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CORPORATE GOVERNANCE AT PONSSE PLC

GROUP STRUCTURE AND MAIN FIELD OF BUSINESS

Ponsse Plc (hereinafter “the Company”) is a public limited company listed on the Helsinki Stock Exchange (NASDAQ OMX Helsinki Oy). The Company’s has its registered office in Vieremä, Finland.

The Ponsse Group includes the parent company Ponsse Plc as well as the following wholly-owned subsidiaries: Ponsse AB, Sweden; Ponsse AS, Norway; Ponssé S.A.S., France; Ponsse UK Ltd., Great Britain; Ponsse North America Inc., the United States; Ponsse Latin America Ltda, Brazil; OOO Ponsse, Russia; Ponsse Asia-Pacific Ltd, Hong Kong; Ponsse China Ltd, China; Ponsse Uruguay S.A., Uruguay; and Epec Oy in Seinäjoki, Finland. Sunit Oy, which operates in Kajaani, Finland, is an affiliated company in which the Company has a holding of 34 per cent.

The main field of business of the Company and the Group is the design, manufacture, sale and servicing of forest machines, other metal products, machine control systems, vehicle PC equipment, different types of separate systems and software.

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GOVERNANCE AND APPLICABLE LEGISTATION AND OTHER PROVISIONS

The Company’s decision-making and administrative processes comply with the Finnish Companies Act, other regulations governing listed companies and the Ponsse Plc Articles of Association. The Board of the Company has ratified the code of governance complying with the Corporate Governance procedure for Finnish listed companies approved by the Board of the Securities Market Association in 2010. The code aims to ensure that the company is competently managed and that business procedures and practices of a high ethical and professional standard are used.

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ANNUAL GENERAL MEETING

The highest decision-making body of the Company is the Annual General Meeting, whose duties and procedures are defined in the Finnish Companies Act and the Company’s Articles of Association. The AGM is responsible for, for example, making decisions on amending the Articles of Association, on increasing and decreasing share capital, on granting stock options and electing the Board of Directors and auditors.

The AGM shall be held each year before the end of June on a date to be specified by the Company’s Board of Directors. At the Annual General Meeting, the Company’s financial statements and the consolidated financial statements shall be presented; the adoption of the profit and loss account, the balance sheet, the consolidated profit and loss account and the consolidated balance sheet, and dividends or actions warranted by the profit or loss shown in the adopted profit and loss account shall be decided on; and the discharge of liability of the Board of Directors and the President and CEO shall be decided on. In addition, the AGM decides on the number of and the remuneration for Board members, the auditor’s fee and the compensation for travel expenses. The AGM also elects the members of the Board of Directors and the auditor.

Shareholders are entitled to submit matters for consideration to the AGM by notifying the Board of Directors thereof in writing well enough in advance so that the matter can be included in the notice of the meeting. Proposals on matters involving the election of Board members and auditors, and other proposals submitted by the Board to the AGM may be countered at the meeting as each point on the agenda is being dealt with. Voting takes place in accordance with the voting procedure adopted by the AGM and all shareholders present at the AGM are entitled to vote.

The notice of an AGM and the following information is made available on the Company website at the latest 21 days before the AGM:
• total number of shares and votes on the date the notice of the AGM is submitted;
• documents to be presented to the AGM (including financial statements, Annual Report and auditor’s report);
• decision proposals of the Board; and
• any business that is included in the AGM agenda without a decision proposal.

In order to attend an AGM, shareholders must inform the Company of their intention to do so by the date given in the notice. The given date may be no earlier than five (5) days prior to the AGM.

All shareholders who are entered as such in the Company’s shareholder register kept by the Finnish Central Securities Depository eight (8) days prior to the meeting are entitled to attend the AGM. Holders of nominee-registered shares may be temporarily entered in the shareholder register for the purpose of attending an AGM. Shareholders may exercise their rights at the AGM either in person or through a representative, in addition to which they are entitled to avail themselves of counsel at the AGM.

Extraordinary meetings of shareholders shall be convened whenever the Board deems it necessary. Likewise, an extraordinary meeting of shareholders shall be convened for the purpose of dealing with a matter specified by them if the auditor or shareholders holding at least one-tenth of all shares issued so request in writing.

