X5 Retail Group. Годовой отчет за 2022 год (на английском) - часть 8

Appointment, suspension and dismissal

A member of the Management Board or
the Supervisory Board is required to immediately
report and provide all relevant information to the
Chair 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.

The Supervisory Board has a conflict of interest
protocol to identify and handle conflicts of
interest of Supervisory Board members, due to
the increased risk of conflicts of interest of
Supervisory Board members as the scope of
activities of the Group is becoming broader while
it increasingly operates as an omnichannel
retailer.

The General Meeting of Shareholders appoints the
members of the Management Board and the 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.

In principle, members of the Supervisory Board may 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.

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
the 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 lifted by the General Meeting of Shareholders at
any time.

Reporting on conflicts of interest

In line with the current remuneration policy adopted by the
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 members of the Supervisory
Board has also been adopted by the General Meeting of
Shareholders. The remuneration policies can be found on
the Company’s website.

Remuneration

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Shareholders and their rights

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General Meeting of Shareholders

Each share confers the right to cast one vote at the
General Meeting of Shareholders. There are no
restrictions, either under Dutch law or the Articles of
Association, on the rights 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 (1) a merger
or demerger, (2) the authorisation to limit or exclude pre-
emptive rights and (3) cancellation of shares with a
majority of at least two-thirds of the votes cast if less than
50% of the issued share capital is represented in that
meeting.

X5 Retail Group N.V. is required to hold a General Meeting
of Shareholders within six months of 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 the 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 the
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 a General Meeting of
Shareholders provided that they hold at least 3% of the
issued share capital. Proposals for agenda items for a
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 bank 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, GDR holders 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

Dividend rights

According to the UK 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 table below lists the shareholders on record on
20 April 2023 in the FCA’s public register that hold an
interest of 5% or more in the share capital of the
Company.

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 to
adjusted EBITDA ratio of below 2.0x as at 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. Since 2020, X5
has been committed to semi-annual dividend
payments. The interim dividend will be announced
following the release of the third-quarter results.

In view of the current market conditions, ongoing
regulatory constraints, and consistent with last
year’s profit allocation, the Supervisory Board will
recommend to X5’s General Meeting of
shareholders not to distribute a dividend for 2022.
While the Company remains committed to its long-
term goal of returning company profits to
shareholders, the Supervisory Board believes it
would be in the Company’s best interest to
temporarily deviate from its dividend policy as long
as current uncertainties and regulatory conditions
prevail.

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

Substantial shareholdings

The members of the Management Board and the 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 the Supervisory Board
must notify the FCA of X5 securities and voting rights at
their disposal. These positions can be viewed on the
FCA’s public register.

Securities owned by Board members

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1 Calculated based on the Company’s full-year consolidated financial statements or information in accordance with IFRS 16 as of the end of each

reporting period as the sum of short-term borrowings and long-term borrowings less cash and cash equivalents.

2 EBITDA shall be adjusted (decreased) by the amount that would have been recognised as operating lease, other store costs, third-party

services, and other expenses payable during the period but which is not recognised as such under IFRS 16, as well as the amount of the net
effect from the decrease in the scope of the lease and lease terminations recognised under IFRS 16.

3 Following Brexit, all notifications regarding the Company need to be made to the FCA in the UK; such notifications were made on 1 January 2021.

4 In accordance with filing requirements, the percentages shown include both direct and indirect capital interests and voting rights. The percentages may differ from

the actual shareholders’ interests due to the fact that changes within the thresholds mentioned above do not require a notification to the FCA. Further details can
be found at

www.fca.org.uk

Name

Date of disclosure

Capital interest

⁴

Voting rights

⁴

CTF Holdings S.A.

1 January 2021

47.86%

The Axon Trust

1 January 2021

11.43%

Repurchase by the Company of its own shares

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 shares have a pre-emptive right to

subscribe for shares in proportion to the aggregate amount of their existing

holdings of X5 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 had
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.

