while holding employees accountable to our strategy and our values.

Executive Compensation Governance Features

What We Have

 

What We Do Not Have

Significant portion of executive pay consists of performance-based “at risk” elements

 

No employment agreements with executive team

Performance goals for cost savings and corporate culture (including diversity and inclusion)

 

No dividend equivalents on unvested PSUs or RSUs

Caps on annual cash incentive and PSU payouts

 

No executive pensions or supplemental retirement plans

Minimum vesting period for long-term incentive awards

 

No repricing of underwater options without shareholder approval

Stock ownership guidelines for directors and executive officers

 

No hedging or pledging of company stock

Compensation recoupment (“clawback”) provision

 

No “single trigger” change of control arrangement

Long-standing, proactive shareholder engagement program

 

No excise tax gross-ups upon change of control

 

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Elements of Compensation for Executive Officers

Our executive officers’ total direct compensation has three elements: base salary; annual incentive; and long-term incentive. In fiscal 2020, long-term incentive awards were granted 60% in PSUs and 40% in RSUs. A significant portion of executive compensation is based on company performance and is at-risk (annual incentive and PSUs). At the beginning of each performance period, the Compensation Committee sets performance goals under our annual incentive program and PSUs. After the performance period ends, the Compensation Committee evaluates the performance and determines payouts. The charts below show the fiscal 2020 target total direct compensation for our Chief Executive Officer and other current named executives.

 

Pay Element

Description and Purpose

Links to Business and Talent Strategies

Base salary

Fixed cash compensation, which is reviewed annually and adjusted when appropriate

Based on qualifications, experience, role, performance, career progression, market data and internal pay equity

Competitive base salaries support our ability to attract and retain executive talent

Annual incentive

Variable cash compensation based on achieving goals for annual adjusted non-GAAP operating earnings, tangible capital, cost savings, culture objectives and individual performance

Target as a percentage of base salary reflects market data and internal pay equity

Primary financial measure reflects our focus on operating earnings, with tangible capital modifier promoting efficient use of capital

Cost savings goal and culture goals focused on performance and change management and diversity and inclusion were added for fiscal 2020 to align with key strategic initiatives

Executives are assessed on their individual performance, including their alignment with our Standards of Business Conduct, values and management behaviors

Long-term incentive

Weighted 60% in PSUs and 40% in RSUs

PSUs vest based on achieving goals for adjusted non-GAAP EPS, cost savings and culture objectives over three years, with a total shareholder return (“TSR”) modifier; RSUs vest ratably over three years

Target annual grant value reflects market data and internal pay equity

Supports sustainable long-term shareholder return and closely aligns management’s interests with shareholders’ interests

Non-GAAP EPS is a primary measure for evaluating our performance and is closely followed by the investment community

Cost savings goal and culture goal focused on our employee engagement survey results were added to PSUs in fiscal 2020 to align with key strategic initiatives

Long-term incentives help to retain executive talent

Base Salary

At the beginning of fiscal 2020, the Compensation Committee increased the base salaries of Mr. Kaufmann by 8%, Mr. Crawford by 4% and Ms. Mayer by 5%.

The Compensation Committee set Mr. Hollar’s base salary at $700,000 when he joined us as Chief Financial Officer and set Mr. Mason’s base salary at $525,000 when he was promoted to Chief Executive Officer — Medical Segment early in the fiscal year.

Later in the fiscal year, the Compensation Committee increased Mr. Mason’s base salary by an additional 19% and Ms. Mayer’s base salary by an additional 5% based on market data for their respective roles. As internal hires, the Compensation Committee initially had set Mr. Mason’s and Ms. Mayer’s target total direct compensation lower in the market range with the expectation of adjusting it based on strong performance.

 

 

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Annual Incentive Compensation

Fiscal 2020 Goal Setting and Results

The Compensation Committee made changes to the fiscal 2020 annual incentive performance program, adding new strategic measures for cost savings and culture objectives to determine 30% of the payout. As noted earlier, even with the unexpected negative impact of COVID-19 (approximately $100 million), we did not adjust either our annual incentive performance goals or results to remove this impact.

Operating earnings goal. The Compensation Committee set the adjusted non-GAAP operating earnings target at the beginning of fiscal 2020 to align with the Board-approved budget for non-GAAP operating earnings. While the target was set below fiscal 2019 results, the Committee determined that it was appropriate and consistent with the budget and our public guidance, which reflected headwinds due to customer contract renewals and then-expected generic program performance. In light of these factors, the Compensation Committee established a payout curve that would not exceed 100% until year-over-year growth was achieved.

The earnings goal is based on non-GAAP operating earnings because it is one of our primary measures of operating performance. If we achieve the threshold earnings goal, tangible capital management operates as a modifier of the payout. Tangible capital management focuses on the efficient use of capital.

Strategic goals. The Compensation Committee set the target for cost savings to align with our publicly announced fiscal 2020 cost savings goal. The Committee set targets for corporate culture goals to advance the “Our Path Forward” initiatives discussed beginning on page 23. The culture goals, which were measured quantitatively on an enterprise-wide basis, focused on performance management (employees entering goals and performance conversation acknowledgments into our internal tracking system), change management (designated leaders completing change management playbooks), and diversity and inclusion (employees completing unconscious bias training).

We describe how we calculate these measures under “Performance Measure Calculations” beginning on page 43.

The Compensation Committee decided that the annual incentive performance funding results in the table below were appropriate with no adjustment for the positives and negatives for fiscal 2020. These included strong management performance through the COVID-19 pandemic and organizational accountability for the surgical gown recall.

(dollars in millions)

Weighting

Threshold

 

Target

 

Maximum

 

Actual

 

Percent of

Target

Impact on

Enterprise

Funding

Adjusted non-GAAP operating earnings(1)

70%

$1,966

 

$2,269

 

$2,722

 

$2,404

 

106

       80

pp

Tangible capital modifier(2)

 

$897

 

$748

 

$598

 

$775

 

NA

-1

pp

Cost savings(3)

20%

$50

 

$130

 

$250

 

$200

 

154

30

pp

Our Path Forward Culture(3)

10%

1 rating

 

3 rating

 

5 rating

 

4 rating

 

145

15

pp

Total

 

 

 

 

 

 

 

 

 

 

123

%

Final enterprise funding percentage

 

 

 

 

 

 

 

 

 

 

120

%

The sum of the components and certain computations may reflect rounding adjustments.

(1)

A payout level between 40% and 200% is earned for achieving the adjusted non-GAAP operating earnings goals (adjusted for tangible capital). The payout curve would not exceed 100% until we achieved growth over fiscal 2019 adjusted non-GAAP operating earnings of $2,382 million.

