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. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
UNION PACIFIC CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number,
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Notes:
Reg. (S) 240.14a-101
SEC 1913 (3-99)
[LOGO] Union Pacific
Union Pacific
Corporation
Notice of Annual Meeting
of Shareholders
1416 Dodge Street
Room 1230
Omaha, NE 68179
To the Shareholders: March 7, 2002
You are hereby notified that the 2002 Annual Meeting of Shareholders (the
Annual Meeting) of Union Pacific Corporation, a Utah corporation (the Company),
will be held at the Little America Hotel, 500 S. Main Street, Salt Lake City,
Utah, at 8:30 A.M., Mountain Daylight Time, on Friday, April 19, 2002 for the
following purposes:
(1) to elect 11 directors, each to serve for a term of one year;
(2) to ratify the appointment of Deloitte & Touche LLP as the independent
certified public accountants of the Company;
(3) to consider and vote upon a shareholder proposal if presented at the
Annual Meeting; and
to transact such other business as may properly come before the Annual Meeting
or any adjournment or postponement thereof; all in accordance with the
accompanying Proxy Statement.
Only shareholders of record at the close of business on February 8, 2002 are
entitled to notice of and to vote at the Annual Meeting.
Your vote is important and, accordingly, you are urged to vote promptly by
telephone, by Internet or by signing, dating and returning the enclosed proxy
card in the enclosed envelope whether or not you expect to attend the Annual
Meeting in person.
Carl W. von Bernuth
Senior Vice President,
General Counsel and Secretary
UNION PACIFIC CORPORATION
PROXY STATEMENT
For Annual Meeting of Shareholders to Be Held on April 19, 2002
March 7, 2002
This Proxy Statement is being furnished to shareholders of Union Pacific
Corporation, a Utah corporation (the Company), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at the
Annual Meeting of Shareholders (Annual Meeting) to be held on April 19, 2002
for the purpose of considering and voting upon the matters set forth in the
accompanying notice of the Annual Meeting. The first date on which this Proxy
Statement and the accompanying form of proxy are being sent to shareholders of
the Company is March 7, 2002.
The close of business on February 8, 2002 has been fixed as the record date
for the determination of shareholders entitled to notice of and to vote at the
Annual Meeting. As of the record date there were 251,225,365 shares of Common
Stock (Common Stock) of the Company outstanding, exclusive of shares held in
the treasury of the Company which may not be voted.
Holders of shares of Common Stock are entitled to one vote for each share
registered in their respective names. On all matters considered at the Annual
Meeting, abstentions and broker non-votes will be treated as neither a vote
"for" nor "against" the matter. Abstentions and broker non-votes will be
counted in determining if a quorum is present.
If your Common Stock is held by a broker, bank or other nominee on your
behalf, you will receive directions from such holder as to how your shares may
be voted in accordance with your instructions. If you hold your Common Stock in
your own name, you may instruct the proxies as to how to vote your Common Stock
by using the toll free telephone number or accessing the Internet address
listed on the proxy card or by signing, dating and mailing the proxy card in
the postage paid envelope provided. When you use the telephone or Internet
voting system, the system verifies that you are a shareholder through the use
of a Control Number assigned to you. The telephone and Internet voting
procedures allow you to instruct the proxies as to how to vote your shares
1
and confirm that your instructions have been properly recorded. Your Control
Number and specific directions for using the telephone and Internet voting
system are on the proxy card.
All shares represented by properly submitted paper, internet or telephone
proxies will, unless such proxies have previously been revoked, be voted at the
Annual Meeting in accordance with the directions provided by the shareholder.
If no direction is indicated, the shares will be voted as recommended by the
Board of Directors. A shareholder submitting a proxy has the power to revoke it
at any time before it is voted by providing written notice of such revocation
to the Secretary of the Company, by submitting new telephone or Internet
instructions or a validly executed later-dated proxy, or by attending the
meeting and voting in person. The mere presence of a shareholder at the Annual
Meeting, however, will not constitute a revocation of a previously submitted
proxy.
The Board of Directors has adopted a confidential voting policy (see
"Corporate Governance Guidelines and Policies" beginning on page 15) under
which record shareholder proxies or voting instructions are received by the
Company's stock transfer agent, Computershare Investor Services, and the vote
is certified by independent inspectors of election who are officers of
Computershare. Proxies and ballots as well as telephone and Internet voting
instructions will be kept confidential from the management of the Company,
except as necessary to meet legal requirements, in certain cases where
shareholders write comments on their proxy cards or in a contested proxy
solicitation. Reports concerning the vote may be made available to the Company,
provided such reports do not reveal how any particular shareholder voted.
The Company will bear the costs of its solicitation of proxies. In addition
to the use of the mail, proxies may be solicited by personal interview,
telephone and facsimile transmission by the directors, officers and employees
of the Company. Arrangements also will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of Common Stock held of record by such
persons, and the Company may reimburse such custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in
connection with such solicitation. In addition, Morrow & Co., Inc., 909 Third
Avenue, New York, N.Y. 10022 has been engaged to solicit proxies for the
Company. The anticipated fees of Morrow & Co., Inc. are $14,500 plus certain
expenses.
2
Shareholder Proposals
Shareholders desiring to submit a proposal under Securities and Exchange
Commission (SEC) Rule 14a-8 for consideration for inclusion in the Company's
proxy statement and form of proxy relating to the 2003 Annual Meeting must
submit in writing such proposal and any statement in support thereof to the
Secretary of the Company by November 7, 2002 and comply with the other
requirements of Rule 14a-8.
Under SEC Rule 14a-4, the Company may exercise discretionary voting
authority under proxies it solicits to vote on a proposal made by a shareholder
at the 2003 Annual Meeting that the shareholder does not seek to include in the
Company's proxy statement pursuant to SEC Rule 14a-8 unless the Company is
notified about the proposal on or before January 22, 2003, and the shareholder
satisfies the other requirements of SEC Rule 14a-4(c). However, except with
respect to shareholder proposals included in the Company's proxy statement
pursuant to SEC Rule 14a-8, the Company's By-Laws provide that to be considered
at the 2003 Annual Meeting any shareholder proposal must be submitted in
writing to the Secretary at the executive offices of the Company during the
period beginning on December 21, 2002 and ending on January 20, 2003 and must
contain the information specified by and otherwise comply with the Company's
By-Laws. Any shareholder wishing to receive a copy of the Company's By-Laws
should direct a written request to the Secretary at the Company's executive
offices.
(1) ELECTION OF 11 DIRECTORS
Unless authority to do so is withheld, the Company's proxies intend to vote
the enclosed proxy at the Annual Meeting for the election of the 11 nominees
for director named herein, all of whom are currently directors of the Company.
It is intended that the nominees for director be elected to hold office for a
term of one year or until their successors are elected. If any nominee(s) for
director for any reason should become unavailable for election, it is intended
that discretionary authority will be exercised by the persons named in the
enclosed proxy in respect of the election of such other person(s) as the Board
of Directors shall nominate. The Board of Directors is not aware of any
circumstances likely to cause any nominee for director to become unavailable
for election. The 11 nominees for director receiving the highest number of
votes cast at the Annual Meeting will be elected. Mr. Anschutz has been
nominated as a director pursuant
3
to the Anschutz Shareholders Agreement, as described under "Certain
Relationships and Related Transactions--Agreement with Anschutz Shareholders".
The Board of Directors recommends that shareholders vote FOR each of the
nominees.
As of February 8, 2002 all directors and executive officers as a group
beneficially owned 10,482,911 shares of Common Stock, representing 4.12% of the
outstanding Common Stock, of which 3,452,590 are shares with respect to which
such persons have the right to acquire beneficial ownership within 60 days. No
nominee for director other than Mr. Anschutz beneficially owns more than 0.72%
of the outstanding Common Stock. Mr. Anschutz beneficially owns and has the
right to vote 2.24% of the outstanding Common Stock, and, pursuant to the
Anschutz Shareholders Agreement, such shares are required to be voted in
accordance with the recommendations of the Board of Directors in the election
of directors.
E. Virgil Conway will retire from the Board at the 2002 Annual Meeting, and
his service as a director of the Company will end at that time. The Board
acknowledges, with utmost gratitude and appreciation, the significant
contributions and special leadership that Virg Conway has so generously given
to the Company over the past 24 years, including service as Chair of the
Compensation and Benefits Committee. Virg's experience and business acumen will
be missed, and the Board wishes him every success and happiness in his future
endeavors.
Richard D. Simmons will also retire from the Board at the 2002 Annual
Meeting and his service of more than 20 years as a director of the Company will
end at that time. The Board wishes to express its deepest appreciation to Dick
Simmons for the integrity, conscientiousness, strength of character and special
insight that have been a constant hallmark of his tenure as a director. Dick's
broad business background and the willingness to express his convictions have
served the Company well, and the Board wishes him the very best in the years to
come.
The following tables set forth certain information on the nominees for
director, including Common Stock beneficially owned as of February 8, 2002 and
current holdings of Company Common Stock Units, representing deferred
compensation and other amounts credited to their accounts. These ownership
figures indicate the alignment of the named individuals' financial interests
with the interests of the Company's shareholders since each Common Stock Unit
is equivalent in value to a share of Company Common
4
Stock and the value of their total holdings fluctuates with the price of the
Company's Common Stock.
Equity Ownership
-------------------
Name and Principal Occupation UPC UPC
or Employment Units(a) Shares(b)
----------------------------- -------- ----------
Philip F. Anschutz 8,942 5,616,193 (c)
Chairman of the Board, Chief Executive Officer and a director,
The Anschutz Corporation and Anschutz Company (the
corporate parent of The Anschutz Corporation), with
holdings in energy, transportation, communications,
professional sports, agriculture, entertainment and real
estate, Denver, CO. Director, Forest Oil Corporation, Qwest
Communications International Inc. Director and Vice
Chairman of the Company since 1996. Age 62.
Richard K. Davidson 302,337 1,787,543(d)
Chairman, President and Chief Executive Officer of the
Company and Chairman and Chief Executive Officer of
Union Pacific Railroad Company, a subsidiary of the
Company. Director of the Company since 1994. Age 60.
Thomas J. Donohue 2,578 5,464
President and Chief Executive Officer, U.S. Chamber of
Commerce, business federation, Washington, DC. Director,
Qwest Communications International Inc., Sunrise Assisted
Living, Inc., XM Satellite Radio. Director of the Company
since 1998. Age 63.
Archie W. Dunham 850 4,619
Chairman, President and Chief Executive Officer, Conoco Inc.,
integrated energy company, Houston, TX. Director,
Louisiana-Pacific Corporation, Phelps Dodge Corporation.
Director of the Company since 2000. Age 63.
Spencer F. Eccles 3,506 13,385(e)
Chairman, Wells Fargo Intermountain Banking Region,
diversified financial services company, Salt Lake City, UT.
Director, Wells Fargo & Company, U.S. Chamber of
Commerce. Director of the Company since 1976. Age 67.
5
Equity Ownership
-----------------
Name and Principal Occupation UPC UPC
or Employment Units(a) Shares(b)
----------------------------- -------- ---------
Ivor J. Evans 104,414 406,336(f)
President and Chief Operating Officer of Union Pacific Railroad
Company, a subsidiary of the Company. Director of the
Company since 1999. Age 59.
