ANNUAL REPORT 2016

Corporate Governance Report

This section sets out how Severstal has applied the principles of good governance during the year.

Corporate governance model

Severstal is listed on the “First Level” on MICEX and has a “standard listing” for its depository receipts on the London Stock Exchange. Accordingly, Severstal follows the provisions of the:

  1. Recommendations from the Corporate Governance Code (2014) approved by the Central Bank of Russia and recommended for application by the joint stock companies with listed securities – available on www.cbr.ru, and
  2. UK Corporate Governance Code (2016) – available on www.frc.org.uk.

Severstal’s Corporate Governance Code has been prepared following recommendations of the codes above and is based on the following main principles:

  • A solid commitment to full alignment with shareholders’ interests,
  • A unified, well-shaped business structure supported by a focused corporate strategy,
  • A disciplined merger and acquisition strategy supported by a qualified majority of Board members,
  • A reliance on a stable, deep-rooted and incentivised management team,
  • Industry-leading disclosure practices and transparent corporate reporting, and,
  • A solid platform for delivering superior, long-term returns for all our shareholders.

Along with Severstal’s Corporate Governance Code and the Charter of the Company (which had some minor revisions during the year and is available at www.severstal.com) the activities of Severstal’s management and supervisory bodies, as well as internal activities, are also governed by a set of internal corporate documents, which are also available online at www.severstal.com.

Severstal is a member of the Russian Institute of Directors, the leading expert and resource centre for corporate governance, established by the largest Russian companies to develop, incorporate and monitor standards of corporate governance in Russia.

Severstal is committed to continue developing and evolving its corporate governance practices. For example, although the minimum requirements for compliance for a “standard listing” for its depository receipts on the London Stock Exchange are relatively limited, Severstal continually monitors the requirements for those companies that have a “premium listing” and where it believes that these requirements will enhance transparency, they are adopted. In this Annual Report, greater disclosure has been provided on executive remuneration and the premium listing requirement for a Viability Statement has been adopted.

Compliance Statement

Throughout the year Severstal complied with the requirements of a listing on the “First Level” on MICEX and a ‘standard listing’ for depository receipts on the London Stock Exchange, apart from the fact that Severstal has not entered into a relationship agreement with Alexey Mordashov, its majority shareholder.

The Board seeks to ensure that the interests of the minority shareholders in the Company are properly respected by and aligned with those of the majority shareholder. The Board has carefully considered whether there would be any benefit to the minority shareholders of the Company entering into a relationship agreement with the majority shareholder, however, the Board has decided that the existing arrangements and regulations that are in place, which endeavour to ensure that Severstal is capable of conducting its business independently of the major shareholder and his related companies, are satisfactory and that transactions with the controlling shareholder and his related companies are at arm’s length and on fair commercial terms. The principal safeguards may be summarised as follows:

  • Half of the Board consists of Independent Non-Executive Directors and the Audit Committee and the Remuneration and Nomination Committee consist of and are chaired by Independent Non-Executive Directors.
  • The majority shareholder exercises his voting rights, including those related to amending Severstal’s Charter, in a way which would not be prejudicial to the interests of minority shareholders.
  • The majority shareholder does not vote on any resolution to approve a “related party transaction”. Severstal has established a process whereby, whenever required, and at least monthly, individual related party transactions are voted on by the other members of the Board, who have no involvement with those transactions, having been reviewed by the internal audit function to ensure that they have been recorded and valued appropriately. All related party transactions are also reviewed by the Audit Committee and by the external auditors and disclosed in the quarterly and annual financial statements in accordance with the requirements of IFRS.
  • Shareholders have direct access to members of the Board and executive management at Severstal’s Annual Capital Markets Day and General Meetings of Shareholders, which are held in person. The majority shareholder, as the Chairman of Severstal, will ensure that the interests of all shareholders continue to be aligned.

Responsibility Statements

Each of the directors who is a Director at the date of the approval of this Annual Report confirms that to the best of his knowledge:

  1. The Group financial statements prepared in accordance with IFRS, give a true fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole;
  2. The Strategic Report includes a fair view of the development of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that it faces;
  3. The Annual Report, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.

The Annual Report was approved by the Board of Directors on 1 February 2017.

KPMG, Severstal’s external auditors, have read the Annual Report and confirmed that it is consistent with their knowledge obtained during their audit, and they have no issues to raise in respect of the Annual Report.

Governance structure

General Meeting of Shareholders and supervisory bodies

The General Meeting of Shareholders (“GMS”) sits at the top of Severstal’s governance structure. Full information on the responsibilities of the GMS is available online at www.severstal.com, together with details of when the GMS is held and how shareholders are informed of an upcoming GMS and information on resolutions at GMS, including those resolutions of the GMS that were taken during 2016.

Severstal’s supervisory bodies are its Internal Audit Commission and its External Auditor.

Severstal’s Internal Audit Commission is a full-time internal control body that supervises the Company’s financial and business operations, to obtain adequate assurance that the Company’s operations are in full compliance with Russian law, to make sure the rights of the Company’s shareholders are observed, and the Company’s reports and accounts have no material misstatements. The Internal Audit Commission acts in the best interests of shareholders and reports to the GMS.

Our Internal Audit Commission comprises three persons who were re-elected by the AGM on 24 June 2016: Nikolay Lavrov (Chief Internal Audit Executive); Roman Antonov (Deputy Chief Internal Audit Executive); and Svetlana Guseva (Manager of Internal Audit and Risk Management). They are elected for a period until the next AGM. Members of the Internal Audit Commission cannot be members of the Company’s Board and occupy any other position in the Company’s management structure at the same time.

The activity of the Company’s Internal Audit Commission is regulated by Severstal’s Regulations for the Internal Audit Commission. These regulations are available at www.severstal.com.

An external auditor is appointed annually by the GMS. The amount of its fee is subject to the Board’s approval.

