Annual Report and Sustainability Report 2019

CORPORATE GOVERNANCE

The Board’s Report relating to “The Norwegian Code of Practice for Corporate Governance”

The KONGSBERG ASA Board actively supports the principles for good corporate governance and attaches importance to KONGSBERG’s compliance with the Norwegian Code of Practice for Corporate Governance and to explaining any deviations.

The following is a detailed discussion of each individual section of the Norwegian Code of Practice. The review is based on the latest version of the Code, dated 17 October 2018.

The information that KONGSBERG is required to disclose pursuant to Section 3–3b of the Accounting Act regarding reporting on corporate governance has been taken into account in this report and follows the systematics of the Code of Practice where it is natural to do so. A detailed description of the location of the disclosures required by Section 3–3b of the Accounting Act follows below:

  1. “a statement of the recommendations and regulations concerning corporate governance that the Group is subject to or otherwise chooses to comply with”: “KONGSBERG Policy” section in the report. The introductory section “Deviations from the code of practice” justifies such deviations.
  2. “information on where the recommendations and regulations mentioned in (a) are available to the public”: “KONGSBERG Policy” section in the report
  3. “a description of the main elements of the Group and, for enterprises that prepare consolidated accounts, if relevant also the Group’s internal control and risk management systems linked to the accounts reporting process”: Report, section 10, “Risk management and internal control”
  4. “articles of association that completely or partially extend or depart from provisions stipulated in Chapter 5 of the Public Limited Companies Act”: Report, section 6, “Annual General Meeting”
  5. “the composition of the Board, corporate assembly, shareholders’ committee/supervisory board and control committee and any working committees that these bodies have, as well as a description of the main elements in prevailing instructions and guidelines for the bodies’ and any committees’ work”: Report, section 8, “The Board, its composition and independence” and section 9, “The Board’s work”
  6. “articles of association that regulate the appointment and replacement of directors”: Report, section 8, “The Board, its composition and independence”
  7. “articles of association and authorisations that allow the Board to decide that the enterprise is to repurchase or issue the enterprise’s own shares or equity certificates”: Report, section 3, “Share capital and dividends”

DEVIATIONS FROM THE CODE OF PRACTICE

According to the Group’s own evaluation, KONGSBERG deviates from the code of practice on one major point:

Item 6 – General Meeting

There are two deviations on this point:

  • The entire Board has not usually attended the General Meeting. Thus far, the items on the agenda of the General Meeting have not required this. One or more Board representatives are always present to respond to questions. Other Board members participate on an ad hoc basis. From the Group’s perspective, this is considered to be sufficient.
  • Article 8 of the Articles of Association specifies that the General Meetings are to be chaired by the Chair of the Board. If the Chair is absent, the General Meeting is chaired by the Board’s Deputy Chair. In the absence of both, the Chair shall be elected by the General Meeting. This is a departure from the recommendation regarding an independent chair. The arrangement has been adopted by the shareholders through a unanimous resolution of the General Meeting and has worked satisfactorily thus far.
  1. Report on corporate governance

    The description of the main features is generally structured like the Code of Practice. As recommended, more details are provided on the individual points. Item 16, “Management and internal Procedures”, is not covered by the recommendation. It has nonetheless been included because the Group considers it to be crucial to KONGSBERG’s discussion of corporate governance.

    KONGSBERG seeks to comply with international best practice standards when drawing up governance documents. The Group argue that there is a close correlation between high-quality systems of governance and value creation in the company. 

    The topic of corporate governance is subject to annual evaluation and discussion by the Board. This report was adopted at the Board meeting on 19 March 2020.

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  2. Operations

    Articles of association

    Kongsberg Gruppen ASA is a company whose objective is to engage in technological and industrial activities in the maritime, defence and related sectors. The Company may participate in and own other companies. The above-mentioned is stated in Section 3 of KONGSBERG’s Articles of Association. The Articles of Association are available on the Group’s website and in this report.

    Objectives, strategy and risk

    The Kongsberg Gruppen ASA aims to be an international technology company based in Norway. KONGSBERG’s objective is to secure and increase stakeholder value through profitable and growth-oriented industrial development with a long-term, sustainable and international perspective. Its shareholders’ assets are protected and managed through utilisation of the Group’s high level of expertise in order to develop attractive solutions for the market, meet important needs for a sustainable society, and focus on continually improving our operations. 

    KONGSBERG must consolidate its competitiveness and at the same time lay the foundations for sustainable and profitable growth. Growth will come through a combination of organic growth and acquisitions.

    To achieve the ambitions, the Board and management have prepared strategies, targets and priorities for the Group and each individual business area. The targets include market work, acquisitions, expertise, corporate social responsibility and sustainability, technology and finance, including capital structure. These targets, our main strategies and risk are covered in more detail in the Directors' report, Chapter 5 of this annual report. The Group’s risk management is described in more detail in Item 10. Strategy, objectives and risk profile are subject to annual review and revision by the Board, and are also monitored continuously throughout the year.

