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Financial Statements and Corporate Governance

Corporate Governance

EADS is a company registered in the Netherlands and listed in France, Germany and Spain. Given the numerous Corporate Governance regimes applicable to it, EADS applies a set of common Corporate Governance principles and recommendations in order to be in line with the Corporate Governance best practices applicable in these jurisdictions.

In accordance with Dutch law and with the provisions of the Dutch Corporate Governance Code (the “Dutch Code”), which includes a number of non-mandatory recommendations, the Company applies the provisions of the Dutch Code or, if applicable, explains in its annual Board of Directors Report the reasons for non-application of such provisions.

While EADS, in its continuous efforts to adhere to the highest standards, applies most of the recommendations, it must, in accordance with the Dutch Code’s “apply or explain” principle, provide the following explanations:

1. EADS is a controlled company and, therefore, a number of the Members of the Board, Audit Committee, Remuneration and Nomination Committee and Strategic Committee are designated and can be removed by its controlling shareholders

Nevertheless, it should be noted that a self-assessment of the Board confirmed that the Members of the Board designated by the controlling shareholders hold opinions and defend positions that are in all relevant aspects aligned with the economic interests of individual shareholders. Given the absence of material conflicting business interests between EADS and its controlling shareholders, and the independence of the controlling shareholders from one another, the Members of the Board designated by the controlling shareholders are deemed to fairly represent the interest of all shareholders in acting critically and independently of one another and of any particular interests. Furthermore, the Board’s composition, as reshaped in October 2007 to increase in particular the number of independent Board Members, with a wide range of different experiences represented in the Board and the running of meetings is conducive to the expression of autonomous and complementary views.

This explains why:

(a) Four Members of the Board out of eleven are independent (whereas provision III.2.1 of the Dutch Code recommends that there be no more than one non-independent Board member);

(b) Members of the Board retire simultaneously on a five-yearly basis (whereas provision III.3.6 of the Dutch Code recommends that there be a retirement schedule to avoid, as far as possible, a situation in which many Non-Executive Members of the Board retire at the same time);

(c) the Board is headed by the Chairman of the Board. In case of dismissal or resignation of the Chairman, the Board shall immediately designate a new Chairman. There is therefore no need for a vice-Chairman to deal with the situation when vacancies occur (whereas provision III.4.1(f) of the Dutch Code recommends that there be a vice-Chairman);

(d) EADS’ Audit Committee includes two Members of the Board designated by the controlling shareholders (whereas provision III.5.1 of the Dutch code recommends that there be no more than one non-independent Audit Committee member);

(e) EADS’ Remuneration and Nomination Committee includes two Members of the Board designated by the controlling shareholders (whereas provision III.5.1 of the Dutch code recommends that there be no more than one non-independent Committee Member);

(f) EADS’ Remuneration and Nomination Committee is not the relevant body responsible for the selection procedure and nomination proposals for Members of the Board (whereas provision III.5.13 (a) of the Dutch Code recommends that such Committee focus on drawing up selection criteria and the appointment procedures for Members of the Board; and provision III.5.13 (d) recommends that such Committee focus on making proposals for appointments and reappointments).

2. As for remuneration of Members of the Board of Directors

EADS applies different rules for the remuneration of Executive (the Chief Executive Officer) and Non-Executive Members of the Board, as explained in “Compensation of the members of the Board of Directors”.

In case of dismissal from the Company of the Chief Executive Officer, a termination package equal to one and a half time the annual total target salary would be paid. However this termination package would be reduced pro rata or would even not be applicable depending on the age and date of retirement. EADS’ Board has decided to change the former policy for termination package and therefore to reduce the maximum termination indemnity from two times to one and a half time of annual total target salary (whereas provision II.2.7 of the Dutch Corporate Governance Code recommends that the maximum remuneration in the event of dismissal be one year’s salary (the ‘fixed’ remuneration component), and that if the maximum of one year’s salary would be manifestly unreasonable for an Executive Board Member who is dismissed during his first term of office, such board member be eligible for severance pay not exceeding twice the annual salary).

