Application of corporate governance - Integrated Report of KGHM Polska Miedź S.A. and the KGHM Polska Miedź S.A. Group for 2022

Corporate governance structure at KGHM Polska Miedź S.A.

KGHM Polska Miedź S.A. strives at every stage of its operations to apply the principles contained in the document entitled Best Practice for GPW Listed Companies 2021 to the greatest possible extent, taking into account the principles of proportionality and adequacy as well as sector-specific aspects.

COMPLY ratio by KGHM Polska Miedź S.A.

To increase interest in the subject of corporate governance and the engagement of shareholders in the affairs of companies, the Warsaw Stock Exchange created a benchmark for companies which, through the EBI system, provided information about their current state of application of the principles of DPSN 2021. The COMPLY ratio used for this purpose was defined as the relation of principles applied to the total number of principles applied and not applied (the response „not applicable” are excluded from the calculation). KGHM Polska Miedź S.A. applies the principles of DPSN 2021 at a comparable level to that declared by companies comprising the WSE’s index, or taking into consideration all of the companies which published a report.

KGHM Polska Miedź S.A., under the principles indicated in section 1 of DPSN 2021, strives to achieve the goal of ensuring quality investor communications and pursuing a transparent and fair disclosure policy In the interest of all market participants and its own interest.

In accordance with the published statement on the Company’s compliance with the principles contained in chapter 1 of DPSN 2021, the following principles regarding informational policy and communication with investors are partially applied:

Involving the integration of ESG factors in the business strategy, in particular environmental factors, including measures and risks relating to climate change and sustainable development.

The principle is partially applied. In connection with the publication of the Climate Policy of KGHM Polska Miedź S.A. as a directional document, whose chief goal is to present the climate-related ambitions of the Company and to set forth the scope of process and organisational changes needed to achieve them, the Company is currently working on detailed solutions related among others to the operationalisation of the Strategy in this regard. The Climate Policy will be followed by the Decarbonisation Program of the KGHM Group, which will provide details on how the planned reduction goals will be attained, as well as total capital expenditures on the realisation of activities aimed at reducing emissions of greenhouse gases.

Involving the integration of ESG factors in the business strategy, in particular social and employee factors, including among others actions taken and planned to ensure equal treatment of women and men, decent working conditions, respect for employees’ rights, dialogue with local communities, customer relations.

The principle is partially applied. The Company regularly publishes a broad range of information on its actions as regards social and employee issues, proper working conditions, respecting employee rights, dialogue with local communities and relations with its customers and stakeholders. In accordance with upcoming regulations, such as the SFDR, the Company will soon be providing information regarding employment at senior management levels broken down by gender as well as information on current and planned actions aimed at ensuring gender equality.

Pursuant to which a company shall publish on their website information concerning the framework of the ESG strategy, which should among others explain how the decision-making processes of the company and its group members integrate climate change, including the resulting risks.

The principle is partially applied. In connection with the publication of the Climate Policy of KGHM Polska Miedź S.A. as a directional document, whose chief goal is to present the climate-related ambitions of the Company and to set forth the scope of process and organisational changes needed to achieve them, the Company is currently working on detailed solutions in this regard.

The Company maintains effective internal control, risk management and compliance systems, as well as an effective internal audit function, appropriate to the size and specifics of the KGHM Polska Miedź S.A. Group. The Company has separate units in its structure responsible for the tasks of individual systems and functions.

The Supervisory Board prepares and submits to the Ordinary General Meeting for its approval an annual report which includes, among other things, an assessment of the Company’s situation on a consolidated basis, taking into account the assessment of the internal control, risk management and compliance systems and the internal audit function, along with information on the steps the Supervisory Board took to make this assessment.

The Supervisory Board’s assessment covers all relevant controls, including in particular those relating to reporting and operations, and is prepared on the basis of, among other things, information received from the Management Board and risk and compliance managers, and the head of internal audit regarding the effectiveness of these functions, discussions held with the Management Board and other persons invited to the Supervisory Board meeting, and taking into account the financial statements, the Management Board’s report on the activities of KGHM Polska Miedź S. A. and the KGHM Polska Miedź S.A. Group, and taking into account the conclusions of the auditor’s examination of the Company’s accounts and other audits.

In the areas of corporate risk, compliance and internal control systems (including financial reporting), the Audit Committee conducts regular monitoring of these functions. The responsibility for the performance of commitments and roles within these systems reflect the principles applicable in the organisation regarding the distribution of competence at various operational and management levels and supports the achievement of defined business objectives. According to the adopted diagram 26, the Company follows the Three Lines of Defence (3LoD) model, placing risk management by business units and risk owners and controls in the company’s operational processes on the first line, the risk management support function on the second, and internal audit controlling the other lines on the third.

Diagram of the Three Lines of Defence in the risk management system of KGHM Polska Miedź S.A.

According to the published Information on the status of the Company’s application of the principles contained in Chapter III of the DPSN 2021 set, the following principles for systems and functions are partially applied or not applied:

Under which a company belonging to the WIG20, mWIG40 or sWIG80 index appoints an internal auditor to head the internal audit function, operating in accordance with generally recognized international standards of professional internal audit practice. In other companies where an internal auditor meeting the above requirements has not been appointed, the audit committee (or the supervisory board, if it performs the functions of the audit committee) assesses annually whether there is a need to appoint such a person.

The principle is partially applied. The Company has appointed an Executive Director for Audit. Due to the failure to meet all the criteria for independence as defined by generally recognized international standards of professional practice for internal auditing, the Company applies the principle in part.

Regarding the remuneration of those responsible for risk management and compliance and the head of internal audit, which should be based on the performance of assigned tasks and not on the short-term performance of the company.

The principle is partially applied. The remuneration of those responsible for risk management and compliance and the head of internal audit in the Company is based on the Company’s internal regulations and the Company’s Collective Labour Agreement, which make part of the remuneration dependent on the Company’s net result for the year and the level of EBITDA. Currently, remuneration depends in part on the completion of assigned tasks.

Under which those responsible for risk management and compliance report directly to the president or another management board member.

The person responsible for risk and compliance management reports organisationally to the Executive Director for Audit, but in accordance with the Company’s Organisational Regulations, he or she is granted autonomy expressed in, among other things, direct reporting to the Management Board and the Supervisory Board Audit Committee.

According to the published Information on the status of the Company's application of the principles contained in Chapter III of the DPSN 2021 set, the following principle relating to systems and functions does not apply to the Company:

Principle 3.7 stating that principles 3.4-3.6 also apply to the company’s material group entities if they have designated persons to perform these tasks.

(See principle 3.4 – Remuneration of those responsible for risk management and compliance and the head of internal audit should be based on the performance of assigned tasks and not on the short-term performance of the company.
Principle 3.5 – Those responsible for risk management and compliance report directly to the president or another management board member.
Principle 3.6 – The head of internal audit reports organisationally to the president of the management board and functionally to the chairman of the audit committee, or to the chairman of the supervisory board if the board serves as an audit committee

The principle does not apply to the Company. No persons have been appointed in the Company’s group entities to perform the tasks indicated in principles 3.4-3.6, but persons have been appointed in the Company’s group entities to act as risk coordinators who report directly to those responsible for risk and compliance management in the parent entity (i.e. the Company). In addition, once the IT tool for the compliance function is completed, compliance coordinators are planned to be appointed in the aforementioned companies. The Company will also consider, in the case of entities from its group, building a structure that complies with principles 3.4.-3.6. with respect to risk and compliance management functions. With regard to the audit function, the tasks in the Company’s group entities are carried out by the Internal Audit Department of the parent entity (Company).