The minutes of the AGM, including voting results and any appendices that constitute the decision of the AGM, will be made available on the Company website two weeks after the AGM.

The Company aims for all Board members as well as the President and CEO to be present at all AGMs. A person who is nominated as a Board member for the first time must attend the AGM deciding upon his or her election, unless there is a weighty reason for his/her absence.

The Company auditor must attend each AGM.

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BOARD OF DIRECTORS

A Board of Directors consisting of no fewer than five and no more than eight members is responsible for the proper organisation of the Company’s administration and operations. The AGM elects Board members for a term of office expiring at the end of the AGM following their election. The Board elects a Chairman and a Deputy Chairman from among its members. In 2010, the Company’s Board of Directors consisted of six members.

Persons elected to the Board of Directors shall have the necessary competence required for their duties. Members shall be elected to represent a diverse range of expertise as well as the viewpoint of the Company’s owners. Under the Articles of Association, no upper age limit applies to Board members.

The majority of Board members shall be independent of the Company, in addition to which no fewer than two of the Board members belonging to the above-mentioned majority shall be independent of any of the Company’s major shareholders. Board members shall submit sufficient information to assess their competence and independence, and report any changes in such information. Notice of independence is given in the Annual Report and on the Company’s website.

The Board of Directors considers Board members Marja Liisa Kaario (as of 31 March 2010), Heikki Hortling (as of 31 March 2010), Ilkka Kylävainio and Ossi Saksman to be independent of the Company and its major shareholders.

The Board members are presented in the Company’s Annual Report and on the Company website at www.ponsse.com.

On 12 April 2011, the AGM confirmed the annual remuneration payable to the Chairman of the Board as EUR 43,000, and the remuneration payable to other members as EUR 32,000. No remuneration is paid to members in the employment of the Company, with the exception of the Chairman of the Board. In 2010 the Board held eleven meetings, of which one was a telephone conference. The average attendance rate of Board members was 92.3 per cent.

If shareholders controlling more than 10 per cent of the Company’s voting rights should notify the Company’s Board of Directors of their proposal on the number and identity of Board members and the identity of the auditor, which are matters to be decided on by the AGM, this information shall be noted in the notice of the AGM. Any proposals on candidates made after the notice of the AGM has been published shall be made public separately.

In addition to the tasks separately specified in the Finnish Companies Act and the Company’s Articles of Association, the Board is responsible for the business of the Company—its earnings and its development, ratifying the long-term strategy and the Group risk management policy, approving the budget and also deciding on corporate and real estate transactions and key strategic business expansions, equity-based investments, investment development and individual major investments. The Board names the Company’s President and CEO and ratifies the nomination of other Management Team members, decides upon the principles for compensating top management and annually assesses management activities.

The Board ratifies its own agenda.

In Board meetings, the business at hand is presented by the President and CEO or an executive named by the President and CEO.

The Board’s activities and working methods are annually assessed by means of self-assessment or by an external auditor.

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COMMITTEES OF THE BOARD OF DIRECTORS

Duties and responsibilities have not been specifically divided among members and the Chairman of the Board of Directors, nor has the Board appointed any specific working groups or committees.

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PRESIDENT AND CEO AND THE MANAGEMENT TEAM

The President and CEO is appointed by the Board of Directors. The President and CEO manages the Company’s day-to-day business affairs in accordance with the guidelines and instructions issued by the Board of Directors. His duties include operational management, keeping the Board informed, presenting matters over which the Board has the power of decision, implementing the decisions of the Board and ensuring the legality of the Company’s business operations. The President and CEO is assisted by a Management Team consisting of the President and CEO as Chairman and the executives appointed to the team by the Board of Directors. The Management Team meets approximately once a month, and also convenes whenever necessary to address, for example, business plans for the following year and strategy over the longer term.

Each member of the Management Team is responsible for a distinct sphere of operations based on key Company functions. Management Team members report to the President and CEO.

Juho Nummela, Doctor of Technology, has acted as President and CEO since 1 June 2008. In 2010, the President and CEO was paid salary and other benefits totalling EUR 208,394.20. The retirement age of the President and CEO is 65 years, and the pension benefit is determined in compliance with valid legislation.