    Sustainability and corporate social responsibility

    The Group’s policy for sustainability and corporate social responsibility forms part of our governance model, which is adopted by the Board. Sustain­ability and corporate social responsibility is an integral part of the Group’s strategic processes and is described in more detail in the Group’s Annual and Sustain­ability Report and on the Group’s website.

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  3. Share capital and dividends

    Equity

    On 31 December 2019, the Group’s equity came to MNOK 12,810 (MNOK 12,626), which is equivalent to 32.5 (45.7) per cent of the total assets.  

    Net interest-bearing debt as of 31 December 2019 was MNOK -1,565 (MNOK -5,706). Of this, cash and cash equivalents represented MNOK 5,654 (MNOK 10,038). Working capital as of 31 December 2019 was MNOK 17 (MNOK -14).

    Total assets at 31 December 2019 was MNOK 39,422 (MNOK 27,658). The Board considers the company’s capital structure to be satisfactory. At any given time, the company’s need for financial strength is considered in the light of its objectives, strategy and risk profile.

    Dividend policy

    The company’s current dividend policy was decided by the Board in 2013: “Dividends over time shall constitute between 40 and 50 per cent of the company’s annual profit after tax. In determining the size of dividends, the expected future capital requirements shall be considered.” 

    The General Meeting approves the annual dividend, based on the Board’s recommendation. The proposal is the ceiling for what the General Meeting can approve. For the accounting year 2018, a dividend of NOK 2.50 per share was paid. 

    For the accounting year 2019, the Board proposes to the Annual General Meeting a dividend of MNOK 450, equivalent to NOK 2.50 per share. The dividend represents 62.8 per cent of the ordinary profit. The Board will also request the General Meeting an authority to execute a share buy-back programme with purpose of cancelling the shares. The value of the programme is up to MNOK 500, equivalent to a value of NOK 2.77 per share. The Board will also request the General Meeting an authority to pay an additional dividend of up to MNOK 1,800, corresponding to NOK 10.00 per share. Both authorisations are valid until the next Annual General Meeting. The total value of the cash dividend and planned share buy-back programme is approximately NOK 15.27 per share.

    Board authorisations

    Capital increase

    The Board has not been authorised to issue shares.

    Purchase of treasury shares

    The General Meeting can, according to the Public Limited Companies Act § 9-4, authorise the Board to repurchase their own shares if the total holding of treasury shares does not exceed 10 per cent of the share capital (Public Limited Companies Act § 9-2). 

    At the Annual General Meet­ing on 14 May 2019, the Board was given authorisation to acquire treasury shares up to a maximum nominal value of MNOK 9.7, which is equivalent to 4.3 per cent of the share capital. The authorisation can be used several times and applies up until the next Annual General Meeting, but not later than 30 June 2020. The Board’s acquisition of treasury shares pursuant to this authorisation can be exercised only between a minimum price of NOK 25 and a maximum of NOK 300 per share. As of 31 December 2019, the Group owned a total of 16,779 (19,869) treasury shares. 

    The shares were purchased for the share purchase programme for all employees, and in connection with the company’s long-term incentive programme (LTI). Shares can also be used as full or partial payment in connection with business acquisitions, or they can be sold on the market. The shares included in the Group’s share purchasing programme are offered to all employees at a discount (20 per cent discount on the market price), and are subject to a one-year lock-in period from the date of acquisition. The LTI scheme is discussed in the annual financial statements Note 28 and section 12 of this report.

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  4. Equal treatment of shareholders and transactions between related parties

    Class of shares

    The Group’s shares are all Class A shares. All shares carry the same rights in the company. At General Meetings, each share carries one vote. The nominal amount per share is NOK 1.25. The Articles of Association place no restrictions on voting rights.

    Trading in treasury shares

    The Board’s mandate to acquire treasury shares is based on the assumption that acquisitions will take place in the market. Acquired shares will be disposed of in the market, as payment for acquisitions, and through share purchase programmes for the Group’s employees and the LTI scheme.

    Transactions with related parties

    The Board is not aware of any transactions in 2019 between the company and shareholders, directors, executive personnel or parties closely related to such individuals that could be described as major transactions. If such a situation were to arise, the Board would ensure that an independent valuation was made by a third party. For further information, see Note 28 and Note 31 of the annual financial statements for 2019.

    The Norwegian Government as customer and shareholder

    The Norwegian Government, represented by the Ministry of Trade, Industry and Fisheries (NFD), has a shareholding of 50.001 per cent in KONGSBERG. The Government is also a major customer, particularly with regard to deliveries to the Norwegian Armed Forces. Relations with the Armed Forces are of a purely commercial nature and are not affected by the ownership structure.