(2)

Tangible capital modifies adjusted non-GAAP operating earnings performance by up to or minus 10 percentage points.

(3)

A payout level between 50% and 200% is earned for achieving the cost savings and Our Path Forward — Culture goals.

Fiscal 2020 Annual Incentive Targets and Payouts

The Compensation Committee annually reviews our named executives’ annual incentive targets as a percentage of base salary. After the review at the beginning of fiscal 2020, the Committee determined not to change the targets of Messrs. Kaufmann and Crawford and Ms. Mayer. The Compensation Committee set the targets for Messrs. Hollar and Mason at 100% of their respective base salaries (the same percentages as their predecessors) in connection with the appointment to their new roles.

The Compensation Committee awarded each eligible named executive his or her fiscal 2020 annual incentive award based on the 120% enterprise funding percentage and an individual performance factor.

 

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Name

Target

(% of Base Salary)

 

Target

Amount

($)

 

Actual

Amount

($)

 

Actual

(% of Target)

 

Kaufmann

150

 

1,929,918

 

2,547,492

 

132

 

Hollar

100

 

124,317

(1)

149,180

(1)

120

 

Crawford

100

 

721,653

 

909,283

 

126

 

Mason

96

(2)

491,639

(2)

586,348

(2)

119

(2)

Mayer

85

(3)

465,885

(3)

559,061

(3)

120

(3)

(1)

Mr. Hollar’s target and actual amounts reflect the prorated portion of his fiscal 2020 annual incentive from when he joined us in April 2020.

(2)

Mr. Mason’s target and actual amounts reflect the different base salaries, annual incentive targets and funding percentages attributable to the different roles he held during the fiscal year.

(3)

Ms. Mayer’s target was increased to 90% effective June 22, 2020 just prior to the fiscal year-end and her fiscal 2020 award was prorated to reflect this change.

Mr. Kaufmann’s annual incentive was based on strong enterprise performance, including growing non-GAAP operating earnings despite the negative impact of COVID-19, and his excellent individual performance. Among the factors the Compensation Committee considered in evaluating his individual performance were his strong leadership of the company’s response to the COVID-19 pandemic, progress made in Our Path Forward culture initiatives, continued integration of his leadership team, his continued excellent working relationship with the Board, and his prioritization of diversity and inclusion.

Mr. Hollar’s prorated annual incentive was based on enterprise performance and his swift and successful onboarding since joining us in April 2020.

Mr. Crawford’s annual incentive was based on enterprise performance and his leadership of the Pharmaceutical segment, whose segment profit exceeded expectations, with above-expectations generic pharmaceutical program performance. Mr. Crawford also showed strong leadership of his segment in the face of COVID-19 and made strong contributions to the company’s progress on diversity and inclusion. He also was instrumental in the progress the Pharmaceutical segment made in Our Path Forward culture initiatives.

Mr. Mason’s annual incentive was based on enterprise performance and his leadership of the Medical segment, stepping in early in the fiscal year to lead initiatives underway to drive longer-term growth. Under his leadership, the segment significantly overachieved its cost savings target. He also managed the segment through the challenges of COVID-19 and the surgical gown recall and made strong contributions to the company’s progress on diversity and inclusion. He also was instrumental in the progress the Medical segment made in Our Path Forward culture initiatives.

Ms. Mayer’s annual incentive was based on enterprise performance, her performance leading our legal and compliance functions, and her assuming responsibility mid-year for our quality function. Ms. Mayer also managed her functions through the challenges of COVID-19 and the surgical gown recall and was instrumental in the progress her functions made in Our Path Forward culture initiatives.

Long-Term Incentive Compensation

For fiscal 2020, long-term incentive awards were delivered 60% in PSUs and 40% in RSUs. As noted earlier, even with the unexpected negative impact of COVID-19 (approximately $100 million), we did not adjust either our PSU performance goals or results to remove this impact.

Fiscal 2020 Long-Term Incentive Grants

The Compensation Committee annually reviews our named executives’ long-term incentive targets. At the beginning of fiscal 2020, based primarily on market data, the Committee increased Mr. Kaufmann’s target to $10.0 million (from $9.0 million) and Ms. Mayer’s target to $1.75 million. The Compensation Committee set Mr. Hollar’s target at $2.5 million when he joined us and Mr. Mason’s target at $2.25 million when he was promoted.

The following table shows the long-term incentive awards made in the fiscal 2020 annual grant to the named executives at the time.

Name

Fiscal 2020

Long-Term Incentive

Target

($)

 

Fiscal 2020 Annual Grant Awards

 

 

RSUs

($)

 

Target

PSUs

($)

 

 

Total

($)

Kaufmann

10,000,000

 

 

4,000,000

 

6,000,000

 

10,000,000

Crawford

2,750,000

 

 

1,100,000

 

1,650,000

 

2,750,000

Mason

2,250,000

 

 

900,000

 

1,350,000

 

2,250,000

Mayer

1,750,000

 

 

700,000

 

1,050,000

 

1,750,000

In May 2020, when he joined us as Chief Financial Officer, we provided Mr. Hollar with initial long-term incentive grants of $1.0 million in PSUs and $1.0 million in RSUs. These grants and his cash sign-on bonus were intended to address compensation he forfeited when he left his prior employer.

 

 

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Fiscal 2018-2020 PSU Payouts

In August 2020, the Compensation Committee certified the payout level of the PSUs granted for the fiscal 2018 through fiscal 2020 performance cycle (the “Fiscal 18-20 PSUs”). The Fiscal 18-20 PSUs were earned based on the average of the adjusted non-GAAP EPS payout level for each of the three fiscal years in the performance period, as adjusted by a relative TSR modifier.

Goal

Fiscal

Year

Threshold

($)

Target

($)

Maximum

($)

Actual

($)

Payout

Level

(%)

Adjusted non-GAAP EPS(1)

2018

4.70

5.00

5.30

4.57

0

2019

5.20

5.40

5.60

5.28

70

2020

5.49

5.70

5.91

5.45

0

3-year average payout level

23

TSR modifier(2)

 

Below 20th percentile

Final payout level

 

 

 

 

19

(1)

The Compensation Committee set absolute goals for the first year of the performance period and the following annual growth goals for the second and third years: 4% at threshold, 8% at target and 12% at maximum. Achieving threshold performance results in a 50% payout level, achieving target performance results in a 100% payout level, and achieving maximum performance results in a 200% payout level.

(2)

The TSR modifier decreases the payout by 20% if TSR is below the 20th percentile of the S&P 500 Health Care Index and increases it by 20% if TSR is above the 80th percentile of the index.

The following table shows the target and earned Fiscal 18-20 PSUs for those named executives who had received this grant.

