UPM Annual Report 2016

UPM Annual Report 2016

In brief

Strategy

Businesses

Stakeholders

Accounts

Governance

In line with its main duties and responsi

bilities, the Board focused on strategic

considerations and closely monitored the

implementation of the group and business area

strategies. The Board reviewed and approved

updated strategic plans in its strategy session

inMay. The main elements of the corporate

strategy are performance improvement,

focused growth projects, business portfolio

development and innovation. A comprehensive

description of the corporate strategy, its focus

areas and implementation is available on pages

10-23 of this report.

An essential part of the Board’s annual

strategy work is the review and consideration

of strategic and operational risks and

opportunities. The company’s annual risk

management process ends with the reporting

of strategic risks and opportunities to the

Board. These risks and opportunities and

their impact on operations and strategy

are described on pages 22-23 of this report.

The risk management process is described

on the corporate website and on page 9 of the

Corporate Governance Statement 2016.

All strategy work is based on the principles

of increasing shareholder value and prioritising

shareholder views. UPMhas increased

dividends paid to shareholders year on year,

and in 2017, the Board proposes a dividend of

EUR 0.95 per share to the company’s AGM (in

2016 EUR 0.75 and in 2015 EUR 0.70). The

proposed dividend is in line with the company’s

dividend policy and represents 30% of the

operating cash flow per share in 2016.

Director independence

The Board of Directors evaluates the

independence of its members annually against

the independence criteria of the Finnish

Corporate Governance Code and additional

director independence criteria adopted by

the Board’s Nomination and Governance

Committee. In addition to this, the Board

monitors compliance with the independence

criteria on an ongoing basis with the assistance

of the Nomination and Governance Committee.

The directors shall provide the Board and the

committee with adequate information to

facilitate the assessment of their independence,

and notify the Board and the committee of any

changes in such information. The directors

shall also express their own opinion of their

independence. The Nomination and

Governance Committee evaluates the

independence of any new director candidates

in a similar manner.

Directors’ independence is assessed in

relation to UPM and its group companies

and the company’s significant shareholders.

A shareholder is significant with a shareholding

of at least 10% of the company’s shares or votes

attached to them or with the right or obligation

to acquire the corresponding number of

already-issued shares. The majority of directors

shall be independent of the company, and at

least two directors of this majority shall be

independent of significant shareholders.

In order to be considered independent of the

company, a director shall not have any material

relationship with the company other than his/

her service as a director. In the overall

assessment of a director’s independence,

any material relationships with a director’s

family members or closely related persons or

entities are also taken into account in addition

to other factors that may compromise the

director’s independence or ability to represent

all shareholders.

According to the evaluation carried out

by the Board, all Board members are indepen

dent of the company’s significant shareholders

as the company has no controlling shareholder

and none of the company’s shareholders has

announced a holding of more than 10% of the

company’s shares or voting rights. The Board

has also assessed that all non-executive

directors are independent of the company,

including Berndt Brunow andWendy E.

Lane, who have been the company’s non-

executive directors for more than ten

consecutive years. Based on the Board’s

overall evaluation of Mr Brunow’s and Ms

Lane’s independence, their independence is

not compromised due to their long service

history, and no such other factors or

circumstances have been identified that

could impair their independence. Instead,

all directors have shown constant capacity

for independent and objective opinions,

challenging and decision making. As the

President and CEO of the company, Jussi

Pesonen is not independent of the company.

Board diversity

The Board’s diversity principles are included

in the Board’s Diversity Policy, which was

approved by the Board in December. The

policy is available on the corporate website.