3. EADS is listed on the Frankfurt, Paris and Spanish stock exchanges and endeavours to strictly comply with the relevant regulations and follow the general practices on these markets protecting all its stakeholders

(a) Moreover EADS has adopted Insider Trading Rules providing for specific internal rules, inter alia, governing Members’ of the Board holding and trading of shares in EADS and other companies. Therefore, in line with these rules and these regulations and common practices in the jurisdictions in which the Company is listed:

(b) EADS does not require Members of the Board to give periodic notice of any changes in their holding of securities in Dutch listed companies to the EADS Compliance officer (whereas provisions II.2.6 and III.7.3 of the Dutch Code recommend such a notice unless a Board Member only invests in listed investments funds);

(c) EADS does not require Members of the Board to treat their securities in the Company as a long-term investment (whereas provision III.7.2 of the Dutch Code recommends such a treatment);

(d) The term of the office of members of the Board is five years without limitation on renewal (whereas provisions II.1.1 and III.3.5 of the Dutch Code recommend that there be no more than three four-year-terms for Non-Executive Members of the Board and that there be four-year-terms (without limitation on renewal) for Executive Members of the Board);

(e) EADS does not follow various recommendations for dealings with analysts, including allowing shareholders to follow meetings with analysts in real time and publishing presentations to analysts on the website as set out in provision IV.3.1 of the Dutch Code;

(f) In accordance with EADS’ Articles of Association, if the Board does not set a “registration date”, the shareholders must be shareholders at the date of the meeting to exercise their voting rights and other rights at the meeting (whereas provision IV.1.7 of the Dutch Code recommends that the Company set a “registration date” prior to the shareholder’s meeting and that the shareholders must be shareholders on the date of such “registration date” to exercise their voting rights at the shareholders’ meetings even if those persons are not any longer shareholders on the date of such meeting).

4. EADS maintains an integrated Group-wide Internal Control and Risk Management System with the purpose of providing reasonable assurance that risks are effectively managed

One of management’s fundamental missions is to ensure an effective Internal Control (“IC”) and Risk Management (“RM”) environment at EADS, in accordance with corporate governance requirements and best practices in the Netherlands, France, Germany and Spain. Faced with continuing changes in the multi-jurisdictional legal and regulatory provisions applicable to it, EADS began to implement a coherent group-wide IC and RM system in 2004. This system is based on the Internal Control and Enterprise Risk Management Frameworks of the Committee of Sponsoring Organisations of the Treadway Commission (“COSO”).

Developments in 2007 and Outlook

During 2007, EADS sought primarily to increase awareness of IC and RM principles at the divisional, BU and Headquarters (“HQ”) level. This included the rollout across several Divisions and BUs of standardised IC and RM training covering basic and refresher concepts. In addition, process coordinators benefited from individual coaching sessions and workshops relating to the performance of yearly IC procedures. Working groups were also established throughout 2007 in order to enhance cross-departmental and cross-organisational knowledge exchange.

During the second half of 2007, most Divisions, BUs and HQ departments conducted a self-assessment of their IC systems to evaluate the design and operational effectiveness of internal controls. The results are currently being analysed. Moreover, independent reviews of the IC & RM systems were performed to substantiate the self-assessment during 2007.

EADS is in the process of reviewing the IC and RM system in place at Airbus in order to further align it with that of the Group as a whole. Pending the completion of this review, Airbus has continued to operate the IC and RM system that was in place prior to BAE Systems’ divestment of its stake in 2006.

Building on the comprehensive IC and RM review and evaluation procedures carried out in 2007, EADS will assess the results over the course of 2008. As a result of the ongoing monitoring activities of the IC and RM systems’ effectiveness, further modifications to the IC and RM systems and integration efforts are expected throughout 2008.

Responsibility for the IC and RM System — Interaction with EADS Management

Overall responsibility for the IC and RM system and the related reporting to stakeholders lies with the EADS Board of Directors (“BoD”). EADS’ CEO and CFO are responsible for ensuring that the IC and RM system and related procedures are implemented throughout the Group. In addition, the Audit Committee oversees the Group-wide functioning of the IC and RM system.

