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The board of directors (the "Board") and the management of Lenovo Group Limited (the "Company") strive to attain and uphold a high standard of corporate governance and to maintain sound and well-established corporate governance practices for the interest sake of shareholders and other stakeholders including customers, suppliers, employees and the general public. The Company abides strictly by the governing laws and regulations of the jurisdictions where it operates and observes the applicable guidelines and rules issued by regulatory authorities. It regularly undertakes review on its corporate governance system to ensure it is in line with international and local best practices.

CORPORATE GOVERNANCE STRUCTURE

The Board continuously reviews its governance structure to ensure its relevance and ability to meet the challenges of the future.


* a management committee comprising the Chief Executive Officer and certain members of the senior management

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CORPORATE GOVERNANCE CODE COMPLIANCE

Throughout the year ended March 31, 2013, the Company has complied with the code provisions of the Corporate Governance Code and Corporate Governance Report (the "CG Code") set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") (the "Listing Rules"), and where appropriate, met the recommended best practices in the CG Code, save for the exception which is explained below.

Code Provision A.2.1 (Separate the roles of Chairman and Chief Executive Officer)

Since November 3, 2011, Mr. Yang Yuanqing ("Mr. Yang") has been performing both the roles as the chairman of the Board (the "Chairman") and chief executive officer of the Company (the "CEO"). The Board has recently reviewed the organization human resources planning of the Company and is of the opinion that it is appropriate and in the best interests of the Company at the present stage for Mr. Yang to continue to hold both the positions as it would help to maintain the continuity of the strategy execution and stability of the operations of the Company. The Board comprising a vast majority of non-executive directors meets regularly on a quarterly basis to review the operations of the Company led by Mr. Yang. Accordingly, the Board believes that this arrangement will not have negative influence on the balance of power and authorizations between the Board and the management of the Company.

Apart from the foregoing, the Company met the recommended best practices in the CG Code as disclosed in the respective sections of the Company's 2012/13 Annual Report. Particularly, the Company published quarterly financial results and business reviews in addition to interim and annual results. Quarterly financial results enhanced the shareholders' ability to assess the performance, financial position and prospects of the Company. The quarterly financial results were prepared using the accounting standards consistent with the policies applied to the interim and annual financial results.

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THE BOARD

As of May 23, 2013, there were eleven Board members consisting of one executive director, four non-executive directors and six independent non-executive directors.

On February 20, 2013, Mr. Chih-Yuan (Jerry) Yang was appointed as an observer of the Board of the Company (the "Board Observer"). As a Board Observer, Mr. Jerry Yang will not have the power to vote at any Board meeting and will not exercise any other rights of a director at such meeting. He is neither a director nor an officer of the Company or any subsidiary of the Company, and does not have any management role in the Company or any of its subsidiaries. His primary role is to attend relevant Board meetings and to participate in such meetings by providing his views on matters being considered by the Board.

Board Composition
During the 2012/13 fiscal year, the Company has made further progress in shaping its Board for the future, ensuring that diversity, in its broadest definition, is at the Company's focus. Summary of the Board diversity policy including the views and measurable objectives is set out on page 40 of the Company's 2012/13 Annual Report.

The Board diversity mix is shown below while the detailed biographies and a snapshot of the Board's experience are set out on pages 96 to 98 of the Company's 2012/13 Annual Report.

The current composition of the Board exceeds the requirements under rule 3.10A of the Listing Rules, as more than half of its members are independent non-executive directors, thus exhibiting a strong independent element which enhances independent judgement. Mr. Nicholas C. Allen, an independent non-executive director of the Company, has the appropriate professional qualifications, or accounting or related financial management expertise, as required under the Listing Rules.

The Company has maintained on its website and Hong Kong Exchanges and Clearing Limited's website (the "HKEx's website") an updated list of its directors identifying their roles and functions and whether they are independent non-executive directors. Independent non-executive directors are also identified as such in all corporate communications that disclose the names of directors of the Company.

Mr. Zhu Linan and Mr. Zhao John Huan, non-executive directors, also serve on the board of directors of Legend Holdings Limited, the controlling shareholder of the Company. Except for the relationships (including financial, business, family, and other material and relevant relationships) as detailed above and in the biographies of directors set out on pages 96 to 98 of the Company's 2012/13 Annual Report, there are no other relationships among the Board to the best knowledge of the Board members as of May 23, 2013.