Issue of new shares and pre-emptive rights

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

There are no agreements to which the Company is a party 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 event of a change of
control over the Company (as speciﬁed in the respective agreements).

Anti-takeover measures
and change-of-control provisions

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 or GDRs for inspection at the ofﬁces of X5 as of the date of the
notice convening the General Meeting of Shareholders until the end 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.

Articles of Association

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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:

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

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; and

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.

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

(re-)appointment 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.

2021 was the last year of Ernst & Young Netherlands’
engagement term as external auditor of the Company. The
current geopolitical environment presented a challenge for
the Company to extend the mandate with Ernst & Young
Netherlands or to engage a new external auditor to audit the
ﬁnancial statements of the Company for the ﬁnancial year
2022 and beyond. Therefore, on 30 June 2022, the General

Meeting of Shareholders delegated the authority to appoint

an external auditor for the ﬁnancial year 2022 to the
Supervisory Board, in order to allow more time for the
external auditor selection and appointment process.
Subsequently the Supervisory Board approved the
nomination of TSATR – Audit Services LLC (”B1”) and Reanda
Audit & Assurance B.V. as X5’s external auditors in Russia and
the Netherlands, respectively, for the audit of the Company’s
2022 consolidated ﬁnancial statements and Annual Report.

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Compliance with the Dutch Corporate Governance Code

X5 applies the relevant principles and best
practices of the Code in the manner described
in this Corporate Governance Report.
Committed to a corporate governance
structure that best serves the interests of all
stakeholders, including shareholders, X5
continues to seek ways to improve and
enhance its corporate governance standards
in line with international best practices. X5
generally adheres to the Code but does not
comply with the following recommendations:

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 shares in the
Company.

Supervisory Board members Vadim Zingman and Leonid
Afendikov are both affiliated with CTF Holdings S.A.,
which has a capital interest of 47.86% in X5. Therefore,
they are not considered independent under the Dutch
Corporate Governance Code.

X5 believes that the non-independent members of its
Supervisory Board have in-depth knowledge of the
Company’s footprint and business, particularly retail, and
a strong 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.
At the time of writing, a majority of four members of the
Supervisory Board, which currently consists of six
members in total, qualifies as independent within the
meaning of the Dutch Corporate Governance Code.

Independence of the Supervisory

Board and its Members

2.1.7–2.1.8:

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.

Supervisory Board Committees

2.3.2:

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

Composition of the Committees

2.3.4:

The equity-based awards to members of the Supervisory
Board are not performance-based and are calculated
based on the fixed board fee of each member. X5 believes
that the level and structure of the remuneration of the
Supervisory Board members safeguard their
independence of thought and judgement, and adequately
reflect the time commitment and responsibilities of the
role. All equity awards to Supervisory Board members are
subject to approval by the General Meeting of
Shareholders.

Moreover, with a three-year vesting followed by a three-
year claw-back period after vesting in the event of a
material misstatement of the Company’s financial results or
any other condition deemed appropriate by the
Supervisory Board, 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.

The Code prescribes that Supervisory Board members
may not be awarded remuneration in the form of shares
and/or rights to shares (“phantom stock units” or
“PSUs”). The number of PSUs awarded annually equals
100% of a Supervisory Director’s fixed base fee in the
calendar year of the award, divided by the average
market value of an X5 GDR on the relevant award date.
PSU awards to members of the Supervisory Board are
not subject to performance criteria.

X5 acknowledges that the PSU awards to members of
the Supervisory Board constitutes a deviation from the
Code. However, in order to attract and reward
experienced individuals with the necessary track record
for the Company, X5 believes it is necessary to allow
members of the Supervisory Board to receive equity-
based remuneration in addition to their fixed board fee.
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.

Award of Shares and/or Rights

to Shares to Members of the Supervisory
Board

3.3.2:

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
Company understands the extent to which
its strategic and operational objectives are
being achieved, 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 or the continuity of its operations.
X5’s risk management system enables management to

continuously and systematically identify, assess, prioritise,
and manage risks, and covers all businesses and corporate

functions within X5 Group. Ongoing identiﬁcation
and assessment of risks, including for new risks arising
through an early-warning system of key risk indicators, form
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 at both business and
functional units, and ensures that the Management Board is
promptly informed of important risk management
developments as they arise.

