X5 Group

Corporate
Governance

Letter from the Chair of the Supervisory Board
Governance structure

How we manage risk
Supervisory and Management Boards

Report of the Supervisory Board
Remuneration Report

Letter from the Chair of the Supervisory Board

Dear Reader,

Looking back on my second year as Chair of the Supervisory Board, I am immensely proud of, and grateful to, all the employees at X5. The complexity of the challenges that society faced in another turbulent year — with macroeconomic conditions deteriorating from late February 2022 and a new wave of sanctions that resulted in restrictions on businesses — required a new level of teamwork and focus from all employees at our Company.

The Supervisory Board remained connected, deeply focused and carried out stringent oversight of the Company’s contingency planning and the impact on X5’s holding structure and operational activity in order to ensure business continuity in the interest of all of our stakeholders, including our employees, customers and shareholders.

We maintained our commitment to X5’s long-term strategy, which aims to strengthen our existing businesses while growing our digital capabilities and omnichannel presence. The Company continued to grow in 2022, and I am proud to say that through the strength of our operations and our customer-focused approach, we maintained profitability margins in line with our strategic targets.

Meanwhile, the Supervisory Board is conscious of the challenging and changing circumstances the Company is facing, as well as the impact of those circumstances on X5’s corporate structure. These include the suspended trading of Company shares on the London Stock Exchange, as well as new regulatory restrictions to the payment of dividends in the Company’s operating environment. While there is a diverse set of issues to be resolved, we are constantly reviewing potential solutions to improve our corporate structure in the long-term sustainable interest of the Company, its stakeholders and shareholders. That being said, in view of the current market conditions, ongoing regulatory constraints, and consistent with last year’s profit allocation, we will recommend to X5’s General Meeting of shareholders not to distribute a dividend for 2022.

As a key strategic priority under these circumstances, the Board extensively reviewed the operational performance of our key retail banners — Pyaterochka and Perekrestok — as well as measures and initiatives to strengthen their position in key regions of operation by adapting our CVP, driving organic growth and building strategic partnerships. The Board closely monitored the development of Chizhik, X5’s hard discounter format. Encouraged by Chizhik’s strong performance, the Board fully supports management in its strategic objective to operate more than 4,000 Chizhik stores by 2025. Meanwhile, driven by the clear shift in consumer preference towards online shopping, X5’s digital businesses continued to gain momentum, resulting in a 46.6% net sales growth year-on-year. By the end of the year, more than 4,400 stores and 44 dark stores in 64 regions of Russia offered express delivery.

ESG matters are increasingly important to us, as well as to all our stakeholders. Across the Board and the entire Company, there is a growing awareness of the role that all our businesses must play in society. The Supervisory Board spent considerable time evaluating and discussing the Company’s sustainability strategy and is fully supportive of the decisions that management has made. X5 is committed to pursuing ESG leadership in all of its business activities and continues to contribute to the transition to a low-carbon economy. Our shift to more sustainable business practices is an ongoing process guided by our sustainability strategy and long-term targets. Despite the rapidly changing environment, emerging challenges and the steady growth of the Company’s businesses, I am proud to say that X5 is on track with its sustainability strategy goals.

As a Supervisory Board, we maintained a strong focus on management development and succession planning. We are working hard with the Executive Board to identify and develop the talent we need to ensure that we have qualified successors in both middle and senior management to deliver continued growth and meet market demand for our existing and new retail concepts. At the same time, the Supervisory Board focuses on stability within X5’s leadership team, particularly in the face of fierce competition and an increased shortage of qualified executives. I am particularly pleased that we could strengthen our Management Board with the appointment of Ekaterina Lobacheva as President, and also announce the Board’s recommendation to extend Igor Shekhterman’s term as CEO for another two years starting in 2023. We are confident that the continuity of X5’s leadership in the current volatile environment will benefit the Company and all its stakeholders.

My role as Chair is to maintain high standards of corporate governance and ensure that the Board is properly equipped to discharge its duties, as well as spending sufficient time on key areas that support our strategic priorities. Our corporate governance framework clearly defines responsibilities and ensures that the Group has the right systems and controls in place to enable the Board and its committees to oversee the business effectively, offering challenges to the status quo where necessary.

That being said, 2022 was another year of significant change in the composition of the Supervisory Board: as described in the Supervisory Board Report, most of my fellow Board members had to step down following the geopolitical turbulence in the beginning of the year. My profound gratitude goes out to each of these highly valued individuals who contributed so much to X5’s impressive growth over so many years. While I sincerely regret their resignation and the external circumstances that led to this, I am pleased to say that we were able to close the year with a new team of highly qualified new Board members, all of whom are introduced in this report in "Supervisory and Management Boards". I look forward to working with this team to support the Company and its leadership during these times of profound change and to capitalise on the opportunities presented by evolving trends in our markets. To that end, the Board unanimously supports the focus on the strategic priorities that will enable X5 to build on its unique strengths and to stay competitive, accelerate growth and generate free cash flow. Further details on our strategic priorities can be found in "Our strategy".

