Corporate governance and corporate governance recommendations report

Overview

Corporate governance constitutes a system of principles for the management of a company. Generally those principles are regulated by law, the Articles of Association and the internal rules of a company. Since 1st January 2006, the companies listed on the Tallinn Stock Exchange are recommended to follow the Corporate Governance Recommendations issued by the Financial Supervision Authority. Throughout 2014 the management of AS Tallinna Vesi has followed those regulations and principles.

AS Tallinna Vesi is committed to high standards of corporate governance for which the Management Board and Supervisory Board are accountable to the shareholders. AS Tallinna Vesi endeavours to be transparent thorough the business - in its ways of operating, corporate disclosures as well as relations with all stakeholders. AS Tallinna Vesi believes that openness and transparency enable to build the confidence and trust towards the company. As a clear recognition of best investor relations practices, AS Tallinna Vesi has been awarded by Nasdaq Baltic exchanges for several years. From 2009 to 2012, AS Tallinna Vesi has been awarded as the best Best Investor Relations in NASDAQ OMX Tallinn and runner up in the Baltics. In 2013 AS Tallinna Vesi was the first Estonian company to win the Best Investor Relations in the Baltics award. At the beginning of January 2015 Tallinna Vesi was announced as the winner in the main category “The Best Investor Relations in the Baltic” for the second consecutive year. Futhermore, AS Tallinna Vesi was voted as The Most Attractive Company on the Nasdaq Baltic Market in 2014, which was the new category introduced by Nasdaq Baltic.

Investor Relations and Disclosure of Information

At the end of the calendar year, AS Tallinna Vesi discloses the next year’s financial calendar, including the disclosure dates of the quarterly and annual financial information and the date of the Annual General Meeting (AGM) of the Shareholders via the Tallinn Stock Exchange homepage. All information disclosed via the Tallinn Stock Exchange is also subsequently disclosed on AS Tallinna Vesi’s homepage.

In addition, AS Tallinna Vesi discloses the following information on its website before AGM is held:

• AGM notice,
• background information about the agenda, including annual report subject to approval and the Supervisory Board´s report and auditor´s report;
• information about the Supervisory Board member to be elected and auditor candidate;
• the total number of voting rights and number of voting rights by share type;
• procedure for adding items to the agenda and presenting draft resolutions;
• procedure for inquiring about ASTV’s activities from the Management Board, and
• list of identification documents required for attending the general meeting, including the form of the power of attorney.

Resolutions of the General Meetings are published shortly after the meeting, and finalised protocol of the General Meetings is published after seven days have passed from the date of the General Meeting.

After the General Meeting, also the Management Board presentation is disclosed on AS Tallinna Vesi’s homepage.

AS Tallinna Vesi has a regular dialogue with its major shareholders and potential investors. For this, AS Tallinna Vesi is having General Meetings of Shareholders at least annually to keep AS Tallinna Vesi’s shareholders informed, and to provide the shareholders with the opportunity to ask questions from the Management Board and the Supervisory Board. The Management Board meets also potential and existing investors outside of General Meetings.

AS Tallinna Vesi is also organising an interactive webinar through Tallinn Stock Exchange internet-based environment once a quarter to present AS Tallinna Vesi’s financial results. All interested parties can take part of webinar. All webinar recordings are disclosed on Tallinn Stock Exchange‘s and AS Tallinna Vesi’s homepage.

The General Meeting of Shareholders

In accordance with the Commercial Code and the Corporate Governance Recommendations, AS Tallinna Vesi convenes its General Meetings, both Annual General Meetings and Extraordinary General Meetings (EGMs) by notifying all of its shareholders via the Tallinn Stock Exchange system and by placing an advertisement in one newspaper with Estonian-wide circulation 3 weeks in advance.

The agendas of AGMs and EGMs of AS Tallinna Vesi are pre-approved by the Supervisory Board, who also puts forward proposals for the attention and voting at the General Meeting. The General Meeting agenda items, the Supervisory Board’s proposals, with relevant commentaries about the agenda items, procedural instructions for participating at a General Meeting and how and when to propose additional items to the agenda are disclosed within the General Meeting notice.

Specific rights for adding agenda items granted to shareholders whose shareholding represents at least 1/20 of the share capital are explained in the General Meeting notice as well as on AS Tallinna Vesi’s homepage. Voting rights are explained to the shareholders on AS Tallinna Vesi’s homepage as well as at the beginning of each General Meeting.

