Strategic Leadership

Role of the Board of Directors

The Board of Directors is responsible for strategic management of the Company and plays a key role in the Federal Grid’s corporate governance system.

The main functions of the Board of Directors are as follows:

• To shape the Company’s strategy and monitor its implementation
• To ensure the exercise and protection of rights and legal interests of Federal Grid’s shareholders; to protect the Company’s assets
• To ensure establishing and maintaining sound internal control and risk management system
• To monitor activities of the executive bodies, to undertake regular performance evaluation of senior managers and to establish and maintain effective incentive schemes and development programmes for them
• To ensure timely disclosure of full and fair information on the Company’s operation
• To establish a system for managing subsidiaries and associates
• To monitor the Company’s corporate governance practice

The Board of Directors’ full responsibilities are set out in the Federal Grid’s Articles of Association and include issues specified by the Federal Law “On Joint Stock Companies”, as well as a wide range of additional issues, including in the following areas:

• Finance and investment
• Business planning
• Procurement
• Approval of material transactions
• Monitoring of executive performance against key performance indicators
• Managing subsidiaries and associates on key issues and areas of focus
• Internal control, risk management and internal audit

Board Composition

In accordance with Clause 16.1 of Article 16 of the Federal Grid’s Articles of Association, the Board shall include 11 members. This number of Board members best fits scope of the Company’s business and ensures compliance with the following principles when composing the Board:

• Ensuring a balance within the Board, including with respect to skills, experience, knowledge and business qualities of its members
• Election of independent directors to the Board in the amount not less than one-fifth of the membership of the Board of Directors, but at least three
• Members of the Management Board may not constitute more than 25% of the Board composition

¹ Independence criteria are defined in accordance with recommendations of the Russian Corporate Governance Code and the Listing Rules of the Moscow Exchange.

Membership of the Board of Directors¹

members elected by the General Meeting of Shareholders on 26 June 2015 (positions are as of 31 December 2015)

As at 31 December 2015, no member of the Federal Grid’s Board of Directors hold ordinary shares of Federal Grid Company, except Oleg Budargin whose share in the Company’s ordinary stock was 0.0006403563%.
In 2015, there were no dealings in the Company’s shares by the Board members.

^{1 Here and elsewhere, personal information about members of the Federal Grid’s governing and control bodies is disclosed with their consent.
2 Decision of the Board of Directors dated 21 July 2015 (Minutes No. 279 dated 24 July 2015).
3 Decision of the Board of Directors dated 20 August 2015 (Minutes No. 280 dated 24 August 2015).}

Membership of the Board of Directors acting from 27 June 2014 to 26 June 2015 (positions are as of the election date)

1	Oleg Budargin	Board Chairman, Non-executive Director	General Director of JSC ROSSETI
2	Vyacheslav Kravchenko	Deputy Chairman, Non-executive Director	Deputy Minister of Energy of the Russian Federation
3	Maxim Bystrov	Non-executive Director	Chairman of the Management Board of Non-profit Partnership Market Council
4	Andrey Demin	Non-executive Director	First Deputy General Director for Economic Affairs and Finance, member of the Management Board of JSC ROSSETI
5	Boris Kovalchuk	Non-executive Director	Chairman of the Management Board of JSC INTER RAO
6	Sergey Mironosetsky	Non-executive Director	Member of the Board of Directors of Siberian Generating Company, LLC
7	Andrey Murov	Executive Director	Chairman of the Management Board of Federal Grid Company
8	Georgy Nosadze	Non-executive Director	Assistant of the Expert Directorate of the Executive Office of the RF President
9	Denis Fedorov	Non-executive Director	General Director of JSC Centerenergoholding General Director of GazpromEnergoholding LLC,
10	Sergey Shmatko	Non-executive Director	Special Representative of the President of the Russian Federation on International Cooperation in the Electric Power Industry of the Executive Office of the RF President
11	Nikolay Shulginov	Non-executive Director	First Deputy Chairman of the Management Board of JSC SO UES

Board of Directors’ Performance Report on the Company’s Business Priorities

In the reporting year, the Board of Directors of Federal Grid Company regularly considered matters related to the maintenance and development of UNEG infrastructure, improvement of the Company management and its long-term development.

To improve the Federal Grid’s corporate governance system, the Board of Directors approved (Minutes No. 255 dated 16 March 2015) an Action Plan (‘road map’) on implementing key provisions of the new Russian Corporate Governance Code. All commitments made within the ‘road map’ were fully met.

