Good morning and welcome. Welcome to the 2020 Annual Meeting of Shareholders for Cardinal Health Inc. I will now hand the meeting over to Greg Kenny, Chairman of the Board of Cardinal Health. Good morning and welcome. I'm Greg Kenny, Chairman of the Board of Directors of Cardinal Health.
I'm pleased to call to order the 2020 Annual Meeting of Shareholders. Due to the public health impact of the coronavirus pandemic and to support the health and well-being of our employees and shareholders, This year's Annual Meeting of Shareholders is being conducted exclusively via the web portal. I'd like to begin by thanking each of our other directors who have joined us remotely today. Next, I'd like to introduce John Rogers, Mike Keane, Kyle Kauffman, Crystal Threep of Ernst and Young, Independent Auditor for Cardinal Health. And finally, the company has appointed Broadridge Financial Services to act as an Inspector of Election.
Linda Pascadlo with Broadridge has joined the meeting today, has taken the oath of Inspector of Election earlier today. Now I'd like to ask the Secretary of the meeting, Jack Adams to lead us through the formal portion of our meeting. Jack? Thank you, Greg.
As you can see from our meeting agenda posted on the web portal for today's meeting, we will begin by considering the 6 proposals outlined in our proxy materials and announcing the preliminary results of our shareholder voting. When the formal portion of the meeting is concluded, Mike Kauffman, our CEO, will provide a brief business report. Then Mike and Greg will address questions from shareholders received through the web portal. The polls are now open. If there are any shareholders present at this meeting virtually who would like to vote, please do so using the meeting website.
If you have already voted prior to this meeting, you do not need to vote now unless you wish to change your vote. We will close the polls on all matters at the end of the formal part of the meeting. Please refer to the Annual Meeting of Shareholders Guide posted on the web portal for the procedures and guidelines applicable to today's meeting. The guidelines are intended to allow for an orderly meeting consistent with the procedures we have followed in the past for our in person annual meetings. I present to the meeting the notice of today's annual meeting of shareholders and the related proxy material, together with an affidavit of Broadridge Financial Services, certifying that the notice of annual meeting was mailed on September 23, 2020 to Cardinal Health Shareholders.
According to our Inspector of Election, 258,000,000 common shares being approximately 88% of total outstanding shares are represented at today's meeting. This exceeds the majority and constitutes a quorum for conducting the 2020 Annual Meeting of Shareholders. The first item of business is the election of 13 directors, each to serve until the 2021 Annual Meeting and until his or her successor is duly elected and qualified. The 13 persons nominated by the Board are Terry Cox, Calvin Darden, Bruce Downey, Sherry Edison, David Evans, Patricia Hemingway Hall, Akhil Jewelry, Michael Kaufman, Gregory Kenny, Nancy Killafer, Jay Michael Walsh, Dean Scarborough and John Wyland. Our Board recommends 4 each of the director nominees included in the first proposal.
The second item of business is a proposal to ratify the appointment of Ernst and Young LLP as our independent auditor for the fiscal year ending June 30, 2021. Our Board recommends voting for the 2nd proposal. The next item of business is a proposal to approve on a non binding advisory basis the compensation of our named executive officers as disclosed in the compensation discussion and analysis, the summary compensation table and the related compensation table notes and narrative in the proxy statement. Our Board recommends voting for the 3rd proposal. The next item of business is a proposal to approve an amendment to our restated code of regulations to reduce the share ownership threshold, we're calling a special meeting of shareholders to 15%.
Our Board recommends voting for the 4th proposal. The next two items of business are 2 non binding advisory proposals. Proposal number 5 from John Shevedden is on reducing the ownership threshold for calling a special meeting of shareholders to 10%. Proposal number 6 from Kenneth Steiner is to adopt the policies that the Chairman of the Board be an independent Director. Operator, please bring John Chvedden into the presenter line.
John, your line is open.
Hello. Welcome, Mr. Shevaden. Please provide any comments regarding the substance of the 2 proposals within 3 minutes on each proposal. You may go ahead.
