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Corporate Governance Guidelines

Nov. 3, 2009
  1. General role of the board of directors
  2. Board membership
  3. Board meetings and other communications
  4. Board committees
  5. Board compensation
  6. Board and management evaluation and succession planning
  7. Annual review of corporate governance guidelines

1. General role of the board of directors

The primary role of the boards of directors (each, the “board”) of Puget Energy, Inc. (“Puget Energy”) and Puget Sound Energy, Inc. (“PSE” and together with Puget Energy, the “company”) is to oversee the business affairs and management of the company, including appointing and overseeing senior management, for the benefit of its shareholders and other constituencies. The company's management is responsible for conducting the day-to-day operations of the company pursuant to appropriate delegation of authority and oversight by the board. The board recognizes that being a good corporate citizen, taking a broad view of the interests of the region, and maintaining positive relationships with the various stakeholders in the communities in which we serve will ultimately contribute to the success of the business.

The board is committed to fulfilling its fiduciary duties applying the highest standards of integrity and ethical conduct. Under the Washington Business Corporation Act, directors are required to discharge their duties according to the following basic standards: (i) in good faith; (ii) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (iii) in a manner the director reasonably believes to be in the best interests of the corporation. Traditionally, these duties have been described as the duty of loyalty and the duty of care:

  1. The duty of loyalty requires that directors act in good faith and in what they believe to be in the best interests of the corporation. Specifically, directors must refrain from self-dealing, that is making a decision that benefits them at the expense of the corporation.

  2. The duty of care requires directors to be well informed, act appropriately and exercise a standard of care equal to that of an ordinary prudent person under similar circumstances.
    Specific board responsibilities include:
  • Approving a corporate mission statement
  • Selecting, evaluating, compensating, and–if necessary–replacing the CEO, other senior executives, and directors
  • Ensuring management succession
  • Reviewing and approving management’s strategic and business plans, and monitoring performance against the plans
  • Reviewing and approving material transactions not in the ordinary course of business
  • Exercising reasonable oversight of the company’s activities to ensure they are conducted in accordance with legal and ethical requirements, such as the Sarbanes-Oxley Act of 2002 and the Federal Sentencing Guidelines, and further ensuring that the company’s Corporate Ethics and Compliance Program, which was designed to detect and deter criminal and unethical conduct, is being appropriately implemented
  • Ensuring its own effectiveness

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2. Board membership

a. Size

In accordance with the Amended and Restated Bylaws of Puget Energy, Inc. (the “Puget Energy bylaws”) and the Amended and Restated Bylaws of Puget Sound Energy, Inc. (the “PSE bylaws” and together with the Puget Energy bylaws, the “company’s bylaws”), the boards shall consist of up to thirteen (13) directors. For the avoidance of doubt, nothing in these Guidelines shall be interpreted to limit or otherwise alter the respective rights and obligations of board observers or board alternates, whose ability to vote or otherwise take actions are set forth in the company’s bylaws.

b. Chair of the board

The chair of the board shall be an independent director (as defined below), appointed in the manner set forth in the company’s bylaws.

The chair will be responsible for the specific duties set forth in these corporate governance guidelines as well as those as may be set forth in the company’s bylaws, those required under law or those assigned from time to time by the board.

The chair, in addition to any other obligations required by law, shall:

  1. Stay regularly informed on the strategy of the company and its evolution.
  2. Stay regularly informed about critical issues and performance of the company
  3. Work with the chair of the Governance and Public Affairs Committee on board composition, structure, performance and any additional governance matters
  4. Work with the chair of the Compensation and Leadership Development Committee on CEO performance reviews, compensation and succession planning
  5. Approve meeting schedules to assure that there is sufficient time for discussion of all agenda items
  6. Work with directors to set the agenda for board meetings
  7. Know the senior leadership of the company and be a point of contact for their concerns, where such concerns cannot be adequately expressed through the CEO
  8. Be available to consult with the CEO about concerns of the board of directors
  9. Serve as a point of contact for shareholder concerns

c. Number of independent directors

The boards must include at least one independent director (as defined below).  Generally, no more than one (1) employee of the company should concurrently sit on the board.

