Supervisory Board report
Society’s demand for renewable energy is growing fast. To integrate renewable sources of energy into the electricity grid, and to keep it balanced and stable, requires considerable investment and carefully considered decisions. The Supervisory Board is closely involved in this critical process by overseeing and advising the Executive Board.
Specifically, the Supervisory Board is responsible for assessing whether the decisions taken by the Executive Board comply with the company's strategic, societal, financial, and technical objectives. The Supervisory Board also assesses TenneT´s safety performance and the security of the electricity supply.
A common theme running through the Supervisory Board’s work in 2016 was balancing the challenges of the fast-changing environment and seizing new business opportunities, while safeguarding security of supply.
The most important topics discussed by the Supervisory Board in 2016 and the challenges faced are outlined below.
TenneT’s five-year strategy: 'Enabling the Change', was reviewed by the Supervisory Board in 2015. The Supervisory Board monitors the implementation of the strategy on an ongoing basis and welcomes the fruitful discussions that ensue. Digital transformation was one of the strategic priorities which was discussed in depth.
For Supervisory Board meetings, discussions on relevant topics are prepared by the three committees as described below.
Supervisory Board Committees
The Supervisory Board has three committees;
(1) Audit, Risk and Compliance,
(2) Remuneration and Appointments, and
(3) Strategic Investments. Each Supervisory Board member serves on at least one of these.
The Chairman of the Supervisory Board does not chair any of the committees.
Each committee advises the Supervisory Board on delegated subjects, and at Supervisory Board meetings, each committee chairman reports on subjects it has discussed, with documents and minutes submitted to the Supervisory Board ahead of its meetings.
In 2016, each Supervisory Board and committee meeting was attended by the company secretary who took minutes on each occasion.
Society relies on TenneT for a reliable and uninterrupted supply of electricity. Every day, TenneT’s high-voltage grid affects the daily lives of 41 million people throughout the Netherlands and in large parts of Germany. The Supervisory Boards aims to support TenneT in and by interacting with society in an open and transparent way.
Contact with the shareholder
During 2016, there was frequent contact with the shareholder outside of the General Meeting of Shareholders. This was important, considering the many developments both within the company and externally, taking into account the role that the Dutch State as shareholder wishes to perform.
During these meetings, the shareholder and the Supervisory Board discussed the topic of variable remuneration for the statutory directors, which is an element of overall remuneration. In 2015, the shareholder expressed its wish to lower the variable element to 20% of base salary for statutory directors of all state-owned enterprises. During 2016, the Supervisory Board agreed with the statutory directors to reduce the variable part of remuneration was accordingly reduced to a maximum of 20%.
During the year, the shareholder also started the process of revising the remuneration policy. Discussions between the Supervisory Board and the shareholder are still ongoing on this matter.
The Supervisory Board and the shareholder also discussed the future dividend policy, assessing the appropriate level in light of the future equity needs of the company and the shareholder’s budgetary expectations balanced against the long-term capital needs of the company.
Supervisory Board Effectiveness Review
The Supervisory Board evaluated its own performance (Board Effectiveness Review) in the second part of 2014, with the support of an external advisor. This consultant also held individual meetings with the members of the Supervisory Board to discuss personal feedback. The results of the Board Effectiveness Review were shared with the Executive Board. In 2016, as in 2015, the Supervisory Board discussed the follow-up to the review. It was noted that topics flagged during the review were adequately addressed, with the regular senior management review not only discussed by the Remuneration and Appointments Committee, but also by the full Supervisory Board. Feedback from the discussions within the committees to the full Supervisory Board was given more efficiently and there were occasions, which facilitated further contact with senior management. A fixed topic on the agenda of each Supervisory Board meeting was added: the evaluation of the current meeting. One topic identified during the Review (the Supervisory Board having a fixed meeting opportunity without the presence of the Executive Board) was not taken up, as the Supervisory Board did not consider this to add any benefit at this stage.
Ever-increasing amounts of renewable energy are flowing into the system. Further integration of the North Western European markets, as well as upgrading the Dutch grid, is necessary to ensure security of supply. TenneT is one of the leaders in establishing a single European energy market and has more interconnectors in place across national borders than any other TSO in Europe. The Supervisory Board discussed TenneT’s role in this and welcomed the fact that TenneT was officially appointed to build and operate the Dutch offshore grid in 2016.
"International cooperation and a high degree of onshore and offshore connectivity are crucial for realizing the transition to renewable energy and secure the uninterrupted and cost-efficient supply of electricity. As Supervisory Board, we consider it in society's interest that TenneT and other North West European TSO's can engage in such cooperation and further shape their role to facilitate the energy transition."