Under the contract of service concluded between the Company and its President and CEO, both parties may terminate the agreement by giving six (6) months’ notice. Should the Company terminate the agreement, it shall pay the President and CEO a sum equal to 12 months’ salary in addition to salary and other benefits accruing during the period of notice.

The following persons were members of the Management Team: Juho Nummela, Chairman and President and CEO; Pasi Arajärvi, Purchasing and Logistics Director; Tapio Mertanen (as of 3 May 2010), Service Director; Juha Haverinen, Factory Director; Paula Oksman, HR Director; Petri Härkönen, CFO; Juha Inberg, Technology and R&D Director; and Jarmo Vidgrén, Deputy CEO, Sales and Marketing Director. The Company management has regular management liability insurance.  In 2010, the salaries and other benefits of the other Management Team members totalled EUR 669,492.88. No bonuses were paid in 2010. The retirement age of the members of the Management Team is 65 years, and the pension benefit is determined in compliance with valid legislation.

The Group’s Management Team members are presented in the Company’s Annual Report and on the Company website at www.ponsse.com.

The compensation for the President and CEO and the Management Group consists of a fixed monthly salary, bonus and shares. The bonus is based on an annual operational target and a performance target set by the Board of Directors every year, while the share bonus system is based on longer-term objectives. The Board of Directors of Ponsse Oyj ultimately decides on the salaries of the President and CEO and the Management Group, the contents and objectives of the bonus and equity system, the persons falling within the scope of the system and on paying the compensation. The annual bonus for the President and CEO and the Management Group may be a maximum of 50% of the fixed monthly salary of the previous year.

The share bonus system aimed at the key persons of Ponsse contains three periods, which are comprised of the following calendar years: from 2010 to 2012, from 2011 to 2013, and from 2012 to 2014. The Board of Directors will decide on the earnings criteria and on targets to be established for them for each earning period. The earnings criteria of the earning period 2010—2012 are the Ponsse Group´s cumulative cash flow, operating profit margin on average and total return on Ponsse Plc share. 

The potential reward from the earning period 2010—2012 will be paid partly as the Company's shares and partly in cash. The proportion to be paid in cash is intended to cover taxes and tax-related costs arising from the reward to the key personnel. The shares cannot be transferred during a two-year restriction period. If a key person's employment or service ends during the restriction period, he or she must gratuitously return the shares given as reward to the Company.

The president and CEO must hold 50% of the shares paid on the basis of the Plan, after the restriction period, as long as the value of the Company shares held by him, in total corresponds to his annual gross salary, and any other member of the Group Management Team, as long as the value of the Company's shares held by him or her, in total corresponds to half of his or her annual gross salary.

During the earning period 2010—2012, approximately 20 people belong to the target group of the Plan. The rewards to be paid on the basis of the earning period 2010—2012 will correspond to the value of a maximum total of 211,000 Ponsse Plc shares (including also the proportion to be paid in cash).

As necessary, the Management Team monitors and revises the Company’s internal principles and procedures, which refer to, for example, reporting, financial administration, investments, risk management, insurance policies, IT systems, general procurement, industrial property rights, management of contractual risks, human resources administration, quality management issues, environmental issues, occupational health and safety, insider guidelines and communications.

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INSIDERS AND INSIDER MANAGEMENT

Ponsse Group complies with the insider regulations of Nasdaq OMX Helsinki Oy.

The Company’s permanent insiders are not allowed to trade in any of the Company’s shares during a period of fourteen days prior to the publication of a Company stock exchange release or interim report (closed window). The closed window ends with the publication of the interim report or stock exchange release.

Pursuant to the Securities Markets Act, Board members, the President and CEO, and his/her deputy, as well as the auditors, are considered permanent insiders due to their position in the Company. In addition to these, pursuant to a decision taken by the Company, the members of the Management Team and specifically named persons, who, by virtue of their duties, regularly deal with non-public information having an impact on the value of the Company’s share are also considered permanent insiders.

The prohibition on misuse of insider information refers to anybody with insider information, regardless of how he or she has obtained the information. Thus, the prohibition on misuse of insider information covers persons other than the Company’s permanent insiders.