    The Group holds quarterly meetings with the NFD. The topics discussed at these meetings are first and foremost the Group’s financial development, and there are briefings on strategic questions related to KONGSBERG. The Government’s expectations regarding investment performance and yield are also communicated. These “one-to-one” meetings with the NFD are comparable to what is customary between a private company and its principal shareholders. The meetings comply with the provisions specified in company and securities legislation, not least with a view to equal treatment of the shareholders. A meeting on corporate social responsibility is held once a year. 

    The requirement regarding equal treatment of the shareholders limits the possibilities for exchanging data between the company and the Ministry. As a shareholder, the Government does not usually have access to more information than what is available to other shareholders. However, that does not preclude discussions on matters of importance to society. Under certain circumstances, i.e. when Government participation is imperative and the Government must obtain authorisation from the Storting (Norwegian parliament), from time to time it will be necessary to give the NFD insider information. In such cases, the NFD is subject to the general rules for dealing with such information.

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  5. Shares and negotiability

    The shares are freely negotiable, with the exception of shares purchased by employees at a discount, and shares allocated in connection with the company’s long-term incentive (LTI) scheme, see sections 3 and 12. The Articles of Association place no restrictions on negotiability.

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  6. Annual General Meeting

    Through the General Meeting, shareholders are ensured participation in the Group’s supreme governing body. The Articles of Association are adopted by this body. Shareholders representing at least five per cent of the shares can call for an Extraordinary General Meeting.

    In 2019, the Annual General Meeting was held on 14 May and 69.88 per cent (67.48) of the aggregate share capital was represented. A total of 112 (98) shareholders were present or represented by proxies.

    Notification

    The Annual General Meeting is ordinarily held by 1 June each year. In 2020, the date is set for 14 May 2020.

    • Notification is usually distributed 21 days in advance of the Annual General Meeting at the latest. The relevant documents, including the Nominating Committee’s approved list of nominees, are available at www.kongsberg.com.
    • It is important that the documents contain all the information required for the shareholders to take a position on all items on the agenda. The company’s Articles of Association stipulate that the deadline for registration can expire no earlier than five days prior to the date of the Annual General Meeting. Efforts are made to set the deadline as close to the meeting date as possible.

    All shareholders registered in the Norwegian Central Securities Depository (VPS) receive the notice and are entitled to submit motions and to vote directly or by proxy. The Financial Calendar is published both via a stock exchange announcement and on the Group’s website.

    Registration and proxies

    Registration can be done by written notice in letters, e-mails or online. The Board would like to make it possible for as many shareholders as possible to participate. Shareholders who are unable to attend the meeting will be encouraged to authorise a proxy. A special proxy form has been drawn up to facilitate the use of proxies for each individual item on the agenda. One person is appointed to vote as a proxy for the shareholders. Representatives of the Board, at least one member of the Nominating Committee and the auditor will attend the General Meeting. Management is represented by the Chief Executive Officer and the Chief Financial Officer, at the very least.

    Agenda and execution

    The agenda is set by the Board, and the main items are specified in Article 8 of the Articles of Association. The same article stipulates that the Chair of the Board will chair the General Meeting. The CEO and other members of the corporate management board review the status of the Group.

    All shareholders are entitled to have their cases dealt with at the General Meeting. Cases shall be submitted in writing to the Board a minimum of seven days prior to the deadline for sending the notification of the General Meeting. The reason for wanting to have the case added to the agenda should also be specified. The minutes from the General Meeting will be posted on the Group’s website.

    KONGSBERG has identified to deviations from the recommendation regarding section 6 – General Meeting. These concern the full Board’s participation at the General Meeting, and an independent chair. The deviations are described in more detail in the introduction to this chapter.

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  7. Nominating Committee

    Article 9 of the Group’s Articles of Association specifies that the Group shall have a Nominating Committee. The Committee’s work is regulated by special instructions adopted by the General Meeting. These instructions were last revised by the Annual General Meeting on 9 May 2016.

    The main task is to make recommendations to the Company’s General Meeting regarding the election of shareholder-elected Board members. The nominations shall be substantiated and recommend a nominee for the Chair of the Board separately. In the work on finding candidates for the Board, the Committee is in contact with relevant shareholders, Board members and the CEO.

    In addition, the Nominating Committee shall submit proposals for the remuneration of Board members and their deputies, and make an annual evaluation of the work of the Board.

    The Nominating Committee consists of three to four members who shall be shareholders or representatives of shareholders. The General Meeting shall elect all members of the Nominating Committee, including the Chair. The Nominating Committee itself proposes a list of Committee nominees to the General Meeting. The Nominating Committee’s remuneration is approved by the General Meeting based on the Nominating Committee’s recommendation.

    Composition

    The current Committee was elected by the Annual General Meeting of 16 May 2018 and consists of:

    • Morten S. Bergesen, managing director of Snefonn AS and Havfonn AS
    • Morten Strømgren, department director in the Ministry of Trade, Industry and Fisheries
    • Vigdis M. Almestad, senior portfolio manager in ODIN Forvaltning AS

    Bergesen was elected Chair of the Committee. The Nominating Committee is elected for a period of two years, and the next election will be held at the Annual General Meeting in 2020.

