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Corporate Governance

Elcoteq SE is a European Company that is domiciled in Luxembourg. Elcoteq applies primarily the laws of Luxembourg, the company’s Articles of Association and the rules of procedure of the company’s Board of Directors and its committees in its corporate governance and management.

Eloteq’s Series A shares are quoted on the Nasdaq OMX Helsinki. Therefore Elcoteq complies, in addition to the laws of Luxembourg, with the insider guidelines and the stock exchange rules of the Nasdaq OMX Helsinki and applicable Finnish securities market legislation, standards and recommendations.

Furthermore, the Company complies with the Finnish Corporate Governance Code effective as of January 1, 2009. The Finnish Corporate Governance Code is publicly available on the website of the Finnish Securities Market Association, at http://www.cgfinland.fi/index.php?lang=en.

Elcoteq issues annually a Corporate Governance Statement. The Statement is available in pdf format. For most up-to-date information on Elcoteq´s Corporate Governance please refer to our website.

Elcoteq´s Corporate Governance and Risk Management Statement (pdf)

General Meetings

The general meeting of shareholders is the supreme decision-making body in Elcoteq and the forum in which its shareholders exercise their voting rights. Shareholder meetings consider the matters stipulated by legislation and the company’s Articles of Association. The language in the meetings is English.

As from February 2010, the Annual General Meeting will be held on April 28 in the city of Luxembourg at the time and in the venue specified by the Board of Directors in the invitation to the Meeting. If said date falls on a national holiday or bank holiday in Luxembourg or Finland, the Annual General Meeting will be held the second following day. 

Group Administration

In addition to the general meeting of shareholders, the principal responsibility for the company’s administration and operations lies with the Board of Directors and the President and CEO. The Board is responsible for the proper organization of the company, and the strategy formulated by the Management Team is endorsed by the Board of Directors. President and CEO is responsible for day-to-day operations. He is supported in his work by the Management Team.

As of April 2010, the Elcoteq Management Team consists of the President and CEO, the CFO, the Senior Vice President of Group Operations, the Vice President of New Sales & Business Development, the Vice President of Human Resources and the Presidents responsible for the two Strategic Business Units.

The task of the Group’s management is to manage the Group in accordance with the strategy endorsed by the Board of Directors. Its main responsibilities include developing and executing the company’s strategy, monitoring and ensuring the company’s financial performance, steering and supervising the company’s operations, developing and maintaining the company’s internal operating procedures and guidelines and also its reporting and monitoring systems, and ensuring that the company’s activities comply with legal regulations.

The Management Team meets at least once a month. Its members report to the President and CEO. 

In August 2009, Elcoteq combined its two former Business Areas, Home Communications and Personal Communications, under a new Strategic Business Unit (SBU) named Consumer Electronics. Communications Networks continued as an independent SBU, but the name changed to System Solutions. Both SBUs are responsible for managing and developing their existing customer relationships and applicable service offerings, while New Sales and Business Development serves both SBUs. Group Operations is responsible for sourcing, supply chain and production.service offerings.

• composition and constitution of the Board of Directors
• conduct and number of meetings
• information on the company to be regularly submitted to the Board
• matters requiring regular consideration at Board meetings, and
• assessment of the Board’s performance.

The Board’s Rules of Procedure stipulate that a majority of the Board members must be independent of the company and at least two of this majority must be independent of the company’s principal shareholders. Six of the seven Board members elected by the Annual General Meeting (AGM) in 2010 are independent of the company and its principal shareholders.

The term of office of the Board members expires at the close of the first AGM following their election. After the close of the Annual General Meeting, the new Board elects a chairman and a deputy chairman from among its members and decides on the establishment of its committees and their members. 

According to the Rules of Procedure, the Board of Directors assesses its own activities and performance annually and develops its activities based on the results of this assessment.

The Board convenes regularly and at least six times during its term of office in accordance with a prearranged schedule, and holds extraordinary meetings at the request of a Board member or the company’s CEO. The Board is convened by its chairman. The Board of Directors constitutes a quorum when more than half of its members are present, either in person or represented by another Board member. Decisions are made with a simple majority of votes. In the event of a tied vote, the chairman’s vote is decisive. The Board’s meetings are also attended by the President and CEO to present matters, and additionally executives and other persons when expert advisers are required.

