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Corporate Governance Statement 2011

This is Itella's Corporate Governance Statement referred to in Recommendation 54 of the Finnish Corporate Governance Code issued by the Securities Market Association on June 15, 2010. It has been reviewed by the Audit Committee of the Corporation's Board of Directors on February 14, 2012. The Corporate Governance Statement is published as a separate, unaudited report released in connection with the Financial Statement.

The remuneration statement and other information related to the Corporate Governance Code are available at www.itella.com/corporategovernance/. The CV information of the management is available at www.itella.com/management.

1 Compliance with the Corporate Governance Code

The duties and responsibilities of Itella's executive bodies are defined according to Finnish law. Itella's decision-making and administration comply with the Finnish Limited Liability Companies Act, Itella Corporation's Articles of Association, and the Finnish Corporate Governance Code (www.cgfinland.fi) for listed companies issued by the Securities Market Association.

Departures from the Corporate Governance Code recommendations:

  • The notice of the General Meeting and the appendices thereto are not published on the company website because a state-owned company has only one shareholder.
  • Itella has neither a public register of insiders nor any persons subject to the disclosure obligation because the company's shares are not publicly listed.

2 Supervisory Board

The Supervisory Board's duties include the following:

  • Ensuring that the company is managed according to sound business practices and on a profitable basis.
  • Providing guidance to the Board of Directors on issues with broad implications or those deemed important in principle.
  • Providing the Annual General Meeting of Shareholders (AGM) with an opinion on the company's financial statements and the auditors' report.
  • Monitoring the functionality of postal services and the consideration of proposals for changes in the services.

The Supervisory Board has adopted written rules and procedures which lay out the Board's key responsibilities and working principles.

Itella Corporation's AGM elects the members of the Supervisory Board and appoints the Board's Chairperson and Vice Chairperson. The Supervisory Board has between six and twelve members. Persons aged 68 and above are not eligible for membership on the Board. The term of office for the members is one year and ends at the close of the next AGM following their election.

Itella's Supervisory Board 2011

Member Born Education Occupation Attendance at meetings
Eero Lehti,
Chairperson
1944 M.Soc.Sc. Member of Parliament
4/4
Antti Rantakangas,
Vice Chairperson
1964 M.Sc. (Agr.)
Member of Parliament
4/4
Paavo Arhinmäki ***) 1976 - Member of Parliament
2/4
Susanna Huovinen 1972 M.Soc.Sc. Member of Parliament
2/4
Harri Jaskari 1964 Lic.Sc. (Admin.)
Member of Parliament
4/4
Bjarne Kallis 1945 M.Soc.Sc.   4/4
Johanna Karimäki 1973 M.Sc. (Tech.)
Member of Parliament
4/4
Lauri Kähkönen 1947 B.A. City Counsellor
4/4
Sari Moisanen ****) 1980 BEng   1/4
Outi Mäkelä 1974 M.Sc. (Econ.) Member of Parliament
3/4
Reijo Ojennus 1947 Trade Tehnician
Personal Assistant to Parliament
4/4
Pertti Salovaara **) 1970 - Member of Parliament
0/4
Markku Pakkanen *) 1960 Agricultural Techinician/
Marketing (MKT) degree
Entrepreneur 3/4
Harry Wallin 1953 - Engine Driver
3/4

*) as of March 9, 2011
**) until March 9, 2011
***) until June 29, 2011
****) as of September 8, 2011

3 Board of Directors

The duties of Itella Corporation's Board of Directors are specified in the Limited Liability Companies Act, the Articles of Association, and the Decision-Making Guidelines approved by the Board of Directors. In accordance with these documents, the Board is responsible for controlling and supervising executive management, appointing and, if necessary, dismissing the President and CEO, approving the company's strategic goals and risk management principles, and ensuring the performance of the company's management system. The Board has adopted written rules and procedures which lay out the Board's key responsibilities and working principles.

Itella's Corporation's AGM elects the members of Itella Corporation's Board of Directors and appoints the Board's Chairperson and Vice Chairperson. The Board of Directors has between five and nine members. Persons aged 68 and above are not eligible for membership on the Board. The members are elected for a one-year period at a time and their terms of office end at the close of the AGM following their election.

The Board of Directors evaluates its performance and working methods on an annual basis. It also assesses the performance and working methods of the President and CEO.

