Merrill Lynch seeks to deliver returns to shareholders through appreciation in its common stock price and cash dividends. The price of a Merrill Lynch common share has grown at an 18% compound annual rate over the past ten years. Merrill Lynch has also paid a quarterly dividend consistently since becoming a public company in 1971.

While in the short term Merrill Lynch’s common share price is subject to fluctuations in market conditions, we believe that over the longer term, the distinctiveness of our franchise, combined with a focus on consistent, profitable growth, will drive superior price performance and returns. The following elements are central to our ability to deliver shareholder value:

Revenue Growth and Diversification
Since going public in 1971, Merrill Lynch has increased net revenues at an 11% compound annual rate. By strategically positioning the company to benefit from continued growth in financial services driven by an aging population, economic and financial deregulation, technology breakthroughs and globalization, Merrill Lynch has established worldwide leadership positions in its three business segments. Attractive underlying growth prospects for each of these businesses favor sustained revenue expansion. Revenue diversification initiatives that leverage Merrill Lynch’s competitive strengths, scale and client relationships offer the opportunity to enhance that growth and to reduce dependence on revenues linked to equity markets. Focused investment in fee-based and recurring sources of revenue also affords more consistent revenue generation across economic and market cycles.

Operating Discipline
Growth in revenues drives expansion in net earnings through focused operating discipline, appropriate scaling of capacity and profitable market share. Since going public in 1971, Merrill Lynch has increased net earnings at a 12% compound annual rate. Key to successful profit margin improvement is our resource allocation focus; the deployment of our people, financial, technical and other resources into those areas that offer the most attractive returns or growth opportunities. To achieve superior performance in cyclical, market-driven businesses, an ongoing expense management discipline limits performance declines in cyclical downturns, while enabling increased profit margins in upturns. This discipline also facilitates investment in the most attractive growth opportunities, and is integral to further enhancing Merrill Lynch’s competitive positioning and profitability across the cycle.

Capital Management and Planning
Merrill Lynch seeks to ensure that it has a strong and flexible capital structure while delivering superior returns on equity. When considering capital adequacy and planning, Merrill Lynch considers equity capital necessary to support the risks and needs of its businesses, including needs related to revenue growth, diversification and other strategic initiatives. Capital management also recognizes that Merrill Lynch increasingly has opportunities to serve individual and institutional clients through the deployment of the company’s equity capital. We assign each of our businesses an amount of equity that reflects the specific risks of that business, both on and off the balance sheet. We evaluate profit margins and risk-adjusted equity returns against internal and external benchmarks. We recognize that equity capital used to support business risks may not always be adequately measured through quantitative models or ratios, and thus we do not rely solely on such measures. Merrill Lynch’s dividend policy is to maintain a competitive market yield, considering conservative increases that do not impair capital planning flexibility.

Liquidity and Funding
Consistent with our objectives of delivering value to shareholders and clients, Merrill Lynch assures sufficient liquidity at all times, across market cycles and through periods of financial stress, as part of its core funding policy. Our primary liquidity objective is to maintain alternative sources of funding so that all debt obligations maturing within one year can be repaid without raising new debt or liquidating assets. Our liquidity policy ensures that sufficient long-term debt and equity capital are in place to fund the firm’s assets, commitments, contingent obligations and regulatory capital needs. We limit our use of short-term funding and prudently manage the interest rate and currency exposures of our assets and liabilities. We diversify our funding sources, including deposits, globally to minimize our overall cost of funding and maximize available sources of liquidity.

Risk Management
Growth, consistent returns and capital are jeopardized if risk is not controlled. Merrill Lynch’s market, credit and operating risk management framework seeks to reduce volatility in our operating performance and lower our cost of equity by managing risks both within and across businesses. We limit our risk profile by diversifying risk and revenue sources, growing fee-based and recurring revenues, and minimizing the break-even point by carefully managing fixed costs. Other risk management objectives include focusing our trading activities on client-driven business, limiting proprietary risk-taking, and closely monitoring our long-term exposure to illiquid assets. We continuously look for opportunities to strengthen our worldwide market and credit risk controls, with particular attention to avoiding undue concentrations. At all levels of the organization, Merrill Lynch recognizes that sound corporate governance and oversight policies are critical to effectively managing risk and protecting the interests of shareholders.

Aligning Employees with Shareholders
Our culture of excellence demands that profitability objectives and shareholder interests be firmly embedded in our compensation structure. We tie incentive compensation to earnings and returns on equity for senior management, and we may use additional role-specific measures such as revenue generation or profit margins for other employees. To further align the financial interests of key managers and revenue producers with those of shareholders, a significant portion of their incentive compensation is paid in stock, in lieu of cash. We determine the mix of stock-based and cash compensation, as well as the type of stock-based compensation, with regard to the impact on our financial results, the need to retain key talent, and the potential dilution to existing shareholders. We also believe that it is important for our stock-based programs to vest over time to further reinforce the alignment between employees and shareholders.