The Board considers it important that all

directors be individuals of high integrity

with the ability to exercise sound judgment

on a broad range of issues. For the Board to

comprise an appropriate mix of relevant

knowledge and experience as well as inde

pendence of judgment and diversity of per

spectives, the Board has set an objective to

have certain key qualifications to be suffi

ciently represented in the Board. A suffi-

cient number of directors is expected to

have relevant professional experience

and education to provide themwith sound

appreciation of issues pertinent to publicly

listed companies of a size and scope

corresponding to that of UPM, including:

•

Financial expertise

•

Relevant industry knowledge

•

International experience

•

Risk management experience

•

Experience in the planning and imple

mentation of company strategies, and

•

Governance and leadership experience

With regard to other factors relevant

to Board diversity, the objective is that the

Board include an appropriate number of

directors of different nationalities, ages, and

lengths of tenure. Information on UPMBoard

diversity in respect to these principles is

enclosed.

As to the representation of both genders

in the Board, the Board has set the following

measurable objective: Both genders shall

always be represented in the Board, and high

priority shall be given to maintaining at least

1/3 representation of the under-represented

gender among the non-executive directors in

the Board. Where two candidates are equally

qualified, priority will be given to the candidate

of the under-represented gender. Currently,

female directors count for 33.3% of UPM’s

non-executive directors and 30% of all

directors.

Board evaluation

The Board of Directors and its committees

evaluate their performance and working

methods annually. The Board has used the

same evaluation questionnaire with some

additions for several years, to maintain

comparability of the results. As a result of the

evaluation, new improvement or focus areas

to enhance the Board work even further are

identified each year. The Nomination and

Governance Committee takes the survey

results into consideration when preparing

the Board’s proposal for the composition of

the Board to the Annual General Meeting.

In 2016, the evaluation was conducted as

a self-assessment and its results were reviewed

and discussed at the Board meeting in

December. Directors evaluated the Board’s

performance of its duties and responsibilities,

Board composition and structure, Board

culture, effectiveness of Board meetings,

individual director contribution, and

performance of the Chairman of the Board.

The overall results of the 2016 self-

evaluation survey indicated that the directors

are highly satisfied with the Board’s operations

and working methods and that the Board is

functioning very effectively. In 2017, the Board

will continue to focus on UPM’s strategy-

related topics and more time will be allocated

to the company’s talent review processes and

management succession planning.

INVESTMENT IN CHINA

RESPONDS TO GROWING

DEMAND

The third paper machine of UPM

Changshu paper mill in China,

originally started up in December

2015, was officially inaugurated

in April. Some 450 dignitaries,

customers and suppliers attended

the on-site grand opening event.

UPM’s Board of Directors also

participated in the ceremonies.

With the investment, the product

portfolio of UPM Changshu has been

extended into labelling material and

other value added specialty products

to better fit customer needs. These

segments are forecasted to see

significant growth globally, but

especially in the Asia-Pacific region.

On this site, UPM has introduced

totally new innovative manufacturing

technology, not only for China but for

the whole paper industry worldwide.

This swing concept of the PM3, the

world’s largest machine for release

liners, improves the efficiency of paper

production and also helps to improve

energy efficiency.

The investment was valued at EUR

277 million. UPM is able to annually

produce 1.4 million tonnes of labelling

material and fine papers for customers

across the Asia-Pacific region and

beyond.

UPM first invested in China in 1998

and has since invested more than

USD 2 billion in the projects. Today,

the Changshu site boasts a fully

integrated production and converting

capability that incorporates a paper

mill, a label stock factory, an Asia

research and development (R&D)

centre as well as a supply chain

centre for the Asia-Pacific region.

40–49

60–69

50–59

Board diversity – age

■

20%

■

40%

■

40%

>10 years

<2 years

2–6 years

7–10 years

Board diversity – tenure

■

20%

■

30%

■

30%

■

20%

Finnish

Swiss

Norwegian

Board diversity – nationality

■

70%

■

10%

■

10%

■

10%

30% 70%

BOARD DIVERSITY –

GENDER

DEGREE

NO.

Ph.D. (Econ.)

B.Sc

. (Econ.)

M.Sc.

(Econ.)

LL.M.

MBA or Executive MBA

M.Sc.

(Eng.)

General Staff Officer

Ph.D. (Chem. Eng.)

BA (Business Admin.)

BA (Business Econ.)

Board diversity – education

CONTENTS