A general management principle at EADS is the delegation of entrepreneurial responsibility and powers to the operational units. This principle of subsidiarity entails a clear allocation of responsibilities between EADS Headquarters and the Divisions or BUs. EADS Corporate sets the overall strategic and operational targets for EADS and assumes the ultimate responsibility for the process. The Divisions and BUs retain responsibility for all operational matters and activities within their scope, subject to audit. Consequently, the responsibility for operating and monitoring the IC and RM system and for risk and IC reporting lies with the respective management of the Divisions, BUs and HQ departments. They must seek to ensure transparency and effectiveness of their local sub-IC and RM systems and the adherence to the objectives defined by the EADS BoD. The management of Divisions, BUs and HQ departments is responsible for the implementation of appropriate mitigation activities to reduce the probability and impact of risk exposures and for the communication of risks that affect others within EADS.

In principle, risk and IC management as well as ensuring overall effectiveness of the IC and RM system is the responsibility of all members of the staff. The Group seeks to integrate risk and IC management into all activities when conducting business transactions.

Monitoring of Internal Controls — Management Discussions

In addition to regular monitoring activities at the Divisional, BU and HQ levels, assessments about the adequacy and effectiveness of the IC and RM systems are discussed between the EADS CEO and CFO and the respective Division/BU CEOs and CFOs or the HQ-department heads. These discussions serve to prioritise potential issues at the EADS level, define and implement appropriate actions, if needed, and derive conclusions for the overall EADS IC and RM report.

Management Sign-Off Process — Sub-Representation

Once every year, identified significant deficiencies and material weaknesses are reported in sub-representation letters. Since the 2007 reporting cycle, an enhanced sign-off process requires EADS’ CEO and CFO confirm to the BoD, to the best of their knowledge, whether:

  • the IC system is adequate to provide reasonable assurance regarding the reliability of financial reporting as well as compliance with applicable laws and regulations;
  • the control objectives are being achieved by controls that are documented, adequately designed for their business and are operating effectively, in all material respects;
  • the owner of each control activity is clearly identified; and
  • the RM system is designed and operated to identify, assess, respond to, design controls and monitor/report on risks on a timely basis.

The EADS CEO and CFO’s IC and RM statement is mainly based on the self-assessments, audit reviews and management discussions described above, and is substantiated by sub-representation letters provided to the EADS CEO and CFO by all Divisional and BU management.

The IC and RM system provides the management with a framework for attempting to manage the uncertainty and associated risks inherent in EADS’ business. It serves as the basis for all sub-IC and sub-RM procedures present throughout EADS at the divisional and Business Unit (“BU”) levels. By employing a uniform approach to IC and RM, EADS seeks to gain reasonable assurance about:

  • the reliability of its financial reporting;
  • efficiency and effectiveness of operations; and
  • compliance with applicable laws and regulations.

The implementation and other aspects of the IC and RM System have been discussed with the Audit Committee on a regular basis, as part of the Audit Committee’s general task to oversee the Group-wide functioning of the IC and RM System.

No matter how well designed, all IC and RM systems have inherent limitations, such as vulnerability to circumvention or management overrides of the controls in place. Consequently, no assurance can be given that EADS’ IC and RM system and procedures are or will be, despite all care and effort, entirely effective.

As this framework (and relevant aspects referred to in the Dutch Code) is still being implemented throughout the Group, the Board will make a declaration on the adequacy and effectiveness of the Groups’ internal control and risk management systems as soon as the implementation is complete (whereas provision II.1.4 of the Dutch Code recommends that such a declaration be included in the Board Report).

5. Ethics Alert System

EADS is in the process of putting in place a procedure for receiving, in full confidentiality, concerns regarding e.g. financial reporting, internal risk management and control systems, as well as regarding general operational matters. The EADS Ethics Alert System architecture will be part of a global new EADS compliance organisational structure that is currently being formalised.

Some consultations with the works councils have started regarding the implementation of such procedure. After decision of the Board and the Audit Committee on the organisational structure for compliance and the completion of the various proceedings with respective works councils regarding the introduction of an Ethics Alert System, will be implemented, thus allowing the Company to comply with provision II.1.6 of the Dutch Code which recommends that a company ensures that its employees have the possibility of reporting alleged irregularities of a general, operational and financial nature in the Company or concerning the functioning of the Executive Member of the Board to the Chairman of the Board or to an official designated by them and that such arrangements for whistleblowers be posted on the Company’s website.


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