Corporate governance

Statement of compliance with corporate governance standards

Having declared compliance with the highest capital market communication standards and principles of corporate governance, in 2016 the parent applied the “Code of Best Practice for WSE Listed Companies 2016”, prepared by the Warsaw Stock Exchange. Following the adoption of the new text of the “Code of Best Practice for WSE Listed Companies 2016” by way of Resolution No. 26/1413/2015 of the supervisory board of the Warsaw Stock Exchange dated October 13th 2015, the parent declares that it follows the recommendations and principles laid down in the new “Code of Best Practice” as published on the website of the Warsaw Stock Exchange at: http://static.gpw.pl/pub/files/PDF/RG/DPSN2016__GPW.pdf to the extent described on the parent’s website: http://tarnow.grupaazoty.com/files/4fbe6653/gpw_dobre_praktyki_grupa_azoty_2016.pdf.

Rules governing amendments to the parent’s Articles of Association

Pursuant to Art. 51.22 of the parent’s Articles of Association, the General Meeting has exclusive authority to amend the parent’s Articles of Association or change the parent’s business profile.

Internal control and risk management systems

Organisational solutions have been put in place at the parent to ensure that risks involved in the preparation of financial statements are effectively and efficiently identified, managed, and eliminated. The solutions are based on the Company’s regulations, organisational rules, document circulation procedures, as well as the scopes of powers and responsibilities of the finance and accounting staff. The Company applies documented accounting policies, which relate in particular to the chart of accounts, measurement of assets and liabilities, calculation of net profit or loss, maintenance of the accounting books, rules to be followed in inventory taking, as well as data and database protection systems.

Accounting books are maintained using SAP, an integrated IT system interoperating with other complementary systems. All systems in place are protected against unauthorised access with periodically changed passwords and function-based access control. Underlying source documents are inspected by organisational units responsible for their review based on the division of duties and authority. Before any accounting entries are made, documents are subject to a final review performed by the accounting and tax personnel.

The Group takes care to ensure that its financial statements are prepared properly, that is in compliance with applicable regulations setting forth the reporting rules and procedures, and in accordance with the principles of fairness and completeness. Data sourced from the accounting records is based on entries made on the basis of appropriate source documents, which are verified through an inventory-taking of assets and review of transactions and balances in individual accounts by dedicated inventory-taking and review teams.

Preparation of the financial statements is overseen by Head of the Corporate Finance Department, who supervises the financial and accounting functions responsible for reviewing and recording economic events in the Company’s accounting books and generating the data necessary to prepare the financial statements.

The accounting policies meet the requirements set forth in the International Financial Reporting Standards/International Accounting Standards and the Polish Accountancy Act. The Company constantly monitors changes to the applicable financial reporting laws and regulations, and makes preparations sufficiently in advance to incorporate them into its rules and policies. Changes to accounting policies necessitated by amendments to accounting laws are made on an ongoing basis by the Company’s Management Board.

Once prepared, the financial statements are presented by Head of the Corporate Finance Department to the Company’s Management Board. In order to confirm that the data in the financial statements is correct and consistent with the records in the Company’s accounting books, the financial statements are audited by an independent auditor, who issues an opinion on the financial statements. The auditor is selected by the Supervisory Board based on a recommendation issued by the Audit Committee (a standing committee of the Supervisory Board). As part of its activities, the Audit Committee monitors the financial reporting process, the effectiveness of internal control and risk management systems in place at the Company, the full-year separate and consolidated financial statements, as well as the work performed and reports prepared by a qualified auditor.

Financial statements adopted by the Management Board are subject to assessment by the Supervisory Board, which submits a written evaluation report to the General Meeting of Grupa Azoty.

The adopted procedures for the preparation of financial statements are intended to ensure accuracy of disclosures and their compliance with the law, and to guarantee that potential risks are identified and eliminated sufficiently in advance in order to obtain a reasonable assurance concerning the accuracy and fairness of the financial statements.

Grupa Azoty S.A. implemented the Enterprise Risk Management System based on ISO 31000 standard “Risk management principles and guidelines” and the “Enterprise Risk Management – Integrated Framework” standard developed by COSO. The “Group Enterprise Risk Management Policy” was adopted along with a range of procedures describing stages of the risk management process and detailed actions to take, which were also implemented by selected companies of the Group.

In accordance with the rules applicable at the Company, enterprise risk management consists of the following stages:

• risk identification and assessment,
• definition and implementation of risk response measures and incident management plans,
• monitoring and reporting of risk levels,
• use of information on risks in decision-making processes,
• reporting and communication,
• monitoring and evaluation of the risk management system.

