Corporate Governance

A more comprehensive and regularly updated description of Kesko's Corporate Governance is presented at www.kesko.fi.

The rules and the Corporate Governance Code observed by Kesko

Kesko Corporation (“Kesko” or “the company”) is a Finnish public limited company in which the duties and responsibilities of the executive bodies are defined according to the Finnish law. The international Kesko Group comprises the parent company, Kesko, and its subsidiaries. The company is domiciled in Helsinki.

The highest decision-making power in Kesko is exercised by the company's shareholders at a General Meeting. The company's shareholders elect the company's Board of Directors and auditor at a General Meeting. The Kesko Group is managed by the Board of Directors and a Managing Director, who is the President and CEO. The company uses a so-called one-tier governance model.

Kesko's decision-making and administration comply with the Finnish Limited Liability Companies Act, other regulations concerning publicly traded companies, Kesko Corporation's Articles of Association, and the rules of NASDAQ OMX Helsinki Ltd. In addition, the company complies with the Finnish Corporate Governance Code (“Corporate Governance Code”) issued by the Securities Market Association. The Corporate Governance Code is available in full at www.cgfinland.fi. In accordance with the Comply or Explain principle of the Corporate Governance Code, the company departs from the Corporate Governance Code's recommendation concerning the terms of office of Board members as specified hereafter.

Departure from the recommendation of the Corporate Governance Code

The terms of the members of Kesko's Board of Directors depart from the recommended term of one year. The term of the company's Board is defined in the company's Articles of Association. The General Meeting makes decisions on amendments to the Articles of Association. According to the company's Articles of Association, the term of office of each Board member is three (3) years with the term starting at the close of the General Meeting electing the member and expiring at the close of the third (3rd) Annual General Meeting after the election.

A shareholder which, together with controlled companies, holds over 10% of all voting rights attached to Kesko's shares, has informed the company's Board of Directors that it considers the term of three (3) years good for the company's long-term development and sees no need to shorten the term of office set in the Articles of Association.

General meeting

The Annual General Meeting, which is held on a date by the end of every June designated by the company's Board of Directors, handles the business specified for the Annual General Meeting in the company's Articles of Association and any other proposals that may be made to the Meeting. If needed, the company may also hold an Extraordinary General Meeting. All General Meetings are convened by the company's Board of Directors. An Extraordinary General Meeting must also be convened if shareholders with at least 10% of the shares so demand in writing in order to deal with a given matter. As a rule, General Meetings handle the matters placed on the agenda by the company's Board of Directors. According to the Limited Liability Companies Act, a shareholder has the right to have a matter specified for a General Meeting handled at a General Meeting, if he/she requests so in writing to the Board of Directors early enough for the matter to be included in the notice of the meeting.

Major matters subject to the decision-making power of a General Meeting

Major matters subject to the decision-making power of a General Meeting include:

  • decisions on the number of the Board members,
  • the election of the Board members,
  • decisions on the remuneration and financial benefits of the members of the Board of Directors and Board Committees,
  • the election of the auditor and decisions of the auditor's fee,
  • the adoption of the financial statements,
  • decisions on discharging the Board and the Managing Director from liability,
  • amendments to the Articles of Association,
  • decisions on increases in the share capital, and
  • decisions on the distribution of the company's earnings, such as distribution of profit. Convening a General Meeting Shareholders are invited to a General Meeting by a notice published in at least two nationwide newspapers, specifying e.g.:
  • the time and place,
  • the proposed agenda for the General Meeting,
  • a description of the procedures that shareholders must comply with in order to participate in and cast votes at the General Meeting,
  • the so-called record date that defines the right to participate in and cast votes at the General Meeting,
  • the place where the documents and proposals for resolutions of the General Meeting are available, and
  • the address of the company website.

The notice is delivered no earlier than two (2) months and no later than one (1) week before the record date of the General Meeting defined in the Limited Liability Companies Act. The notice and the proposals of the company's Board to a General Meeting are published in a stock exchange release. A proposal of such shareholders who hold at least 10% of the votes carried by the company shares as Board member is also published in a stock exchange release.