Itella's Board of Directors 2011

Member Born Education Occupation
Eero Kasanen (Chairperson) **) 1952 D.Sc. (Econ. & Bus. Admin.)
Executive Dean
Arto Hiltunen (Vice Chairperson.) *) 1958 M.Sc. (Econ.)
-
Kalevi Alestalo 1947 M.Soc.Sc. Financial Counsellor
Hele-Hannele Aminoff 1960 MBA CEO
Erkki Helaniemi **) 1962 LL.M. Partner
Päivi Pesola 1956 M.Sc. (Econ.)
Vice President
Jussi Kuutsa ***) 1964 M.Sc. (Econ.)
Country Manager
Timo Löyttyniemi ***) 1961 D.Sc. (Econ. & Bus. Admin.)
CEO
Riitta Savonlahti 1964 M.Sc. (Econ.)
Executive Vice President, HR
Maarit Toivanen-Koivisto 1954 M.Sc. (Econ.)
CEO
Antero Palmolahti **) 1952 - Chief Shop Steward

*) Chairperson as of March 9, 2011
**) on the Board of Directors until March 9, 2011
***) on the Board of Director as of March 9, 2011

All members of the Board of Directors, apart from personnel representative Antero Palmolahti, are independent of the company. All members other than Kalevi Alestalo, a representative of the Ownership Steering Department of the Prime Minister's Office, are independent of the shareholder.

3.1 Audit Committee

The Board of Directors elects a maximum of four of its members to the Audit Committee, whose duties include:

  • preparation, control, review, and assessment of risk management policies, internal control systems and internal audit reports, organizing financial reporting and auditing,
  • examining financial statements with the auditors before submitting them for review by the Board of Directors,
  • submitting a proposal concerning the appointment of the auditor,
  • assessing the independence of the auditor and the additional services offered by the auditor.

The Committee prepares matters entrusted to it for decision by the Board of Directors.

On March 22, 2011, the Board of Directors elected the following members to the Audit Committee: Päivi Pesola (Chairperson), Hele-Hannele Aminoff, Jussi Kuutsa, and Timo Löyttyniemi.

3.2 Remuneration and Nomination Committee

The Board of Directors elects a maximum of four of its members to the Remuneration and Nomination Committee, whose duties include:

  • preparation of decisions concerning the appointments and remuneration of executive management,
  • preparation of the outlines for the remuneration, bonus, and incentive schemes and ensuring that they are fair and competitive.

The Committee prepares matters entrusted to it for decision by the Board of Directors.

On March 22, 2011, the Board of Directors elected the following members to the Remuneration and Nomination Committee: Arto Hiltunen (Chairperson), Kalevi Alestalo, Riitta Savonlahti, and Maarit Toivanen-Koivisto.

The Board of Directors' attendance in meetings

Member Committee membership
Board of
Committee
Eero Kasanen (Chairperson.) *) Remuneration and Nomination Committee (Chairperson)
2/12 1/4
Arto Hiltunen (Vice Chairperson) **) Audit Committee
Remuneration and Nomination Committee
12/12 1/6
3/4
Kalevi Alestalo Remuneration and Nomination Committee
12/12 4/4
Hele-Hannele Aminoff Audit Committee
10/12 6/6
Erkki Helaniemi *) Audit Committee
2/12 1/6
Jussi Kuutsa ***) Audit Committee
9/12 4/6 ***)
Timo Löyttyniemi ***) Audit Committee
10/12 4/6 ***)
Antero Palmolahti *) - 2/12 -
Päivi Pesola Audit Committee (Chairperson)
12/12 6/6
Riitta Savonlahti Remuneration and Nomination Committee
10/12 4/4
Maarit Toivanen-Koivisto Remuneration and Nomination Committee
12/12 3/4

*) on the Board of Directors until March 9, 2011
**) member of Audit Committee until March 22, 2011, Chairperson of the Remuneration and Nomination Committee as of March 22, 2011
***) member of Audit Committee as of March 22, 2011

4 President and CEO

The President and CEO is responsible for the Group's operative management in accordance with the Limited Liability Companies Act and the instructions and directions issued by the Board of Directors. The President and CEO is appointed and, if necessary, dismissed by the Board of Directors, which also determines the terms and conditions of the President and CEO's employment relationship.