d. Independence: defining independence for this board

In accordance with the company's bylaws, "independent director" shall mean a director who (i) shall not be a member of Puget Holdings LLC (a “Holdings member”) or an affiliate of any Holdings member (including by way of being a member, stockholder, director, manager, partner, officer or employee of any such member), (ii) shall not be an officer or employee of PSE, (iii) shall be a resident of the state of Washington, and (iv) if and to the extent required with respect to any specific director, shall meet such other qualifications as may be required by any applicable regulatory authority for an independent director.  As required by clause (iii) of the foregoing definition, the board shall apply any additional independence standards with respect to any specific director as may be required by any applicable regulatory authority for an independent director, which standards may include, without limitation, those of The New York Stock Exchange or the Securities and Exchange Commission.

In making any independence determinations, the following relationship will not be considered to be a material relationship unless the described payments would automatically disqualify the director from being independent under the applicable independence standards: if a director or an immediate family member of a director, or a company for which a director or an immediate family member of a director, makes payments to Puget Sound Energy, Inc. for power or natural gas provided by Puget Sound Energy at rates fixed in conformity with law or governmental authority. In addition, the following relationships also are not material when making independence determinations: if a director is a director, employee or executive officer of another company that makes payments to or receives payments from Puget Energy, Puget Sound Energy, or any of their affiliates, for property or services in an amount which is less than the greater of $1 million or 1 percent of such other company’s consolidated gross revenues, determined for the most recent fiscal year. These categorical standards will not apply, however, to the extent that the company would be required to disclose an arrangement as a related party transaction pursuant to Item 404 of Regulation S-K.

The board will periodically review the independence of each of the company's directors pursuant to the provisions of this section 2(d).

e. Independence: avoiding conflicts

Each director should immediately advise the chair of the board and the chair of the Governance and Public Affairs Committee of any proposed or current affiliation, relationship or transaction with any entity (including nonprofits or governmental agencies) or individual that may create a potential conflict of interest or be inconsistent with company policies or values. The Governance and Public Affairs Committee must determine if such affiliation is cause for the board to suggest that the director take appropriate action to avoid the conflict

If a director determines that he or she is interested or otherwise has an actual or perceived conflict of interest with respect to any matter, such director must comply with Section 15 – “Conflicts of Interest; Affiliate Transactions” in the company’s bylaws, which relates to the reporting of and effects of actual or perceived conflicts of interest among directors.

f. Director qualifications and selection

Directors shall have such qualifications and shall be selected in the manner provided for in the Amended and Restated Limited Liability Company Agreement of Puget Holdings LLC, the Amended Articles of Incorporation of Puget Energy, the Amended and Restated Articles of Incorporation of Puget Sound Energy and the company’s bylaws (collectively, the “charter documents”), in each case, as applicable, and as may be provided for in the Governance and Public Affairs Committee charter.

g. Independent director changing employment status

Independent directors are expected to tender their resignations if they experience a substantial change in principal employment responsibility that was not anticipated by the board at the time of the director's nomination or election to the board. The board does not believe that such a director must necessarily leave the board. Upon receipt of a resignation offered under these circumstances, the Governance and Public Affairs Committee will review the director’s change in employment responsibilities to evaluate whether the director’s continued service is appropriate and will make a recommendation accordingly to the full board.  The board will then make a determination whether to accept or decline the director’s tendered resignation.

h. Other boards and committees

Without specific approval from the board, no director may serve on more than five (5) public company boards and no member of the company's Audit Committee may serve on more than three (3) public company audit committees or their equivalents. Service on the boards of Puget Holdings LLC and its subsidiaries, including Puget Energy, Inc. and Puget Sound Energy, Inc., shall be deemed to count as service on one (1) board for purposes of calculating a director’s total board service. In calculating service on a public company board or audit committee, service on a board or audit committee of a substantially owned subsidiary will not be counted in the calculation so long as the director also serves on the board or audit committee of the subsidiary's parent.