Right to participate in a General Meeting

Shareholders have the right to participate in a General Meeting if they are registered as shareholders in the company's register of shareholders kept by Euroclear Finland Ltd at the record date separately given by the company. Those wishing to attend a General Meeting must notify their intention in advance by the date announced in the notice of the General Meeting, which date must not be earlier than ten (10) days before the meeting. Shareholders may attend the meeting themselves or through an authorised representative.

Kesko's aim is that all members of the company's Board of Directors are present at the Annual General Meeting. First-time candidates for the Board of Directors are present at the General Meeting which decides on election, unless there is a weighty reason for their absence.

Share series

The company has two share series, A and B, which differ as to the votes to which they give entitlement. Each A share entitles its holder to ten (10) votes and each B share to one (1) vote at a General Meeting.

Kesko's Articles of Association do not include any redemption clauses or voting restrictions. No shareholder agreements on the use of voting rights in the company or agreements on restricting the transfer of company shares are known to the company.

Board of Directors and Board Committees

Composition and term of the Board of Directors and independence of Board members

According to the Articles of Association, Kesko's Board of Directors consists of a minimum of five (5) and a maximum of eight (8) members. The General Meeting elects all members of the Board of Directors. The Board elects the Chair and the Deputy Chair from among its members. All Kesko's Board members are non-executive directors. According to the Articles of Association, the term of office of each Board member is three (3) years with the term starting at the close of the General Meeting electing the member and expiring at the close of the third (3rd) Annual General Meeting after the election.

The majority of Kesko's Board members are independent of the company and all Board members are independent of the company's significant shareholders. The Board of Directors evaluates the independence of its members on a regular basis. Each Board member is obliged to provide the Board with sufficient information that will allow the Board to evaluate his/her independence.

Duties

The function of Kesko's Board of Directors is to duly arrange the company's management, operations and accounting, and to supervise the company's financial management. The Board of Directors has confirmed the written rules of procedure that specify the Board of Directors' duties, business to be handled, meeting practice and the decision-making process. According to the rules of procedure, the Board of Directors handles and decides on all matters that are financially, commercially or fundamentally significant for the Group's operations. According to the rules of procedure, the principal duties of the Board of Directors include:

  • making decisions on Group strategy and confirming strategies for the divisions,
  • confirming the Group's rolling plan, which includes the investment plan,
  • approving the Group's financing and investment policy,
  • confirming the Group's risk management principles and handling the Group's major risks and uncertainties,
  • confirming the Group's insurance policy handling and adopting consolidated financial statements interim financial reports and related stock exchange releases and the report by the Board of Directors,
  • making decisions on strategically or financially important individual capital expenditure, acquisitions, disposals or other arrangements, and contingent liabilities,
  • making decisions on key Group structure and organisation, appointing and dismissing the company's President and CEO, approving his/her managing director's service contract and making decisions on his/her remuneration and other financial benefits,
  • approving the appointments, remuneration and financial benefits of the Corporate Management Board members responsible for business divisions,
  • making decisions on Kesko's remuneration systems including possible granting of stock options within the terms and conditions decided by the General Meeting,
  • establishing a dividend policy and being responsible for the development of shareholder value, and
  • handling the Corporate Responsibility Report.

Remuneration and other financial benefits of the Board of Directors and its Committees

The Annual General Meeting makes decisions on the remuneration and other financial benefits paid to the members of the Board of Directors and its Committees annually. Fees to the members of the Board of Directors and its Committees are paid as monetary compensation. Board members have no share or share-linked remuneration systems.

Committees of the Board of Directors

Kesko has the Board of Directors' Audit Committee and Remuneration Committee, both of which consist of three (3) Board members. The Board of Directors elects the Chairs and the members of the Committees from among its members for one year at a time. All members of the Audit Committee are independent of the company and its significant shareholders. All members of the Remuneration Committee are independent of the company's significant shareholders. The Committees regularly assess their operations and working practices and carry out a related self-assessment once a year. The Board of Directors has confirmed written rules of procedure for the Committees that lay down their key duties and operating policies.