Chairman and Chief Executive Officer
The Chairman leads the Board in the determination of its strategy and in the achievement of its objectives and ensures that all directors are properly briefed on issues arising at Board meetings and receive adequate, complete and reliable information in a timely manner. The CEO has delegated authority from the Board to take direct charge of the Company and its subsidiaries (collectively the "Group") on a day-to-day basis and is accountable to the Board for the financial and operational performance of the Group. Both the Chairman and CEO positions are currently held by Mr. Yang. The Board believes that the current governance structure, with a combined Chairman and CEO and a vast majority of non-executive directors, provides an effective balance of power and authority for the management of the Company in the best interests of the Company at the present stage.

Lead Independent Director
As a means of enhancing corporate governance of the Company, Mr. William O. Grabe ("Mr. Grabe"), an independent non-executive director of the Company, has been appointed by the Board as the lead independent director of the Company ("Lead Independent Director") on May 23, 2013. The Lead Independent Director is not an executive position in the Company and does not have any management role in the Company or any of its subsidiaries. Subsequent to this appointment, Mr. Grabe will continue to serve as an independent non-executive director, the chairman of the Compensation Committee and a member of Nomination and Governance Committee of the Company.

As the Lead Independent Director, Mr. Grabe has the following roles: (1) to chair the Nomination and Governance Committee meeting and/or the Board meeting when considering (a) the combined roles of Chairman and CEO; (b) assessment of the performance of Chairman and/or CEO; (2) to call and chair meeting(s) with all non-executive directors at least once a year on such matters as are deemed appropriate and provide feedbacks to Chairman and/or CEO; (3) to serve a key role in the Board evaluation process; (4) responds directly to shareholders and other stakeholder questions and comments that are directed to the Lead Independent Director or to the independent non-executive directors as a group, when appropriate; (5) if requested by major shareholders, ensures that he is available, when appropriate, for consultation and direct communication; and (6) to perform other duties as directors may designate.

Independence of Non-executive Directors
The current composition of the Board, with a high proportion of independent non-executive directors, ensures and provides strong and meaningful oversight over management. The independent non-executive directors do not participate in the day-to-day management of the Company and do not engage in any business dealing or other relationships with the Group (other than in situations permitted by the applicable regulations) in order to ensure that they remain truly capable of exercising independent judgement and act in the best interests of the Group and its shareholders. Further, the Board is satisfied and assured that no individual or group of directors has unfettered powers of decision that could create a potential conflict of interest.

The non-executive directors of the Company continue to proactively engage with senior management and other relevant parties, such as the external or internal auditors as well as the Company's legal and compliance departments, to ensure that the various concerns and issues relevant to the management and oversight of the business and operations of the Company and the Group are properly addressed.

Each of the independent non-executive directors has made a confirmation of independence pursuant to rule 3.13 of the Listing Rules. On May 22, 2013, the Nomination and Governance Committee of the Board conducted an annual review of the independence of all independent non-executive directors of the Company for the year ended March 31, 2013. Having taken into account the factors as set out in rule 3.13 of the Listing Rules in assessing the independence of independent non-executive directors, the Nomination and Governance Committee (with the relevant committee member abstaining from voting on the resolution concerning his own independence) concluded that all of the independent non-executive directors satisfied the criteria of independence as set out in the Listing Rules.

In addition, the Nomination and Governance Committee affirmed that all independent non-executive directors of the Company provided a strong independent element on the Board, were free from any business or other relationship which could materially interfere with the exercise of their judgement, and remained independent for the year ended March 31, 2013.

Appointment and Election of Directors

Board diversity
The Board values diversity as a factor in selecting candidates to serve on the Board, and believes that the diversity which exists in its composition provides significant benefits to the Board and the Company.

There is a formal and transparent procedure for the appointment of new directors to the Board, the primary responsibility of which has been delegated to the Nomination and Governance Committee. The Nomination and Governance Committee is composed of the Chairman and two independent non-executive directors. This composition ensures that any decisions made are impartial and are in the best interest of the Company.

On May 23, 2013, the Board adopted the Board diversity policy (the "Diversity Policy") which relates to the selection of candidates for the Board. The Diversity Policy was adopted to ensure that diversity in its broadest sense continues to remain a feature of the Board. The Nomination and Governance Committee's assessment of the candidates includes, but is not limited to, consideration of the relevant knowledge and diversity of backgrounds, skills, experience and perspectives that would complement the existing Board. The Company has set out the following objectives for fiscal year 2013/14:


Measurable objectives Goal for meeting objective
Objective 1 Consider candidates for appointment as independent non-executive directors from a wide pool of backgrounds, skills, experience and perspectives that would complement the existing Board In the ordinary course of the Board succession process
Objective 2 Report annually against the objectives and other initiatives taking place within the Company which promote diversity FY2013/14 and ongoing
Objective 3 Report annually on the outcome of the composition and structure of the Board as well as any issues and challenges the Board is facing when considering the diverse make up of the Company FY2013/14 and ongoing