Can you hear me okay then?
Yes.
Okay. Proposal 5, make shareholder right to call a special meeting more accessible. Shareholders ask our Board to take the steps necessary to amend the appropriate governing documents to give the owners of the combined total of 10% of our outstanding common stock the power to call a special shareholder meeting. This proposal is already a success because it led the Board of Directors to lower the stock ownership threshold to call a special shareholder meeting, which is incorporated in proposal 4 for today. Peerless can largely vote in favor of both proposals 45.
Proposal 4 is good and proposal 5 ask management to do better. It is simply logical to make it less difficult to call a special shareholder meeting, because less can be accomplished by a special shareholder meeting and management is better protected from shareholder criticism in a special shareholder meeting due to the near extinction of in person shareholder meetings. Cardinal Health shareholders also do not permanently do not have the right to act by written consent, which makes this proposal all the more important since scores in major companies give shareholders both the right to call a special meeting and the right to act by written consent. Special shareholder meetings allow shows to vote on important matters such as electing new directors that can arise between annual meetings. This proposed topic won more than 70% supported Edward Life Sciences and SunEdison.
Nuance Communications shareholders gave 94% support to a 2018 proposal on this same topic. Since a special shareholder meeting can elect a new Director, it can be increased importance to refresh our Board of Directors after Chairman Gregory Kenny was rejected by 12 times as many shares in 2019 as each of 5 other Cardinal Health Directors. John Loesch, Chairman of the Audit Committee was rejected by 10 times as many shares. Patricia Hemingway Hall, who chaired the Director Nomination Committee was rejected by 9 times as many shares. And Bruce Downey was rejected by 7 times as many shares.
The Chairman of this meeting should at least announce before the end of the meeting whether these directors did any better today in voting results and also the percentage vote for the say on executive pay proposal number 3. Please vote yes. Make the shareholder right to call a special meeting more accessible. So, do you want me to continue with Proposal 6 or do you have
Please go ahead and proceed with Proposal 6.
Okay. Just giving you an opportunity to state the company position. So Proposal 6 as an independent is for an independent Board Chairman as a permanent policy sponsored by Kenneth Steiner of Great Neck New York. Charles requested our Board of Directors adopt the policy and amend our governing documents to require that the Chairman of the Board be an independent member of the Board whenever possible. Currently Cardinal Health Directors can at any time they want name 1 person to have both the Chairman and CEO jobs at the same time.
This proposal won 52% support at Boeing and 54% support at Baxter International in 2020. This proposal topic also won 50 plus percent support at 5 major U. This proposal topic won significant 36% support from Cardinal Health shareholders in 2017. However, there have been setbacks at Cardinal Health since 2017 when our stock was at $80 Cardinal Health and 2 other large opioid distributors and 2 opioid manufacturers were in talks to sell more than 2,000 lawsuits against them over their role in the opioid epidemic for $50,000,000,000 The possible settlement would include $22,000,000,000 in cash and $29,000,000,000 in drugs. Cardinal Health, McKesson and AmerisourceBergen Corporation would give $18,000,000,000 to be used for treatment and prevention over 18 years.
Meanwhile, our directors were busy making it more difficult to hold them responsible. In late 2019, Cardinal Health adopted a formal amendment to require that United States District Court for the Southern District of Ohio will be the exclusive form for derivative lawsuits and other lawsuits. There are indications that shareholders are growing impatient with their directors, Bruce Downey, Gregory Kenny, John Loesch and Patricia Hall each received from 7 times to 12 times as many negative votes from shareholders as each of 5 other Cardinal Health Directors at the 2019 Annual Meeting. An independent Chairman is best positioned to build up the oversight capabilities of our directors, while our CEO addresses the challenging day to day issues facing the company. The roles of Chairman of the Board and CEO are fundamentally different and should not be held by the same person as a consistent practice for the future.
Please vote yes, Independent Board Chairman, Proposal 6.
Thank you, Mr. Chhabbaton. Does that conclude your remarks?