    None of the Committee’s members represents KONGSBERG’s management or Board. The members are considered to be independent of the daily management and Board. Morten S. Bergesen is managing director of Snefonn AS which, as of 31 December 2019, had a shareholding of 1.32 per cent in KONGSBERG. In addition, Bergesen is managing director of Havfonn AS, which had a shareholding of 0.65 per cent in KONGSBERG at the same point of time. Morten Strømgren is employed by the Ministry of Trade, Industry and Fisheries which, as of 31 December 2019, had a shareholding of 50.001 per cent in KONGSBERG. Vigdis M. Almestad is employed by ODIN Forvaltning AS which, through its funds, had a 1.39 per cent share in KONGSBERG at 31 December 2019. The Nominating Committee is considered to have a composition that reflects the common interests of the community of shareholders. Information about the Nominating Committee, a form for nominating candidates for the Board/Nominating Committee and the deadlines are available on the Group’s website.

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  8. The Board, its composition and independence

    The Annual General Meeting in 1999 resolved to discontinue the Corporate Assembly. The reason was an agreement between the unions and the Group that increased the number of employee representatives on the Board from two to three.

    Composition of the Board

    The Board consists of eight members and currently has the following composition: Eivind K. Reiten (chair), Anne-Grete Strøm-Erichsen (deputy chair), Morten Henriksen, Martha Kold Bakkevig and Per A. Sørlie. Elisabeth Fossan, Helge Lintvedt and Sigmund Ivar Bakke are Board members elected by and among the employees. Detailed information on the individual directors can be found on the Group’s website.

    The Board held 11 meetings in total in 2019, of which eight were ordinary, one was held as a telephone conference, and two were Board deliberations without a meeting.

    It is important that the entire Board has the expertise required to deal with Board work and the Group’s main business activities. In addition, the directors need to have the capacity to carry out their duties.

    According to the Articles of Association, the Group shall have five to eight directors. The CEO is not a Board member.

    In electing the Board of Directors, the Nominating Committee presents its proposals for Board representatives and Chair to the shareholder-elected Board representatives to the General Meeting. The Board and Chair are selected by the General Meeting for a two-year period. Eivind K. Reiten was elected Chair of the Board. All Board members will be up for election in 2021.

    Participation in Board and committee meetings in 2019


    Participation in meetings

    Participation in meetings

    Board
    Audit
    Committee
    Compensation
    Committee
    Eivind K. Reiten
    Eivind K. Reiten
    11
    4
    Anne-Grete Strøm-Erichsen
    Anne-Grete Strøm-Erichsen
    10
    4
    Morten Henriksen
    Morten Henriksen
    11
    6
    Martha Kold Bakkevig
    Martha Kold Bakkevig
    10
    6
    Per Arthur Sørlie (appointed 14 May 2019)
    Per Arthur Sørlie (appointed 14 May 2 019)
    6
    3
    Elisabeth Fossan
    Elisabeth Fossan
    11
    4
    Helge Lintvedt
    Helge Lintvedt
    11
    6
    Sigmund Ivar Bakke
    Sigmund Ivar Bakke
    11
    Irene Waage Basili (retired 14 May 2019)
    Irene Waage Basili (retired 14 May 2 019)
    4


    The Board’s independence

    All shareholder-elected directors are considered autonomous and independent of the Group’s corporate executive management. The same applies relative to important business associates. The Election Committee for the election of employee representatives to the Board complies with the Representation Ordinance and ensures that the recommendation of independence is addressed through nominations and elections. It is important that there are no conflicts of interest between owners, the Board, management and the Company’s other stakeholders.

    Among the shareholder-elected directors, there are three men and two women, i.e. 40 per cent women.

    Election of the Board

    The General Meeting elects the five shareholder-elected representatives to the Board. Board members are elected by a simple majority. The Nominating Committee prepares a recommendation for shareholder-elected representatives ahead of the general meeting. The recommendations will be available to the shareholders contemporaneous with notification of the General Meeting. The Norwegian state owns 50.001 per cent of the shares in KONGSBERG and could, in principle, exercise control over the election of the shareholders’ directors. The directors are elected for two-year terms and are eligible for re-election.

    Three of the directors are elected by, and from, the Group’s employees. The election of employee representatives in 2019 was cancelled and a re-election will be carried out in first quarter 2020. 

    The directors’ shareholdings

    Directors are encouraged to own shares in the company, but this is not a requirement. As of 31 December 2019, the shareholder-elected directors held the following portfolios of shares in the Group:

    • Eivind K. Reiten owns 2,850 (2,850) shares through his 100 per cent-owned company Mocca Invest AS.
    • Anne-Grete Strøm-Erichsen owns 2,000 (2,000) shares through her 50 per cent-owned company AGSE Consulting.
    • Morten Henriksen owns 3,027 (3,027) shares.
    • Martha Kold Bakkevig owns 2,119 (2,119) shares through her 50 per cent-owned company Kold Invest AS.
    • Per A. Sørlie owns 1,400 (0) shares.