Our approach to doing business and the performance of all employees across the Group are of vital importance to the Board. We recognise that culture plays a fundamental role in delivering on our strategic priorities, and the Board is ultimately responsible for ensuring that our activities reflect the culture we wish to instill to drive the right behaviours among all our staff members and stakeholders. One of my goals as Chair is to build a culture where we fully understand our stakeholders and what matters most to them — whether customers, employees, suppliers, shareholders or our communities — and then act on these insights by driving change and innovating to meet their needs. Within the Board, there is a clear emphasis on setting the right tone from the top and leading by example.

As we look ahead to 2023, the current volatile environment remains a challenge in our markets and will bring continued uncertainty. However, I believe that our commitment to delivering on X5’s strategic objectives will guide and support our teams in all areas of the business, as we live our shared values and help our customers to eat healthy, save time and live better.

In conclusion, I would like to extend a word of thanks to the Executive Board and all X5 employees, whose hard work and resilience enabled the Company once again to fulfil its vital role in society during this challenging year.

On behalf of the Supervisory Board,

Peter Demchenkov

Сhairman of the Supervisory Board

31 May 2023

In accordance with the Code, a broad outline of the Company’s corporate governance structure is presented in this section, including any deviations from the Code’s principles and best practices. X5 aspires to high standards of corporate governance and is committed to a corporate governance structure that best supports its business, meets the needs of its stakeholders and complies with applicable rules and regulations.

Governance structure

Management Board

The Management Board has ultimate responsibility for the overall management of the Company and oversees all corporate governance activities. It is accountable for the Company’s pursuit and achievement of corporate goals and objectives, its strategies and policies. The Management Board is responsible for complying with all relevant laws and regulations, for managing the risks associated with the Company’s activities and for financing and external communication.

When managing X5’s general affairs and its day-to-day operations, the Management Board is supported by the Executive Board, which was established to serve as a leadership team for the Company’s operating subsidiaries in Russia in order to best support X5’s strategy and businesses at the local level.

The current members of the statutory Management Board and the Executive Board (the broader management team that handles day-to-day strategic, operational and financial issues), including their biographies, can be found in "Management Board".

Supervisory Board

The Supervisory Board is responsible for supervising and advising the Management Board and overseeing the general course of affairs, strategy and operational performance of X5 and its businesses. It ensures that external experience and knowledge are embedded in the Company’s operations. When performing its duties, the Supervisory Board takes into account the relevant interests of the Company and all its stakeholders, and, to that end, considers all appropriate interests associated with the Company and its affiliated businesses, including corporate responsibility issues that are relevant to the Company. Major business decisions require the approval of the Supervisory Board. The Supervisory Board is responsible for monitoring and assessing its own performance.

The Supervisory Board determines its number of members. X5’s Supervisory Board currently consists of siх members, with a majority of four independent members. The current members, including their biographies, can be found in “Supervisory Board”.

The Supervisory Board has prepared a profile of its size and composition, taking account of the nature of the Company’s business and its activities and the desired expertise and background of the members of the Supervisory Board. The Supervisory Board evaluates its profile and composition annually. Due to the new composition of the Supervisory Board, a relatively light assessment was conducted in 2022. For further details, please refer to the Supervisory Board Report in “Report of the Supervisory Board”.

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. The total term of office may not exceed 12 years. The Supervisory Board has prepared a retirement and reappointment schedule to, as far as possible, prevent simultaneous reappointments. The Supervisory Board’s profile and rotation plan can be viewed on the Company’s website.

Composition and reappointment schedule of the Management Board

Name	Year of birth	Year of first appointment	End of current term of appointment
Igor Shekhterman	1970	2015	2023
Frank Lhoёst	1962	2007	2023
Quinten Peer	1974	2019	2023
Ekaterina Lobacheva	1982	2022	2025

Composition and reappointment schedule of the Supervisory Board

Name	Year of birth	Year of first appointment	End of current term of appointment
Peter Demchenkov (Chair)	1973	2015	2023
Olga Vysotskaya	1961	2022	2025
Vadim Zingman	1970	2022	2025
Dmitry Alekseev	1974	2022	2025
Vassilis Stavrou	1970	2022	2025
Leonid Afendikov	1978	2022	2025

Committees of the Supervisory Board

The Supervisory Board currently has two standing committees: the Audit and Risk Committee and the Nomination and Remuneration Committee. The members of each committee are appointed by the Supervisory Board from among its members. Each committee has a charter describing its role and responsibilities and the manner in which it discharges its duties and reports to the full Supervisory Board. These charters are included in the Rules of Procedure of the Supervisory Board, which can be viewed on X5’s website. As of 16 March 2022, the duties and responsibilities of the Sustainable Development and Innovation Committee were included in the remit of the full Supervisory Board.