The Committees have no independent decision-making power, but the Board makes decisions based on the preparations made by the Committees. The Chair of the Committee regularly reports on the work of the Committee to the Board of Directors.

Audit Committee

The duties of the Audit Committee include:

  • monitoring the financial position and financing of the Kesko Group,
  • monitoring the company's reporting process of financial statements,
  • supervising the company's financial reporting process,
  • monitoring the efficiency of the company's internal control, internal audit and risk management systems,
  • handling the plans and reports of the company's Internal Audit Department,
  • monitoring the statutory audit of the financial statements and consolidated financial statements,
  • evaluating the independence of the company's audit firm,
  • evaluating the related services provided to the Group by the company's audit firm and the audit companies belonging to the same chain,
  • preparing the draft resolution concerning the election of the company's auditor, and
  • maintaining contact with the company's auditor.

Remuneration Committee

The duties of the Remuneration Committee include:

  • the preparation of the remuneration and other financial benefits of the company's President and CEO for the company's Board of Directors,
  • the preparation of the salaries and other financial benefits of the Corporate Management Board members responsible for the business divisions,
  • the preparation of the appointment matters of the President and CEO and the Corporate Management Board members responsible for the business divisions and the assessment of their successors,
  • the preparation and development of the company's remuneration systems, and
  • the preparation of matters related to the possible granting of stock options to the company's Board of Directors within the terms and conditions decided by the General Meeting.

Further information about Kesko's Board of Directors and its Committees is also available at www.kesko.fi.

President and CEO

Kesko has a Managing Director who is known as the President and CEO. His duty is to manage the company's activities in accordance with the company's Board of Directors' instructions and rules and to inform the Board of Directors about the development of the company's business and financial situation. He is also responsible for arranging the company's day-to-day administration and ensuring that the financial administration of the company has been arranged reliably. The Board of Directors elects the President and CEO. The Board of Directors has decided the terms of the President and CEO's service contract. A managing director's service contract has been made in writing between the company and the President and CEO.

Information about the President and CEO's biographical details, working experience and key positions of trust as well as his holdings of securities issued by Kesko are presented on page "Corporate Management Board on 31.12.2008" and at www.kesko.fi.

Corporate Management Board

The Kesko Group has a Corporate Management Board, the Chair of which is Kesko's President and CEO. The Corporate Management Board has no authority based on legislation or the Articles of Association. The Corporate Management Board is responsible for dealing with Group-wide development projects and Group-level principles and practices. In addition, the Corporate Management Board deals with the Group's and the division parent companies' business plans, profit performance and prepares matters that are handled by Kesko's Board of Directors. The Corporate Management Board meets 8–10 times a year.

Further information about Kesko's Corporate Management Board is presented on page "Corporate Management Board on 31.12.2008" and at www.kesko.fi.

Remuneration

The remuneration system of the President and CEO and Kesko's management consists of a fixed monthly salary, a bonus based on the profit impact of each management position, an executive's pension benefits, and the stock option system. The company has no share remuneration system.

Kesko's Board of Directors makes decisions on the salaries and other financial benefits of the President and CEO and the Corporate Management Board members responsible for the business divisions, on the principles of the performance-based bonus system and the principles of other executives' bonuses. The President and CEO makes decisions on the salaries and remuneration of other Corporate Management Board members except for those mentioned above and on the details of other executives' bonus remuneration systems, following the one-over-one principle. Depending on the profit impact of each management position, the maximum bonuses can vary up to an amount corresponding to an executive's salary for 3–8 months. The bonus system criteria consist of Group-level and responsibility areaspecific profit targets, customer and personnel indicators, and the supervisor's overall assessment. The bonus system covers about 100 executives of the Kesko Group.

In addition to the bonus system, Kesko has a valid year 2003 stock option scheme for the Kesko Group's management and a valid year 2007 stock option scheme for the Group management and other key people. The 2007 option scheme includes the obligation made by Kesko's Board of Directors to option recipients to use 25% of their option income to buy company shares for permanent ownership. Kesko's Board of Directors makes decisions on the distribution of stock options based on the proposal by the Remuneration Committee and within the terms and conditions of the stock option scheme decided by the company's General Meeting.

