X5 Group

Corporate
Governance

Corporate
governance
report

Governance structure

The Company has a two-tier board structure, comprising a Management Board and a Supervisory Board.

The Management Board and the Supervisory Board are independent of one another and accountable to the General Meeting of Shareholders. The overview below shows the governance structure of X5.

General Meeting of Shareholders

Supervisory Board

Audit and Risk Committee

Nomination and Remuneration Committee

Sustainable Development and Innovation Committee

Management Board

Audit and Risk Committee

Nomination and Remuneration Committee

Sustainable Development and Innovation Committee

Executive Board

Pyaterochka
Perekrestok
Karusel
Chizhik
Digital
businesses

Management Board

The Management Board has ultimate responsibility for the overall management of the Company and oversees all corporate governance activities. It is accountable for the Company’s pursuit and achievement of corporate goals and objectives, its strategies and policies. The Management Board is responsible for complying with all relevant laws and regulations, for managing the risks associated with the Company’s activities and for financing and external communication.

In managing X5’s general affairs and its day-to-day operations, the Management Board is supported by the Executive Board, which was established to provide for a leadership team at the level of the Company’s operating subsidiaries in Russia in order to best support X5’s strategy and businesses at the local operating level.

The current members of the statutory Management Board and the Executive Board (the broader management team that handles day-to-day strategic, operational and financial issues), including their biographies, are presented on pages 48-50 and 161.

In 2021, the Management Board conducted a self-assessment by means of a questionnaire. Items that were assessed and discussed included the composition of the Management Board, its role versus that of the Supervisory Board and Executive Board, its tasks and duties as well as remuneration. The results of the evaluation will be taken into account in 2022.

Composition and reappointment schedule
of the Management Board

Name

Igor Shekhterman

Frank Lhoëst

Quinten Peer

Year
of birth

1970

1962

1974

Year of first
appointment

2015

2007

2019

End of
current term
of appointment

2023

Supervisory Board

The Supervisory Board is responsible for supervising and advising the Management Board and overseeing the general course of affairs, strategy and operational performance of X5 and its businesses. It ensures that external experience and knowledge are embedded in the Company’s operations. In performing its duties, the Supervisory Board takes into account the relevant interests of the Company and all its stakeholders, and, to that end, considers all appropriate interests associated with the Company and its affiliated businesses, including corporate responsibility issues that are relevant to the Company. Major business decisions require the approval of the Supervisory Board. The Supervisory Board is responsible for monitoring and assessing its own performance.

The Supervisory Board determines the number of its members. X5’s Supervisory Board currently consists of four members, with a majority of three independent members. The current members, including their biographies, are presented on page 159.

The Supervisory Board has prepared a profile of its size and composition, taking account of the nature of the Company’s business and its activities and the desired expertise and background of the members of the Supervisory Board. The Supervisory Board evaluates its profile and composition annually. The results of the evaluation in 2021, along with the Board’s profile and skill matrix, will be taken into account in future Board nominations. For further details, please refer to the Supervisory Board Report on pages 161-166.

Starting in 2020, the Supervisory Board resolved to reduce the term of (re-)appointment for Supervisory Board members to a maximum of three years, to promote agility and diversity and to create more flexibility in view of rapidly changing skill requirements at the Supervisory Board level. The total term of office may not exceed 12 years. The Supervisory Board has prepared a retirement and reappointment schedule to, as far as possible, prevent simultaneous reappoint-ments. The Supervisory Board’s profile and rotation plan can be viewed on the Company’s website.

Composition and reappointment schedule
of the Supervisory Board

Name

Peter Demchenkov (Chairman)

Nadia Shouraboura¹

Marat Atnashev

Alexander Tynkovan²

Karl-Heinz Holland³

Stephan DuCharme³

Mikhail Fridman^{3, 4}

Richard Brasher^{2, 3}

Geoff King³

Michael Kuchment³

Year
of birth

1973

1970

1977

1967

1964

1961

1965

1973

Year of first
appointment

2015

2018

2020

2021

2018

2015

2006

2021

2015

Year of possible
reappointment

2023

2022

2023

2024

—

1 The terms of Nadia Shouraboura will expire in 2022.

2 Richard Brasher and Alexander Tynkovan were appointed on 12 May 2021.

3 Karl-Heinz Holland stepped down as of 12 May 2021. Stephan DuCharme and Mikhail Fridman stepped down as of 1 March 2022. Richard Brasher stepped down as of 4 March 2022. Geoff King stepped down as of 11 March 2022. Michael Kuchment stepped down as of 25 March 2022.

4 In accordance with the Supervisory Board’s Rules of Procedure, a Supervisory Board member who directly or indirectly holds at least 10% of the shares in the issued share capital of the Company may hold office for more than 12 years and is eligible for reappointment after that term (see «Compliance with the Dutch Corporate Governance Code» in this report).

Committees of the Supervisory Board

The Supervisory Board currently has three standing committees: the Audit and Risk Committee, the Nomination and Remuneration Committee and the Sustainable Development and Innovation Committee. The members of each committee are appointed by the Supervisory Board and from among its members. Each committee has a charter describing its role and responsibilities and the manner in which it discharges its duties and reports to the full Supervisory Board.

These charters are included in the Rules of Procedure of the Supervisory Board, which can be viewed on X5’s website. In September 2021, the Innovation and Technology Committee was renamed the Sustainable Development and Innovation Committee to strengthen the focus of the Supervisory Board on ESG matters.

Composition of the Supervisory Board Committees

Name

Audit and Risk Committee

Nomination and
Remuneration Committee

Sustainable Development and Innovation Committee

Peter Demchenkov

Member

Chairman

Nadia Shouraboura

Chair

Marat Atnashev

Member

Alexander Tynkovan

Member

The Audit and Risk Committee assists the Supervisory Board in overseeing the integrity of X5’s financial statements, system of internal business controls and risk management, financing and finance-related strategies, taxation, the Company’s compliance with legal and regulatory requirements, as well as the qualifications, performance and independence of the external auditor and the performance of the internal audit function. Furthermore, the Audit and Risk Committee advises the Supervisory Board on handling and deciding on reported (potential) conflicts of interest and/or related party transactions involving members of the Supervisory Board and members of the Management Board.

The Nomination and Remuneration Committee recommends the remuneration policy for the Management Board to be adopted by the General Meeting of Shareholders, prepares proposals for the Supervisory Board for remuneration of the individual members of the Management Board in line with the remuneration policy and advises the Management Board on the level and structure of compensation for other senior personnel. The Nomination and Remuneration Committee also advises in respect of the selection and appointment of members of the Supervisory Board, the Management Board and the Executive Board.

The Sustainable Development and Innovation Committee assists the Supervisory Board in its responsibility to advise on the Company’s long-term vision on sustainability, strategy and target setting, monitor the Company’s performance on sustainability targets and oversee X5’s e-commerce activities and initiatives in the area of technical and commercial innovation.

Diversity

The Supervisory Board operates a Leadership Diversity Policy that aims for a diverse composition of both the Management Board and the Supervisory Board in particular areas of relevance for X5. This includes diversity of experience, nationality and background. Appointments to the Management Board and Supervisory Board are evaluated against the relevant profile; the existing balance of skills, knowledge and experience on the respective board; and the need for the relevant board to be prepared for disruption and change. Management Board and Supervisory Board members are prompted to be mindful of diversity, inclusiveness and meritocracy considerations when examining and proposing nominations to the Management Board and Supervisory Board. In the selection and appointment of new Management Board or Supervisory Board members, the Supervisory Board will consider a diverse range of candidates. This will also include diversity of gender and age so that, when the final appointment is made, the Supervisory Board can be confident that the most effective candidate has been selected.

Each year, the Supervisory Board conducts an evaluation of its functioning and the functioning of the Management Board. In this context, the Supervisory Board gives careful consideration to the diversity of its own composition, as well as that of the Management Board, so as to be effective in performing its role. The results of the 2021 evaluation of the Supervisory Board and the Management Board are described in the Supervisory Board Report on page 163.

While the Management and Supervisory Boards are currently not balanced with regard to gender, X5 recognises the benefits of gender diversity and of the importance that is attached to achieving this. We feel that gender is only one part of diversity, and future members of the Management Board and Supervisory Board will continue to be selected on the basis of specific experience, background, skills, knowledge and insights. X5 recognises the importance of diversity, including gender, at all levels of the Group and has a very strong track record of developing a critical executive layer of female business leaders. Across all of the Group’s operations, specific diversity targets are taken into account in recruitment, talent development, appointments, retention of employees, mentoring and coaching programmes, succession planning, training and development.

Appointment, suspension and dismissal

The General Meeting of Shareholders appoints the members of the Management Board and Supervisory Board based on binding nominations made by the Supervisory Board. The recommended candidate is appointed by the General Meeting of Shareholders unless the nomination is deprived of its binding character by a qualified majority vote of at least two-thirds of the votes cast, representing more than one-half of the issued share capital of the Company.

Members of the Supervisory Board may in principle serve for a maximum term of four years from the date of their appointment or a shorter period if determined upon their appointment by the General Meeting of Shareholders or as per the Supervisory Board’s rotation schedule. A Supervisory Board member can be reappointed after their first term of four years for one additional term of four years, followed by two additional terms of two years. Starting in 2020, the Supervisory Board resolved to reduce the term of (re-)appointment for Supervisory Board members to a maximum of three years, to promote agility and diversity and to create more flexibility in view of rapidly changing skill requirements at the Supervisory Board level.

A Supervisory Board member may not serve more than 12 years. A Supervisory Board member who directly or indirectly holds at least 10% of the shares in the issued share capital of the Company may hold office for more than 12 years and is eligible for reappointment after that term (see «Compliance with the Dutch Corporate Governance Code» in this report).

Members of the Management Board are elected for a period of four years or a shorter period if determined upon their nomination for appointment by the General Meeting of Shareholders. Neither the Articles of Association nor the Code limits the total term of office for Management Board members.

Each member of the Supervisory Board and Management Board may, at any time, be dismissed or suspended by the General Meeting of Shareholders. A member of the Management Board may, at any time, be suspended by the Supervisory Board. Such suspension may be discontinued by the General Meeting of Shareholders at any time.

Remuneration

In line with the current remuneration policy, as adopted by the 2021 Annual General Meeting of Shareholders, the remuneration of the individual members of the Management Board will be decided by the Supervisory Board upon the recommendation of its Nomination and Remuneration Committee.

The remuneration policy for the members of the Supervisory Board was adopted by the 2020 Annual General Meeting of Shareholders. The remuneration policies can be found on the Company’s website.

Reporting on conflicts of interest

A member of the Management Board or Supervisory Board is required to immediately report and provide all relevant information to the Chairman of the Supervisory Board (and to the other members of the Management Board if it concerns a member of that board) on any conflict of interest, or potential conflict of interest, that they may have with the Company and that may be of material significance to them or the Company.

If a member of the Supervisory Board or a member of the Management Board has a conflict of interest with the Company, that member may not participate in the discussions or decision-making process on subjects or transactions relating to the conflict of interest. A decision taken by X5 to enter into a transaction involving a conflict of interest with a member of the Management Board or a member of the Supervisory Board that is of material significance to them or the Company requires the approval of the Supervisory Board. The Audit and Risk Committee advises the Supervisory Board on handling and deciding on (potential) conflicts of interest and prepares resolutions of the Supervisory Board in relation thereto.

In 2021, the Supervisory Board approved a new conflict of interest protocol to identify and handle conflicts of interest involving Supervisory Board members, in addition to the existing conflict of interest provisions in the Board’s Rules of Procedure. The reason for the new protocol is the increased risk of conflicts of interest involving Supervisory Board members, as the scope of activities of the Group is becoming broader while it increasingly operates as an omnichannel retailer.

Shareholders and their rights

General Meeting of Shareholders

X5 Retail Group N.V. is required to hold a General Meeting of Shareholders within six months after the end of the financial year in order to, among other things, adopt the financial statements, decide on any proposal concerning profit allocation and discharge the members of the Management Board and Supervisory Board from their responsibility for the performance of their respective duties for the previous financial year.

Extraordinary meetings are held as often as the Management Board or the Supervisory Board deems necessary. In addition, shareholders and holders of global depositary receipts (GDRs) jointly representing 10% of the outstanding share capital may ask the Management Board and the Supervisory Board to hold a General Meeting of Shareholders, stating their proposed agenda in detail when doing so.

The powers of the General Meeting of Shareholders are specified in the Articles of Association. Apart from the decisions taken at the Annual General Meeting of Shareholders, the main powers of the General Meeting of Shareholders are to appoint (subject to the Supervisory Board’s right to make binding nominations), suspend and dismiss members of the Management Board and Supervisory Board; to appoint the external auditor; to adopt amendments to the Articles of Association; to issue shares and grant subscriptions for shares; to authorise the Management Board or the Supervisory Board to issue shares and grant subscriptions for shares; to authorise the Management Board or the Supervisory Board to restrict or exclude pre-emptive rights of shareholders upon the issuance of shares; to authorise the Management Board to repurchase outstanding shares in the Company; to adopt the remuneration policy of the Management Board; to determine the remuneration of members of the Supervisory Board; and to merge, demerge or dissolve the Company.

The notice for a General Meeting of Shareholders needs to be published no later than 42 days prior to the day of the meeting. The mandatory record date, establishing which shareholders are entitled to attend and vote at the General Meeting of Shareholders, is set at least 28 days prior to the date of the meeting.

Shareholders and/or holders of GDRs are entitled to propose items for the agenda of the annual General Meeting of Shareholders provided that they hold at least 3% of the issued share capital. Proposals for agenda items for the annual General Meeting of Shareholders must be submitted at least 60 days prior to the date of the meeting.

