Corporate governance

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Glossary

Internal control and risk management systems in connection with financial
reporting1

Introduction

TDC’s internal control and risk management systems concerning financial reporting are planned to obtain assurance that internal and external financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union and additional Danish disclosure requirements for annual reports of listed companies, and assurance that true and fair financial statements without material misstatements and irregularities are presented.

Internal control and risk management systems are updated regularly and are designed to detect and eliminate errors and inconsistencies in the financial statements. Due to an inherent risk of misappropriation of assets, unexpected losses, etc. the established internal control and risk management systems may only provide reasonable and not absolute assurance that material misstatements and irregularities in the financial reporting be detected and corrected.

Control environment

The Board of Directors has set up an Audit Committee mainly to assist the BoD in monitoring financial reporting and the efficiency of TDC’s internal control and risk management systems.

The Audit Committee has a supervising responsibility and reports to the entire Board of Directors. The Executive Committee is responsible for keeping efficient internal control and risk management systems in connection with financial reporting.


Powers and responsibilities are defined in policies and procedures. The Board of Directors and the Executive Committee define policies and procedures in significant areas concerning the financial reporting process. Relevant responsible functions define other guidelines and control, and supervise that policies and procedures are applied, including required separation of incompatible functions.

Risk assessment

The Board of Directors and the Executive Committee continuously assess the risks incumbent on TDC, including risks that affect financial reporting. The risk of errors in items in the financial statements based on estimates and complex processes is relatively larger than in other items. The section ’Critical accounting estimates and judgments' in the Consolidated Financial Statements includes a description of the most significant identified risks concerning financial reporting. Such matters are subject to specific review and evaluation by the Audit Committee and the Board of Directors.

Control activities

Control activities area based on risk assessments. The purpose of the activities is to ensure that policies, procedures, guidelines, manuals, etc. are complied with, and that any errors and inconsistencies are prevented, detected and corrected on a timely basis. The control activities are an integral part of TDC’s accounting and financial reporting procedure and cover, e.g. authorization, approval, reconciliation, performance analyses, performance assessment and fulfillment of agreed targets (Key Performance Indicators, etc.), control of IT applications and general IT control.

Information and communication

TDC keeps and maintains information and communication systems to ensure correct financial reporting. The accounting manual and other reporting instructions, including budgeting and monthly closing procedures, are updated regularly and when required. These and other policies, procedures and descriptions of business procedures concerning financial reporting are available for relevant employees. Changes in procedures, etc. are reported and explained to the business lines in the relevant fora.

Information systems are designed to regularly identify, collect and communicate relevant information at relevant levels in compliance with the prescribed confidentiality for listed companies.

Surveillance

TDC uses an extensive financial control system to monitor performance, which facilitates detection and correction of any errors and irregularities in the financial reporting at an early stage, including weaknesses found in the internal control system and non-compliance with policies and procedures.

The group reporting process covers budget reporting and monthly reporting of actual results, including variance reports with regular estimates for the year. In addition to the statement of income, balance sheets and cash flow statement, notes and supplementary financial and operational data and analyses are also part of the financial reporting.

The detailed reports from all Group companies are analyzed and monitored at Group and business line levels as well relevant management levels in the organization.

The auditors elected by the Annual General Meeting will report any significant weaknesses in the internal control systems in long-form audit reports to the Board of Directors in connection with the financial reporting process. Less material matters are reported in management letters to the Executive Committee. The Audit Committee will follow up on weaknesses in internal controls detected and reported by the auditors elected by the Annual General Meeting to assure that such are corrected.

Recommendations from the Committee on Corporate Governance

Introduction

As a company listed on NASDAQ OMX Copenhagen, TDC A/S must account for its approach to the recommendations from the Committee on Corporate Governance in its Annual Report based on a 'comply or explain' principle.

In 2005, the Nørby Committee recommendations on corporate governance from 2001 were revised by what was then called the Copenhagen Stock Exchange Committee on Corporate Governance. In 2008, the recommendations were revised again, this time by the Committee on Corporate Governance - a continuation of the Copenhagen Stock Exchange Committee, but no longer under the auspices of the stock exchange.

TDC complies with the majority of the recommendations. Of the 40 numbered recommendations, divided into eight main categories, TDC fully complies with 33 recommendations, whereas three are partly complied with, and four are not complied with. TDC’s non-compliance is further described below. The full recommendations are available at the Committee on Corporate Governance’s website, www.corporategovernance.dk.

