The Board Committees

The Audit Committee

The Audit Committee has two independent Board members and one non-executive director, Nikolai Pilipenko, who is not formally regarded as independent as he previously served as the company’s Financial Director. We believe that the mix of a majority of independent members who are experienced in financial accounting, international reporting and risk management is complemented very effectively by the additional in-depth knowledge of the company’s operations brought to the committee by Mr. Pilipenko.

In 2009, the Committee held six joint-presence meetings and three meetings by conference call. As a rule, committee meetings are attended by the external auditors, the CFO, the Head of Internal Audit, and the Corporate Secretary.

The Committee holds discussions with the external auditors, PricewaterhouseCoopers, twice a year without the presence of management. The committee chairman has regular one-to-one meetings with the Head of Internal Audit either in preparation for meetings or to discuss audit findings. Between meetings, the Committee is in regular contact with the Financial Director, the Head of Internal Audit, the Risk Management desk and the Corporate Secretary.

The Committee’s primary function is to oversee the quality of financial reports, as well as the integrity and reliability of the information disclosed about the company. During 2009 it has increasingly focused on risk management and is now actively overseeing the development of the risk management structure and processes.

In 2009 the Board reviewed the Audit Committee Regulations and expanded the Committee’s terms of reference to reflect the focus on risk management.

The committee undertook a formal review of its effectiveness. This involved an assessment questionnaire that was completed by management who have regular contact with the committee as well as the committee members. As a result we are looking to make improvements in the agenda structure and management reports.

The committee’s work during 2009 gives a good indication of its activity and responsibilities. Its work has included:

• The auditors’ review of quarterly financial statements was discussed in detail. At year-end the full year audited financial statements were reviewed and discussed in particular detail to ensure compliance with the company’s reporting standards and IFRS. The audit plans, reporting risks and financial disclosures were discussed prior to the start of the interim audit work and considered again during the approval of the year end financial statements.
• Monthly management accounts were discussed to help ensure that the review of the quarterly and year end statements were based on a good understanding of financial performance at all times during the year.
• Overseeing the development of the risk management function and improvements in reporting on risks, risk mitigation and controls assurance. The committee is currently putting considerable emphasis on the development of the risk management processes.
• Considering the steps to be taken to position the company for listing on an international exchange, including development of controls relating to insider trading regulations, anti-trust rules, public and regulatory disclosures and external reporting.
• Regular interaction with internal audit, approving its plans, discussing its findings and overseeing its development. Its effectiveness was formally reviewed through a survey of stakeholders as well as the committee. This particular focus on internal audit development will continue during 2010.

As well as continuing to drive the development of risk management and internal audit functions, in 2010 the committee will also look at how to ensure that the company’s Code of Conduct is properly embedded and reflected in sound ethics and a strong control culture.

The Strategy Committee

The Strategy Committee has two members, both of which are non-executive directors. It held six meetings during the year with the General Director and CFO in attendance. The Committee recommends to the Board the overall strategy of the Company, strategies for individual business lines, capital expenditure, acquisitions, joint ventures and licenses.

During 2009, the Committee’s primary task was the review of the capital investment programme. Revenue generation from investments in developing and expanding production was the key area of focus along with lowering current production costs. The Strategy Committee reviewed revised strategies in all of the company’s business lines: nitrogen, phosphorus, and potash. Management initiatives in logistics, sales and distribution, and production were considered in particular detail. The Committee has established a strong foundation for post-crisis development based on a reduced cost base and long-term strategic positioning, particularly in raw materials and distribution.

The Corporate Governance and Personnel Committee

The Corporate Governance and Personnel Committee has three members, all of which are independent directors. During 2009, the Committee held eight joint-presence meetings and focused in particular on the HR management policy. Over several years considerable progress has been made toward establishing international standards of governance and an important part of its role is to ensure that these standards are maintained.

In the wake of the economic crisis, considerable attention was paid to retaining key employees and also to protecting the core of our workforce, including increasing social protection taking into account the crisis conditions. Our response to the crisis also, however, inevitably involved workforce optimization to reduce costs, and the committee actively supported management’s plans while also considering the people-related risks at each factory.

During the year, a series of meetings were held with operating unit senior managers to help the committee get a better, more direct understanding of the situation at each of our operating companies and to better identify the areas that need more attention.

A metrics-based system has helped the Committee monitor the situation at our regional facilities. Starting in November 2009, the reporting process was automated using a Group-wide information system. In 2010, one of the Committee’s key tasks will be to adjust the HR strategy in view of the changes made to business strategies and the changing conditions on regional labour markets.

The Committee also pays close attention to remuneration for key managers. This is tied to the implementation of individual plans and the company’s operational results. The Committee’s activities are planned based on a cycle: for example, the incentives system and top management’s targets for the coming year are set at the end of the year at the same time as the budgeting process and after adjustments have been made to business strategies. Individual target achievement results are assessed from February to April in the year following the reporting year once the results have been reported. As a result, the Committee uses a systemic approach to assure the Board that management remuneration is adequate and management incentivisation is appropriate.

The Committee has considered social projects that the company is working on in the regions in order to improve the quality of life for employees of its factories and for the region’s other residents. EuroChem is keen to make sure it meets its commitments in this area.

Every year, the Committee organizes the Board’s performance appraisal exercise. The method used for the appraisal involves a survey, and detailed answers provided by the directors form the basis for Board discussion and decisions made based on the conclusions.

The Committee also assists the Corporate Secretary with issues related to the development of corporate governance practices.

Remuneration

Issues concerning Board member remuneration are referred to the General Meeting of Shareholders. The criteria for determining Board member remuneration and payment procedures for both remuneration and compensation of expenses are set out in the Board Member Remuneration Regulations. Remuneration is fixed and adjusted to account for membership and chairmanships in Board Committees and performing the duties of the Chairman of the Board of Directors.

The total remuneration paid to members of the Board of Directors for their work on the Board and Board Committees in 2009 amounted to RUR 39,838 thousand. Compensated expenses amounted to RUR 1,259 thousand.

Dividends

The Board of Directors prepares recommendations for dividend payments taking into account the long term development of the company and interests of the shareholders. High profits in the pre-crisis period resulted in a recommendation to pay interim dividends. With the onset of deteriorating economic conditions and a drop in company revenues and profits, and with a commitment to and the long term strategy and the need to support our investment programme, the Board decided to re-invest the company’s profits into development. This position was in line with the company’s dividend policy and is understood and accepted by the shareholders. The history of dividend payments and the company’s Dividend Policy can be found in the Corporate Governance section published on the company’s website.

Dividends declared and paid during the years 2008 and 2009 were as follows:

Parentheses indicate the additional number of meetings that were held by phone or in absentia.