Corporate governance

Focusing on the governance of listed companies, the Dutch Corporate Governance Code (the Code) provides guidance for effective cooperation and management. Governance is about management and control, about responsibility and influence, and about supervision and accountability. The revised Code was published on 8 December 2016 and was transposed into Dutch law effective from 1 January 2018. It replaces the 2008 Code starting from the 2017 financial year. Accordingly, the report for the 2017 financial year is the first to be prepared in accordance with the revised Code.

As an energy network operator with an important social role in Dutch society, we subscribe to the importance of effective management and supervision, good ‘checks and balances’ and transparency. For this reason, Alliander - though not a listed company - voluntarily applies the Dutch Corporate Governance Code.

Revised Code

The revised Code is subdivided into seven themes:

1. long-term value creation;

2. risk management;

3. effective management and supervision;

4. culture;

5. remuneration;

6. relationship with shareholders;

7. clarification of requirements as to quality of explanation.

The 'comply or explain’ principle has been maintained. The full text of the Code is available at www.mccg.nl.

This chapter of the annual report that deals with the outlines of the corporate governance structure and the compliance with the Code will be put to the General Meeting of Shareholders as a separate agenda item. The meeting will take place on 4 April 2018.

Corporate governance structure in outline

General

Alliander N.V. (Alliander) is a public limited company according to Dutch law with a two-tier governance structure. The company is managed by the Management Board, while supervision is carried out by the Supervisory Board. These bodies act independently of each other and both are accountable for the performance of their duties to the General Meeting of Shareholders. The shares of Alliander are held by Dutch provinces and municipalities and are not listed on the stock exchange.
The governance structure is based on Book 2 of the Dutch Civil Code, the Code, the company's articles of association and various sets of internal rules and by-laws. In 2017, the by-laws of the Management Board, the Supervisory Board, the Audit Committee and the Selection, Appointment and Remuneration Committee were adjusted to the revised Code. The Gas Act and the Electricity Act 1998 also contain various provisions that influence the company's governance. In addition, Alliander operates a Code of Conduct (including a Guideline on Prevention of Market Abuse) and a Whistleblower Policy. The articles of association, various sets of rules and by-laws and other corporate governance documentation are posted on the website of Alliander.

Management Board

General duties and responsibilities

The Management Board is tasked with the management of the Alliander Group. This responsibility includes:

• formulating and realising the strategy targeted at long-term value creation and Alliander's policy, including the achievement of the envisaged results;

• identifying and managing the risks relating to the company's strategy and the company's activities;

• complying with all relevant laws and regulations;

• developing a corporate culture aimed at long-term value creation.

Certain decisions of the Management Board are subject to the approval of the Supervisory Board and/or the General Meeting of Shareholders. The Management Board carries collective responsibility for the management of Alliander. The allocation of tasks agreed among its members has been approved by the Supervisory Board.

By-laws

In addition to the statutory regulations and the relevant provisions in the articles of association, the Management Board must adhere to the by-laws of the Management Board. These by-laws have been approved by the Supervisory Board. They set out the composition, duties and powers and the procedures of the Management Board, and also contain rules regarding its relations with the external auditor, the Supervisory Board and the shareholders. In addition, the by-laws contain rules for dealing with an actual or possible conflict of interest and for other positions of the Management Board members.

Appointment

The members of the Management Board are appointed by the Supervisory Board for an indefinite period. Appointments take place with due regard to the diversity policy for the composition of the Management Board as drawn up by the Supervisory Board. The Supervisory Board notifies the Committee of Shareholders of a proposed appointment, and shall not dismiss members of the Management Board without consulting the Committee of Shareholders^[1].

• 1 This is a group of shareholders appointed by and from the General Meeting of Shareholders to exercise certain powers on its behalf. These include the power of recommendation, appointment and dismissal of members of the Supervisory Board and powers in relation to the appointment and dismissal of members of the Management Board. For the composition of the Committee, see the website of Alliander.com.