The role of the shareholders and their interaction with the management

TDC has a majority shareholder that owns 87.9% of the shares, and a number of minority shareholders. Due to the ownership structure, the Board of Directors is not able to predetermine how to act in the event of a takeover bid for TDC. Thus, the Board of Directors does not comply with Recommendation I.4 on the duties of the Board of Directors and the rights of the shareholders in the event of a takeover bid. If a takeover bid is made, the Board of Directors will protect the Company’s and shareholders’ interests by assessing each specific case individually.

TDC complies with all other recommendations on the role of the shareholders and their interaction with the management.

The role of the stakeholders and their importance to the Company

TDC complies with all recommendations on the role of the stakeholders and their importance to the Company.

Openness and transparency

TDC complies with all recommendations on openness and transparency.

Tasks and responsibilities of the Board of Directors

TDC complies with all recommendations on the tasks and responsibilities of the Board of Directors.

Composition of the Board of Directors

Composition of the Board of Directors

The Board of Directors regularly assesses the competence needed for the Board of Directors to best perform its tasks and in the light hereof the Board of Directors assesses its composition, in compliance with the general recommendation in V.1 on the composition of the Board of Directors. However, the Board of Directors does not comply with all the underlying recommendations in V.1.

Thus, the Board of Directors does not comply with the recommendation on diversity in the Board composition and a formal, thorough and transparent process for selection and nomination of candidates for the Board of Directors. This is due to TDC's ownership structure as described above. The majority shareholder selects and nominates candidates for TDC’s Board of Directors, who may be elected by the majority shareholder’s votes alone. In the selection and nomination of candidates, the majority shareholder ensures a composition of the Board of Directors that provides the competence needed for the Board of Directors to best perform its tasks.

As a result of the Board of Directors' non-compliance with the recommendation on a formal and transparent process for selection and nomination of candidates for the Board of Directors, TDC does not comply with the recommendations that the notice of the Annual General Meeting include information on the recruitment criteria and the Board of Directors' assessment of its composition. A general description of the applied recruitment criteria and the composition of the Board of Directors may be given at the Annual General Meeting. For the same reason, TDC does not comply with the recommendation that in the annual management's review the Board of Directors account for its composition and for any special competence possessed by the individual Board members.

The independence of the Board of Directors

TDC’s ownership structure, as described above, affects the composition of TDC’s Board of Directors and accounts for non-compliance with Recommendation V.4 that at least half of the Board members elected by the Annual General Meeting be independent persons.

Use of Board committees

The Board of Directors has set up an Audit Committee and a Compensation Committee. The Audit Committee complies with Recommendation V.10 that appointment of a committee take place for the sole purpose of preparing decisions to be made by the entire Board of Directors. The Compensation Committee, on the other hand, has power of decision on matters relating to specific issues within the Compensation Committee’s areas of responsibility, and does therefore not comply with this recommendation. The Board of Directors deems it expedient that the Compensation Committee has this limited power of decision. The Compensation Committee reports regularly to the entire Board of Directors.

Assessment of the work of the Board of Directors and the Executive Committee

TDC does not comply with Recommendation V.11 on the assessment of the composition of the Board of Directors and the Board of Directors’ and the individual Board members’ work and results. Due to TDC’s ownership structure and its significance for the composition of TDC’s Board of Directors, as described above, the Board of Directors deems it unnecessary to establish formal assessment procedures. At an Annual Board Meeting, the Board of Directors has an informal discussion about its work and collaboration. Therefore, the Annual Report does not provide information on the Board of Directors’ procedures of self-assessment.

Likewise, the Board of Directors has neither established a formal assessment procedure for evaluating the Executive Committee’s work and results, nor a procedure to assess the collaboration between the Board of Directors and the Executive Committee – as stated in Recommendation V.11. However, the Board of Directors regularly assesses the work of the Executive Committee by setting goals and evaluating the degree to which such goals are met. The collaboration between the Board of Directors and the Executive Committee is regularly assessed at meetings attended by the CEO and the Chairman of the Board of Directors.

Other recommendations on the composition of the Board of Directors

TDC complies with all other recommendations on the composition of the Board of Directors.