Yes.
Okay. Thank you very much.
Thank you.
Operator,
please remove him from the line. Thank you. The Board statement in opposition to each of these proposals is contained in the proxy statement. The Board of Directors recommends a vote against these shareholder proposals. So I now declare the polls closed.
The results I'm about to report are considered preliminary and are subject to final tabulation and verification by the Inspector of Election. We will post the final results on our website atwww.cardinalhealth.com on the Investor Relations page in the next few days. On proposal number 1, the election of directors, preliminary results indicate that each of the 13 director nominees has been elected. On Proposal 2, ratification of the appointment of Ernst and Young LLP as our independent auditor for fiscal 2021. Preliminary results indicate that this proposal is passed.
On proposal 3, to approve the compensation of our named executive officers, preliminary results indicate that this proposal has passed. On proposal 4, to approve an amendment to our restated code of regulations to reduce the share ownership threshold, we're calling a special meeting of shareholders. Preliminary results indicate that this proposal has passed. On proposal 5, preliminary results indicate that the shareholder proposal on reducing the ownership threshold for calling a special meeting of shareholders did not pass. And finally, on proposal 6, preliminary results indicate that the shareholder proposal the policy that the Chairman of the Board be an independent director did not pass.
The report of the voting results is now concluded.
Thank you, Jack. That concludes the formal portion of today's meeting. Mike Kauffman will now provide a brief business update, and Mike and I will address questions received through the web portal. Mike? Thanks, Greg.
Good morning, everyone, and thank you for joining us today.
I will share a brief update on the company, then Greg and I will answer questions. Before I begin my remarks, I'll direct your attention to Slide 4. During today's meeting, we will be making forward looking statements. The matters addressed in these statements are subject to risk and uncertainties that could cause actual results to differ materially from those projected or implied. For a description of these risks and uncertainties, please refer to this slide and to our SEC filings.
Now let's turn to our company updates beginning on Slide 5. Since our fiscal 2020 numbers were recently issued in our annual report and our fiscal 2021 Q1 numbers will be reported tomorrow, I'll just briefly touch on performance and then give some context for our strategic and cultural direction, particularly as we evolve to address COVID-nineteen and the macroeconomic environment. I will ground my comments in the framework we shared with you last year called our path forward. This evolution of our mission, vision and values is more relevant now than ever, and it continues to guide our future. I will share a few thoughts about where we are going and what we value.
In doing so, I'll highlight the progress we've made in fiscal 2020 and our commitments for fiscal 2021 in each of these areas. 1st, where we are going on Slide 6. This statement is our strategic lens and how we want to evolve. I will break this statement into 5 sections and discuss how each one helps drive our fiscal 2020 results and fiscal 2021 strategic priorities. First, trusted partner.
We play a critical role in the healthcare supply chain and are first and foremost committed to being a trusted partner to our customers, suppliers, the government and others. This is especially critical as we collectively navigate the pandemic and drive our business forward. 2nd, scale and heritage in distribution, products and solutions. We are optimizing our scale and leveraging our deep expertise in our core distribution, products and solutions capabilities to create current and future value. 3rd, drive growth in evolving areas of healthcare.
We're prioritizing growth in key businesses that are well positioned in rapidly 4th, customer insights, data and analytics. To foster this growth, we're developing and deploying technologies that will enable us to better understand, respond to and predict the needs of our customers. And finally, focusing our resources. To support this optimization and growth, we remain disciplined with managing our resources and allocating capital. Transitioning to Slide 7, I will share a few highlights from fiscal 2020 that showcase our accomplishments and progress.
In fiscal 2020, we delivered on our commitments while adapting quickly to the challenges of COVID-nineteen. For the year, we exceeded our non GAAP guidance range and surpassed our cost savings target, highlighting our focus on using our resources carefully. We continue to deploy capital in a disciplined manner, returning more than $900,000,000 to shareholders and strengthening our balance sheet by paying down more than $1,400,000,000 of long term debt. To drive growth, we made strategic investments in evolving areas, including our specialty, at home and services businesses. And we continue to fulfill our role in the supply chain by leveraging our scale, working diligently with partners across the care continuum and building upon our deep capabilities in distribution, products and services.
