This Statutory Annual Corporate Governance Statement for TK Development A/S forms part of the Management’s review in the 2010/11 Annual Report, covering the period from 1 February 2010 to 31 January 2011. The “corporate governance” section in the Statement is not encompassed by the Auditors’ Report in the 2010/11 Annual Report.
The Statement outlines the Company’s management structure, addresses the corporate governance recommendations that are not followed, and describes key elements in the Group’s internal control and risk management systems as part of the financial reporting procedure.
TK Development A/S is a listed Danish company with a two-tier management system, consisting of a Supervisory Board and an Executive Board.
The planning basis for the work of Management is defined in the Danish Companies Act, the Financial Statements Act, the Securities Trading Act, NASDAQ OMX Copenhagen’s rules and recommendations for issuers, the Company’s Articles of Association, etc. The rules of procedure regulate the distribution of duties and responsibilities between the Supervisory Board and the Executive Board.
The Supervisory Board has chosen not to set up special board committees other than the audit committee, which is composed of all members of the Supervisory Board. This decision was made in light of the size of the Supervisory Board and the commitment to ensuring a high level of information and knowledge for all board members.
As a listed company, TK Development A/S is comprised by the Corporate Governance Code and required to follow its recommendations. TK Development complies with the current recommendations. The recommendations are publicly available at the website of the Committee on Corporate Governance, www.corporategovernance.dk.
The Committee recommendations not followed are listed below:
Corporate social responsibility
In the light of the Company’s size and activities and the Group’s operating markets, the Supervisory Board has decided not to adopt policies for corporate social responsibility. The Board will regularly assess the need for policies in this area.
Setting an age limit for the members of the Supervisory Board has not been considered appropriate by TK Development, as talents, expertise and experience are weighted higher than an age criterion.
The Supervisory Board believes that auditing is an issue that concerns all board members. For this reason, and given the complexity of the accounting procedures, it has been considered appropriate not to set up an actual audit committee, but to let all board members function jointly as the audit committee.
The Supervisory Board has decided not to establish a nomination committee as it is the Board’s opinion that these tasks are best handled by the Supervisory Board as a whole.
TK Development has decided not to establish a remuneration committee because these tasks are dealt with by the Chairman and Deputy Chairman of the Supervisory Board.
Content of remuneration policy
The existing remuneration policy contains reasons for the selection of the individual pay elements, but does not specify the basic criteria determining the balance between them because the remuneration policy was adopted before the implementation of the new Recommendations on Corporate Governance. At TK Development’s Annual General Meeting on 24 May 2011, the Supervisory Board will recommend the adoption of a new remuneration policy describing these criteria.
So far, the Supervisory Board has decided not to set limits for how high a portion of the total remuneration may be constituted of variable components, as the amount of bonus will only be paid if a minimum 8 % return on equity is achieved. Until further notice, the amount of bonus is expected to account for a minor portion only relative to the fixed pay elements.
As bonus is only paid if a minimum 8 % return on equity is achieved for an individual financial year, the Supervisory board assesses that the remuneration policy ensures constant alignment between the interests of the Executive Board and the shareholders. It has therefore been found unnecessary to establish criteria ensuring that the vesting period for variable pay elements, wholly or in part, is longer than one financial year.
In 2010, the Supervisory Board decided to issue warrants to the Executive Board and other executive staff members to be exercised at the earliest after two years, and not, as recommended, at the earliest after three years. This decision should be seen in the context of the size of the incentive schemes and the expectation that the selected combination of incentive scheme size and time duration will generate the best value for the Group relative to cost and retention potential. In future, incentive schemes will provide that the warrants granted will be exercisable at the earliest after three years, including the incentive scheme recommended for adoption at the General Meeting in May 2011.
The Supervisory and Executive Boards have overall responsibility for the Group’s risk management and internal controls related to its financial reporting, including compliance with relevant legislation and other regulatory provisions governing financial reporting.
Management considers good risk management and internal controls essential and regularly impresses this policy on the Group’s staff members.
The Group’s risk management and internal controls related to financial reporting have been established with a view to effectively controlling financial reporting and thus minimizing/eliminating the risk of misstatement and error.