All shareholders and other persons who, pursuant to Dutch law or the Articles of Association, are entitled to attend and/or vote at a General Meeting of Shareholders are entitled to address the General Meeting of Shareholders. X5 uses the Bank of New York Mellon, the depositary for X5’s GDR facility (the Depositary), to enable GDR holders to exercise their voting rights represented by the shares underlying the GDRs. As described in the «Terms and Conditions of the Global Depositary Receipts», holders of GDRs may instruct the Depositary with regard to the exercise of the voting rights connected to the shares underlying their GDRs. Alternatively, upon request of the holders of such depositary receipts, the Depositary will grant a proxy to such holders who wish to vote in person at a General Meeting of Shareholders. Persons who hold a written proxy may represent shareholders at a General Meeting of Shareholders. The written proxy must be duly executed and legalised in accordance with the applicable laws and may be submitted electronically.

Voting rights

Each share confers the right to cast one vote at the General Meeting of Shareholders. There are no restrictions, either under Dutch law or in the Articles of Association, on the right of non-residents of the Netherlands or foreign owners to hold shares or to vote, other than those also imposed on residents of the Netherlands. Resolutions of the General Meeting of Shareholders are passed by a simple majority of the votes cast in a meeting where more than 25% of the issued share capital is present or represented. If 25% or less of the issued share capital is present or represented, a second meeting should be convened no later than four weeks following the first meeting. At the second meeting, no quorum requirement will apply. However, the General Meeting of Shareholders can only resolve on (i) a merger or demerger, (ii) the authorisation to limit or exclude pre-emptive rights and (iii) cancellation of shares with a majority of at least two-thirds of the votes cast if less than 50% of the issued capital is represented in that meeting.

Dividend rights

Any distribution of profits to shareholders will be made after the adoption by the General Meeting of Shareholders of the annual accounts of the Company from which it appears that such distribution is permitted. The Company may only declare profit distributions insofar as its net assets exceed the sum of its issued share capital plus any legal reserves required to be maintained pursuant to Dutch law. A loss may only be applied against such reserves to the extent permitted by Dutch law. On a proposal of the Supervisory Board, the General Meeting of Shareholders will determine which part of the profits will be added to the reserves and the allocation of the remaining profits.

On a proposal of the Supervisory Board, the General Meeting of Shareholders may resolve to pay an interim dividend insofar as X5’s net assets exceed the sum of its issued share capital and the reserves that are required to be maintained pursuant to Dutch law, as evidenced by an interim financial statement prepared and signed by all the members of the Management Board. In addition, on a proposal of the Supervisory Board, the General Meeting of Shareholders may resolve to make distributions to the shareholders out of any reserves that need not be maintained pursuant to Dutch law.

The Company’s dividend policy was approved in 2017 and amended in 2020. The Company intends to pay a full-year dividend per share that will remain stable or grow over time in absolute Russian rouble—denominated terms. The dividend payout will be based on operating cash flow and a target consolidated net debt adjusted EBITDA ratio of below 2.0x as of the end of the year for which the dividend is proposed, taking into account considerations including but not limited to the Company’s growth profile, capital requirements and return on capital. Starting in 2020, X5 is committed to semi-annual dividend payments. The interim dividend will be announced following the release of the third-quarter results.

Detailed information on the dividend policy and dividend history is available on the Company’s website.

Substantial shareholdings

According to the Disclosure Guidance and Transparency Rules, any person or legal entity who, directly or indirectly, acquires or disposes of an interest in X5’s capital and/or voting rights must immediately give written notice to the Company and the Financial Conduct Authority (FCA) if the acquisition or disposal causes the percentage of outstanding capital interest and/or voting rights held by that person or legal entity to reach, exceed or fall below any of the following thresholds: 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75%.

The following table lists the shareholders on record on 19 May 2022 in the FCA’s public register that hold an interest of 5% or more in the share capital of the Company:

Shareholder

CTF Holdings S.A.

The Axon Trust

Date of
disclosure

01.01.2021

Capital
interest

47.86%

11.43%

Voting
rights

47.86%

11.43%

Securities owned by Board members

The members of the Management Board and Supervisory Board and X5’s other senior management are subject to the Company’s Inside Information and Dealing Code. This Code contains rules of conduct to prevent trading in X5’s GDRs of shares or other financial instruments when holding inside information or during blackout periods when trading is not permitted (for instance, prior to the publication of quarterly financial results). The Inside Information and Dealing Code can be viewed on the Company’s website.

Under the Inside Information and Dealing Code, members of the Management Board and Supervisory Board must notify the FCA of X5 securities and voting rights at their disposal. These positions can be viewed in the FCA’s public register.

Repurchase by the Company of its own shares

The Company may acquire fully paid shares, or GDRs thereof, in its capital for a consideration only following authorisation by the General Meeting of Shareholders and subject to certain provisions of Dutch law and the Company’s Articles of Association if:

Shareholders’ equity minus the purchase price is not less than the sum of X5’s issued and fully paid-in capital plus any reserves required to be maintained by Dutch law
X5 and its subsidiaries would not, as a result, hold shares or GDRs thereof with an aggregate nominal value exceeding half of the issued share capital

In 2021, the Management Board was authorised to acquire up to 10% of the Company’s shares or GDRs thereof. This authorisation is valid through 12 November 2022. In addition, the Supervisory Board resolved that, in case a purchase of shares or depositary receipts thereof by X5 would lead to X5 holding more than 5% of the shares or GDRs thereof, the Management Board would require the Supervisory Board’s prior approval for such purchase.

Shares or GDRs thereof held by X5 or a subsidiary may not be voted on and are not taken into account for determining whether quorum requirements, if any, are satisfied.

In order to fulfil the Company’s obligations under the Restricted Stock Unit Plan, the Company from time to time acquires GDRs under a restricted buyback programme pursuant to an authorisation of the General Meeting of Shareholders in accordance with Article 9 of the Company’s Articles of Association. The Company did not repurchase any GDRs in 2021.

Issue of new shares and pre-emptive rights

Shares in X5 may be issued, and rights to subscribe for shares may be granted, pursuant to a resolution of the General Meeting of Shareholders or another X5 corporate body to which the General Meeting of Shareholders has delegated such authority for a time not exceeding five years. In 2021, the General Meeting of Shareholders approved a delegation of this authority to the Supervisory Board relating to the issuance and/or granting of rights to acquire up to 6,789,322 shares (10% of the issued share capital) through 12 November 2022.

Upon the issue of new shares, holders of X5’s shares have a pre-emptive right to subscribe for shares in proportion to the aggregate amount of their existing holdings of X5’s shares. According to the Company’s Articles of Association, this pre-emptive right does not apply to any issue of shares to employees of X5 or a Group company. Pre-emptive rights may be restricted or excluded pursuant to a resolution of the General Meeting of Shareholders or another X5 corporate body to which the General Meeting of Shareholders has delegated such authority for a time not exceeding five years. The General Meeting of Shareholders has delegated the authority to restrict or exclude the pre-emptive rights of shareholders upon the issue of shares and/or the granting of rights to subscribe for shares to the Supervisory Board through 12 November 2022.

Articles of Association

X5’s Articles of Association contain rules on the Company’s organisation and corporate governance.

Amending the Company’s Articles of Association requires a resolution of the General Meeting of Shareholders. A proposal to amend the Articles of Association, including the text of the proposed amendment, must be made available to the holders of shares and GDRs for inspection at the offices of X5 as of the date of the notice convening the meeting of the General Meeting of Shareholders until the end of the meeting of the General Meeting of Shareholders at which the proposed amendment is voted on.

The current text of the Articles of Association is available on the Company’s website.

Anti-takeover measures and change-of-control provisions

According to provision 4.2.6 of the Code, the Company is required to provide a survey of its actual or potential anti-takeover measures and to indicate in what circumstances it is expected that they may be issued.

There are no agreements to which the Company is a party and that will automatically come into force or be amended or terminated under the condition of a change of control over the Company as a result of a public offer. However, the contractual conditions of most of X5’s important financing agreements and notes issued (potentially) entitle the banks and noteholders, respectively, to claim early repayment of the amounts borrowed by the Company in the situation of a change of control over the Company (as specified in the respective agreement).

Auditor

The General Meeting of Shareholders appoints the Company’s external auditor. The Audit and Risk Committee makes a recommendation to the Supervisory Board with respect to the external auditor to be proposed for appointment or reappointment by the General Meeting of Shareholders. In addition, the Audit and Risk Committee evaluates and, where appropriate, recommends the replacement of the external auditor. The Audit and Risk Committee also pre-approves the fees for audit and permitted non-audit services to be performed by the external auditor. The Audit and Risk Committee will not approve the engagement of an external auditor to render non-audit services prohibited by applicable laws and regulations or that would compromise the independence of the auditor. Specific rules relating to non-audit work performed by the external auditor are included in X5’s «Rules on External Auditor Independence and Selection». This document is available on the Company’s website.

On 12 May 2021, the General Meeting of Shareholders reappointed Ernst & Young Accountants LLP as external auditor for the 2021 financial year.

Compliance with the Dutch Corporate Governance Code

Independence of the Supervisory Board and Its Members

2.1.7–2.1.8

In accordance with best practice provisions 2.1.7 and 2.1.8, at most one Supervisory Board member may represent, or be affiliated with, a shareholder who directly or indirectly holds more than 10% of the shares in the Company.

Supervisory Board members Mikhail Fridman and Marat Atnashev are both affiliated with CTF Holdings S.A., which has a capital interest of 47.86% in X5. Stephan DuCharme serves as Managing Partner of L1 Retail, part of the LetterOne investment group, which is partially controlled by the ultimate shareholders of CTF Holdings S.A. Therefore, Mikhail Fridman, Marat Atnashev and Stephan DuCharme are not independent in the sense of the Dutch Corporate Governance Code.

X5 believes that the non-independent members of the Supervisory Board have in-depth knowledge of the geographic market, of business in general and of retail specifically, as well as a relevant track record in the markets in which X5 operates. This is of particular benefit to X5 and its shareholders.

It is Company policy that a majority of the members of the Supervisory Board must be independent at all times. A majority of the Supervisory Board, which currently consists of four members, qualifies as independent within the meaning of the Dutch Corporate Governance Code.

Appointment and Reappointment Periods of Supervisory Board Members

2.2.2

Mikhail Fridman is the founder and chairman of the Alfa Group Consortium; he was appointed as a member of the Supervisory Board in 2006. In 2021, he was reappointed for a fifth term, thus exceeding the maximum of 12 years prescribed by the Code.

X5 believes that long-term value creation stands to benefit from committed shareholders, and that the interests of Supervisory Board members largely coincide with those of the Company. Supervisory Board members generally perform their duties for a prolonged period of time, which fits in well with long-term value creation for the Company.

Supervisory Board Committees

2.3.2

The Code states: «If the Supervisory Board consists of more than four members, it should designate [...] a Remuneration Committee and a Selection and Appointment Committee.» As it is felt that issues related to selection, appointment and remuneration are interlinked, the Supervisory Board decided that all these activities should be dealt with by one committee: the Nomination and Remuneration Committee.

Composition of the Committees

2.3.4

The Code prescribes that the remuneration committee should not be chaired by the chairman of the supervisory board. Currently the chairman of the Supervisory Board is also the chairman of the combined Nomination and Remuneration Committee, which constitutes a deviation from the Code. However, it is not uncommon for a Board chair to also chair the selection and appointment or nomination committee. In view hereof and the fact that the Board safeguards its statutory responsibilities in remuneration matters, as reflected in the Supervisory Board Rules of Procedure, X5 believes that the Chairman, being an independent Supervisory Board member, is the right person to chair the Nomination and Remuneration Committee.

Award of Shares and/or Rights to Shares to Members of the Supervisory Board

3.3.2

The Code prescribes that Supervisory Board members may not be awarded remuneration in the form of shares and/or rights to shares. Members of the Supervisory Board of the Company are entitled to restricted stock units (RSUs). The number of annual RSU awards equals 100% of a Supervisory Board member’s fixed base fee in the year of the award, divided by the average market value of an X5 GDR on the relevant award date. RSU awards to members of the Supervisory Board are not subject to performance criteria.

X5 acknowledges that the award of shares to members of the Supervisory Board constitutes a deviation from the Code. However, in order to attract and reward experienced individuals with a track record that is of specific relevance to the Company, X5 believes it is necessary to allow members of the Supervisory Board to participate in the Company’s equity-based remuneration plan. This structure aligns the interests of Supervisory Board members with those of shareholders and strengthens their commitment to and confidence in the future of the Company.

The equity-based awards to members of the Supervisory Board are computed with respect to the fixed board fee of each member and are therefore not performance-based. X5 believes that the level and structure of the remuneration of the Supervisory Board members safeguard their independence of judgement and thought, and adequately reflect the time spent and responsibilities of their role. All equity awards to Supervisory Board members are determined by the General Meeting of Shareholders.

Moreover, with a three-year vesting followed by a two-year lock-up, the equity award programme is in line with the spirit of the Dutch Corporate Governance Code, which states that shares held by Supervisory Board members should be long-term investments.

How we manage risk

The Management Board, supported by the Executive Board and the Risk Management team, is responsible for designing, implementing and operating an adequately functioning risk management system for the Company. The aim is to ensure that the extent to which the Company’s strategic and operational objectives are being achieved is understood, that the Company’s reporting is reliable and that the Company complies with relevant laws and regulations.

Risk management

X5’s risk management activities seek to identify and appropriately address any significant threat to the achievement of the Company’s strategy and business objectives, its reputation and the continuity of its operations. X5’s risk management system enables management to identify, assess, prioritise and manage risks on a continuous and systematic basis, and covers all businesses and corporate functions within X5 Group. Ongoing identification and assessment of risks, including new risks arising through an early-warning system of key risk indicators, are part of X5’s planning, performance and risk management cycles.

Management teams at all levels of the Group are responsible for identifying, managing and monitoring relevant risks. The Risk Management team facilitates a Company-wide view of risk-relevant issues, helps to develop risk management activities in both business and functional divisions and ensures that the Management Board is continuously and promptly informed of important risk management developments.

