Report on the supervisory task of the Supervisory Board
Realisation of corporate objectives
The realisation of the objectives is clearly a key focus area for the Supervisory Board. It also monitors whether the organisation is designed in such a manner that timely adjustments can be made to changing conditions.
Each year, Alliander draws up an operational year plan, in which the strategic objectives are translated into concrete and measurable operational corporate objectives by means of a balanced scorecard (dashboard). The corporate objectives are defined from four perspectives: safety, customers, employees, and shareholders & investors. The Supervisory Board has concluded that the quarterly reports generate adequate information to monitor the progress of the realisation of the corporate objectives. The specific corporate objectives that Alliander sets in a year are defined in the form of measurable financial and non-financial key performance indicators (KPIs) and are adjusted whenever necessary. The year plan 2015 that we approved, as well as the underlying corporate objectives, were largely achieved.
The Supervisory Board looked closely at the impact of the development of results, the balance sheet ratios and the financial position on the company's creditworthiness. The Board notes with satisfaction that Standard & Poor’s (AA-/A-1+ with stable outlook) maintained its credit rating in 2015. Moody’s increased its long-term credit rating in 2015 from Aa3 to Aa2 with stable outlook and reconfirmed the short term rating at P-1.
Strategy and risks
In 2015, the Supervisory Board extensively discussed Alliander's strategic direction with the Management Board. What are the consequences of the energy transition and what is its impact on the reliability, affordability and accessibility of energy? What is the future of the gas networks? What do the new business models look like? This review produced a revised strategy. The Supervisory Board made an active and professional contribution to this process. The revised strategy provides guidance and focus for the direction in which Alliander intends to move in the coming period, and ensures that Alliander can respond adequately to the changing energy landscape.
With a view to the upscaling in the Netherlands, and after giving due and careful consideration to the strategic, financial, operational and social aspects, the Supervisory Board approved the sale of the Endinet Group to Enexis in combination with Alliander's acquisition of the activities of Enexis in Friesland and the Noordoostpolder. The transfer of the electricity and gas networks in the respective regions into single ownership creates transparency for customers and local administrators and enhances operational efficiency.
At the end of 2015 it became clear that Minister Kamp (Economic Affairs) wants to press ahead with the unbundling of the Delta and Eneco energy companies, despite the draft bill ('STROOM') being rejected by the Dutch Senate. A majority of the Senate voted against the STROOM bill because it also provided for the unbundling of the energy companies into a network company and a commercial production company (known as the 'group ban'), even though the existing Gas Act and Electricity Act 1998 already provide for the group ban and the Supreme Court ruled on 26 June 2015 that the group ban is not incompatible with EU law. So the rejection of the draft bill does not mean that the group ban is no longer on the table. Earlier, the ACM already ordered Delta and Eneco to unbundle their network companies by no later than, respectively, 30 November 2016 and 31 January 2017.
Design and effectiveness of internal risk management and control systems
The findings from the internal audits were discussed, as were the actions taken on the resulting recommendations. The Supervisory Board monitors the progress of these actions every six months on the basis of ‘in control’ reports from the Internal Audit Department. The Supervisory Board has observed that limited improvements were made to the internal control system in 2015.
In addition, the management letter from PwC, containing the 2015 interim audit findings regarding the internal controls, was discussed with the Audit Committee and the Supervisory Board. During the interim audit, the auditor found that the quality of the internal controls is comparable to that of the previous year. One point for improvement concerned the extent of progress made in resolving the findings. In response, the Management Board took measures to implement the initiated improvement plans with greater focus and urgency. It was also agreed to discuss the follow-up of the audit findings every six months. Another subject discussed with the auditor concerned the actions taken to address the identified theft of operating assets. Specific attention was devoted to the scope of Alliander's investigation and the severity of the sanctions.
The interim audit contains one significant new finding, namely that the systems fail to achieve a 100% separation of duties in the sales process. It was established that no breaches of the separation of duties requirement occurred in this process in 2015. Meanwhile, Alliander has taken control measures to remedy the identified risk. In addition, six findings from previous years that had not yet been entirely resolved were included in the letter.
The Supervisory Board received no indications of any deficiencies in the effectiveness of Alliander's risk management and control system with respect to the control objectives in the field of financial reporting in the year under review.
In addition, the design and effectiveness of the risk management system, the main risks to which Alliander is exposed and possible additional mitigation and control measures were discussed every quarter.