Directors must advise and consult with the chair of the Governance and Public Affairs Committee and the chair of the board prior to accepting an invitation to serve on any public company boards that the director did not serve on prior to joining the board or standing for election to a public office that the director did not hold prior to joining the board.

i. Terms

The directors shall continue to hold office until his or her successor is elected and qualified. The board does not believe in limiting the number of terms a director may serve. However, with respect to independent directors, the Governance and Public Affairs Committee will review, taking tenure into account, each director prior to recommending a director for renomination.

j. Retirement

Independent directors are expected to tender their resignation prior to the annual shareholders’ meeting following their 72nd birthday, with such resignation effective upon the conclusion of the annual shareholders’ meeting. Independent directors may stand for re-election even though the company's retirement policy would prevent them from completing a full term.

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3. Board meetings and other communications

a. Frequency of board meetings

The board generally has at least four (4) regularly scheduled meetings per year and holds several special meetings and planning retreats as necessary. In addition, each committee holds regularly scheduled meetings and special meetings as necessary. It is the responsibility of each director to attend both scheduled and special meetings, except if unusual circumstances make attendance impractical.

b. Nonmanagement executive sessions

Nonmanagement directors meet in executive session on a regular basis, generally at each scheduled board meeting. The chair of the board, if a nonmanagement director, presides over the executive sessions. However, if the chair is an employee of the company, then an independent director will preside. If the group of nonmanagement directors includes any nonindependent directors, then the independent directors will meet in executive session at least once a year.

c. Access to management and employees and outside advisors

For the purpose of obtaining information, directors have complete access to the management and employees of the company. Any particular contact a director wishes to initiate with management or other employees will generally be arranged through the chief executive officer, corporate secretary, general counsel, chair of the board, or appropriate committee chair. Under unusual circumstances, management or employee contact may be made directly by the director. A director should ensure that any such contact is not unnecessarily disruptive to the affairs of the company and should, unless inappropriate due to the particular circumstances, copy the chair or the chief executive officer on any written communications or brief the chair or the chief executive officer on any material oral communications the director has with a member of management or other employee.

Requests for corporate action, as opposed to information, should generally be made only to the chief executive officer.

The board has complete access to the assistance of outside advisors of its choosing, including counsel, with respect to any issues relating to board functions. No approval is required from management for engagement of outside advisors, although management should be informed with respect to any such engagement, as appropriate.

d. Meeting agendas

The chair of the board, in consultation with the chief executive officer (and with appropriate input from the chairs of the Audit, Compensation and Leadership Development, Governance and Public Affairs, Asset Management and Business Plan and Budget Review committees), is responsible for establishing the agenda for each board meeting. Directors are encouraged to suggest, as appropriate, the inclusion of additional items on the agendas. At any board meeting, the directors may raise matters for discussion that are not on the meeting’s formal agenda.

In addition, the chair of the board in consultation with the chief executive officer (and with appropriate input from the chairs of the Audit, Compensation and Leadership Development, Governance and Public Affairs, Asset Management and Business Plan and Budget Review committees), is responsible for preparing an annual agenda. This annual agenda should set forth a general agenda of items to be considered by the board at each of its scheduled meetings for the forthcoming year.  General items to be covered usually include:

Upon completion of a draft of the annual agenda, it should be provided to each of the directors for review. Directors should feel free to suggest inclusion of additional items on the annual agenda before it is finalized.

e. Board materials.

Each director should receive materials important to understanding the agenda items, as well as the presentations, discussions and issues to be covered at each board meeting in writing and sufficiently in advance of the meeting to permit appropriate review and preparation, unless distribution of such materials prior to the applicable meeting might compromise confidential information.  The chair of the board, in consultation with the chief executive officer and other applicable senior management, is responsible for providing such materials to each director. Directors are responsible for adequately reviewing these materials and otherwise preparing for each committee meeting.

 f. Information regarding significant subsidiaries.

The board should regularly receive reports regarding material developments affecting the company's significant subsidiaries. The chief executive officer, with the assistance of subsidiary management, is responsible for regularly reporting material information to the board relating to these subsidiaries.

g. Board communications to outside parties

The chief executive officer, as well as other applicable senior management, is responsible for speaking for the company, including establishing effective communications with each of the company's constituencies. The chair of the board is the spokesperson for the board. On occasion, however, individual directors may meet or otherwise communicate with various constituencies regarding the company after consultation with senior management or the chair of the board.