Throughout the year, the management teams at all levels of
the Group, supported by the Risk Management team, review
X5’s risks, develop mitigation plans and allocate appropriate
resources to risk mitigation. The outcomes of risk mitigation

efforts are monitored and reported to the Audit and Risk

Committee on a quarterly basis, with a focus
on strengthening the design and effectiveness of the risk

management and internal control systems to ensure:

a comprehensive review of both internal and external risks

is carried out at least once a year

a review and conﬁrmation of the Company’s risk appetite

is carried out periodically

key risk indicators are reviewed periodically

risk assessments for both strategic and short-term

objectives are conducted

ongoing monitoring of emerging risks

adequate risk responses and risk mitigating activities

accurate and reliable reporting

full compliance with relevant laws and regulations

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Risk appetite

X5 applies a “three lines of defence” model to ensure the Company’s risk management
and internal control system is both effective and comprehensive:

First line

Second line

Third line

Team

Business unit / risk owners

Risk Management, Internal Control

and Compliance

Internal Audit

Role

Day-to-day management of risks, providing
assurance regarding the effectiveness

of controls

Steering, monitoring and supporting line
management in (1) managing risks and (2)
developing and maintaining an adequate
framework for control and compliance

Conducting audits and testing the internal
control and compliance framework for
assurance of control effectiveness

GREEN ZONE

YELLOW ZONE

RED ZONE

X5’s risk appetite is set by the Management Board and approved by the
Supervisory Board, and is integrated into Company businesses through the

Group’s strategy, procedures, controls, and budgets. X5’s risk appetite is
expressed in qualitative or quantitative terms:

Qualitative risk appetite determines the attitude to risk for key critical
risks and is then used as the basis for the design and effectiveness of

control procedures by business units and risk owners.

Quantitative risk appetite consists of high-level metrics that highlight

the potential risks of not achieving strategic goals. They are monitored
on a quarterly basis against set thresholds (see the table below).

Risk appetite is cascaded to the level of retail chains and business units and
integrated into the decision-making process and control environment of

business processes.

Risk level

Low

Medium

High

Target state for key
risk indicators

Target zone
for all risks

Acceptable for
a short period

Unacceptable

Measures taken to
achieve strategic goals

Monitoring of key
risk indicators

Development of risk
mitigation measures

Critical measures
to decrease risk

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Monitoring and assurance

A key element of X5’s risk management framework

is monitoring and assurance. The Company leverages
a comprehensive business planning and performance review
process to monitor its performance. This process covers
the adoption of strategy, budgeting and the reporting of
current and projected results. The Company’s business
performance is gauged against both ﬁnancial and non-
ﬁnancial (including sustainability) targets.

X5’s internal control activities aim to provide reasonable
assurance as to the accuracy of ﬁnancial and non-ﬁnancial
disclosures, the Company’s compliance with applicable laws
and internal policies, and the effectiveness of internal
processes. Internal controls have been established for
operating entities and across all functions. Compliance with
Сompany 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) performs 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 systematic 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 better
integrate them into the Company’s business processes.

Ethics and compliance

X5 recognises that ethics and integrity are key components
in driving X5’s sustainable health and long-term value
creation. Our Code of Business Conduct and Ethics reﬂects
our values and principles, which, coupled with underlying
policies and procedures, are promoted and embedded
across the Group through learning and training programmes.

Further information on these objectives can be found in the
Sustainability management section on pages 83–85 and Risk
Proﬁle below.

2022 ESG performance

X5 Group is committed to pursuing ESG leadership in all of its
business activities and continues to participate in the
transition to a low-carbon economy. Our shift to more
sustainable business practices is an ongoing process, guided
by our sustainable development strategy and long-term
targets.