An insider is not allowed to provide any sales, purchase, etc. assignments on the Company shares or, directly or indirectly, advise any third parties on any trading of which he or she has insider information. No such information may be disclosed to a third party, unless such disclosure is done as part of the regular job, profession or tasks of the person disclosing the information.

In addition to a public insider register, the Company maintains a company-specific insider register on people who, due to their position or tasks, regularly obtain insider information and whom the Company has specified as company-specific insiders. The information in the company-specific register is not public.

The shareholding of insiders is available for inspection at the insider register of the Company maintained by Euroclear Finland Oy. Information on the shareholding of permanent insiders may be viewed on the Company’s website and the office of Euroclear Finland Oy at Urho Kekkosen katu 5 C, Helsinki, Finland. Insiders are obligated to inform the person in charge of managing insider matters within the Company of any changes in the information entered in the insider register without delay. 


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AUDITING

The primary purpose of statutory audits is to verify that the financial statements give a true and fair view of the Group’s result and financial position for the financial period. The Company’s financial year is the calendar year.

The auditor is responsible for auditing the Company’s accounts and financial statement to verify that they are free of material misstatement. The auditor shall also submit a report on the audit performed to the AGM. In addition, under Finnish law, the auditor also audits the Company’s corporate governance for compliance with relevant legislation. Normally, the auditor reports to the Board of Directors once per year.

The Company has one auditor, which shall be a public accounting firm authorised by the Central Chamber of Commerce. The auditor is elected by the AGM, and the auditor’s term of office expires at the end of the first AGM following its election.

The auditing procedures of the foreign subsidiaries within the Ponsse Group have been organised in the manner required by each country’s legislation and other regulations. In 2009, Ernst & Young Oy acted as the parent company’s auditor, with Eero Huusko, Authorised Public Accountant, as the principal auditor.

In 2009, the Group’s auditing costs amounted to EUR 191,000. 

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RISK MANAGEMENT

RISK MANAGEMENT
The Company’s risk management is based on the Company’s values as well as strategic and financial objectives. Risk management goal is supporting the achievement of the objectives specified in the Company’s strategy as well as to ensure the financial development of the Company and the continuity of its business.

Risk management’s task is to identify, assess and monitor business-related risks which may influence the achievement of the Company’s strategic and financial goals or continuity of its business. Decisions on the necessary measures to anticipate risks and react to observed risks are made on the basis of this information.

Risk management is a part of the Company’s regular daily business, and it is also included in the management system. Risk management is controlled by the risk management policy approved by the Board.

A risk is any event that may prevent the Company from reaching its objectives or that threatens the continuity of business. On the other hand, a risk may also be a positive event, in which case the risk is treated as an opportunity. Each risk is assessed on the basis of its impact and probability. The Company’s methods of risk management include avoiding, mitigating and transferring risks. Risks can also be managed by controlling and minimising their impact.

RISK MANAGEMENT PROCESS
The Company’s risk management policy seeks to maintain and further develop a practical and comprehensive system for the management and reporting of risks. The risk management process includes systematic surveying of function- and unitspecific risks, their assessment and comparing the risks with the Company risk management plan. Risk management is systematically implemented and monitored as part of the daily business. The Company aims at promoting its risk management by increasing awareness of the significance of risk management and supporting shared risk management projects of the functions.

RISK CLASSIFICATION
The key risks to the Company’s business are divided into four categories: strategic and operative risks as well as financing risks and risks of injury or damage.

STRATEGIC RISKS
The term “strategic risk” refers to a risk related to the nature of the Company’s business, its selected strategy and implementation of the strategy. Such risks may refer to the competitive situation, markets or market environment, legislation and other legal norms, for example. A strategic risk may also be a major investment or a strategic choice related to the business. If realised, a strategic risk may clearly deteriorate the preconditions for the Company’s business.

Market and business environment
Global economic crisis and general economic fluctuations affect the demand for the Company’s products and its financial position. The fact that the Company does business in more than forty countries balances out the fluctuation risks. Furthermore, the Company aims to maintain its business so that it is flexible and adaptable to changes in order to be ready to quickly adapt its business to the prevailing market situation.

