Philips 2008 Annual Report Download - page 256

of the Board of Management has been placed on the agenda. From
August 1, 2003 onwards, for new members of the Board of Management
the term of their contract of employment is set at a maximum period
of four years, and in case of termination, severance payment is limited
to a maximum of one year’s base salary subject to mandatory Dutch
law, to the extent applicable; if the maximum of one-year’s salary would
be manifestly unreasonable for a member of the Board of Management
who is dismissed during his first term of office, the member of the
Board of Management shall be eligible for a severance payment not
exceeding twice the annual salary. The Company does not grant
personal loans, guarantees or the like to members of the Board of
Management, and no such (remissions of) loans and guarantees were
granted to such members in 2008, nor are outstanding as per
December 31, 2008.
In 2003, Philips adopted a Long-Term Incentive Plan (‘LTIP’ or the
‘Plan’) consisting of a mix of restricted shares rights and stock options
for members of the Board of Management, the Group Management
Committee, Philips executives and other key employees. This Plan
was approved by the 2003 General Meeting of Shareholders. Future
substantial changes to the Plan applicable to members of the Board
of Management will be submitted to the General Meeting of
Shareholders for approval. As from 2002, the Company grants fixed
stock options that expire after ten years to members of the Board of
Management (and other grantees). The options vest after three years
and may not be exercised in the first three years after they have been
granted. Options are granted at fair market value, based on the closing
price of Euronext Amsterdam on the date of grant, and neither the
exercise price nor the other conditions regarding the granted options
can be modified during the term of the options, except in certain
exceptional circumstances in accordance with established market
practice. The value of the options granted to members of the Board
of Management and other personnel and the method followed in
calculating this value are stated in the notes to the annual accounts.
Philips is one of the first companies to have introduced restricted
shares as part of the LTIP. A grantee will receive the restricted shares
in three equal installments in three successive years, provided he/she
is still with Philips on the respective delivery dates. If the grantee still
holds the shares after three years from the delivery date, Philips will
grant 20% additional (premium) shares, provided he/she is still with
Philips. The Plan is designed to stimulate long-term investment in
Philips shares. To further align the interests of members of the Board
of Management and shareholders, restricted shares granted to these
members of the Board of Management shall be retained for a period
of at least five years, or until at least the end of employment, if this
period is shorter.
The actual number of long-term incentives (both stock options and
restricted shares rights) that are to be granted to the members of the
Board of Management will be determined by the Supervisory Board
and depends on the achievement of the set team targets in the areas
of responsibility monitored by the individual members of the Board
of Management and on the share performance of Philips. The share
performance of Philips is measured on the basis of the Philips Total
Shareholder Return (TSR) compared to the TSR of a peer group of
12 leading multinational electronics/electrical equipment companies
over a three-year period; the composition of this group is described
in the chapter Report of the Supervisory Board of this Annual Report.
The TSR performance of Philips and the companies in the peer group
is divided into three groups: top 4, middle 4 and bottom 4. Based on
this relative TSR position, the Supervisory Board establishes a multiplier
which varies from 1.2 to 0.8 and depends on the group in which the
Philips TSR result falls. Every individual grant, the size of which depends
on the positions and performance of the individuals, will be multiplied
by the TSR-multiplier.
The so-called ultimum remedium clause and claw back clause of best
practice provisions II.2.10 and II.2.11 of the new Dutch Corporate
Governance Code as presented by the Corporate Governance Code
Monitoring Committee in its report of December 2008, is applicable
to Annual Incentive payments and LTIP grants over the year 2009
onwards to all members of the Board of Management. In respect of
the LTIP grants, the ultimum remedium clause can be applied to the
performance related actual number of stock options and restricted
share rights that is (unconditionally) granted.
