UPM Annual Report 2016

Governance

In brief

Strategy

Businesses

Stakeholders

Accounts

Board diversity – age

Board diversity – nationality

Board diversity – tenure

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.

US

40–49

<2 years

>10 years

Swiss

60–69

Norwegian

Finnish

2–6 years

50–59

7–10 years

■ 20%

■ 40%

■ 40%

■ 70%

■ 10%

■ 10%

■ 10%

■ 20%

■ 30%

■ 30%

■ 20%

Board diversity – education

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.

30% 70% GENDER DEGREE NO. Ph.D. (Econ.) 1 B.Sc. (Econ.) 1 M.Sc. (Econ.) 1 LL.M. 1 MBA or Executive MBA 3 M.Sc. (Eng.) 1 General Staff Officer 1 Ph.D. (Chem. Eng.) 1 BA (Business Admin.) 1 BA (Business Econ.) 1

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

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

BOARD DIVERSITY –

CONTENTS

76

77

UPM Annual Report 2016

UPM Annual Report 2016