Elbridge T. Gerry, Jr. 6,311 10,394(g)
Partner, Brown Brothers Harriman & Co., bankers, New York,
NY. Director of the Company since 1986. Age 68.
Judith Richards Hope 3,357 7,985
Partner, Paul, Hastings, Janofsky & Walker, law firm, Los
Angeles, CA, New York, NY and Washington, DC. Director,
The Budd Company, General Mills, Inc., Russell Reynolds
Associates. Director of the Company since 1988. Age 61.
Richard J. Mahoney 3,675 18,798
Retired Chairman and Chief Executive Officer, Monsanto
Company, agricultural products, St. Louis, MO. Distinguished
Executive in Residence, Weidenbaum Center, Washington
University, St. Louis, MO. Advisory Director, Metropolitan Life
Insurance Company. Director of the Company since 1991.
Age 68.
Steven R. Rogel 667 4,600
Chairman, President and Chief Executive Officer, Weyerhaeuser
Company, integrated forest products company, Federal Way,
WA. Director, Kroger Company. Director of the Company
since 2000. Age 59.
Ernesto Zedillo Ponce de Leon 523 1,000
Former President of Mexico. Director, Alcoa Inc., The Procter &
Gamble Company. Director of the Company since 2001.
Age 50.
--------
(a) See "Compensation of Directors" for a discussion of the Stock Unit Grant
and Deferred Compensation Plan for non-employee directors. Additionally,
see "Report
6
on Executive Compensation" for an explanation of certain restrictions on
retention stock units for employee directors.
(b) The UPC Shares amount for all directors except Messrs. Davidson, Evans and
Zedillo includes 3,600 shares of Common Stock subject to presently
exercisable options granted under the 2000 Directors Stock Plan.
(c) Includes 2,470,970 shares of Common Stock that are the subject of a forward
sale contract under which The Anschutz Corporation retained voting power as
of February 8, 2002. Does not include 6,884,446 shares of Common Stock with
respect to which The Anschutz Corporation has entered into previous forward
sales contracts and as to which The Anschutz Corporation does not have the
power to dispose of or vote the shares. The Anschutz Corporation does,
however, have the power in certain circumstances to reacquire voting power
with respect to all of such shares subject to these previous forward sales
contracts. Mr. Anschutz is the owner of 100% of the stock of Anschutz
Company, which owns 100% of the stock of The Anschutz Corporation.
(d) The UPC Unit amount includes 33,445 deferred stock units and 268,892
retention stock units, including 50,000 retention units representing the
maximum award that could be earned under the 2001 Long Term Plan. The UPC
Shares amount includes 1,312,876 shares of Common Stock subject to
presently exercisable stock options granted under the 1993 Stock Option and
Retention Stock Plan. In addition, Mrs. Richard K. Davidson is the
beneficial owner of 15,910 shares of Common Stock. Mr. Davidson disclaims
beneficial interest in such shares.
(e) Mr. Eccles also has shared voting or investment power with respect to
30,000 shares held in family trusts or owned by members of Mr. Eccles'
family.
(f) The UPC Unit amount includes retention stock units only, including 27,500
retention units representing the maximum award that could be earned under
the 2001 Long Term Plan. The UPC Shares amount includes 265,000 shares of
Common Stock subject to presently exercisable stock options granted under
the 1993 Stock Option and Retention Stock Plan.
(g) Mr. Gerry also has shared voting or investment power with respect to
327,352 shares held in family trusts.
--------
All nominees for director are also members of the Board of Directors of
Union Pacific Railroad Company (the Railroad), an indirect wholly-owned
subsidiary of the Company, and it is intended that all nominees for director
will also be elected to serve on the Board of the Railroad until their
successors are elected.
7
Except for the nominees listed below, each of the nominees named in the
preceding table has held the indicated office or position in his or her
principal occupation for at least five years. Each of the nominees listed below
held the earliest indicated office or position as of at least five years ago.
Mr. Thomas J. Donohue was President and Chief Executive Officer of the
American Trucking Associations, the national organization of the trucking
industry, through September 1997 and since such date has been President and
Chief Executive Officer of the U.S. Chamber of Commerce. Mr. Archie W. Dunham
added the title of Chairman of Conoco Inc. in August 1999. Mr. Spencer F.
Eccles was Chairman and Chief Executive Officer of First Security Corporation,
bank holding company, through October 26, 2000 and has been Chairman of Wells
Fargo Intermountain Banking Region since such date. Mr. Ivor J. Evans was
Senior Vice President of Emerson Electric Company, industrial motors and
equipment, appliance components, electronics, power tools and valves, through
September 14, 1998. Mrs. Judith Richards Hope was Senior Partner of Paul,
Hastings, Janofsky & Walker through April 1997, Senior Counsel to such firm to
February 1, 2000 and on April 28, 2000, was appointed a non-equity Partner,
effective February 1, 2000. Mr. Steven R. Rogel was President and Chief
Executive Officer of Willamette Industries, Inc., integrated forest products
company, to December 1, 1997, President and Chief Executive Officer of
Weyerhaeuser Company to April 20, 1999 and Chairman, President and Chief
Executive Officer of Weyerhaeuser since such date. Dr. Ernesto Zedillo served
as President of Mexico through November 2000.
Compensation of Directors
Directors who are not employees of the Company receive an annual retainer of
$60,000 plus expenses. Directors are required to invest $30,000 of the retainer
in the Stock Unit Account referred to below. In addition, Chairs of Board
Committees receive annual retainers of $6,000 each. Directors who are employees
of the Company receive no retainers. Under the Stock Unit Grant and Deferred
Compensation Plan for directors of the Company, a director may elect by
December 31 of any year to defer all or a portion of any compensation for
service as a director in the ensuing year or years, excluding reimbursement for
expenses. Payment of such deferred compensation begins, for amounts in the
Stock Unit Account, in January of the year following termination of service as
a director (or of a year selected by the director but no earlier than such
termination) and, for amounts in the Fixed Rate or Vanguard Accounts referred
to below, at the
8
election of the director either at any of such times or in the January
following retirement from the director's primary occupation. Deferred
compensation may be paid, at the election of the director, in either a lump sum
or in up to 15 equal annual installments and may be invested, at the option of
the director, in either a Fixed Rate Account or a Stock Unit Account
administered by the Company or in various accounts administered by The Vanguard
Group. The accounts are unfunded, unsecured obligations of the Company. The
Company Fixed Rate Account earns interest compounded annually at a rate
determined by the Treasurer of the Company in January of each year and the
Vanguard Accounts experience earnings and value fluctuations as determined by
Vanguard's investment experiences. The Stock Unit Account fluctuates in value
based on changes in the price of the Common Stock, and equivalents to cash
dividends paid on the Common Stock are deemed to be reinvested in the Stock
Unit Account. Cash retainers voluntarily deferred by four directors during 2001
totaled $132,000.
Directors who are not employees of the Company receive $10 million of excess
liability insurance coverage. Directors elected to the Board prior to April 21,
2000 are eligible to participate in a Company sponsored contributory health
care plan. Medical and dental benefits are paid only after payment of benefits
under any other group plan in which a director participates. Medical coverage
for directors elected after April 21, 2000 was terminated upon adoption of the
2000 Directors Stock Plan by the shareholders on April 21, 2000.
Each non-employee director who was elected to the Board prior to January
1996 participates in a pension plan which provides an annual pension benefit of
$36,000 upon retirement from the Board of Directors with at least five years of
service and attainment of age 65. Directors Conway, Eccles, Gerry, Hope,
Mahoney and Simmons currently are eligible to receive pension benefits upon
retirement. The Company has purchased annuities to satisfy part of the pension
obligation to certain directors in amounts calculated to provide the same
expected amount net of federal taxes as the pension obligation replaced by the
annuity. In January 1996, the Board terminated the pension plan for directors
newly elected subsequent to that date. Non-employee directors elected between
January 1996 and April 2000 will receive a credit, at their fifth anniversary
date, to the Stock Unit Account referred to above based on a value of $85,000.
This value was determined based upon certain age, retirement and mortality
assumptions and a discount rate of 9.8%, and would not be available until after
termination of Board service. The units to be credited will be determined by
dividing $85,000 by the Company's Common Stock
9
price on the fifth anniversary date. Directors first elected to the Board prior
to 1996 will continue to be eligible for the $36,000 annual pension. However,
such directors were permitted to exchange $6,000 of such pension for a credit
to the Stock Unit Account calculated to provide an approximately equivalent
expected present value to the $6,000 annual pension. Such credits to the Stock
Unit Accounts are reflected in the preceding biographical information on
directors.
As part of its overall program to promote charitable giving, the Company
established the Union Pacific Corporation Board of Directors' Charitable
Contribution Plan pursuant to which the Company purchased $1 million of life
insurance on each director elected prior to April 21, 2000, subject to vesting
requirements based on length of service as a director (i.e., over a five-year
period in 20% increments). Death benefits will be paid to the Company and the
Company will donate up to $500,000 of the proceeds to no more than two
charitable organizations recommended by the director and the remainder of the
proceeds to Union Pacific Foundation in the name of the director. Directors
derive no financial benefit from this program since all charitable contribution
tax deductions accrue solely to the Company. Moreover, benefits paid to the
Company's Foundation may reduce the amount of funding that the Company provides
to the Foundation. This Plan was terminated for directors elected after April
21, 2000 upon adoption of the 2000 Directors Stock Plan by the shareholders on
April 21, 2000.
Under the 1992 Restricted Stock Plan for Non-Employee Directors of Union
Pacific Corporation, as amended, (the 1992 Plan) each individual who was a
non-employee director on May 28, 1992, or who was elected as a non-employee
director up to April 21, 2000 has received an award of 1,785 restricted shares
of Common Stock. The restricted shares of Common Stock vest on the date a
director ceases to be a director of the Company by reason of death, disability
or retirement, as defined in the 1992 Plan. During the restricted period, the
director has the right to vote and receive dividends on such shares, but may
not transfer or encumber such shares, and will forfeit such shares unless he or
she remains a director during the restricted period. The 1992 Plan was
terminated for directors elected after April 21, 2000 upon adoption of the 2000
Directors Stock Plan by the shareholders on April 21, 2000.
Under the 2000 Directors Stock Plan (the 2000 Plan) adopted by the
shareholders on April 21, 2000, each non-employee director of the Company is
granted annually on the date of the first Board of Directors meeting of a
calendar year an option to purchase
10
shares of Common Stock of the Company. The exercise price for each option
granted is the fair market value of the Common Stock on the date of grant, and
the number of shares granted is determined by dividing 60,000 by 1/3 of the
fair market value on such date. Each of the non-employee directors of the
Company on January 31, 2002 was granted an option to purchase 2,950 shares at
an option price of $61.14 per share. The 2000 Plan also provides that each
non-employee director, upon election to the Board of Directors, shall receive a
grant of 1,000 restricted shares of Common Stock or restricted share units,
such units to represent the right to receive Common Stock in the future. The
restricted shares or share units vest on the date a director ceases to be a
director of the Company by reason of death, disability or retirement, as
defined in the 2000 Plan. During the restricted period, the director has the
right to vote and receive dividends on such shares or units, but may not
transfer or encumber such shares or units, and will forfeit such shares or
units unless he or she remains a director during the restricted period.