Throughout the year, the Risk Management team reviews X5’s risks and develops action plans to mitigate risks and allocate appropriate resources for risk mitigation. The results of the risk mitigation actions are monitored and reported to the Audit and Risk Committee on a quarterly basis. Attention is paid to strengthening the design and effectiveness of the risk management and internal control systems, ensuring that:

A comprehensive review of both internal and external risks is carried out at least annually
Set up and confirmations of risk appetite
Key risk indicators are reviewed
Risks for both our strategic and short-term objectives are assessed
Emerging risks are continuously monitored
Required risk responses and risk mitigating activities are put in place
Reporting is accurate and reliable
Full compliance with relevant laws and regulations

In addition, specifically in 2021, the Company was resilient in handling the risks associated with the COVID-19 pandemic and demonstrated the ability to quickly adapt to changes in the market and its business.

Risk appetite

X5’s risk appetite is defined by the Management Board and approved by the Supervisory Board, and is integrated into the businesses through our strategy, Group policies, procedures, controls and budgets. Our appetite for each risk is determined by considering key opportunities and potential threats to achieving our strategic objectives and can be categorised as reflected in the table below.

Risk Category

X5 applies a «three lines of defence» model to ensure the effectiveness and completeness of the Company’s risk management and internal control system:

first line

Business unit / risk owners

Manage risks on a daily basis and provide assurance regarding the effectiveness of controls

second line

Risk Management, Internal
Control and Compliance

Steer, monitor and support
line management in (1) managing risks and (2) developing and maintaining an adequate
framework for control and compliance

third line

Internal Audit

Conduct audits and test the
internal control and compliance framework for assurance of the effectiveness of control

Monitoring and assurance

A key element of our risk management framework is monitoring and assurance. We use a comprehensive business planning and performance review process to monitor the Company’s performance. This process covers the adoption of strategy, budgeting and the reporting of current and projected results. We assess business performance according to both financial and non-financial (including sustainability) targets.

X5’s internal control activities aim to provide reasonable assurance as to the accuracy of financial information, non-financial disclosures, the Company’s compliance with applicable laws and internal policies, and the effectiveness of internal processes. Internal controls have been defined at the level of operating entities and across all functions. Compliance with company policies is periodically assessed. The Company’s policies, procedures and controls are periodically updated to reflect both the Company’s key risks and the extent to which the Company is willing and able to mitigate them.

The Internal Audit Department (IAD) is mandated to perform reviews of key processes, projects and systems across the Group, based on X5’s strategic priorities and most significant risk areas. The IAD provides independent, objective assurance and value-adding advisory services that assist the Company in achieving business objectives and improving its operations. Based on a systemic assessment of the design and effectiveness of the Company’s risk management and internal control systems, the IAD reports its audit findings to the Management Board and the Audit and Risk Committee, and makes recommendations to improve the effectiveness of the risk management and internal control systems and their integration into the Company’s business processes.

Ethics and compliance

We recognise that ethics and integrity are key components in the fulfilment of X5’s sustainable health and long-term value creation.

Our Code of Business Conduct and Ethics reflects our values and principles, which, together with underlying policies and procedures, are promoted and implemented across the group through learning and training programmes.

Further information on these objectives can be found in the sections «Compliance and Business Ethics» on page 120 and «Risk Profile» below

Climate change

X5 Group acknowledges the urgency of acting on climate change, especially in light of COP26 and the latest IPCC report findings. Cognisant of the fact that the climate agenda will only become more important over time, X5 closely monitors changes in international and local climate regulation and stakeholder engagement. Likewise, it continues to monitor and manage climate-related risks, implementing multiple initiatives to achieve carbon neutrality by 2050.

X5 Group’s management and Management Board are responsible for effectively monitoring and managing risks and opportunities associated with climate change. Thus, in 2021 a climate risk and opportunity assessment was conducted following TCFD recommendations to test the Group’s resilience and business strategy regarding the consequences of climate change.

We recognise that, as the world shifts to a low-carbon economy, joining the SBTi and verifying our climate targets are steps we must take in order to decarbonise and improve X5’s global sustainability profile. In 2021, X5 developed a decarbonisation plan and road map for all stages of its value chain. We are already sourcing sustainable power for some of our distribution centres, and we are exploring the feasibility of using solar energy for our logistics operations. Among other sustainability goals, X5 aims to increase the share of renewable energy used in its operations to 30% by 2030.

The Company’s principal risks

X5’s principal risks — those that may impede the achievement of X5’s objectives on strategy, operations, compliance and reporting — are addressed below. It should be noted that there are additional risks which management considers immaterial or common to companies in the same industry. Risks and corresponding management actions following sanctions, imposed on Russia, and credit rating downgrades by foreign credit rating agencies are additionally covered in the section bellow since the negative consequences for the Russian economy, retail industry and X5 are significant.

Principal risks

Risk movement

Key controls and mitigating factors

Market and macroeconomics

Principal risks

Major changes in the economic environment may challenge the existing business strategy or have a material impact on financial performance.

Risk movement

Macroeconomic and regulatory factors became increasingly important for the food market in 2021, as food supplies, labour and other resources became more scarce and caused prices to rise. This was partly a result and compounded by the ongoing impact of the COVID-19 pandemic. Sanctions imposed on Russia will significantly worsen macroeconomic environment. Currently it is too early to anticipate all the details but in general unemployment and inflation will rise, GDP and personal income level will fall.

Key controls and mitigating factors

We constantly monitor and forecast the economic environment and make adjustments to our strategy as needed.
We are developing a hard discounter format (Chizhik) and taking other steps to address the pressure on personal income.

Competitive environment

Principal risks

Actions taken by competitors or new entrants to the market affect the Company’s competitive advantage and performance.

Risk movement

During 2021, the rapid growth of hard discounters and specialist chains caused additional competitive threats to our businesses.

The pandemic and continued digitalisation of the economy, with an increasing number of omnichannel participants in the retail landscape, are driving rapid growth of online services, especially in larger cities across Russia.

Sanctions, imposed on Russia, can probably change the competitive landscape in retail.

Key controls and mitigating factors

We constantly analyse customer behaviour and adjust our strategy accordingly.
We continue to roll out new concepts and CVPs in our proximity and supermarket formats.
We sustain our lead over traditional and new competitors by creating a digital infrastructure around the core business that covers all stages of the customer journey in food and complementary categories.
We are developing a new hard discounter format (Chizhik).

Business development investments

Principal risks

Insufficient return from investments in new business lines, and capital costs for the development of our retail formats.

Risk movement

—

Key controls and mitigating factors

We adhere to strong investment control procedures. All new business initiatives are subject to pilot validation.
For non-performing stores, we implement action plans to increase their efficiency and profitability.
We decreased our plans for capital expenditure in growth, development and certain digital products for 2022 following imposed sanction on Russia and downgrades of credit ratings

Retail and customer service

Principal risks

Non-effective and inconsistent operational management may affect X5’s ability to provide its customers with an attractive shopping experience.

Risk movement

—

Key controls and mitigating factors

We use commercial and research data to assess our performance in meeting customer priorities and expectations regarding prices, product range, availability and service.
Every year we assess and where required strengthen regional management teams to ensure our stores are well supported across all locations.

Supply chain

Principal risks

Insufficiencies in our retail operations infrastructure and inventory management may lead to an inability to maintain effective inventory management and ensure a reliable supply of goods for our customers while minimising shrinkage and excessive stock.

Risk movement

In 2021, many of our suppliers faced a shortage of vehicles for deliveries. X5’s active development of services for suppliers kept this risk at a medium level.

Sanctions imposed on Russia have material impact on cross border supply chains and import of goods, spare parts and etc.

Key controls and mitigating factors

We run comprehensive supply chain operations with a decentralised logistics function, which allows our retail formats to effectively manage inventory across the supply chain.
We strengthened our supply chain in order to fulfil the elevated demand for social goods in February 2022.
We continue to develop X5’s direct import business to diversify and reduce dependency on local distributors and move up the value chain to optimise the balance of demand and supply and shift focus from quality control to quality assurance.
We are also optimising operations across the supply chain and constantly reviewing ways to further leverage X5 Group’s purchasing power and the scale of its infrastructure.

Also see «Retail infrastructure» on pages 98-116.

Human resources

Principal risks

Failure to recruit, retain and develop people with the required skills and to instil a culture that reflects our values could impact business performance.

Failure to meet the necessary standards to protect the health and safety of personnel may impact operations and lead to adverse financial and reputational consequences. This risk became imminent as a result of the COVID-19 pandemic.

Risk movement

One of the key challenges we faced in 2021 was the increasing labour shortage because of the decrease in migration and the significant increase in demand for labour from the growing construction, retail and e-grocery segments.

New waves of the COVID-19 pandemic made it more important to ensure that the necessary quantities of vaccines were available.

Decrease of production, increase of unemployment should increase the supply and decrease demand for labour.

Key controls and mitigating factors

We monitor the labour market and regularly assess X5’s employer value proposition to ensure that we offer employee benefits in line with the market.
We have a system for employee onboarding, training and development in place, along with a talent pool.
We create a culture that enables us to recruit, retain and promote the best professionals in the industry, and to promote an environment that stimulates professional growth, collaboration and accountability together with safety and flexibility.
We have made vaccines widely available in all regions of the Russian Federation to protect the health of our personnel.
We have a health and safety policy in place to cover workplaces across various functional divisions. We are committed to promoting the highest health and safety standards by implementing advanced safety technologies and techniques and through ongoing risk monitoring, analysis and mitigation.

Business continuity performance

Principal risks

Interruptions in business processes due to crisis situations and emergencies.

Disruptions of business continuity due to emergencies may lead to a situation where core business operations and resources are unavailable.

Risk movement

In 2021, no new significant risk factors were identified.

Sanctions imposed on Russia and other consequences have material impact on our IT. A significant number of vendors, producers of equipment are freezing their operations or exiting the Russian market. This will bring additional challenges for stability of our IT infrastructure.

Key controls and mitigating factors

We constantly monitor and control business processes.
We implement business continuity plans for our key business processes and disaster recovery plans for our critical IT systems.

Also see «X5 Technologies» on pages 106-109.

IT

Principal risks

Inability to implement and develop
state-of-the-art IT solutions on a timely basis.

Lack of infrastructure capacity to maintain the required level of service.

Risk movement

In 2021, no new significant risk factors were identified.

Key controls and mitigating factors

We are developing existing controls to maintain the integrity and efficiency of our IT systems, including detailed recovery and contingency plans. This is our key priority.
We manage the capacity of our IT systems in order to ensure that our IT resources are able to meet current and future business requirements in a cost-effective manner.

Cybersecurity

Principal risks

External and internal threats to information security, including cyberattacks, viruses and other malicious actions to, for instance, infiltrate our IT systems or damage data.

Risk movement

—

Key controls and mitigating factors

We implement all necessary policies and procedures and use all necessary tools, hardware and software to ensure the confidentiality, integrity and availability of our information assets.
We strengthened our cyber security team to increase our protection in the current environment.

Also see «X5 Technologies» on pages 106-109.

Fraud and corruption

Principal risks

The inability to establish and promote a Company-wide culture of integrity and the failure to detect or prevent corruption and fraud can lead to a decline in economic value and significant reputation damage.

Risk movement

—

Key controls and mitigating factors

We uphold a zero-tolerance policy for non-compliance with the principles of business ethics, and continuously provide personnel with training on prevention of bribery and corruption.
We implement automated and manual controls in business processes, and segregate rights to access information systems (SoD).
We require that all employees complete a declaration on conflicts of interest to monitor potential conflicts.

Legislation and litigation

Principal risks

Inability to identify, quickly respond to and attempt to modify unfavourable proposed changes to applicable laws.

The conclusion of contracts that are unfavourable for the Company and the failure to comply with or monitor contract terms to protect the Company from financial losses.

Risk movement

Risks of state regulation of the retail market in the current macroeconomic and political environment remain significant but not critical.

Vaccination requirements in different regions put additional pressure on the Company but haven’t been critical for the Company.

Key controls and mitigating factors

Our legal team participates in every stage of important business negotiations and analyses business terms and conditions to minimise risk.
Contracts are largely standardised to ensure our rights are consistently and uniformly protected.
We are strongly committed to complying with all applicable laws and regulations.
We have made vaccines widely available in all regions of the Russian Federation to protect the health of our personnel and fulfil regulatory requirements. We haven’t experienced any material effect on the business.

Data privacy and security

Principal risks

Failure to identify and prevent non-compliance with privacy rules and regulations standards, resulting in improper disclosure of confidential customer information.

Risk movement

—

Key controls and mitigating factors

We regularly report on the progress of our security and privacy programmes to management and oversight committees.
Ongoing monitoring of our processes, which includes assessment and monitoring of risk, continues to drive compliance throughout our business.

Financial risks

Principal risks

X5 could be affected by
common financial risks:

Increases in interest rates and/or banking fees
Significant volatility of foreign exchange rates
Liquidity risk and credit risk

Risk movement

The increasing volatility of the rouble exchange rate and rising interest rates may adversely affect our financial performance.

Key controls and mitigating factors

We plan and monitor our budget and performance, and introduce changes where needed to achieve financial targets.
We monitor repayment schedules for long-term and short-term accounts receivable, and oversee the use of short-term lending via available credit lines to manage liquidity.
We manage the effective financing rate as well as undrawn credit limits in banks.

Risk of sanctions and credit rating downgrade

Principal risks

Imposition of new sanctions and downgrades in credit ratings
Credit rating downgrades from foreign credit rating agencies (S&p, Fitch, Moody’s)

Risk movement

Different countries impose sanctions on particular sectors of the Russian economy and companies.

Foreign credit rating agencies downgrade credit ratings

Key controls and mitigating factors

As part of our business continuity process, we develop plans in case of new sanctions and possible legal restrictions or requirements for the Russian retail market.

See section bellow with details of our key risks and corresponding management actions.