Jukka Alho, M.Sc. (Tech.), has acted as President and CEO of Itella Corporation since 2000.

5 Internal control and risk management systems associated with the financial reporting process

Itella Corporation has defined internal control principles based on the generally accepted framework for internal control systems (COSO). Internal controls have been defined as a process effected by Itella's Board of Directors, management, and other personnel, the purpose of which is to provide reasonable assurance on achieving the following objectives:

a) the effectiveness and efficiency of operations,
b) the reliability of financial reporting,
c) compliance with laws and regulations.

The following sections describe the main characteristics of Itella's internal controls based on the five essential aspects thereof: the control environment, risk assessment, control measures, information and communications, and monitoring.

5.1 Control environment

5.1.1 Roles and responsibilities

Itella's Board of Directors is responsible for the company's internal control, and it has approved the corporate policies on which the control environment is based. In addition, the Board of Directors approves the policies concerning risk management and corporate governance.

The financial reporting process is monitored by the Board of Directors' Audit Committee. The internal control function independently monitors the effectiveness of the internal control system on financial reporting in accordance with the Audit Committee's instructions. These duties are supplemented by the statutory audit of financial statements, meant to ensure the quality and integrity of the financial statements and related disclosures.

The President and CEO is responsible for maintaining an efficient control environment. The Group's business operations are divided into three business groups and Group functions, the managements of which are responsible for internal control in their respective areas.

Management responsibilities are specified in the Group management system, which is described in the Itella Way Handbook guidelines. The business groups' management systems are described in each business group's own Business Way Handbooks. In general, management is responsible for implementing more specific internal control policies and procedures. Both management and employees are assigned appropriate levels of authority and responsibility to facilitate effective internal control in financial reporting.

The Group's Chief Financial Officer is responsible for developing and maintaining procedures and tools that support the management of business groups and Group functions in the consistent execution and maintenance of an internal control system for financial reporting. This allows for consistent Group-wide monitoring.

5.1.2 Group policies and instructions

Itella Group's general internal control policies and responsibilities regarding financial reporting are specified in a separate operating model (Itella Group Policy on Control over Financial Reporting) approved by the Board of Directors. This policy is also employed to increase the personnel's awareness on internal control and to influence attitudes towards internal control.

Itella Group follows responsible and ethical procedures, which are described on a general level in Itella's Corporate Responsibility Principles and, more specifically, in Itella's Employee Code of Conduct. Each Group company must ensure that its personnel are familiar with these ethical principles and that they comply with them in all activities. The Group has a feedback channel for reporting actions that conflict with the ethical principles.

The principles applied to financial communications are described in a separate document (Disclosure Policy at www.itella.com/about/financials/).

The guidelines and Group-wide policies issued by Group Finance hold a key position in ensuring the accuracy of financial reporting. Financial control and reporting instructions are explained in the Controller's Manual available on the company's intranet. The manual contains the common accounting and reporting principles and practices as well as the roles and responsibilities of the finance functions. Group wide accounting principles are applied to financial statements and common chart of accounts is used in group reporting.

5.1.3 Key improvement measures in 2011

The development measures focused on the internal control of the financial reporting process were continued. Units updated their descriptions on the targets and processes of internal control. The measures were based on the general key control requirements, divided into four categories: operations, reports, compliance, and fraud. The requirements concern the five principal finance processes as well as IT systems. The control requirements remained unchanged throughout 2011, to improve the identification of the impact of the changes brought about by the control measures.

The functioning of the internal control system was assessed by monitoring the extent and efficiency of units' control measures in respect of the key control measures as well as in respect of control measures in which shortcomings had been detected. The assessment was performed internally, by interviewing the people responsible for carrying out control measures. In addition, the internal audit unit implemented an assessment performed by an external party on the internal control of the Group's financial reporting.

The main results in 2011 were the following:

  • The assessment and documentation work carried out on all organizational levels was up-to-date in respect of all material aspects and the control descriptions corresponded with the process content.
  • The implementation of the development measures varied. While some units displayed significant improvement in their control measures, the trend was not as extensive in other units.
  • Significant deficiencies in the effectiveness or efficiency of control measures were not detected during monitoring. However, individual control measures could certainly be made more efficient.

For further information on the results, see section 5.3.

In 2012, the Group will focus on the further development of the control system, so that it will support the deployment of common practices and policies and the adoption of best practices in all Group units.