For further details on the results of the ‘road map’ implementation, please, see section GOVERNANCE AND DEVELOPMENT / CORPORATE GOVERNANCE of the Annual Report

In 2015, special attention was given by the Board to issues related to the Company’s joining the Anti-Corruption Charter of the Russian Business the result of which was the approval of new version of the Federal Grid’s Anti-corruption policy.

Within the Board’s role and responsibilities, drafts of the Federal Grid’s investment programme for 2016–2020 were considered, as well as its adjustments for 2015–2019.

To reduce uncertainty with respect to the achievement of the Company’s objectives and to ensure an independent review of the effectiveness of the internal control system and corporate governance practice, the Regulations on Risk Management System and Regulations on Internal Audit were approved in 2015.

For more details on the Company performance within its business priorities see section PERFORMANCE of the annual report

Structure of issues considered by the Board of Directors in 2015

Dealing with Conflicts of Interest of Board Members

The Company has developed and implements a comprehensive system for dealing with conflicts of interest of Board members that provides reasonable assurance that any conflict will be resolved at an early stage and the Federal Grid’s interests will not be infringed.

The Company’s internal documents define a ‘conflict of interest’ of a Board member and set forth his/her obligations:

• To declare his/her affiliatio
• To report a conflict of interest or likelihood of conflict and its cause, including interests in transactions
• To refrain from actions that will or may lead to a conflict between his/her interests and the Company’s interests
• To refrain from voting on matters in which he/she has a conflict of interest
• To report on his/her holding of the Company securities and transactions therewith

Directors’ Liability Insurance

In 2015, the Company maintained Directors’ liability insurance based on the AGM resolution of 27 June 2014.

The Company concluded the D&O liability insurance contract aimed at reducing risk of adverse effect from actions/decisions made by the Company directors and officers.

The insurer was determined through open competitive procurement, and terms and conditions of the insurance contract, including the volume of insurance cover, was in line with the best practices in this area.

Board Performance Evaluation

In accordance with the ‘road map’ on implementing key provisions of the Russian Corporate Governance Code, as well as amendments made into the Company’s internal documents in 2015, Federal Grid has planned an annual evaluation of the Board performance with the assistance of independent consultants.

At the beginning of 2016, an independent organisation JSC VTB Registrar, engaged through competitive procurement procedures, conducted the Board performance evaluation for 2015. It included evaluation of the Board performance and that of its committees and individual directors.

The evaluation was conducted by questioning members of the Board and its committees, members of the Federal Grid’s Management Board, as well as interviewing some Board members, Committee members and the Corporate Secretary.

In addition, experts performed a review of the internal and administrative documents of Federal Grid Company that regulate relevant issues.

Experts developed recommendations on further improving work of the Board of Directors, including identification of the Board and committee priorities for the year, holding an offsite meeting of the Board (within the facilities of Federal Grid Group), as well as other recommendations.

According to the matters reserved for the HR and Remuneration Committee, results of the evaluation are submitted for consideration to the Board of Directors with the preliminary consideration by the Committee. Results of the evaluation for 2015 were considered at the Board meeting on 20 April 2016 (Minutes No. 26 dated 20 April 2016).

Board Committees

In order to improve performance of the Federal Grid’s Board of Directors and to provide in-depth consideration of matters within its competence, special-purpose advisory bodies within the Board of Directors – Board Committees have been established and are working actively.

The key role of each Committee is to provide preliminary consideration of the most important matters which are reserved for the Board, and to develop recommendations, which the Board follows when making decisions on relevant matters.

When expert advice is necessary on issues requiring specialised knowledge, the Committees are entitled to involve outside experts within the limits of Committee budgets approved by the Board.

Federal Grid’s Board of Directors has four permanent committees: for Audit, HR and Remuneration, Strategy, and Investment.

The work of each Committee is regulated by the corresponding Regulations approved by the Board of Directors that include, among other things, the procedure for creation, composition, working arrangements, rights and obligations of Committee members.

In 2015, the Board of Directors approved new versions of the Regulations for each Committee updating them in accordance with the recommendations of the Russian Corporate Governance Code.

Audit Committee Report

Role and Responsibilities

The role of the Audit Committee is to assist the Board of Directors in providing oversight of the Company’s financial and business operations.