Despite a rapidly changing environment, emerging
challenges and the steady growth of the Company’s
business units, X5 is on track with its sustainable
development strategy goals. X5 closely monitors its
environmental footprint by continuing to calculate its annual
greenhouse gas emissions, implementing decarbonisation
measures and improving its awareness of climate-related
issues and risks.

Issues related to climate change are reviewed regularly at the
most senior levels of management. Climate-related risks are
integrated in the Group-wide risk assessment and
management process and are categorised as “principal risks”.
The process of evaluating such risks evolves each year; in
2022, X5 expanded its climate risk analysis by geographically
mapping its climate risks to identify the Company’s exposure
and vulnerability to climate change across its footprint.

The Company’s sustainability strategy, as well as initiatives
implemented by business units, are designed to address the
following challenges:

The unsustainable use of natural resources, environmental
pollution caused by waste, the impact of waste on natural
ecosystems, and the entry of waste into water bodies;

The decline in the standard of living across the Company
footprint and the increasing need for affordable products
and charity work;

The reduction of food waste by optimising the production
process, logistics and product sales.

The Company is also currently working to assess its impact
on human rights in the context of key stakeholders:
customers, employees, suppliers, and delivery services.

The Company’s principal risks

X5’s principal risks – those that may prevent X5
from achieving its objectives regarding 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.

Hard discounters and specialist segments benefitted from the
macroeconomic environment and customer behaviour trends.

Competition in the proximity segment increased because of the
rising importance of price for consumers.

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

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 building 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).

Competitive environment

Strategy

Market and macroeconomics

In 2022, the economy faced a structural change in prices as a result
of restrictions on foreign trade. Exchange rate volatility and rising
costs led to CPI acceleration in the first half of the year. Meanwhile,
the strengthening of the exchange rate and a bumper harvest
mitigated the impact of acute inflation in the second half of the
year. The labour market remained strong and mitigated a decline in
real disposable incomes.

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

We constantly monitor and forecast the economic environment and make adjustments to our strategy
as needed.

We are actively developing a hard discounter format (Chizhik) and taking other steps to address the
pressure on individual incomes.

We are revising our CVP in the proximity format to favour low-price segment products and private labels,
increasing their share of the assortment and sales.

We are revising our CVP in the supermarket segment to favour affordable ready-to-eat food, focus
on product quality and freshness, and increase the number of coffee points and ready-to-eat food
outlets in the stores.

Governance and ownership structure

The government of the Russian Federation imposed temporary
restrictions on cross-border payment of dividends or similar capital
distributions to a number of countries including the Netherlands.
under these restrictions such payments are subject to a preliminary
government of Russian Federation authorisation, leading to
significant uncertainties with respect to future dividend
distributions from Russian operations. It is not clear when such
restrictions will be lifted.

Whilst the admission to trading of X5's GDRs on the London stock
exchange remains suspended and such suspension may remain in
place for an indefinite period of time, X5's shareholders currently
have limited or no liquidity in our stocks.

While we are closely monitoring sanctions and their impact on our operations, governance and
ownership structure, we are analysing all available options to improve our corporate structure and
safeguard the long-term interests of our shareholders and other stakeholders.

We are taking appropriate measures to conserve cash, consider our capital allocation and budget
appropriately during this period of uncertainty.

X5’s strategy to optimize shareholder recognition may be at risk
by laws or regulations that could adversely affect value, return
and liquidity of global depositary receipts (GDRs) held by X5’s
shareholders. If we pursue a restructuring of the Group’s
ownership and governance and are unable to implement such
steps on acceptable terms, the interests of our shareholders
could be materially adversely affected.

If sanctions were to be imposed directly on X5 Retail Group N.V.,
our operating subsidiaries and members of our governing bodies,
our operations as well as our corporate ownership structure, may
be materially adversely affected.

CORPORATE GOVERNANCE

HOW WE MANAGE RISK

122

Principal risks

Risk movement in 2022

Key controls and mitigating factors

Human resources

One of the key challenges in 2022 was a growing labour shortage

caused by a decrease in migration, coupled with signiﬁcant growth

in demand for labour from the growing construction, retail and
e-grocery segments.