On 20 May 2014, AS Tallinna Vesi held an Annual General Meeting (AGM) of its Shareholders to approve the 2013 annual report and distribution of profit, to elect Supervisory Board members, as well as to elect the auditor. The Management Board also made a presentation on the privatisation contract dispute to update the shareholders.

And on 29 October 2014, AS Tallinna Vesi held an Extraordinary General Meeting (EGM) of its Shareholders to elect a Supervisory Board member.

No questions were asked neither regarding the 2014 AGM nor EGM agenda. Neither were any additional agenda item proposals made in 2014. The chairman of any AGM and EGM is an independent person. In 2014, the AGM was chaired by Mr. Raino Paron and EGM by Mr Sven Papp, who both introduced the procedure for conducting the General Meeting, including the procedure for inquiring about the AS Tallinna Vesi’s activities from the Management Board.

All members of the Management Board, the Chairman of the Supervisory Board and the auditor in charge participated at the AGM in 2014. When a Supervisory Board member or auditor in charge stands for election at the General Meeting, the candidate for the respective position usually also participates in the meeting. Therefore, the Supervisory Board member candidate Mr Robert John Gallienne and Mr Mart Mägi participated at the 2014 AGM. Supervisory Board member candidate Mr Martin Benjamin Padley participated at the 2014 EGM. Candidate for the position of auditor in charge Mr Ago Vilu also participated at the 2014 AGM, among others.

AS Tallinna Vesi does not enable the shareholders to participate at the General Meetings via electronic communication tools, as it would be too complicated and expensive to establish reliable solutions to identify the shareholders most of whom are overseas’ residents.

No shareholder has shares that grant them a right for specific control. AS Tallinna Vesi is not aware that any shareholders have concluded any voting agreements.

As per the Articles of Association of AS Tallinna Vesi amended on 24 May 2011, AS Tallinna Vesi has issued one registered preferred share with the nominal value of 60 euros (B-share). The B-share grants the holder the right to participate at General Meetings as well as in the distribution of profits and of the assets remaining upon dissolution of AS Tallinna Vesi, also other rights provided by law and the Articles of Association of AS Tallinna Vesi. The B-share grants the holder the preferential right to receive a dividend in an agreed sum of 600 euros. The B-share grants the shareholder 1 (one) vote at the General Meeting (restricted right to vote) when deciding on amending the Articles of Association of AS Tallinna Vesi; increasing and reducing the share capital of AS Tallinna Vesi; issuing convertible bonds; acquisition of treasury shares by AS Tallinna Vesi; deciding on the merger, division, transformation and/or dissolution of AS Tallinna Vesi and deciding on issues related to the activities of AS Tallinna Vesi that have not been placed in the sole.

The Supervisory Board

The Supervisory Board plans the activities of AS Tallinna Vesi, organises its management and supervises the activities of the Management Board. Pursuant to the Articles of Association of AS Tallinna Vesi, the Supervisory Board consists of nine members with the term of two years. In 2014, five regular and no extraordinary Supervisory Board meetings were held. The Supervisory Board pre-approved the 2013 annual report presented to the Annual General Meeting for approval, and reviewed AS Tallinna Vesi’s 2015 budget.

At the time of compilation of this report, AS Tallinna Vesi’s Supervisory Board consisted of the following members:

• Mr Simon Gardiner (United Utilities (Tallinn) B.V.), Supervisory Board member until 22 May 2016, Chairman of the Supervisory Board;
• Mr Steven Richard Fraser (United Utilities (Tallinn) B.V.), Supervisory Board member until 21 January 2016;
• Mr Brendan Francis Murphy (United Utilities (Tallinn) B.V.), Supervisory Board member until 27 October 2015;
• Mr Martin Benjamin Padley (United Utilities (Tallinn) B.V.), Supervisory Board member until 31 October 2016;
• Mr Priit Lello (Tallinn City), Supervisory Board member until 16 November 2015;
• Mr Rein Ratas (Tallinn City), Supervisory Board member until 22 May 2016;
• Mr Toivo Tootsen (Tallinn City), Supervisory Board member until 7 April 2015;
• Mr Mart Mägi (independent) Supervisory Board member until 22 May 2016;
• Mr Allar Jõks (independent) Supervisory Board member until 21 May 2015.

AS Tallinna Vesi has not made any transactions with the members of the Supervisory Board nor their related parties.

The Supervisory Board has formed three committees to advise the Supervisory Board on audit, nomination and remuneration, and corporate governance matters as described below.