Name

Target

Number of Shares

(#)

Number of Shares

Earned

(#)

Kaufmann

14,301

2,717

Mason

2,258

429

Mayer

2,258

429

Fiscal 2020-2022 PSU Grants

When granting PSUs for the fiscal 2020 through fiscal 2022 performance cycle (the “Fiscal 20-22 PSUs”), the Compensation Committee changed its approach to setting adjusted non-GAAP EPS goals and added new strategic measures for cost savings and culture.

(dollars in millions)

Weighting

Threshold

(50%)

Target

(100%)

Maximum

(200%)

Adjusted non-GAAP EPS

70%

95% of cumulative EPS goal

100% of cumulative EPS goal

110% of cumulative EPS goal

Cost savings

20%

$150

$300

$500

Our Path Forward — Culture

10%

No change in leadership score

2 pp increase in leadership score

10 pp increase in leadership score

TSR modifier(1)

 

 

 

 

(1)

The TSR modifier decreases the payout by 20% if TSR is below the 20th percentile of the S&P 500 Health Care Index and increases it by 20% if TSR is above the 80th percentile of the index.

EPS goal. Adjusted non-GAAP EPS remains the primary PSU performance measure because non-GAAP EPS is one of our primary measures of operating performance and is an important measure used by the investment community to evaluate our performance. The EPS goal is a three-year cumulative goal, which is the sum of annual targets set by the Compensation Committee. The Compensation Committee set the adjusted non-GAAP EPS target for fiscal 2020 at $5.00 to align with the Board-approved budget. The target was consistent with our public EPS guidance range issued at the beginning of fiscal 2020.

The Compensation Committee changed its EPS goal-setting approach to address significant healthcare industry uncertainties that the company has been facing. These uncertainties have made setting appropriate three-year goals very challenging. The Compensation Committee will continue to evaluate its goal-setting approach, especially in light of the COVID-19 pandemic; when it made the change, the Committee viewed it as temporary.

Strategic goals. The Compensation Committee added a three-year cost savings measure based on an annual run rate in cost savings projects implemented before the end of fiscal 2022. The Compensation Committee set the three-year cost savings target to align with our internal and publicly announced five-year goal of more than $500 million. The Committee also added an Our Path Forward — Culture measure (see pages 23 and 24 for a discussion of Our Path Forward) focused on a leadership score improvement from our employee engagement surveys.

TSR modifier. A relative TSR modifier measured over a three-year period continues to link this long-term incentive compensation directly to our relative shareholder returns. We use the S&P 500 Health Care Index as the peer group because it is an objective, widely available index with broad representation in the healthcare sector.

Operating cash flow threshold. Operating cash flow must exceed net earnings for the first two years of the performance period for any of the Fiscal 20-22 PSUs to vest, regardless of whether the other goals are achieved.

We describe how we calculate these measures under “Performance Measure Calculations” beginning on page 43.

Other Elements of Compensation

401(k) Savings and Deferred Compensation Plans

Our 401(k) Savings Plan and DCP allow most of our U.S.-based employees to accumulate value on a tax-deferred basis and allow us to be competitive in recruiting and retaining talent. Our DCP permits certain management employees, including the named executives, to defer payment and taxation of a portion of their salary and annual incentive compensation into a variety of different investment alternatives. We make matching contributions subject to limits discussed under “Deferred Compensation” on page 46. We also may make additional contributions to the 401(k) Savings Plan and DCP on the same basis for all employees. Named executives also may elect to defer payment and taxation of PSUs and RSUs.

 

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Other Benefits and Perquisites

The Compensation Committee encourages use of our corporate aircraft for the personal travel of our Chief Executive Officer because it increases his time available for business purposes and enhances his safety and security, especially during the COVID-19 pandemic. Mr. Kaufmann’s fiscal 2020 personal travel allowance was $150,000. He does not receive tax reimbursement for any imputed income associated with personal travel. Mr. Kaufmann has an aircraft time-sharing agreement, under which he may reimburse us for incremental costs when he uses the aircraft for personal travel. Reimbursed travel does not count against his allowance.

Relocation assistance is an important tool for us to recruit talent. We provided Mr. Hollar a $200,000 lump sum payment for relocation. Our offer letter agreement with Mr. Hollar allows us to recover the full relocation payment if he voluntarily leaves the company during the first year following his start date and 50% of it if he leaves during the second year following his start date.

Severance and Change of Control Benefits

Under our Board-adopted Senior Executive Severance Plan (the “Severance Plan”), our named executives are eligible for severance benefits under certain circumstances. Specifically, if

prior to a change of control or following the second anniversary of a change of control, we terminate a named executive without cause, or

during the two-year period commencing upon a change of control (the “change of control period”), we terminate a named executive without cause, or a named executive resigns for good reason,

then, the named executive will receive:

in the case of the Chief Executive Officer, cash severance equal to 2.0 times (or 2.5 times, if the termination occurs during the change of control period) the sum of annual base salary and target bonus;

in the case of other named executives, cash severance equal to 1.5 times (or 2.0 times, if the termination occurs during the change of control period) the sum of annual base salary and target bonus; and

a prorated annual bonus for the year of termination based on actual performance (or the greater of target performance and actual performance if the termination occurs during the change of control period) and up to 18 months of health insurance premiums.

Receipt of these amounts is conditioned upon execution of a general release and compliance with certain restrictive covenants.

During fiscal 2020, the Compensation Committee amended the definition of “Termination for Cause” under the Severance Plan to include committing fraud or theft or violating the Standards of Business Conduct or any other written company policy.

We believe that the Severance Plan is competitive with market practices and provides appropriate levels of compensation under standard terms and conditions related to executive separations. These benefits are an important component of our compensation packages designed to attract and retain top caliber talent in senior leadership roles and define terms and conditions of separation events.

We do not have any agreements to provide change-of-control excise tax gross-ups. We discuss our severance payments and benefits in detail under “Potential Payments on Termination of Employment or Change of Control” beginning on page 47.

Our Policies, Guidelines and Practices Related to Executive Compensation

Role of Compensation Committee’s Compensation Consultant

The Compensation Committee has utilized Korn Ferry as its independent executive compensation consultant since 2018. The nature and scope of the consultant’s engagement consists primarily of:

participating in meetings of the Compensation Committee;

providing compensation data on the Comparator Group; and

providing advice and recommendations related to compensation for our executive officers, the design of our executive compensation program, the composition of our Comparator Group and director compensation.

The Compensation Committee has made an assessment under the factors set forth in the NYSE rules and concluded that Korn Ferry is independent and that the firm’s work for the Compensation Committee does not raise any conflicts of interest. In making this assessment, the Committee considered other services that Korn Ferry provides to management.