The Group’s risk management and internal control systems related to financial reporting cannot provide absolute assurance but only reasonable assurance that any misuse of assets, losses and/or material misstatements and errors connected with financial reporting can be avoided.
The Supervisory Board, which also makes up the audit committee, performs an ongoing assessment of important risks and internal controls in connection with the Group’s activities and their potential impact on its financial reporting.
Each year the Supervisory Board assesses the Group’s organizational structure and staffing in important areas, including areas that are crucial in the financial reporting process. In addition, an assessment is made of the risk of fraud and the appropriateness of the Group’s accounting principles, accounting policies and the most significant accounting estimates.
The Supervisory Board has introduced a number of general procedures in all key areas for financial reporting purposes. In doing so, the Supervisory Board has accorded weight to having a clear organizational structure as well as precise reporting guidelines, approval procedures and functional separation.
The Group’s accounting function is responsible for planning and controlling the financial reporting process. The Group Accounting Manager and the associated staff members monitor compliance with agreed guidelines, continuously reviewing the Group’s internal financial reporting from both domestic and foreign sources. Their duties also include random checks of accounting records.
As an element in the Supervisory Board’s assessment of the internal control environment, the Board annually determines the appropriateness of internal control and risk management systems and the possible need for an internal audit. Based on the Company’s size, complexity and accounting department organization, the Supervisory Board has so far assessed that an internal function is unnecessary.
At least once a year, the Supervisory Board, which also makes up the audit committee, and the Executive Board perform an overall risk assessment as part of the financial reporting process.
Against this background, the Supervisory Board adopts a number of overall procedures, including initiatives to reduce/eliminate risk.
As an element in the risk assessment, each year the Supervisory and Executive Boards estimate the risk of fraud and decide which measures to take to minimize such risks. In this connection, the Supervisory Board also assesses the risk of the Executive Board bypassing controls and exercising undue influence on the financial reporting process.
Decisions regarding initiatives to reduce/eliminate risks are based on an assessment of materiality.
The most significant risks associated with financial reporting appear from the Management’s review and the notes to the financial statements, to which reference is made.
Control activities are based on the risk assessment. The goal of such control activities is to ensure that the guidelines laid down by Management are followed, and to prevent, detect and correct any misstatements and errors.
Both manual and computerized control activities are carried out. These procedures essentially comprise rules on powers, approval procedures, reconciliations, functional separation, follow-up on financial results, an analytical review of the financial statements, verification of the existence of assets and other verification procedures.
Standard formal procedures have been set up for preparing interim reports and annual reports. Checklists are used to ensure that each company submits correct and adequate information and to ensure compliance with relevant legislation, primarily IFRS and other disclosure requirements for listed companies.
Information is gathered on an ongoing basis for use in ensuring compliance with any requirements regarding notes and other disclosure requirements.
The Supervisory Board has adopted an information and communication policy setting out the fundamental requirements for financial reporting and external financial reporting in accordance with applicable legislation.
One of the goals of the adopted information and communication policy is to ensure compliance with applicable disclosure requirements, and that such disclosures are adequate, complete and accurate.
The Supervisory Board attaches importance to open communication throughout the Group within the framework applying to listed companies, and to ensuring that the individual employees understand their roles in the Group’s internal control system.
The risk control and internal control systems are monitored on an ongoing basis to ensure that they function effectively. Ongoing monitoring is an integral part of the day-to-day work at TK Development and is one of the activities performed by both Management and employees in connection with their work routines.
Any ascertained weaknesses, control failures, cost/budget overruns and/or transgression of powers are reported upstream in the organization. Inadequacies in internal control systems are reported to the immediate superior, and serious errors are reported to the Executive Board and/or the Supervisory Board.
The Executive Board regularly submits reports to the Supervisory Board regarding compliance with established guidelines.
The auditors elected at the Annual General Meeting report to the Supervisory Board via audit book entries regarding material weaknesses in the Group’s internal control systems as part of the financial reporting process. Less significant matters are reported to the Executive Board.
The Supervisory Board monitors the Executive Board on an ongoing basis to ensure that it takes agreed steps to address identified risks in the financial reporting process, carries out necessary monitoring procedures and takes prompt action to deal with any weaknesses and/or errors.