The Audit Committee and Internal Audit

At each meeting, an internal audit report was presented to the Supervisory Board. The internal auditor of AS Tallinna Vesi reports directly to the Audit Committee. At the time of compilation of this report, the Audit Committee consisted of the following members of the Supervisory Board: Mr Brendan Francis Murphy is the Chairman of the Audit Committee, and Mr Allar Jõks and Mr Simon Gardiner are members of the Audit Committee. The Audit Committee follows the Authorised Public Accountants Act and the guidelines issued by the Financial Supervision Authority regarding the composition and working processes of an Audit Committee.

The main tasks of the Audit Committee are:

• to monitor and analyse financial information;
• to monitor and analyse the effectiveness of risk management and internal controls;
• to monitor and analyse the audit processes regarding the consolidated annual accounts;
• to monitor and analyse independence of external auditor and legality of his/her activity regarding ASTV;
• to evaluate the work of external auditors annually and report to the Supervisory Board about the results of such evaluation.
• to monitor independence of external auditor

The appointed external auditor and any member of the external audit team cannot provide any service outside the scope of annual audits without prior approval from the Audit Committee. In 2014, the external auditor did not provide any services to AS Tallinna Vesi outside the scope of the annual audit.

Pursuant to the Articles of Association of AS Tallinna Vesi, an external auditor shall be elected by the General Meeting of Shareholders to conduct the annual audit. The remuneration of the external auditor is regulated in the respective contract, signed between the external auditor and the Management Board. In 2014, the Group paid 28 thousand euros of audit fee as per the invoices for auditing the annual reports. AS Tallinna Vesi chooses an external auditor by following internal procurement procedures (which includes approval by the Supervisory Board of AS Tallinna Vesi), ensuring the best match of service quality and the price offered for the services. Proposals are taken only from internationally respected, high quality audit companies. AS Tallinna Vesi signs up to 3-year audit contract with a clause that requires the re-appointment of the auditor in charge each year and follows the Financial Supervision Authority guidelines of 1 November 2013 “Rotation of the auditors of certain subjects of financial supervision by the state” with regard to the requirement to rotate the auditor in charge after every 5 years. Based on the report of the Audit Committee, the Supervisory Board evaluates the quality of the work of the external auditor annually in the course of the approval of the Annual Accounts and discloses the summary of such evaluation in the AGM notice. The external auditor is present at the AGM and participates where necessary.

Nomination and Remuneration Committee

In 2014, the Nomination and Remuneration Committee continued to advise the Supervisory Board on management remuneration issues and Management Board nominations. At the time of compilation of this report, the Nomination and Remuneration Committee consisted of the following members of the Supervisory Board: Mr Steven Richard Fraser is the Chairman of the Nomination and Remuneration Committee, and Mr Mart Mägi and Mr Simon Gardiner are members of the Nomination and Remuneration Committee.

Supervisory Board approves the remuneration principles of the issuer’s managers and appoints the Nomination and Remuneration Committee. The Nomination and Remuneration Committee recommends the remuneration principles of AS Tallinna Vesi and exercises supervision that the principles approved by the Supervisory Board and the requirements of the Securities Market Act are being followed.

The Nomination and Remuneration Committee ensures that the proposed remuneration principles are based on the short- and long-term objectives of AS Tallinna Vesi, taking into account the financial performance of AS Tallinna Vesi and legitimate interests of investors. The Nomination and Remuneration Committee ensures also that the proportion of remuneration for the principal job and performance related pay (PRP) are in accordance with the duties of the Management Board Member and that the remuneration for principal job forms a sufficient part of the total remuneration. The PRP depends on annual performance and can be adjusted upwards or downwards. If the annual results are worse than expected it can be decided that no PRP is paid.

Corporate Governance Committee

In 2014, the Corporate Governance Committee continued to advise the Supervisory Board on improvement of corporate governance of AS Tallinna Vesi for the benefit of its Supervisory Board and shareholders. At the time of compilation of this report, the Corporate Governance Committee consisted of the following members of the Supervisory Board: Mr Allar Jõks is the Chairman of the Corporate Governance Committee, and Mr Karl Heino Brookes and Mr Simon Gardiner are members of the Corporate Governance Committee.

The Management Board

The Management Board is a management body that represents and manages the day-to-day activities of AS Tallinna Vesi in accordance with the law and the Articles of Association of AS Tallinna Vesi. The Management Board is obliged to act in the most economically efficient manner. The Management Board can be composed of two to five members according to the Articles of Association. The Management Board always prepares management reports for Supervisory Board meetings and such reports are disseminated to the Supervisory Board members one week in advance of the meeting, as required by the Commercial Code. The Management Board also reports ad hoc to the Supervisory Board ex-meetings, when it is considered necessary as and when requested by the Chairman of the Supervisory Board.