Alliander draws up monthly reports and issues quarterly reports to the Supervisory Board. The financial quarterly reports, where the actual results are compared with the budget 2015, the annual forecast 2015 and the results for 2014, were intensively discussed. Subjects raised included the settlement of a financial instrument relating to cross-border leases, the sufferance tax costs, the book profit from the sale of the Endinet networks (which will be recognised in 2016) and the movement in the number of FTEs.
In addition, the Supervisory Board discussed in detail Alliander's annual report and financial statements for 2014 in the presence of the external auditor, including the independent auditor's report and the proposed profit appropriation. The Supervisory Board also reviewed Alliander's 2015 half-year report, including the external auditors' report on their findings. Furthermore, the operational year plan 2016 (including investment budget) was reviewed and approved, and the business plan 2016-2020 was discussed. The Audit Committee of the Supervisory Board carried out intensive preparatory work on all these matters.
Compliance with legislation and regulations
In conformity with the Electricity Act 1998 and the Gas Act, the Netherlands Authority for Consumers & Markets (ACM) supervises the network operators' compliance with their statutory obligations. The ACM is vested with supervisory and enforcement powers, including the power to request information and impose sanctions, such as administrative penalties. In 2015, the Supervisory Board was informed about various investigations conducted by the ACM. One investigation concerned the allegation that Liander had given preferential treatment to Alliander's subsidiary Allego. Another ACM investigation was initiated after a market party lodged an enforcement request regarding some of Alliander's activities. The first investigation relating to Allego has now been completed and found that the Electricity Act 1998 is being respected. The second investigation is still in progress.
The Supervisory Board was also informed of a ruling of the Enlarged Trade and Industry Appeals Tribunal (Grote Kamer van het College van Beroep voor het bedrijfsleven (CBb)) about the fine imposed by the ACM on Liander because of the alleged violation of the network operator's confidentiality obligations under the Electricity Act 1998 and the Gas Act. The CBb found that ACM had unjustly imposed a fine of €3.3 million on Liander. The ACM was of the opinion that Liander had failed to exercise sufficient care in protecting customer data. According to the CBb, there is no evidence whatsoever of any violation of the confidentiality obligation. In 2015, the ACM repaid the amount of €3.3 million. Regarding the binding instruction that was imposed in the same connection and was also overturned by the CBb, Liander has submitted a claim of about €1 million to the ACM for compensation of costs incurred.
In addition, the half-yearly 'Fraud & Incidents' reports of the Internal Audit Department were discussed in the Audit Committee's meetings. Items reported include violations of the Code of Conduct applicable within Alliander and any instances of fraud and theft reported to the Fraud Disclosure Office. Internal Audit carried out various compliance audits to ascertain whether Alliander is compliant with relevant legislation and regulations as well as its internal regulations, standards and values. The Supervisory Board gave consideration to a number of fraud cases that occurred in the year under review and found that the Management Board had taken adequate measures. The Supervisory Board sees integrity as a matter of the utmost importance.
The Management Board kept the Supervisory Board informed of the progress and developments regarding the most important legal claims and proceedings and about the possible impacts of changing laws and regulations.
Relationship with shareholders
The key channel for contacts between the Supervisory Board and the shareholders is the meeting of shareholders. The full Supervisory Board attended the annual General Meeting of Shareholders. At this meeting, the financial statements for 2014 were adopted and the shareholders approved the procedure for the appointment of the external auditor by the Supervisory Board. The members of the Supervisory Board twice attended an Extraordinary General Meeting of Shareholders in different compositions. At these meetings, the shareholders appointed Mr Roetert as a new member of the Supervisory Board and approved the exchange of networks between Alliander and Enexis.
The Supervisory Board is of the opinion that contacts between the company and shareholders outside the formal setting of shareholder meetings are also important, both for the company and the shareholders. Alliander has outlined a policy for bilateral contacts between the company and its shareholders, which is posted on Alliander's website. In 2015, the Management Board consulted five times with the major shareholders. Three of these consultative meetings were attended by the chairman of the Supervisory Board, and one meeting was attended by the vice-chairman. Topics discussed included the exchange of networks between Alliander and Enexis, the outcome of the audit services procurement process, the renewed strategy, the STROOM bill and the large-scale roll-out of the smart meter.
In 2015, the Supervisory Board twice sought advice from the Committee of Shareholders regarding vacancies in the Supervisory Board. It also consulted with the Committee about the remuneration policy for the Management Board in relation to the Public and Semi-Public Sector Executives' Pay (Standards) Act (WNT). The Supervisory Board attaches great value to the open dialogue with the shareholders.