The Board of Directors

Severstal’s Board of Directors is responsible for the review and approval of its strategy and business model, and closely monitoring its financial and business operations both by segment and as a whole. The Board is also responsible for approval of annual, half-year and quarterly results, the issue of any securities, establishing dividend policy and recommendation of dividends. It is also responsible for establishing Severstal’s risk appetite, system of internal control, governance, monitoring executive performance and succession planning. The Board reviews standards of ethics and policy in relation to health, safety, environment, social and community obligations. Full information on the responsibilities of the Board of Directors is available online at www.severstal.com.

The Board’s activity is regulated under Russian law, the Company’s Charter (2015) and Regulations for the Board of Directors (2014).

The Board

According to the Company’s Charter, Severstal’s Board comprises ten members. Severstal believes that maintaining a balance on the Board is a prerequisite for good decision-making and corporate governance and ensuring equal regard for the interests of all shareholders. Details of our Directors can be found in their biographies.

The Board reviews the independence of all Independent Non-Executive Directors annually, and has determined that all such directors are independent, in line with the UK Corporate Governance Code and have no cross-directorships or significant links, which could materially interfere with them exercising their independent judgment. The Company’s Independent Non-Executive Directors play a leading role in corporate accountability and governance through their membership and participation in the Board’s committees.

New directors to the Board participate in an induction programme when they take office. This includes details of the Company’s operations and procedures, as well as information on what is required from them in their role according to the Company’s internal documents. This includes Severstal’s Corporate Governance Code, applicable corporate governance law, and descriptions of best practice to help ensure their early effective contribution to the Company.

Governance calendar for 2016

The overall calendar of General Meetings of Shareholders, in-person Board meetings and Board committees’ meetings are shown below:

Separation of the roles of Chairman and CEO

The roles of the Company’s Chairman and CEO are separate and their responsibilities are clearly defined in the Company’s organisational documents and are regulated by law.

Alexey Mordashov is Chairman of the Board of Directors. The Board Chairman is elected from among its members by a majority vote.

The Board Chairman’s role is to:

– Lead the Board and with other members of the Remuneration and Nomination Committee lead the recruitment of new directors,
– Ensure constructive relations between Executive and Independent Non-Executive Directors,
– Ensure that all Board members can maximise their contribution to the Board,
– Provide strategic insight from his wide-ranging business experience and contacts built up over many years,
– Provide a sounding Board for the CEO on key business decisions and challenge proposals where appropriate,
– Preside over the GMS, and,
– Meet with shareholders on governance matters and be an alternative point of contact to the CEO for shareholders on other matters.

The Chief Executive Officer’s role is to:

– Lead the business and the rest of the management team,
– Lead the development of the Company’s strategy with input from the rest of the Board,
– Lead the management team in company acquisitions and new build decisions,
– Ensure organisation, status and accuracy of the company’s accounting practices and the timely provision of appropriate authorities with financial reports,
– Bring matters of particular significance or risk for discussion and consideration by the Board, if appropriate,
– Be the principal public face of the company with shareholders, customers, suppliers and the industry in general, and
– Cooperate with the company’s trade unions to protect the interests of the company’s employees and communicate with state and municipal authorities.

Sole Executive Body

Following the resolution of the Company’s shareholders dated 10 September 2014, the powers of Severstal’s CEO were transferred to the managing company, Severstal Management, with effect from 1 January 2015.

The managing company has authority for managing all issues in the Company’s current operations except for those issues specifically reserved for the Company’s GMS and the Board of Directors.

Vadim Larin header Severstal Management from 26 May 2015 until 7 November 2016. Alexey Kulichenko, CFO of Severstal Management was appointed acting CEO of Severstal Management from 7 November 2016 until 12 December 2016. Alexey Kulichenko continued in his role as CFO of Severstal. Alexander Shevelev was appointed CEO of Severstal Management with effect from 12 December 2016.

Board activity in 2016

In 2016, Severstal’s Board of Directors held four meetings in person and eighteen (18) meetings in absentia.

The Board spent a considerable amount of time during 2016 discussing the impact and the implications of the explosion at the Severnaya mine. In particular, the Board has reviewed safety throughout the business and its continuing initiatives to improve Severstal’s safety performance. It also discussed regularly the changing dynamics of raw material prices and the impact of the increasing rise in protectionism on Severstal’s business.

In addition to the matters described above, the Board also reviewed the following key matters:

– Severstal’s financial plan, financial performance and reporting,
– The composition of the Board and succession planning,
– Issues relating to the strategic options facing Severstal,
– Risk and risk mitigation matters,
– Severnaya mine accident,
– Severstal’s approach to quality,
– Budget for 2017,
– Transactions with related parties, etc.

The attendance of the Company’s directors at in-person meetings of the Board and its committees during 2016

Moreover, Independent Non-Executive Directors meet separately as a group during the year. There were four such meetings in 2016.

The Board and Committee members have direct and continuous access to Board and Committee materials via an electronic system, which also serves as an archive for Board and Committee materials, and as a way to vote in Board meetings where members are able to participate remotely.

Board effectiveness

The Board carries out an annual self-evaluation of its performance based on the individual contribution of each Board member, and has an external evaluation once every three years in accordance with the best corporate governance practices.

In 2016 the Board commissioned its third independently facilitated review of its effectiveness.

Statement on the Board evaluation results

An externally facilitated evaluation of the Board was held this year. Following a selection process led by the Chairman and Independent Non-Executive Directors, an international team led by the Independent Directors Association (the IDA) was engaged as the external evaluator. The IDA is a leading institute of directors in Russia and a recognised authority on corporate governance and board effectiveness. It has wide experience of working with the boards of leading public companies in Russia/CIS, including those that are traded on the LSE, NYSE and MICEX.

The evaluation process was primarily based on a series of confidential and wide-ranging questionnaires and interviews with each director, members of the executive team and those who support the Board in the execution of its activities. Questionnaires and interviews were focused on evaluating the efficiency and performance of the Board and its Committees, and separately those of individual directors including the Board Chairman. In addition, the evaluators reviewed the Board and its Committees agendas and materials for the past year.