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4. Board committees

a. Number and types of committees

The company must have at all times a standing audit committee, compensation committee, nominating/governance committee, asset management committee, and business plan and budget review committee. The responsibilities and duties of each of these committees must be outlined in their respective committee charters. The board may form or disband other committees as it deems necessary.

b. Appointment of committee members

The Governance and Public Affairs Committee will annually recommend to the board appointment of board members to committees after consulting with the chair of the board and subject, in all cases, to the provisions of the charter documents, as applicable. After reviewing the Governance and Public Affairs Committee’s recommendations, the board is responsible for the appointment of members to the committees on an annual basis, subject, in all cases, to the provisions of the charter documents, as applicable. In addition, the board is responsible for either appointing committee chairs or leaving such appointments to the members of the respective committees.

c. Rotation of committee members

When the Governance and Public Affairs Committee annually reviews committee appointments, it must consider whether the rotation of committee chairs and members is appropriate with a view towards balancing the benefits derived from the continuity of committee membership with the benefits derived from bringing diversity of experience and viewpoints in the form of new member appointments to the committees. The Governance and Public Affairs Committee shall evaluate rotation of each committee chair at least once every five (5) years.

d. Frequency and length of committee meetings

Each committee meets as frequently and for such length of time as may be required to carry out its assigned duties and responsibilities or as otherwise required by its charter. An annual schedule for regular meetings for each standing committee is submitted and approved by the board in advance. In addition, the committee may hold special meetings, as appropriate. It is the responsibility of each committee member to attend both scheduled and special committee meetings, except if unusual circumstances make attendance impracticable.

e. Committee meeting agendas

The chair of each committee, in consultation with the chair of the board and the chief executive officer or other applicable senior management, is responsible for establishing the agenda for each committee meeting. Committee members are encouraged to suggest, as appropriate, the inclusion of additional items on the agendas. Committee members may raise at any committee meeting matters for discussion that are not on the meeting’s formal agenda.

In addition, the chair of each committee, in consultation with the chair of the board and the chief executive officer or other applicable senior management, is responsible for preparing an annual agenda. This annual agenda should set forth a general agenda of items to be considered by the committee at each of its scheduled meetings for the forthcoming year. Upon completion of a draft of the annual agenda, it should be provided to each of the committee members for review. Committee members should feel free to suggest inclusion of additional items on the annual agenda before it is finalized.

f. Committee materials

Each committee member should receive materials important to understanding the agenda items, as well as the presentations, discussions and issues, to be covered at each committee meeting, in writing and sufficiently in advance of the meeting to permit appropriate review and preparation, unless distribution of such materials prior to the applicable meeting might compromise confidential information. The chair of each committee, in consultation with the chief executive officer and other applicable senior management, is responsible for providing such materials to each committee member. committee members are responsible for adequately reviewing these materials and otherwise preparing for each committee meeting.

g. Director access to committee meetings

In order to promote transparency, all directors are provided notice of and the agendas to all committee meetings. Any director may attend any committee meeting, whether or not a member of that particular committee.

h. Access to outside advisors

Each committee has complete access to the assistance of outside advisors of its choosing, including counsel, with respect to any issues relating to committee functions. No approval is required from the full board or management for engagement of outside advisors, although the board should be consulted and management should be informed with respect to any such engagement, as appropriate.

i. Committee reports

Each committee chair reports on the committee meetings to the extent appropriate to the full board. All directors are furnished copies of each committee’s minutes as and when appropriate.

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5. Board compensation

a. Director compensation

Each director who is not (i) an employee of (1) the shareholder of the applicable company, (2) the members of Puget Holdings LLC, or (3) an affiliate (as defined in the company’s bylaws) of the shareholder of the applicable company or the members of Puget Holdings LLC, or (ii) the chief executive officer of PSE, shall be paid annual compensation at a level approved by the board.