Mr. Veenman, Chair Supervisory Board TenneT
Security of supply
TenneT needs to do substantial and complex investments to strengthen the onshore grids in Germany and the Netherlands. As a result, the offshore grid connections and interconnector capacity with other countries were high on the Supervisory Board's agenda during the year. In line with its duties, the Supervisory Board assessed the strategic, societal, financial, and technical aspects of these investments. As some of these factors may lead to different outcomes, the Supervisory Board carefully considers all aspects and alternatives.
Last year, these discussions included an analysis into the causes of the 2015 outage in Diemen. Mr. Fischer, CEO of Tata Europe – which was affected by the outage – did not take part in these discussions.
Strategic Investments Committee
Throughout the year, the Strategic Investments Committee reviews investment proposals with a value above EUR 50 million, as submitted by the Executive Board. It assesses whether such proposals are compatible with the company's economic, financial, and technical objectives, as well as with the risk profile and stakeholder impact. Dilemmas discussed included issues such as the cost of grid expansion versus those of redispatch, as well as the costs involved in underground cabling, often necessary to gain public acceptance. The Strategic Investments Committee also monitors timeliness, quality, cost efficiency and associated risks of large projects, and advises the Supervisory Board on investments.
In 2016, the Strategic Investments Committee consisted of Mr. Zwitserloot and Mr. Fischer (Chair). Mr. Fischer took over the chair of Mr Zwitserloot to ensure rotation of duties within the Supervisory Board. The committee held six meetings, each with several members of the Executive Board. Most of the meetings were attended by Mr. Veenman and/or Mrs. Griffith as a guest.
TenneT is a facilitator of the transition to green energy, but its activities have an unavoidable impact on nature. As TenneT's Supervisory Board, we are fully aware that we have a responsibility to care for the wellbeing of the natural environment for future generations. TenneT's 'Commitment to Nature' vision underlines the company's approach to biodiversity, ecosystems, and the landscape.
In 2016, the Dutch government formally appointed TenneT as the responsible party for developing and operating the Dutch offshore grid connections, which will make 3,500 MW of renewable wind energy available by 2023. The first two offshore wind park connections, Borssele and Hollandse Kust Zuid, were discussed by the Supervisory Board.
Offshore development in Germany is progressing rapidly and is vital to the success of the Energiewende. The challenging transitional work involved in putting grid connections into operation was discussed in detail by the Supervisory Board. Furthermore, the challenges of commissioning offshore grid connections, underlined by the failure of the DolWin2 cable joints during trial operations phase, was a point of focus.
Innovation is high on the Supervisory Board's mind, most particularly the innovation roadmap, innovation programs and the way TenneT structures and governs innovation. Innovations such as long stretches of underground cabling can help preserve the landscape and are the preferred political option for DC in Germany.
TenneT’s people are at the heart of the company’s continued success and growth and the Supervisory Board aims to help create a safe, healthy, stimulating and energising work place where they can perform to the best of their abilities. Attracting the right people in an environment where talented technical specialists are scarce and empowering them to perform is crucial to TenneT’s ongoing success.
Safety at TenneT is a matter of primary focus for the Supervisory Board, particularly as regards the company's safety record, which is benchmarked against TenneT’s peers and overall best-performing companies. The Supervisory Board continued to closely monitor the implementation of TenneT's Safety Vision 2018 - introduced in 2014 - and discussed the LTIF, which has regretfully not continued its progress made during previous years.
During its meetings, the Supervisory Board discussed individual safety incidents, as well as the lessons learned and best practices from other industries.
Remuneration and Appointments Committee
The Remuneration and Appointments Committee is tasked with the company's remuneration policy and the remuneration of individual board members. The Remuneration and Appointments Committee also establishes criteria for appointing new board members and supervises the recruitment process. Furthermore, it is tasked with the management review and possible nominations for the re-appointment of board members.
In 2016, the Remuneration and Appointments Committee consisted of Ms. Hottenhuis (Chair), Mrs. Griffith and Mr. Veenman. The committee held eleven meetings. Most were conducted in the presence of the Chairman of the Executive Board. Discussions concerning the remuneration report were conducted in the presence of the CFO. Of the eleven conferences, five were telephone conferences, regarding the shareholder's wish to reduce variable remuneration, as well as the revision of the remuneration policy.