A failure to recruit, retain and develop people with the required

skills or to instil a culture that reﬂects our values could impact

business performance.

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 in place for employee onboarding, training and development, and have built a
sizeable talent pool.

We create a culture that enables us to recruit, retain and promote top industry talent, and to foster an
environment that stimulates professional growth, collaboration and accountability, as well as ensuring

safety and ﬂexibility.

We have a health and safety policy in place to cover workplaces across various functions. 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.

Supply chain

Sanctions are having a material impact on Russia’s suppliers and on
cross-border supply chains, as well as on imports of goods, spare
parts and other items.

Gaps in X5’s retail infrastructure and inventory management, as well

as external shocks, may lead to an inability to maintain effective

inventory management and ensure a reliable supply of goods for
our customers at an acceptable level of shrinkage and
overstocking.

We run comprehensive supply chain operations through decentralised logistics networks, enabling our
retail formats to effectively manage their inventories across the supply chain.

We are strengthening our supply chains in order to meet the elevated demand for staple goods.

We continue to develop X5’s direct import business to establish long-term and stable business
relationships with major producers in other countries. This is especially important in light of international
sanctions regimes and their impact on Russian supply chains. We are better positioned to adapt to the
new normal and rebuild logistics processes in the case of a disruption.

We are optimising operations across the Company’s supply chain and are constantly reviewing ways

to further leverage X5 Group’s purchasing power and the scale of its infrastructure.

See the Retail Infrastructure section on pages

56–63

Operations

Retail and customer service

Inconsistent and ineffective operational management may affect
X5’s ability to provide its customers with an attractive shopping

experience.

We use commercial and research data to gauge our performance against customer priorities and

expectations regarding price, product range, availability and service.

Every year we assess and, where required, strengthen our regional management teams to ensure our
stores are well supported across all locations.

Business development investments

Insufﬁcient return from investments in new business lines, and

capital costs for the development of X5’s retail formats.

We follow strong investment control procedures. All new business initiatives are subject to validation
through pilot projects.

We implement action plans for underperforming stores to increase their efﬁciency and proﬁtability.

CORPORATE GOVERNANCE

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123

Principal risks

Risk movement in 2022

Key controls and mitigating factors

Sanctions continue to affect our IT systems and infrastructure.
A significant number of critical hardware and software suppliers
are freezing their operations or exiting the Russian market.

We audit the necessary and critical IT systems and constantly explore alternative solutions to ensure
business continuity, including through import substitution.

We operate controls to maintain the integrity and efficiency of our IT systems, including detailed
recovery and contingency plans.

We maintain or improve our internal expertise in IT systems in order to maintain the necessary availability
and service level of IT services.

We ensure that our IT resources are able to meet current and future business requirements in a cost-
effective manner.

Inability to support existing and supported solutions.

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.

Cybersecurity

Sanctions have decreased the availability of vendors and
cybersecurity solutions. A significant number of critical hardware
and software suppliers are freezing their operations or exiting
the Russian market.

External and internal threats to information security, including
cyberattacks, viruses and other malicious actions aimed at, for
instance, infiltrating our IT systems or corrupting data.

We operate 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 cybersecurity team to increase our protection in the current environment.

See the X5 Technologies section on pages

61–62

Compliance

Business continuity performance

Foreign policy tensions had a complex impact on business
continuity in 2022.

Sanctions continue to affect the Company as a whole and IT as one
of its key components. A significant number of critical hardware and
software suppliers are freezing their operations or exiting the
Russian market.

International sanctions and export restrictions affecting businesses
and individuals in Russia, and countermeasures implemented by
the Russian authorities remain in place; at holding level in the
Netherlands, the Company is confronted with enhanced scrutiny
and due diligence by its service providers.

New logistics and international activity arrangements are under development.

We constantly monitor and control business processes.

