UPM Annual Report 2017

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Governance

In brief

Strategy

Businesses

Stakeholders

Accounts

INFRASTRUCTURE DEVELOPMENT KEY ENABLER FOR URUGUAYAN OPERATING PLATFORM

UPM has agreed with the Uruguayan government on the local prerequisites for industrial investment as well as initiatives for infrastructure development for a possible world-class pulp mill investment. A long-term industrial operation requires stable and predictable operational environment. This will be supported by several measures in the areas of regional development, environment, forestry and land planning as well as labour and energy conditions. The government will develop the rail and road network by tendering the construction and long-term maintenance of the network. The total investment by the Uruguayan government is reportedly around USD 1 billion. This investment is necessary to establish efficient logistic infrastructure for inland Uruguay. The Government will also promote concession for a terminal in the Montevideo port with rail access. Once the permitting requirements are fulfilled, the government will grant the mill free trade zone status, which is necessary to ensure competitiveness on international markets. For UPM, the pre-engineering of the mill is in progress. The preliminary estimate for a pulp mill investment on site is approximately EUR 2 billion. In addition, a successful project requires off-site investments in plantation land and forestry, road network and nursery capacity, harvesting and transport equipment, rolling stock for rail, export facilities and training. If all preparation phases are concluded successfully, UPM will initiate the company’s regular process of analysing and preparing an investment proposal for Board approval.

Audit Committee work in 2017

Audit Committee Duties and responsibilities of the Audit Committee are related to the oversight of the company's financial reporting processes and financial reporting, internal control, internal audit and risk management, and to monitoring the audit and compliance procedures of the company. To perform its duties, the Audit Committee monitored the company's financial performance and reviewed the key financial figures and quarterly financial reports. The committee's results reviews also included reviews of potential significant and unusual transactions, and accounting estimates and policies for the period in question. On a quarterly basis, the committee also reviewed reports on assurance and legal matters, including status reports on compliance, internal control, internal audit, litigations, and other legal proceedings. Other quarterly reports presented for the committee's review included treasury reports and energy risk management report. With regard to monitoring the effectiveness of the company's risk management systems, the committee reviewed the company's risk management process and was informed of the major risks identified in this process including macroeconomic, political, environ mental, compliance and business-specific risks. In 2017, the committee also reviewed the following annual, quarterly, regular and other topics presented in the enclosed table. The lead audit partner attended all committee meetings and provided the committee with reports on the interim procedures and findings as well as accounts of the audit and non-audit fees incurred during the quarter in question. The committee had quarterly non-executive sessions with the internal and statutory auditors and held sessions with executive management, and among the committee members at every meeting.

ANNUAL TOPICS Dividend distribution

Corporate Governance Statement IT compliance and cybersecurity Auditor performance and qualifications

Internal audit plan and its realisation

Read more: www.upm.uy/growth

Auditor independence

Election of auditor

Remuneration of auditor

Audit engagement letter

Audit plan

Framework for non-audit services

Committee calendar

Board evaluation As stipulated in its charter, the Board conducts an annual evaluation of its performance and working methods including an evaluation of the performance and working methods of its committees. In addition, the committees evaluate their performance and working methods annually. The Nomination and Governance Committee assists the Board in the annual evaluation and in the review of the survey results and takes the results into consideration when preparing the Board's proposal for the composition of the Board to the Annual General Meeting. In 2017, the evaluation was conducted as a self-assessment and its results were reviewed and discussed at the Board meeting in December. The survey included some amended questions related to the Board and committee duties and responsibilities and some new questions related to increased importance of committee work as a result of changes in the regulatory framework and subsequent charter amendments. Directors evaluated the Board’s and the committees’ performance of their duties and responsibilities, Board and committee composition and structure, Board culture, effectiveness of Board and committee meetings, individual director contribution,

and performance of the Chairman of the Board. The overall results of the 2017 self- evaluation survey were very favourable and indicated that the Board, Chairman of the Board and the Board committees are functioning very effectively and focus on right issues. The Board composition and structure also received very high scores. In 2017, the Board allocated more time to the company’s talent review processes and succession planning, and the survey results indicated clear improvement in this respect. In 2018, the Board will allocate more time to the oversight of the assessment and management of strategic and operational risks. Board committees The committees assist the Board of Directors by preparing matters to be decided by the Board. In addition, the committees assist the Board in its oversight and monitoring responsibilities. The Board is responsible for the performance of any duties assigned to the committees. According to Board evaluation results 2017, the distribution of tasks between the full Board and its committees is deemed appropriate and the committees

contribute effectively to the Board’s work. The Nomination and Governance Committee assisted the Board in the review of the composition, qualification criteria and duties of the Board committees, and made a proposal to the Board for the appointment of committee members and chairmen. The directors appointed to the Board committees in the Board's constitutive meeting on 29 March 2017 are shown in the table below. Neither the President and CEO nor other company executives may be members of any Board committees. The written committee charters approved by the Board of Directors set forth the purposes, composition, operations and duties of each committee, as well as qualifications for committee membership. The charters are available on the corporate website. Each committee is responsible for carrying out the duties assigned to it in its charter. The committees hold their meetings prior to Board meetings in order to prepare matters to be decided on by the Board. In the Board meeting following the committee meetings, the Committee Chairmen report to the Board on matters discussed and actions taken by the committees. In addition, minutes are kept for the committee meetings and submitted to the Board members for their information.

QUARTERLY AND REGULAR TOPICS General Data Protection Regulation

ADDITIONAL INFORMATION

New EU-wide regulation applicable as of 25 May 2018. Progress of the implementation plan with required communications and trainings to ensure GDPR compliance at UPM reported to the committee Conducted by the Institute of Internal Auditors Auditor rotation mandatory in 2024 Invoices to be approved by the committee Update on development plans

Finance organisation

Internal audit external quality assessment

Auditor rotation

Audit, audit-related and non-audit services and fees