The terms and conditions of the 2003 and 2007 stock option schemes are available in full at www.kesko.fi.

Group-wide financial reporting

The Group's financial performance and the achievement of financial objectives are monitored via Group-wide financial reporting. Monthly performance reporting includes Group-, division- and subsidiary-specific results, progress compared to the previous year, comparisons with financial plans, and forecasts for the next 12 months. The Group's short-term financial planning is based on plans drawn up by the quarter, extending for 15 months. The financial indicator for growth is sales growth, while those for profitability are the accumulation of operating profit excluding non-recurring items and the accumulation of economic value added, monitored via monthly internal reporting. When calculating economic value added, the requirements concerning return on capital are determined annually on market terms. In profit requirements, risk-related division- and country-specific differences have been taken into account. Information about the Group's financial situation is given by interim financial reports and the financial statements release. The Group's sales figures are published in a stock exchange release each month.

Risk management, control and internal audit

Risk management

In the Kesko Group, risk assessment and management is conducted on a comprehensive basis. Risk management is an essential part of management and day-to-day operations. The objective of Kesko's risk management is to ensure the delivery of the Group's customer promises, the shareholder value, profit performance, the ability to pay dividends and the continuity of business. Efficient risk management is a competitive advantage for Kesko.

In the Kesko Group, a risk has been defined as any kind of uncertainty that may lead to:

  • a failure to exploit business opportunities,
  • events or reasons which prevent or hinder the attainment of objectives or have other unwanted consequences.


The risk management policy approved by the Board of Directors guides risk management in the Kesko Group. This policy is based on the COSO ERM Integrated Framework. The policy defines the objectives, principles, responsibilities and key practices of risk management.

The Kesko Group's principles of risk management

  • Conscious and carefully evaluated risks are taken in selecting strategies, e.g. in expanding business operations, in enhancing market position and power, and in creating new business.
  • Financial, operational and damage/loss risks are avoided or reduced.
  • A safe shopping environment for customers and product safety are ensured.
  • A safe working environment is created for employees.
  • Information about risks and risk management is provided to stakeholders.
  • Opportunities for unhealthy phenomena, crime or malpractice are minimised through operating principles, controls and supervision.
  • The continuity of operations is ensured by safeguarding critical functions and essential resources.
  • Crisis management, disaster recovery and continuity plans are prepared in case any risks are realised.
  • The costs and resources involved in risk management are in proportion to the obtainable benefits.

Responsibilities and roles in risk management

The business management is responsible for the risk management in practice. Persons responsible for risk management have been appointed in the divisions to coordinate and report on risk management activities. Kesko Food and Rautakesko also have Risk Managers of their own, who are responsible for the development of risk management in their divisions in cooperation with the business management and supporting functions.

The Corporate Risk Management Unit is responsible for developing risk management and its tools, introducing best practices to the Group and reporting on risk management to the Group management. The Unit is responsible for Group-level insurance programmes.

Kesko has a Group-level Risk Management Steering Group, which is chaired by the President and CEO, and has representatives of various divisions and Group units as members. The Steering Group approves risk management procedures and key policy definitions, and assesses and monitors the Group's risks and the implementation of risk management responses. Risks are reported to Kesko's Board of Directors' Audit Committee on a quarterly basis. Kesko's Board of Directors handles the major risks, their management and assesses risk management efficiency.

With respect to the management of financial risks, the Group observes the financial policy that has been confirmed by the Board of Directors. The Group's Treasury is responsible centrally for Group funding, liquidity management, relations with providers of finance, and the management of financial risks. The implementation of the policy and the Group's financing is reported to the Audit Committee. The Corporate Internal Audit assesses the Group's risk management annually and reports on the level of risk management to the Audit Committee.

Risk management implementation in 2008

As a result of the global financial and real economy crisis, risk management has become increasingly important and it has been systematically developed in the Kesko Group. The role of divisions' management in risk management has become increasingly important. Risk management is part of Kesko's management and operational activity. Risks are assessed on a regular basis and reported quarterly in connection with financial reporting. Project-specific risk analyses are also prepared.