We have in place business continuity plans for our key business processes and disaster recovery plans
for our critical IT systems (including import substitution).

We are building our knowledge base in business continuity management measures and spread
awareness of this topic among Company employees.

We are closely monitoring international sanctions and export control developments and the
macroeconomic climate in the Company's operational environment and we are assessing contingency
plans to address potential developments.

Interruptions to business processes due to crises and
emergencies.

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

Whereas X5 is not subject to sanctions, the current environment
may have an impact on the due diligence and client acceptance
of suppliers and service providers outside of Russia, leading to
operational constraints both in Russia and at holding company
level in the Netherlands.

See the X5 Technologies section on pages

61–62

Fraud and corruption

The inability to set and foster 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 reputational damage.

We uphold a zero-tolerance policy for non-compliance with the principles of business ethics and regularly
run anti-bribery and corruption trainings within the Company.

We implement automated and manual controls in business processes and segregate rights to access
information systems.

We require that all employees complete a conflict of interest declaration to monitor any potential conflicts.

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124

Principal risks

Risk movement in 2022

Key controls and mitigating factors

Data privacy and security

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

We regularly report on the progress of our security and privacy programmes to management and
oversight committees.

Ongoing monitoring of Company processes, including risk assessment and monitoring, continues
to drive compliance across our business.

Financial risks

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

X5 could be affected by a number of industry-wide financial risks:

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.

Increases in interest rates and/or banking fees

Significant volatility in foreign exchange rates

Liquidity risk and credit risk

Dollar/euro clearing and bank correspondence

Reporting and financing

ESG

All ESG-related risks

X5 Group strives for ESG leadership in all areas of its activities and
continues to participate in the transition to a low-carbon economy
while upholding human rights.

See Sustainable Development on pages

77–107

Legislation and litigation

There are significant risks of state regulation of the retail market in
the current macroeconomic and political environment.

International sanctions and export restrictions affecting businesses
and individuals in Russia, and countermeasures implemented by
the Russian authorities, may have a material adverse impact on X5's
business operations, governance and corporate structure.

Our legal team participates at 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.

An inability to identify, quickly respond to and attempt to modify
proposed changes to applicable laws that may negatively impact
the business.

Concluding contracts with unfavourable terms for the Company
and the failure to comply with or monitor contract terms to
protect the Company from financial losses.

CORPORATE GOVERNANCE

HOW WE MANAGE RISK

125

Principal risks

Risk movement in 2022

Key controls and mitigating factors

CORPORATE GOVERNANCE

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126

Statement of the Management Board

Over the course of 2022, the Management Board reviewed and analysed the
strategic, operational, compliance, and reporting risks to which the Company
was exposed, as well as the effectiveness of the Company’s risk
management and internal control systems. The outcome of this review and
analysis has been shared with the Audit and Risk Committee and the
Supervisory Board and has been discussed with X5’s external auditor.

The Management Board reviewed the effectiveness of X5’s internal risk
management and control systems based on:

internal audit reports on reviews performed throughout the year, with
observations and measures to address issues 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 teams of corporate
functions and 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 How We Manage Risk section 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 that the Company will achieve its
operational and strategic business objectives, nor can they fully prevent instances of
misstatements, inaccuracies, errors, fraud, and non-compliance with legislation, rules
and regulations.

Based on the annual evaluation and discussion of X5’s risk management and
internal control systems and identified risk factors, the Management Board confirms
that, based on the current state of affairs and to the best of its knowledge:

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 for financial reporting to be prepared on a going concern basis,
based on the Management Board's review of the strategic plan, the 2023 budget
and the Management Board's 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 Company position on the date of the balance sheet, the growth and
performance of the business over the financial year and a thorough
description of the principal risks and uncertainties that the Company faces.

