Volvo 2006 Annual Report Download - page 85

The organization of the internal
control over financial reporting
Volvo has had internal control processes for a
long time.
Volvo applies internal control principles
introduced by the Committee of Sponsoring
Organizations of the Treadway Commission
(COSO). The COSO principles consists of five
interrelated components where a number of
objectives have to be met in each component.
The components are: control environment, risk
assessment, control activities, information and
communication and monitoring.
Volvo has an internal audit function of which
the main responsibility is to ensure adherence
to the internal control system that the company
applies. The Head of Internal Audit reports
directly to the CEO and CFO and has a dotted
reporting line to the Audit Committee of the
Board of Directors.
During 2005 and 2006, Volvo continued its
efforts that were initiated in 2004 in terms of
reviewing and documenting relevant processes
for the purpose of ensuring that the internal
control of the financial reporting functioned
satisfactorily and was well documented. In
2006, the work was finalized and the relevant
processes were tested.
Since AB Volvo’s Series B shares are regis-
tered with the Securities & Exchange Commis-
sion (SEC) in the US, Volvo must comply with
Sarbanes-Oxley Act (SOX). SOX section 404
requires that Volvo submit a report from Volvo’s
CEO and CFO regarding Volvo’s internal con-
trol over the financial reporting, in conjunction
with the presentation of the US Annual Report,
Form 20F, for 2006. The report, which is part of
the Form 20F, will include a statement regard-
ing the outcome of the company’s evaluation of
the effectiveness of the internal control over
the financial reporting for the 2006 year-end.
The report will also include a statement from
the CEO and CFO on whether the internal con-
trol over the financial reporting is effective or
not, and a statement on which internal control
system that was used to evaluate the effective-
ness. If any material weaknesses in the internal
control of the financial reporting are identified
these will be described in the report. PwC will
submit an auditor’s statement pertaining to the
internal control of the financial reporting.
The intention is to publish the Form 20F in
May 2007.
Disclosure Committee
A Disclosure Committee was established in
2004. The Committee contributes to ensuring
that Volvo fulfills its obligations according to
applicable legislation as well as to listing rules to
timely disclose to the financial market all mater-
ial information that affects the share price.
The Committee comprises the heads of the
departments, Corporate Finance, Internal Audit,
Investor Relations, Corporate Legal, Business
Control and Financial Reporting.
Principles for remuneration and other
employment terms for the Group
Executive Committee
The Annual General Meeting of 2006 decided
upon principles for remuneration and other
employment terms for the members of Volvo’s
Group Executive Committee (“Remuneration
Policy”) in accordance with Section 4.2.2 of the
Code. The proposed principles for remuner-
ation and other employment terms can be sum-
marized as follows.
The guiding principle is that remuneration
and other employment terms for company man-
agement shall be competitive to ensure that
Volvo can attract and retain skilled persons in
the Group Executive Committee. The fixed sal-
ary may be competitive and reflect the individu-
al’s area of responsibility and performance. In
addition to the fixed salary a variable salary may
be paid. A variable salary may amount to a max-
imum of 50% of the fixed annual salary and be
based on the Volvo Group’s and/or the execu-
tive’s Group company’s fulfillment of certain
improvement goals. The improvement goals are
decided by the Board of AB Volvo and may be
related, for example, to operating income or cash
flow. In addition to fixed and variable salary, nor-
mally other customary benefits, such as com-
pany car and company healthcare are provided.
In individual cases, housing and other benefits
are provided. In addition to pension benefits
provided by law and collective bargaining agree-
ments, the members of the Group Executive
Committee domiciled in Sweden are offered a
defined-contribution pension whereby the
amount of the individual’s pension comprises
the premium paid and any return. In individual
cases, other pension solutions may be con-
sidered. Members of the Group Executive
Committee domiciled outside Sweden are
offered pension solutions that are competitive
in the country in which the person is domiciled.
With regard to notice of termination of employ-
ment for members of the Group Executive
Committee domiciled in Sweden, the notifica-
tion period is 12 months if the company termin-
ates the employment and six months if the
i ndividual terminates employment. In addition,
the employee is entitled to a severance pay of 12
months’ salary if Volvo terminates employment.
In individual cases, other principles for notifica-
tion periods and severance pay may be con-
sidered. Those members who are domiciled
outside Sweden are offered terms in this
respect that are competitive in the country in
which the person is domiciled.
A more detailed account of remuneration to
the President and principles for the remuner-
ation to other senior executives is presented in
Note 34 to the consolidated financial state-
ments.
At the 2007 Annual General Meeting, the
Board has decided to propose renewed guide-
lines for remunerations to executives. The pro-
posal will be available on Volvo’s website.
Outstanding share- and share-price-
related incentive programs
An account of outstanding share- and share-
price related incentive program is provided in
Note 34 to the consolidated financial state-
ments.
The Board at a visit to Volvo Construction
Equipment in Shanghai.
Corporate Governance 2006 81