In addition to the matters stipulated in the applicable legislation and Elcoteq’s Articles of Association, the Board of Directors also:

• decides the Group’s strategy and supervises its implementation
• evaluates and approves projects related to the company’s development and decides on the establishment or discontinuation of the Group’s subsidiaries
• approves the Group’s business plan and budget and monitors their implementation
• decides acquisitions and significant investments and monitors their implementation
• decides significant Group-level financing arrangements and the granting of collateral and guarantees
• decides the Group’s administration and organization
• decides the appointment and remuneration of the President and CEO, the COO and other top management
• decides the bonus and remuneration schemes applied to the company’s management and personnel
• considers and approves the annual and interim financial statements
• supervises risk management in the Group and compliance with its procedures
• supervises compliance with legislation and regulations and compliance with the company’s corporate governance guidelines
• decides donations to good causes, and
• presents proposals to general meetings.

The Board of Directors has seven members during the term of office ending at the 2011 Annual General Meeting. Since the General Meeting in 2010, the Chairman of the Board has been Mr. Jorma Vanhanen and the Deputy Chairman Mr. Heikki Horstia.

The Board of Directors met 24 times during 2009. The attendance of its members at these meetings averaged 88 percent. 

The Board’s Committees

Since the Annual General Meeting 2010, the Board of Directors has three committees: Audit Committee, Compensation Committee and Nomination Committee. The Board can also establish other committees for specific purposes.

The tasks of each committee are stipulated in their own rules of procedure which are approved by the Board of Directors. The committees report on their work to the Board at the Board meetings. 

Audit Committee

The Audit Committee supervises and prepares for the Board matters related to financial reporting, external auditing, the internal audit and risk management. It also supervises and enhances these functions in the company. The Committee consists of at least three independent Board members, who must have sufficient financial expertise for the task. The Committee meets regularly and at least four times during its term of office. The Committee is in regular contact with the company’s auditors. The Committee met five times during 2009.

As of May 2010, the chairman has been Mr. Heikki Horstia and Mr. Martti Ahtisaari, Mr. Eero Kasanen and Mr. François Pauly members of this committee.

Compensation Committee

The Compensation Committee prepares for the Board matters related to the remuneration, performance-based compensation, benefits and perquisites policies applied to the company’s management and the remuneration policy of the company. The Committee consists of at least three independent Board members. The Committee meets during its term of office as necessary and is convened by its chairman. The Committee met six times during 2009.

As of May 2010, the chairman has been Mr. Heikki Horstia and Mr. Martti Ahtisaari, Mr. Eero Kasanen, Mr. François Pauly and Mr. Pauli Aalto-Setälä members of this committee.

Nomination Committee

The Nomination Committee prepares matters related to the nomination and remuneration of the Board members, and seeks suitable individuals for nomination to the Board. The Committee consists of at least three members and is convened as necessary by its chairman. The Committee met three times during 2009. 

As of May 2010, the chairman has been Mr. Jorma Vanhanen and Mr. Antti Piippo, Mr. Henry Sjöman and Mr. Juha Toivola were elected as members of this committee. 

Fees Paid to the Board of Directors

As decided by the Annual General Meeting held in the spring of 2010, the Board members are each paid an annual fee for their Board work amounting to 60,000 euros, of which 60% will be paid in money and 40% in Elcoteq shares and those needed shares have to be acquired during May 20 - June 3, 2010 within the limits set by the rules governing insider trading. The acquired shares may not be surrendered before the following Annual General Meeting unless the individual’s membership of the Board ends earlier.

The Annual General Meeting in 2010 decided to pay an additional monthly fee of 45,000 euros to the full-time Chairman of the Board and an additional monthly fee of 10,000 euros to the Deputy Chairman of the Board. The salaries, fees and fringe benefits paid to the Board of Directors for their Board work in 2009 totaled approximately 1,140,000 euros.

In addition to the statutory pension cover, additional pension arrangements allow some of the Board members to retire at the age of 60. The members of the company’s Board of Directors do not participate in Elcoteq’s share subscription plans.

In 2009, Board member Henry Sjöman had employment relationship to Elcoteq Network S.A. and his monthly salary was 18,386 euros. Board member Jorma Vanhanen has employment relationship to Elcoteq SE, Finnish Branch and his monthly salary is 17,500 euros.