Role of Executive Officers

Our Chief Executive Officer and Chief Human Resources Officer participate in Compensation Committee meetings to make recommendations regarding program design and compensation amounts, present performance assessments of the named executives (other than our Chief Executive Officer) and discuss company performance. The Compensation Committee delegates authority to our executive officers to administer compensation plans for participants who are not officers subject to Section 16 of the Exchange Act.

Our Chief Executive Officer reviews performance objectives with the Compensation Committee at the beginning of the fiscal year. At the end of the fiscal year, the Compensation Committee reviews and discusses the performance and compensation of the Chief Executive Officer in executive session and with the Chairman of the Board. The Chief Executive Officer does not participate in decisions regarding his own compensation.

Comparator Group

The Compensation Committee establishes target compensation levels based on a variety of factors, including data from a “Comparator Group” of similarly situated public companies, which helps the Compensation Committee to assess whether our executive pay remains reasonable and competitive in the marketplace. Developed with the assistance of the Compensation Committee’s compensation consultant, our Comparator Group reflects the industry in which we primarily compete for executive talent and includes direct competitors and other companies in the healthcare field. Our Comparator Group also includes air/freight and logistics companies and retailers and because of their similar size and business models.

The following companies comprised the Comparator Group for fiscal 2020 executive pay decisions:

 

 

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Abbott Laboratories

Danaher

Owens & Minor

AmerisourceBergen

FedEx

Stryker

Anthem

Henry Schein

Sysco

Baxter International

Johnson & Johnson

Target

Becton Dickinson

Kroger

Thermo Fisher Scientific

Boston Scientific

LabCorp

United Parcel Service

CIGNA

McKesson

UnitedHealth Group

CVS Health

Medtronic

Walgreens Boots Alliance

The Compensation Committee, working with its compensation consultant, periodically reviews the group’s composition to ensure that the companies remain relevant for comparison purposes. The Compensation Committee uses the following key guidelines when it reviews the Comparator Group’s composition with the assistance of Korn Ferry:

firm size (firms generally falling in the range of 0.2 to 2.0 times our revenue and 0.2 to 5.0 times our market capitalization);

industry;

business model; and

other secondary considerations, such as talent market, customer base and market presence.

Our revenue is in the top quintile of the Comparator Group and our market capitalization is in the bottom quintile.

Our Compensation Committee compares total direct compensation (base salary plus annual and long-term incentive) against the median of the Comparator Group as a reference point in setting target compensation levels. In addition to competitive market data, the Compensation Committee also considers internal pay equity and an executive’s experience, scope of responsibility, individual performance, potential, and unique or hard-to-replace skills, as well as retention considerations.

Risk Assessment of Compensation Programs

Management has assessed our compensation programs and concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on Cardinal Health. This risk assessment included reviewing the design and operation of our compensation programs, identifying and evaluating situations or compensation elements that could raise more significant risks and evaluating other controls and processes designed to identify and manage risk. The Compensation Committee along with Korn Ferry reviewed the risk assessment and concurred with management’s conclusion.

CFO Offer Letters

Jason Hollar joined us as in April 2020 and became Chief Financial Officer on May 26, 2020. Mr. Hollar’s offer letter set his initial base salary and annual and long-term incentive targets. To address compensation forfeited at his former employer, the offer letter provided for Mr. Hollar to receive initial long-term incentive grants of $1.0 million in PSUs and $1.0 million in RSUs and a $1.55 million cash sign-on bonus. The offer letter also provided for a $200,000 lump sum payment for relocation. Under the terms of the offer letter, Mr. Hollar must repay 100% of the sign-on bonus and the relocation payment if he voluntarily leaves the company during the first year following his start date and 50% of it if he leaves during the second year following his start date.

David Evans served as our interim Chief Financial Officer from September 1, 2019 until May 25, 2020. Mr. Evans’ offer letter provided him with monthly cash compensation during his time of employment with a minimum duration of five months. In his interim role, he did not participate in our annual or long-term incentive award programs or our Severance Plan.

We discuss the terms of Messrs. Hollar’s and Evans’ offer letters in more detail under “CFO Offer Letters” on page 41.

Stock Ownership Guidelines

We have stock ownership guidelines to align the interests of executive officers and directors with the interests of our shareholders. The guidelines specify a dollar value (expressed as a multiple of salary or cash retainer) of shares that executive officers and directors must accumulate and hold while serving in these positions.

 

Multiple of Base

Salary/Annual

Cash Retainer

Chief Executive Officer

6x

Chief Financial Officer and Segment Chief Executive Officers

4x

Other executive officers

3x

Non-management directors

5x

We count common shares, RSUs and phantom shares held through the DCP under the stock ownership guidelines. Executive officers and directors must retain 100% of the net after-tax shares received under any equity awards until they satisfy the required ownership levels.

Non-GAAP Financial Measures

Our primary annual incentive and PSU performance measures are based on the same non-GAAP financial measures that we use internally for planning and evaluating our performance and present externally in our earnings materials and SEC reports. We adjust these non-GAAP financial measures to exclude some items that are included in our GAAP measures, such as restructuring and employee severance costs, amortization and other acquisition-related costs, impairments and gain or loss on disposal of assets and net litigation recoveries or charges. We make these adjustments primarily because they are not part of our ongoing operations or included in our financial planning, or they relate to events that may have occurred in prior or multiple periods or their timing or amount is inherently unpredictable.

We excluded the following charges and gains, among others, from our non-GAAP financial measures during relevant periods:

 

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pre-tax charge of $5.63 billion ($5.14 billion after tax or $17.54 per share) during fiscal 2020 related to opioid litigation(1); our long-standing practice has been to exclude litigation charges like this from our non-GAAP financial measures;

pre-tax gain of $579 million ($493 million after tax or $1.68 per share) during fiscal 2020 related to completion of the divestiture of our remaining equity interest in naviHealth; and

transitional tax benefits of U.S. tax reform during fiscal 2018, 2019 and 2020, including a $936 million ($2.97 per share) benefit in fiscal 2018.

We explain the adjustments to our non-GAAP financial measures and provide a reconciliation to GAAP measures in Annex A.

When determining the payout level for the Fiscal 18-20 PSUs, we removed the positive impact of a benefit from a change in U.S. federal rate of $135 million ($0.43 per share) that was reflected in our fiscal 2018 non-GAAP financial measures.

In addition, the negative impact of COVID-19, which we estimate had a net negative impact on operating earnings of approximately $100 million, was reflected in our fiscal 2020 non-GAAP financial measures and, as noted earlier, we did not adjust either our annual incentive or PSU performance goals or results to remove this impact.