The Supervisory Board.

General duties and responsibilities

• The Supervisory Board monitors the manner in which the Management Board implements the strategy for long-term value creation. It regularly discusses the strategy, the implementation of the strategy and the principal risks associated with it.

• The Supervisory Board monitors the manner in which the Management Board performs activities in respect of culture.

• The Supervisory Board supervises the policy pursued by the Management Board and Alliander's operations in general. This includes monitoring the effectiveness of the internal risk management and control systems of Alliander and the integrity and quality of the financial reporting.

• The Supervisory Board submits the nomination for the appointment of the external auditor to the General Meeting of Shareholders.

• The Supervisory Board supervises the functioning of the external auditor and the internal audit function.

• The Supervisory Board supports the Management Board with advice and adopts the remuneration of the individual members of the Management Board.

The Supervisory Board fulfils its duties as a collegiate body with collective responsibility. In the performance of its duties, the Supervisory Board is guided by the interests of Alliander and its group companies, taking into account the stakeholder interests that are relevant in the specific context.

By-laws

In addition to the statutory regulations and the relevant provisions in the articles of association, the Supervisory Board has also adopted by-laws to ensure its proper functioning. These by-laws provide for the composition, duties and powers as well as the procedures of the Supervisory Board. They also set out rules for its relations with the shareholders and the Works Council, as well as for dealing with an actual or possible conflict of interest and for other positions that members of the Supervisory Board may have.

Appointment

The General Meeting of Shareholders appoints the members of the Supervisory Board, upon the nomination of the Supervisory Board. Both the Committee of Shareholders and the Works Council can recommend candidates. The Supervisory Board is in principle obliged to nominate one third of its members upon the recommendation of the Works Council ('enhanced right of recommendation'). The Committee of Shareholders also has an enhanced right of recommendation for the nomination of one third of the Supervisory Board members.

The Supervisory Board has drawn up a profile for its composition, taking account of the nature and activities of the company. The profile covers the following subjects:

1. the desired expertise and background of the members of the Supervisory Board;

2. the desired diverse composition of the Supervisory Board;

3. the size of the Supervisory Board;

4. the independence of the Supervisory Board members. 

Appointments or reappointments are made with due regard to the profile.

A Supervisory Board member is appointed for a four-year period and may then be reappointed once for another four-year period. The Supervisory Board member may subsequently be reappointed again for a period of two years, which may be extended by at most two years. In the event of a reappointment after an eight-year period, reasons should be given in the report of the Supervisory Board.

The Supervisory Board may suspend any one of its members. Only the Enterprise Section of the Court in Amsterdam can dismiss a Supervisory Board member. The General Meeting of Shareholders can only withdraw its confidence from the full Supervisory Board and cannot dismiss individual Supervisory Board members.

Supervisory Board committees

Members of the Supervisory Board form two standing committees: an Audit Committee and a combined Selection, Appointment and Remuneration Committee. The committees meet independently and do the preparatory work for the full Supervisory Board in specific areas. They report the deliberations and findings of each committee meeting in the meeting of the full Supervisory Board. Decision-making takes place on the basis of these reports. Each committee has its own by-laws, indicating its role and responsibility, its composition and the manner in which it performs its task.

Audit Committee

The committee prepares the decision-making of the Supervisory Board on the supervision of the integrity and quality of the company's financial reporting and on the effectiveness of its internal risk management and control systems. It focuses on, among other things, the supervision of the management regarding the relationship with and the follow-up of recommendations made by the internal auditor and the external auditor, the company's funding policy and financing and its application of information and communication technology, including risks in the field of cybersecurity and the company's tax policy.