Governance of the Company
In accordance with applicable Utah law and the By-Laws of the Company, the
business and affairs of the Company are managed under the direction of its
Board of Directors. The Board has established certain standing Committees and
adopted certain guidelines and policies to assist it in fulfilling its
responsibilities as described below.
During 2001, the Board of Directors met six times. None of the directors
attended fewer than 75% of the meetings of the Board and Committees on which he
or she served. The average attendance of all directors at Board and Committee
meetings was 97%.
Committees of the Board
Executive Committee
The current members of the Executive Committee are Philip F. Anschutz
(Chair), E. Virgil Conway, Richard K. Davidson, Elbridge T. Gerry, Jr., Judith
Richards Hope and Richard J. Mahoney.
The Committee has all the powers of the Board, when the Board is not in
session, to direct and manage all of the business and affairs of the Company in
all cases in which specific directions have not been given by the Board. The
Committee did not meet in 2001.
11
Audit Committee
The Audit Committee operates under a charter revised and readopted by the
Board of Directors on May 31, 2001, which is appended hereto as Appendix A. The
Board has reviewed the business relationships certain directors serving on the
Audit Committee have with the Company and determined in its business judgment
that such relationships do not interfere with any Committee member's exercise
of independent judgment. The Board also reviewed the experience and training of
the members of the Committee and determined that each member is financially
literate, and that at least one member has accounting or related financial
management expertise.
The Committee meets regularly with financial management, the internal
auditors and the independent certified public accountants of the Company to
provide oversight to the financial reporting process and internal control
structure. The Committee reviews fees and non-audit engagements of the
independent certified public accountants. Both the independent certified public
accountants and the internal auditors have unrestricted access to the Committee
and meet regularly with the Committee, without Company management
representatives present, to discuss the results of their examinations and their
opinions on the adequacy of internal controls and quality of financial
reporting. The Committee reviews the adequacy of disclosures to be included in
the annual report to shareholders regarding the Company's contractual
obligations and commercial commitments, including off balance sheet financing
arrangements. The Committee also reviews the scope of audits as well as the
annual audit plan. In addition, the Committee reviews the administration of the
Company's policies concerning business conduct, derivatives, environmental
management and use of corporate aircraft as well as officers' travel and
business expenses. Each year the Committee recommends to the Board of Directors
selection of the firm of independent certified public accountants to audit the
accounts and records of the Company and its consolidated subsidiaries. The
Committee met four times in 2001.
The Committee wishes to report that it has reviewed and discussed with
management the Company's consolidated financial statements for the year ended
December 31, 2001. The Committee has discussed with the Company's independent
certified public accountants, Deloitte & Touche LLP, the matters required to be
discussed by Statement on Auditing Standards No. 61. The Committee has also
received and reviewed the written disclosures and the letter from Deloitte &
Touche LLP required by
12
Independence Standards Board Standard No. 1 and has discussed with Deloitte &
Touche LLP their independence. Based on the foregoing reviews and discussions,
the Committee recommended to the Board of Directors that the financial
statements referred to above be included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, for filing with the SEC.
The Committee has also considered whether the provision of the non-audit
services listed below is compatible with maintaining the independence of
Deloitte & Touche LLP.
Audit Fees. The audit fees billed to the Company by Deloitte & Touche LLP
for the year ended December 31, 2001, totaled $2,022,258.
Financial Information Systems Design and Implementation Fees. Deloitte &
Touche LLP did not provide such services to the Company for the year ended
December 31, 2001.
All Other Fees. All other fees billed to the Company by Deloitte & Touche
LLP for the year ended December 31, 2001, for services other than those
disclosed above totaled $1,068,744, including audit related services of
$598,945 and tax and other fees of $469,799. Audit related services include
consultation on accounting standards and transactions, actuarial work, consents
and financial comfort letters and audits of employee benefit plans.
The Audit Committee
Judith Richards Hope (Chair)
Thomas J. Donohue
Spencer F. Eccles
Steven R. Rogel
Richard D. Simmons
Finance Committee
The current members of the Finance Committee are Elbridge T. Gerry, Jr.
(Chair), Philip F. Anschutz, Spencer F. Eccles, Judith Richards Hope, Richard
J. Mahoney and Ernesto Zedillo.
13
The Committee is responsible for oversight of the Company's financial
position. The Committee meets regularly with management to review the Company's
capital structure, short and long-term financing plans and programs, dividend
policies and actions, investor relations activities, insurance programs, tax
management and other related matters. The Committee also reviews the investment
management of assets held by the Company's pension, thrift and other funded
employee benefit programs, including the appointment of investment managers and
trustees. The Committee met four times in 2001.
Compensation and Benefits Committee
The current members of the Compensation and Benefits Committee are E. Virgil
Conway (Chair), Thomas J. Donohue, Archie W. Dunham, Steven R. Rogel and
Richard D. Simmons.
The Committee reviews and makes recommendations to the Board of Directors
with respect to employee salaries exceeding an amount set by the By-Laws which
cannot be exceeded without Board or Executive Committee approval. The Committee
administers the Company's executive incentive plans and determines for senior
executives the amounts of, and the individuals to whom, awards shall be made
thereunder. The Committee is responsible for reviewing and recommending to the
Board all the material amendments to the Company's pension, thrift and employee
stock ownership plans. The Committee also periodically reviews the Company's
vacation, life insurance and medical and dental benefit plans and the matching
gifts program to ensure that these benefit plans remain competitive. See pages
23 through 27 for the Committee's report on 2001 compensation and stock
ownership programs. The Committee met five times in 2001.
Corporate Governance and Nominating Committee
The current members of the Corporate Governance and Nominating Committee are
Richard J. Mahoney (Chair), Philip F. Anschutz, Archie W. Dunham and Elbridge
T. Gerry, Jr.
The Committee assists management concerning matters of succession, reviews
and recommends changes in compensation for the Board of Directors, reviews the
qualifications of candidates for the position of director and recommends
candidates to the Board of Directors as nominees for director for election at
Annual Meetings or to fill such Board vacancies as may occur during the year.
14
The Committee is also responsible for the oversight of the Corporate
Governance Guidelines and Policies discussed below to ensure board independence
and promote excellence in governance. The Committee reviews current trends and
practices in corporate governance and recommends to the Board adoption of
programs pertinent to the Company. In this connection the Committee
periodically reviews the composition and activities of the Board, including but
not limited to committee memberships and Board evaluation, compensation, size,
retirement policy and stock ownership. The Committee also assesses and refines
on an ongoing basis the process of annual CEO evaluation and coordinates with
the Compensation and Benefits Committee on implementation.
The Committee will consider director candidates suggested by directors and
shareholders of the Company. Shareholders desiring to suggest candidates for
consideration at the 2003 Annual Meeting should advise the Secretary of the
Company in writing during the period beginning on December 21, 2002 and ending
on January 20, 2003 and include sufficient biographical material to permit an
appropriate evaluation of the candidate and comply with all other procedures
contained in the Company's By-Laws. In considering candidates for director, the
Board of Directors seeks individuals who have demonstrated outstanding
management or professional ability and who have attained a position of
leadership in their chosen careers. The Committee met two times in 2001.
Corporate Governance Guidelines and Policies
The Board has adopted and refined from time to time the guidelines and
policies set forth below, and they are published herein to apprise shareholders
of the Board's point of view with respect to selected corporate governance
issues considered to be of significance to shareholders. The Board, with
ongoing input from the Corporate Governance and Nominating Committee, will
continue to assess the appropriateness of these guidelines and policies and
implement such changes and adopt such additions as may be necessary or
desirable to ensure the effective and efficient governance of the Company.
Confidential Voting. The Corporate Governance and Nominating Committee at
its September 2001 meeting developed a confidential voting policy in response
to the support by approximately 60% of the shares voted at last year's Annual
Meeting of a
15
shareholder proposal to adopt such a policy. The new policy, which was
presented to and approved by the full Board, reads as follows:
"It is the Company's policy that all stockholder proxies, consents,
ballots and voting materials that identify the votes of specific
stockholders be kept confidential from the Company except as may be
required by law or to assist in the pursuit or defense of claims or
judicial actions, and except in the event of a contested proxy
solicitation. Access to proxies, consents, ballots and other stockholder
voting records will be limited to inspectors of election who are not
employees of the Company.
This policy shall not operate to prohibit stockholders from
disclosing the nature of their votes to the Company or the Board of
Directors if any stockholder so chooses. Comments written on proxies,
consents, ballots, or other voting materials, together with the name and
address of the commenting stockholder, will be made available to the
Company without reference to the vote of the stockholder, except where
such vote is included in the comment or disclosure is necessary to
understand the comment.
Information concerning which stockholders have not voted and status
reports concerning the vote, including breakdowns of vote totals by
different types of stockholders, may be made available to the Company,
provided that the Company is unable to determine from such reports how
any particular stockholder voted."
Board Meeting Agendas. The Board permits the origination by directors and
the management of the Company of action items relating to the business and
affairs of the Company for the Board agenda and the scheduling of reports on
aspects of parent or subsidiary operations.
Distribution of Board Materials. The Board recommends that information and
material for Board consideration be distributed to directors at least five days
in advance of the meeting, with additional time to be provided when the
complexity of an issue demands.
Board Presentations. The Board encourages broad management participation in
Board presentations and the involvement of those managers who are directly
responsible for the recommendations or other matters before the Board.
16
Board Size. The Board has adopted a guideline to achieve a target Board size
of ten to 12 members with no more than two inside directors.
Board Independence. The Board has established the criteria that at least a
majority of the Board members be independent directors and that the membership
of the Audit Committee and the Compensation and Benefits Committee be made up
exclusively of independent directors. The Board adopted as its standard of
independence the standard used by the New York Stock Exchange in determining
independence of directors on the Audit Committees of listed companies.
CEO Service on Outside Boards. The Board recommends that when the CEO is
invited to serve on outside boards of directors, the CEO should present the
issue to the Board for review and approval.
New Director Orientation. The Board requests that new directors, upon
election to the Board, be provided with a comprehensive set of materials on the
operations, finances and business plan of the Company, visit at least two major
facilities during the first year of service and meet informally with as many
members of senior management as practical.
Board Committee Meeting Agendas. The Board recommends the inclusion of items
on Board Committee agendas as developed by the departments of the Company that
administer the area of responsibility charged to each committee, and permits
committee members to suggest topics for inclusion or request additional
information with respect to any program previously reviewed by the committee.
Board Member Compensation. The Board considers it desirable that
non-employee Board members generally be paid an annual retainer valued between
the median and seventy-fifth percentile of compensation at comparable
companies, with such retainer to be reviewed periodically by the Corporate
Governance and Nominating Committee.
Board Member Pensions. The Board eliminated the non-employee director
pension plan for directors who begin service after January 1996. Directors
elected between January 1996 and April 2000 received or will receive a one-time
credit to their deferred Union Pacific Stock Unit Accounts after five years of
service.
17
Board Member Equity Ownership Target. The Board recommends that Board
members should own equity in the Company equal to at least three times the
value of the annual retainer, with the goal to be reached within five years of
joining the Board.