    The employee-elected board members hold the following portfolios of shares in KONGSBERG as of 31 December 2019:

    • Elisabeth Fossan owns 5,209 (4,904) shares.
    • Helge Lintvedt owns 0 (0) shares.
    • Sigmund Ivar Bakke owns 3,383 (3,078) shares.
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  9. The Board’s work

    The Board’s responsibilities

    The Board bears the ultimate responsibility for managing the Group and for monitoring day-to-day administration and the Group’s business activities. This means that the Board is responsible for establishing control systems and for ensuring that the Group operates in compliance with the adopted value platform and the Corporate Code of Ethics, as well as in accordance with the owners’ expectations of good corporate governance. First and foremost, the Board protects the interests of all shareholders, but it is also responsible for safeguarding the interests of the Group’s other stakeholders.

    The Board’s main responsibilities are to contribute to corporate competitiveness, and to ensure that the Group develops and creates value. Furthermore, the Board is to participate in the framing and adoption of the Group’s strategy, exercising the requisite control functions and ensuring that the Group is managed and organized in a satisfactory manner. The Board sets the objectives for financial structure and adopts the Group’s plans and budgets. The Board also handles items of major strategic and/or financial importance to the Group.

    In important cases where the Chair or other Board members have been actively engaged, this will be disclosed in the proceedings and managed by the Board on a case-by-case basis. These tasks are not constant and the focus will depend on the Group’s needs at any given time. The Board appoints the CEO, defines their work instructions and authority, and determines their wages.

    Board instructions

    The Board’s instructions are subject to review every second year by the Board and are revised as needed. The current instructions were presented to the Board in February 2019. The instructions cover the following items: the notification of Board meetings, notification deadlines, administrative preparations, Board meetings, Board decisions, the keeping of minutes, the Board’s competency and items on the Board’s agenda, segregation of duties between the Board and the CEO, relations between subsidiaries and the parent company, independence and disqualification, main principles for the work of the Board in connection with a possible corporate take-over, confidentiality and professional secrecy and relations to legislation, the Articles of Association and instructions. Rules of procedure for the Board of directors can be read on the Group’s website.

    The Board may decide to deviate from the instructions in individual cases.

    Instructions for the CEO

    There is a clear segregation of duties between the Board and executive management. The Chair is responsible for ensuring that the Board’s work is conducted in an efficient, correct manner and in compliance with the Board’s responsibilities.

    The CEO is responsible for the Group’s operational management. The Board has prepared a separate instruction for the CEO. The instruction will be reviewed by the Board every second year and will be revised as required. The current instructions were presented and revised by the Board in February 2019.

    Financial reporting

    The Board receives financial reports ten times per year where the Group’s economic and financial status is described. The reports are financial presentations that describe what has happened in the Group’s operative and administrative functions during the reporting period. The financial report forms the basis for internal control and communication on status and necessary measures. Quarterly financial reports are compiled that form the basis for the external financial report. This report is dealt with in the Group’s audit committee before being submitted to and reviewed by the Board. The report is made public after approval from the Board.

    Notice of meetings and discussion of items 

    The Board schedules regular Board meetings each year. Ordinarily, eight meetings are held each year. Additional meetings are held on an ad hoc basis. The Board held 11 Board meetings (17) in 2019, of which one was held as a telephone conference, and two Board deliberations conducted without a meeting. The Board meetings had 97 (96) per cent attendance in 2019.

    All directors receive regular information about the Group’s operational and financial progress well in advance of the scheduled Board meetings. The Company’s business plan, strategy and risk are regularly reviewed and evaluated by the Board. The directors are free to consult the Group’s senior executives as needed. The Board draws up and adopts an annual plan, including set topics for the Board meetings. Ordinarily, the CEO proposes the agenda for each individual Board meeting. The final agenda is decided in consultation between the CEO and the Chair of the Board.

    Besides the directors, Board meetings are attended by the CEO, CFO, other EVPs as needed, and the General Counsel (secretary of the Board). Other participants are called in on an ad hoc basis.

    The Board adopts decisions of material importance to the Group. This involves, amongst other things, the approval of the annual and quarterly accounts, strategies and strategic plans, the approval of investments, contracts, as well as acquisitions and divestitures of businesses where the Group’s authority matrix or the Group’s directive concerning significant offers, contracts or framework agreements require this.

    New directors are briefed on the Group’s current strategy and historical factors related to the current situation.

    Duty of confidentiality – communication between the Board and shareholders

    The Board’s proceedings and minutes are, in principle, confidential unless the Board decides otherwise, or there is obviously no need for such treatment. This ensues from the instructions to the Board.