31 May 2023

THE MANAGEMENT BOARD

Supervisory and Management Boards

CORPORATE GOVERNANCE

SUPERVISORY AND MANAGEMENT BOARDS

127

Supervisory Board

Peter

Demchenkov

CHAIR OF THE SUPERVISORY

BOARD, CHAIR OF THE NOMINATION

AND REMUNERATION COMMITTEE

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

Olga

Vysotskaya

MEMBER OF THE SUPERVISORY

BOARD, CHAIR OF THE AUDIT

AND RISK COMMITTEE

Olga Vysotskaya, a Russian national (1961),
previously served as partner in the audit
and assurance practice of KPMG,
PricewaterhouseCoopers and Deloitte. In
addition, Olga has more than 13 years of
board-level experience including at NIS
(Naftna Industrija Srbije), Samolet, Irkutsk Oil
Company, and SUEK. She is a member of the
Association of Independent Directors and a
Chartered Director and Fellow at the Institute
of Directors in London. Olga graduated from
St Petersburg University with honours
and holds an MBA degree from the University
of Bristol.

Vadim

Zingman

MEMBER OF THE SUPERVISORY

BOARD

Vadim Zingman, a Russian national (1970), is
currently President of Alfa Group. From 2009 to

2019, Vadim held senior positions at Aeroﬂot,

including as Deputy General Director and
Customer Service Director. He also has
extensive expertise in the banking sector,
having served as Vice President of Inkombank
(1992–1998), Chair of the Management Board
of Baltonexim Bank (1992–1998) and President
of Interregional Clearing Bank (2000). He
graduated with honours from the St Petersburg
University of Economics and Finance.

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128

Supervisory and Management Boards

Supervisory Board

Dmitry

Alekseev

MEMBER OF THE

SUPERVISORY BOARD

Dmitry Alekseev, a Russian national (1974),
is the founder, co-owner and President of
DNS (Digital Network System) Group, a
retail network specialising in digital and
household appliances as well as computer
manufacturing. Dmitry holds degrees in
engineering and law from Far Eastern
Federal University in Vladivostok and has
an MBA from Moscow State University’s
Higher School of Business.

Vassilis

Stavrou

MEMBER OF THE

SUPERVISORY BOARD

Vassilis Stavrou, a Greek national (1970),
worked for almost 30 years at Ahold Delhaize,
were he served in various roles throughout the
group, ultimately being appointed as Brand
President at Alfa Beta in Greece in 2018.
Vassilis Stavrou holds an MSc in Food Science
and Technology from the Aristotle University of
Thessaloniki and has a postgraduate diploma
in Business Administration from the Hellenic
Management Association.

Leonid

Afendikov

MEMBER OF THE

SUPERVISORY BOARD

Leonid Afendikov, a Russian national (1978),
is currently Director of Group Portfolio
Management at CTF Consultancy Ltd. From
2012 to 2021, he held senior positions at
Alvarez & Marsal, including as Managing
Director, and has extensive legal, financial, and
tax and accounting experience, including
work for McKinsey and private shareholders.
Leonid graduated with honours from Financial
Academy under the Government of the
Russian Federation (now named Financial
University under the Government of the
Russian Federation).

CORPORATE GOVERNANCE

SUPERVISORY AND MANAGEMENT BOARDS

129

Supervisory and Management Boards

Management Board

Igor

Shekhterman

X5 CHIEF EXECUTIVE OFFICER,

CHAIR 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 Kaliningrad Technical
Institute (1992) and degrees in Business
Administration from Institut d’Administration
des Enterprises (France, 1994) and 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.

Ekaterina

Lobacheva

PRESIDENT, MEMBER OF THE

MANAGEMENT BOARD

Ekaterina Lobacheva, a Russian national
(1982), joined X5 in October 2016 as the Head
of the Corporate Law and X5’s Corporate
Structure Department. She has more than
15 years of successful managerial and practical
experience, including various positions at
Evraz Holding, where she implemented a
number of large-scale projects focused on
legal support for the business, and MDM Bank.
Ekaterina has an MBA degree from IMD
Business School, a degree in Law from the
Russian Academy of State Service and a
degree in Finance and Credit from the
Plekhanov Russian University of Economics.

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