Potential Impact on Compensation from Executive Misconduct (“Clawbacks”)

Our 2011 LTIP and equity award agreements provide that we may require repayment of cash incentives and gains realized under equity awards and cancel outstanding equity awards in specified instances of executive misconduct, including misconduct causing a financial statement restatement or a material violation of law or of our Standards of Business Conduct that causes material financial harm to us.

We will disclose publicly the incentive compensation forfeitures or repayments from our executive officers if required by law or if we have already disclosed publicly the underlying event triggering the forfeiture or repayment and the disclosure would not violate any individual’s privacy rights, is not likely to result in or exacerbate any existing or threatened employee, shareholder or other litigation, arbitration, investigation or proceeding against us, and is not otherwise prohibited.

These clawback provisions support our compliance and risk management programs. We discuss the provisions in more detail under “Potential Impact on Compensation from Executive Misconduct (“Clawbacks”)” on page 45.

Hedging and Pledging Shares

Our Board has adopted a policy prohibiting all employees and directors from entering into short sales, publicly traded options, puts and calls, forward sale contracts and other swap, hedging or derivative transactions relating to our securities. The Board also has adopted a policy prohibiting our executive officers and directors from holding our securities in margin accounts or pledging our securities as collateral for a loan.

Equity Grant Practices

The Compensation Committee typically approves the annual equity grant in August of each year and sets August 15 as the grant date. The Compensation Committee expects the annual grant date to follow the release of earnings for the prior fiscal year in early August, without regard to whether we are aware of material nonpublic information.

Equity Dilution Practices

Our fiscal 2020 annual equity run rate was 0.92%. We calculate our equity run rate as the total number of shares subject to equity awards granted in the fiscal year divided by the weighted average number of our common shares outstanding during the fiscal year.

 

Human Resources and Compensation Committee Report

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on that review and discussion, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in Cardinal Health’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

Submitted by the Human Resources and Compensation Committee of the Board.

Carrie S. Cox, Chairman
Calvin Darden
Patricia A. Hemingway Hall
Nancy Killefer



(1)

As disclosed in our fiscal 2020 Form 10-K, pharmaceutical wholesale distributors, including us, have been named as defendants in over 3,000 lawsuits relating to the distribution of prescription opioid pain medications. These lawsuits also name pharmaceutical manufacturers, retail pharmacy chains and other entities as defendants. Approximately 2,800 of these lawsuits have been filed by counties, municipalities, cities and political subdivisions in various federal, state, and other courts. In October 2019, we agreed in principle to a global settlement framework with a leadership group of state attorneys general that is designed to resolve all pending and future opioid lawsuits and claims by states and political subdivisions and includes, among other things, a cash component, under which we would pay up to $5.56 billion over 18 years. In connection with this and with an October 2019 settlement with two Ohio counties, we recorded a total pre-tax charge of $5.63 billion ($5.14 billion after tax or $17.54 per share) during fiscal 2020. Because loss contingencies are inherently unpredictable and unfavorable developments or resolutions can occur, the assessment is highly subjective and requires judgments about future events. We regularly review these opioid litigation matters to determine whether our accrual is adequate. The amount of ultimate loss may differ materially from this accrual. We continue to strongly dispute the allegations made in these lawsuits and reaching an agreement in principle on a global settlement framework is not an admission of liability or wrongdoing.

 

 

Cardinal Health | 2020 Proxy Statement    39


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Executive Compensation Tables

The table below summarizes fiscal 2020 compensation for:

our Chief Executive Officer;

our current and former Chief Financial Officers; and

our three other most highly compensated executive officers as of June 30, 2020, the end of our fiscal 2020.

Summary Compensation Table

Name and

Principal Position

Year

Salary

($)

Bonus

($)

 

Stock

Awards

($)

(1) 

Option

Awards

($)

 

Non-Equity

Incentive Plan

Compensation

($)

 

All Other

Compensation

($)

 

Total

($)

Michael C. Kaufmann(2)

Chief Executive Officer

2020

1,286,612

0

 

10,239,990

 

0

 

2,547,492

 

143,033

 

14,217,127

2019

1,193,288

0

 

12,110,701

 

0

 

2,126,439

 

140,576

 

15,571,004

2018

955,699

0

 

4,900,007

 

948,690

 

1,518,780

 

100,404

 

8,423,580

Jason M. Hollar(3)

Chief Financial Officer

2020

124,317

1,550,000

(3)

2,067,619

(3)

0

 

149,180

 

213,137

(3)

4,104,253

Victor L. Crawford

Chief Executive Officer — Pharmaceutical Segment

2020

721,653

0

 

2,815,992

 

0

 

909,283

 

14,250

 

4,461,178

2019

443,014

2,500,000

 

3,095,770

 

0

 

502,378

 

184,660

 

6,725,822

Stephen M. Mason(4)

Chief Executive Officer — Medical Segment

2020

511,749

0

 

2,304,024

 

0

 

586,348

 

21,350

 

3,423,471

Jessica L. Mayer

Chief Legal and Compliance Officer

2020

547,268

0

 

1,792,014

 

0

 

559,061

 

15,859

 

2,914,202

2019

429,856

0

 

2,152,539

 

0

 

364,933

 

19,707

 

2,967,035

David C. Evans(5)

Former interim Chief Financial Officer

2020

2,178,361

0

 

0

 

0

 

0

 

26,850

 

2,205,211

Jorge M. Gomez(6)

Former Chief Financial Officer

2020

65,574

0

 

0

 

0

 

0

 

2,951

 

68,525

2019

593,288

0

 

2,530,734

 

0

 

0

 

26,757

 

3,150,779

2018

478,149

0

 

1,294,742

 

163,519

 

387,356

 

37,527

 

2,361,293

(1)

The amounts reported represent the aggregate accounting value of PSUs (at target) and RSUs granted during each fiscal year. The amounts reported in each fiscal year do not represent amounts paid to or realized by the named executives. See the Grants of Plan-Based Awards for Fiscal 2020 table on page 42 and the accompanying footnotes for information on the accounting value of each award granted in fiscal 2020. The accounting values of the PSUs granted during fiscal 2020 at target are: Mr. Kaufmann — $6,239,994; Mr. Hollar — $1,067,620; Mr. Crawford — $1,716,012; Mr. Mason — $1,404,006; and Ms. Mayer — $1,092,000. The accounting values of the PSUs granted during fiscal 2020 assuming that the highest level of performance conditions will be achieved are: Mr. Kaufmann — $14,975,994; Mr. Hollar — $2,562,308; Mr. Crawford — $4,118,412; Mr. Mason — $3,369,606; and Ms. Mayer — $2,620,800.

(2)

Mr. Kaufmann also served as interim Chief Financial Officer from August 9, 2019 until August 31, 2019.