Board’s Fees Approved by the Annual General Meeting on April 28, 2010

Chairman 60,000 euros/year + 45,000 euros/month
Deputy Chairman 60,000 euros/year + 10,000 euros/month
Other members 60,000 euros/year

The President and CEO

The Board of Directors appoints a President who is responsible for overall management of the company as required by legislation and in accordance with the instructions and stipulations of the Board of Directors.

Since January 1, 2004, the President and CEO of the company has been Mr. Jouni Hartikainen, M.Sc. (Eng.). 

President and CEO’s Remuneration

The President and CEO’s monthly salary is 87,356 Swiss francs and he also receives the usual fringe benefits. In addition to his monthly salary, the President and CEO receives a performance-based bonus in accordance with the incentive scheme in force to a maximum amount of 50% of his basic annual salary. The salary, other short-term benefits and share-based payments paid to the President and CEO in 2009 totaled some 834,000 euros.

In addition to the statutory pension cover, additional pension arrangements allow the President and CEO to retire at the age of 60. 

The CEO’s notice period is six months. In the event that the CEO’s employment contract is terminated by the company without proper cause, the CEO will be paid severance compensation equivalent to 12 months’ monetary salary.

Management Remuneration and Incentive Schemes

The Board of Directors decides on the fees and remuneration schemes applicable to the members of the Management Team based on a proposal by the Compensation Committee. The level and competitiveness of the salaries is reviewed on the basis of comparison data obtained from international evaluation systems.

The company operates a bonus system under which a part of the bonus is based on achievement of the Group’s financial targets and a part on achievement of each director’s individual targets. The Board of Directors determines the criteria for the financial targets based on a proposal by the Compensation Committee. Individual targets are determined during performance appraisal discussions. The maximum amount to be paid to members of the Management Team for 2009 is 50% of their basic annual salaries.

Due to the importance of the project to strengthen the balance sheet the Board of Directors has set up a specific incentive scheme for the members of Management Team. Subject to the completion of a transaction or series of transactions the Management Team members will be paid a bonus corresponding to 3 to 6 month’s salary. Furthermore, the Management Team members may be entitled to an additional achievement bonus, subject to being employed by the company for a period of no less than 6 months after the closing and fully depending on the development of the shareholder value as a result of the said transaction or transactions.

The company had a share subscription plan from 2007 that allowed the company to issue shares to key personnel on the basis of the improvement of the profit before taxes for the full financial year 2008. According to the plan, the actual number of new series A shares transferred to the personnel on November 12, 2009 was 336,266.

The company also has a fairly similar share subscription plan from 2009, where the potential reward is based on reaching the targets regarding consolidated income before taxes for the first and second half of year 2009. Based on the achieved targets the company would issue a maximum of 1,500,000 new series A shares of which 50 percent would be issued during June 2010 and the remaining 50 percent during January 2011. Based on the actual results for 2009, the targets for the first and second half of 2009 have not been met and thus no shares will be issued. 

Internal Control and Risk Management Related to Financial Reporting 

Internal control is a fundamental element of the Company’s governance and management systems. Internal control covers all processes, policies and organizational structures in Elcoteq and helps the management and the Board to ensure that the Company can execute its strategy effectively based on reliable financial reporting and in compliance with all applicable laws and regulations.

Financial Reporting

The financial reporting in Elcoteq is carried out in a harmonised way in all Group Companies using a common Enterprise Resource Planning (ERP) system and a uniform chart of accounts. A common consolidation tool is used as basis for the internal and external financial reporting.

The international financial reporting standards (IFRSs) are applied in all group companies for preparing the financial statements. The key policies and instructions regarding the financial reporting are incorporated in the Elcoteq Accounting Policy and are applied in all group companies. Group Control is responsible for ensuring that the accounting policy is consistently followed throughout the company and it is reflecting the latest accounting regulations.

The Board and the President and CEO have the responsibility to set up the internal control systems for financial reporting. The Board has authorized the Audit Committee of the Board of Directors of Elcoteq to oversee the internal control and financial reporting process. The CFO and Group Control are responsible for implementing and supporting the group wide financial management and control of operations.

Internal control systems for financial reporting are supported also by the Internal Audit function of Elcoteq. The Internal Audit function is described below in the Internal Audit section.

Business Units, Strategic Business Units and Group functions are responsible for the accuracy and correctness of the reported financial information. The Group Control and the CFO prepare the reports and analyse the performance in relation to the financial targets and past performance on all organizational levels. The Audit Committee reviews the interim reports and annual financial statements in detail and the Board approves the financial statements and any forward looking statements included in external reports.

