Corporate governance - Novartis

1 82 | Novartis Annual Report 2017 Corporate governanceContentsLetter from the Chairman 82 Our Corporate governance approach 84 Our shares and our shareholders 85 Our Board of Directors 92 Our management 106 Our independent external auditors 111 Our Corporate governance framework 113 Further information 114 Dear shareholder,2017 was an important and successful year for our company and our Board.

2 We made good progress in pursuing our mission, managed the selection of the new CEO, reinforced the Board s membership, increased our strategic focus on digital technology, accelerated our Corporate culture change, and further improved our Corporate in pursuing our missionAt a time of big geopolitical uncertainties and increas-ing regulatory, pricing and enforcement pressure, we achieved a solid business performance, launched import-ant new products, and made further efficiency gains. Strong and diverse BoardWe have a strong, diverse and independent Board. A key to our achievements is the excellent collaboration between our Board and our CEO and his executive diversity of our Board was further strengthened when Ton Buechner and Liz Doherty joined in February 2016, and Frans van Houten in February 2017, re inforc-ing our expertise in finance and accounting, in digital health solutions, as well as in leadership and manage-ment.

3 With their arrival, we have substantially refreshed our Board. Two-thirds of our members have a tenure of less than six years, balancing the benefits of continuity and experience with new appointed new members of the Audit and Compliance Committee; the Risk Committee; and the governance , Nomination and Corporate Responsibilities Committee, benefiting from the experience and know-ledge of new Board the 2018 Annual General Meeting (AGM), Pierre Landolt will leave our Board, having reached the statu-tory retirement age of 70. I would like to thank Pierre for his many contributions over the years, including his chair-manship of the governance , Nomination and Corporate Responsibilities Committee.

4 During his chairmanship, the committee extended its mandate to also cover cor porate responsibility, and Pierre was instrumental in driving the Novartis Corporate responsibility strategy as well as the Board s oversight of the many Corporate responsibility programs at the end of 2017, we initiated a performance and effectiveness evaluation of the Board s work by an independent expert. The outcome is encouraging. We have made significant progress over the last few years in our efforts to continuously improve our performance. Novartis Annual Report 2017 | 83 Corporate governanCeLetter from the ChairmanCEO successionOne of the most important tasks of a Board is selecting the right CEO.

5 After Joe Jimenez informed us that he was considering stepping down, we conducted a thor-ough evaluation of internal and external candidates with the help of an executive search firm, building on our CEO succession plan. We concluded that Vas Narasimhan is the right choice to build on Joe s heritage and lead Novartis in our next growth phase. It is a phase that we expect will be characterized by new technologies that transform science, our business, and our interactions with people and societies. Vas will take the helm from Joe on February 1, 2018, completing a smooth transition facilitated by the strong leadership team that Joe built.

6 I sincerely thank Joe for his dedication to our company and for his achievements, which span a period of 10 years. Strategy and cultureOther key areas for our Board are the strategy and cul-ture of Novartis . During our strategy retreat in August, one of the conclusions was that we should strengthen our strategic focus on digital technologies to improve how we use data in drug discovery and development; how we engage with patients, doctors and other stakeholders; and how we automate business processes. Our Chief Digital Officer, a newly created role, will lead the compa-nywide implementation of our digital strategy. In 2017, we also accelerated our Corporate culture change.

7 The executive Committee took action to further improve collaboration, reduce bureaucracy, speed up decision-making, support smart risk-taking, increase empowerment and trust throughout the organization, and reinforce our interactions with the external world and society at large. Auditor rotationIn 2017, we discussed the question of changing our long-standing auditor. While the Board is open to a change in the foreseeable future, we concluded that it is in the best interest of Novartis , our investors and other stake-holders to continue with our current auditor. We will, of course, continue with the yearly assessments of Price-waterhouseCoopers effectiveness and independence, and with the regular rotation of the audit partner in charge.

8 The matter remains high on our agenda and will be con-tinuously engagementLet me end by addressing our engagement with you, our shareholders. As you know, shareholder engagement is an important aspect of our Corporate governance frame-work. Although I believe our engagement program has in many instances aligned the views of the Board with those of our shareholders, we recognize that a signifi-cant number of you did not support at our 2017 AGM the advisory vote on the 2016 Compensation Report. As a result, we have intensified our engagement with you and we are confident that we can further align our views. I encourage you to actively participate and share your we achieved quite a lot in 2017, I believe there is more work to be done.

9 Our Board and our executive Committee must continue to sharpen our strategy, strengthen our Corporate culture, and accelerate the evolution of our business model. I am very confident that with your support, we will continue to make reinhardtChairman of the Board of Directorsgeneral Meeting of ShareholdersApproves operating and financial review, Novartis Group consolidated financial statements and financial statements of Novartis AG; decides appropriation of available earnings and dividend; approves compensation of Board and executive Committee; elects Board members, Chairman, Compensation Committee members, Independent Proxy and external auditors.

10 Adopts and modifies Articles of Incorporationexternal auditorProvides opinion on compliance of Novartis Group consolidated financial statements and the financial statements of Novartis AG with applicable standards and Swiss law, on compliance of the Compensation Report with applicable law, on effectiveness of internal control over financial reporting, and on the Corporate responsibility reporting of NovartisGovernance bodies Sets strategic direction of Novartis , appoints and oversees key executives, approves major transactions and investmentsBoard of Directorsaudit and Compliance CommitteeCompensation Committeeresearch & Development Committeerisk Committeegovernance, nomi nation and Corporate responsibilities Committeeexecutive CommitteeResponsible for operational management of Novartis84 | Novartis Annual Report 2017 Our Corporate governance approachLeadership structureIndependent, non- executive Chairman and separate CEOB oard governanceStructureAll Board members are non- executive and independent, as defined by our rules.