Climate change

Principal risks

All climate-related risks.

Risk movement

Climate change has become a widely acknowledged global emergency.

Key controls and mitigating factors

We closely monitor changes in international and local climate regulation and stakeholder engagement.
In 2021, we developed a decarbonisation plan and road map for all stages of our value chain. We are already sourcing sustainable power for some of our distribution centres, and we are exploring the feasibility of using solar energy for our logistics operations.

Risk of sanctions and credit rating downgrade and corresponding Management actions

01
On-shelf availability of goods
02
Continuity of payments and financing
03
Technological risks
04
Information security
05
Equipment supplies and other non-commercial procurement
06
Human resources
07
Audit
08
Securities trading

On-shelf availability of goods

Prevention of any disruptions to the supply chain or supplier relationships is our key priority. We’re working with our key suppliers to ensure the availability of social goods.

Supply chains, especially those for imported goods, are facing restrictions. In the short term, we are looking for alternative suppliers of domestic goods, and in the medium term for alternative supply routes through other countries (Turkey, Egypt, Azerbaijan, Armenia, etc.). Overall, this is a small fraction of X5’s sales (5.7%), and the assortment of our retail chains will be adjusted to the new situation.

Technological risks

Х5 depends to a certain extent on Western vendors and IT companies. Some of these vendors and IT companies are freezing their supplies to companies under sanctions and to Russian companies. Our IT teams have their action plans in place for the near term, so we do not expect any material impact on our availability to operate.

Payment continuity and financing

X5 is not subject to any sanctions. All correspondent banks carry out settlements for X5 in foreign currencies. In order to reduce forex risks, X5 is looking for options to avoid settlements in USD and EUR and make direct settlements in other currencies with major importers (Turkey, Egypt, China and etc.).

In any case, the share of imported goods in X5’s business is relatively limited, and the bulk of settlements are rouble-denominated.

In terms of our financing needs in roubles, all banks are paying in full and on time. X5’s operating cash flow is strong enough for us to service and repay our loans. In the near future, we expect support from the state authorities in terms of offering soft financing to the retail sector.

Information security

We are facing increased cyberattacks. Though X5 is not targeted, our infrastructure is suffering additional strain. Our Information Security Department knows our potential weaknesses and has reallocated resources to ensure sufficient security. As of now, we have not met with any failures or losses resulting from information security risks.

Equipment supplies and other non-commercial procurement

Our Company depends to a certain extent on supplies of imported components for our supply chain, IT and stores. X5 has built up a stock of spare parts and components to ensure business continuity. In the mid-term, we are looking for alternatives or substitutes among domestic and foreign suppliers.

Human resources

Our security service has deployed additional security measures in our stores where the highest threat level is expected.

To the extent our employees may be suffering from stress or fear, we strive to mitigate such risks and provide adequate support to our staff. The risk of staff shortages may increase in certain areas; however, this risk is assessed as not critical.

Audit

The Group may encounter limitations in its ability to engage audit and consultant firms in some jurisdictions due to local formal and informal restrictions for companies operating in a primarily Russian environment.

Securities trading

Trading in X5 securities has been limited in certain jurisdictions. For example, the London Stock Exchange imposed a suspension of trading in securities of a number of companies with operations in Russia, including X5, and this suspension currently remains in place. There is no assurance that this suspension will be lifted, and it is difficult to predict how long this suspension may last.

Statement of the Management Board

Internal audit reports on reviews performed throughout the year; observations and measures to address issues were discussed with management and the Audit and Risk Committee
A systematic review of scoping, control execution and control assessments in the context of the internal control strategy
Periodic risk reports provided by the management of corporate functions and the main business segments
Ongoing monitoring of key risk management initiatives aimed at mitigating risks and keeping risks at an acceptable level
The external auditor’s ongoing reflections on the control framework, and the management letter from the external auditor with observations and remarks regarding internal controls; this letter has been discussed with the Audit and Risk Committee and the Supervisory Board

For more information on X5’s risk management activities, internal control, risk management systems and key risks, see the section «How we manage risk» above. The purpose of X5’s risk management and internal control systems is to adequately and effectively manage the significant risks to which the Company is exposed. Such systems can never provide absolute assurance as to the realisation of operational and strategic business objectives, nor can they prevent all misstatements, inaccuracies, errors, fraud and non-compliance with legislation, rules and regulations. These systems do not provide certainty that the Company will achieve its objectives.

X5’s risk management and internal control systems provide reasonable assurance that the Company’s financial reporting does not contain any material inaccuracies
There have been no material failings in the effectiveness of X5’s risk management and internal control systems
There are no material risks or uncertainties that could reasonably be expected to have a material adverse effect on the continuity of X5’s operations in the coming 12 months
It is appropriate that the financial reporting is prepared on a going concern basis, based on our review of the strategic plan, the budget 2022 and our estimate of the economic outlook

In view of all of the above, the Management Board confirms that, to the best of its knowledge, the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and its consolidated subsidiaries, and the management report includes a fair review of the position on the balance sheet date and of the development and performance of the business during the financial year together with a description of the principal risks and uncertainties that the Company faces.

19 May 2022

Supervisory and Management Boards

Supervisory Board

Peter Demchenkov

Chairman of the Supervisory Board, Chairman of the Nomination
and Remuneration Committee

Peter Demchenkov, a Russian citizen (1973), from 2006 till October 2021 was CEO of ALIDI, a leading provider of distribution and logistics services in Russia. From 2004 to 2005, he was Development Director of KIT Finance (JSC), and from 1997 to 2004, Peter worked in Procter & Gamble’s Business Development Department in Eastern Europe. Peter graduated from the St. Petersburg Polytechnical University with a degree in Technical Cybernetics.

Nadia Shouraboura

Member of the Supervisory Board, Chair of the Sustainable Development
and Innovation Committee

Nadia Shouraboura, a US citizen (1970), joined X5 in 2018. She has extensive experience in development of innovative concepts for modern retail, as well as technology and data-driven solutions for consumers. From 2004 to 2012, Nadia served as Technology Vice President for Amazon’s global supply chain and fulfilment platforms and was a member of Amazon’s management board. Subsequently, she launched her own technology consultancy for the retail industry globally, aimed at combining the best of the online and offline worlds. Nadia is a senior advisor to New Mountain Capital and serves as an independent non-executive director at Ferguson plc, MTS Russia and Ocado Group. Nadia holds a degree in Mathematics and Computer Science from Moscow State University and a PhD in Mathematics from Princeton University.

Marat Atnashev

Member of the Supervisory Board

Marat Atnashev, a Russian citizen (1977), is the Director of Group Portfolio Management at CTF Consultancy Limited. He is a member of the Boards of Directors of Management Company Rosvodo-kanal, A1 Investment Holding S.A., ABH Holdings S.A., Alfa Bank (Russia) and AlfaStrakhovanie PLC. From 2016 to 2019, Mr Atnashev was Dean of the Skolkovo Moscow School of Management. Before that, he worked at EVRAZ plc as Vice President, Major Projects, Head of the Iron Ore Division; he held the position of Director of the Directorate of Major Projects at JSC Gazprom Neft and worked at TNK-BP in various positions in supply chain management, finance and major project management. Mr Atnashev graduated with honours from the Energy Department of the State University of Management, Moscow, in 1999; in 2003, he received a PhD (Candidate) in Economics. Furthermore, he also holds an MBA from INSEAD, France (2002). In 2008, he graduated from the BP Projects Academy, MIT (USA), and in 2016 he received an MPA from the Harvard Kennedy School (USA).

Alexander Tynkovan

Member of the Supervisory Board

Alexander Tynkovan, a Russian national (1967), is a returning member of the Supervisory Board of X5 Retail Group N.V., having previously served from 2008 to 2015. He is the founder of M.Video (currently M.Video-Eldorado Group), the leading consumer electronics and home appliance retailer in the Russian Federation. Alexander currently serves as the Chairman of M.Video’s Board, focused on digitalisation and increasing the company’s online presence. He is also a non-executive Deputy Chairman of the Board of Fix Price Group Ltd., a Russia-based retail chain of discount variety value stores. Alexander graduated summa cum laude from the Moscow Energy Institute, majoring in Aircraft Electric Equipment.

Management Board

Igor Shekhterman

X5 Chief Executive Officer, Chairman
and Member of the Management Board

Igor Shekhterman, a Russian national (1970), has served on X5’s Supervisory Board since 2013. He was previously the Managing Partner and CEO at RosExpert, which he co-founded in 1996 and subsequently successfully developed into the Russian partner of Korn Ferry International. Igor started his career as Finance Manager at the Russian branch of Beoluna, the Japanese jewellery producer. Igor holds a degree in Economics from the Kaliningrad Technical Institute (1992) and degrees in Business Administration from the Institut d’Administration des Entreprises (France, 1994) and the Danish Management School (1995).

Frank Lhoёst

Company Secretary, Member of the Management Board

Frank Lhoёst, a Dutch national (1962), joined X5 in 2007, having previously held several positions at Intertrust Group. Frank graduated from Leiden University in the Netherlands with a degree in Law.

Quinten Peer

Member of the Management Board

Quinten Peer, a Dutch national (1974), joined X5 in 2018. Previously, he worked for Gazprom in the Netherlands, where he managed Gazprom’s 50% interest in the Sakhalin-II project. He lived in Russia from 2012 to 2016, where he managed international business development and the expansion of a major capital project as COO for Sakhalin Energy. Quinten holds a degree in Law from the University of Groningen in the Netherlands.

Report of the Supervisory Board

Composition and profile of the Supervisory Board

X5’s Supervisory Board determines the number of its members. The Supervisory Board currently consists of four members, with a majority of three independent members. On an ongoing basis, the Supervisory Board reviews the profile of its size and composition, taking into account the evolving nature of X5’s business and activities and the desired expertise and background of the members of the Supervisory Board. The Supervisory Board profile is published on X5’s corporate website.

At the 2021 Annual General Meeting of Shareholders, Richard Brasher and Alexander Tynkovan were appointed as new members of the Supervisory Board. Richard Brasher was appointed in view of his proven track record and leadership experience in the food retail industry, and his strong operational background with functional experience in different roles, including store operations, supply chain, category management, buying and private label, coupled with the ability to think strategically and take a long-term view. Alexander Tynkovan strengthened the Supervisory Board in view of his proven track record and leadership experience in the Russian retail industry, his in-depth knowledge and experience in the fields of digitalisation and e-commerce, and his knowledge of X5, having previously served as a member of the Company’s Supervisory Board.

On 12 May 2021, Karl-Heinz Holland resigned as a member of the Supervisory Board in view of his new executive responsibilities outside the Group. The Supervisory Board expresses its sincere appreciation for the strong expertise and support Karl-Heinz provided to the Group.

Also at the 2021 Annual General Meeting of Shareholders, following their nomination in line with the Supervisory Board’s rotation schedule, Stephan DuCharme was reappointed for an additional two-year term, and Mikhail Fridman was reappointed for an additional three-year term. The Board deeply regrets that, following unexpected recent developments, Stephan DuCharme and Mikhail Fridman stepped down as of 1 March 2022, and Richard Brasher, Geoff King and Michael Kuchment stepped down as of 4, 11 and 25 March 2022, respectively. The Board thanks each of them for their valuable and significant contribution to the Company.

At the 2022 Annual General Meeting of Shareholders, the terms of Nadia Shouraboura will expire in accordance with the Board’s retirement and reappointment schedule. Nadia Shouraboura will not be eligible for reappointment.

Recognising the value and increasing importance of leveraging different points of view from among its members, the Supervisory Board aims for a diverse composition in particular areas of relevance for X5. Supervisory Board candidates are evaluated against the Board’s profile, existing balance of skills, knowledge and experience, and the need for the Board to be prepared for disruption and change. Supervisory Board members are prompted to be mindful of diversity, inclusiveness and meritocracy considerations when examining and nominating Board candidates. While the Supervisory Board is currently not balanced with regard to gender, it recognises the benefits of gender diversity, and importance is attached to achieving this. The Board is conscious of the public debate and regulatory developments in this respect, and takes this into account in its succession planning, in line with the Group’s Leadership Diversity Policy.

An overview of the current composition of the Supervisory Board and a short biography of each member is presented in the Corporate Governance Report on page 159.

Composition of the committees

While retaining overall responsibility, the Supervisory Board assigns certain tasks to three committees: the Audit and Risk Committee, the Nomination and Remuneration Committee and the Sustainable Development and Innovation Committee.

In September 2021, the Innovation and Technology Committee was renamed the Sustainable Development and Innovation Committee to strengthen the Supervisory Board’s focus on ESG matters.

Following their appointments, Richard Brasher became a member of the Audit and Risk Committee, and Alexander Tynkovan joined the Sustainable Development and Innovation Committee and the Nomination and Remuneration Committee.

In March 2021, the Supervisory Board elected Peter Demchenkov as its Chair, succeeding Stephan DuCharme, who had served as Chairman of the Supervisory Board since November 2015. Peter had served as Vice Chairman of the Supervisory Board since March 2019.

An overview of the current composition of the Supervisory Board and its committees is presented in the Corporate Governance Report.

Induction and ongoing education

Induction and permanent education are key elements of good governance. Following their appointment, new Supervisory Board members go through X5’s strategic, financial, legal and reporting affairs with senior executives of the Company. In addition, prior to their appointment, they are invited to meetings of the Supervisory Board and its committees. On an ongoing basis, and together with members of senior management, members of the Supervisory Board visit stores, distribution centres and other operational facilities to gain a more in-depth understanding of local operations, opportunities and challenges.

Same as in 2020, these visits were limited in 2021 due to travel restrictions stemming from the ongoing COVID-19 pandemic.

As an additional source of informal learning, external guest speakers with expert knowledge of topics that are of particular relevance to the Company are invited to plenary Board meetings on a regular basis.

The Supervisory Board remains committed to the ongoing education of its members in order to comply with the highest standards of excellence and governance.