The divisions assess the risks in connection with the strategy cycle and prioritise them according to their criticality and management level. Division parent companies' risks and their management have been discussed by the companies' and the Group's management. Separate risk analyses have been carried out for major projects. Also the Group units, such as Corporate Finance and Accounting, Treasury, Corporate Communications and Responsibility, Legal Affairs and IT Management, have assessed the risks threatening the Group objectives and their management.

On the basis of the divisions' and Group units' risk analyses, the Corporate Risk Management Unit has prepared summaries of major risks and their management on a quarterly basis. The resulting risk report has been handled by the Audit Committee. The main risks and uncertainties have been reported in connection with the interim financial reports.

Other risk management responses in 2008

  • Continuity management projects progressed.
  • Shrinkage reporting was harmonised.
  • Group-level crisis plan and crisis communications guidelines were updated.
  • Insurance policy updated by the Corporate Risk Management Unit was approved by Kesko's Board of Directors.
  • Risk reporting to the management was increased.
  • Deviation reporting application was introduced (incl. the reporting of “near miss” situations and follow-up of corrective actions).
  • Guidelines for the safety and security of business premises were harmonised.
  • Guidelines for handling malpractice were updated.
  • The operation of Group-level cooperation forums to support the development of risk management was established (subjects include corporate, premises and work safety, data security and insurance).
  • Risk awareness was increased through risk management and safety training, and communications.

Risk management emphases in 2009

Key development areas at the Group level include more efficient counterparty risk and continuity management and improved management of operational risks and loss prevention. An assessment of job hazards will be carried out in operations in Finland.

Major risks and uncertainties related to Kesko's business operations and risk management responses are described in Kesko's Annual Report, in the report by the Board of Directors on page, in notes Nos. 44 and 45 to the consolidated financial statements, and on Kesko's website at www.kesko.fi.

Internal audit

Roles of management and the Corporate Internal Audit in internal control

The Audit Committee of Kesko's Board of Directors has confirmed Kesko's internal audit policies, which are based on good auditing principles, widely accepted internationally.

Internal control is an essential part of corporate governance and management. The Board of Directors and the President and CEO are responsible for organising internal control. The Board of Directors is accountable to shareholders and the President and CEO to the Board of Directors. The chain of responsibilities continues throughout Kesko's organisation so that the direct subordinates of the President and CEO report to him, and each Kesko employee is accountable for the internal control of his/her area of responsibility to his/her immediate superior. The main duty of the Corporate Internal Audit is to support Kesko's President and CEO, the Board of Directors and management in their task of control.

Kesko's Corporate Internal Audit is responsible for the independent corporate assessment and assurance functions required of a listed company that systematically evaluate and verify the effectiveness of risk management, control, management and governance. In addition, support is given to the management and organisation in their work of ensuring that the Group's goals and objectives are achieved and that the monitoring system is developed further.

Organisation and focus of internal audit

The operating policies of Kesko's Corporate Internal Audit have been defined in the Charter confirmed by the Audit Committee. The unit is subject to Kesko's President and CEO and the Board's Audit Committee, and it reports about its plans and activities to them on a regular basis. Audit findings, recommendations and the progress of actions are reported to the auditee management, the President and CEO, the Audit Committee and the external auditors.

The Corporate Internal Audit is divided into foreign audit, group audit and IT audit. Auditing is based on risk analyses and the control discussions carried on with Group and divisional management. The Corporate Internal Audit cooperates with the Corporate Risk Management and participates in the work of the Group's Risk Management Steering Group. The Corporate Internal Audit assesses the effectiveness of Kesko's risk management system annually.

Auditing evaluates the effectivity and efficiency of operations, the reliability of financial and operational reporting, the compliance with laws and regulations, and the safeguarding of assets. Focus areas include foreign operations and retailing, especially controls of goods and money in the supply chain, finance and reporting, information systems and information security.

