UPM Annual Report 2017

Governance

In brief

Strategy

Businesses

Stakeholders

Accounts

General meeting of shareholders The Annual General Meeting of UPM- Kymmene Corporation took place in Helsinki, Finland on 29 March 2017. A total of 3,249 shareholders were present or represented at the meeting, representing 49.9% of registered shares and votes. The AGM approved all Board proposals and all decisions were taken without voting. Information on these decisions is available on the corporate website www.upm.com/ governance. Board of Directors The primary role of the Board is to be responsible for the governance of the company, with the focus on overseeing the long-term value creation of UPM. In pursuing this goal, the directors have a duty to act on an informed basis with due care and in the best interests of the company, consistent with their other statutory duties. To fulfil its role effectively, the Board sets the company's strategic objectives, reviews and approves financial and other plans relevant to the achievement of these objectives, and reviews the performance of management in meeting these objectives. The Board's other main responsibilities relate to the integrity of the company's financial reporting, effectiveness of internal control and risk management systems, and the appointment, remuneration and succession planning of the senior management of the company. Board composition and diversity Following the Nomination and Governance Committee's evaluation of the Board performance and review of the Board composition, competences, diversity and qualifications in relation to UPM strategy, operations and governance needs, the committee found that the Board’s competence base was broad and relevant

attached thereto, or with the right or obligation to acquire the corresponding number of already-issued shares, is deemed significant. In order to be considered independent of the company, a director must not have a 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 with the assistance of the Nomination and Governance Committee, all Board members are independent 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 at least 10% of the company's shares or votes attached thereto. The Board has also assessed that all non-executive directors are independent of the company, including Berndt Brunow, Wendy E. Lane and Veli-Matti Reinikkala, who have been the company's non-executive directors for more than ten consecutive years. Based on the Board's overall evaluation of these directors’ independence, their independence is not compromised due to their long service history, and no other factors or circumstances have been identified that could impair their independence. As the President and CEO of the company, Jussi Pesonen is not independent of the company. Board work in 2017 The Board held nine meetings in 2017. There is no minimum attendance requirement for directors' attendance at the meetings but directors are expected to attend all meetings unless there is a valid reason for non- attendance. Directors' commitment and availability for Board and committee work is evidenced by the high attendance rates.

The directors’ average attendance at the Board meetings was 96.7% (98%) and at the committee meetings 100% (100%). Directors' personal attendance rates are presented in the table below.

This decision remains at the sole discretion of the Board and is subject to significant progress in the implementation of the agreed infrastructure initiatives. More information on these initiatives and on the planned strategic investment amounting to approximately EUR 2 billion is available on the following page and on page 28 of this report. Strategic focus areas in 2018 In 2018, the Board will continue to follow the progress of the infrastructure initiatives in Uruguay closely. The second preparation phase of the operating platform develop­ ment is expected to take some 1.5 to 2 years which means that the investment decision, if any, can be expected in 2019 at the earliest. The Board will also follow closely another interesting strategic business opportunity relating to the company’s biochemicals business and potential construction of an industrial scale biorefinery in Germany. The company is proceeding with a detailed commercial and basic engineering study to verify the attractiveness of the business case that was announced in October 2017. If all preparation phases of this business platform opportunity are concluded successfully, the company will initiate its standard analysis procedure and prepare an investment proposal for Board approval in late 2018 at the earliest. (Read more on page 41). The third nuclear power plant unit in Olkiluoto has been a matter of concern for the Board throughout the seriously delayed construction because the company is involved in this project through its energy shareholdings (more information on these holdings and on this project is available on pages 133–134 of this report). As the construction project is approaching completion and production start-up is expected in 2019, Olkiluoto 3 will be one of the Board’s focus areas in 2018.

to UPM’s needs and that its structure was well-balanced also in terms of other factors that contribute to appropriate diversity. Since no obvious development needs were identified, no changes in the Board composition were proposed to the Annual General Meeting (AGM) in 2017. As proposed, the AGM elected all incumbent directors to the Board for a term that will end upon closure of the AGM 2018. Composition of the Board is presented in the table below. The Board diversity aspects are defined in its Diversity Policy and include relevant professional experience and education, gender, age, nationality and length of tenure. Information on the directors’ professional backgrounds and other significant commit­ ments is available on pages 86–87 of this report. Information on the other aspects of Board diversity is available in the enclosed charts and in the table below. More information on Board diversity, related objectives and results is included in the Corporate Governance Statement 2017. Director independence Evaluation of director candidate independence is an important factor when the Nomination and Governance Committee prepares its annual proposal for the composition of the Board. The committee assesses directors' independence continuously and in every meeting reviews a report on any changes in the directors' professional engagements and other commitments. It also assesses the potential effects of such changes on the directors' independence and availability for Board work, and reports to the Board on the outcome of such assessments. According to the committee's assessment, the few changes that took place in 2017 had no effect on the directors' independence or availability for Board work. Directors' independence is assessed overall and in relation to UPM, its group companies and the company's significant shareholders. A shareholder with a shareholding of at least 10% of the company's shares or the votes