The competitive situation and changing requirements of the markets may influence the demand for and profitability of the Company’s products. The Company invests in understanding the needs of its customers, and it carefully studies the demands posed by different markets on products in order to ensure that the products comply with the specific requirements of each region and are competitive. The Company has an extensive network of stakeholders. Stakeholder risks are mitigated by continuously monitoring the network and engaging in good cooperation. The price development of strategically important raw materials and their availability in the global market influence the profitability of the Company’s products. Risks related to the price development and availability of raw materials are mitigated by surveying alternative materials and developing acquisition channels.

Legislation and the environment
Changes to the political environment, legislation influencing the Company’s business and phenomena connected to climate change may clearly influence the Company’s business in different market areas. In cooperation with its subsidiaries and regional partners, the Company actively monitors the requirements posed by the markets on products, services and the business as a whole—such as general business and import legislation as well as product compliance and environmental requirements. Furthermore, the Company actively communicates with its stakeholders, influences future solutions and sees such solutions as new opportunities.

Products and technology
The Company’s product and technology risks refer to technological choices and R&D. These risks are mitigated by staying close to customers and other stakeholders in order to ensure that product technology is developed in the correct manner. Furthermore, the Company aims to actively cooperate with universities, institutions of higher education and research establishments as well as participate in global R&D projects. Developed technologies and products are protected by means of intellectual property rights. The Company is also aware of the industrial rights of its competitors and respects them in the conduct of its own business.

OPERATIVE RISKS
The term “operative risk” refers to a risk related to the Company’s internal processes, personnel, business network and systems. If realised, operative risks may deteriorate the Company’s earnings, effectiveness and profitability.

Organisation and management
Risks related to the Company’s organisation and management include risks connected to, for example, the availability of workforce, labour market disturbances and management of key competence. The Company’s personnel strategy has a key role in managing risks related to the organisation and management. The commitment of key employees in the Company is improved by means of an incentive scheme. Investments in recruiting are made in order to ensure access to the correct type of workforce. The Company’s image as an employer is developed by means of appropriate communications and cooperation with various educational establishments and other stakeholders.

Information and IT
The Company’s information and IT risks include, for example, the risk of trade secrets leaking out of the Company as well as risks related to the functionality, security and safety of IT systems. The Company complies with an information security policy to manage these risks, with the aim of ensuring that all preconditions for the functionality of the systems and ensuring their safety exist. Information leaks are proactively prevented by means of all necessary measures.

Supplier network
The Company persistently develops its supplier network. Material price and availability risks are also related to the supplier network. The Company aims to ensure a competitive material price level by studying alternative procurement channels and signing long-term agreements. In order to achieve cost-efficient solutions, the Company invests in close R&D cooperation with its supplier network.

Whenever necessary, the Company utilises a policy of two suppliers to manage material availability risks. The business environment is stabilised by means of long-term supplier agreements and regular supplier audits in compliance with the auditing programme. The Company aims to create a supply chain by which the Company does business directly with manufacturers in order to retain a real-time communications channel. A supply chain management tool is utilised in monitoring the supplier network and optimising batch sizes.

Production and processes
The Company’s business requires comprehensive process management. What is important for a cost-efficient business is maintaining and improving processes. The Company’s quality management system is continuously developed in order to maintain its processes as functional. Functionality of the system is assessed by utilising results obtained from process management as well as ISO 9001 certification by a third party.

Production process disturbances or disruptions may hamper the business. Preparations for major disturbances are made by maintaining substitute manufacturing methods and equipment. Furthermore, the opportunity to manufacture cooperation with key partners is maintained.

FINANCING RISKS
The Company is exposed to several financing risks in the normal course of its business. The Company’s financing risk management system aims to protect the Group’s performance, cash flows, shareholders’ equity and liquidity from unfavourable financing market fluctuations. Financing risk management is handled in a centralised manner by the Company Financing Unit. The Board ratifies the Company financing risk management policy, and the Company CFO is in charge of its practical implementation in cooperation with the Financing Unit.

The Company’s financing risks include currency, interest, credit and liquidity risks as well as capital management risks. For more information on financing risk management, please see Note 30 to the consolidated financial statements.