Combined Selection, Appointment and Remuneration Committee

The committee prepares the decision-making of the Supervisory Board, focusing at least on: i) drawing up selection criteria and procedures for the appointment of the Management Board and Supervisory Board members, ii) assessing from time to time the functioning of individual Management Board and Supervisory Board members and reporting its findings to the Supervisory Board and iii) making proposals for appointments and reappointments. The Committee also prepares the Remuneration Report.

General Meeting of Shareholders

The shares in Alliander are held directly or indirectly by public authorities (municipalities and provinces). Alliander convenes a General Meeting of Shareholders within six months after the end of the financial year. The agenda of the General Meeting of Shareholders lists which items are up for discussion and which items are to be voted on. The agenda includes the following subjects insofar as relevant:

• discussion of the annual report;

• notes to the company's policy on additions to reserves and on dividends (the level and purpose of additions to reserves, the amount and type of the dividend);

• external auditor's explanation of the audit opinion;

• adoption of the financial statements and the dividend;

• approval of the management conducted by the Management Board (discharge of Management Board members from liability);

• approval of the supervision exercised by the Supervisory Board (discharge of the Supervisory Board members from liability);

• appointment of members of the Supervisory Board;

• discussion of each substantial change in the corporate governance structure of the company and in the compliance with this Code; approval of material changes in the articles of association; and

• appointment or reappointment of the external auditor.

Participation of as many shareholders as possible in the decision-making in the General Meeting of Shareholders is in the interest of the company's checks and balances. All resolutions are passed on the basis of the `one share is one vote' principle. Resolutions are adopted by an absolute majority of votes, unless the law or the company's articles of association explicitly prescribe otherwise. Extraordinary meetings can be held if the Supervisory Board or the Management Board considers this necessary. The agenda of the General Meeting of Shareholders is determined by the Management Board and the Supervisory Board. Shareholders can also convene meetings and/or put items on the agenda, as provided for in the law and the articles of association.

Risk management

Risk management is the deliberate handling of uncertainties that can have a negative impact on the achievement of the strategy as adopted by the Management Board. An effective risk management and internal control system is therefore important, and the Management Board endorses its significance. The risk management and internal control system is updated in line with internal and external developments. We apply the `three lines of defence' model for risk management. Each line of defence has its own responsibility in the management and control process:

• The first line is primarily responsible for the identification, management and monitoring of the risks within its processes and for an effective risk management and control system.

• The second line supports, advises, coordinates and sets frameworks to ensure that the management genuinely takes responsibility. It thus provides additional assurance within Alliander.

• The third line provides additional assurance about the question whether the first and second lines can jointly manage risks, so that the organisational objectives are achieved. They give an objective and independent opinion on this matter, including suggestions for possible improvements. The third line operates objectively and independently from all other parts of the organisation.

In addition, various other controls are in place to manage our risks, such as the Planning & Control Cycle, the Risk Management Framework, the Business Control Framework and the Alliander Accounting Manual. These measures are discussed in other sections of this report. Management responsibility for supervising the quality of the control of our top risks consists of three layers.

• The Alliander Resilience Committee. This committee, which is chaired by the CFO, issues recommendations to the Management Board and the management team of Liander on risk acceptance, risk profile, external risk reporting requirements, exceptions of a temporary nature or events that diverge from the applicable risk policy and acceptance. In addition, the committee approves guidelines for Governance, Risk and Compliance arising from approved policy, and makes adjustments in respect of specific risk-related issues. The committee discusses internal and external risk reports, and monitors and advises on the follow-up on internal and external controls and audits. Finally, it also promotes the embedment of risk management and internal control processes within the business units and chains of Alliander.

• The Management Board. The members of the Management Board play a proactive role in managing attitudes and behaviours regarding risk management and internal control. Every quarter, the portfolio of top risks is discussed by the members of the Management Board, and the discussion of specific risks is frequently on the agenda. If necessary, they initiate the implementation of additional measures. Moreover, the Management Board monitors the risk management and control system, which it regularly tests against the expectations of, and developments at, our most important stakeholders. The main risks are set out in this annual report at Risk information.