Selection, appointments, remuneration and performance
Selection and succession processes within TenneT's Executive Board are an important task of the Supervisory Board. As part of this, the Supervisory Board conducts performance appraisals for the members of the Executive Board, which consists of six members, four statutory directors and two non-statutory directors. The input for these appraisals is gathered by the Remuneration and Appointments committee in a part of a Supervisory Board meeting not attended by the Executive Board.
As well as assessing the performance of the Executive Board, the Supervisory Board discussed the yearly review of TenneT’s wider senior management, including succession planning. Also, the Supervisory Board frequently discussed issues relating to remuneration. In 2016, specific topics included targets set for the variable remuneration of the statutory Executive Board members and the 2015 remuneration report.
Diversity and Culture
TenneT aims for its Executive Board and Supervisory Board to be comprised of people with diverse backgrounds experiences, skills, and knowledge. TenneT values this diversity and believes it contributes positively to the way situations are assessed and decisions made. The Supervisory Board is fully aware that the Executive Board lacks gender diversity and will take this into account for future appointments. TenneT will make serious efforts to comply with the gender equality targets set by the European Commission to ensure greater board-level gender diversity by 2020. During 2016, the Supervisory Board delibirated on the organisational culture of the company and the need to balance the organisational focus on stability and reliability vs. employees' ability to address new opportunities provided by the external environment.
Contact with the Works Council
Fostering good relations with the Works Council, which represents employee interests, is an important task of the Supervisory Board, and one it considers vital given the rapid developments in the energy market in general and at TenneT in particular. As such, the Chairman of the Supervisory Board regularly met with members of the Works Council during the year to keep abreast of employee issues. A joint meeting in November with the Supervisory Board, the Works Council and the Executive Board was welcomed by the Supervisory Board since it gave an opportunity for an active dialogue with the Works Council.
After they are appointed, new Supervisory Board members participate in a programme introducing them to TenneT's key business areas.
The Supervisory Board considers ongoing education of this kind to be of great importance. In 2016, two in-depth workshops were held, focusing on project management and IT. In addition, Supervisory Board members visited the TenneT sites in Voorburg, Eemshaven and Dörpen. These site visits and workshops (presented by the senior managers) are a good opportunity for the Supervisory Board members to meet with TenneT employees across the company.
Composition of the Supervisory Board
Members of the Supervisory Board are appointed for a term of four years with a maximum of three terms. Details on this can be found on TenneT's website. Many factors are considered in the composition of TenneT's Supervisory Board, including the nature of the company, diversity and the required expertise and background of its members.
In accordance with the Corporate Governance Code, all Supervisory Board members are independent. Furthermore, the Supervisory Board complies with the Electricity Act, which stipulates that the majority of Supervisory Board members has no direct or indirect links with legal entities (or shareholders thereof) engaged in the production, purchase or supply of electricity or gas. Certain Supervisory Board members hold positions at companies, which have a customer or supplier relationship with TenneT. It should be noted that these Supervisory Board members have not been involved in any business dealings between their respective companies and TenneT. Contract reviews, negotiations or awards between the companies were conducted at the appropriate business levels and in the ordinary course of business.
In 2016, Mr. Verboom was re-appointed by the shareholder for his second term. This reappointment was discussed internally within the Supervisory Board. Furthermore, an interview with the shareholder was part of the reappointment process.
Mr. Zwitserloot is a member of the Aufsichtsrat of TenneT TSO GmbH, the German equivalent of the Supervisory Board.
In March 2017, the third term of the Supervisory Board's chair, Mr Veenman, will end. In accordance with the applicable statutory provisions, Mr Veenman shall retire no later than at the close of the first general meeting after expiry of his third term, i.e. at the annual general meeting in March 2018.
More information on the members of the Supervisory Board can be found in the next section of this annual report.
TenneT must balance the financial interests of its shareholder with its duty to ensure electricity remains affordable and freely available to all. TenneT’s license to operate is rooted in ensuring the security of electricity supply in its markets, while delivering maximum benefit to society in the most financially viable way.
Audit, Risk and Compliance Committee
The Audit, Risk and Compliance Committee monitors the company's financial reporting, including quarterly and annual reports, financing policy, risk management and internal control system, internal audit, the independent external audit of the financial statements and the evaluation of the external auditor.
In 2016, the Audit Committee consisted of Mr. Verboom (Chair) and Mr. Veenman. It held four meetings attended by the Chair of the Executive Board, the CFO, the senior manager for Internal Audit and the senior manager for Corporate Control. The company’s external auditor also attended these meetings.