Meetings of the Supervisory Board

In 2021, the Supervisory Board held four regular meetings and one additional meeting in November to approve the interim dividend. In addition, resolutions in writing were taken when necessary during the year. Each of the four meetings of the Supervisory Board was preceded by meetings of the Audit and Risk Committee, the Nomination and Remuneration Committee and the Sustainable Development and Innovation Committee. Due to ongoing travel restrictions imposed as a result of the pandemic, most Board members attended the meetings by videoconference, which actually enabled effective communication and interaction.

The plenary Supervisory Board meetings also included a half-day strategy session, thus ensuring sufficient time for the meetings and discussions on specific themes, such as operational performance, digital transformation and new businesses, sustainability and management development. In December, the strategy session took a full day partially dedicated to digital development only. The CEO and CFO attended all meetings, and other members of senior management were regularly invited to present.

In 2021, the Supervisory Board held regular private sessions without members of the Management Board present to independently discuss matters related to the performance, functioning and development of members of the Executive Board. The external auditor attended the meeting in March at which the 2020 Annual Report and financial statements were recommended for adoption by the Annual General Meeting of Shareholders. In between Supervisory Board meetings, several informal meetings and telephone calls took place among Supervisory Board members and members of the Management Board and other Company management to consult with each other on various topics and to ensure that the Supervisory Board remained well informed about the running of the Company’s operations.

The Supervisory Board confirms that all Supervisory Board members have adequate time available to give sufficient attention to the concerns of the Company. In 2021, the attendance rate was 100% for both the Supervisory Board and the committee meetings.

Activities in 2021

Throughout the year, the Supervisory Board focused on a number of key topics. An ongoing point of attention was the COVID-19 pandemic and its impact on the health and safety of employees and customers as well as its impact on the Company’s businesses and their supply chains. The Supervisory Board received regular updates from the CEO and other members of the management team and, in the context of the annual strategy update, assessed the impact of the pandemic on the Company’s long-term strategy.

Against the background of the pandemic and deteriorating macroeconomic conditions, the Supervisory Board continued to monitor the implementation of X5’s corporate strategy, with a focus on long-term value creation through operational excellence and X5’s capacity to continuously adjust to market trends and changing customer needs. In addition, the Supervisory Board reviewed various matters related to all significant aspects of the Company, its activities and operational results, its strategy going forward and the management team and its development.

A key topic during 2021 was the Company’s digital strategy, including e-commerce and profitability. With the continued surge of online sales as a result of the pandemic, and resilient customer habits favouring food-at-home consumption, the Supervisory Board had several discussions with management on the impact of these market dynamics on the evolution of the Company’s business model. An important dilemma discussed was how to develop the Group’s omnichannel capabilities to ensure the right balance between traditional brick-and-mortar operations and e-commerce capabilities, while maintaining a healthy margin. As part of these discussions, the Board extensively reviewed strategic options for the Group’s digital businesses, including organic growth, strategic partnerships and/or selective spin-offs.

Meanwhile, the Board continued to review measures and initiatives to strengthen X5’s core businesses. The Board closely reviewed opportunities to automate and digitalise key functions and processes inside the Company to increase efficiencies and decrease operational risks. Throughout the year, the Board extensively reviewed the operational performance of its key banners, Pyaterochka and Perekrestok, and in particular measured the Company’s success in translating new store concepts and in-store innovations into expanded customer reach and increased traffic and sales. Also, the Board extensively reviewed the performance and development plan of the new hard discounter format Chizhik, and the implementation of the Company’s private label strategy across all formats.

The Supervisory Board continued to discuss key trends and opportunities for the Company to improve customer experience and accelerate growth. As part of these discussions, Board members reviewed various initiatives to strengthen X5’s position in the Russian food market, including the new Food.ru media platform launched in July, and the acquisition of the Mnogo Lososya ‘dark kitchen’ chain in support of the Company’s offering in the fast-growing ready-to-eat segment. Also, as part of further initiatives to accommodate customers , the Board discussed the introduction of financial services under the ‘X5 Bank’ brand, allowing the Company to leverage its large customer base to cross-sell financial services in a joint venture with Alfa Bank, in first instance by combining the functionality of the Pyaterochka and Perekrestok loyalty cards with banking services.

On various occasions during the year, the Supervisory Board discussed corporate governance requirements to support a culture of agile entrepreneurship in the increasingly competitive omnichannel retail environment. In this context, through the work of its Nomination and Remuneration Committee, the Board reviewed adjustments to the Group’s operational model, as well as tailored incentive schemes for key employees across traditional and new businesses alike, ranging from store managers to key executives in the Company’s new businesses.

The Board’s sustainability oversight took centre stage in 2021. As the Company further developed and refined its sustainability strategy in 2021, the Board enhanced its oversight of environmental, social and governance matters, which was also reflected in the Board’s decision to include ESG responsibilities in the work of its renamed Sustainable Development and Innovation Committee. Through the work of this committee, the Board closely monitored X5’s progress against the medium- and long-term goals set out in X5’s sustainability strategy, encouraging management to set ambitious targets and making sure that these are integrated into the Company’s overall business strategy.

The financial reporting process and in particular the approval of the 2020 Annual Report and Sustainability Report, and review of the 2021 half-yearly and quarterly financial reports
The agenda and explanatory notes for the Annual General Meeting of Shareholders held in May 2021, including the dividend proposal for the year 2020
The 2021 interim dividend based on the Q3 financial results
Reports by the internal and external auditors
The assessment of the cooperation with the external auditor, based on a report from the Audit and Risk Committee
The composition of the Executive Board and the evaluation of its individual members, including talent management and succession planning
The profile and effectiveness of the Supervisory Board in the context of the annual board evaluation, as described in more detail below
The composition and profile of the Supervisory Board and its committees
The annual review of the financing strategy
Updates on X5’s risk management and risk appetite, as well as risk mitigation measures and internal controls
The annual budget for 2022

Board evaluation

X5 undertakes an annual review of the Supervisory Board, its committees and its individual members. The objective is to provide a framework for discussion on the effectiveness of the Supervisory Board and its members and committees, and to come up with an updated Board Development Plan with specific actions to facilitate improvement.

Under the leadership of the new Chair, the 2021 evaluation was performed by an external party by means of a questionnaire, individual interviews and observation of the Board and committee meetings held in December. Ward Howell was engaged as the external evaluator.

Items assessed and subsequently discussed included: the profile and composition of the Supervisory Board, level of skills and expertise, oversight of business performance, priorities and work processes of the Board, effectiveness in overseeing strategy, effectiveness of the committees in alleviating the Board’s overall oversight, and the Supervisory Board’s relationship with the Executive Board. In addition to the self-assessment by the Supervisory Board members, input was also solicited and received from members of the Executive Board and members of the Management Board.

Overall, the Board positively assessed its own functioning and its relationship with management, despite the limited opportunities to meet in person due to the travel restrictions brought on by the pandemic. Board discussions were open and constructive, and good progress was made in striking the right balance between the Board’s operational oversight and strategic responsibilities. The Board continued to function as a team where different opinions and perspectives are valued and respected.

The Supervisory Board attaches great value to these evaluations. They ensure continuous focus on the quality of its activities, the composition and functioning of the Supervisory Board and its committees and the Supervisory Board’s relationship with the Executive Board. Given the recent geopolitical developments, having immediate impact on composition and profile of the Supervisory Board, the Supervisory Board shall make a thorough reassessment of its composition and profile during 2022.

Meetings of the committees

Audit and Risk Committee

The role of the Audit and Risk Committee is described in its charter, which is available on the Company’s website. On 31 December 2021, the Audit and Risk Committee consisted of Geoff King (Chairman), Peter Demchenkov, Richard Brasher and Marat Atnashev. In 2021, the Committee held five regular meetings. To allow for a more in-depth review of the broad range of topics covered by the Audit and Risk Committee, meetings were held over the course of two half-day sessions each. In connection with ongoing travel restrictions brought on by the COVID-19 pandemic, certain committee members had to attend all meetings by videoconference. The meeting in August to review the half-yearly results was held entirely by videoconference. As a rule, all meetings were attended by the CFO, the external auditor and the internal audit director, while the CEO was invited to, and attended, all meetings. Other members of the Supervisory Board and senior management were invited when necessary or appropriate. The Committee met once with the external auditor without the presence of management.

The Audit and Risk Committee assists the Supervisory Board in its responsibility to oversee X5’s financing, financial statements, financial reporting process and system of internal business controls and risk management.

Throughout the year, the Committee reviewed the Company’s annual and interim financial statements, quarterly results and related press releases, as well as the outcomes of the year-end audit. The Committee also periodically reviewed the level of financial provisions, key movements in the balance sheet and any contingent liability movements.

Throughout the year, the Committee closely monitored risk management and the risk management process, including the timely follow-up to high-priority actions and risk mitigation measures based on quarterly progress updates. As part thereof, the Committee received several updates on the impact of the pandemic on the risk profile of the Company and its financial position. As one of the emerging risks in this respect, the Committee discussed the increasingly tight labour market and inherent impact on operational capacity and personnel costs. The Committee was informed regularly on compliance and reviewed and received regular updates on the Company’s whistleblower programmes. Furthermore, the Committee reviewed activities and initiatives relating to detection and prevention of misconduct and irregularities, and risk mitigating measures to protect the Company in these areas.

The Committee also closely monitored the effectiveness of the capital investment process, the appraisal methodology and the safeguarding of core assets. Twice during the year, the Committee reviewed an assessment of the level of returns from recent investments, as well as management actions addressing underperforming stores and assets whose carrying value were impaired.

Each quarter, the agenda included a discussion of current control topics, including internal audit findings and the external auditor’s reflections on the control framework. These discussions guided management and Internal Audit to focus on the right priorities throughout the year, to mitigate any significant risks or weaknesses and to build a relevant internal audit plan for 2022.

The external auditor’s report with respect to accounting and audit issues and internal control recommendations in respect of their audit of the 2020 consolidated financial statements:
Quarterly interim financial reports and trading updates
Audit plans of the internal and external auditors, and the approval thereof
The annual assessment of the functioning and independence of the external auditor
X5’s financing strategy
Tax matters, including specific attention to the denunciation of the double tax treaty between Russia and the Netherlands, effective as of 1 January 2022, and the implications for the Company
IT infrastructure, cybersecurity and data protection
Ethics and compliance, including updates to the Company’s whistleblower programmes, as well as activities and initiatives relating to detection and prevention of misconduct and irregularities, and risk mitigating measures to protect the Company in these areas
Changes in the Company’s regulatory and compliance framework as of 1 January 2021, following Brexit

The Audit and Risk Committee and its Chair held several private meetings together with the CFO, the Internal Audit Director and the external independent auditor. During the private sessions with the new CFO, his onboarding and start at the Company were regularly discussed.

With respect to the external auditor’s management letter about the 2021 financial year, the Audit and Risk Committee confirmed that the management letter contained no significant items that need to be mentioned in this report.

Related party transactions

The Company operates a Related Party Transaction Policy, which prescribes the internal reporting and approval mechanism for related party transactions. Under this policy, review and approval of related party transactions is delegated to the Audit and Risk Committee, whereby related party transactions exceeding a certain threshold remain subject to the approval of the Supervisory Board. The policy requires that the Audit and Risk Committee or the Supervisory Board approve a related party transaction only if it is agreed on competitive terms which are customary in the market and in the best interest of X5 Group.

During the year, the Audit and Risk Committee reviewed and/or approved related party transactions which, by their nature or materiality, could potentially have constituted a conflict of interest for members of the Supervisory Board and Management Board. In 2021, the following related party transactions were of material significance to the Company and/or members of the Management Board or Supervisory Board:

Service agreement with CTF Holdings S.A.
Commercial relationship agreement with DIA;
Joint venture with Alfa Bank for the establishment of X5 Bank
Foreign exchange agreements, bond issues, revolving credit facilities and other bank products with Alfa Bank
Service agreement with CTF Holdings S.A.
Advertising and marketing agreements with Alfa Bank
Payroll service agreement with Alfa Bank
Insurance services from Alfa Insurance (AlfaStrakhovanie)
Lease agreements with Alfa Capital Holdings Limited
Procurement of goods (for resale) from Borjomi Group
Agreements with Home Interior for the lease of retail and warehouse space
Agreements with VimpelCom for the lease of retail space
Telecommunication services provided by VimpelCom
agreement for development, purchase and maintenance of online cash registers with VimpelCom
Procurement of goods (for resale) from RusBioTrade
Procurement of goods (for resale) from Alidi-Nord

These transactions were discussed and/or approved by the Audit and Risk Committee and the Supervisory Board with due observance of provisions 2.7.3 to 2.7.5 of the Corporate Governance Code, the Related Party Transactions Policy and the Rules of Procedure of the Supervisory Board, which Rules are available on the Company’s website.

While members of the Supervisory Board who have a conflict of interest in relation to a certain matter do not participate in the Supervisory Board’s deliberations and decision-making on such matters, the Supervisory Board assessed that, to the extent that any of the listed transactions constituted a conflict of interest for certain members of the Supervisory Board, such conflict did not undermine the independent judgement of these Board members while performing their duties for X5.

Nomination and Remuneration Committee

The role of the Nomination and Remuneration Committee is described in its charter, which is available on the Company’s website. On 31 December 2021, the Nomination and Remuneration Committee consisted of Peter Demchenkov (Chairman), Geoff King, Alexander Tynkovan and Marat Atnashev. In 2021, the Nomination and Remuneration Committee held six regular meetings, all of which were attended virtually due to COVID-19 travel restrictions. The CEO and the Director of HR and Organisational Development were invited to attend every meeting, and other members of the Supervisory Board and senior management were invited when necessary or appropriate.