The evaluation tested key areas of the Board’s operations including its participation in the formation of the Company’s strategy, succession and composition, boardroom interaction, culture, and the way the Board supervises business performance, risk, governance and operations in the interests of the Company as a whole.

The results of the Board evaluation and feedback from these questionnaires and interviews were collectively discussed by the Board at its meeting in February 2017, with the feedback relating to the Chairman’s evaluation conveyed by the Senior Independent Director.

The evaluation concluded:

Notwithstanding significant changes in the composition of the Board, its Committees and the senior executive team in recent years, the Board is performing well. Whilst optimising financial performance in the current market environment is important, the Board expressed its desire to remain focused on developing the Company’s long-term strategy for value creation. Furthermore, it emphasised the important role of the Board in this process.

Good progress has been made in implementing the succession of Board members and key executives, including the CEO. The formal processes associated with succession issues will continue to be built on.

The boardroom environment was seen to be conducive to wideranging and critical discussion. The executive team is being effectively challenged and tested by the Board members. The Board has agreed to explore how its core values and principles can be more explicitly communicated and further disseminated throughout the organisation as a whole.

Committee work was seen as being of high quality. Given the wide scope of topics covered by the Committees, further steps will be taken to ensure that directors receive sufficient information to support their decision-making capabilities. The directors are looking to further expand their programme of visits to operational units where they will be able to interact with a wide range of employees and managers.

The Board will maintain its interaction with minority shareholders through the enhanced engagement activities of the Senior Independent Director and other Non-Executive Directors.

In view of the accident at the Severnaya mine in February 2016, the Board is reviewing how it can improve its monitoring of the Company’s health and safety policies.

The Board noted that the Company is committed to the principles and provisions of both the UK and Russian Corporate Governance Codes.

A Board development strategy has been agreed by the Board as means of embedding the findings of the Board evaluation process.

Senior Independent Director

Sakari Tamminen is Severstal’s Senior Independent Director and Chairman of the Remuneration and Nomination Committee.

The Senior Independent Director’s role is to:

– coordinate communication of Independent Directors,
– liaise with the Board Chairman,
– act as an advisor for the Chairman to ensure efficient activity of the Board,
– ensure that appropriate succession planning procedures are in place in relation to the Board Chairman’s succession,
– meet annually with Independent Directors to appraise the Chairman’s performance, taking into account the views of Executive Directors, and on such other occasions as are deemed appropriate, and,
– be available to shareholders if they have concerns which have not or cannot be resolved through contact with the Chairman or the Company’s executive body.

Investor relations

The Board makes considerable efforts to establish and maintain good relationships with shareholders and the wider investment community. There is regular dialogue with institutional investors during the year, primarily though the Head of Communications and Investor Relations and his team.

In June 2016, Sakari Tamminen presided at the Annual General Meeting of Shareholders held in Cherepovets.

In November 2016, Sakari Tamminen and Vadim Larin led Severstal’s senior management team in London at the Company’s sixth annual Capital Markets Day. The meeting was also attended by certain independent non-executive directors in order that they could develop their own understanding of the views of institutional shareholders.

Corporate Secretary

The Corporate Secretary ensures Severstal’s compliance with the requirements of applicable law, the Company’s Charter and internal documents regulating the needs and interests of the Company’s shareholders. The Corporate Secretary is responsible for safeguarding the rights and interests of shareholders, as well as establishing transparent and effective regulations to secure the rights of shareholders. Full information on the responsibilities of the Corporate Secretary is available online at www.severstal.com.

Artem Bobulich has been the Corporate Secretary of Severstal since 20 January 2014. Artem Bobulich (born in 1983) has been working in the Company’s Corporate Secretary Team of the Legal Affairs Directorate since 2007. He graduated from the Cherepovets State University with foreign philology specialisation and at the Moscow State Law Academy.

Share capital

Severstal share capital comprises ordinary shares with a nominal value of RUB 0.01 each. The authorised share capital of Severstal as at 31 December 2016 comprises 837,718,660 issued and fully paid shares.

All Severstal shares carry equal voting and distribution rights. There are no restrictions or limitations on voting rights for holders of Severstal shares and GDRs.

Whistleblowing procedures

Severstal operates a whistleblowing policy for employees to confidentially report concerns about any unethical business practices to senior management in strict confidence and without fear of recrimination through several routes. Severstal’s Ethics Committee is the executive body which oversees the firm’s whistleblowing activities and the Audit Committee receives details of whistleblowing reports.

Anti-bribery and anti-corruption measures

Severstal’s anti-corruption policy, which is available at www.severstal.com and supported by the Severstal Employee Code of Conduct and Severstal Code of Business Conduct, incorporates appropriate provisions to meet Severstal’s obligations under Russian legislation and the UK Bribery Act.

All individuals applying for employment with Severstal are screened for their attitude to corruption and risk. The applications of those employees who do not meet the expected standard are not proceeded with. A training and communication programme is in place for all employees to ensure that they understand Severstal’s requirements and related reporting procedures. Regular screening checks are also carried out for existing employees.

Arrangements with contractors and suppliers have been and continue to be reviewed to ensure full compliance with Severstal’s anti-corruption policy.

Oversight of the programme is the responsibility of the Ethics Committee, which reports regularly to the Audit Committee.

Payments to Governments

Severstal’s payments to Governments disclosure in the year ended 31 December 2016 can be found in the Investor Relations section of www.severstal.com.

Board Committees

Severstal’s Board of Directors has the following committees:

– Audit Committee,
– Remuneration and Nomination Committee, and,
– Health, Safety and Environmental Committee.

The Board Committees serve as consultative and advisory bodies that deal with issues raised by the Board of Directors. Committees may not act on behalf of the Board and are not considered to be management bodies of the Company. They have no powers in relation to managing the Company.

