IV. Stock option plans for executive members of the Board of Directors and senior executives of the Company and Group
Aiming to match the long-term personal goals of its senior executives with the interests of the Company and its shareholders, TITAN CEMENT COMPANY S.A. has established and has been using stock option plans since 2000.
The initial Plan (the 2000 Plan), which was approved by the General Meeting of Shareholders of 5 July 2000, had a three year term (2001-2003), a vesting period of three years and expiration date in 2007. The beneficiaries of the 2000 Plan were 48 senior executives of the Company and the Group’s companies and 3 members of the Board of Directors, who had an employment relationship with the Company. Under the 2000 plan, options to purchase 119,200 ordinary shares were exercised at a sale price of € 29.35 per share and options to purchase 451,900 ordinary shares were exercised at a sale price of € 14.68 per share.
The second relevant Plan (the 2004 Plan) was approved following the decision of the General Meeting of Shareholders of 8 June 2004, for a three-year period (2004-2006) a three year vesting period, expiration date in 2009 and exercise price equal to the nominal price of the share. The beneficiaries of the 2004 plan were 63 senior executives of the Company and the Group’s companies and 5 executive members of the Board of Directors who had an employment relationship with the Company.
The 2004 Plan provided that following the lapse of the 3 year vesting period, beneficiaries would be entitled, without other conditions, to exercise only the 1/3 of the number of the options granted, whereas the ability to exercise the other 2/3 of the options depended on the performance of the Company’s ordinary share in relation to the average performance of the ATHEX FTSE 20, FTSE 40 and General Index of the Athens Exchange and of highly merchantable shares of pre-selected high cap companies in the building materials sector worldwide. Under the 2004 Plan, options to purchase 186,000 ordinary shares were eventually exercised up (108,480 in December 2006, 39,770 in December 2007, 14,200 in December 2008 and 23,550 in December 2009) at a purchase price equal to the nominal price of the share.
On 29 May 2007 the General Meeting of Shareholders approved the third consecutive stock option plan (the 2007 Plan) covering, as the previous plans, a three-year period (2007 2009), again with a three-year vesting period, expiration date in 2012 and exercise price equal to the nominal price of the Company’s share. The beneficiaries of the 2007 plan were 99 senior executives of the Company and the Group’s companies, including 5 executive members of the Board of Directors of the Company.
Under the 2007 Plan, the number of options which was exercised by the beneficiaries after the end of the vesting period varied; one third depended on the average EBITDA of the Company and its net profits in relation to the return on 3-year Greek treasury bonds during the relevant three-year period. One third depended on the performance of the Company’s ordinary share in relation to the performance of the highly merchantable shares of 12 pre-selected high cap companies in the building materials sector internationally and one third depended on the performance of the Company’s ordinary share in relation to the average performance of the ATHEX FTSE 20, ATHEX FTSE 40 and FTS Eurofirst 300 indexes.
In accordance with the vesting terms and conditions of the 2007 Plan, in December 2009 only 11.11% of the options which had been granted to beneficiaries in 2007 vested, while in December 2010 and December 2011, the 22.22% of the total number of options granted to beneficiaries in 2008 and 2009 vested. Overall, in December 2009, December 2010 and December 2011 options to purchase 61,804 ordinary shares in the Company were exercised at a price equal to the nominal price of each share, namely four (4) euro per share.
Lastly, on 3 June 2010 the General Meeting approved the fourth consecutive stock option plan (the 2010 Plan), having a three year term (2010-2012), a three year vesting period, expiration date in 2016 and exercise price equal to the nominal price of the Company’s share. The beneficiaries of the 2010 plan are 109 senior executives of the Company and the Group’s companies, including 6 executive members of the Board of Directors.
Under the 2010 Plan, which is still ongoing, during the years 2010, 2011, 2012, options to purchase 267,720, 301,200 and 376,290 respectively Company’s ordinary shares were granted. These options may be exercised in the months of April and October of the years 2013, 2014, 2015 and 2016 provided that the targets and conditions of the Plan have been fulfilled.
More specifically, following the three-year vesting period, the final number of exercisable options depends on:
a.One- third on the operative results and the net profits of the Group
b.One-third on the performance of the Company’s ordinary share in relation to the performance of the highly merchantable shares of other multinational high cap companies in the building materials sector and
c.One-third on the performance of the Company’s ordinary share in relation to the performance of the ATHEX FTSE 20, ATHEX FTSE 40 and FTS Eurofirst 300 indexes.
Under the 2010 Plan and until December 2013, with regard to the options granted in 2010, the 25% thereof has vested and with regard to options granted in 2011, the 58% thereof has vested. Until December 2013, options to purchase 50.282 ordinary shares in the Company were exercised at a price equal to the nominal price of each share, namely € 4 per share. In April and October 2014 and in April and October 2015, beneficiaries will be entitled to exercise additional 164,313 options, that is the 58% of the total number that was granted in 2011, while in April and October of the years 2015 and 2016 beneficiaries will be entitled to exercise those of the options granted in 2012 which will have matured and will be fulfilling the conditions of the Plan.
Both the 2004 Plan and 2010 Plan favour the long-term retention of a significant number of shares by company executives, since they contain a term requiring the retention of a minimum number of shares depending on the executive’s position within the hierarchy, and any infringement of that requirement will result in a reduced number of options being granted in the next stock option plan.
It should be also noted that all the aforementioned Plans were designed to deter the undertaking of excessive risks by the senior executives of the Company, which, if unsuccessful, could have as a result the significant decrease of the Company’s share price. Therefore, the Plans require the share price to be attractive at the time of the exercise of the option, compared to its trading price at the time of the grant of the option.
Lastly, it is worth noting that in the context of the aforementioned four Plans beneficiaries have acquired in total 869,186 ordinary shares, representing the 1.03% of the paid up share capital of the Company.