We remain focused on this role throughout the pandemic and into the future. Let's now turn to Slide 8 to discuss a few areas of our COVID-nineteen response. As the global pandemic unfolded, we moved quickly to protect the health and safety of our employees and maintain operations to serve our customers while addressing potential impacts to our financial performance. 1st, regarding our employees. Our greatest priority is and has been the health and safety of our employees and their families.
To that end, we implemented worksite hygiene practices and enhanced cleaning procedures in all facilities. Also in March, we quickly transitioned office based employees to a remote work model and implemented new technologies and practices to ensure ongoing connectivity. And we have provided incremental educational, mental health and financial benefits for our employees to support their total well-being. This included additional compensation for our frontline teams as they continue to support our operations. Our employees have been amazing and I thank them for their commitment and contributions.
2nd, regarding our operations. We have maintained continuous operations in all distribution facilities, nuclear pharmacies and global manufacturing plants. As the pandemic evolved, we acquired additional equipment to expand production of PPE and we continue to evaluate additional suppliers to expand and diversify our critical product options. At the same time, we leveraged our sourcing capabilities through Red Oak to ensure minimal disruptions to the pharmaceutical supply chain. 3rd, COVID-nineteen impacts on our financial performance.
In fiscal 2020, we experienced an estimated net negative impact of about $100,000,000 to operating earnings. We will provide updates regarding our COVID-nineteen assumptions and their potential impacts to our fiscal 2021 performance tomorrow on our earnings call. Now let's turn to Slide 9 to review how we are advancing our mission in fiscal 2021. This year, as we approach our 50th anniversary, we are focused on building upon our rich history as a distribution and logistics company and prioritizing growth areas to position our company for the future. This means optimizing our core businesses, including our global supply chain and commercial areas, as well as maximizing our generics program.
We remain focused on our cost savings targets and we'll leverage our strong governance structure to identify, execute and track efficiency initiatives across the company. To drive growth, we continue to make select strategic investments in specialty, at home and our services businesses as well as our core technology and infrastructure capabilities. Finally, to support business growth, we will create maximum efficiency in our capital structure. We are focused on maintaining a strong balance sheet and returning capital to shareholders. Now that I've shared a bit about where we are going, I would like to transition to Slide 10 to discuss another key part of our path forward, what we value.
This year presents both unique challenges and unique opportunities to grow, think and work differently, and none of that would be possible without our people. These five values are central to our identity as a company, and I see our teams demonstrating them every day in the way we serve our customers. I along with the Board and the management team am fully committed to fostering a best in class, respectful and diverse work environment that embodies these values and inspires excellence, innovation and collaboration. Slide 11 illustrates our deep commitment to diversity and inclusion, which has been a key focus of the company for many years. We continue to modify and improve our strategies to ensure that every employee, regardless of skin color, sexual orientation, ethnic background or gender, brings 100% of themselves to work every day.
The diversity of our Board and Executive Committee creates a broad inclusive lens through which we can confront today's difficult realities and determine how to move forward. Creating this type of culture means having difficult, uncomfortable conversations and we're leaning into that discomfort to drive real change. In fiscal 2020, we continue to demonstrate this commitment and fosters these conversations in multiple ways. In February, our executive committee and other senior management traveled to the National Memorial For Peace and Justice and the Legacy Museum in Montgomery, Alabama for a day of discussion, reflection and ideation. We established an African American and Black Racial Equity Cabinet to share barriers, opportunities, recommendations and successes monthly with me and our Chief Human Resources Officer.
And we hosted multiple VP plus meetings and an all employee town hall focused on honest conversations around DNI. In addition, we implemented mandatory unconscious bias training for all manager and above employees and we embedded DNI and culture metrics in our annual incentive plan goals for all VPs and above. As we move forward into fiscal 2021, our leaders recognize that it is imperative to continue this progress. For this reason, we set incremental DNI and culture incentive plan goals for all leaders across the company. We also established a corporate holiday honoring Martin Luther King Jr.