The business performance of Elcoteq is reported by the Group Control daily on customer level and the full financial performance monthly on group, strategic business unit, customer and factory level. Forecasts for the following 12 months are drawn up monthly. The results and forecasts include an income statement, a balance sheet and key financial indicators. The Group Management Team reviews the financial performance on monthly basis and decides upon any corrective actions. The company monitors fulfilment of its strategic goals in quarterly strategy meetings. The meetings review the key indicators that describe the business plan targets. Elcoteq updates its business plan once a year for a three-year period. Annual and long-term targets are approved by the Board.

Risk Management

Elcoteq’s risk management is an integral part of the internal control. Risk management aims at supporting the achievement of strategic and operational goals and ensures the continuity of business operations. Elcoteq seeks to manage risks in a comprehensive and forward-looking manner and to limit any negative effects should any risks materialize.

The Audit Committee of the Board of Directors oversees the quality, adequacy and effectiveness of risk management, and reports to the Board on risk management. Board decides about the risk taking tolerance. The purpose of Elcoteq’s risk management function is to support and evaluate the risk management work of the Group’s different units, and to report key risks to the Group’s Management Team. Elcoteq´s risk management function reports to the CFO.

Elcoteq’s risk management consists of a Group-wide risk assessment process. Each function reports its main risks and risk management action plans to Group Management Team twice per year. The action plan implementation is monitored on regular basis by the Group Management Team. Key risks are also addressed in the strategic planning process.

Internal Audit

The Internal Audit function assists the Audit Committee of the Board of Directors in assessing and assuring the adequacy and effectiveness of Elcoteq’s internal controls and risk management. Elcoteq has outsourced its internal audit to KPMG Oy Ab Risk Advisory Services. The internal audit is coordinated by Elcoteq´s risk management function. The internal audit reports administratively to the CFO but in matters related to the internal audit directly to the Audit Committee of the Board of Directors. The Audit Committee also decides annually the areas that the internal audit will focus on. The internal audit function is independent of the company’s external auditors.

Elcoteq performs numerous audits with KPMG Oy Ab Risk Advisory Service each year to establish, among other things, the functionality of certain preselected processes and the adequacy and efficacy of controls in various units. In 2009, KPMG executed internal audits in seven different business functions. The most important observations resulting from the audits are reported in detail to the management of each unit in question and a summary of the audits is submitted to the Audit Committee.

Insider Matters

The Insider Rules endorsed by the Board of Directors and adopted by the company on March 1, 2000 fully comply with and exceed the requirements of the guidelines recommended by the Nasdaq OMX Helsinki and are updated accordingly. The Insider Rules are available to all the company’s employees through the company’s intranet.

Under the company’s Insider Rules, insiders may engage in trading in the company’s shares only at times when the market has the fullest possible knowledge of matters that could influence the share value. For this reason, Elcoteq’s permanent insiders are not permitted to trade in the company’s shares during the time between the closing of its reporting period and the date of the results publication.

As from the beginning of 2006, the company has maintained a public insider register that comprises the members of the Board of Directors, the President and CEO, the members of the Management Team, the auditor and other separately specified members of the company’s management. Individuals who by virtue of their duties regularly receive information regarded as insider information are included in the company’s non public insider register. Elcoteq also maintains project-specific insider registers.

The insider registers are maintained by Elcoteq’s legal affairs department, which also updates the information on Elocteq´s insiders in the register maintained by Euroclear Finland Ltd.

The legislation of both Finland and Luxembourg is applied in insider supervision. The Finnish Financial Supervisory Authority supervises compliance with legislation and regulations on project-specific insider registers, while supervision of the public and company specific insider register is handled by CSSF (Commission de Surveillance du Secteur Financier). 

The Auditor

According to the company’s Articles of Association, the company shall have one or more statutory auditors. The Annual General Meeting appoints the auditor. The term of office ceases at the close of the first Annual General Meeting following his election.

Elcoteq SE’s auditors are the firm of authorized public accountants KPMG Audit S.à.r.l, under the supervision of Principal Auditor Philippe Meyer. In 2009, the auditing associations belonging to the KPMG Group were paid approximately 520,000 euros in auditing fees and approximately 420,000 euros for other consultation assignments. Other consultation assignments mainly consisted of consultation related to the business development projects, taxation consulting and internal auditing.