A detailed description of these Plans is available on the Company’s website (www.titan.gr), link: http://ir.titan.gr/titan/app/cms/lang/en/page/programma.paroxis.dikaiomaton.proairesis.metoxon
V. Description of main features of the Company’s internal audit and risk management system in relation to the procedure for preparing the financial statements
Internal Audit
Internal audit is carried out by the Group Internal Audit Division, which is an independent department with its own written regulation, reporting to the Board of Directors’ Audit Committee.
Internal audit was performed in 2013 by 15 executives who had the necessary training and experience to duly carry out their work.
Internal Audit’s primary role is to evaluate the checks and balances that have been put in place for all Group functions in terms of their adequacy and effectiveness. Internal Audit’s functions also include monitoring implementation and compliance with the Company’s Internal Regulation, Code of Conduct, Articles of Association and applicable laws in all jurisdictions in which the Group operates, reporting to the Board of Directors of conflict of interest situations relating to the members of the Board of Directors or the Company’s executives towards the Company’s interests, as such situations may be identified in the frames of the internal audit, monitoring of the relationship and transactions of the Company with the related parties, as defined in the International Accounting Standard 24 as in force, as well the audit of the Company’s dealings with companies in the capital of which participate with more than 10% members of the Board of Directors or shareholders of the Company with more than 10%.
During the year 2013, 26 written reports from the Internal Audit Division relating to all audits of Group functions were submitted to the Audit Committee and via it to the Board of Directors. The half-yearly and annual reports on the work of the Internal Audit Division, which contained an overall reference to the most important audit findings, were also submitted. During the year 2013 the Audit Committee held regular private meetings with the Group’s Internal Audit Director to discuss functional and organisational issues, and all the information requested was provided and briefings were given about the audit systems currently in place, their effectiveness and the progress of audits. Following a report from the Audit Committee the Board of Directors approved the audit schedule for 2014 and specified the functions and points on which internal audit must focus.
The System of Internal Controls and Risk Management
The Board of Directors is generally responsible for the Company and Group’s internal audit and risk management, and for evaluating their effectiveness each year.
The Board of Directors confirms that the Company has internal control systems and risk management policies in place and that it has been informed by the CEO and the competent Group executives about their effectiveness.
The Board of Directors is aware of the important risks which could materially impact the Group’s operations, reputation and results, as well as of the risk management processes that support their identification, prioritization, mitigation and monitoring.
It should be noted, though, that the system of internal controls and the risk management provide reasonable, but not absolute security, as they are designed to reduce the probability of occurrence of the relevant risks and to mitigate their impact, but cannot preclude such risks from materialising.
Specifically, the key elements of the system of internal controls utilized in order to avoid errors in the preparation of financial statements and to provide reliable financial information are as follows:
The assurance mechanism regarding the integrity of the Group’s financial statements consists of a combination of the embedded risk management processes, the applied financial control activities, the relevant information technology utilized, and the financial information prepared, communicated and monitored.
The Group’s management reviews on a monthly basis the consolidated financial statements and the Group’s Management Information (MI) – both sets of information being prepared in accordance with IFRS and in a manner that facilitates their understanding.
The monthly monitoring of the financial statements and Group MI and their analysis carried-out by the relevant departments, are key elements of the controlling mechanism regarding the quality and integrity of financial results.
In consolidating the financial results and statements, the Group utilizes specialized consolidation software and specialized software for reconciling intercompany transactions. These tools come with built-in control mechanisms and they have been parameterized in accordance with the Group needs. Finally, the above tools indicate best-practices regarding the consolidation process, which the Group has to a large extent adopted.
During each Board meeting, the Group CEO informs the Board about financial results and business performance and the Group CFO informs the Board on the aforementioned once every quarter.
The Group’s external auditors review the mid-year financial statements of the Company, the Group and its material subsidiaries and audit the full-year financial statements of the aforementioned. In addition, the Group’s external auditors inform the Audit Committee about the outcomes of their reviews and audits.
During its quarterly, bi-annual and annual reviews of the financial statements, the Audit Committee is informed about the performance of the Group’s working capital and cash-flow, as well as about the Group’s financial risk management. Following this, the Audit Committee informs the Board whose members have the right to request additional information or clarifications.
Prior to Board’s approval, the Audit Committee reviews the consolidated financial statements. Any additional information or clarifications regarding the financial statements and requested by the Audit Committee is provided by the Company’s competent executives.
Risk management
Given the nature of its operations and its geographical diversification, the Group is de facto exposed to risks and uncertainties, the most important of which are outlined in the Section Risk and Uncertainties of the Board of Directors’ Annual Report. Those risks include, among others, financial risks (liquidity/FX/interest rate/credit risks), risks arising from the cyclical nature of the construction sector, risks arising from the Group’s presence in developing markets, political risks, risks arising from natural disasters, risk of accidents, environmental risks, management risks, risks related to input costs/access to raw materials and risks related to legal disputes.
The Board of Directors’ Annual Report contains a detailed description of the policy it implements to address financial risks and quite a few of the other risks referred to above. The financial risk management policy implemented is reviewed and revised twice a year by the Board of Directors.
The Group management team’s main concern is to ensure that by implementing appropriate internal audit and risk management systems the Group overall is able to rapidly and effectively respond to risks as they arise and in all events to take the right measures to mitigate their effects to the extent possible.
To that end, the systems implemented by the Group provide for specific procedures to be followed and the implementation of specific policies and standards and designate the competent officers, at all levels, assigned with the management of the risks, and their limits of authority.
The Board of Directors is informed at least once a year about the main operational risks faced by the Group and examines whether those risks are clearly defined, have been adequately assessed and whether the method for managing them is effective.