    Competence

    The entire Board has completed a programme to gain insight into the Group’s business activities. In that connection, the Board makes excursions to different Group locations. The purpose of the excursions is to improve the Board’s insight into the commercial activities in the area.

    Disqualification

    The Board and CEO cannot discuss cases in which they have a significant special interest, and are bound by the rules regarding disqualification as they appear in Section 6–27 of the Public Limited Companies Act and in the instructions to the Board.

    Guidelines for directors and executives

    The Corporate Code of Ethics discusses this topic under conflicts of interest under Item 5.10. The same applies to the instructions to the Board. Here, it is emphasised that the Board shall act independently of special interests. Independence in this context is defined as follows:

    • Board members shall normally not receive any remuneration from the company other than their directors’ fee and remuneration for work on Board committees. Any deviation from this general rule requires the approval of the entire Board and shall be recorded in the minutes. When material transactions take place between the company and a director or the CEO, an independent valuation shall be obtained from a third party.
    • Board members shall inform the Board of any relationships with KONGSBERG’s significant business associates or interests in its transactions.
    • The directors’ fee shall not be linked to the financial performance of the Group and options shall not be allocated to Board members.
    • Cross relationships between directors, the CEO or other executives shall be avoided.
    • Board members shall not have or represent significant business relations with the Group.

    If a director is in doubt about his/her legal competence, the question shall be discussed by the entire Board. The conclusion on the question of disqualification shall be recorded in the minutes.

    Use of board committees

    The Board has two subcommittees: an Audit Committee and a Compensation Committee. Both committees act as preparatory bodies for the Board; they are accountable only to the assembled Board and have only recommending authority. In addition, special committees are formed as needed, such as appointment committees.

    The Board’s Audit Committee

    The Audit Committee shall support the Board in its responsibilities related to financial reporting, audits, internal control and overall risk management. The Audit Committee is also a preparatory body in terms of non-financial policy and control. The Committee previously consisted of two shareholder-elected directors and one employee-elected director. After the General Meeting in 2019, the Audit Committee was expanded with one more shareholder-elected board member. The Committee now consists of four members. The Group's CFO and its elected accountant normally participate in the meetings. The CEO and the other directors are entitled to attend if they so desire. Six (seven) meetings were held in 2019, of which one was extraordinary. Members: Morten Henriksen (chair), Martha Kold Bakkevig, Per A. Sørlie and Helge Lintvedt. The instructions for the Audit Committee are published on the Group’s website.

    The Board’s Compensation Committee

    The committee shall prepare issues for Board discussion related to remuneration, management development and diversity. This includes, among others, discussion of issues associated with the remuneration for the CEO, and questions of principle relating to salary levels, bonus systems, pension schemes/terms, employment contracts, etc. for leading employees. The committee also prepares issues regarding other conditions associated with remuneration that the committee considers of particular significance to the company’s competitive position, profile, recruitment ability, reputation, etc. In addition, the committee prepares for discussion of the Group’s management development plans, performance reviews and succession plans for managers, with particular emphasis on ensuring diversity.

    The Committee consists of the Chair of the Board, one shareholder-elected director and one employee-elected director. The CEO is entitled to participate in the Committee’s meetings if they so desire, except when their own situation is under discussion. Four (four) meetings were held in 2019.

    Members: Eivind K. Reiten (chair), Anne-Grete Strøm-Erichsen and Elisabeth Fossan. The instructions for the Compensation Committee are published on the Group’s website.

    The Board’s own evaluation

    The Board has one extended meeting each year to evaluate the work done by the Board and the CEO. In this connection, the Board also holds its own activities up for comparison with the Norwegian Code of Practice for Corporate Governance. The Board’s evaluation is made available to the Nominating Committee. Individual performance interviews are conducted each year between the Chair of the Board and the other directors.

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  10. Risk management and internal control

    The Board’s responsibilities and the purpose of internal control

    KONGSBERG’s internal control and risk management system for financial reporting are based on the internationally recognised COSO framework.

    The Group has established a decentralised management model featuring delegated responsibility for profits. As a result, the control function parallels the Group’s management model, and it is the individual unit’s responsibility to make sure that it has the capacity and expertise it requires to carry out responsible internal control. Corporate executive management and the individual technological fields are responsible for ensuring that the business areas have implemented the appropriate internal controls.

    Ten times per year, the management prepares operating reports including risk analyses, and these are sent to the directors. In addition, quarterly financial reports are published for the financial market. The Audit Committee reviews the Group’s quarterly report ahead of the Board meeting. The auditor takes part in the Audit Committee’s meetings and meets with the entire Board in connection with the presentation of the interim annual financial statements and as otherwise required.

    Follow-up by the Board

    The Board follows up risk management and internal controls through its annual plan and agenda. This includes a quarterly review of strategic and operational risks, central discretionary items related to financial reporting and non-financial compliance. The Board processes and approves major customer quotations according to the Group’s authority matrix. The Board is also involved in the Group’s strategy processes on an ongoing basis.