Relevant CSR aspects
Corporate Social Responsibility (CSR) is an integral part of Alliander's strategy. The progress on the objectives for safety, outage duration, customer satisfaction, socially responsible procurement and reduction of the company's own emissions is monitored by the Supervisory Board on the basis of quarterly reports.
The Management Board regularly informed the Supervisory Board about topical safety issues, such as gas faults and the outcomes of related investigations by, for instance, the Dutch Safety Board (OvV). The Supervisory Board agrees wholeheartedly with the Management Board that safety is a top priority. Both the incidents themselves and the initiated or proposed measures are discussed wherever useful and necessary.
Good examples of sustainability initiatives in 2015, as noted by the Supervisory Board, included the greening of network losses (the energy lost during the transmission of electricity), the development of the Fair Meter (a smart meter made of reusable materials) and the construction of the sustainable office in Duiven.
In 2015, Alliander ranked 9th in the Transparency Benchmark of the Ministry of Economic Affairs (2014: 15th). According to the Supervisory Board, this confirms Alliander's commitment to transparency and integrated reporting. The aim is to provide more openness on the social impact of our activities in the coming years. The external auditors' opinion on the corporate social responsibility report is given in the Assurance Report, which forms part of this annual report. Regarding the sustainability information, the assurance level for the Alliander dashboard was increased last year to ‘reasonable assurance’. The other parts of the sustainability information were given 'limited assurance' (with the exception of the GRI table). Reasonable assurance was also obtained for the materiality test in the report of 2015.
Attention was also devoted to the application of the Public and Semi-Public Sector Executives' Pay (Standards) Act (Wet normering topinkomens (WNT). Partly in response to Parliamentary questions that were prompted by a press publication, the WNT Supervision Unit of the Dutch Ministry of the Interior initiated a further investigation. The Dutch House of Representatives was informed of the final conclusions. Minister Plasterk confirmed that the network company Alliander and its Management Board do not fall within the scope of the WNT. However, the network operator Liander is subject to the WNT. In 2013, Alliander adopted, on its own initiative, the WNT1 standard (130% of a minster's remuneration) as the company-wide remuneration cap. This means that since 2013 no new employees have been engaged with remuneration above the WNT1 limit. According to the Supervisory Board, any further reduction of this limit would seriously jeopardise the company's position in the labour market. The Supervisory Board is promoting the introduction of a sector-wide remuneration code with different categories in order to create a level playing field and ensure that all companies can compete with their peers on equal terms in the relevant labour market in terms of technological developments, complexity and required knowledge.
Various other subjects
In addition, the Supervisory Board determined the realisation and the objectives for the short- and long-term variable remuneration of two Management Board members, Messrs Molengraaf and Van Lieshout. In 2015, the members of the Management Board were no longer permitted to accrue pension on the portion of their salary above €100,000. The Supervisory Board has therefore decided to extend the application of Alliander's pension contribution release arrangement, as applicable to the employees of Alliander, to the members of the Management Board by incorporating the released pension contribution into their salary. The decision-making on these subjects is prepared by the Selection, Appointment and Remuneration Committee of the Supervisory Board.
Various other subjects were also put to the Board for decision-making. These included the investment proposal for the redevelopment of the corporate accommodation in the east of the Netherlands, the appointment – on the recommendation of the Management Board and the Audit Committee – of Deloitte as Alliander’s new external auditor, a proposal to amend the articles of association of Alliander N.V., the procedure for filling vacancies in the Supervisory Board of Alliander and the governance of Liander.
The Supervisory Board also discussed the initiated changes in Liander's culture and business processes in order to realise the company's ambition to be an excellent network operator. The Supervisory Board will follow the progress on this issue with great interest.
Other subjects discussed were:
- the outcomes of the annual employee survey;
- the outcomes of the annual customer satisfaction survey;
- the preparation for the annual shareholders' meeting and two extraordinary shareholders' meetings;
- customer service;
- topical issues in the field of safety, such as accidents and related investigations;
- governance and the provision of information on new activities;
- a management development session relating to succession and talent development;
- an update on the large-scale smart meter roll-out.
Senior employees from the organisation regularly attended meetings of the Supervisory Board during the discussions of subjects within their specific areas of expertise. It has been agreed that in 2016 the Supervisory Board will combine at least two meetings with a project or company visit in order to deepen its knowledge of the company.