Monitoring will be carried out in most of units which were not monitored in 2011.

5.2 Risk assessment

The internal control system does not provide full guarantees for the absence of material errors or losses. The system allows the management of risks associated with the correctness of financial reporting but does not eliminate such risks.

Itella has identified and investigated the risks associated with the correctness of financial reporting in its own processes and, on the basis of its findings, taken the necessary development measures. Operative risks related to the process of financial reporting are assessed as part of Itella's enterprise risk management.

In 2010, Itella analyzed its principal financial risks as part of the control assessment process. On the basis of this, it identified the primary factors with an influence on financial processes. The analysis was conducted at Group level and the results were also used at unit level to support their control assessment work. In 2011, the risk assessment was used in connection with monitoring by focusing monitoring measures on the processes identified as most significant. Monitoring was also accompanied with an assessment on the likelihood of error and risk management related to an individual control measure.

5.3 Control measures

The purpose of the control measures is to ensure the quality of financial reporting and to secure the company's assets. Control measures include the inspection and approval of various business transactions, principles for the separation of duties and for approval authorizations, the inspection of basic data and system registers, reconciliation of bank accounts and accounting, checklists, and various IT and systems controls associated with financial reporting.

A Group-wide assessment of the current status of controls was carried out in all parts of Itella's organization in 2010. All units assessed their internal controls on the basis of Group-level control requirements, documented their financial reporting processes, and prepared detailed improvement plans. In 2011, units updated the assessments concerning the current status and the descriptions of control processes. Monitoring was carried out in selected units. The purpose of the monitoring was to ensure the efficient implementation of control measures meant to secure the reliability of financial reporting.

The general results of the assessment confirmed that key control measures are still performed appropriately. However, not all units have made control measures a fixed part of business processes – a fact that may weaken their effectiveness. To harmonize control measures, Group Finance drew up instructions and policy descriptions aiming at common financial practices in 2011. The control of user rights was improved by documenting operational procedures and with the preliminary use of an application that will support controls. Development measures in 2012 will focus on improving the integration of control measures into all business processes. The control of user rights will improve with regular monitoring.

5.4 Information and communications

Itella's financial reporting principles and guidelines are maintained centrally by Group Finance. The Group's finance personnel have been informed of these principles and guidelines over the intranet. Throughout the year, Group management and unit managers inform all organizational levels of the Group's financial performance, taking into account the constraints of the Disclosure Policy. Business units regularly prepare financial and management reports for the units' and the Group's management. The reports analyze and discuss matters related to the business units' profitability and risks.

The Group's profitability is reported in each meeting of the Board of Directors, and the Board reviews all interim and annual reports before they are published. Itella complies with the reporting standards specified for listed companies and publishes stock exchange releases on its interim and annual reports. Itella also reports to the Finnish Communications Regulatory Authority on operations related to its universal service obligation.

Itella's consolidation process relies on the global Hyperion system. Consolidation data is transmitted to Hyperion automatically or through manual input. The reported figures are reviewed in subsidiaries and business groups alike. Group Finance also validates the reported figures before the release of financial statements.

Key improvement measures in 2011 involved the Group-wide program aiming to harmonize financial processes. During the year, Group Finance drew up a significant number of new instructions and improved the content of the existing instructions. In addition, the Finance personnel were provided with training on topical changes, such as the content of the IFRS. The program's implementation progressed according to plan.

5.5 Monitoring

Itella Group has a financial reporting system for the purposes of monitoring business operations. The system applies to the entire Group and allows for the identification of any operational non-conformities. External and internal reports are based on the same information, and they are processed in the same system. This allows for the monitoring of financial data on all levels: Group level, business group and Group function level, business unit level, and individual reporting unit level.

Group Finance and business groups follow the correctness and accuracy of external and internal reporting and ensure that external reporting complies with regulations. Local management and controllers furthermore ensure that external reporting complies with local regulations. The Group's Finance Management Team – composed of representatives of the Group, Group functions, and business groups –meets monthly to assess financial reports and analyze any possible deviations.

The observations and results of 2011 were reported to the Group's management and Audit Committee. The objective in 2012 is to improve the reporting of management to enable the monitoring and steering of the implementation of development measures and the development of control measures as scheduled. Development measures and observation results will be reported to Group management and the Audit Committee on a regular basis.