Committee meetings are held as and when necessary, but at least three times a year (except for the Health, Safety and Environmental Committee, which meets at least twice a year). They are held separately from Board meetings so that extra attention can be given to discussing issues, which require preliminary Board consideration prior to approval by the Board of Directors members, and determine the necessity of the Board’s approval for a specific issue.

Decisions of each Committee are taken by a majority vote of all Committee members taking part in the meeting. Each member has one vote and the Committee Chairman has no casting vote in the event of a tie.

The activity of Severstal’s Committees is regulated by the Regulations for Board Committees. Please refer to www.severstal.com for more information.

The Audit Committee

The Audit Committee consists of three Independent Non-Executive Directors. Currently they are:

1. Alun Bowen (Chairman),
2. Philip Dayer, and,
3. Vladimir Mau.

Role

The Audit Committee assists the Board of Directors in monitoring the Company’s risk management processes and control environment, and in reviewing the Company’s annual and quarterly financial statements and overseeing its internal and external audit arrangements.

In its work, the Audit Committee also:

  1. Exercises control to ensure completeness, accuracy and adequacy of the Company’s financial statements,
  2. Ensures the independence and objectivity of the external and internal auditors,
  3. Evaluates candidates put forward as the Company’s external auditors and makes recommendations to the Board regarding the selection of external auditors,
  4. Develops recommendations to the Board regarding external auditors’ fees,
  5. Reviews the scope and results of the auditors’ work and their opinions, the efficiency of their processes and their objectivity. Monitors the independence of the external auditor, taking into account the applicable requirements of professional and regulatory bodies in Russia and the UK,
  6. Reviews the Company’s quarterly and annual financial statements, changes in accounting policies and practices, as well as material adjustments, if any, arising from the audit, before the financial statements are submitted to the Board for approval and publication,
  7. Reviews any other statements to be published which may relate to the financial performance of the Company, prior to their recommendation to the Board for approval,
  8. Oversees the reliability and efficiency of risk management, internal control and corporate governance systems,
  9. Monitors the internal audit function,
  10. Monitors and controls the compliance policy for auditors supplying non-audit services,
  11. Controls the efficiency of the Company’s whistleblowing system for potential frauds from the Company’s employees (including dishonest use of insider or confidential information) and third parties, as well as any other violations in the Company’s activities; control actions taken by the Company’s executive management within such a system,
  12. Analyses material changes to applicable law that affect the Company’s financial statements, and any findings of supervisory bodies and court proceedings.

Composition

The Board considers that each member of the Audit Committee has appropriate knowledge and understanding of financial matters and commercial expertise, sufficient to enable them to consider effectively the financial and accounting issue that are presented to the Audit Committee. Also, Sakari Tamminen who has extensive experience of the steel industry, is invited to attend all meetings of the Audit Committee to enable to the members to access his experience. The Board considers Alun Bowen, the Chairman of the Audit Committee to have specific recent and relevant financial experience, further details are available in his biography.

Report by Alun Bowen, Chairman of the Audit Committee

I am pleased to report on the work of the Audit Committee.

A key responsibility is to ensure that the financial information presented by Severstal is fair, balanced and understandable. To do this we focus on the quality of financial information, the independence of our external auditors and the assurance provided by internal audit.

The Audit Committee continues to debate and challenge the assumptions and estimates made by management, particularly this year in respect of the accounting and disclosure of the financial effect of the tragic explosion at the Severnaya mine.

The Audit Committee continued to work closely with the Health, Safety and Environment Committee and the Remuneration and Nomination Committee with the aim of covering pertinent topics in the appropriate forum.

I mentioned in last year’s report that the Board had asked Alexey Kulichenko and the Audit Committee to carry out a comprehensive review of the external reporting carried out by Severstal and how it compares with international best practice. During 2016 the Audit Committee and the Board considered management’s proposals for delivering enhanced annual external reporting and most of their recommendations have been included in this Annual Report. Next year’s Annual Report will see further enhancement of external reporting.

Audit Committee effectiveness

The Audit Committee reviews its terms of reference and effectiveness annually. An external effectiveness review carried out in December 2016 and concluded that there was no significant area for concern in respect of the performance of the Audit Committee or any of its members.

Financial reporting

The most significant issues regarding the 2016 Annual Report and financial statements and how the Audit Committee dealt with them are set out below:

External audit

The Audit Committee places great importance on the quality and effectiveness of the external audit. In assessing quality and effectiveness, the Audit Committee looks to the audit team’s objectivity, professional scepticism, continuing professional education and its relationship with management.

The Audit Committee carries out an annual evaluation of the independence and objectivity of the external auditor and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements. This assessment is based on a specific discussion between the members of the Audit Committee with the input of the Executive Directors and other relevant senior management. The output from this discussion was discussed with KPMG who built the recommendations, primarily in communication, into their process.

In addition to the annual evaluation, the Audit Committee undertakes an ongoing assessment of external audit quality and effectiveness in the following ways:

  • The Audit Committee debates and agrees the key areas of focus for the external audit, which included this year the impact of the Severnaya explosion and taxation issues (including the recognition of deferred tax assets).
  • The Audit Committee negotiates and agrees the scope of the audit prior to its commencement.
  • The Audit Committee discusses the accuracy of financial reporting (materiality) with KPMG both for accounting errors that will be brought to the Audit Committee’s attention and amounts that would need to be adjusted so that the financial statements give a true and fair view.
  • I discussed with KPMG the output of reviews carried out by Russian and international regulators on its work, no issues of significance arose from these reviews.
  • I meet with Larisa Kiseleva, the audit partner from KPMG, in her office once a quarter and we communicate regularly by email and telephone in between these meetings.
  • The Committee receives at every Audit Committee meeting an update of KPMG’s work, compliance with independence and its findings.
  • There is a detailed discussion of KPMG’s audit findings including audit differences, the work undertaken to support their audit opinion on the financial statements and the consistency of the Annual Report with their work, prior to the approval of the financial statements and Annual Report.
  • Audit differences were also discussed. No uncorrected audit difference was qualitatively or quantitatively material to any line item in either the income statement or the balance sheet. Accordingly, the Audit Committee did not require any adjustment to be made to the financial statements as a result of the audit differences reported by KPMG.