• The Supervisory Board. The Supervisory Board supervises the design and effectiveness of the risk management and control system. The portfolio of top risks is discussed every quarter in the Audit Committee. A summary of this discussion is given to the full Supervisory Board. The Management Board provides an explanation of the risk report, which the Audit Committee takes on board in its supervision. Possible adjustments to the risk management policy, including the risk-bearing capacity, are put to the Audit Committee before being introduced.

Internal audit function

Internal Audit is an independent function that provides additional assurance regarding control, effectiveness, efficiency and compliance of operations to the management of Alliander, and particularly to the Management Board. To this end, Internal Audit systematically evaluates the control, risk management and governance processes. Internal Audit functions as a Fraud Disclosure Office within Alliander.
The Internal Audit Director acts under the responsibility of the chair of the Management Board and has direct access to the external auditor and the Audit Committee. The Internal Audit Director attends the meetings of the Audit Committee.

Every year, Internal Audit draws up an audit plan based on risk reports and audit findings, in consultation with the Management Board, the Audit Committee and the external auditor. This plan contains the proposed audit engagements. As well as financial audits, it also covers the implementation of IT, compliance and operational audits. In addition, the plan devotes attention to the interaction with the external auditor. The audit plan is approved by the Management Board, submitted to the Audit Committee and adopted by the Supervisory Board. Internal Audit reports its audit results to the Management Board and the essence of its audit results to the Audit Committee and the Supervisory Board and informs the external auditor. The audit findings of Internal Audit should in any event include: i) any flaws in the effectiveness of the internal risk management and control systems, ii) any findings and observations with a material impact on the risk profile of the company and its affiliated enterprises and iii) any failings in the follow-up on recommendations made by the internal audit function.

External auditor

The Audit Committee advises the Supervisory Board on the nomination for the appointment or reappointment or the dismissal of the external auditor and prepares the selection of the external auditor. The Audit Committee does this, taking into account the observations of the Management Board. Based partly on this input, the Supervisory Board determines its nomination for the appointment of the external auditor to the General Meeting of Shareholders. The main conclusions of the Supervisory Board regarding the nomination and the outcomes of the selection process for the external auditor are communicated to the General Meeting of Shareholders.

The external auditor examines the consolidated and company financial statements of Alliander as well as the statutory financial statements of Alliander's subsidiaries. In addition to an audit opinion, the external auditor also reports his findings each year in the form of a management letter and an auditor’s report. The Supervisory Board is permitted to examine the most important points of discussion arising between the external auditor and the Management Board based on the draft management letter or the draft auditor’s report. In December 2017, Deloitte issued its management letter, confirming that no material failings were found. The findings about the IT environment in 2016 were largely followed up. Deloitte included recommendations that have been or are being followed up by Alliander. The external auditor also assesses the sustainability information in the report, for which an Assurance report is issued.

In principle, the external auditor attends the meetings of the Audit Committee, as well as the meeting of the Supervisory Board in which the external auditor's report on the annual audit is discussed. Moreover, the external auditor attends the meeting of the Supervisory Board in which the half-year figures are discussed. He also attends the annual General Meeting of Shareholders. At this meeting, he clarifies the audit opinion and answers shareholders' questions about his audit work and on the true and fair view of the financial statements. Effective from the 2016 financial year, Deloitte Accountants B.V. has been appointed as the external auditor for a period of four years with the option of two renewal periods of two years each.

Compliance with the Code

The Management Board and the Supervisory Board are responsible for corporate governance at Alliander and for compliance with the Code, which is based on the ‘comply or explain’ principle. The Management Board and the Supervisory Board account for compliance with the Code to the General Meeting of Shareholders and provide a substantive and transparent explanation for any departures from the principles and best practice provisions.