Evaluation of the Chairman and CEO. The Corporate Governance and Nominating
Committee, in conjunction with the Compensation and Benefits Committee,
developed a written procedure, including a Mission Statement for the Chairman
and CEO, which was presented to and confirmed by the full Board, for evaluating
the Chairman and CEO. This process involves the distribution of a questionnaire
and business objectives summary to all non-employee directors prior to the
January Board meeting. The questionnaire provides each director the opportunity
to assess individual elements of performance in major categories such as
leadership, strategic planning, financial performance, operations, human
resources, external relations and communications, and Board relations. The
questionnaire and business objectives summary become the basis for a
discussion, led by the Chair of the Corporate Governance and Nominating
Committee, during an Executive Session of the Board, without the CEO or any
member of management present, of Company and CEO performance for the year. The
Compensation and Benefits Committee then meets following the Executive Session
to determine bonuses, if any, to be awarded to the CEO and management of the
Company. The Chairs of the Corporate Governance and Nominating Committee, the
Executive Committee and the Finance Committee then review with the CEO his
performance and any recommended areas for improvement.
Change in Principal Occupation. The Board adopted a policy with respect to
the retirement of directors from their principal occupation requiring that a
director submit his or her resignation from the Board of Directors to the
Corporate Governance and Nominating Committee for its consideration and
recommendation as to acceptance upon a director's retirement, resignation or
other significant change in professional duties and responsibilities.
Evaluation of Board Performance. The Corporate Governance and Nominating
Committee, on recommendation of the management of the Company, developed a
process whereby the Board of Directors will periodically review Board
performance, including the conduct of Board meetings, to provide the Committee
and the Chairman with input as to how the effectiveness of the Board might be
improved. The process involves the distribution of a self-assessment
questionnaire to all Board members in
18
advance of a Board meeting at which performance is to be reviewed. This
questionnaire invites written comments by the individual director on all
aspects of the Board process and then becomes the basis for a discussion during
an Executive Session of the Board, led by the Chairman and CEO, of Board
performance and any recommended improvements.
The most recent such evaluation of Board efficiency and effectiveness was
conducted by the Board in November 2001. During this session the directors
commented on various aspects of the Board process and suggested several topics
for future management presentations.
Evaluation of Director Performance. To assist in discharging its
responsibilities to review the qualifications of candidates for the position of
director and to recommend candidates to the Board of Directors as nominees to
stand for election at Annual Meetings or to fill such Board vacancies as may
occur during the year, the Corporate Governance and Nominating Committee has
developed a Board Profile outlining qualities deemed helpful to the Company and
has adopted a selection procedure that reviews a number of areas in evaluating
the performance and contributions of current directors in connection with their
renomination to stand for election to the Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors to file initial reports of
ownership and reports of changes in ownership of the Company's Common Stock
with the SEC and the New York Stock Exchange. Executive officers and directors
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file. As a matter of practice, the Company's
administrative staff assists the Company's executive officers and directors in
preparing initial reports of ownership and reports of changes in ownership and
filing such reports with the SEC and the New York Stock Exchange. Based solely
on a review of the copies of such forms furnished to the Company and written
representations from the Company's executive officers and directors, the
Company believes that none of its executive officers and directors failed to
comply with Section 16(a) reporting requirements in 2001.
19
Security Ownership of Certain Beneficial Owners
The following table sets forth information known to the Company regarding
the beneficial ownership of the Common Stock of the Company by owners of more
than five percent of the outstanding shares of such Common Stock.
Number of Shares of
Names and Addresses Common Stock Percent of
of Beneficial Owners Beneficially Owned Class
-------------------- ------------------- ----------
FMR Corp. 21,800,898(a) 8.60%
82 Devonshire Street
Boston, MA 02109
AXA Financial, Inc. 19,740,705(b) 7.86%
1290 Avenue of the Americas
New York, NY 10104
--------
(a) Based on information contained in Schedule 13G filed by FMR Corp. (FMR)
with the SEC with respect to shares of Common Stock owned on December 31,
2001. According to the filing, on that date FMR, through its subsidiaries
Fidelity Management & Research Company, Fidelity Management Trust Company
and Strategic Advisers, Inc., and Fidelity International Limited, an
affiliate of FMR, had in the aggregate sole and shared power to vote
1,829,857 and 0, respectively, of such shares, and sole and shared power to
dispose of 21,800,898 and 0, respectively, of such shares. Of the aforesaid
21,800,898 shares, the number of shares of Common Stock owned by FMR's
wholly-owned investment companies included 2,354,534 shares resulting from
the assumed conversion of 3,244,500 shares of 6 1/4% Convertible Preferred
Securities issued by Union Pacific Capital Trust, a statutory business
trust sponsored and wholly-owned by the Company. The percentage set forth
above assumes conversion of the Convertible Preferred Securities
beneficially owned by FMR but no conversion by any other holder of the
Convertible Preferred Securities.
(b) Based on information contained in Schedule 13G filed by AXA Financial, Inc.
(AXA) with the SEC with respect to shares of Common Stock owned on December
31, 2001. According to the filing, on that date AXA through its
subsidiaries Alliance Capital Management L.P. and The Equitable Life
Assurance Society of the United States, and its affiliates AXA Conseil Vie
Assurance Mutuelle, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie
Mutuelle, AXA Courtage Assurance Mutuelle,
20
AXA Rosenburg Investment Management LLC and AXA, had in the aggregate sole
and shared power to vote 8,328,529 and 5,290,053, respectively, of such
shares, and sole and shared power to dispose of 19,588,915 and 151,790,
respectively, of such shares.
--------
Certain Relationships and Related Transactions
Agreement with Anschutz Shareholders
In connection with the Company's acquisition of Southern Pacific Rail
Corporation (SP), the Company entered into a shareholders agreement (Anschutz
Shareholders Agreement) with Mr. Philip F. Anschutz, The Anschutz Corporation
(TAC) and Anschutz Foundation, a not-for-profit corporation (collectively,
Anschutz Shareholders), which provides, among other things, that the Company
will elect Mr. Anschutz or another individual selected by TAC (such individual
being referred to as the Anschutz Designee), as a director of the Company.
Under the Anschutz Shareholders Agreement, the Anschutz Designee, at the
request of the Company, is required to resign from the Board upon certain
occurrences, including if the Anschutz Shareholders and their affiliates cease
to beneficially own at least 4% (or under certain circumstances 3%) of the
total outstanding securities of the Company entitled to vote in the election of
directors.
The Anschutz Shareholders Agreement provides for certain "standstill"
limitations on the Anschutz Shareholders until September 2003 (subject to
earlier termination under certain circumstances and certain exceptions) with
respect to, among other things: the acquisition of voting securities; the
solicitation of proxies with respect to voting securities; seeking or proposing
any merger, business combination or similar extraordinary transaction involving
the Company; and the disposition of voting securities. In addition, during such
"standstill" period, the Anschutz Shareholders agreed to vote all shares of the
Company's Common Stock which they are entitled to vote in accordance with the
recommendation of the Company's Board of Directors in the election of
directors. On all other matters, the Anschutz Shareholders may vote their
shares in their discretion. Pursuant to the Anschutz Shareholders Agreement,
the Company also has agreed to (i) appoint Mr. Anschutz as Vice Chairman of the
Board of Directors, (ii) appoint the Anschutz Designee as a member of the
Executive and Finance Committees of the Board, and (iii) subject to certain
conditions which have not been satisfied, appoint the Anschutz Designee as a
member of the Compensation and Benefits Committee of the Board.
21
Transactions Involving Anschutz Shareholders and Affiliates
Effective November 3, 1997, ANSCO Investment Company (ANSCO), a subsidiary
of TAC, entered into an agreement with the Railroad, replacing agreements
between ANSCO and SP's railroad subsidiaries assumed by the Railroad, governing
the operation of ANSCO owned railcars, including cars used in the operation of
what is referred to as the Winter Park Ski Train, over the Railroad's rail
system. Effective May 1, 1997, ANSCO leased from the Railroad 3,639 feet of
yard track at the Burnham Yard in Denver, Colorado, for storage of ANSCO Winter
Park Ski Train railcars at an annual rental based on the Railroad's usual and
customary charge for rental of track. In addition, effective September 1, 1997,
ANSCO leased a vacant coach shop building at Burnham Yard from the Railroad for
repair and maintenance of ANSCO Winter Park Ski Train railcars. The current
annual rentals under these lease agreements are approximately $23,700 and
$26,800, respectively, and are subject to annual adjustment. Compensation paid
or accrued to the Railroad during 2001 under all three agreements totaled
approximately $328,800.
Pacific Pipeline System LLC (Pacific Pipeline), a majority-owned indirect
subsidiary of Anschutz Company, owns a crude oil pipeline located on a portion
of the Railroad's right-of-way between Santa Clarita and Los Angeles/Long
Beach, California. The pipeline is covered by an easement agreement between the
Railroad, as successor in interest to Southern Pacific Transportation Company
(SPTC), and Pacific Pipeline, which provides for compensation to the Railroad
for the use of its right-of-way. Prior to entering into the easement agreement,
SPTC obtained an opinion from an unrelated real estate appraisal firm that the
rental calculation and other terms pertaining to the pipeline easement were
representative of market transactions and were no less favorable than could be
obtained in an arms-length transaction. The total amount paid to the Railroad
by Pacific Pipeline under this agreement in 2001 was approximately $3,997,000.
In December 2001, the Railroad invoiced Pacific Pipeline approximately
$1,007,000 for rentals under the easement agreement for the first three months
of calendar year 2002. This amount was paid by Pacific Pipeline in January
2002. Pursuant to the terms of the easement agreement, the rental for the
period beginning April 1, 2002 will be revised in accordance with a prescribed
valuation procedure to reflect the then current fair market rental.
Additionally, Pacific Pipeline holds various pipeline crossing and
encroachment permits granted by the Railroad. Pursuant to these instruments
Pacific Pipeline paid approximately $9,600 during 2001.
22
Other Business Relationships
Judith Richards Hope is a non-equity Partner in the firm of Paul, Hastings,
Janofsky & Walker, a law firm that rendered legal services to the Company
during 2001 and 2002.
Compensation Committee Interlocks and Insider Participation
The Compensation and Benefits Committee includes the following non-employee
directors: E. Virgil Conway, Thomas J. Donohue, Archie W. Dunham, Steven R.
Rogel and Richard D. Simmons.
The Railroad has a consulting agreement with Modjeski & Masters, Inc.,
providing for that firm to conduct fatigue assessment studies on certain
railroad bridges, and paid approximately $460,000 to such firm during 2001 for
these services. William B. Conway is a brother of E. Virgil Conway and
President and owner of a substantial interest in Modjeski & Masters, Inc.
Report on Executive Compensation
The Compensation and Benefits Committee is responsible for administering the
executive compensation and stock ownership programs for the Company.
The Committee administers a performance-based executive compensation program
consisting of annual and long-term compensation. The program is designed to
provide payment for performance of assigned accountabilities and achievement of
goals that contribute to corporate earnings, thereby enhancing shareholder
value.