    The Group’s financial position and risks are thoroughly described in the Directors’ Report.

    The Board conducts an annual review of the Group’s key governance documents to ensure that these are updated and cover the relevant topics.

    Compliance with values, ethics and corporate social responsibilities

    KONGSBERG stresses that our values and Code of Ethics are to be an integral part of operations. We expect our employees and partners to demonstrate high ethical standards and compliance with applicable rules and regulations.

    In 2019, KONGSBERG continued its work on systematic development and follow-up of important areas for compliance with regulations, rules and internal guidelines. The Group has focus on the anti-corruption programme, where employee training, cooperation with business partners on anti-corruption measures as well as training and review of market representatives have been the key elements. We also have a particular focus on export control and sanctions. The Group has compliance functions at both a corporate level and in the business areas. In the same way as the financial reporting, the internal control was established in accordance with a decentralised management model. The KONGSBERG compliance programme is coordinated and monitored from a corporate level.

    Routines have been established for notification and follow-up on any alleged misconduct. The Group has a whistleblower system with a web-based notification channel available to all employees globally, providing the opportunity for external notifications and anonymity for whistleblowers.

    The Group has an Ethics Committee whose purpose is to promote high ethical standards and good behaviour, and to ensure that KONGSBERG maintains a good reputation.

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  11. Remuneration of the Board

    The Annual General Meeting approves the remuneration paid to the Board each year. The proposal for remuneration is made by the Nominating Committee. From the Annual General Meeting in 2019 until the next Annual General Meeting, the total remuneration to the Board members will amount to NOK 2,473,000 (NOK 2,355,000).

    The remuneration breaks down as follows:

    • Board Chairperson NOK 544,000 (NOK 518,000)
    • Deputy Chair NOK 291,000 (NOK 277,000)
    • Other Board members NOK 273,000 (NOK 260,000)

    In addition, the members of the Audit Committee receive NOK 10,400 (NOK 10,100) per meeting, and a maximum of NOK 104,000 (NOK 101,000) per year. The Committee’s chair receives NOK 12,700 (NOK 12,100) per meeting, and a maximum of NOK 127,000 (NOK 121,000) per year.

    The members of the Compensation Committee receive NOK 9,400 (NOK 9,400) per meeting, and a maximum of NOK 47,000 (NOK 47,000) per year. The Committee’s chair receives NOK 11,700 (NOK 11,200) per meeting, and a maximum of NOK 58,500 (NOK 56,000) per year.

    The directors’ fees are not contingent on financial performance, option programmes or the like. No remuneration has been paid in allowances, apart from normal Board fees. None of the Board’s shareholder-elected directors works for the company outside of their directorships, and no-one has any agreement regarding a pension plan or severance pay from the company.

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  12. Remuneration of executive management

    The Board has drawn up special guidelines for the determination of salaries and other remuneration to executive management. The CEO’s terms of employment are determined by the Board. Each year, the Board undertakes a thorough review of salary and other remuneration to the CEO. The evaluation is based on market surveys of comparable positions.

    The structure of the incentive system for the other members of the corporate executive management is determined by the Board and presented to the Annual General Meeting for information purposes. The terms are determined by the CEO in consultation with the Chair of the Board.

    The Board’s attitude to executive management’s salaries is that they should be competitive and provide incentive, but not be at the very top end of the scale. The incentive system consists of basic wages, bonuses, pensions, long-term incentives (LTI), severance arrangements and other benefits in kind.

    The guidelines for determining salaries and other remuneration to executive management are presented in the General Meeting. The guidelines are binding for the LTI scheme and serve as guidelines for the rest.

    Performance-based part of salary

    In 2006, the Board introduced a new bonus system for executive management. The scheme was adjusted slightly in 2016 and further adjusted in 2018. Performance-based compensation is linked to improved EBIT and ROACE, increased operating revenues and individual targets. The payment of performance-based salary has a ceiling of 50 per cent of the basic salary. A more detailed description of the scheme is given in Note 28, “Declaration regarding the determination of salaries and other remuneration to senior executives” in the Annual Report for 2019. In 2019, the Group had 76 (76) managers who were covered by an incentive plan that included an individual performance element.

    The Bonus System meets guidelines for salaries and other remuneration to senior employees of enterprises and companies with a state shareholding. In 2019, the bonus system consisted of direct payments and payments from previous bonus banks. The bonus bank scheme was discontinued in 2019.

    Long-term incentive (LTI)

    In 2012, the Board decided to introduce a (LTI) scheme as part of the regular remuneration for the CEO and other members of corporate executive management. The programme was changed to a variable performance system in 2016. As of 2018, the LTI scheme was further expanded to include management groups in the business areas, as well as key positions. The LTI programme represents a maximum of 30 per cent of the fixed salary for the CEO and 25 per cent for the rest of the group management, 15 per cent for the management groups in the business areas and 10 per cent for key positions. The rationale is to be competitive with comparable companies. A more detailed description of the scheme is provided in Note 28 of the annual financial statements for 2019.

