News; Aug 16, 2002 CET

The Board is the extended arm of shareholders

The role and responsibility of a board of directors is often a matter of debate in media and financial markets. In Swedish Match there is a clear set of working rules that govern the distribution of work between the board and the Company’s management. But the board not only has a supervisory role; it must also contribute by providing expertise and advice to management.

Management of a company involves intricate interplay between different players, all with different roles and areas of responsibility. These roles and areas of responsibility, in turn, are defined in different ways - for example, in legislation such as the Swedish Companies Act and tax and auditing laws, through stock exchange contracts, in Articles of Association, and in the Company's corporate culture and method of operating.

ULTIMATELY, IT IS THE shareholders who are responsible for ensuring that the business has the orientation that they desire. The shareholders' primary formal forum for the exercise of their power is the Annual General Meeting. Here, the income statement and balance sheet for the preceding year are adopted, and a decision on how the profit is to be disposed of is made. The Annual General Meeting also releases the Board of Director and the President from liability (for their management of the Company in the preceding year) and elects the Board of Directors and auditors. Thus, between general meetings, it is the Board of Directors which, on behalf of the shareholders, must ensure that the Company measures up to the shareholders' demands and intentions, while the President - who is also a member of the Board - has the daily responsibility for converting these intentions into practical action. This involves a great responsibility for each of the Board members, including the employee representatives. Board members are, indeed, managing the property of others, and large values are often involved, This also imposes heavy demands for good cooperation between the Board of Directors and Company management.

THE BOARD OF DIRECTORS of Swedish Match has established rules of procedure that govern the distribution of work between the Board and the President. The rules also contain instructions specifying how financial reports are to be made. Matters of a long-term, strategic nature in particular are to be decided by the Board. This applies, for example, to such matters as acquisitions and divestments, the budget and the Company's strategic plans, as well as guidelines for the management and investment of the Company's funds. The Board is also responsible for the continuing follow-up of the strategy and budget; it adopts and presents financial reports such as quarterly reports and annual reports, except for the sixmonths report, which is presented by the President on behalf of the Board. THE SWEDISH MATCH BOARD holds five regular meetings each year, plus an organizational meeting at which a Chairman and Secretary are elected. In addition, it may be necessary to call »extra« meetings if there is some special matter that requires an immediate decision - a company acquisition, for example.

A matter that has been debated strenuously in Sweden and elsewhere pertains to companies' systems for compensating key persons. In Swedish Match, the Board's Compensation Committee decides such matters. The Committee consists of Chairman Bernt Magnusson and three regular Board members. The Committee establishes salaries and other terms of employment for the President and other Group managers who report directly to him. The Committee also makes decisions on other compensation matters - such as options programs and profit-sharing systems - that deal with principles or which are otherwise of major importance.

ALTHOUGH DECISIONS on benefits and compensation are made within a small circle in the Board of Directors, the decisions are reported in detail to the other members once a year. This is necessary because the entire Board is formally responsible for decisions and no one can disclaim responsibility by referring to a lack of information. For the same reason, the Board is provided continuously with information on operations in the Company. This occurs at Board meetings, where a number of »information points« are always on the agenda - generally with the President as the presenter, but other members of Group management may also report to the Board on these occasions. For example, reports on current strategic projects are presented at each meeting. A current acquisition may have been discussed in this way at a number of meetings, while a decision may not be made until the process is relatively well advanced, for example through the Board, by means of a »framework decision,« giving a green light to complete negotiations.

THE PROVISION OF good information internally is a key factor in determining the quality of Board work, according to Bo Aulin, General Counsel and Board Secretary. At least equally important is confidentiality outside the Board where members' views and discussions are concerned. »It is of critical importance, in terms of trust on the part of investors and in the market, that the Board be able to conduct its work on its own terms and that all parties in the market obtain the same information at the same time.« Bo Aulin says. Swedish Match has never had any problems with »leaks.« Despite events involving individual companies that have attracted interest recently, Bo Aulin thinks that the Swedish system functions satisfactorily. Real »scandals« are still uncommon. He doesn't want to enter the continuing debate over more legislation as opposed to more self-regulation, but he still sees advantages in a combination of the two. »Legislation and stock exchange contracts provide a necessary framework.

But, ultimately, good governance is to a high degree a matter of the internal corporate culture. And that, in turn, depends on such factors as the composition of the Board, the Chairman's personality and the expertise possessed by the Board and management.«