The Board has established a policy setting out what audit services can be purchased from the firm appointed as external auditors. Generally, only assurance services are purchased where it is sensible to use the external auditor from a cost-efficiency or regulatory perspective. The only non-audit fees incurred in the year ended 31 December 2016 were in connection with assurance work on a potential bond offering.

Severstal carries out a review of its external audit arrangements on a three-year basis and a formal tender process took place in 2015. The next audit tender will take place in 2018.

Internal Audit

The annual Internal Audit Plan is developed from a consideration of the principal risks facing Severstal, a cycle of audit testing and management requests. The Audit Committee provides its input in advance of approving the plan at an off-site meeting with the Nikolay Lavrov, the Chief Audit Executive, attended by members of the Audit Committee. In 2016 it was held in London, and also gave the Audit Committee and the Chief Audit Executive the opportunity for an extended discussion of issues, such as Severstal’s culture, internal audit resourcing and his perspectives of the business.

An external review of the internal audit function, which is carried out once every five years, was carried out in 2015 by Deloitte. All recommendations for improvement had been implemented by the end of 2016. The Audit Committee undertakes an ongoing assessment of the effectiveness and quality of internal audit in the following ways:

  • The Audit Committee receives the reports issued by Internal Audit and provides feedback on the quality of the findings.
  • The Audit Committee regularly reviews the resources available to the internal audit function.
  • The Audit Committee meets with Nikolay Lavrov, in addition to the off-site session outlined above, at least three times a year.
  • I attended in May 2016 the two-day internal audit conference in Moscow and ensured that there was a channel of communication to the Audit Committee, in addition to that through the Chief Audit Executive and also discussed the requirements of the Audit Committee.
  • I have scheduled conference calls with Nikolay Lavrov four times a year and this year we had additional calls to discuss issues arising from the Severnaya incident.

Management continues to demonstrate increasing willingness to implement internal audit’s recommendations and there has been a significant reduction again this year in the number of agreed recommendations, which have not yet been implemented.

Control environment

The Audit Committee has supported management’s efforts to improve the control environment during the year. In addition to the work carried out by Internal Audit, the Audit Committee receives reports from the Head of Security who briefs the Audit Committee on Security Department’s efforts though screening and other methods to ensure that the risk culture within the organisation is the best it can be. He also briefs the Audit Committee on issues of physical and cyber security and his plans and actions to minimise the risk in these areas and his cooperation with Internal Audit.

Looking ahead

In 2017, in addition to its regular work, the Audit Committee will be focusing on:

  • the outcome of a detailed penetration test carried out by an external agency to test Severstal’s defences to a cyber-attack;
  • starting the detailed planning for the external audit tender which is planned to take place in 2018;
  • reviewing Severstal’s whistleblowing procedures and other communication channels to ensure that they are as effective as possible.
  • Oversee managing continuing efforts to improve the Annual Report and in particular the provision of non-financial information.

The Remuneration and Nomination Committee

The Remuneration and Nomination Committee consists of three Independent Non-Executive Directors. Currently they are:

1. Sakari Tamminen (Chairman),
2. Philip Dayer, and,
3. Alun Bowen.

The Remuneration and Nomination Committee’s role is to assist the Company engage qualified professionals to manage the Company, create the incentives necessary to ensure they are successful within the Company and ensure there is an appropriate talent pool and oversee succession planning within Severstal. It also reviews the remuneration and compensation for the Company’s senior managers and Board members.

In its work, the Remuneration and Nomination Committee:

  1. Develops general recommendations for the Board on selecting nominees to the Board, proposed by the Board,
  2. Conducts preliminary evaluations of potential nominees to the Board and provides the Board with recommendations,
  3. Informs the Board of any potential nominees to the Board it is aware of, and recommends individual persons for nomination or election to the Board,
  4. Issues an opinion as to whether a person nominated to the Board qualifies as an Independent Director,
  5. Develops recommendations for shareholders to vote on election of candidates to the Company’s Board of Directors,
  6. Conducts an annual evaluation of the effectiveness of the Company’s Board of Directors and its members, determines priorities and direction to strengthen the Company’s Board of Directors,
  7. Plans appointments of personnel, ensuring due succession, and the Company’s CEO; develops recommendations for the Board of Directors on candidates for the position of CEO and Corporate Secretary,
  8. Develops the system of remuneration and other payments made by the Company or at the Company’s expense (including life and health insurance, and pension plans) for Board members, based on members’ personal contributions to the Company’s strategic objectives,
  9. Develops and periodically revises the Company’s policy on nomination and remuneration of members of the Board and CEO, monitor its implementation and execution,
  10. Reviews the Board members’ performance, including the advisability of nominating Board members for another term in office,
  11. Provides the Board with recommendations regarding the material terms of the CEO’s contract,
  12. Develops conditions for premature termination of the employment contract with the Company’s CEO,
  13. Conducts a preliminary evaluation of the Company’s CEO’s performance, based on annual results in accordance with the Company’s remuneration policy,
  14. Develops recommendations for the Board of Directors on the determination of the amount of remuneration and bonus for the Company’s Corporate Secretary,
  15. Reviews information furnished by Board members – to be disclosed in accordance with applicable law or the Charter – for establishing whether such Board members have an interest in any decisions of the Company, as well as information related to the circumstances preventing the aforementioned officers from efficiently discharging their duties as members of the Board, and any circumstances entailing their loss of independence as a member of the Board.

Report by Sakari Tamminen, Chairman of the Remuneration and Nomination Committee

The Remuneration and Nomination Committee, has focused on three principal areas this year:

  • Executive remuneration structure,
  • Succession planning and Severstal’s talent pool, and,
  • Long-term incentive plan (LTIP).