Provisions not applying to Alliander

A number of best practice provisions do not apply because Alliander is a company with a two-tier structure, while the shares may exclusively be held by Dutch lower government authorities and are not listed on a stock exchange. In addition, our articles of association stipulate specific requirements concerning shareholder quality and Alliander is not protected by any anti-takeover measures. Moreover, the best practice provisions relating to remuneration in shares, issuance of depositary receipts for shares, financing preference shares and institutional investors are not applicable.

Based on the above, the following best practice provisions did not apply to Alliander in 2017:
2.8.2 (informing the supervisory board about request for inspection by competing bidder): Alliander shares are not listed on a stock exchange.
2.8.3 (management board's position on a private bid): Alliander shares are not listed on a stock exchange.
3.3.3 (share ownership of supervisory board member): under the articles of association of Alliander, shareholders must meet specific quality requirements to be eligible for share ownership. These quality requirements stipulate that only public bodies are eligible for share ownership.
4.2.5 (management board contacts with press and analysts): Alliander shares are not listed on a stock exchange.
4.2.6 (outline of anti-takeover measures): Alliander is not protected by any anti-takeover measures.
4.3.3 (the general meeting of shareholders of a company not having statutory two-tier status may pass a resolution to cancel the binding nature of a nomination for the appointment of a management board or supervisory board member and/or a resolution to dismiss a management board or supervisory board member): Alliander is a two-tier company.
4.3.4 (voting right on financing preference shares): Alliander has not issued any financing preference shares.
4.3.5 (publication of institutional investors' voting policy): Alliander has no institutional investors as shareholders as referred to in the Code.
4.3.6 (report on the implementation of institutional investors' voting policy): Alliander has no institutional investors as shareholders as referred to in the Code.
4.4.1 to 4.4.8 (issuance of depositary receipts for shares): no depositary receipts have been issued for Alliander shares.
5.1.1. to 5.1.5 (one-tier governance structure): Alliander has a two-tier governance structure.

Departures/qualified departures from the Code

The vast majority of the provisions are adhered to insofar as applicable. For a number of best practice provisions, Alliander adds a qualifying statement and/or does not apply the best practice provision either in part or in whole.

Corporate governance statement

Pursuant to the ‘Decree on the content of the Management Board Report' (‘Besluit inhoud bestuursverslag’), the Code has been transposed into law and designated as the statutory code of conduct for good corporate governance. The decree is an amendment of the Decree on Additional Requirements for the Management Board Report (‘Besluit nadere voorschriften bestuursverslag’) effective since 2004.
Pursuant to this decree, companies that have issued listed shares or bonds are required to include a corporate governance statement in the annual report or publish such a statement on their website.

As Alliander has exclusively issued securities, not being shares, that have been admitted to trading on a regulated market located in the EEA (European Economic Area consisting of the EU member states and Liechtenstein, Norway and Iceland), Alliander is exempt from the preparation of a full statement on corporate governance.
The required information that must be included in the corporate governance statement, as referred to in Article 3a (a and d) of the Decree on the content of the Management Board Report, can be found in the following chapters and sections of the report of the Management Board for 2017 and should be considered as included and reiterated here:

• the main features of the internal risk management and control system relating to the financial reporting process of the Alliander Group (Article 3a (a) of the Decree on the content of the Management Board Report) are set out in the ‘Risk management’ chapter;

• the diversity policy relating to the composition of the Management Board and the Supervisory Board stating the objectives of the policy, the method of implementation and the results in the past financial year (Article 3a (d) of the Decree on the content of the Management Board Report) is set out in the Report of the Supervisory Board.

Supervision

External organisations supervise Liander in its capacity as a network operator that is active in a regulated environment. Among other things, they supervise compliance with specific legislation and regulations.

Integrity

Integrity is a matter of great importance to Alliander, which has put in place various arrangements to safeguard integrity within its organisation.