    Conditions

    Remuneration to corporate executive management and the Board is described in Notes 28 and 29 to the consolidated financial statements for 2019.

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  13. Information and communication

    Annual Report and Directors’ Report – interim reporting

    The Group usually presents preliminary annual accounts in February. “The Annual Report and Sustainability Report” are sent to shareholders and other stakeholders in March/April. Beyond this, the Group presents its accounts on a quarterly basis. Other information linked to sustainability and corporate social responsibility can be found on the Group’s website. The Group’s Financial Calendar is published via a stock exchange announcement, on the Group’s website and in the Annual Report.

    Other market information

    Open investor presentations are conducted in connection with the Group’s annual and quarterly reports. Here the CEO, assisted by the CFO, reviews the results and comments on markets and future prospects. Other members of the Group’s management participate as needed. An annual Capital Markets Day is usually held in which business area directors will participate. The entire Group management is normally present at this Capital Markets Day.

    The annual and quarterly reports will be available on www.newsweb.no (Oslo Stock Exchange) and on the Group’s website, along with presentation of the results. The annual and quarterly results are also available via video transmission. Beyond this, the Group conducts an ongoing dialogue with and makes presentations to analysts and investors.

    Informing owners and investors about the Group’s progress and economic and financial status is considered to be of great importance. Attention is also devoted to ensuring that the equity market gets the same information at the same time. The prudence principle is applied to guarantee impartial distribution of information when communicating with shareholders and analysts.

    The Group has directives concerning communication with the investor market and handling of insider information. Emphasis is given to equal treatment of all shareholders.

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  14. Take-overs

    There are no defence mechanisms against take-over bids in the Group’s Articles of Association, nor have other measures been implemented to limit the opportunity to acquire shares in the company. The Norwegian government owns 50.001 per cent of the shares. The marketability of these shares is subject to parliamentary discretion. The Board’s instructions contain an item that refers to the guiding principles for how the Board shall react in the event of any take-over bid. The Board is responsible for ensuring that KONGSBERG’s shareholders are treated equally and that operations are not disrupted unnecessarily.

    Where a bid is made for the entirety or parts of the company, the Board shall draw up a statement containing a well-founded evaluation of the bid and, if need be, provide an independent third-party assessment. The evaluation shall specify how, for example, a take-over would affect long-term value creation at KONGSBERG.

    If a bid is made for the Company’s shares, the Company will not limit others from presenting similar bids for the Company’s shares, unless this is clearly justified as being in the Company’s and shareholders’ common interest. In the event of a bid for the Company’s shares, the Company will publish the required disclosures pursuant to legislation and regulations for companies listed on the Oslo Stock Exchange.

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  15. Auditor

    The auditor’s relationship to the Board

    The Group’s auditor is elected by the General Meeting. A summary of the main aspects of the work planned by the auditor shall be presented to the Audit Committee once a year.

    The auditor is always present at the Board’s discussions of the annual accounts. At that meeting, the Board is briefed on the financial statements and any other issues of particular concern to the auditor, including any points of disagreement between the auditor and management. The auditor normally also participates in the Audit Committee’s meetings.

    The Audit Committee arranges annual meetings with the auditor to review the report from the auditor that addresses the Group’s accounting policy, risk areas and internal control routines.

    At least one meeting a year will be held between the auditor, the Audit Committee and the Board without the presence of the CEO or other members of executive management.

    The auditor has presented a written declaration to the Board concerning the fulfilment of fixed independence requirements between the auditor and the Group pursuant to the Ac­countancy Act. The Board has dealt with the guidelines for the business relationship between the auditor and the Group.

    Ernst & Young AS is the Group auditor. Some smaller companies within the Group use other audit firms. Some foreign companies do not have auditors as this is not a part of the local requirements. In addition to ordinary auditing, the auditing company has provided consultancy services related to accounting. For further information, see Note 30 of the Group’s financial statements.

    At regular intervals, the Board evaluates whether the auditor exercises a satisfactory level of control and assesses the auditor’s competitiveness otherwise.

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  16. Management and internal procedures

    The Group’s subsidiaries have their own Boards, which are comprised of internal managers and employees. The managing director of the holding company or a person authorised by the managing director will chair the Board of the subsidiaries. Appointments of the Boards and the Board work in subsidiaries are handled pursuant to the Group’s principles for good corporate governance.

    Guidelines for share trading

    The company has laid down internal guidelines, aimed primarily at the company’s primary insiders, for trading in the company’s shares. These guidelines are updated regularly to maintain compliance with the legislation and regulations that apply at any given time. The guidelines require primary insiders to secure internal clearance from the CEO before KONGSBERG shares are bought or sold.

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