Members of the Board of Management hold shares in the Company
for the purpose of long-term investment and are required to refrain
from short-term transactions in Philips securities. According to the
Philips’ Rules of Conduct on Inside Information, members of the
Board of Management are only allowed to trade in Philips securities
(including the exercise of stock options) during ‘windows’ of ten
business days following the publication of annual and quarterly results
(provided the person involved has no ‘inside information’ regarding
Philips at that time) unless an exemption is available. Furthermore, the
Rules of Procedure of the Board of Management contain provisions
concerning ownership of and transactions in non-Philips securities
by members of the Board of Management and the annual notification
to the Philips Compliance Officer of any changes in a member’s
holdings of securities related to Dutch listed companies. In order
to avoid the impression that the Company should or could take
corrective action in respect of a certain transaction in securities in
another company by a member of the Board of Management and
the unnecessary administrative burden, the Supervisory Board and
the Board of Management consider this annual notification to be in
line with best practices and sufficient to reach an adequate level of
transparency; however, it does not fully comply with the Dutch
Corporate Governance Code recommendation II.2.6 which requires
notification on a quarterly basis. Members of the Board of Management
are prohibited from trading, directly or indirectly, in securities in any
of the companies belonging to the above-mentioned peer group of
12 leading multinational electronics/electrical equipment companies.
Indemnification of members of the Board of Management
and Supervisory Board
Unless the law provides otherwise, the members of the Board of
Management and of the Supervisory Board shall be reimbursed by the
Company for various costs and expenses, such as the reasonable costs
of defending claims, as formalized in the articles of association. Under
certain circumstances, described in the articles of association, such as
an act or failure to act by a member of the Board of Management or
a member of the Supervisory Board that can be characterized as
intentional (‘opzettelijk’), intentionally reckless (‘bewust roekeloos’)
or seriously culpable (‘ernstig verwijtbaar’), there will be no entitlement
to this reimbursement. The Company has also taken out liability
insurance (D&O - Directors & Officers) for the persons concerned.
Supervisory Board
Introduction
The Supervisory Board supervises the policies of the Board of
Management and the general course of affairs of Philips and advises
the executive management thereon. The Supervisory Board, in the
two-tier corporate structure under Dutch law, is a separate body that
is independent of the Board of Management. Its independent character
is also reflected in the requirement that members of the Supervisory
Board can be neither a member of the Board of Management nor
an employee of the Company. The Supervisory Board considers all
its members to be independent under the applicable US Securities
and Exchange Commission standards and pursuant to the Dutch
Corporate Governance Code.
The Supervisory Board is a separate body
independent of the Board of Management
The Supervisory Board, acting in the interests of the Company and
the Group and taking into account the relevant interest of the Company’s
stakeholders, supervises and advises the Board of Management in
performing its management tasks and setting the direction of the
Group’s business, including (a) achievement of the Company’s objectives,
(b) corporate strategy and the risks inherent in the business activities,
(c) the structure and operation of the internal risk management and
control systems, (d) the financial reporting process, and (e) compliance
with legislation and regulations. Major management decisions and the
Group’s strategy are discussed with and approved by the Supervisory
Board. In its report, the Supervisory Board describes its activities in
the financial year, the number of committee meetings and the main
items discussed.
Rules of Procedure of the Supervisory Board
The Supervisory Board’s Rules of Procedure set forth its own
governance rules (including meetings, items to be discussed, resolutions,
appointment and re-election, committees, conflicts of interests, trading
in securities, profile of the Supervisory Board). Its composition follows
the profile, which aims for an appropriate combination of knowledge
and experience among its members encompassing marketing,
technological, manufacturing, financial, economic, social and legal
aspects of international business and government and public
administration in relation to the global and multi-product character
of the Group’s businesses. The Supervisory Board further aims to
have available appropriate experience within Philips by having one
former Philips executive as a member. In line with US and Dutch best
practices, the Chairman of the Supervisory Board should be
independent under the applicable US standards and pursuant to the
Philips Annual Report 2008256
180
Sustainability performance
192
IFRS financial statements
244
Company financial statements
124
US GAAP financial statements