A winning corporate culture and talent retention

Severstal pays a lot of attention to developing a unique corporate culture of continuous improvement. We firmly believe that a strong corporate culture is our unique advantage with a long-lasting and growing value. It is hard to replicate by peers and helps to promote changes faster.

The cornerstone of our corporate culture is the Business System of Severstal which is the logical development of more than ten years of ongoing efforts to optimise production and standardise internal processes, through many projects striving to achieve maximum efficiency of labour, equipment and energy, improve customer service. Among industry players, the system is unrivalled in the extent of its integration and EBITDA contribution potential.

It also includes a set of projects for cultural change. We believe this gives us a key competitive advantage, and is crucial for success in the steel and mining industry. Ultimately, its intention is to make Severstal a global efficiency leader in the steel industry.

There are five main lines of development in the Business System:

  • Continuous improvement
  • Safety
  • Customer care
  • People of Severstal
  • Business standard

As a result of our Business System initiatives, we are already seeing an increased level of engagement of our employees and higher satisfaction levels of our clients, a trend that we are confident is to continue.

In addition to the Business System we have internal policies in place to prevent any violation of our corporate values. We do not tolerate bullying behaviour or corruption regardless of the executive level. Severstal has an Anti-Corruption Policy focused on ensuring our compliance with both Russian and international anti-corruption laws. This policy sets standardised anti-corruption requirements for all Severstal businesses and regulates activities associated with high corruption risks, such as cooperation with partners, acquisition of corporate securities, establishment of joint ventures, mergers and acquisitions, conflict of interest evaluation procedures, sponsorships and charities, gifts and entertainment, and so on under this programme, we developed and adopted the Severstal Employee Code of Conduct and Severstal Code of Business Partnership propagating our anticorruption requirements into our supply chain. There is also an Ethical Committee in place and a phone/SMS hotline for our staff to anonymously report any wrongdoing.

Continuous demonstration of corporate values is a task going far beyond the responsibility of just the HR function; it is a fundamental requirement for any manager of employees across the organisation.

The recruitment of high-potential students and graduates is a priority of Severstal’s HR policy. We work hard to meet our long-term need for young professionals, to improve the quality of training of our future employees and to make the metals and mining industry more attractive for job seekers. Our aim is to make the steelmaking industry and the science behind it exciting for younger generations.

The development of the corporate culture has been a priority of Severstal’s Board of Directors for many years.

An ambition to become a global leader in value creation also helps to attract and retain career-oriented professionals seeking challenges and interesting tasks. We intend to achieve this leadership through sustained improvements in operational facilities and lean production, and use of best available technologies. We have a set of ongoing schemes for employee development and training, from induction programmes through to senior professional development. This helps us to create a culture where employees share similar values and work towards achieving similar goals.

Executive remuneration structure

The executive remuneration structure seeks to strike the right balance between engaging and retaining highly qualified managers and the interests of the shareholders. Though the established remuneration policy has long-term variable pillars like LTIP and KPIs, the fixed salary element undergoes annual revision involving benchmarking using external data to ensure that the Сompany management’s compensation is fair and is in line with the market trends. We seek to reward our executives in the range between the 50th and 75th percentile of the market average, as defined by external benchmarks. We regularly review these external benchmarks, which are currently provided by members of the Big 4 accounting firms, to ensure that they are relevant and appropriate to our business.

Annual Remuneration consists of the following two parts: a fixed salary mentioned above and a variable part known as a bonus. The bonus’ percentage of an individual’s annual salary varies for various executive levels. However, in general the bonus consists of two parts – an individual element and a corporate one:

  • The first 50% is based on performance against individual targets. The individual targets for executive Board members are set by the Company CEO; targets for CEO are determined by the Remuneration and Nomination Committee and recommended to the Board;
  • The other 50% of the bonus is performance compared with the Company’s financial and operational KPIs set by the CEO at the start of the year and approved by the Remuneration and Nomination Committee. The set of KPIs includes financial targets such as OCF and EBDA.

Compensation of Senior Managers, Executive Officers and Directors

Key management’s remuneration for the year ended 31 December 2016, consisting of salaries and bonuses, totalled US$10 million (2015: US$10 million; 2014: US$23 million). Additionally, in 2016, a provision for key management’s long-term cash-settled share-based incentive programmes of US$3 million was accrued (2015: US$2 million, 2014: US$7 million). This provision is subject to further adjustments, dependent on a range of the Group’s financial indicators.

The BoD remuneration and compensation policy

By the decision of the General Meeting of Shareholders (GMS), Board members may be paid a remuneration during the execution of their duties, and be reimbursed for expenses incurred in connection with their functions as Board members. The amount of such remuneration or compensation is subject to approval by the GMS only. Should any Board member decide to resign before their term of his/her office expires, such a Board member is paid pro rata in proportion to the term of office that expired prior to resignation.

If incurred, we reimburse our Board members’ expenses in connection with the performance of their duties as Board members, including transport, accommodation and mailing costs, as well as costs relating to the translation of company documents or materials that they are provided with.

Succession planning and Severstal’s talent pool

Part of our effort to create a motivating corporate culture is a focus on growth of a talent pool, establishing remuneration policies which motivate management for long-term performance and are clearly aligned with the business KPIs and objectives, as well as interests of Severstal’s shareholders. This also includes annual 360-degree evaluation (feed-back), half-year (annual) assessment of top managers by the CEO and the BoD, semi-annual Staff Committees’ reviews and development of a succession pool. As a result, since Severstal’s IPO all executive director positions at the Сompany’s BoD have been placed with top managers from Severstal’s internal talent pool. Undesirable executive talent outflow has been minimal and much below the average industry level.

At each meeting the Committee discusses and reviews Severstal’s existing and emerging talent pool, for senior positions and the Company’s plans for development of the individuals and the potential succession plans for each senior position.

I am pleased that this work has continued to bear fruit this year as a number of changes have been necessary in the senior management for a variety of reasons and, in each case, the individual has been replaced by someone who had been identified as a potential successor. Although our new CEO was not included in our plan as he had left Severstal, he was effectively still part of our wider talent pool, as he was working for Severgroup.