Directors receiving compensation are compensated (i) by quarterly retainer payments and (ii) for each board or committee meeting attended. In addition, any director entitled to compensation who serves as the chair of the board, the chair of any of the Audit, Compensation and Leadership Development, or Governance and Public Affairs committees, or a member of the Audit Committee, shall be paid additional quarterly retainers.

Directors who also serve as employees of the company do not receive compensation for their service on the board or any committees.

b. Director compensation review practices

The Governance and Public Affairs Committee is responsible for annually reviewing the company’s director compensation practices. Any changes to be made to director compensation practices must be recommended by the Governance and Public Affairs Committee for approval by the full board.

c. Director orientation and continuing education

New directors are required to attend a company orientation program, which should be conducted within one (1) month of the meeting at which the director is elected. The orientation program includes: (i) informative materials and presentations by appropriate officers to familiarize new directors with the company's strategic plans, its significant financial, accounting and risk-management issues, its compliance programs, the codes of business conduct and ethics and the corporate governance guidelines; and (ii) meetings with senior management and the company's internal and independent auditors. The orientation program also includes visits to company headquarters and, to the extent practical, some of the company's significant facilities. All directors are invited to attend the orientation program.

In addition, the board is periodically provided with presentations by outside advisors regarding current issues and trends, including accounting and legal, affecting the company's business affairs and industry. Directors are reimbursed reasonable costs associated with participation in educational programs relating to their service on the board and the committees.

Directors also routinely receive materials from the company relating to its business affairs and industry, such as financial reports, press releases and analyst reports. Directors are responsible for reviewing these materials and generally staying current with the company's business affairs and industry.

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6. Board and management evaluation and succession planning

a. Annual board evaluation

The full board annually conducts an evaluation to assess whether the board and its committees are functioning effectively. The Governance and Public Affairs Committee is responsible for coordinating with the chair of the board and the chief executive officer to establish the evaluation criteria and implement the process for any such evaluation. The evaluation should focus on the contributions of the board and its committees as a whole and on any areas where the board or management believes the board and its committees could make larger contributions. The full board is responsible for discussing the results of the evaluation. Any director may make suggestions on board or committee practices and communicate them to the chair of the board or the chair of the Governance and Public Affairs Committee.

b. Annual committee evaluation

Each committee annually conducts an evaluation to assess whether it is functioning effectively. The Governance and Public Affairs Committee is responsible for separately coordinating with each committee chair to establish the evaluation criteria and implement the process for any such evaluation. Each committee is responsible for discussing the results of its evaluation. Any committee member may make suggestions on committee practices and communicate them to the applicable committee chair or the chair of the Governance and Public Affairs Committee.

c. Management assessment and succession planning

The board is responsible for succession planning for the chief executive officer position as well as for other senior management positions. To assist the board in this planning, the Compensation and Leadership Development Committee provides the board with an evaluation of the current senior management and the leadership potential of senior management and other appropriate employees. The chief executive officer should continually make available to the board and the Compensation and Leadership Development Committee recommendations for potential successors to the chief executive officer position and also for certain other senior management positions.

In addition, the chief executive officer, in consultation with and with the assistance of the chair of the board and the chair of the Compensation and Leadership Development Committee, should make available a short-term succession plan which delineates temporary delegations of authority to certain officers of the company in the event all or a portion of senior management unexpectedly becomes unable to perform their duties. The short-term succession plan would be in effect only until the board has the opportunity to consider the situation and take appropriate action.

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7. Annual review of corporate governance guidelines

The Governance and Public Affairs Committee annually reviews these corporate governance guidelines and recommends appropriate revisions to the board for consideration.

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Approved as revised Nov. 3, 2009.

In implementing these corporate governance guidelines, the board of each of Puget Energy, Inc. and Puget Sound Energy, Inc. should be cognizant of the relationship between Puget Energy, Inc. and Puget Sound Energy, Inc.

Reference in these corporate governance guidelines to “the company” shall mean to Puget Energy, Inc. and its respective subsidiaries or Puget Sound Energy, Inc. and its respective subsidiaries as applicable.