The Committee:

• Monitors the completeness, accuracy, and reliability of the Company’s accounting (financial) statements
• Monitors the robustness and effectiveness of the risk management and internal control system and the corporate governance system, including the review of their effectiveness and drafting proposals on their improvement
• Ensures the independence and objectivity of the Company’s internal audit function
• Reviews the external auditor’s independence, objectivity and absence of conflict of interest, evaluates candidates for the Company’s external auditors and makes recommendations to the Board of Directors regarding the appointment of external auditors and their fees, reviews audit quality and quality of the auditor’s opinion
• Reviews the efficiency of a system of reporting on potential fraud and other irregularities on the part of any of the Company’s employees and third parties, as well as other violations in the Company

The Committee’s activities are governed by the Regulations on Audit Committee of the Board of Directors of Federal Grid Company, a revised version of which was approved by the Board of Directors on 16 November 2015 (Minutes No. 291 dated 19 November 2015).

Activities in 2015

The Committee held 10 meetings (8 in absentia and 2 in person).

In accordance with the Work plan approved (Minutes No. 35 dated 08 April 2015), the Committee considered, among others, the following issues:

HR and Remuneration Committee Report

Role and Responsibilities

The role of the HR and Remuneration Committee is to assist the Board of Directors in establishing efficient and transparent remuneration practices and developing HR and succession policies.

The key responsibilities of the HR and Remuneration Committee include preliminary consideration, review and making recommendations to the Federal Grid’s Board of Director on the following matters:

• Annual evaluation of the Board performance and that of its committees and individual directors
• Approving an organisational structure of the Company’s Executive Office and candidates for senior executive positions
• Approving terms and conditions of agreements concluded with the Chairman and members of the Management Board, determining their remuneration and compensation
• Appointing a Corporate Secretary of Federal Grid, determining his/her additional remuneration, preliminary evaluation of his/her performance for the year
• Reviewing the Company’s remuneration policies for the Board of Directors and executive bodies, including the approval of KPI target values

The Committee’s activities are governed by the Regulations on HR and Remuneration Committee of the Board of Directors of Federal Grid Company, a revised version of which was approved by the Board of Directors on 30 September 2015 (Minutes No. 285 dated 02 October 2015).

Activities in 2015

The Committee held 4 meeting (3 in absentia and 1 in person), and considered, among others, the following matters:

• Review of the organisational structure of the Federal Grid’s Executive Office and recommendations to the Board of Directors with respect to its approval (Minutes No. 22 dated 21 September 2015)
• Review of KPIs for senior management progress reports for 2Q and 3Q 2015 and recommendations to the Board of Directors with respect to the approval thereof (Minutes No. 23 dated 16 November 2015 and No. 24 dated 30 November 2015 )
• Recommendations to the Board of Directors with respect to the approval of the Methodology for Calculation and Evaluation of Key Performance Indicators for Federal Grid’s Senior Management (Minutes No. 24 dated 30 November 2015)
• Recommendations to the Board of Directors with respect to the inclusion of target values for OPEX Reduction Indicator into the list of key performance indicators for the Company’s management that must be considered when making compensation decisions and personnel decisions, as well as of aligning the remuneration payable to the Company’s management to the achievement of ‘OPEX Reduction’ Indicator targets (Minutes No. 25 dated 18 December 2015)

Strategy Committee Report

Role and Responsibilities

The role of the Strategy Committee is to assist the Board of Directors in improving the Company’s performance efficiency in the long term.

The Strategy Committee is responsible for preliminary consideration, review and making recommendations to the Federal Grid’s Board of Director on the following matters:

Activities in 2015

The Committee held 8 meetings (5 in person and 3 in absentia) and considered, among others, the following matters:

• Review of the Business Plan Progress Report for 1H 2015 and recommendations to the Board of Directors with respect to its approval (Minutes No. 22 dated 24 September 2015)
• Approval of adjustments to the Federal Grid’s Long- Term Development Programme for 2015–2019 and Prospects through 2030, and of a revised version of the above Programme (Minutes от 06.11.205 No. 24)
• Review of the Regulations on Quality Control System and recommendations to the Board of Directors with respect to its approval (Minutes No. 26 dated 13 November 2015)
• Review of the Federal Grid’s Business Plan for 2017–2020 and recommendations to the Board of Directors with respect to the approval thereof (Minutes No. 25dated 09 November 2015 and No. 27 dated 26 November 2015)
• Review of the Procedures for improving the investment and operating efficiency and reducing costs (Minutes No. 25 dated 09 November 2015 and No. 27 dated 26 November 2015)
• Review of the Report on the results of comparative analysis of key performance indicators of the UNEG management organisation with such of major foreign electric grid companies and recommendations to the Board of Directors with respect to the approval thereof (Minutes No. 27 dated 26 November 2015)
• Recommendations to the Board of Directors with respect to amending the Federal Grid’s Business Planning Standards (Minutes No. 29 dated 18 December 2015)

Investment Committee Report

Roles and Responsibilities

The role of the Investment Committee is to assist the Board of Directors in improving and developing the Company’s investment policy.