Annual Compensation
Annual compensation consists of two components: base salary and at-risk
annual incentive pay. Depending on performance and the level of the executive,
generally 20% to 75% of total annual compensation will be at risk. The
Committee reviews each senior executive officer's salary, taking into
consideration the executive's performance, corporate and operating unit
performance, the executive's position and responsibility in the organization,
the executive's experience and expertise, salaries for similar positions at
comparable companies and internal pay equity. In making salary recommendations
or
23
decisions, the Committee exercises subjective judgment using no specific
weights for the above factors. Average base salaries for the Company's
executives generally do not exceed the median for comparable companies. When
the Company consistently attains its performance objectives, total cash
compensation for executives, including salary and bonus, could be equal to or
slightly above the seventy-fifth percentile for comparable companies.
Comparable companies include those in the line of business index in the
Performance Graph on page 36, as well as industrial companies of a similar size
in different lines of business with which the Company competes for first-rate
executive talent.
Annual incentive pay is awarded under the Executive Incentive Plan (EIP). In
accordance with the EIP, a reserve account for payment of incentive awards is
credited based on a shareholder-approved formula tied to return on equity (ROE)
and net income. The account is credited only in years where the results from
continuing operations produce a return on average annual shareholder's equity,
before accounting changes, of at least 10%, which permits 1.5% of net income to
be credited. The permissible credit is increased .075% of net income for each
..1% of ROE over 10%. The maximum credit is 3% of net income which requires a
ROE of 12%. Under the EIP, the maximum annual award that may be made to
executive officers whose compensation is subject to Section 162(m) of the Code
is .25% of covered income for the Chief Executive Officer and .15% of covered
income for other covered executive officers, which generally includes the four
most highly compensated officers other than the Chief Executive Officer.
"Covered income" is the greater of net income (excluding certain items) for the
year or such net income for the first 11 months of the year. For 2001, a total
of $19.4 million was awarded to executives under the EIP. Executives have an
alternative to forego all or a portion of their EIP award in exchange for
retention stock units equal to 150% of the incentive amount foregone pursuant
to the Executive Incentive Premium Exchange Program (PEP). The units are
generally subject to a three-year vesting period. Executive officers, including
the Chief Executive Officer, elected to forego $7.8 million of EIP cash
incentive awards and received 190,189 retention stock units.
Long-Term Compensation
The Committee believes that long-term compensation should comprise a
substantial portion of each executive officer's total compensation. The
Company's long-term compensation incentives currently include stock options,
retention stock and retention
24
stock units. The Company's 2001 Long Term Plan described below also includes a
potential cash award.
Stock-Based Awards. Stock-based awards are key elements in the Company's
long-term compensation program. The size of stock awards is based on the
executive's position, experience and performance, without giving particular
weight to any one factor. The number of options currently held by an executive
is not a factor in any award grant. Stock options are granted with an exercise
price equal to the fair market value of the Common Stock on the date of the
grant, and when vested are exercisable up to 10 years from the date of grant.
The Company maintains guidelines for executive stock ownership levels ranging
from one to seven times salary. Until the minimum ownership amount is achieved,
executives are expected to retain in Common Stock (or Common Stock units) 100%
of the profit upon exercise of options, net of taxes and cost of exercise.
Retention stock and retention stock units generally require three years of
continuous employment to vest, and, in some cases, achievement of certain
performance goals.
2001 Long Term Plan (LTP). In November 2000, the Committee established the
LTP to further align the interests of key employees with Company shareholders.
Participants were awarded retention shares or retention stock units and cash
awards subject to attainment of performance targets and continued employment
through January 31, 2004. The LTP performance criteria include three-year
(2001-2003) cumulative Earnings Per Share (EPS) and stock price targets.
Varying levels of awards may be earned based upon achievement of the
performance targets. Executives subject to restrictions under Section 162(m) of
the Code are required to defer receipt of any retention stock units awarded
under the LTP until termination of employment pursuant to the Company's
Deferral of Stock Award Gains Program.
Executive Stock Purchase Incentive Plan. This one-time program established
in 1999 allowed 64 executives, including the Chief Executive Officer, to
purchase from the Company 1,008,000 shares of Common Stock at a fair market
value of $46.3125 per share using a full-recourse, interest-bearing loan from
the Company. Currently, there are 62 participants who purchased 993,000 shares
under the program. The terms of the loan are described beginning on page 29.
25
Deductibility of Performance-Based Compensation
The Committee has, where it deems appropriate, taken steps to preserve the
deductibility of performance-based compensation to the CEO and executive
officers. The Committee may award non-deductible compensation when it believes
that such grants are in the best interest of the shareholders, balancing tax
efficiency with long-term strategic objectives.
CEO Compensation
Under Mr. Davidson's leadership in 2001, the Company overcame the effects of
the economic recession while implementing strategic initiatives and posting
record setting results. Significant progress was made in service improvement,
productivity and leveraging the strengths of the Railroad and Overnite
Transportation Company (Overnite) franchises to serve customers in new ways.
Critical 2001 financial measures, including revenue, operating income and
net income were the best marks in the history of the Company. The Railroad
reported an all-time high and industry record revenue of $10.8 billion.
Productivity improvements enabled the Railroad to keep expenses essentially
flat and earn over $2 billion in operating income, another best-ever
performance. The rail operating ratio ended the year at a post-UP/SP merger
best of 80.7%. These strong results were reflected in the 14% year-over-year
increase in Company market value, to $14.3 billion as of December 31, 2001.
During this same time period, the S&P 500 declined approximately 13%.
The Railroad also maintained its forward momentum during the year in the
areas of safety and customer service. The Federal Railroad Administration
reportable injury rate and crossing incidents decreased to all-time records for
the Railroad. Service performance and customer satisfaction also set new
records in 2001 as the Railroad continued to expand innovative rail service
offerings for its customers. The Railroad was chosen as one of thirteen
finalists for the prestigious Malcolm Baldrige National Quality Award and
received numerous awards during the year recognizing excellence in customer
service and employee relations.
Overnite posted 3% revenue gains to a best ever $1.14 billion despite the
significant downturn in the economy that drove most competitors' results below
last year. Overnite
26
reported operating income of $54 million, a 1% improvement from 2000, and
achieved an all-time best free cash flow. Overnite also matched its on-time
delivery performance record of 97.5% set last year.
Mr. Davidson is the Company's most highly compensated officer. His salary
was not adjusted during 2001. In January 2002, the Board of Directors reviewed
Mr. Davidson's performance and based on that review, as well as other factors
including competitive compensation information, the Committee awarded him
73,603 retention stock units and 200,000 options. Mr. Davidson would have been
eligible for an award under the EIP but elected in advance to forego the entire
amount of any such award for retention stock units under the PEP.
The Compensation and Benefits Committee
E. Virgil Conway, Chair
Thomas J. Donohue
Archie W. Dunham
Steven R. Rogel
Richard D. Simmons
27
Summary Compensation Table
The following table provides a summary of compensation during the last three
calendar years for the Company's Chief Executive Officer and the other four
most highly compensated executive officers.
Long-Term Compensation
----------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------
Other
Annual Restricted All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus(a) sation(b) Awards(c) SARs Payouts sation(d)
------------------------------------------------------------------------------------------------
Richard K. Davidson 2001 $1,100,004 $ 0 $107,945 $4,500,000 150,000 $0 $73,460
Chairman and CEO 2000 962,504 0 96,442 3,600,000 0 0 53,815
1999 887,504 0 81,410 3,000,000 0 0 51,725
Ivor J. Evans 2001 683,340 0 77,311 1,575,000 75,000 0 48,943
President and COO 2000 600,000 0 77,113 1,275,000 0 0 38,310
of the Railroad 1999 516,670 0 53,461 1,050,000 0 0 21,080
Carl W. von Bernuth 2001 421,900 700,000 196 0 35,000 0 22,312
Sr. Vice President, 2000 405,000 325,000 183 487,500 0 0 19,980
General Counsel 1999 391,800 615,000 180 0 0 0 19,475
and Secretary
James R. Young 2001 400,008 340,000 179 127,500 35,000 0 16,325
Exec. Vice Presi- 2000 323,336 175,000 119 262,500 0 0 12,363
dent-Finance(e) 1999 238,300 285,000 58 0 0 0 9,235
Dennis J. Duffy 2001 400,008 212,500 179 318,700 35,000 0 17,207
Executive Vice 2000 333,336 67,000 127 572,700 0 0 13,363
President-Opera- 1999 267,504 315,000 84 0 0 0 11,225
tion of Railroad
--------
(a) Bonus amounts foregone under the Company's PEP for 1999, 2000 and 2001 are
excluded from the bonus column, and the value of the retention stock units
awarded is included in the restricted stock awards column.
(b) Other Annual Compensation includes reimbursements for Medicare tax on
supplemental pension and thrift plans and certain personal benefits,
including the following: for Mr. Davidson in 2001, 2000 and 1999--use of
corporate transportation $61,462, $43,920 and $26,090, respectively, and
tax and financial counseling services $43,782, $49,880 and $52,780,
respectively; and for Mr. Evans in 2001, 2000 and 1999--use of corporate
transportation $56,012, $58,009 and $37,624, and
28
tax and financial counseling services $18,922, $16,740 and $13,720. Other
Annual Compensation below disclosure thresholds has been omitted.
(c) Pursuant to the PEP, for 2001 Messrs. Davidson, Evans, Young and Duffy
elected to forego all or a portion of their respective annual incentive
awards in exchange for grants of retention stock units equal to 150% of the
amount foregone, with retention stock units valued at the fair market value
of Common Stock on January 31, 2002, the day the award was made. The
amounts shown in the restricted stock awards column for 2001 for Messrs.
Davidson, Evans, Young and Duffy include 59,250, 25,761, 2,086 and 5,214
retention stock units, respectively, so awarded. Such retention stock units
are generally subject to a three-year vesting period. During the vesting
period, the holder is entitled to receive a payment in cash equal to the
amount of dividends that would have been paid on an equivalent number of
shares of outstanding Common Stock.
(d) All Other Compensation for 2001 consists of Company-matched thrift plan
contributions (Mr. Davidson $33,000, Mr. Evans $20,500, Mr. von Bernuth
$12,657, Mr. Young $12,000 and Mr. Duffy $12,000), and life insurance
premiums in 2001 (Mr. Davidson $40,460, Mr. Evans $28,443, Mr. von Bernuth
$9,655, Mr. Young $4,325 and Mr. Duffy $5,207).
(e) Mr. Young was elected Senior Vice President-Finance of the Company and
Treasurer of the Railroad in June 1998, Controller of the Company and
Senior Vice President-Finance of the Railroad in March 1999, and Executive
Vice President-Finance of the Company and Chief Financial Officer of the
Railroad effective December 1, 1999.
--------
Indebtedness of Management
In September 1999, the Board of Directors approved the Executive Stock
Purchase Incentive Plan (ESPIP) whereby certain of the Company's executive
officers purchased Common Stock at fair market value with the proceeds of
full-recourse, unsecured, interest bearing loans from the Company. The loans
have a seventy-six month term, commencing October 1, 1999, and accrue interest
at 6.02% (the applicable federal rate as determined pursuant to Section 1274(d)
of the Code on the purchase date for loans of such maturity), compounded
annually. Dividends paid on the purchased shares are assigned to the Company to
offset the loan balance until certain performance criteria are met, following
which the dividends are paid to the individual. The proceeds of deferred cash
incentives awarded upon the satisfaction of certain retention or performance
criteria during the performance period must also be applied to pay the loans.