Next year we will endeavour to ensure that the overwhelming majority of the existing talent pool is known personally by as many members of the Committee as possible, in order that the Committee can play a more informed role in succession planning.

Long-term incentive program (LTIP)

For long-term retention of top management and alignment of their interests with those of the shareholders, Severstal has a LTIP programme in place.

The LTIP covers a period of three years and is based on a “phantom” stock plan. This type of stock plan pays a cash award to an employee that equals a set number of Сompany shares multiplied by the current share price. Phantom stock plans contain vesting schedules that are based on tenure. The vesting period for the whole LTIP starts only after the end of the third year of the executive’s participation in the programme. The number of phantom shares attributed to an executive is determined by a proportion of the executive’s salary in the first year of the programme.

The Committee reviews on an annual basis the awards made under the LTIP programme and the individuals who are eligible to receive awards.

Health, Safety and Environmental Committee

The Health, Safety and Environmental Committee currently consists of:

  1. Philip Dayer (Chairman),
  2. Alexey Mordashov,
  3. Vadim Larin (until 7 November 2016),
  4. Vladimir Lukin, and,
  5. Alexander Auzan.

The Health, Safety and Environmental Committee assists the Board in obtaining assurance that appropriate systems are in place to deal with the management of health, safety and environmental risks.

The functions of the Health, Safety and Environmental Committee include:

  1. Advise the Board of Directors on safety policy and the establishment of safety procedures including the reporting system to the Сompany’s executive body and through the executive body to the Board of Directors,
  2. Review the safety performance of the Сompany and its constituent parts against targets established either by the Company’s Board of Directors or its executive body,
  3. Review major safety incidents and advise on lessons learnt and/ or sanctions to be applied,
  4. Initiate and review comparisons with best safety and environmental practice,
  5. Advise the Board of Directors on environmental policies, the establishment of procedures and practices and the reporting system on environmental performance to the Company’s executive body and through the executive body to the Board of Directors,
  6. Review the environmental performance of the Company and its constituent parts against targets as established by the Board of Directors or its executive body, as well as compliance with legal obligations or objectives and restrictions set by the authorities,
  7. Review major environmental incidents or breaches of compliance and to advise on lessons learnt and/or sanctions to be applied.

Report by Philip Dayer, Chairman of the Health, Safety and Environmental Committee, on the activity during 2016 is set out below:

This year was dominated by the tragedy at the Severnaya mine and the HSE committee offers its heartfelt condolences to the bereaved families of the miners and rescue workers who perished in that mine. Whilst nothing can replace those who died, Severstal made prompt compensatory payments to those bereaved families to provide them with financial support and also offered them grief counselling services. The Severnaya mine has now been shut to prevent the risk of further accidents and the Company is giving its fulsome support to the authorities investigating the accident. A full report on the Severnaya accident is set out on page 63 below. The safety of our workforce remains our first priority notwithstanding the Severnaya accident and a number of our safety initiatives are described above. The Company has also continued with its work to protect the environment and to promote social programmes in the regions where we operate.

Information of our sustainability initiatives in 2016 can be found in the Responsibility section of the Annual Report on page 34. In the HSE Committee report we provide a more detailed overview of the Severnaya Mine accident which has shocked and saddened all of us here at Severstal.

The Severnaya Mine Disaster

On 25 February 2016, a sudden methane leak and explosion occurred at the Severnaya mine. 110 miners were in the mine at the time of the explosion. By 26 February: 80 miners had been evacuated safely; four miners had been killed by the explosion; and, a rescue operation was commenced to save the remaining 26.

On 28 February, another explosion occurred during the rescue operation killing five rescue workers and one miner. Based on the high temperatures and the oxygen, methane and carbon dioxide concentration data, as well as the extensive damage, the Technical Commission declared the missing miners dead. The rescue operation was subsequently terminated.

A Russian Government Commission was established to study the causes of the mine disaster and to provide support to the relatives of the victims and injured miners by an order of the Russian President Vladimir Putin. Deputy Prime Minister of the Russian Federation, Arkady Dvorkovich, headed the Commission.

An investigation was launched by the Investigative Committee of the Russian Federation. This involved cooperation with the Prosecutor’s Office of Russia and Rostechnadzor which supervises industrial safety in Russia.

Severstal is committed to a completely objective investigation and is providing all of the documents and information requested by the law enforcement and regulatory authorities. The investigation still continues at the date of the issue of the Annual Report. Preliminary data suggests that the accident was caused by geological factors, a methane gas leak followed by an exposition although an equipment failure or human error cannot be fully ruled out.

The Severnaya Mine: key facts

Severnaya Mine is one of the five underground mines of Vorkutaugol (there is also one open pit). In 2015 the Severnaya mine produced approximately 1.5 mln tonnes of coking coal concentrate, which is approximately 26% of Vorkutaugol’s overall production of coking coal concentrate in 2015 (5.7 mln tonnes). The Severnaya Mine was commissioned in 1969. In 2003, Severstal became the new owner of Vorkutaugol.

The Severnaya Mine is deep and has a high level of methane gas content. However, the mine was being developed according to relevant state requirements for such mine types. There are several levels of operational monitoring and supervision (including official regulatory control at the mine) and safety systems.

There were several audit visits by Rostechnadzor days before the accident which did not indicate any violations.

Support of the victims and the Severnaya mine employees

We are committed to providing the highest level of support to the Severnaya mine employees. The majority will be employed at the Company’s other facilities, whilst others will receive professional retraining.

We have transferred most of the Severnaya mine staff to other mines of Vorkutaugol. Nearly all of them kept earning their average wage. To date we have arranged new employment for most of the workers of the Severnaya mine, the rest are helping with the restoration works. Those who have not been offered employment at the Company, have been paid redundancy compensation by the Company. There are also ongoing retraining programmes to new professions in cooperation with the local authorities.