The Committee regularly reviews the composition and profile of the Supervisory Board and its сommittees to ensure they continue to provide informed and constructive support and challenge to the management team. The committees is responsible for identifying and reviewing suitable candidates through a formal and transparent process, ensuring that plans are in place for orderly succession to the Board. Early in the year, the Committee focused on the succession of Karl-Heinz Holland, who informed the Board of his intention to step down at the Annual General Meeting of Shareholders in May 2021. Egon Zehnder assisted the Committee in its search for a successor. Following a rigorous selection process, the Committee recommended the nomination of Richard Brasher as a new member of the Supervisory Board. Furthermore, as successor of Alexander Torbakhov, who stepped down earlier, on 3 July 2020, the Committee recommended the nomination of Alexander Tynkovan in view of his in-depth knowledge and experience in the fields of digitalisation and e-commerce, and his knowledge of X5, having previously served on the Supervisory Board. Finally, the Committee recommended the reappointment of Stephan DuCharme and Mikhail Fridman for a new term, in line with the rotation schedule of the Supervisory Board.

In 2021, the Nomination and Remuneration Committee continued to monitor succession planning, management development and human resource needs in relation to the Company’s sustainable growth objectives. Building on previous year discussions, the Committee reviewed the Group’s organisational structure in support of the Company’s strategic objectives to strengthen its the key formats while growing e-commerce and improving omnichannel productivity.

In November, the Committee dedicated a full meeting to staffing implications resulting from the Company’s transformation into omnichannel retailing with new employee requirements based on digital and e-commerce competencies. In particular, the Committee reviewed implications for staff recruitment and retention, training and development, and remuneration benchmarking based on distinct peer groups for the various key positions at senior management level.

Furthermore, as part of its regular review of variable remuneration principles, the Committee reviewed and discussed tailored incentive schemes for key employees across the Group, ranging from store managers to key executives in the Company’s new businesses. Meanwhile, taking into account pandemic-related and macroeconomic uncertainties, and their impact on the retail environment, the Committee assessed and evaluated options to restructure the Company’s incentive plans for 2022 and beyond.

The Nomination and Remuneration Committee further reviewed and prepared the following items for recommendation or report to the full Supervisory Board as part of its ongoing responsibilities:

Annual assessment of the Executive Board and its individual members, and changes in the composition of the Executive Board
The proposed reappointment of the CEO for an additional two-year term
Management changes, including the appointment of Vsevolod Starukhin as CFO and member of the Executive Board, succeeding Svetlana Demyashkevich in May 2021
Proposals on fixed and variable remuneration of the members of the Executive Board, including adjustments following the annual remuneration benchmarking analysis
The remuneration policy of the Executive Board adjusted in line with the updated 2021-2023 LTI programme, as proposed to and approved by the Annual General Meeting of Shareholders in May 2021
The profile and effectiveness of the Supervisory Board in the context of the annual Board evaluation
Review of X5’s Leadership Diversity Policy and diversity levels across the Group

Details of actual remuneration in 2021 can be found in notes 28 and 29 to the consolidated financial statements.

Sustainable Development and Innovation Committee

The role of the Sustainable Development and Innovation Committee is described in its charter, which is available on the Company’s website. On 31 December 2021, the Sustainable Development and Innovation Committee consisted of Nadia Shouraboura (Chair), Michael Kuchment and Alexander Tynkovan. The Sustainable Development and Innovation Committee held four meetings in 2021, all of which were attended virtually due to COVID-19 travel restrictions. The CEO was invited to attend every meeting, and other members of the Supervisory Board and senior management were invited when necessary or appropriate.

The Sustainable Development and Innovation Committee assists the Supervisory Board in its responsibility to closely monitor X5’s progress against the medium- and long-term goals set out in X5’s sustainability strategy as well as X5’s e-commerce activities and initiatives in the area of technical and commercial innovation.

In 2021, the Committee reviewed and discussed various tech- and/or data-driven processes and initiatives to enhance operational efficiencies, as well as innovative in-store solutions to improve the customer experience. Also, the Committee closely monitored the performance of new activities in the Group’s omnichannel offering, including the media platform Food.ru launched in May.

In September, the Innovation and Technology Committee was renamed the Sustainable Development and Innovation Committee to strengthen the Supervisory Board’s focus on the Company’s ambitious ESG agenda. During the second half of the year, following the release of X5’s first Sustainability Report in May, the Committee closely monitored the implementation of X5’s sustainability strategy and performance on sustainability targets, also reviewing ways to apply innovations to accelerate the achievement of these targets.

Independence

The Supervisory Board endorses the principle that the composition of the Supervisory Board shall be such that its members are able to act critically and independently of one another and of the Management and Executive Boards and any particular interests. It is Company policy that a majority of the members of the Supervisory Board must be independent at all times. The majority of the members of the Supervisory Board, which currently consists of four members, qualify as independent.

According to best practice provisions 2.1.7 and 2.1.8 of the Dutch Corporate Governance Code, there can only be one Supervisory Board member who can be considered to be affiliated with or representing a shareholder who directly or indirectly holds more than 10% of the shares in the Company.

As of 31 December 2021, Supervisory Board members Mikhail Fridman and Marat Atnashev are both affiliated with CTF Holdings S.A., which has a capital interest of 47.86% in X5. Stephan DuCharme, Chairman of the Board, serves as Managing Partner of L1 Retail, part of the LetterOne investment group, which is partially controlled by the ultimate shareholders of CTF Holdings S.A. Therefore, Mikhail Fridman, Marat Atnashev and Stephan DuCharme are not independent in the sense of the Dutch Corporate Governance Code.

Financial statements

This Annual Report and the 2021 consolidated financial statements, audited by Ernst & Young Accountants LLP, were presented to the Supervisory Board in the presence of the Management Board and the external auditor. Ernst & Young’s report can be found on page 266.

The Supervisory Board recommends that the shareholders adopt these financial statements. Due to the current geopolitical developments having severe impact on the Russian consumer market and, as a result, the Company’s strategic outlook and financial position, the Supervisory Board recommends to exceptionally deviate from the dividend policy and Company guidance by not declaring the final dividend for the year 2021, in addition to the amount of RUB 73.65 per GDR that was paid as interim dividend in December 2021. The Supervisory Board therefore recommends, in the best interest of the Company and as proposed by the Management Board, to add an amount of RUB 22,738 million, representing the remaining amount of the profit in the financial year 2021, to the retained earnings of the Company.

The Supervisory Board furthermore requests that the Annual General Meeting of Shareholders grant discharge to the members of the Management Board for their management and to the members of the Supervisory Board for their supervision in 2021.

The COVID-19 pandemic has had, and is still having, a significant impact on X5’s businesses, employees and customers. The continued dedication and efforts of the entire X5 team has ensured the safety of our stores and distribution centres, sustained the strength of our supply chains and helped nourish families and local communities in 66 regions of Russia. The Supervisory Board wishes to thank everyone at X5 for going the extra mile last year to build a stronger business and serve customers better every day.

Remuneration

The General Meeting of Shareholders determines the remuneration of the members of the Supervisory Board in accordance with the remuneration policy for members of the Supervisory Board. The remuneration policy for the Supervisory Board was approved by the 2020 Annual General Meeting of Shareholders. The detailed amounts are reflected in the Remuneration Report on page 174, as well as notes 28 and 29 to the consolidated financial statements.

19 May 2022

Remuneration Report

Statement from the Chairman of the Nomination and Remuneration Committee

On behalf of the Nomination and Remuneration Committee, I am pleased to present the Remuneration Report 2021, providing a summary of the remuneration policies for the Management Board and the Supervisory Board, and an account of the implementation of these policies in 2021.

At the 2021 Annual General Meeting of Shareholders, a positive advisory vote was cast for the Remuneration Report 2020. Meanwhile, we took into account feedback received from shareholders and improved our disclosures in this Remuneration Report, creating more transparency in the link between performance and payout. Going forward, we will continue to have an open dialogue with our shareholders and other stakeholders on remuneration principles and remuneration of the Management Board and Supervisory Board.

The year 2021 was another challenging one for X5, as COVID-19 continued to impact our customers, employees and their families. Their health and safety will remain a key focus of our oversight as long as the pandemic is ongoing. In these extraordinary circumstances, X5 continued to serve its vital role in society, as frontline employees did their utmost to meet customer needs and care for people in their communities.

Meanwhile, despite the pandemic and challenging macroeconomic conditions in Russia’s food market, with strong competition and inflation putting pressure on consumers, the Company continued to grow in 2021, and maintained profitability margins in line with our strategic targets. Total revenue rose by 11.5% year-on-year, while EBITDA margin for FY 2021 was 7.3% under pre-IFRS 16. In addition, to meet consumer needs in line with e-grocery and ready-to-eat trends, X5 continued to invest in omnichannel solutions for customers, resulting in 140% net growth in online sales year-on-year.

Throughout the year, the Committee continued to reflect on the remuneration policy for the Executive Board to ensure that it continues to support the Company’s strategy and long-term growth. The Committee performed its annual remuneration benchmark review and evaluated performance measures under the short- and long-term incentive programmes.

Apart from the Group’s key financial measures applied for the 2021 short-term incentive programme, specific business priorities were reflected in additional short-term performance measures to drive business efficiencies and online performance. Furthermore, recognising the strategic importance of our new hard discounter format, Chizik, specific rollout targets were added as an additional performance measure for the CEO. We feel that these performance measures adequately contribute to the Company’s success in the short term, while addressing strategic imperatives that contribute to long-term value creation for the Company.

In May, the Annual General Meeting of Shareholders approved the new 2021–2023 long-term incentive (LTI) programme as part of the remuneration policy for the Management Board. The LTI programme is designed to support the Company’s goal of strengthening its leadership by enterprise value multiples and market share, while focusing on revenue, as well as margins to increase profitability, and prudently managing capital spending and expenses. In addition, as the Company has integrated sustainable development goals into its overall business strategy, the LTI programme includes ESG targets supporting the Company’s sustainability strategy.

As part of our broader responsibility, we also discussed the remuneration principles for other key staff or divisions within the Group. As such, underlining our customer-centric business model, we reviewed new incentive programmes designed to reward a more entrepreneurial approach on the part of store managers. Also, as we continue to invest in our digital and omnichannel ambitions, we recognised the need for tailored incentive schemes for our new businesses, and various management initiatives in this respect have been reviewed.

Finally, with respect to remuneration of the Supervisory Board, certain technical adjustments and mandatory legal updates to the rules of the Restricted Stock Unit Plan were reviewed in 2021. Although these amendments do not change the remuneration policy for the Supervisory Board, an executive summary of the plan will be submitted to the upcoming 2022 Annual General Meeting of Shareholders.

Looking forward, the Supervisory Board will closely engage with management on a thorough re-assessment of both the short- and long term remuneration principles and targets, taking into account the impact of current developments on the Company’s strategic priorities. In doing so, we will continue to collect feedback from shareholders and other stakeholders in order to achieve maximum alignment on our remuneration policies.

Peter Demchenkov
Chair of the Nomination and Remuneration Committee

Remuneration of the Management Board

The Supervisory Board resolved that the remuneration policy for the Management Board serves as a basis for the remuneration policy for the Executive Board. In view of the relative size and composition of both boards, this Remuneration Report refers to the Executive Board unless specific provisions apply to members of the Management Board only, which will be clearly indicated.

Objectives

The remuneration policy for the Management Board is aligned with the Company’s strategy and supports the Company’s long-term development, while aiming to be effective, transparent and simple. The objective of the remuneration policy is twofold:

To create a remuneration structure that supports a healthy corporate culture and allows the Company to attract, reward and retain the best-qualified talent to lead the Company towards its strategic objectives
To provide for a balanced remuneration package that is focused on achieving sustainable financial results, that is aligned with the long-term strategy of the Company and that will foster alignment of the interests of management with those of shareholders and other stakeholders, including customers, employees and wider society

While developing the remuneration policy, the Nomination and Remuneration Committee conducted scenario analyses to determine the risks to which variable remuneration may expose the Company.

Remuneration in context

The table below reflects the total remuneration of each member of the Management Board and the average remuneration of all other X5 employees (on a full-time equivalent basis), set against the Company’s performance over the five most recent financial years.

	2017	2018	2019	2020	2021
Company performance
Revenue, RUB bln	1,295	1,533	1,734	1,978	2,205
Selling space, ths sqm	5,480	6,464	7,239	7,840	8,410
Number of stores	12,121	14,431	16,297	17,707	19,121
Net profit (pre-IFRS 16), RUB bln	31	29	26	39	49
Share price, $ eop	37.8	24.8	34.5	36.1	26.5
Management Board remuneration (RUB, mln)
I. Shekhterman	344	347	259	275	358
F. Lhoëst	28	33	35	44	44
Q. Peer	—	—	—	38	40
Average employee remuneration, RUB	659,344	701,192	754,990	782,079	799,555
Internal pay ratio (CEO vs employee remuneration)	174	209	211	198	273

Benchmarking

The remuneration of Executive Board members is benchmarked against the labour market peer group every year. As a company with operations mainly in Russia, the reference group created for the benchmarking is composed of Russian companies equivalent in terms of size of business and complexity of operations, as well as international, non-Russian retail companies. In total, the reference group is composed of 58 companies in various sectors including retail (26%), digital and telecommunications (21%), industrial (19%), financial (10%), FMCG (9%), transportation and logistics (9%) and other (6%).

Although external market data provide useful context, it is ultimately the responsibility of the Supervisory Board to determine remuneration packages at an appropriate level that reflect the skills, level of responsibility and performance of each individual. As we aim to recruit and retain the most qualified talent available, the target Total Direct Compensation level for Management and Executive Board members is set between the 50th and the 75th percentile.

For the current CEO, the Supervisory Board resolved to make an exception in recognition of the size and complexity of X5. Following his re-appointment for a two-year term at the 2021 AGM, the CEO’s total direct compensation was set, in case of on-target performance, at the 90th percentile.