Both the Management Board and Supervisory Board members are deemed to be insiders who are aware of AS Tallinna Vesi’s insider rules and together with their related persons are listed in AS Tallinna Vesi’s insider list. Until 31 January 2014 the Management Board consisted of four members; between 1 February 2014 and 19 March 2014 the number of members has been three; between 20 March 2014 and 1 June 2014 the number of members has been four; and since 2 June 2014 onwards, including during compilation of this report, the Management Board of AS Tallinna Vesi has consisted of three members. The responsibilities of all Management Board members are specified below. All Management Board members are appointed by the Supervisory Board of AS Tallinna Vesi. The members are as follows:

• Mr Karl Heino Brookes, with the powers of the Management Board member until 20 March 2017;
• Ms Riina Käi, with the powers of the Management Board member until 29 October 2015;
• Mr Aleksandr Timofejev, with the powers of the Management Board member until 29 October 2015.

The duties of the Chairman of the Management Board, Mr. Ian John Alexander Plenderleith until 1 June 2014, and Mr Karl Heino Brookes since 02 June 2014 onwards were, amongst others, to fulfil the everyday obligations of the Chief Executive Officer (CEO) of AS Tallinna Vesi by leading and representing AS Tallinna Vesi, ensuring the compliance with contracts and the law, organizing the activities of the Management Board, coordinating preparation the strategies and ensuring their implementation.

The duties of the member of the Management Board, Mr. Aleksandr Timofejev, are, amongst others, to fulfil the everyday obligations of the Chief Operations Officer (COO) of AS Tallinna Vesi by managing and being responsible for the operations of treatment facilities and planning and delivery of long-term investments; management of AS Tallinna Vesi’s water and sewerage networks’ everyday operations, as well as being responsible for customer services and relations as well as relations established with external partners.

The duties of the member of the Management Board, Ms. Riina Käi, are, amongst others, to fulfil the everyday obligations of the Chief Financial Officer (CFO) of AS Tallinna Vesi by managing and being responsible for the accounting and financial activities of AS Tallinna Vesi.

Until her leaving on 31 January 2014, the duties of the member of the Management Board, Ms. Ilona Nurmela were, amongst others, to fulfil the role of AS Tallinna Vesi’s General Counsel and act as the head of legal and compliance.

AS Tallinna Vesi has signed service contracts with all members of the Management Board. AS Tallinna Vesi has not made any transactions with the members of the Management Board nor their related parties.

According to the Articles of Association of AS Tallinna Vesi, the Chairman of the Management Board has the sole representation right of AS Tallinna Vesi, other Management Board members can represent AS Tallinna Vesi only jointly. In order to make daily decisions, the Management Board has approved a framework of principles, according to which certain management team members are authorized to conclude transactions in small amounts.

The Management Board of AS Tallinna Vesi also acts on behalf of AS Tallinna Vesi as the sole shareholder of OÜ Watercom.

Conformity with Tallinn Stock Exchange Corporate Governance Recommendations

Starting from 1st January 2006, the companies whose shares have been admitted for trading on the regulated market operating in Estonia shall describe, in accordance with the ‘Comply or Explain’ principle, their management practices in a Corporate Governance report and confirm their compliance or non-compliance with the Corporate Governance Recommendations. If the issuer does not comply with the Corporate Governance Recommendations, it shall explain the reasons for its non-compliance in the report.

Declaration of Conformity by AS Tallinna Vesi

In 2014, AS Tallinna Vesi has complied with the vast majority of the Corporate Governance Recommendations. However, AS Tallinna Vesi did not comply with certain recommendations, which are listed below together with the reasons for such non-compliance:

‘2.2.3. The basis for Management Board remuneration shall be clear and transparent. The Supervisory Board shall discuss and review regularly the basis for Management Board remuneration. Upon determination of the Management Board remuneration, the Supervisory Board shall be guided by evaluation of the work of the Management Board members. Upon evaluation of the work the Management Board members, the Supervisory Board shall above all take into consideration the duties of each member of the Management Board, their activities, the activities of the entire Management Board, the economic condition of the Issuer, the actual state and future prediction and direction of the business in comparison with the same indicators of companies in the same economic sector. ‘

The arrangements undertaken in connection with the privatisation of AS Tallinna Vesi in 2001 provided that, in return for certain fees, United Utilities International Ltd. would provide AS Tallinna Vesi with technical and asset management services and make its personnel available to AS Tallinna Vesi in connection with its operation and management. The working hours, rates of compensation, and all other matters relating to the employment of the individual directly employed by United Utilities International Ltd. are to be determined solely by United Utilities International Ltd., the Supervisory Board does not review the principles of remuneration of this Management Board member.