Vorkutaugol paid more than 155 million roubles of compensation to the families of the deceased miners and rescue workers as prescribed by the provisions of our Corporate Social Responsibility Policy and employment agreements. On average, Vorkutaugol paid the miner’s families more than 4.3 million roubles per family. Severstal also paid the same amounts to the families of rescue workers at our own initiative. With the state payments, each family with children received around 6–7 million roubles in total.

Between 2 March and 1 May 2016, Severstal ran an employee initiated fundraiser for the benefit of the families of miners and rescue workers. Approximately 4.7 million roubles was raised and distributed among 115 recipients. Vorkuta residents raised an additional 2 million roubles that was distributed among the children of miners and rescue workers.

Prospects of the Severnaya mine

On 20 September 2016, Severstal announced that the Severnaya mine will be sealed off to avoid the risk of airflow causing further underground fire and explosions in the mine. The decision was made by the Technical Commission comprising representatives of AO Vorkutaugol and the Russian authorities.

A study undertaken by several leading mining research institutes has concluded that an underground fire in the mine remains a risk. Despite being flooded with water for several months, the temperature in some parts of the mine remains approximately 400–700 degrees centigrade. An inflow of oxygen could cause further fires and blasts.

Health and safety is our key priority. Therefore, no further activity will take place in the Severnaya mine until we are fully confident that it is safe. In order to keep our employees in work, and to ensure that we maintain our required levels of coal production, we are considering safe methods to extract the remaining coal from the Severnaya mine via the infrastructure of the adjacent Komsomolskaya mine, which is preliminarily expected to start in 2020.

Actions to increase the level of safety at Vorkutaugol

A new industrial safety system will be created. This system will be more sophisticated involving individual sensors of methane, thus allowing the circulation of gases and air in the mines to be modelled. In case individual sensors record an excess of admissible concentrations, the system will automatically give an alarm signal. At the same time, meter information will be stored in a database allowing predictive analysis of accumulations and emissions of gases in the mines.

An additional inspection of crossing points in the fulfilled developments regarding their quality, degree of reliability and the isolating properties will be carried out. A programme to raise the competence of personnel involved in emergencies is also planned. Individual means of protection will be improved, in particular, self-rescue.

Safety is Severstal’s number one priority. Our goal is to achieve zero fatalities.

To achieve this, we run a continuous safety improvement programme across all our operations, aiming to employ the best international health and safety practices and become the leading Russian company in this field.

We are open to cooperation. The Company’s top managers and senior experts participate in the Committee on Environmental, Industrial and Process Safety under the Russian Union of Industrialists and Entrepreneurs, within the framework of the Russian Steel Consortium, which is a national professional association of steelmakers. Severstal is also an active member of the World Steel Association and reports on its health and safety on a regular basis.

Health and safety systems at the four enterprises of the Russian Steel division (the Cherepovets Steel Mill (CherMK), Izhora pipe Mill, SIA Severstal Distribution, Severstal-Proekt), and the health and safety systems at Karelsky Okatysh and Olcon are certified according to requirements of OHSAS 18001:200 standards.

Projects in the area of industrial safety are integrated into the Business System of Severstal, which is a set of projects for longterm cultural transformation and efficiency enhancements. Some of our health and safety initiatives during 2016 included:

1. Engagement of all employees in safety (through dialogue and visual presentations) by monitoring the safety of working places and identifying hazardous jobs and activities:

  • safety measures have been specified;
  • feedback has been provided to employees;
  • surveys are conducted regularly on hazardous jobs and during safety training.

2. The Safestart Programme was launched (Safe behaviour basics are promoted):

  • The aim is to develop safe habits (at home and at work);
  • Substantial number of employees has been trained;
  • About 2,000 people were trained in 2016.

3. Visual presentations:

  • The PR campaign “Safety is the choice of professionals!” was launched across all corporate media (newspaper, TV, internet);
  • Posters with the basic causes of injuries were disseminated.

4. Identifying hazardous jobs and work places (including injuries analysis):

  • the causes of all the minor injuries were analysed with conclusions drawn and presented;
  • safety audits have been implemented at Vorkutaugol and Karelsky Okatysh.

5. Stricter disciplinary actions for violators of safety rules.

6. Psychological testing when hiring staff (to identify people with risky potentially behaviours which might be a constraint for certain jobs).

7. A new stream of efforts – engaging contractors of Severstal more fully in health and safety issues.

Sole Executive Body

What is the Company’s Sole Executive Body?

The authority of the Company’s Sole Executive Body is exercised by the Chief Executive Officer/General Director of the Company.

Upon decision of the GMS, the powers of the Company’s Sole Executive Body can be transferred to a commercial organisation (managing company) on a contract basis. The GMS may take such a decision as a result of a proposal of the Company’s Board of Directors.

Severstal’s shareholders resolved to transfer the powers and responsibilities of Severstal’s Executive Management Team including those of its CEO, to a new managing company – Severstal Management, effective from 1 January 2015.

This change is in line with the Company’s stated strategic focus of optimising its management structure and further enhancing management efficiency and transparency. Severstal Management will achieve this by reducing management layers, centralising certain administrative functions and removing duplication. Alexey Mordashov stepped down as CEO of Severstal Management and Vadim Larin headed Severstal Management as from 26 May 2015 until 7 November 2016.

Alexey Kulichenko, CFO of Severstal Management was appointed acting CEO of Severstal Management as from 7 November 2016 until 12 December 2016. Alexey Kulichenko continued in his role as CFO of the Company.

Alexander Shevelev was appointed CEO of Severstal Management with effect from 12 December 2016. Alexander Shevelev previously held the positions of CEO of SVEZA Group, a subsidiary of Severgroup, and CEO of Severstal-Metiz, an international metalware manufacturer and subsidiary of PAO Severstal.

The managing company has authority for managing all issues in the Company’s current operations except for those issues reserved for the Company’s General Meeting of Shareholders and the Board of Directors.

More details on the Company’s managing company are available on www.severstal.com.