Chairman and Chief Executive Officer
Caterpillar
Inc.
Peoria,
Illinois
61629
May
19,
2006
Dear
Institutional
Investor:
This
is a great
time for Caterpillar, and the future promises to be even more rewarding.
Because
you are a valued investor in Caterpillar stock, I wanted to take a moment
to
personally contact you and explain our position on certain proposals listed
in
our 2006 proxy.
Let
me begin with
the stockholder proposals. While one could argue about the relative merits
of
these types of proposals when they are aimed at companies with less than
stellar
histories or governance practices, I believe that if stockholder proposals
are
“shot-gunned” across a broad spectrum of companies, the relative proxies should
be voted on a company specific, and not issue specific basis. Companies with
a
strong leadership team and impressive track records should be given the benefit
of the doubt. As an investor in Caterpillar stock, you know that we have
a
strong, independent board that effectively oversees our management as
demonstrated by the company’s stellar financial and governance performance.
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As
of
November 2005, Caterpillar outperformed 81.6% of the companies in
the
S&P 500 Index and 97.9% of the companies in the capital goods group
in
the ISS - Corporate Governance Quotient scores.
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For
2005,
Caterpillar significantly outperformed the S&P 500 in total cumulative
stockholder return (CAT = $275.81 vs. S&P 500 =
$102.74).
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For
the first
quarter of 2006, sales, revenues and profit were the highest for
any first
quarter in Caterpillar’s history.
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Share
usage
(run rate) has declined significantly, from 17.8 million or 2.7%
in 2004,
to 9.8 million or below 1.5% in 2006.
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When
you look at
what has been accomplished over the past five years, the picture is very
positive. From 2000 to 2005, sales and revenues increased about 80%, profit
has
risen over 170%, and the stock price has more than tripled since year-end
2000.
And, as you recall, in July of last year we had a 2-for-1 stock
split.
So,
let’s turn to
the stockholder proposals.
The
first
stockholder proposal seeks to declassify our board by having annual elections
of
all directors. However, our current board structure is designed to provide
stability, prevent sudden disruptive changes to the board's composition,
enhance
long-term planning and ensure that, at any given time, there are directors
serving on the board who are familiar with our company, our business and
our
strategic goals.
The
second
stockholder proposal asks that we split the CEO and Chairman roles. However,
separating
the CEO
and Chairman position could potentially cause unnecessary dilution of leadership
authority and accountability. Our current management structure has generated
outstanding results and the board is comfortable with it.
We
do understand
the importance of having an independent director act as the chair for executive
sessions. That’s why in April of this year, the board designated the Chairman of
our Governance Committee as the Presiding Director with clearly delineated
responsibilities, which are listed in the proxy under the Governance Committee
report.
The
third
stockholder proposal asks that we switch from plurality voting to majority
voting. Let me point out that Caterpillar has a history of electing, by a
plurality, strong and independent boards.
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In
the past
10 years, the average affirmative vote for the directors has been
greater
than 96% of the shares voted through the plurality process.
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None
of our
directors has ever
received
less than the majority of votes cast.
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We
also believe
that the implementation of a majority vote standard would be inappropriate
in
light of the fact that a number of associations, scholars, corporations and
investors are analyzing and evaluating alternative voting standards. At this
time, we do not believe that our current plurality vote standard should be
changed, and there is no reason to rush to adopt a majority vote standard.
Let’s
turn now to
the management proposals.
As
you may know,
the company's former long-term incentive plan expired on April 9, 2006, and
the
executive short-term incentive plan expires on December 31, 2006. We believe
that this type of compensation is critical in our ability to attract, retain
and
motivate highly qualified individuals.
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Pay
at risk
(through our annual bonus program and long term incentive plans)
is a
powerful motivator of performance.
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To
determine
the appropriate level of compensation and benefits, we benchmark
all
elements of the plans annually.
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All
of our
equity grants are subject to performance adjustments, and every option
eligible employee is subject to strictly enforced target ownership
requirements.
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Also,
you should
know that we set board approved aggressive targets for our plans every year,
and
that there are no golden parachutes or special change in control provisions
for
executives.
Finally,
I ask that
you approve management’s proposal to amend the company’s articles of
incorporation to increase the amount of authorized shares
from 900 million
to 2 billion shares. While
we do not
have any current plans to issue additional shares of common stock, the amendment
would enhance the board's flexibility in possible future actions, including
share splits that have been used to keep our stock in an attractive price
range
for individual investors. And,
you will note
that our overall history shows a responsible and prudent use of our authorized
capital,
with a
long history of
dividend increases, superior stock price performance, and a reasonable equity
compensation burn rate which has been more than offset with our share buy
back
program.
I
urge you to give
these proposals particular attention and consider supporting Caterpillar,
a
company with a strong history of ethical behavior, outstanding performance
in
cyclical markets, and sterling corporate governance. Thank you again for
your
consideration.
Sincerely,
/s/
James W.
Owens
James
W.
Owens
Chairman
&
CEO