Special attention is paid to good communications with management and providing support in adopting good audit practices. The Corporate Internal Audit communicates and consults on good control solutions within the Group by preparing reports and arranging events for exchanging experiences. Controls are constantly compared with the best Finnish and international practices with the aim to identify the most efficient solutions from the viewpoint of Kesko.

Ensuring professional competence

According to its Charter, the Corporate Internal Audit must have sufficient resources available and the knowledge, skills and other competencies needed for performing its duties. The President and CEO and the Audit Committee approve the Corporate Internal Audit's annual plan and decide on its resources. The auditors' competencies are developed by systematic professional education and examinations. Kesko's Corporate Internal Audit has five employees with the international qualification of Certified Internal Auditor, granted by the Institute of Internal Auditors (IIA).

The extent and competence of auditing is ensured and coordinated by regular contacts and exchange of information with the Group's other internal assurance operations and external auditors. In addition, the department acquires external services for occasional needs or assessment assignments that require special competence. International guidelines of the IIA require that an external quality assurance audit be conducted in internal audit operations every five years. According to the audit carried out at Kesko in 2005, Kesko's Corporate Internal Audit mainly complies with the international professional and ethical IIA standards.

Insider administration

Kesko's insider regulations

Kesko complies with insider guidelines of NASDAQ OMX Helsinki Ltd (Helsinki Stock Exchange), effective 2 June 2008. Kesko's Board of Directors has confirmed Kesko's insider regulations for permanent and project-specific insiders. The contents of the regulations correspond with the insider rules of the Helsinki Stock Exchange. Kesko's insider regulations have been distributed to all insiders.

Kesko's permanent insiders and insider registers

In accordance with the Securities Markets Act, Kesko's permanent public insiders include Kesko's Board members, the President and CEO (Managing Director), and the auditor with principal responsibility in the audit firm. Kesko Corporation's Board of Directors has also stipulated that, in addition to the President and CEO, other members of the Corporate Management Board are regarded as the company's permanent public insiders. All permanent public insiders and the statutory information about them, their related persons and the corporations that are controlled by related persons or in which they exercise influence, have been entered in Kesko's register of public insiders. Other permanent insiders of Kesko include such persons working in positions determined by the Board of Directors, who in their duties receive insider information on a regular basis and who are thus entered in the company's own, non-public insider register. Kesko's company-specific insider register is divided into individual registers that consist of permanent insiders and of possible insider projects and persons participating in their preparation.

Monitoring

The Group's Legal Affairs Unit monitors the compliance with insider regulations and maintains the company's insider registers in cooperation with Euroclear Finland Ltd. Kesko's permanent insiders may not acquire or transfer securities issued by the company, including securities or derivative financial instruments entitling to them, during 21 days prior to the publication of interim financial reports and during 28 days prior to the publication of annual financial statements. Further information about the holdings of Kesko's permanent public insiders is available on page "Shares and shareholders" and updated information at www.kesko.fi.

Auditing

According to the Articles of Association, Kesko has one (1) auditor, which shall be an audit firm authorised by the Central Chamber of Commerce. The Board of Directors' Audit Committee prepares the proposal concerning the company's auditor for presentation at a General Meeting. The term of an auditor is the company’s financial period and an auditor’s duties terminate at the close of the Annual General Meeting following the election. A company belonging to the same chain as the audit firm represented by the auditor elected by Kesko's General Meeting mainly acts as an auditor of the Group companies outside Finland.

The auditor presents the audit report required by law to Kesko's shareholders in connection with the handling of the company's financial statements at the General Meeting, and regularly reports to the Audit Committee of Kesko's Board of Directors.

Other matters

Stock exchange communications and stock exchange releases

The Group's Senior Vice President, CFO is responsible for the financial content of stock exchange releases as well as for investor information. The Corporate Communications and Responsibility Unit produces Group-level communications material and is responsible for providing stock exchange and financial information. The Vice President, General Counsel is responsible for ensuring that the rules related to stock exchange releases are observed at Kesko.

In its investor communications, Kesko follows the principle of impartiality and publishes all investor information on its website in Finnish, Swedish and English. Kesko observes a twoweek period of silence before publishing information on its results.