Codes of Conduct

The Alliander Code of Conduct formally sets out how our employees are required to deal with business partners, company and personal interests, business assets, confidential and non-confidential corporate information and safety as well as the rules of behaviour that apply within Alliander. In this way, we protect customers, associates and the reputation of Alliander, and jointly safeguard a pleasant and safe working environment. If necessary, measures are taken against undesirable behaviour. The Management Board monitors the effectiveness of and compliance with the Alliander Code of Conduct. Every six months, the Management Board informs the Audit Committee of the Supervisory Board of its findings and observations in relation to the effectiveness and compliance.

In addition, all contracted suppliers of Alliander have committed to the ‘Alliander Suppliers Code of Conduct'. This Code of Conduct is based on the guidelines of the Organisation for Economic Cooperation and Development (OECD) and requires suppliers as well as their suppliers and manufacturers to adhere to ethical and fair business practices.

Complaints policies

The integrity policy includes a `Complaints Procedure for Undesirable Behaviour' and a Whistleblower Policy. Employees can also raise concerns in confidence with Nominated Officers within Alliander. The Whistleblower Policy lays down how malpractice, or suspicions of malpractice, of a general, operational and financial nature must be reported and handled within Alliander. All reports are treated in confidence. A whistleblower can report malpractice, or suspicions of malpractice, without compromising his or her legal rights. Once every six months, the Nominated Officer for whistleblowers provides the Management Board and the Audit Committee of the Supervisory Board with an overview of whistleblowing reports received, the outcomes of the investigations and the whistleblower's reactions to the outcomes of the investigations. Material malpractice and irregularities, including suspicions thereof, are immediately reported to the Supervisory Board. The Whistleblower Policy 2017 encourages employees to report every complaint or undesirable situation within the organisation. This can also be done anonymously and under protection of the Whistleblower Policy. Employees can also call the Fraud Disclosure Office. One FTE from the Internal Audit Department is available to investigate reported situations. Employees of the Fraud Disclosure Office must be members of the organisation of certified fraud investigators (ACFE) with CPE obligation. 

Every new employee is informed about the Alliander Code of Conduct for employees by means of a letter. In addition, an Investigation Protocol is available, including the Whistleblower Policy 2017. The Fraud Disclosure Office exclusively investigates reports of fraud. Preventative investigations are the responsibility of the 'first line of defence', optionally with advice from the Governance Risk & Compliance Department (GRC).
These investigations focus on the organisation of the administrative and operational processes and monitor compliance with all requisite separations of functions, signatory powers and mandates. Alliander staff are also exposed to risks in terms of bribery, corruption and conflicts of interest. Customer-facing employees run an increased risk in this respect. The Alliander Code of Conduct makes this explicit in a separate chapter entitled ‘Omgaan met zakenpartners en balans in zakelijk en privébelang’ (Dealing with business partners and balancing business and personal interests). Violations of the Code of Conduct may lead to disciplinary or other measures, including a written warning, reprimand, suspension or dismissal. In the year under review 18 violations of the Code of Conduct were reported. Two reports resulted in investigations into possible conflict of interest/corruption, of which one is still ongoing. The other report proved unfounded after investigation. Eight cases led to dismissal or termination of a temporary contract.

Guideline for the Prevention of Market Abuse

In 2017, the Insider Trading Policy was transformed into the Guideline for the Prevention of Market Abuse (hereafter: the “Guideline”). The Guideline draws on the Alliander Code of Conduct and the European Market Abuse Regulation. The aim of the Guideline is to set out in clear terms that employees are not permitted to share inside knowledge or use inside knowledge to perform personal trading transactions in financial instruments of Alliander. The Guideline contains the rules of behaviour and is also applicable to the members of the Management Board and the Supervisory Board.

The by-laws of the Management Board and the Supervisory Board stipulate that members of the Management Board and the Supervisory Board must adhere to all disclosure and insider trading requirements that apply pursuant to the law or stock exchange regulations with regard to the ownership of or transactions in securities in stock exchange-listed companies.