(3)

Mr. Hollar joined us on April 27, 2020 and became Chief Financial Officer on May 26, 2020. To address compensation forfeited at his former employer, Mr. Hollar received a sign-on bonus of $1,550,000, PSUs with an accounting value of $1,067,620 and RSUs with an accounting value of $1,000,000. He also received a $200,000 lump sum payment for relocation. He must repay the full sign-on bonus and relocation payment if he voluntarily leaves the company during the first year following his start date and 50% of it if he leaves during the second year following his start date.

(4)

Mr. Mason was not previously a named executive.

(5)

Mr. Evans served as interim Chief Financial Officer from September 1, 2019 until May 25, 2020. In his interim role, he received monthly cash compensation of $220,000 during his employment and did not participate in our annual or long-term incentive plans or our Severance Plan.

(6)

Mr. Gomez served as Chief Financial Officer from the beginning of the fiscal year through August 8, 2019, when he left the company.

 

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All Other Compensation

The amounts shown for “All Other Compensation” for fiscal 2020 include: company contributions to the named executive’s account under our 401(k) plan; company contributions to the named executive’s account under our DCP; and perquisites, in the following amounts:

Name

Company 401(k) Savings

Plan Contributions

($)

Company Deferred

Compensation Plan

Contributions

($)

Perquisites

($)

(1) 

 

Total

($)

Kaufmann

14,250

5,000

123,783

(2)

 

143,033

Hollar

12,825

0

200,312

(3)

 

213,137

Crawford

14,250

0

 

 

14,250

Mason

16,850

4,500

 

 

21,350

Mayer

15,859

0

 

 

15,859

Evans

26,850

0

 

 

26,850

Gomez

0

2,951

 

 

2,951

(1)

The amounts shown include the value of perquisites and other personal benefits if the aggregate value exceeded $10,000. We quantify each reported perquisite or personal benefit if it exceeds $25,000.

(2)

The amount reported for Mr. Kaufmann includes the incremental cost to us of his personal use of corporate aircraft ($121,718), home security system monitoring fees and personal liability insurance coverage. We calculate the incremental cost of personal use of corporate aircraft based on the average cost of fuel, average trip-related maintenance costs, crew travel expenses, per flight landing fees, hangar and parking costs and smaller variable costs. Since we use our aircraft primarily for business travel, we do not include fixed costs, such as depreciation, pilot salaries and certain maintenance costs. For fiscal 2020, Mr. Kaufmann received up to $150,000 in personal use of corporate aircraft. He does not receive tax reimbursement for any imputed income associated with personal travel. He has an aircraft time-sharing agreement, under which he may reimburse us for incremental costs when he uses the aircraft for additional personal travel consistent with Federal Aviation Administration regulations. Reimbursed travel does not count against his personal use allowance.

(3)

The amount reported for Mr. Hollar includes the incremental cost to us of a lump sum payment for relocation ($200,000) and home security system monitoring fees. He must repay 100% of this relocation assistance if he voluntarily leaves the company during the first year following his start date and 50% of it if he leaves during the second year following his start date.

CFO Offer Letters

Mr. Hollar became our Chief Financial Officer on May 26, 2020. We entered into an offer letter with him in March 2020 providing for:

an annual base salary of $700,000;

a target annual bonus of 100% of his annual base salary prorated from his start date to the end of the fiscal year; and

target long-term incentive awards of $2,500,000 for the fiscal 2021 annual grant.

To address compensation forfeited at his former employer, the offer letter provided that Mr. Hollar receive initial long-term incentive grants of $1.0 million in PSUs and $1.0 million in RSUs and a $1.55 million cash sign-on bonus. The offer letter also provided for a $200,000 lump sum payment for relocation. Under the terms of the offer letter, Mr. Hollar must repay the full sign-on bonus and the relocation payment if he voluntarily leaves the company during the first year following his start date and 50% of it if he leaves during the second year following his start date.

Mr. Evans served as our interim Chief Financial Officer from September 1, 2019 until May 25, 2020. Mr. Evans’ offer letter provided him with monthly cash compensation of $220,000 during his time of employment with a minimum duration of five months. He did not participate in our annual or long-term incentive award programs or our Severance Plan.

 

 

Cardinal Health | 2020 Proxy Statement    41


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Grants of Plan-Based Awards for Fiscal 2020

The table below supplements our Summary Compensation Table by providing additional information about our plan-based compensation for fiscal 2020.

Name/

Award Type

Grant

Date

 

Approval

Date

Estimated Potential Payouts Under

Non-Equity Incentive Plan Awards(1)

Estimated Potential Payouts Under

Equity Incentive Plan Awards(2)

All Other

Stock

Awards:

Number

of Shares

of Stock

or Units

(#)(3)

Grant

Date Fair

Value of

Stock

Awards

($)(4)

 

Threshold

($)

Target

($)

Maximum

($)

Threshold

(#)

Target

(#)

Maximum

(#)

Kaufmann

 

 

 

 

 

 

 

 

 

 

 

 

Annual Incentive

 

 

 

 

771,967

1,929,918

3,859,836

 

 

 

 

 

PSUs

8/15/2019

 

8/6/2019

 

 

 

 

71,429

142,857

342,857

 

6,239,994

RSUs

8/15/2019

 

8/6/2019

 

 

 

 

 

 

 

95,238

3,999,996

Hollar

 

 

 

 

 

 

 

 

 

 

 

 

Annual Incentive(5)

 

 

 

 

49,727

124,317

248,634

 

 

 

 

 

PSUs(6)

5/15/2020

 

3/12/2020

 

 

 

 

10,215

20,429

49,030

 

1,067,620

RSUs(6)

5/15/2020

 

3/12/2020

 

 

 

 

 

 

 

20,429

1,000,000

Crawford

 

 

 

 

 

 

 

 

 

 

 

 

Annual Incentive

 

 

 

 

288,661

721,653

1,443,306

 

 

 

 

 

PSUs

8/15/2019

 

8/6/2019

 

 

 

 

19,643

39,286

94,286

 

1,716,012

RSUs

8/15/2019

 

8/6/2019

 

 

 

 

 

 

 

26,190

1,099,980

Mason

 

 

 

 

 

 

 

 

 

 

 

 

Annual Incentive

 

 

 

 

196,656

491,639

983,279

 

 

 

 

 

PSUs

8/15/2019

 

8/6/2019

 

 

 

 

16,072

32,143

77,143

 

1,404,006

RSUs

8/15/2019

 

8/6/2019

 

 

 

 

 

 

 

21,429

900,018

Mayer

 

 

 

 

 

 

 

 

 

 

 

 

Annual Incentive

 

 

 

 

186,354

465,885

931,769

 

 

 

 

 

PSUs

8/15/2019

 

8/6/2019

 

 

 

 

12,500

25,000

60,000

 

1,092,000

RSUs

8/15/2019

 

8/6/2019

 

 

 

 

 

 

 

16,667

700,014

Evans

 

 

 

 

Gomez

 

 

 

 

(1)

This information relates to annual cash incentive award opportunities with respect to fiscal 2020 performance. Amounts actually earned under the annual cash incentive awards are reported in the Summary Compensation Table under the “Non-Equity Incentive Plan Compensation” column.