30%

Strategic focus areas in 2017 In line with its main duties and

70%

responsibilities, 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 UPMBiofore strategy are performance, growth, innovation, responsibility and portfolio development as presented on pages 10–11 of this report. An essential part of the Board's annual strategy work is the review and consider­ ation of strategic and operational risks and opportunities. These risks and opportunities and their impact on operations and strategy are described on pages 22–23 of this report. In 2017, the Board’s strategic considerations focused on the operating platform development in Uruguay. This development plan was initiated in 2015 and continued with discussions on logistical infrastructure and operating environment with the government of Uruguay in July 2016. The purpose of these discussions was to outline the local prerequisites for a possible pulp mill investment in central Uruguay. The Board was updated on the progress of these discussions continuously and considered risks and opportunities related to the platform development in light of global megatrends and their effect on the pulp market environment in the 2020s and beyond. Mutual understanding on the establishment of a competitive operating platformwas reached in November 2017 when UPM and the government of Uruguay signed an investment agreement detailing the roles, commitments and time-line for both parties, as well as relevant items to be agreed on prior to the investment decision.

BOARD DIVERSITY, GENDER

Board diversity – age

40–49

60–69

50–59

■ 20%

■ 30%

■ 50%

Board diversity – nationality

US

Norwegian

Swiss

Finnish

■ 70%

■ 10%

■ 10%

■ 10%

Board diversity – tenure

>10 years

2–5 years

6–10 years

■ 20%

■ 40%

■ 40%

Board composition in 2017

Attendance in meetings 2017

DIRECTOR SINCE

NO. OF TERMS

NON-EXECUTIVE/ EXECUTIVE DIRECTOR

ATTENDANCE/ NO. OF BOARD MEETINGS

ATTENDANCE/ NO. OF COMMIT- TEE MEETINGS

AVERAGE ATTENDANCE -%

DIRECTOR

AGE

EDUCATION Ph.D. (Econ.) B.Sc. (Econ.) M.Sc. (Econ.)

ATTENDANCE -%

ATTENDANCE -%

DIRECTOR

Björn Wahlroos (Chairman)

2008 2002 2015 2013 2005 2007 2014 2007 2015 2012

10 16

65 68 49 43 66 57 66 60 56 57

NED NED NED NED NED NED NED NED NED

Björn Wahlroos (Board and NGC Chairman) Berndt Brunow (Deputy Chairman, NGC member)

9/9 9/9 8/9 9/9 9/9 9/9 9/9 9/9 8/9 8/9

100 100

4/4 4/4 5/5 5/5 5/5 4/4 5/5 5/5 5/5 –

100 100 100 100 100 100 100 100 100 –

100 100 92.9 100 100 100 100 100 92.9 92.9

Berndt Brunow (Deputy Chairman)

Henrik Ehrnrooth Piia-Noora Kauppi

3 5

Henrik Ehrnrooth (RC member) Piia-Noora Kauppi (AC Chairman) Wendy E. Lane (AC member)

89

LL.M.

100 100 100 100 100

Wendy E. Lane Jussi Pesonen Ari Puheloinen

13 11

MBA (Harvard)

M.Sc. (Eng.)

Executive

Jussi Pesonen

4

General Staff Officer

Ari Puheloinen (NGC member) Veli-Matti Reinikkala (RC Chairman)

Veli-Matti Reinikkala

11

eMBA

Suzanne Thoma (RC member)

89 89

Suzanne Thoma

3 6

Ph.D. (Chem. Eng.), BA (Business Admin.) MBA (Harvard), BA (Business Econ.)

Kim Wahl (AC member)

Kim Wahl

NGC – Nomination and Governance Committee, RC – Remuneration Committee, AC – Audit Committee

CONTENTS

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UPM Annual Report 2017

UPM Annual Report 2017