For U. S. Based employees. Going forward, we are continuing enterprise wide deployment of unconscious bias training and other D and I trainings. We are also creating forums for strategy development and ongoing listening sessions for African American and Black leaders and employees.
We are facilitating ongoing discussions through our D and I Council, employee resource groups, all employee meetings and engagement with our Chief Diversity Officer and other senior leaders. We are also progressing workforce strategies and talent processes to further enhance organizational performance, team collaboration, commitment to external customers and competitive advantage in the marketplace. I believe this is work this work is both the right thing to do and the smart thing to do for our people and for our business and for our collective future. To close, thank you for your continued engagement and support. Together, we will continue to serve our customers and their patients, and we will continue to invest for growth in our business and in our people, so that we can perform our essential role in healthcare now and into the future.
Now with that, Jack will make some initial comments regarding the Q and A process and then Greg and I will answer your questions.
We will now address questions from shareholders received through the web portal. As noted in the guidelines distributed for this meeting, there is a limit of 1 question or comment per shareholder. It will help us if questions are succinct and cover only one topic per question. We ask that you note and comply with the published guidelines regarding appropriate questions for this meeting, which are posted on the web portal for the meeting. Please note, we will attempt to answer as many questions as time allows, but only questions that are germane to the meeting will be addressed.
Answers to any pertinent questions that we do not address during the time allotted for the meeting will be posted on our company's Investor Relations website shortly after the meeting. We have our Vice President of Investor Relations, Kevin Moran here with us today to relay questions received through the portal. Kevin, please go ahead.
Thanks, Jack. The first question we have today is which directors are not in attendance for this meeting? And today we have all of our directors in attendance for this meeting. Okay. The next question we have is, how many board meetings have there been in 2020 and how were they held?
There were 9 board meetings in 2020. They were held in person until the global pandemic caused us to shut down our offices in March and they've been held remotely since that time.
The next question is, how many shareholders are attending this meeting who are not employees or directors? And I think I can answer this one. I have visibility that there are about 20 shareholders logged into this meeting. What I don't have visibility to is how many of them are employees. And then there could be relates to COVID-nineteen.
How many of your employees have contracted COVID-nineteen?
Well, thanks for the question. Employee safety is critical. And as you could tell by my prepared remarks, we talked about this significantly in the sense that we did a lot of enhanced cleaning, safe distancing and other important activities in our forward distribution centers, manufacturing facilities and plants and pharmacies also. We also moved all of our office based employees to work from home since March. So while we have had some employees contract COVID-nineteen, we were able to keep all of our distribution centers, manufacturing facilities and nuclear pharmacies open during the other in time And the dedication of our employees to our customers and patients has been outstanding.
And a follow-up to that question or related question is, what percent of employees can do most of their work from home?
Yes, the vast majority of our employees do work in our forward distribution centers, our manufacturing plants and our nuclear pharmacies, which I mentioned already. They continue to go to work every day and provide the critical products and solutions and services to our customers that they need. We do, however, have a percentage of employees that do work in office based locations. We continue to keep any office based location would be attached to a forward distribution center closed out of abundance of caution to our employees in those distribution centers or plants. And the other employees have been allowed to come back on a volunteer basis to our office based areas.
And so we have been able to move all of those employees that are office based to remote working and our IT teams and others have been able to work together to make us continue to work very efficiently and effectively.
The next question is, my investment in Cardinal has declined in the last 7 years. I understand the ups and downs of the market, but what gives?
I appreciate the question. Our management team is always focused on driving total shareholder return, both through stock price appreciation and through our dividend. And in the past, we have been very transparent and highlighted some of the challenges our company and our industry has faced. But I will tell you, we feel really good about the strategic priorities we have in place and the progress we are making. We are focused on optimizing our core business.