Name	Audit and Risk Committee	Nomination and Remuneration Committee
Peter Demchenkov	Member	Chair
Olga Vysotskaya	Chair
Vadim Zingman
Dmitry Alekseev
Vassilis Stavrou		Member
Leonid Afendikov	Member	Member

Audit and Risk Committee

The Audit and Risk Committee assists the Supervisory Board in overseeing the integrity of X5’s financial statements, system of internal business controls and risk management, financing and finance-related strategies, taxation, the Company’s compliance with legal and regulatory requirements, as well as the qualifications, performance and independence of the external auditor and the performance of the internal audit function. Furthermore, the Audit and Risk Committee advises the Supervisory Board on handling and deciding on reported (potential) conflicts of interest and/or related party transactions involving members of the Supervisory Board or members of the Management Board.

Nomination and Remuneration Committee

The Nomination and Remuneration Committee recommends the remuneration policy for the Management Board to be adopted by the General Meeting of Shareholders, prepares proposals for the Supervisory Board for remuneration of the individual members of the Management Board in line with the remuneration policy and advises the Management Board on the level and structure of compensation for other senior personnel. The Nomination and Remuneration Committee also advises in respect of the selection and appointment of members of the Supervisory Board, the Management Board and the Executive Board.

Diversity

The Supervisory Board operates a Leadership Diversity Policy that aims for a diverse composition of both the Management Board and the Supervisory Board in particular areas of relevance for X5. This includes diversity of experience, nationality and background. Appointments to the Management Board and the Supervisory Board are evaluated against the candidate’s profile; the existing balance of skills, knowledge and experience on the respective board; and the need for the relevant board to be prepared for disruption and change. Management Board and Supervisory Board members are prompted to be mindful of diversity, inclusiveness and meritocracy when examining and proposing nominations to the Management Board and the Supervisory Board. In the selection and appointment of new Management Board or Supervisory Board members, the Supervisory Board will consider a diverse range of candidates. This will also include diversity of gender and age so that, when the final appointment is made, the Supervisory Board can be confident that the most effective candidate has been selected.

Each year, the Supervisory Board conducts an evaluation of its performance and the performance of the Management Board. In this context, the Supervisory Board gives careful consideration to its own diversity, as well as to diversity on the Management Board, for them to be effective in performing their roles.

On 1 January 2022, the Gender Diversity Act came into force in the Netherlands. The law introduced a requirement to set ambitious gender balance targets for management boards and senior management of large listed Dutch companies and a plan which outlines the actions needed in order to meet these gender diversity targets. The Gender Diversity Act also calls for companies to report to the Dutch Social and Economic Council (Sociaal Economische Raad) with regard to diversity.

While the Management and Supervisory Boards are currently not gender balanced, the Executive Board meets the one-third gender balance target. X5 recognises the importance of diversity, including gender, at all levels of the Group and has a very strong track record of developing a critical executive layer of female business leaders. Across all of the Group’s operations, specific diversity targets are taken into account in recruitment, talent development, appointments, retention of employees, mentoring and coaching programmes, succession planning, training, and development.

Appointment, suspension and dismissal

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.

Remuneration

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.

Reporting on conflicts of interest

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.

Shareholders and their rights

General Meeting of Shareholders

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

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.

Dividend rights

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

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.

Name	Date of disclosure	Capital interest	Voting rights
CTF Holdings S.A.	1 January 2021	47.86%	47.86%
The Axon Trust	1 January 2021	11.43%	11.43%

Securities owned by Board members

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.

Repurchase by the Company of its own shares

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:

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.

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.

Issue of new shares and pre-emptive rights

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.

Articles of Association

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.

Anti-takeover measures
and change-of-control provisions

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).

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.

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:

2.3.4: Composition of the Committees

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.

2.1.7–2.1.8: Independence of the Supervisory Board and its Members

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.

2.3.2: Supervisory Board Committees

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.

3.3.2: Award of Shares and/or Rights to Shares to Members of the Supervisory Board

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.

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.

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

Risk appetite

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.

	Green zone	Yellow zone	Red zone
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

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

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 “Sustainability management” and “The Company’s principal risks”.

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.

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.

Principal risks	Risk movement in 2022	Key controls and mitigating factors
Strategy
Market and macroeconomics Major changes in the macroeconomic environment may challenge the existing business strategy or have a material impact on financial performance.	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.	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 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.	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 authorisation, leading to significant uncertainties with respect to future dividend distributions. it is not clear when such restrictions will be lifted. X5’s shareholders currently have limited or no liquidity in our stock 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.
Competitive environment Actions taken by competitors or new entrants to the market affect the Company’s competitive edge and performance.	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.	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).
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.
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.
Supply chain 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.	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.	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. More information can be found in “Retail Infrastructure”.
Human resources 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.	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.	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.
Business continuity performance 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 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.	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. More information can be found in “X5 Technologies”.
IT 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.	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.
Cybersecurity 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.	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.	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. More information can be found in “X5 Technologies”.
Compliance
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.
Legislation and litigation 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.	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.
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.
Reporting and financing
Financial risks X5 could be affected by a number of industry-wide financial risks: 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	The increasing volatility of the rouble exchange rate and interest rates adversely affect our financial performance.	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.
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.	More information can be found in “Sustainable Development”.

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 Board’s review of the strategic plan, the 2023 budget and the 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.

Supervisory and Management Boards