RISKS OF INJURY OR DAMAGE
The main focus in risk of injury or damage mitigation lies in identifying and preventing risks. Identified risks of injury or damage include, for example, occupational health and safety risks, environmental risks and risks of property damage. Risks of injury or damage are managed by means of an extensive insurance scheme. Damage is proactively prevented by applying a safety policy and safety guidelines as well as ensuring that working methods and tools are safe. The Company quickly reacts to any dangers observed. All accidents and close call situations are recorded in a monitoring system, and the necessary measures to prevent dangers are implemented. The Company’s objective is an accident-free working environment. Risks of injury or damage are regularly assessed by means of internal audits. The entire personnel participate in identifying risks of injury or damage. 

RISK MANAGEMENT AND RESPONSIBILITIES

 Board of Directors Decides on risk management objectives and principles as well as ratifies the Company Risk Management Policy. The Board supervises the implementation of risk management.
 President and CEO Responsible for arranging risk management measures and presenting risk management issues to the Board.
 CFO Coordinates the risk management process, carries responsibility for reporting and presents risk management issues to the Management Team.
 Management Team Risk management is included in the strategy process. The Management Team participates in controlling the risk management process and naming the persons in charge. Each member of the Management Team is in charge of identifying risks in his or her business area and implementing risk management.
 Regional directors The subsidiaries independently implement their risk management in compliance with the Group’s risk management policy and guidelines.
 All employees Obligated to act in a manner required to prevent risks, follow the Company policies and report any observed risks to their supervisors.

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INTERNAL AUDITING

In compliance with the Finnish code of corporate governance, internal auditing and risk management seek to ensure that the Company’s activities are effective and efficient, the information used by the management when making decisions is reliable, the Company policies are followed, implementation of risk management measures complies with the risk management policy, and the Company complies with all laws and regulations. Internal auditing supports the Board’s management task.

Internal auditing is integrated as part of the Company’s management and reporting system. Internal auditing is implemented by the Board of the Company, operative management and employees. Implementation of internal auditing is ensured by paying special attention in organising activities, the competence of personnel, operational guidelines, reporting and auditing scope.

The Board ensures that the auditing of the Company’s accounting, asset management and risk management has been properly organised and complies with the relevant legislation. Furthermore, the Board ensures—together with the President and CEO—that the Company conducts its business in compliance with its values. The Board approves the risk management policy and all guidelines pertaining to internal auditing and the code of governance. If necessary, the Board may request external auditors or other service providers to conduct an internal audit.

The President and CEO is in charge of the daily management of the Company in compliance with the Board’s instructions. The President and CEO provides a basis for internal auditing by managing and guiding top management and monitoring how executives audit their own activities.

The Company’s Management Team ensures that different activities of the Company comply with the internal auditing guidelines and practices. Risk management, financial administration guidelines and financial administration practices are of particular importance.

Under the management of the Company CFO, financial administration assists in creating proper risk management and financial management auditing practices and monitors the sufficiency and practical functionality of the auditing measures.

The President and CEO, the members of the Management Team and managers of the subsidiaries have the responsibility for legislative compliance of the accounting of their areas of responsibility as well as compliance with the Company’s operational guidelines. Auditors annually check the accounting and administration of the subsidiaries. Audits of all the Group companies are performed by authorised accounting firms. The auditor of the parent company has the responsibility for coordinating audit focus areas, analysing audit observations from the perspective of the consolidated financial statements and communication with the Group’s financial administration. The internal auditing structure of the Group companies is taken into account when deciding upon the scope of the audit. Annual detailed reports on auditing results are provided to Group management and the Board.

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SHAREHOLDER AGREEMENTS

The Company is not aware of its shareholders having entered into shareholder agreements.

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DIVIDEND POLICY

The Company has adopted a dividend policy whereby dividends are paid in accordance with the Company’s long-term performance and capital requirements.

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COMMUNICATION

The Company’s President and CEO carries the responsibility for communication outside the Company. The Company’s Communications Unit and financial administration participate in handling investor and media relations, stock exchange communication and creation of investor information published on the Company website, managed by the President and CEO.

In connection with its financial statements and Annual Report, the Company publishes its Corporate Governance Statement as a separate document.

The Corporate code of governance of the Company is available under Investor Information on the Company website (www.ponsse.com).

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