Internal pay ratio

As is commonly understood, pay ratios are specific to the company’s industry, geographical footprint and organisational model. As a major food retail company, the relatively small number of executive staff vs operational staff in stores and warehouses across seven federal districts in Russia adds to the variety of pay within the Company and substantially differentiates the average employee compensation with compensation levels of Management Board members. For companies in other industries, this will be different. Furthermore, pay ratios can be volatile over time, as they can be heavily dependent on the Company’s annual performance since that performance impacts the remuneration of the Management Board (and Executive Board) much more than that of all other employees.

Summary of remuneration elements and implementation in 2021

	Policy Summary	2021 Summary
Base Salary	Base salaries are in line with compensation levels in peer group companies based on the salary benchmarking survey conducted annually.	Igor Shekhterman RUB 120,000,000 Frank Lhoëst EUR 315,000 Quinten Peer EUR 275,000
Short-Term Incentive	Annual cash bonus Target payout for CEO: 100% Target payout for Management Board members based in the Netherlands: 60% Maximum level: 140% of target payout per quantitative target, and 120% of target payout per qualitative target The total STI payout may be adjusted up- or downwards by up to 20% of the target payout at the discretion of the Supervisory Board.	Igor Shekhterman Group targets: 100% Actual payout: 86.2% of base salary Frank Lhoëst Group targets: 50% Divisional targets: 25% Individual targets: 25% Actual payout: 61.2% of base salary Quinten Peer: Group targets: 50% Divisional targets: 25% Individual targets: 25% Actual payout: 63.2% of base salary
Long-Term Incentive	Cash incentive programme over a three-year period from 1 January 2021 until 31 December 2023 Payout thresholds: EBITDA margin and net debt/EBITDA ratio to ensure business efficiency and retain focus on prudent financial and balance sheet management 50% of the total award is paid in 2024 subject to maintaining achieved targets through the end of 2023, while the other 50% is deferred to 2025 with a profitability threshold as a condition for deferred payout.	Igor Shekhterman Targets Enterprise value / EBITDA multiple: 50% Market share: 45% Sustainability targets: 5% Frank Lhoëst: N/A Quinten Peer: N/A

Policy Summary

2021 Summary

Base Salary

Base salaries are in line with compensation levels in peer group companies based on the salary benchmarking survey conducted annually.

Igor Shekhterman RUB 120,000,000

Frank Lhoëst EUR 315,000

Quinten Peer EUR 275,000

Short-Term
Incentive

Annual cash bonus

Target payout for CEO: 100%

Target payout for Management Board members based in the Netherlands: 60%

Maximum level: 140% of target payout per quantitative target, and 120% of target payout per qualitative target

The total STI payout may be adjusted up- or downwards by up to 20% of the target payout at the discretion of the Supervisory Board.

Igor Shekhterman

Group targets: 100%
Actual payout: 86.2% of base salary

Frank Lhoëst

Group targets: 50%
Divisional targets: 25%
Individual targets: 25%
Actual payout: 61.2% of base salary

Quinten Peer:

Group targets: 50%
Divisional targets: 25%
Individual targets: 25%
Actual payout: 63.2% of base salary

Long-Term
Incentive

Cash incentive programme over a three-year period from 1 January 2021 until 31 December 2023

Payout thresholds: EBITDA margin and net debt/EBITDA ratio to ensure business efficiency and retain focus on prudent financial and balance sheet management

50% of the total award is paid in 2024 subject to maintaining achieved targets through the end of 2023, while the other 50% is deferred to 2025 with a profitability threshold as a condition for deferred payout.

Igor Shekhterman

Targets

Enterprise value / EBITDA multiple: 50%
Market share: 45%
Sustainability targets: 5%

Frank Lhoëst: N/A

Quinten Peer: N/A

Elements of remuneration

Total Direct Compensation

The remuneration provided to Executive Board members consists of the following fixed and variable components (the «Total Direct Compensation»): a base salary, an annual cash incentive (STI) and a long-term cash incentive (LTI). Both the STI and LTI are built around performance measures, both financial and non-financial, to support the Company’s strategic objective of achieving long-term value creation through sustainable leadership in customer, employee and shareholder recognition.

The Executive Board’s Total Direct Compensation is equally balanced between the fixed and annual variable remuneration components, and more heavily weighted on the LTI to strengthen the focus on long-term goals. The ratio between fixed and variable pay components for members of the Executive Board is as follows in case of on-target performance.

In addition to the Total Direct Compensation, members of the Executive Board are entitled to other benefits as described below under «Other remuneration components» and «Contractual arrangements».

40%

30%

Base salary

STI

LTI

2021 Management Board remuneration

The following table provides an overview of the Management Board’s remuneration in 2021 (in millions of Russian roubles).

Name	Year	Base salary	Short-term incentive	Long-term incentive	Social security cost	Fixed vs variable remuneration	Total
I. Shekhterman	2021 2020	104 74	88 59	122 108	44 34	33—67% 31—69%	358 275
F. Lhoëst	2021 2020	27 27	16 17	— —	1	63—37% 61—39%	44 44
Q. Peer	2021 2020	24 23	15 15	— —	1	62—38% 61—39%	40 38
Total	2021 2020	155 124	119 91	122 108	46 34	— —	442 357

Name

Year

Base
salary

Short-term
incentive

Long-term
incentive

Social
security
cost

Fixed
vs variable
remuneration

Total

I. Shekhterman

2021

2020

104

122

108

33—67%

31—69%

358

275

F. Lhoëst

2021

2020

—

63—37%

61—39%

Q. Peer

2021

2020

—

62—38%

61—39%

Base salary

The base salary of the CEO and the other members of the Management Board is determined by the Supervisory Board and derived from compensation levels in peer group companies based on the salary benchmarking survey conducted annually.

For Igor Shekhterman, the total remuneration in the table includes remuneration paid in the Netherlands and Russia: as a Russia-based member of the Management Board, Igor Shekhterman also has a contract of employment with an operational subsidiary in Russia. Under this contract, 75% of his total base salary as well as variable remuneration components are paid in Russia. No other remuneration has been granted or allocated by subsidiaries or other companies whose financials are consolidated by the Company to members of the Management Board.

Following his re-appointment for a two-year term at the 2021 Annual General Meeting, the CEO’s total direct compensation was set, in case of on target performance, at the 90th percentile. The total contractual annual base salary for Igor Shekhterman was increased to RUB 120,000,000 (2020: RUB 70,000,000), in recognition of the rapidly increasing size and complexity of X5. In accordance with Russian labour law, the base salary is adjusted based on the number of days spent on vacation. The amount also includes other fixed benefits not exceeding 2% of the total contractual annual base salary.

The base salaries of Frank Lhoëst and Quinten Peer are set at, respectively, EUR 315,000 and EUR 275,000.

Short-term incentive (STI)

The short-term incentive is an annual cash bonus ensuring focus on the achievement of performance targets over the financial year. It drives behaviour and reflects the key priorities for the year. At the beginning of each financial year, the Supervisory Board determines the performance measures and their relative weight, and the targets to be achieved for each performance measure, based on X5’s business priorities for that year. For each measure, performance ranges are set, i.e. the value below which no payout will be made (the threshold), the on-target value and the maximum payout level.

Performance measures are aligned with the Company’s objective to deliver sustainable value to shareholders and other stakeholders, and include:

Financial measures related to the Company’s operational performance, consisting of key financial metrics which typically reflect X5’s goal of expanding market share while focusing on margins to increase profitability and prudently managing capital spending and expenses.
Measures that reflect specific strategic and key business priorities of the Company. In 2021, these measures consisted of e-commerce performance, the level of digitalisation to achieve business efficiencies, as well as the expansion of the hard discounter format Chizhik launched in 2020.

Furthermore, divisional and individual targets may be set for other members of the Management Board and Executive Board. All performance measures contribute to the Company’s success in the short term, while also securing the Company’s long-term objectives. X5 does not disclose the actual targets as this is considered commercially sensitive information.

The following table reflects the STI achievement and payout for 2021.

	Performance measure	Weight	Realised performance	Resulting payout as % of target	Actual bonus (% of payout *weight)	Total bonus payout of base salary
Igor Shekhterman Chief Executive Officer	Revenue X5	20%	97.1%	88.6%	17.72%
	X5 LFL sales	15%	Below threshold	0.0%	0.0%
	X5 ROI	25%	107.3%	114.7%	28.67%
	X5 digital channels revenue	10%	87.7%	75.4%	7.54%
	Digitalisation index	20%	105.6%	111.2%	22.24%
	Rollout of Chizhik	10%	Achieved	100%	10.00%
	Total	100%			86.2%	86.20%
Frank Lhoëst	X5 revenue	12.5%	97.1%	88.6	11.08%
Company Secretary	X5 LFL sales	10%	Below threshold	0.0%	0.0%
	X5 ROI	12.5%	107.3%	114.7%	14.34%
	X5 digital channels revenue	5%	87.7%	75.4%	3.77%
	Digitalisation index	10%	105.6%	111.2%	11.12%
	Divisional KPI	25%	118.4%	136.8%	34.21%
	Individual KPI	25%	110%	110%	27.50%
	Total	100%			102.0%	61.20%
Quinten Peer	X5 revenue	12.5%	97.1%	88.6	11.08%
Chief Operating Officer (X5 Retail Group N.V.)	X5 LFL sales	10%	Below threshold	0.0%	0.0%
	X5 ROI	12.5%	107.3%	114.7%	14.34%
	X5 digital channels revenue	5%	87.7%	75.4%	3.77%
	Digitalisation index	10%	105.6%	111.2%	11.12%
	Divisional KPI	25%	120%	140%	35.00%
	Individual KPI	25%	120%	120%	30.00%
	Total	100%			105.3%	63.20%

The total STI payout may be adjusted up- or downwards by up to 20% of the target payout at the discretion of the Supervisory Board. The target payout as a percentage of base salary is 100% for the CEO and other members of the Executive Board and 60% for Management Board members, contingent on the targets being fully achieved.

For the reporting year 2021, the achievement of performance targets was assessed and determined by the Supervisory Board for each Management Board member individually.

For Igor Shekhterman, the STI opportunities are weighted 100% based on the Group’s financial and non-financial performance measures. For 2021, it results in a total payout of 86.2% of the target payout (or base salary).

For Frank Lhoëst and Quinten Peer, the STI targets are weighted at 50% for the Group’s financial and non-financial performance measures, 25% for division-related targets and 25% for individual, function-related performance measures, also with revenue and profitability thresholds as a condition for STI payout. For 2021, it results in an aggregate cash payout of 102.0% of the target payout, or 61,2% of the base salary for Frank Lhoëst and 105.3% of the target payout or 63.2% of the base salary for Quinten Peer consequently.

Long-term incentive (LTI)

The CEO and other members of the Executive Board participate in the Company’s long-term incentive programme. Under the LTI programme, performance is calculated and cash awards are paid after a revolving three-year performance period, with a 50% deferred payout subject to maintaining achieved targets in the fourth year, with a profitability threshold as a condition for deferred payout. This creates a focus on long-term goals throughout the programme and provides an effective mechanism for motivating and retaining members of management who are critical to the ongoing success of the Company.

For the CEO, the long-term incentive amount in 2020 represents an accrual-based amount in line with IFRS requirements (see note 28, «Staff costs», on pages 232-237). On 31 December 2020, the 2018–2020 LTI programme came to an end, with targets and thresholds achieved. In recognition of exceptional results and efforts during the period, the LTI reward includes an additional one-off amount of RUB 30,000,000 awarded at the discretion of the Supervisory Board. This additional reward represents a deviation from the remuneration policy and increases the weight of the LTI in the Total Direct Compensation.

The 2021 Annual General Meeting approved the 2021–2023 LTI programme. Performance indicators under the programme have a one- or three-year vesting period.

Targets under the LTI reflect the Company’s strategy to achieve leadership in customer recognition through continuously evolving value propositions in the food market, while setting the industry standard in digital transformation and omnichannel growth. Long-term performance measures to support this strategy are sustained leadership in terms of enterprise value multiple and market share, with profitability and net debt/EBITDA thresholds to remain focused on margins, business efficiency and prudent financial and balance sheet management. In addition, the LTI programme includes a non-financial target to support the Company’s ESG strategy.

The following table reflects the LTI performance and payout for the CEO (in millions of Russian roubles) for the 2018–2020 LTI programme:

LTI 2018–2020	Performance measure	Weight	Target payout %	Achievement	Cash	50% payout in 2021	50% payout in 2022
	Revenue	50%	100%	100%	155	77.5	80.3
	EV/EBITDA multiple	50%	100%	100%	155	77.5	80.3

The size of each individual cash award is based on the participant’s annual base salary and LTI scale reflecting his/her role and position as well as his/her contribution to meeting the LTI targets at both the individual and team levels, with a maximum of 133% per year of the participant’s base salary during the three-year programme.

Performance measure	Weight	Definition	Thresholds	Link to strategy	Payout
EV/EBITDA multiple	50%	Multiple calculated and accrued on an annual basis.	Net debt/EBITDA EBITDA margin	Long-term shareholder value creation through sustained leadership in the Russian food market, with a 15% share in grocery and a 20% share in e-grocery by the end of 2023.	In 2024 (50%) and 2025 (50%, subject to EBITDA threshold)
Market share	45%	X5 market share relative to competition in the Russian food retail segment throughout the programme, with an annual revenue growth threshold. If the threshold is not achieved in a specific year, one-third of the target payout is not accrued. The minimum payout level is 60%, and the maximum is 140%, depending on achievement level.	Net debt/EBITDA EBITDA margin	Long-term shareholder value creation through sustained leadership in the Russian food market, with a 15% share in grocery and a 20% share in e-grocery by the end of 2023.	In 2024 (50%) and 2025 (50%, subject to EBITDA threshold)
Sustainability	5%	To achieve by the end of 2023: Reduce CO₂ emissions by 10% Increase the share of recycled solid waste to 95% Increase the share of private label goods in sustainable packaging to >50%	Net debt/EBITDA EBITDA margin	Achievement of ESG targets under X5’s «30×30» Sustainability Plan.	In 2024 (50%) and 2025 (50%, subject to EBITDA threshold)

Social security cost

For the year ended 31 December 2021, the social security costs include statutory pension contributions in the amount of RUB 29 (2020: RUB 22).