At the end of the year, the Audit Committee was renamed as the Audit, Risk and Compliance Committee, as this better describes its focus. In 2016, as is done each year, the Audit, Risk and Compliance Committee spoke with the external auditor without the Board being present. No additional material topics arose from these meetings.
Individual interviews were conducted with the members of the Supervisory Board as part of the 2016 annual strategic risk assessment. The dilemma of accommodating the rapid growth of the company while simultaneously controlling risks was taken into account as the basis for the strategic risk assessment. The Executive Board was responsible for finalising the set of strategic risks as disclosed in the section Risk management and internal control.
Quarterly project reports, which focus on the progress of large projects, were reviewed by the Strategic Investments Committee and subsequently by the Supervisory Board. Particular focus was placed on project management, with specific attention paid to timely delivery, risks of delays and interruptions and the societal demands, which can lead to delays and/or projects becoming more expensive.
TenneT's financing position, its financing structure and the overall financing plan were also assessed by the Supervisory Board. During 2016, it assessed a range of factors, including shareholder objectives, the long-term continuity of the company and short-term liquidity needs. Topics discussed included the financing structure of TenneT Group, cash flow and liquidity forecasts, equity solutions and several debt financing instruments. The Supervisory Board welcomed the commitment of the Dutch State underlined by its equity contribution for the coming years and is also keeping a close eye on the balance between the shareholder's focus on the Dutch investment portfolio and the equity needs for the whole of TenneT.
The Supervisory Board repeatedly discussed the implications of TenneT operating in a regulated environment, in the Netherlands as well as in Germany. One of the topics was striking the balance between regulatory optimisation and creating value for society. In addition, the topic of growing company profits vs. rapidly increasing grid tariffs was considered.
Integrated reporting and audit
TenneT's financial statements for the 2015 financial year, the 2016 internal quarterly reports and the 2016 interim results were all discussed by the Supervisory Board during the year. The meetings also covered the management letter from the external auditor; the independent auditor's report; internal audit reports; and results from internal risk and control assessments; the 2017 budget and the medium-term plan for 2017-2019.
Compliance and integrity
Compliance and integrity is a matter of continuous attention. A specific case which led to the dismissal of an employee of the company was discussed on several occasions, as well as compliance and integrity in general.
The Supervisory Board has examined the 2016 integrated annual report, the 2016 financial statements and the independent auditor's report and assurance report related to non-financial information, management letter and audit results report issued by TenneT's external auditor, EY. This is based on the preparatory work and advice of the Audit, Risk and Compliance Committee. As a result, the Supervisory Board endorses the documents and recommends that the General Meeting of Shareholders adopts the financial statements.
The Supervisory Board recommends that the General Meeting of Shareholders discharges the Executive Board from liability in respect of its management of the company and releases the Supervisory Board from liability in respect of its supervision.
Supervisory Board meetings and other topics
The Supervisory Board held six regular meetings in 2016. All meetings were attended in full, except for one, which had one absentee. One of these regular meetings took place at the TenneT offices in Bayreuth, Germany.
In addition to these regular meetings, a telephone conference was held to discuss the recruitment of the new chairman of the Supervisory Board and another extra meeting took place to confer on future equity needs and possible alternatives. Besides these topics and topics mentioned in the report above, other topics covered by the Supervisory Board in 2016 included: the results of TenneT’s latest Reputation Survey, the outcomes of the latest Customer Satisfaction Survey, CSR reports and the Dutch legislative processes 'STROOM' and 'Voortgang Energietransitie'. In addition, the Supervisory Board discussed the development of power exchanges, the location and the building concept of TenneT's new German headquarters and the internal 'Power to Perform' performance management programme.
Word of appreciation
The Supervisory Board would like to extend its appreciation to the members of the Executive Board and all TenneT employees. Over the course of 2016, TenneT successfully dealt with significant challenges while simultaneously working on multiple crucial investment projects. The high level of investments in maintenance and expansion projects were major achievements in the year, demonstrating TenneT's commitment to investing in a reliable and secure electricity grid. Besides transmission and system services, it is TenneT's task to facilitate a smoothly functioning electricity market and to support the large-scale transition to renewables. TenneT plays a leading role in shaping an integrated European electricity market. Throughout all of this, TenneT remained focused and dedicated to its central purpose of safeguarding the safety and security of supply. These are significant achievements and it is TenneT’s employees' hard work and dedication, contribution and continuous commitment that made them possible.
The Supervisory Board also very much values the contribution by the Company Secretary, who consistently supports the Supervisory Board and its members in their work.
Arnhem, 6 March 2017
Supervisory Board TenneT Holding B.V.