Risk management is a process carried out by the Group’s Corporate Centre. A Steering Committee was also established to support the process management. The Committee exchanges information, makes analyses and formulates opinions to support reaching viable solutions for the process. The Risk Management Steering Committee brings together representatives of the Group companies at which the risk management system was implemented.

The Company identifies and assesses the risks periodically, using the adopted risk model. Risk identification and assessment is performed by the respective risk owners. The assessment is performed based on a rating of the impact and likelihood of the risk occurrence adopted for a given year. Then risks are prioritised and key risks for the Company in a given period are identified. Outcomes of the process are also used to plan internal audits.

Results of periodical reviews of the risk register at individual companies are then used to prepare the Group’s key risk list.

Risks are managed by the respective risk owners, who adopt risk management strategies, take day-to-day measures to analyse relevant risk factors and monitor their levels.

As a rule, once a year the parent prepares a periodic report on the enterprise risk management. The report contains a description of the key risks and information about the operation of the risk management function at the parent.

The operational risks are identified and steps are taken to mitigate their adverse effect. Internal audits of the management systems are among the tools applied by the Company to asses effectiveness of the risk mitigation measures undertaken in individual processes carried out at the Company.

Remuneration policy

Remuneration system at Grupa Azoty S.A.

The parent’s remuneration policy is based on a negotiation system. Remuneration is set by way of negotiation between the Management Board and the trade unions. As part of the process, the average remuneration growth rate in a given year and the remuneration components to which the growth rate will apply are determined. By the end of February every year, the Management Board and the trade unions sign a remuneration agreement defining the remuneration growth rate and the remuneration components to which the growth rate will apply, as well as the incentive policy for the year. The key principles governing the terms of employment and remuneration are provided for in the Collective Bargaining Agreement and the Work Rules. Persons holding key managerial positions at the parent are hired under management contracts and are not covered by the remuneration policy. Their remuneration comprises a monthly base salary and an annual bonus, whose amount depends on the degree of achievement of individual targets set for the year.

Remuneration policy for members of the Management Board

Remuneration of Management Board members comprises:

• a fixed monthly salary, which includes also remuneration for sitting on management or supervisory boards of the Group subsidiaries (this does not apply to the Management Board member elected by employees, whose remuneration comprises a fixed monthly salary including remuneration for serving on the Management Board and remuneration due under the employment contract),
• a variable performance-based component, paid in accordance with the rules approved by the Supervisory Board,
• additional employee benefits granted each time by the Supervisory Board.
• a special bonus (the Management Board member elected by employees is not entitled to receive the bonus).

Additional benefits may be awarded to the Management Board members by the Supervisory Board, including:

• a length-of-service award, granted not more frequently than every five years,
• a severance pay if employment is terminated due to old age or disability retirement,
• partial reimbursement of the cost of using an apartment made available to a Management Board member, including a company apartment (up to PLN 2,000 per month),
• benefits consisting in using partly paid telecommunication services,
• additional health, property and personal insurance,
• personal indemnity cover, including in connection with share issues,
• the right to use the company car free of charge,
• the right to use the hardware and software owned by the parent to perform the duties of a Management Board member.

The employment contracts of the former Management Board members: Andrzej Skolmowski, Paweł Jarczewski, Marek Kapłucha, Marian Rybak, and Krzysztof Jałosiński, provide for a severance pay amounting to three months’ fixed monthly salary equivalent in the event of removal from the Management Board prior to the expiry of the term of office. Members of the Management Board are not entitled to severance pay if their removal from the Management Board results from justified termination of the employment contract without notice for reasons attributable to the employee, pursuant to Art. 52.1 of the Polish Labour Code.

In the case of employment contracts with Mariusz Bober, Tomasz Hinc, Józef Rojek, Witold Szczypiński, and Paweł Łapiński, the payment of severance pay for removal or resignation from the Management Board must be approved by the Supervisory Board.

Additionally, the Management Board members are bound by non-competition agreements which remain in force upon termination of employment. Upon termination of their employment contracts, Mariusz Bober, Tomasz Hinc, Józef Rojek, and Witold Szczypiński are entitled to compensation amounting to 50% of their fixed monthly salary provided for in their employment contracts, paid out over a period of six months.

Upon termination of employment contracts, Andrzej Skolmowski, Paweł Jarczewski, Marek Kapłucha, Marian Rybak, and Krzysztof Jałosiński are entitled to compensation amounting to 100% of their fixed monthly salary provided for in their employment contracts, paid out over a period of twelve months. The right to receive the compensation expires on breach of the non-competition agreement.

Artur Kopeć is bound by an agreement on holding the position of the employee-elected Management Board member. The agreement, effective only for the duration of the employment term, does not provide for any severance pay for removal from the Management Board.