Following such
29
payment, the balance of the loans at the end of the performance period will
generally be payable in three equal installments (plus interest) on the first
three anniversaries after the end of the performance period. The payment of the
loan will be accelerated if the executive officer's service is terminated while
the loan is outstanding. If the executive officer's service is terminated
during the performance period for any reason, no deferred cash incentives will
be awarded. The loan may also be prepaid at any time at the executive officer's
option. The performance period ends January 31, 2003.
The first performance criterion was satisfied in March 2001, and accordingly
thereafter dividends on the purchased shares are paid directly to the
participant. In addition, the participant will receive a deferred cash
incentive equal to the amount of accrued interest at the end of the performance
period assuming other required conditions of the plan are met.
The following table describes the indebtedness of the Company's executive
officers under the ESPIP:
Aggregate Amount of
Greatest Amount of Indebtedness as of
Name Indebtedness in 2001 December 31, 2001
---- -------------------- -------------------
R. K. Davidson $10,358,886.88 $10,358,886.88
I. J. Evans 5,179,443.43 5,179,443.43
L. H. Suggs 3,884,582.59 3,884,582.59
D. J. Duffy 2,071,777.40 2,071,777.40
R. B. King 2,071,777.40 2,071,777.40
J. J. Koraleski 2,071,777.40 2,071,777.40
C. W. von Bernuth 2,071,777.40 2,071,777.40
J. R. Young 2,071,777.40 2,071,777.40
L. M. Bryan, Jr. 1,035,888.67 1,035,888.67
C. R. Eisele 1,035,888.67 1,035,888.67
R. M. Knight, Jr. 517,944.32 517,944.32
M. E. McAuliffe 414,335.50 414,335.50
B. R. Gutschewski 258,972.19 258,972.19
M. S. Jones 258,972.19 258,972.19
R. J. Putz 258,972.19 258,972.19
B. W. Schaefer 258,972.19 258,972.19
30
Security Ownership of Management
The following table sets forth information concerning the beneficial
ownership of the Company's Common Stock as of February 8, 2002 by the Company's
Chief Executive Officer and the other four most highly compensated executive
officers.
Number of
Shares Beneficially Percent
Name Owned(a) of Class
---- ------------------- --------
Richard K. Davidson 1,820,988 0.72%
Ivor J. Evans 406,336 0.16%
Carl W. von Bernuth 512,797 0.20%
James R. Young 177,582 0.07%
Dennis J. Duffy 202,724 0.08%
--------
(a) Each individual has sole voting power with respect to the shares
beneficially owned. Included in the number of shares beneficially owned by
Messrs. Davidson, Evans, von Bernuth, Young and Duffy are 1,312,876,
265,000, 409,655, 111,589 and 134,596, respectively, which such persons
have the right to acquire within 60 days pursuant to stock options.
Included in the number of shares owned by Messrs. Davidson and von Bernuth
are 33,445 and 13,408 deferred stock units, respectively, representing
deferred stock option exercise gains and vested retention shares which they
will acquire as shares of Common Stock at termination of employment. Not
included in the number of shares owned by Messrs. Davidson, Evans, von
Bernuth, Young and Duffy are 201,080, 76,914, 9,774, 7,349 and 13,274
restricted stock units, respectively, awarded under the PEP and 50,000,
27,500, 13,750, 18,750 and 18,750 retention units, respectively,
representing the maximum awards such persons could earn under the LTP, and
for Messrs. Davidson, Young and Duffy 17,812, 3,000 and 3,422 retention
stock units, respectively, awarded under the 1993 Stock Option and
Retention Stock Plan or the 2001 Stock Incentive Plan.
--------
31
Option/SAR Grants Table
The following table sets forth information concerning individual grants of
stock options during 2001 to the Company's Chief Executive Officer and the
other four most highly compensated executive officers.
Individual Grants
------------------------------------------------------
Number of % of Total
Securities Options/
Underlying SARs Exercise Grant Date
Options/SARs Granted to or Base Expiration Present
Name Granted(a) Employees Price Date Value(b)
---- ------------ ---------- -------- ---------- ----------
Richard K. Davidson 150,000 8.34% $49.88 1/25/2011 $1,962,435
Ivor J. Evans 75,000 4.17% 49.88 1/25/2011 981,217
Carl W. von Bernuth 35,000 1.95% 49.88 1/25/2011 457,901
James R. Young 35,000 1.95% 49.88 1/25/2011 457,901
Dennis J. Duffy 35,000 1.95% 49.88 1/25/2011 457,901
--------
(a) 2,004 shares of the options granted to each executive were in the form of
an incentive stock option and the balance in the form of a non-qualified
option.
(b) Calculated in accordance with the Black-Scholes option pricing model. The
assumptions used in such option pricing model are: expected volatility,
29.5%; expected dividend yield, 1.4%; expected option term, 4 years; and
risk-free rate of return, 4.3%.
--------
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table sets forth individual exercises of stock options during
2001 by the Company's Chief Executive Officer and the other four most highly
compensated executive officers.
32
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End at FY-End
Acquired ------------- -------------
On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---- -------- -------- ------------- -------------
Richard K. Davidson 29,749 $399,529 1,162,876 $11,144,232
431,000 1,208,500
Ivor J. Evans 0 0 190,000 2,963,000
75,000 534,000
Carl W. von Bernuth 35,695 729,248 374,655 5,174,403
102,500 282,950
James R. Young 15,149 312,978 120,300 1,493,345
35,000 249,200
Dennis J. Duffy 12,642 345,854 108,516 702,758
35,000 249,200
Defined Benefit Plans
Pensions for non-agreement employees of the Company and the Railroad are
provided chiefly through the Pension Plan for Salaried Employees of Union
Pacific Corporation and Affiliates (Basic Plan) and the Supplemental Pension
Plan for Officers and Managers of Union Pacific Corporation and Affiliates
(Supplemental Plan). The amount of the annual pension benefit from both Plans
is based upon average annual compensation for the 36 consecutive months of
highest regular compensation (including up to three EIP awards within the
36-month period) within the 120-month period immediately preceding retirement
(final average earnings).
The Supplemental Plan is an unfunded non-contributory plan which provides,
unlike the Basic Plan, for the grant of additional years of service and deemed
age to officers or supervisors, for the inclusion of earnings in excess of the
limits contained in the Code and deferred incentive compensation in the
calculation of final average earnings and for any benefit in excess of the
limitations provided for under the Code. Messrs. Davidson, Evans, von Bernuth,
Young and Duffy have accrued benefits under the Supplemental Plan. In January
2002, Mr. Evans was granted an additional six years of service under the
Supplemental Plan.
33
The credited years of service and approximate annual final average earnings
(as of February 28, 2002) for each of the five individuals named in the Summary
Compensation Table under both Plans mentioned above are as follows: Mr.
Davidson 40, $3,219,000; Mr. Evans 14, $1,478,000; Mr. von Bernuth 22,
$1,063,000; Mr. Young 23, $684,000; and Mr. Duffy 28, $701,000.
The Company purchased annuities to satisfy certain unfunded obligations
under the Supplemental Plan to executives and certain other active and former
employees and has paid the federal and state taxes on behalf of such persons
imposed in connection with these purchases. These purchases reduce the
Company's obligations under the Supplemental Plan. The benefits in the
following Pension Plan Table will be reduced for any employee for whom an
annuity was purchased by an amount calculated so that the expected aggregate
amount received by the employee from the annuity and the Supplemental Plan net
of federal taxes will be the same as the net amount that would have been
received from the Supplemental Plan if the annuity had not been purchased.
The estimated annual benefits payable under the Plans at normal retirement
at age 65 based upon annual final average earnings and years of employment is
illustrated in the following table:
Years of Employment
------------------------------------------------------------------------
Final 10 Yrs 15 Yrs 20 Yrs 25 Yrs 30 Yrs 35 Yrs 40 Yrs
Average Employ- Employ- Employ- Employ- Employ- Employ- Employ-
Earnings ment ment ment ment ment ment ment
---------- -------- -------- ---------- ---------- ---------- ---------- ----------
$ 600,000 $ 97,550 $146,320 $ 195,100 $ 243,870 $ 292,590 $ 321,350 $ 350,110
800,000 130,890 196,330 261,780 327,220 392,590 431,350 470,110
1,000,000 164,230 246,340 328,460 410,570 492,590 541,350 590,110
1,200,000 197,570 296,350 395,140 493,920 592,590 651,350 710,110
1,500,000 247,580 371,365 495,160 618,945 742,590 816,350 890,110
2,000,000 330,930 496,390 661,860 827,320 992,590 1,091,350 1,190,110
2,500,000 414,280 621,415 828,560 1,035,695 1,242,590 1,366,350 1,490,110
3,000,000 497,630 746,440 995,260 1,244,070 1,492,590 1,641,350 1,790,110
3,500,000 580,980 871,465 1,161,960 1,452,445 1,742,590 1,916,350 2,090,110
4,000,000 664,330 996,490 1,328,660 1,660,820 1,992,590 2,191,350 2,390,110
The benefits in the foregoing Pension Plan Table would be paid in the form
of a life annuity with 50% surviving spouse's benefit, and reflect offsets for
Social Security or Railroad Retirement.
34
Change in Control Arrangements
In November 2000, the Board of Directors adopted a Change in Control policy
to provide the Company with a smooth transition of management and continuing
operations throughout a Change in Control transaction. The Key Employee
Continuity Plan (the Continuity Plan) provides severance benefits to 34 senior
level executives of the Company and its subsidiaries in the event a Change in
Control occurs and, in addition, the covered executive is involuntarily
terminated or constructively discharged within two years following a Change in
Control. A Change in Control is generally deemed to occur if (i) any person or
group becomes the beneficial owner of 20% or more of the Company's outstanding
voting securities, (ii) there is a change in 50% of the composition of the
Board of Directors (such change must be due to new directors not recommended by
the Board), (iii) a merger, consolidation or reorganization which results in
the Company's shareholders holding 50% or less of the outstanding voting
securities of the post-transaction entity, or (iv) a liquidation, dissolution
or sale of all or substantially all the Company's assets.
Under the Continuity Plan, severance benefits are the same for all covered
executives except for the multiple used to determine lump sum severance
payments with respect to base salary and the average annual incentive
compensation earned in the most recent three calendar years beginning in 2000.
Covered executives are categorized into three tiers under the Continuity Plan,
with Tier 1 executives receiving a multiple of three; Tier 2 executives
receiving a multiple of 2; and Tier 3 executives receiving a multiple of one
and one-half. Messrs. Davidson and Evans are Tier 1 executives and Messrs. von
Bernuth, Young and Duffy are Tier 2 executives. Other benefits under the
Continuity Plan include the continuation of health insurance, dental and
executive life insurance for three years reduced by any benefits receivable
from a subsequent employer. The Continuity Plan provides for automatic vesting
in the Company's Supplemental Plan and an additional accumulation of three
years of age and service credit (subject to certain limits). Covered executives
will also be made whole with respect to any excise tax imposed by Section 4999
of the Code upon the severance benefits received under the Continuity Plan.