‘2.2.7. Basic wages, performance pay, severance packages, other payable benefits and bonus schemes of a Management Board member as well as their essential features (incl. features based on comparison, incentives and risk) shall be published in clear and unambiguous form on website of the Issuer and in the Corporate Governance Recommendations Report. Information published shall be deemed clear and unambiguous if it directly expresses the amount of expense to the Issuer or the amount of foreseeable expense as of the day of disclosure.

AS Tallinna Vesi does disclose the overall Management Board remuneration in note 24, but considers that individual remuneration is sensitive and private information and additional disclosure would bring no benefit to the shareholders.

‘3.2.2. At least half of the members of the Supervisory Board of the Issuer shall be independent. If the Supervisory Board has an odd number of members, then there may be one independent member less than the number of dependent members.’

Pursuant to the Articles of Association of AS Tallinna Vesi, the Supervisory Board consists of nine members. Under the Shareholders` Agreement, United Utilities (Tallinn) B.V. (hereinafter UUTBV) and the City of Tallinn have agreed that the division of seats in the Supervisory Board shall be such that UUTBV shall have four seats, the City of Tallinn shall have three seats and two seats shall be reserved for independent members to be elected to the Supervisory Board as permitted by the Tallinn Stock Exchange on listing in June 2005.

Information Disclosure

‘2.2.2. The member of the Management Board shall not be at the same time a member of more than two management boards of an Issuer and shall not be the Chairman of the Supervisory Board of another Issuer. A member of the Management Board can be the Chairman of the Supervisory Board in company belonging to same group as the Issuer.’

The Management Board Members of AS Tallinna Vesi are not in the Management Boards and Supervisory Boards of other Issuers.

2.3.2. The Supervisory Board shall approve the transactions which are significant to the Issuer and concluded between the Issuer and a member of its Management Board or another person connected/close to them and shall determine the terms of such transactions.

The Supervisory Board approves the remuneration principles of the Management Board. In 2014, there were no other transactions between AS Tallinna Vesi and either any member of the Management Board or any persons or companies related to them.

3.2.5. The amount of remuneration of a member of the Supervisory Board shall be published in the Corporate Governance Recommendations Report, indicating separately basic and additional payment (incl. compensation for termination of contract and other payable benefits).

According to the decision of the General Meeting the remuneration of Supervisory Board members is set at 6 391 euros per year per person. The fee is paid to six members out of nine. The fee is subject to deduction and payment of applicable taxes and is payable monthly. The Supervisory Board members were not paid any additional benefits in 2014.

3.2.6. If a member of the Supervisory Board has attended less than half of the meeting of the Supervisory Board, this shall be indicated separately in the Corporate Governance Recommendations Report.

In 2014, five Supervisory Board meetings were held (23 January 2014, 19 March 2014, 24 April 2014, 31 July 2014 and 30 October 2014).

The following members of the Supervisory Board attended more than 50% of the meetings during the time they were appointed or elected in 2014: Mr. Robert John Gallienne, Mr. Steven Richard Fraser, Mr. Simon Gardiner, Mr. Brendan Francis Murphy, Mr. Rein Ratas, Mr. Toivo Tootsen, Mr. Priit Lello, Mr Allar Jõks and Mr. Mart Mägi.

3.3.2. A Supervisory Board member candidate shall inform other members of the Supervisory Board about the existence of conflict of interests before their election and immediately upon arising of it later. Members of the Supervisory Board shall promptly inform the Chairman of the Supervisory Board and Management Board regarding any business offer related to the business activity of the Issuer made to him, a person close to him or a person connected with him.

All Supervisory Board members are aware of this requirement and at minimum once per annum AS Tallinna Vesi requires all Supervisory Board members to update the record of their business interests. No business transactions took place between AS Tallinna Vesi and either any Supervisory Board member or any persons or companies related to them in 2014.

Management Report which consists of Chairman's statement, Results of operations – for the year 2014, Corporate Governance and Corporate Governance Recommendations Report is an integral part of the annual report of AS Tallinna Vesi for the financial year ended 31 December 2014. The Management Report gives a true and fair view of the trends and results of operations, main risks and doubts of AS Tallinna Vesi.