Other policy information and contract terms

Other remuneration components

Members of the Executive Board may be offered a number of other arrangements, such as an expense allowance, medical insurance, accident insurance and life insurance, in accordance with Company policy. The Company’s policy does not allow personal loans or guarantees to members of the Executive Board, nor does the Company provide pension arrangements for members of the Executive Board.

Legacy arrangements

As disclosed when Mr Shekhterman took office in 2015, he is entitled to a minimum annual compensation package of USD 4,000,000. Should the minimum annual compensation exceed the total annual remuneration based on fixed and variable components, Mr Shekhterman will be entitled to the difference upon completion of his full term as CEO. Furthermore, Mr Shekhterman is eligible for termination compensation of up to USD 5,000,000 at the discretion of the Supervisory Board, repayable in case of breach of the non-competition obligations as described herein under «Contractual arrangements».

Contractual arrangements

Members of the Management Board are engaged on the basis of a Management Services Agreement with a maximum four-year term, to be extended upon reappointment by the General Meeting of Shareholders. The CEO, as a Russia-based member of the Management Board, also has a contract of employment with an operational subsidiary in Russia. The fixed and variable salary components stipulated in each contract reflect the relevant responsibilities of the CEO in the Netherlands and in Russia.

The severance payment is generally limited to six months’ base salary; however, the Supervisory Board may increase this to a maximum of one year’s base salary if required under individual circumstances. For the CEO and other members of the Executive Board, the severance pay is structured as a non-competition reward payable in quarterly instalments following contract termination, subject to compliance with non-competition conditions. The non-competition period for the CEO is 12 months and six months for other Executive Board members. In case of breach of the non-competition obligations, the contract provides for a penalty in the amount of two annual base salaries for the CEO and one annual base salary for other Executive Board members. No severance pay will be awarded if the agreement is terminated at the initiative of the Management or Executive Board member, or in the event of seriously culpable or negligent behaviour on his/her part.

Agreements with members of the Management Board may be terminated by either party with a notice period of two months or, in the case of the CEO, three months.

Clawback

The Supervisory Board may recover from the Management Board members all or part of a paid bonus derived from the STI or LTI if such bonus is based on incorrect information regarding the targets or the conditions of the bonus. Furthermore, the Supervisory Board has the discretionary authority to adjust an unpaid bonus to an appropriate amount if payment of the bonus is considered unreasonable or unfair.

Insurance and indemnity arrangements

Members of the Management Board as well as certain senior management members are insured under X5’s Directors and Officers Insurance Policy.

Although the insurance policy provides broad coverage, X5’s directors and officers may incur uninsured liabilities. Under the Company’s Articles of Association, members of the Management Board are indemnified by the Company against any claims arising out of or in connection with the general performance of their duties, provided that such claim is not attributable to gross negligence, wilful misconduct or intentional misrepresentation by the director or officer in question.

Remuneration of the Supervisory Board

Objectives and benchmarking

Supervisory Board fees are set at an appropriate level to attract individuals with the necessary experience, knowledge and ability to make a significant contribution to the Company’s strategy, long-term development and sustainability. As such, the remuneration policy supports the long-term development of the Company, while aiming to fulfil all stakeholders’ requirements.

The level and structure of remuneration for members of the Supervisory Board is periodically benchmarked against a reference group of Dutch and other European companies that are comparable in size and complexity, as well as leading Russian and international retailers. In order to attract the most talented individuals with the necessary experience, knowledge and ability, the cash allowances for members of the Supervisory Board are set between the 50th and the 75th percentile. For the current Supervisory Board fees, the peer group consisted of 33 mostly non-Russian international companies in various retail sectors, i.e. food retail and wholesale (61%), drug retail (9%), specialty retail and other types of retail (30%).

The Company acknowledges that the awarding of shares to members of the Supervisory Board constitutes a deviation from the Dutch Corporate Governance Code. However, in addition to the cash allowance, X5 believes it is necessary to compensate members of the Supervisory Board in the form of equity to align the interests of Supervisory Board members with the long-term interests of shareholders and to strengthen their commitment to the future of the Company. The equity-based awards paid to members of the Supervisory Board are computed with respect to the fixed board fee of each member and are therefore not performance-based. While the total remuneration including the equity component may exceed the benchmark for the chairman and committee chairs, X5 believes that the level and structure of the remuneration of the Supervisory Board members safeguard their independence of judgement and thought, and adequately reflect the time spent and the responsibilities of their role.

2021 Supervisory Board remuneration

In 2021, the remuneration policy for members of the Supervisory Board was applied.

The following table provides an overview of the Supervisory Board’s remuneration that became unconditional in 2021 or at year end (in millions of Russian roubles).

		Base remuneration		Share-based compensation		Total remuneration
Name	Position	2021	2020	2021	2020	2021	2020
Peter Demchenkov	Chairman, Nomination and Remuneration Committee	30	22	22	13	52	35
Geoff King	Chairman, Audit and Risk Committee	22	21	21	13	43	34
Michael Kuchment		10	10	10	6	20	16
Nadia Shouraboura	Chair, Sustainable Development and Innovation Committee	17	12	11	6	28	18
Marat Atnashev		−	−	−	−	−	−
Alexander Tynkovan		8	−	2	−	10	−
Karl-Heinz Holland		3	8	2	5	5	13
Mikhail Fridman		−	−	−	−	−	−
Stephan DuCharme		12	21	19	20	31	41
Richard Brasher		7	−	2	−	9	−

Mikhail Fridman and Marat Atnashev, in their role as representatives of CTF Holdings S.A., have waived any entitlement to Supervisory Board remuneration, whether in cash or restricted stock units.

Richard Brasher and Alexander Tynkovan were appointed on 12 May 2021.

Karl-Heinz Holland stepped down as of 12 May 2021. Stephan DuCharme and Mikhail Fridman stepped down as of 1 March 2022. Richard Brasher stepped down as of 4 March 2022. Geoff King stepped down as of 11 March 2022. Michael Kuchment stepped down as of 25 March 2022.

Base remuneration

In 2020, the General Meeting of Shareholders approved the remuneration policy for the Supervisory Board. Annual fees are as follows:

Role	Fee (EUR)
Supervisory Board Chair	250,000
Supervisory Board Member	100,000
Additional allowance for:
Supervisory Board Vice Chair	50,000
Committee Chair	100,000
Committee Member	16,000

Share-based compensation

The share-based compensation reflects the accrued amounts related to the Restricted Stock Unit Plan (see table to the right).

Each remunerated Supervisory Board member is entitled to an annual equity award in the form of restricted stock units (RSUs), for an award value equal to his/her annual cash allowance.

In accordance with the remuneration policy, Supervisory Board members Stephan DuCharme, Peter Demchenkov, Geoff King, Michael Kuchment, Nadia Shouraboura, Richard Brasher and Alexander Tynkovan were awarded a number of RSUs equal to 100% of their gross annual cash allowance in 2021 divided by USD 31.36, the average market value of one GDR as of 20 May 20211, the award date. The RSUs awarded in 2021 will vest in 2024, followed by a lock-in period ending in 2026.

Total remuneration

No other remuneration has been granted or allocated by subsidiaries or other companies whose financials are consolidated by the Company to members of the Supervisory Board.

Restricted stock units awarded and outstanding to members of the Supervisory Board

Name	Tranche	RSUs awarded in 2017	RSUs awarded in 2018	RSUs awarded in 2019	RSUs awarded in 2020	RSUs awarded in 2021	Year of vesting	RSUs vested	Value on vesting date	Vested GDRs after tax	GDRs locked up as OF 31/12/2021	End of lock-up period	RSUs outstanding as OF 31/12/2021	RSUs outstanding as OF 31/12/2020
S. DuCharme	8	9,631					2020	9,631	21	9,631	9,631	2022
	9		9,977				2021	9,977	23	9,977	9,977	2023		9,977
	10			9,722			2022					2024	9,722	9,722
	11				9,335		2023					2025	9,335	9,335
	12					5,133	2024					2026	5,133
G. King	8	8,026					2020	8,026	18	5,433	5,433	2022
	9		9,977				2021	9,977	23	5,300	5,300	2023		9,977
	10			9,373			2022					2024	9,373	9,373
	11				9,211		2023					2025	9,211	9,211
	12					9,747	2024					2026	9,747
P. Demchenkov	8	5,618					2020	5,618	12	3,803	3,803	2022
	9		7,982				2021	7,982	18	4,240	4,240	2023		7,982
	10			8,942			2022					2024	8,942	8,942
	11				9,800		2023					2025	9,800	9,800
	12					13,448	2024					2026	13,448
M. Kuchment	8	3,210					2020	3,210	7	2,173	2,173	2022
	9		3,991				2021	3,991	9	3,991	3,991	2023		3,991
	10			4,099			2022					2024	4,099	4,099
	11				4,274		2023					2025	4,274	4,274
	12					4,523	2024					2026	4,523
K.-H. Holland	9		1,995				2021	1,995	5	1,304		2023		1,995
	10			3,749			2022	2,498	—	1,633		2024		3,749
	11				3,684		2023	1,228	—	802		2025		3,684
N. Shouraboura	9		1,995				2021	1,995	5	1,502	1,502	2023		1,995
	10			4,099			2022					2024	4,099	4,099
	11				4,274		2023					2025	4,274	4,274
	12					7,798	2023					2026	7,798
R. Brasher	12					3,245	2024					2026	3,245
A. Tynkovan	12					3,245	2024					2026	3,425

Other policy information and contract terms

Other items

Supervisory Board members benefit from liability insurance coverage and reimbursement of expenses. The Company does not grant variable remuneration to Supervisory Board members; they do not accrue any pension rights and are not eligible for personal loans or guarantees.

Supervisory Board members do not receive any other benefits or entitlements and are not entitled to any severance payment or benefits upon termination of their appointment. Supervisory Board members are appointed and reappointed based on the provisions of the law and Articles of Association of the Company.

No clawback or change-in-control arrangements are in place for Supervisory Board members.

Legacy arrangements

The table to the right reflects the total remuneration of each member of the Supervisory Board in the five most recent financial years (in millions of Russian roubles).

Name	2017	2018	2019	2020	2021
Peter Demchenkov	20	24	31	35	52
Mikhail Fridman	−	−	−	−	−
Geoff King	34	35	36	34	43
Stephan DuCharme	34	39	40	41	31
Michael Kuchment	24	13	15	16	20
Karl-Heinz Holland	−	4	11	13	5
Nadia Shouraboura	−	4	12	18	28
Marat Atnashev	−	−	−	−	−
Richard Brasher	−	−	−	−	9
Alexander Tynkovan	−	−	−	−	10

Mikhail Fridman and Marat Atnashev, in their role as representatives of CTF Holdings S.A., have waived any entitlement to Supervisory Board remuneration, whether in cash or restricted stock units.

Richard Brasher and Alexander Tynkovan were appointed on 12 May 2021.

Other information

Total remuneration

The annual remuneration for Management Board and Supervisory Board members during 2021 amounted to RUB 640 mln (2020: RUB 519 mln).

Other arrangements

No (personal) loans were granted to the members of the Management Board or of the Supervisory Board, and no guarantees or the like were granted in favour of any of the members of the Management Board or of the Supervisory Board. No severance payments were granted to members of the Management Board or of the Supervisory Board in 2021, and no variable remuneration was clawed back.

Shareholder voting

This Remuneration Report will be submitted to the 2022 Annual General Meeting of Shareholders for an advisory vote.

19 May 2022

Corporate Governance

Corporate governance report

Governance structure

Pyaterochka

Perekrestok

Karusel

Chizhik

Management Board

Composition and reappointment schedule of the Management Board

Name

Year of birth

Year of first appointment

End of current term of appointment

Supervisory Board

Composition and reappointment schedule of the Supervisory Board

Name

Year of birth

Year of first appointment

Year of possible reappointment

Committees of the Supervisory Board

Composition of the Supervisory Board Committees

Name

Audit and Risk Committee

Nomination and Remuneration Committee

Sustainable Development and Innovation Committee

Audit and Risk Committee

Nomination and Remuneration Committee

Sustainable Development and Innovation Committee

Diversity

Appointment, suspension and dismissal

Remuneration

Reporting on conflicts of interest

Shareholders and their rights

General Meeting of Shareholders

Voting rights

Dividend rights

Substantial shareholdings

Shareholder

Date of disclosure

Capital interest

Voting rights

Securities owned by Board members

Repurchase by the Company of its own shares

Issue of new shares and pre-emptive rights

Articles of Association

Anti-takeover measures and change-of-control provisions

Auditor

Compliance with the Dutch Corporate Governance Code

Independence of the Supervisory Board and Its Members

Appointment and Reappointment Periods of Supervisory Board Members

Supervisory Board Committees

Composition of the Committees

Award of Shares and/or Rights to Shares to Members of the Supervisory Board

How we manage risk

Risk management

Risk appetite

Risk Category

first line

second line

third line

Monitoring and assurance

Ethics and compliance

Climate change

The Company’s principal risks

Principal risks

Risk movement

Key controls and mitigating factors

Strategy

Market and macroeconomics

Principal risks

Risk movement

Key controls and mitigating factors

Competitive environment

Principal risks

Risk movement

Key controls and mitigating factors

Business development investments

Principal risks

Risk movement

Key controls and mitigating factors

Corporate
Governance

Corporate
governance
report

Composition and reappointment schedule
of the Management Board

Year
of birth

Year of first
appointment

End of
current term
of appointment

Composition and reappointment schedule
of the Supervisory Board

Year
of birth

Year of first
appointment

Year of possible
reappointment

Nomination and
Remuneration Committee

Nomination and
Remuneration Committee

Date of
disclosure

Capital
interest

Voting
rights