The key responsibilities of the Investment Committee include preliminary consideration, review and making recommendations to the Federal Grid’s Board of Director on the following matters:

• Approving the Federal Grid’s investment programme, including its adjustments, and reviewing its progress reports
• Reviewing internal documents related to investing activities, including standards for technological and price audit of investment projects
• Reviewing progress of certain investment projects of the Company
• Approving the Federal Grid’s innovative development programme, including R&D programme, and reviewing progress reports on its implementation
• Determining the Company’s procurement policy
• Reviewing schemes and development programmes of the UES of Russia
• Considering issues related to the technological connection to electric grids

The Committee’s activities are governed by the Regulations on Investment Committee of the Board of Directors of Federal Grid Company, a revised version of which was approved by the Board of Directors on 20 August 2015 (Minutes No. 280 dated 24 August 2015).

* On 12 January 2014, the Board of Directors decided to terminate the Investment Committee member Viktor Lebedev and to reduce the number of Committee members to 16 persons (Minutes No. 240 dated 15 January 2014). In January 2015, Leonid Mazo resigned, and the Committee membership reduced to 15 persons.

Remuneration of the Board of Directors and its Committees

The Federal Grid Directors’ remuneration system has been designed to ensure the Company’s effective governance, meet its long-term interests, attract and retain highly competent professionals.

Directors’ remuneration and compensation principles and arrangements are set by the Regulations on Remuneration and Compensation Payable to Members of the Board of Directors of Federal Grid Company, as approved by the Annual General Meeting of Shareholders on 26 June 2015 (Minutes No. 16 dated 30 June 2015).

In accordance with the above Regulations, remuneration is paid to Board members out of the Company’s net profit based on their performance for the corporate year and subject to the relevant resolution of the General Meeting of Shareholders.

The amount of remuneration to each Board member depends on the following factors:

• His/her involvement in the activities of the Board including the number of Board meetings he/she attended
• Total number of Board meeting held during the corporate year
• The Company’s revenue for the fiscal year, which determines the basic part of remuneration

Remuneration for the Chairman of the Board of Directors is increased by 30%. Increase is also set for members of the Board for their work in committees: the Chairman of the Committee receives a 20% bonus, and a Committee member receives 10%.

The total remuneration for each Board member, given all premiums, cannot exceed RUB900 thousand.

The Regulations provide for compensation of actual expenses of Board members, including travel expenses incurred in travelling to the place of the Board or Committee meeting and back, accommodation costs and expense not related to the meeting attendance but related to the Company’s activities.

Remuneration paid in 2015

The remuneration to the Board members for 2014 was paid in accordance with the Regulations on Remuneration Payable to Members of the Board of Directors approved by the resolution of the Annual General Meeting on 29 June 2012 (Minutes No, 16 dated 30 June 2015).

When calculating the remuneration, the same factors and increases were considered that are provided by the effective Regulations. No compensation of expenses was provided.

The 2016 General Meeting of Shareholders on 29 June 2016 will resolve on remuneration to the members of the Board of Directors for 2015

During the reporting year, the Company did not provide any loans (credits) to the Board members.

Board Committees

In the reporting year, the Board of Directors approved (Minutes No. 280 dated 24 August 2015) the Regulations on Remuneration and Compensation Payable to Members of Committees of the Board of Directors of Federal Grid Company that cover matters of paying remuneration to members of the Board committees who are not members of the Board of Directors or persons with whom the Company has concluded an employment agreement, as well as persons with respect to whom there are no legislative restrictions for or prohibition on receiving any payments from commercial organisations.

On a quarterly basis, the above committee members shall be paid remuneration for each meeting attended. The amount of remuneration is equal to three minimum monthly wage rates for a first category worker set by the sectoral tariff agreement of the FR electric energy complex at the date of the meeting. Remuneration to the Committee Chairman is increased by 50%. The total amount of remuneration

The total amount of remuneration paid to members of the Board committees in 2015 was RUB 997.1 thousand.