Changes in rules of remuneration

The rules of remuneration for members of the Management Board were changed on February 6th 2017. Total remuneration of members of the Management Board comprises a fixed component in the form of a monthly base pay (fixed remuneration) and a variable component representing additional remuneration for the Company’s financial year (variable remuneration). The monthly remuneration of a Management Board member is the product of the average monthly remuneration in the business sector, net of bonuses paid from profit, in the fourth quarter of the previous year, as announced by the President of the Central Statistics Office of Poland (GUS). Starting from the calendar month following the month in which the President of GUS announced the amount of the average monthly remuneration, the amount of the fixed remuneration is changed accordingly.

The fixed remuneration is reduced by the amount payable for the days on which no work was performed by a Management Board member.

The variable (additional) remuneration depends on the progress of management objectives and is paid in accordance with the rules stipulated in Resolution No. 8 of the Company’s General Meeting of December 2nd 2016, and in the Act on rules of remunerating persons who manage certain companies of June 9th 2016 (Dz.U. of 2016, item 1202).

Variable remuneration is paid after:

• approval of the Directors’ Report on the Company’s operations and of the financial statements for the previous financial year,
• the General Meeting has granted a Management Board member discharge in respect of performance of their duties in a given financial year,
• a Management Board member has submitted a report on performance of the management objectives,
• the Supervisory Board has approved performance of the management objectives by the Management Board member in a given year,
• the Supervisory Board has adopted a resolution on performance of the management objectives and the amount of variable remuneration due.

Rules governing remuneration of key management personnel

Persons holding key managerial positions at the parent are hired under management contracts. Under management contracts, the managers are entitled to the following perquisites: a company car, provided on the terms and conditions specified in the parent’s internal regulations, parking space for a private car, a portable computer with Internet access and a mobile phone with unlimited business calls, a fixed amount to cover the cost of accommodation (for some managers).

Evaluation of the remuneration policy

The remuneration policy, established through negotiations with the social partners, is closely linked to the parent’s financial results. In accordance with the Collective Bargaining Agreement, the parent’s current and forecast economic condition is the basis for determining the remuneration growth for any given year. In addition, the amounts of certain remuneration components, such as the incentive bonus and the annual bonus, depend directly on the financial results of the parent and the degree of achievement of the targets set for the individual mangers.

Remuneration of the parent’s Supervisory Board members

^*  including remuneration under employment contract with the Company – PLN 268 thousand,
^** including remuneration under employment contract with the Company – PLN 85 thousand,
^*** including remuneration under employment contract with the Company – PLN 140 thousand,
^**** including remuneration under employment contract with the Company – PLN 97 thousand.

Remuneration of the parent’s Management Board members

 * Remuneration potentially due corresponds to a provision created for performance-based annual bonuses, granted in accordance with the rules approved by the Supervisory Board. The annual bonus is planned to be paid in 2017.

Remuneration of the parent’s management and supervisory personnel for holding office at the Group’s subsidiaries

Further information on remuneration

In the reporting period, the Group did not recognise any retirement or similar benefit obligations with respect to former members of management, supervisory or administrative bodies.

Restrictions on voting rights

In accordance with Art. 47.2 of the parent’s Articles of Association, each share carries one vote at the General Meeting.

On March 15th 2013, the parent’s Extraordinary General Meeting passed Resolution No. 9 to amend the Articles of Association by changing the individual rights of certain shareholders by amending Art. 47.3 to read as follows:

“Art. 47.3. As long as the State Treasury of Poland or its subsidiaries hold shares in the Company carrying at least one fifth of the total voting rights, the other shareholders’ voting rights will be limited in such a manner that no shareholder may exercise more than one fifth of total voting rights at the General Meeting existing on the day of the General Meeting. The limitation on the voting rights referred to in the preceding sentence shall not apply to the State Treasury or any of its subsidiaries. For the purposes of this Art. 47.3, the exercise of voting rights by a subsidiary shall be deemed the exercise of voting rights by its parent as defined in the Act on public offering, conditions governing the introduction of financial instruments to organised trading, and public companies of July 29th 2005 (the “Public Offering Act”), and the terms “parent” and “subsidiary” shall include any entity whose voting rights attached to shares held, directly or indirectly, in the Company are aggregated with the voting rights of another entity or entities, in accordance with the Public Offering Act, in connection with the holding, disposal or acquisition of major holdings in the Company. A shareholder whose voting rights are subject to the limitation shall in any case retain the right to cast at least one vote.”

Limitation of the transfer of the truth of warts papers.

There is no restrictive transfer of ownership of the Parent Company's securities

Rules governing amendments to the parent’s Articles of Association

Pursuant to Art. 51.22 of the parent’s Articles of Association, the General Meeting has exclusive authority to amend the parent’s Articles of Association or change the parent’s business profile.

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