We are enhancing our global supply chain, driving commercial excellence in medical, maximizing all aspects of our generics program and pharma distribution and focusing on exceeding our 5 year cost savings goal. In addition, we are investing in our business. We are focused on driving organic growth in the strategic growth areas that in my prepared remarks such as specialty, at home and our services businesses. And we will continue to deploy capital efficiently In addition to investing in our business, which is our main priority, we will also focus on our balance sheet and are committed to return cash to shareholders primarily through our dividend. So we are very pleased with our FY 2020 operating results where we grew operating earnings and we exceeded our non GAAP EPS guidance range and we have strong conviction in our value proposition and the actions we're taking to prepare ourselves for the future.
The next question is, as institutional investors, we recognize and appreciate Cardinal's performance. However, we are concerned about individual performance award issued without consideration of the $5,000,000,000 charge related to opioid litigation. Would you please explain how the Board feels this approach adequately links pay and performance?
I'll take that question. It's Greg Kenny. We think things are linked. The compensation committee considered the charge in determining the CEO's bonus and overall bonuses. The committee assesses overall performance and how performance was achieved.
But to better understand the nature of this process, it's important to consider the decision in context of our overall performance, overall program and in this case, I'll speak about the CEO's pay components. First on performance, we grew non GAAP operating earnings in fiscal 2020 despite an approximately $100,000,000 net negative impact from COVID-nineteen in addition to headwinds from customer and contract renewals. Our TSR reflected this performance, which was up 15%. 2nd, with respect to the program, the annual bonus in the case of Mike Kaufman represents 15% of his total direct compensation and is based on achieving annual goals. For 2020, 70% of the annual bonus was based on annual non GAAP operating earnings performance.
We've always excluded litigation charges and gains from non GAAP measures from our annual bonus program because they are not part of our ongoing operations, are not included in our financial planning and cannot be reliably predicted. Our long term incentives, which represents 75% of the CEO's total compensation is where his compensation has been impacted. Not only does the value of equity grants vary with our stock price, but our PSUs settled at only 19% of target in fiscal 2020 and did not pay out at all in fiscal 2019 2018.
Thank you.
The next question. Investors are increasingly calling for disclosure of self identified Board attributes. As business case shows, a positive correlation between Board diversity and increased shareholder returns. Will there be consideration given to disclosing Board attributes such as gender, race and ethnicity in your next proxy statement?
This is Jack Adams. I'll take that. Thank you for the question. Our current proxy statement discloses gender and ethnic diversity in the aggregate among our Board and shows that there's good diversity in the Board that's important to the Board. But we don't identify specific attributes of specific directors.
We continue to consider and follow that disclosure. Greg, do
you want to add any comments on the diversity of the Board and the importance of that? Well, I think it's very important. It's a core value of Cardinal Health that includes diversity of skills, experience, backgrounds, ethnic and gender diversity. Our board has 4 women as Jack said and 3 ethnically diverse members And it creates a broad inclusive lens in my judgment, where we can confront today's difficult realities and determine how to move forward to prove outcomes for our customers, communities and teams. So we celebrate the diversity and we have as you all know, a feedback mechanism so that we look at our own individual performance with an outside third party, our collective performance, plus we get management input in terms of how this Board functions as well as on part of the outreach to shareholders, which is on a continual basis.
Thanks, Jack.
The final question that I see today is, can a percentage vote be announced for each director in each ballot item? So this is Jack Adams again and I'll take that one.
We don't want to go through the level of detail and don't typically announce in percentages. And I don't want to go through and read a whole bunch of preliminary numbers for folks. So I would encourage you to look at our website in the next couple of days where we'll post our final results for those items rather than going through all those details on the meeting here.
There are no other questions.
So that concludes the Q and A portion for today's meeting. We did receive several questions in the portal that were specific to the individuals who submitted them and not of general shareholder interest. If you submitted a specific question that we did not address today, please follow-up with a member of our Investor Relations team whose contact information can be found in the guidelines for this meeting and on our website. Thank you for attending everyone, and have a nice day.