Remuneration of members of the Board of Directors and the Executive Committee

Remuneration policy

TDC does not comply with Recommendation VI.2 that the Board of Directors adopt a remuneration policy, and consequently does not comply with the underlying recommendations regarding the contents of the remuneration policy and remuneration policy reporting. The Board of Directors believes that a formal remuneration policy is unnecessary other than to ensure the more general condition that remuneration should be competitive and able to promote TDC's long-term value-creation goals.

In accordance with the rules in the Danish Companies Act, the Board of Directors has set out general guidelines for incentive schemes for the Executive Committee and these guidelines have been adopted by the Annual General Meeting. The principles of TDC’s existing bonus schemes are described in note 6 to the Consolidated Financial Statements.

The total annual remuneration of the Board of Directors is approved by the Annual General Meeting in connection with the adoption of the Annual Report. Therefore, TDC does not comply with Recommendation VI.2 that the remuneration of the Board of Directors for the current fiscal year be presented for adoption at the Annual General Meeting where the Annual Report for the previous year is submitted for adoption. TDC deems its practice expedient, for example because the composition of the Board of Directors occasionally changes during the year.

Openness about remuneration

TDC does not comply with Recommendation VI.5 that the Annual Report include information on the amounts of total remuneration received by individual members of the Board of Directors and the Executive Committee granted to such members by the Company and other companies within the same Group. TDC finds the information in the Annual Report on the remuneration of the entire Board of Directors and the entire Executive Committee to be adequate (cf. note 6 to the Consolidated Financial Statements).

Other recommendations on the remuneration of the members of the Board of Directors and the Executive Committee

TDC complies with all other recommendations on the remuneration of the members of the Board of Directors and the Executive Committee.

Risk management

TDC complies with all recommendations on risk management.

Audit

TDC complies with all audit recommendations.

Guidelines from the Danish Venture Capital and Private Equity Association

In 2008, the Danish Venture Capital and Private Equity Association (DVCA) published new guidelines for responsible ownership and good corporate governance in private equity funds in Denmark.

TDC A/S’ majority shareholder, Nordic Telephone Company Holding ApS, is - through a number of holding companies – ultimately controlled by investment funds each of which is advised or managed, directly or indirectly, by Apax Partners Worldwide LLP, The Blackstone Group International Limited, Kohlberg Kravis Roberts & Co. L.P., Permira Advisers KB and Providence Equity Partners Limited. Both Nordic Telephone Company Holding ApS and TDC A/S are covered by the DVCA guidelines.

TDC complies with all DVCA guidelines of relevance to TDC. The guideline regarding a company's provision of financial information after delisting in connection with a transaction is not relevant to TDC A/S, as TDC remains listed on NASDAQ OMX Copenhagen.

The shareholders, customers, employees and society are TDC's primary stakeholders. The entire Annual Report reflects how TDC's management accommodates these stakeholders. Any other information requested by the DVCA guidelines has been included in the appropriate sections of the Annual Report.

The guidelines are available at DVCA's website, www.dvca.dk.

The Board of Directors

TDC’s Board of Directors has 11 members, seven elected by the Annual General Meeting and four elected by the employees.

All the members of the Board of Directors act in the interests of TDC. The members of the Board of Directors who are also partners of the equity funds, which ultimately own the majority shareholder of TDC, do not represent these equity funds on the Board of Directors.

In 2009, the Board of Directors held 22 meetings and a strategy session.

Currently, the Board of Directors has set up two committees – the Compensation Committee and the Audit Committee.

The Compensation Committee consists of Vagn Sørensen, Pierre Danon, Kurt Björklund, Oliver Haarmann and Gustavo Schwed. The Compensation Committee approves the compensation and other terms of employment for the members of the Group’s Executive Committee. It also approves the framework of the Group’s incentive program and proposes to the Board the size of the Board of Directors' fee, which is approved at the General Meeting. The Compensation Committee held six meetings in 2009.

The Audit Committee consists of Lawrence Guffey, Vagn Sørensen and Andrew Sillitoe. The Audit Committee assists the Board of Directors with activities including: (i) monitoring the financial reporting process, (ii) monitoring the efficiency of TDC's internal control system and any internal auditing and risk management systems, (iii) monitoring the statutory audit of the annual report, (iv) appointing TDC's independent auditors and monitoring and checking the independence of the auditors, including in particular the delivery of non-audit services to TDC. The Audit Committee held three meetings in 2009.

  1. Statutory statement regarding corporate governance, see Section 107 b of the Danish Financial Statements Act.