(2)

“Equity Incentive Plan Awards” are PSUs granted during the fiscal year under our 2011 LTIP. PSUs are eligible to vest based on achieving goals for cumulative adjusted non-GAAP EPS over three annual periods, three-year cost savings and a culture measure over the performance period, with a modifier based on TSR relative to the S&P 500 Health Care Index. A cashflow threshold must be achieved to receive any payout under the PSUs.

(3)

“All Other Stock Awards” are RSUs granted during the fiscal year under our 2011 LTIP that vest ratably over three years and accrue cash dividend equivalents that are payable when, and only to the extent that, the RSUs vest.

(4)

We valued PSUs using a Monte Carlo simulation valuation model, which applies a risk-free interest rate and expected volatility assumptions. The risk-free interest rate is assumed to equal the yield on U.S. Treasury bonds on the grant date with remaining terms consistent with the remaining performance measurement period. Expected volatility is based on the average of historical volatility over a look-back period commensurate with the remaining performance measurement period ending on the grant date and the implied volatility from exchange-traded options as of the grant date. The assumed per-share value was $43.68 for the PSUs granted on August 15, 2019, using a risk-free rate of 1.44% and expected volatility of 31.59%, and $52.26 for the PSUs granted on May 15, 2020, using a risk-free rate of 0.16% and expected volatility of 38.75%. These accounting values differ from the compensation values of PSU awards discussed in Compensation Discussion and Analysis and under “CFO Offer Letters” above.

(5)

Mr. Hollar’s award opportunity was prorated from his start date to the end of the fiscal year.

(6)

Mr. Hollar received these PSUs and RSUs when he joined us as Chief Financial Officer. His sign-on bonus and initial long-term incentive awards were intended to address compensation forfeited at his former employer.

 

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2011 Long-Term Incentive Plan

Our key executive employees, including our named executives, are eligible to receive annual cash incentive awards under our 2011 LTIP. As discussed in the Compensation Discussion and Analysis, for 70% of the fiscal 2020 annual incentive award payout, the Compensation Committee set a performance goal of adjusted non-GAAP operating earnings and established a matrix of potential funding percentages based upon achievement of varying levels of earnings, subject to adjustment based on tangible capital performance. The Compensation Committee set additional strategic goals for cost savings and Our Path Forward — Culture for the remaining 30%. Based on performance against these goals, an aggregate funding percentage determines the named executives’ annual incentive awards before applying an individual performance factor. The performance goals established by the Compensation Committee may vary from year to year.

The 2011 LTIP provides that the timing of payment of any cash award will occur on or before the 15th day of the third month after the end of the applicable performance period, unless the Compensation Committee exercises its discretion to specify another payment date or to defer payments. The 2011 LTIP also grants the Compensation Committee broad discretion to assess and determine the amounts payable, including how performance was achieved and whether there were inappropriate risks undertaken or conduct by individual participants. In practice, the Compensation Committee has deferred decisions on payment of awards under the annual cash incentive program until fiscal year-end audited financial statements are substantially complete to support its assessment of the company’s and named executives’ performance. The Compensation Committee retains discretion to adjust upward or downward the amount payable under a cash award, including, if appropriate, to support the company’s clawback policy. It also may make annual incentive awards to named executives even if we do not achieve the threshold performance goals.

Under our 2011 LTIP, we also may grant stock options, stock appreciation rights, stock awards and other stock-based awards to employees. During fiscal 2020, we granted PSUs and RSUs under the 2011 LTIP to our named executives, as shown in the Grants of Plan-Based Awards for Fiscal 2020 table on page 42 and discussed in Compensation Discussion and Analysis. The 2011 LTIP provides for “double-trigger” accelerated vesting in connection with a change of control, under which the vesting of awards will accelerate only if there is a qualifying termination within two years after the change of control or if the surviving entity does not provide qualifying replacement awards.

We have one-year minimum vesting provisions in our 2011 LTIP. Under these provisions, stock options and stock awards are subject to a one-year vesting condition, except upon a change of control or the death or disability of the grantee or for up to an aggregate not to exceed 5% of the total number of shares provided for in the 2011 LTIP.

PSUs granted under the 2011 LTIP settle after a performance period by the issuance of shares, which may be a fraction or multiple of the target number of PSUs subject to an award. Issuance of the shares is subject to both continued employment and the achievement of performance goals established by the Compensation Committee (which vary from award to award).

As discussed in the Compensation Discussion and Analysis, the Compensation Committee established performance goals for the Fiscal 20-22 PSUs based on cumulative adjusted non-GAAP EPS over three annual periods for 70% of the payout and cost savings and Our Path Forward — Culture strategic goals for the remaining 30%. A modifier based on TSR relative to the S&P 500 Health Care Index is then applied to determine the final payout. A cashflow threshold must be achieved to receive any payout.

We describe how we calculate the measures referred to in this section under “Performance Measure Calculations” below.

Performance Measure Calculations

Our primary annual incentive and PSU performance measures are based on the same non-GAAP financial measures that we use internally for planning and evaluating our performance and present externally in our earnings materials and SEC reports. We adjust these non-GAAP financial measures to exclude some items that are included in our GAAP measures, such as restructuring and employee severance costs, amortization and other acquisition-related costs, impairments and gain or loss on disposal of assets and net litigation recoveries or charges. We make these adjustments primarily because they are not part of our ongoing operations or included in our financial planning, or they relate to events that may have occurred in prior or multiple periods or their timing or amount is inherently unpredictable. We explain the adjustments to our non-GAAP financial measures and provide a reconciliation to GAAP measures in Annex A. See also “Non-GAAP Financial Measures” in Compensation Discussion and Analysis beginning on page 38 for a discussion of certain adjustments we made during relevant periods.

 

 

Cardinal Health | 2020 Proxy Statement    43


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Award

Performance Measure

Calculation

Annual Cash Incentive

Adjusted non-GAAP operating earnings

Non-GAAP operating earnings(1) adjusted to exclude annual cash incentive expense to the extent below or above target performance, incremental contributions to the 401(k) Savings Plan and DCP, PSU expense to the extent below or above budgeted performance, and income or expense related to the performance of our DCP assets that is included within distribution, selling, general and administrative expenses in our consolidated statement of earnings.(2)

Tangible capital modifier

12-month average of total assets, less total liabilities (other than interest-bearing long-term obligations), goodwill and other intangibles, net, and cash and equivalents.(2)

Cost savings

Annual cost savings achieved through cost optimization initiatives.