Under the Change in Control provisions adopted in various compensation plans
and subject to certain limitations, there will be an acceleration of the
vesting of, or lapse of restrictions and restriction periods applicable to,
outstanding stock options, retention stock and other similar equity based
awards, along with the deemed satisfaction of certain performance criteria, to
the extent not previously vested or satisfied. In addition, executives will be
allowed to cash out of certain deferred compensation programs and receive cash
payment on certain retention shares.
35
Five-Year Performance Comparison
The following graph provides an indicator of cumulative total shareholder
returns, assuming reinvestment of dividends, for the Company as compared to the
S&P 500 Stock Index and a peer group comprising CSX Corporation, Norfolk
Southern Corporation and Burlington Northern Santa Fe Corporation.
[CHART]
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN
UPC, S&P 500 AND PEER GROUP
---------------------------
DOLLARS
UPC S&P 500 PEERS
12/31/96 100.00 100.00 100.00
12/31/97 107.10 133.30 115.50
12/31/98 78.40 171.40 117.20
12/31/99 77.20 207.40 85.80
12/31/00 91.50 188.50 84.70
12/31/01 104.30 166.20 103.90
36
(2) RATIFICATION OF APPOINTMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors, upon the recommendation of the Audit Committee, has
appointed Deloitte & Touche LLP as the firm of independent certified public
accountants to audit the books and accounts of the Company and its consolidated
subsidiaries for the year 2002 subject to ratification by shareholders. The
appointment of Deloitte & Touche LLP continues a relationship that began in
1969.
A representative of Deloitte & Touche LLP is expected to be present at the
Annual Meeting and will have an opportunity to make a statement if such
representative desires to do so and will be available to respond to appropriate
questions by shareholders.
The Board of Directors recommends that shareholders vote FOR approval of
Proposal 2.
(3) SHAREHOLDER PROPOSAL REGARDING
CHAIRMAN OF THE BOARD
The Amalgamated Bank of New York LongView Collective Investment Fund, 11-15
Union Square, New York, NY 10003, the beneficial owner of 73,258 shares of the
Company's Common Stock, has submitted the following proposal. The Board of
Directors recommends a vote against this proposal. The vote required for
approval would be a majority of the votes cast on this proposal.
Proposal:
RESOLVED: The shareholders of Union Pacific Corporation ("Union Pacific" or
the "Company") urge the Board of Directors to amend the bylaws to require that
an independent director who has not served as chief executive officer ("CEO")
of the Company shall serve as Chairman of the Board of Directors.
SUPPORTING STATEMENT
The primary purpose of the Board of Directors is to protect shareholders'
interests by providing independent oversight of management, including the CEO.
Such oversight is important in light of the performance of Union Pacific's
stock under its current Chairman
37
and CEO, Richard Davidson. We believe that a separation of the roles of
Chairman and CEO will promote greater management accountability to shareholders
at Union Pacific.
Corporate governance experts have questioned how one person serving as both
Chairman and CEO can effectively monitor and evaluate his or her own
performance. The NACD Blue Ribbon Commission on Director Professionalism has
recommended that an independent director should be charged with "organizing the
board's evaluation of the CEO and providing continuous ongoing feedback;
chairing executive sessions of the board; setting the agenda with the CEO, and
leading the board in anticipating and responding to crises."
Separating the positions of Chairman and CEO will enhance independent Board
leadership at Union Pacific. Many institutional investors have found that a
strong, objective board leader can best provide the necessary oversight of
management. For example, CalPERS' Corporate Governance Core Principles and
Guidelines states that "the independence of a majority of the Board is not
enough" and that "the leadership of the board must embrace independence, and it
must ultimately change the way in which directors interact with management."
Under Richard Davidson's leadership as Chairman and CEO, Union Pacific
shareholders have seen the stock price falter and the dividend cut by more than
half. Indeed, the Company's stock price has been flat for the five-year period
ending November 7, 2001. The Southern Pacific acquisition resulted in
unforeseen traffic congestion that cost Union Pacific approximately $450
million after taxes in 1997. The integration of Southern Pacific into the
Company's operations has continued to incur costs in subsequent years. A
lifelong Union Pacific employee, Davidson admitted in The Wall Street Journal
that "this has truly been a humbling experience and no way to run a railroad."
We believe that separating the CEO and Chairman positions and having an
independent Chairman will strengthen the Board's integrity and improve its
oversight of management.
For these reasons, we urge a vote FOR this resolution.
Recommendation of the Board of Directors:
This same proposal by the same proponent was defeated by nearly 80% of the
votes cast at last year's Annual Meeting. The Board views this as strong
support for its position
38
that it is not in the best interests of the Company and its shareholders to
adopt a by-law provision to require that an independent director serve as
Chairman of the Board. The Board opposes the resolution because it would reduce
the Board's flexibility to select a style of leadership depending on time and
circumstances. It is the Board's opinion that it should be free to make this
choice in a manner that is best for the Company at any point in time. Currently
there is nothing in the Company's by-laws which would preclude the Board from
determining that the positions of Chairman and Chief Executive Officer should
be held by different people if, at some future time, the Board believes that
such action is in the best interests of the Company's shareholders. The
proposed by-law amendment, however, limits the flexibility of the Board to act
in the manner that it determines would best serve the shareholders' interests
and thus deprives the Board of its flexibility to organize its functions and
conduct its business in the manner it deems most efficient.
In its "Policy Statement on Corporate Governance", TIAA-CREF, a major
institutional investor widely recognized for its leadership in corporate
governance, specifically recognizes this responsibility of the Board. TIAA-CREF
also advises that it does not generally support shareholder resolutions to
separate the positions of CEO and Chairman.
The Board believes the Company has been and continues to be best served by
having one person, Mr. Davidson, serve as both Chairman and CEO, acting as a
bridge between the Board and the operating organization and providing critical
leadership for the strategic initiatives and challenges of the future. The
Board also considers that Board independence and oversight is maintained
effectively through the composition of the Board and through sound corporate
governance practices as set out on pages 15 through 19. The independence of the
Board as a whole is assured as 11 of 13 current directors are outside
independent directors, and the Audit, Compensation, Finance and Governance
Committees are all composed entirely of outside directors. Moreover, directors
of the Company, including the Chairman, are bound by state law-imposed
fiduciary obligations to serve the best interests of the Company's
shareholders. Separating the offices of Chairman and Chief Executive Officer
would not serve to enhance or diminish the fiduciary duties of any director or
officer of the Company.
The proponent states that the NACD Blue Ribbon Commission on Director
Professionalism recommends that an independent director be charged with
organizing the Board's evaluation of the CEO. The Board wishes to point out, as
detailed in the section Evaluation of the Chairman and CEO on page 18, that the
Company utilizes two board committees, both comprised entirely of outside
directors and chaired by outside
39
directors, to evaluate the CEO. The proponent also points to the Southern
Pacific integration as further support for having an independent chairman. The
Board fails to see how such an individual, without the knowledge, experience
and dedication to Union Pacific and the railroad industry exhibited by Mr.
Davidson, could have improved the oversight of management or have strengthened
the Board's integrity in that time of challenge. Indeed, under the strong
leadership of Mr. Davidson, Union Pacific has achieved record setting
operational and financial performance. The Board does not believe that an
independent chairman would have improved these excellent results.
For the above reasons, the Board believes that no purpose is served by
imposing an absolute rule against a Chief Executive Officer serving as Board
Chairman.
The Board of Directors recommends that shareholders vote AGAINST Proposal 3.
OTHER BUSINESS
The only business to come before the meeting of which the management is
aware is set forth in this Proxy Statement. If any other business is presented
for action, it is intended that discretionary authority to vote the proxies
shall be exercised in respect thereof in accordance with the best judgment of
the proxy holders.
IT IS IMPORTANT THAT PROXIES BE VOTED PROMPTLY. THEREFORE, SHAREHOLDERS ARE
URGED TO VOTE BY TELEPHONE OR INTERNET OR TO DATE, SIGN AND RETURN THE
ACCOMPANYING FORM OF PROXY IN THE ENCLOSED ENVELOPE.
Carl W. von Bernuth
Senior Vice President,
General Counsel and Secretary
Any security holder wishing to receive, without charge, a copy of Union
Pacific's 2001 Annual Report/Form 10-K (without exhibits) filed with the
Securities and Exchange Commission or the Company's report, "Commitment to
Diversity" should write to Secretary, Union Pacific Corporation, 1416 Dodge
Street, Room 1230, Omaha, NE 68179.
40
Appendix A
UNION PACIFIC CORPORATION
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
Function
The Audit Committee will assist the Board of Directors in fulfilling its
responsibility to the shareholders and investment community relating to
Corporate accounting, reporting practices of the Corporation, and the quality
and integrity of the financial reports of the Corporation. In fulfilling these
responsibilities, the Audit Committee will (i) review the scope of audits of
the Corporation and its subsidiaries, (ii) monitor the system of internal
control implemented throughout the Corporation, and (iii) provide an avenue of
communication among the independent auditors, management, the internal audit
staff, and the Board of Directors. In addition, the Audit Committee is
responsible for reviewing appropriate standards of business conduct for the
Corporation and its employees and for monitoring compliance with these
standards.
Membership
The Audit Committee will be composed of at least three Directors each of
whom will meet the independence requirements of the New York Stock Exchange as
the Board of Directors determines in its business judgment.
All members of the Audit Committee must be financially literate and at least
one member of the Audit Committee must have accounting or related financial
management expertise, as such qualifications are determined by the Board of
Directors in the exercise of its business judgment.
One member of the Audit Committee will be appointed by the Board of
Directors as Chair and will be responsible for scheduling of regular and
special meetings and the functioning of the Committee.
A-1
Meetings
The Audit Committee will meet as often as may be deemed necessary or
appropriate in its judgment, generally four times each year. Meetings shall be
conducted in accordance with applicable provisions of the Utah Revised Business
Corporation Act. Meetings of the Audit Committee will normally be held in
conjunction with meetings of the Board of Directors; however, exact timing and
location of the meetings will be set by the Audit Committee Chair in
consultation with the chief financial officer.
The Audit Committee may have in attendance at its meetings such members of
management, the independent auditors, and internal auditors as it may deem
necessary or desirable to obtain the information needed to carry out its duties
and responsibilities. The Committee shall meet in executive session with the
Corporation's independent auditors and/or internal auditors without management
present at least annually and at such other times the Committee deems it
appropriate.
Duties and Responsibilities
As part of its responsibility, the Committee will:
(1) Assess the adequacy of the Committee's charter annually.
(2) Recommend to the Board of Directors the independent auditors to be
selected to audit the financial statements of the Corporation and its
subsidiaries, and review and approve the discharge of the independent
auditors, which auditors shall ultimately be accountable to the Board of
Directors through the Audit Committee.
(3) Review with the independent auditors and management the scope of the
proposed audit for the current year, the audit procedures to be used,
and the proposed fee.
(4) Review with management and the independent auditors the results of the
annual audit, including any comments or recommendations of the
independent auditors, and any reports of the independent auditors with
respect to interim financial reviews as required by Statement on
Auditing Standards 71, Interim Financial Information. Reports of the
independent auditors with respect to interim financial reviews may be
presented to the Audit Committee Chair. In addition, the
A-2
Committee will discuss with the independent auditors those matters required
by Statement on Auditing Standards 61, Communication with Audit
Committees, respecting the independent auditors' judgment as to the quality
of the Corporation's accounting principles.