Our Path Forward — Culture

Rating between 1 and 5 based on achievement of goals set for performance management (percentage of employees entering goals and performance conversation acknowledgments into our internal tracking system by set deadline), change management (percentage of designated leaders completing change management playbooks) and diversity and inclusion (percentage of employees completing required unconscious bias training by set deadline).

Fiscal 18-20 PSUs

Three-year average adjusted non-GAAP EPS payout level

Sum of the annual payout levels based on achievement of adjusted non-GAAP EPS(3) goals in each of the three fiscal years during the performance period, divided by three. A payout level is earned for each fiscal year based on achieving set levels of adjusted non-GAAP EPS for the first fiscal year and growth over the prior fiscal year’s adjusted non-GAAP EPS for the second and third fiscal years.

TSR modifier

Cumulative TSR for the performance period assuming dividend reinvestment and determined based on the average daily closing stock prices for the 20 trading days ending immediately prior to the first day and last day of the three-year performance period, respectively. TSR percentile rank references companies in the S&P 500 Health Care Index on both the first and the last day of the performance period and any company that filed for bankruptcy during the performance period is assigned a -100% TSR.

Fiscal 20-22 PSUs

Adjusted non-GAAP EPS payout level

Level of achievement of cumulative adjusted non-GAAP EPS goal, which is the sum of the annual adjusted non-GAAP EPS goals established at the beginning of each of the three fiscal years during the performance period.

Cost savings

Attaining a specified annual run rate in the aggregate in cost savings projects implemented before the completion of the performance period.

Our Path Forward — Culture

Maintaining or increasing a leadership score in the final employee engagement pulse survey completed during the performance period from the baseline score from the company’s most recent bi-annual full engagement survey.

TSR modifier

Same calculation as used for Fiscal 18-20 PSUs.

 

Cash flow threshold

Operating cash flow(4) exceeding net earnings(5) for the first two years of the performance period.

(1)

Non-GAAP operating earnings is operating earnings/(loss) excluding LIFO charges/(credits), surgical gown recall costs, state opioid assessment related to prior fiscal years, restructuring and employee severance, amortization and other acquisition-related costs, impairments and (gain)/loss on disposal of assets, and litigation (recoveries)/charges, net.

(2)

Historically, we have excluded the results of acquired or divested businesses from the adjusted non-GAAP operating earnings and tangible capital calculations if they were not included in our Board-approved annual budget. The Compensation Committee also may make other adjustments for purposes of determining whether we achieved our performance goals.

(3)

Adjusted non-GAAP EPS is adjusted non-GAAP net earnings attributable to Cardinal Health, Inc. divided by diluted weighted average shares outstanding. Adjusted non-GAAP net earnings attributable to Cardinal Health, Inc. is net earnings/(loss) attributable to Cardinal Health, Inc. excluding LIFO charges/(credits), surgical gown recall costs, state opioid assessment related to prior fiscal years, restructuring and employee severance, amortization and other acquisition-related costs, impairments and (gain)/loss on disposal of assets, litigation (recoveries)/charges, net, loss on early extinguishment of debt, gain on sale of equity interest in naviHealth, any federal, state or other assessments or taxes on the distribution or sale of opioids and any unbudgeted taxes, tariffs, assessments or other items, whether benefit or expense, that individually exceed $20 million, tax benefits and expenses associated with each of the foregoing items, transitional tax benefit, net, and such other adjustments that the Compensation Committee may approve to reflect a change by us to the definition of that measure as presented to investors, exceptional acquisitions or divestitures, changes in accounting principles or other exceptional items that are not reflective of our operating performance.

(4)

Operating cash flow is net cash provided by operating activities as shown on the consolidated statements of cash flows for the relevant fiscal year, with adjustments that the Compensation Committee may approve to address the comparability of items within operating cash flow and net earnings.

(5)

Net earnings is GAAP net earnings/(loss) attributable to Cardinal Health, Inc.

 

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Potential Impact on Compensation from Executive Misconduct (“Clawbacks”)

The 2011 LTIP authorizes us to seek repayment of incentive awards if a named executive engages in misconduct that causes or contributes to the need to restate previously filed financial statements and the payment was based on financial results that we subsequently restate. In addition, cash awards granted under the 2011 LTIP may be subject to repayment if a named executive engaged in a material violation of law or of our Standards of Business Conduct and this conduct caused material financial harm to us.

Under our 2011 LTIP and stock option, PSU and RSU agreements, unpaid annual cash incentive awards, unexercised stock options, unvested PSUs and RSUs and certain vested PSUs and RSUs are forfeited if a named executive breaches our Standards of Business Conduct, discloses confidential information, commits fraud, gross negligence or willful misconduct, solicits business or our employees, disparages us or engages in competitive actions while employed by Cardinal Health or during a set time period after termination of employment. We also may require a named executive to repay the gross gain realized from any stock option exercises or the value of annual cash incentive awards paid or PSUs and RSUs settled within a set time period prior to such conduct.

Outstanding Equity Awards at Fiscal Year-End for Fiscal 2020

The table below shows the number of shares underlying exercisable and unexercisable stock options and unvested PSUs and RSUs held by our named executives on June 30, 2020.

Name

Option Awards

Stock Awards

Option

Grant

Date

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

 

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

(1) 

Option

Exercise

Price

($/Sh)

Option

Expiration

Date

Number of

Shares or

Units of

Stock That

Have Not

Vested

(#)

 

Market Value

of Shares or

Units of Stock

That Have Not

Vested

($)

(2) 

Equity Incentive Plan

Awards: Number of

Unearned Shares,

Units or Other Rights

That Have Not

Vested

(#)

(3) 

Equity Incentive Plan

Awards: Market or

Payout Value of

Unearned Shares,

Units or Other Rights

That Have Not Vested

($)

(2) 

Kaufmann

8/15/2011

76,909

 

0

 

41.60

8/15/2021

 

 

 

 

 

 

 

 

 

8/15/2012

96,291

 

0

 

39.81

8/15/2022

 

 

 

 

 

 

 

 

 

8/15/2013

68,316

 

0

 

51.49

8/15/2023

 

 

 

 

 

 

 

 

 

8/15/2014

53,698

 

0

 

71.43

8/15/2024

 

 

 

 

 

 

 

 

 

8/15/2015

47,067

 

0

 

84.27

8/15/2025

 

 

 

 

 

 

 

 

&nb