(5) Review with management the status of pending litigation, regulatory and
tax matters, the performance of safety programs and operations, and other
areas of oversight to the legal and compliance area as may be appropriate.
(6) Recommend to the Board of Directors, based on the review and discussions
noted above, whether the audited financial statements should be included in
the Corporation's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
(7) Preapprove non-audit engagements of independent accountants and review
fees paid for these engagements considering whether such fees are
compatible with maintaining the independence of the auditor as provided in
the Corporation's Statement of Audit Committee Procedures in Connection
with Non-Auditing Services Rendered by Independent Accountants.
(8) Evaluate the independence of the independent auditors through receipt and
review of written independence disclosures as required by Independence
Standards Board Standard No. 1 and discussion with the independent
auditors.
(9) Review with management, the internal auditors, and independent auditors
the Corporation's policies and procedures for maintaining the adequacy and
effectiveness of internal controls. As part of this effort, the Committee
will inquire of management, the internal auditors, and independent auditors
about significant risks or exposures and assess the steps management has
taken to minimize such risks to the Corporation.
(10) Review the appointment or dismissal of the chief internal auditor and
chief safety officer.
(11) Review the internal audit staff's proposed audit plans for the coming
year, evaluate the effectiveness of the internal audit staff on an annual
basis, and periodically review the staff's independence, purpose,
authority, and responsibilities.
A-3
(12) Review with the chief internal auditor and the independent auditor the
coordination and integration of audit efforts to ensure the scope of
audits is appropriate, redundant efforts are minimized, and audit
resources are used efficiently and effectively.
(13) Review the Corporation's Statement of Policy Concerning Business Conduct
and assess procedures for administering the Statement.
(14) Inform the Board of Directors, through minutes and presentations as
needed, of matters discussed at the Committee meetings including
significant developments identified by the Committee.
A-4
[GRAPHIC]
Recycled
[Logo of Union Pacific]
PROXY
SOLICITED BY BOARD OF DIRECTORS
ANNUAL MEETING APRIL 19, 2002
SALT LAKE CITY, UTAH
The undersigned hereby appoints RICHARD K. DAVIDSON and CARL W. von BERNUTH, and
each of them, as Proxies, each with the power to appoint a substitute, and
hereby authorizes them to represent and to vote all the shares of stock of UNION
PACIFIC CORPORATION which the undersigned is entitled to vote at the Annual
Meeting of Shareholders to be held on April 19, 2002 or any adjournment or
postponement thereof as indicated in this Proxy upon all matters referred to on
the reverse side and described in the Proxy Statement for the meeting, and, in
their discretion as set forth in the Proxy Statement, upon any other matters
that may properly come before the meeting.
If no direction is made, this Proxy will be voted FOR all nominees in the
election of Directors, FOR proposal 2, and AGAINST proposal 3. The Board of
Directors recommends a vote FOR all nominees in the election of Directors, FOR
proposal 2, and AGAINST proposal 3.
YOUR VOTE IS IMPORTANT! PLEASE VOTE PROMPTLY BY TELEPHONE OR INTERNET OR BY
MARKING, SIGNING AND DATING THIS PROXY ON THE REVERSE SIDE AND RETURNING IT IN
THE ACCOMPANYING ENVELOPE.
(Continued and to be signed on reverse side.)
007ANB
***YOU CAN VOTE BY TELEPHONE OR INTERNET!
AVAILABLE 24 HOURS A DAY 7 DAYS A WEEK***
Instead of mailing your proxy, you may choose one of the two voting methods
outlined below to vote your proxy.
Have this proxy card in hand when you call.
TO VOTE BY TELEPHONE
--------------------
(within the U.S. and Canada ONLY)
.. Call toll free 1-888-266-6790 from a touch tone telephone. There is NO
CHARGE for this call.
.. Enter six-digit Control Number located below and then follow the voting
instructions.
Option 1: If you choose to vote as the Board of Directors recommends on ALL
--------- proposals, press 1. When asked, please confirm your vote by
pressing 1 again.
Option 2: If you choose to vote on EACH proposal SEPARATELY, press 0 and
--------- follow the recorded instructions. Your vote selections will be
repeated and you will have an opportunity to confirm them.
TO VOTE BY INTERNET
-------------------
.. Go to the following web site: www.computershare.com/us/proxy
.. Enter the information requested on your computer screen, including your
six-digit Control Number located below, then follow the voting instructions
on the screen.
If you vote by telephone or the Internet, DO NOT mail back this proxy card.
Proxies submitted by telephone or the Internet must be received by 12:00
midnight, Central Time, on April 17, 2002.
THANK YOU FOR VOTING
CONTROL NUMBER
+ UNION PACIFIC CORPORATION
APRIL 19, 2002
007AMB
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[_] Mark this box with an X if you have made changes to your name or address
details below.
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A3571
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Proxy Card
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Please mark vote in box in the following manner using dark ink only. X
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The Board of Directors Recommends a Vote FOR all nominees.
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1. Election of Directors: Nominees For Withhold
01. P. F. Anschutz [_] [_]
02. R. K. Davidson [_] [_]
03. T. J. Donohue [_] [_]
04. A. W. Dunham [_] [_]
05. S. F. Eccles [_] [_]
06. I. J. Evans [_] [_]
07. E.T. Gerry, Jr. [_] [_]
08. J. R. Hope [_] [_]
09. R. J. Mahoney [_] [_]
10. S. R. Rogel [_] [_]
11. E. Zedillo [_] [_]
OR PLEASE REFER TO THE REVERSE SIDE FOR
TELEPHONE AND INTERNET VOTING INSTRUCTIONS.
================================================================================
The Board of Directors Recommends a Vote FOR proposal 2, and AGAINST proposal 3.
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For Against Abstain
2. Ratify appointment of Deloitte & Touche as [_] [_] [_]
independent auditors.
3. Shareholder proposal regarding Chairman of [_] [_] [_]
the Board.
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and of the Proxy Statement.
Please sign exactly as name appears. Joint owners should each sign personally.
Where applicable, indicate your official position or representative capacity.
Signature Signature Date
------------------------ ------------------------ ---------------------
------------------------ ------------------------ ---------------------
+ +
[Logo of Union Pacific Corporation]
CONFIDENTIAL VOTING INSTRUCTIONS FOR
ANNUAL MEETING APRIL 19, 2002
To the Trustee:
The UNDERSIGNED hereby instructs you to vote, in person or by proxy, all the
shares of stock of Union Pacific Corporation which were allocated to my account
as of February 8, 2002, under one or more of the plans listed below and
identified by the four-letter code below and on the reverse side of this card at
the Annual Meeting of Shareholders to be held on April 19, 2002, or any
adjournment or postponement thereof, as indicated upon all matters referred to
on the reverse side of this card and described in the Proxy Statement for the
meeting. I understand that this card when properly executed will be voted in the
manner described herein; if no direction is made, the shares allocated to my
account will be voted FOR all nominees in the election of Directors, FOR
proposal 2, and AGAINST proposal 3; if I do not return my card, the shares that
may be allocated to the plans in the left column below will be voted by the
Trustee in the same proportion as the shares with respect to which voting
instructions are received, and the shares allocated to the plans in the right
column below will not be voted; and if I have shares allocated to more than one
of the plans below and wish to vote the shares differently among the plans, I
may contact Computershare Investor Services at 1-800-317-2512 for additional
instruction cards.
Union Pacific Corporation Thrift Plan (THRT) Union Pacific Corporation Thrift Plan PAYSOP (UPSP)
Union Pacific Agreement Employee 401(k) Retirement Thrift Plan (AGRE) Union Pacific Corporation Employee Stock Ownership Plan
Union Pacific Fruit Express Company Agreement Employee 401(k) (TRASOP) (TSOP)
Retirement Thrift Plan (FREX)
Chicago and North Western Railway PS and Retirement Savings (Continued and to be signed on reverse side.)
Program (CNWP)
YOUR VOTE IS IMPORTANT! PLEASE VOTE PROMPTLY BY TELEPHONE OR INTERNET OR BY
MARKING, SIGNING AND DATING THIS FORM ON THE REVERSE SIDE AND RETURNING IT IN
THE ACCOMPANYING ENVELOPE.
007ASD
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***YOU CAN VOTE BY TELEPHONE OR INTERNET! AVAILABLE 24 HOURS A DAY 7 DAYS A WEEK***
Instead of mailing your proxy, you may choose one of the two voting methods outlined below to vote your proxy.
Have this proxy card in hand when you call.
TO VOTE BY TELEPHONE TO VOTE BY INTERNET
-------------------- -------------------
(within the U.S. and Canada ONLY)
. Call toll free 1-888-215-8522 from a touch tone telephone. There . Go to the following web site: www.computershare.
is NO CHARGE for this call. com/us/proxy
. Enter six-digit Control Number located below and . Enter the information requested on your computer
then follow the voting instructions. screen, including your six-digit Control Number
located below, then follow the voting instructions
on the screen.
Option 1: If you choose to vote as the Board of Directors recommends If you vote by telephone or the Internet, DO NOT mail
-------- on ALL proposals, press 1. When asked, please confirm your vote back this proxy card.
by pressing 1 again.
Option 2: If you choose to vote on EACH proposal SEPARATELY, press 0 and follow
-------- the recorded instructions. Your vote selections will be repeated and
you will have an opportunity to confirm them.
Proxies submitted by telephone or the Internet must be received by 12:00 midnight, Central Time, on April 17, 2002.
THANK YOU FOR VOTING
CONTROL NUMBER
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+
[_]
UNION PACIFIC CORPORATION
APRIL 19, 2002
007ARC
--------------------------------------------------------------------------------
[_] Mark this box with an X if you have made changes to your name or address
details below.
-------
A3572
-------
--------------------------------------------------------------------------------
Proxy Card
--------------------------------------------------------------------------------
Please mark vote in box in the following manner using dark ink only. [X]
--------------------------------------------------------------------------------
The Board of Directors Recommends a Vote FOR all nominees.
--------------------------------------------------------------------------------
1. Election of Directors: Nominees For Withhold
01. P. F. Anschutz [_] [_]
02. R. K. Davidson [_] [_]
03. T. J. Donohue [_] [_]
04. A. W. Dunham [_] [_]
05. S. F. Eccles [_] [_]
06. I. J. Evans [_] [_]
07. E. T. Gerry, Jr. [_] [_]
08. J. R. Hope [_] [_]
09. R. J. Mahoney [_] [_]
10. S. R. Rogel [_] [_]
11. E. Zedillo [_] [_]
OR PLEASE REFER TO THE REVERSE SIDE FOR
TELEPHONE AND INTERNET VOTING INSTRUCTIONS.
--------------------------------------------------------------------------------
The Board of Directors Recommends a Vote FOR proposal 2, and AGAINST proposal 3.
--------------------------------------------------------------------------------
2. Ratify appointment of Deloitte & Touche as
independent auditors.
For Against Abstain
[_] [_] [_]
3. Shareholder proposal regarding Chairman of the Board.
For Against Abstain
[_] [_] [_]
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the Proxy Statement.
Please sign exactly as name appears.
Signature Date
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