Board appointment process
The structure, size and composition (including, for example, gender, age, and length of service) of the Board will be reviewed from time to time by the Nomination and Governance Committee to ensure that the Board has a balance of skill and expertise for providing effective leadership to the Company. The Nomination and Governance Committee also ensures that candidates satisfy the requisite skills and core competencies to be deemed fit and proper, and to be appointed as director. The nomination process involves the following six stages:

Board tenure
In accordance with the articles of association of the Company (the "Articles of Association"), all directors are subject to retirement by rotation. At each annual general meeting, one-third of the directors for the time being shall retire from office. The retiring directors shall be eligible for re-election. New appointments either to fill a casual vacancy or as an addition to the Board are subject to re-election by shareholders of the Company at the next following annual general meeting of the Company.

All non-executive directors (including independent non-executive directors) have entered into letters of appointment with the Company for a term of three years. Their terms of appointment shall be subject to retirement from office by rotation and re-election at the annual general meeting in accordance with the Articles of Association.

The Company agreed that the independence of directors is an important principle of the Company. In line with the best practices on corporate governance, the Board adopted the principle that each term of an independent non-executive director of the Company shall not be more than three years and shall, subject to re-election by shareholders at any subsequent annual general meeting of the Company, be renewable for additional three-year terms up to a total of nine years. At the recommendation of the Nomination and Governance Committee, the Board may invite an independent non-executive director to serve for an additional three-year term extending up to a total of twelve years subject to re-election at any subsequent annual general meeting of the Company.

Directors' commitments
All directors are committed to devote sufficient time and attention to the affairs of the Group. Directors are given guidelines on their time commitments to the affairs of the Company and corresponding confirmations were received from the directors in their letters of appointment. Directors have also disclosed to the Company the number and nature of offices held in Hong Kong or overseas listed public companies or organisations and other significant commitments, with the identity of the public companies or organisations. Directors are reminded to notify the Company in a timely manner and bi-annually confirm to the Company of any changes of such information. With respect to those directors who stand for re-election at the 2013 annual general meeting, all of their directorships held in listed public companies in the past three years are also set out in the document accompanying the notice of the 2013 annual general meeting.

Director induction and continuous professional development
The Company is aware of the requirement to regularly review and agree with each director their training needs. Keeping up-to-date with key business developments is essential for directors to maintain and enhance their effectiveness.

Induction program
Upon joining the Company, directors undergo a comprehensive, formal and tailored induction program covering amongst other things:

If appropriate, the induction will also include attending briefings and presentations from relevant senior executives, and opportunities to visit business operations. During the 2012/13 fiscal year, the Company arranged Mr. William Tudor Brown, who joined the Board in January, 2013, to visit Lenovo showroom in India, the Lenovo Products Exhibition Center, manufacturing plant and MIDH showcase in Beijing to enhance his understanding of the businesses and operations of the Group.

Continuous professional development program
As part of the continuous professional development program, the Board members from time to time receive presentations from senior executives in the business on matters of significance. Financial plans, including budgets and forecasts, are regularly discussed at Board meetings. The Company would arrange, where appropriate, site visits and meetings with senior management for directors to facilitate their understanding of the Group's businesses and have a better awareness of the risks associated with the Group's operations.

To facilitate the training for directors, the Company had also introduced an online training at Lenovo University for directors. In fiscal year 2012/13, the focus of the online training was "Ethics and Compliance" and the attendance rate of directors was 100%.

The directors are updated on a continuing basis by the Company Secretary on any new regulations and guidelines, as well as any amendments thereto issued by the Stock Exchange and other regulatory authorities, particularly the effects of such new or amended regulations and guidelines on directors specifically, and the Company and the Group.

The directors are also encouraged to attend relevant external professional programs at the Company's expense as necessary to keep abreast of issues facing the changing business environment within which the Group operates.

The Board considers the aforementioned training attended and/or participated in by the directors, and the continuing legal updates provided to the directors, as adequate to enhance the directors' skills and knowledge to carry out their duties as directors. The Nomination and Governance Committee will, on a continuing basis, evaluate and determine the training needs of the directors, particularly on relevant new laws and regulations and essential practices for effective corporate governance and risk management, to enable the directors to sustain their active participation in Board deliberations and effectively discharge their duties.

In addition to directors' attendance at meetings and review of relevant materials provided by senior management during the 2012/13 fiscal year, the professional trainings attended by the directors are set out as follows:


Type of training
Name of directors Reading regulatory updates / Company Policies Visiting the place of operations, Company's facilities and meeting with local management Attending experts briefing / seminar / conference relevant to the Company's business or director's duties Attending online training at Lenovo University
Executive director
Mr. Yang Yuanqing
Non-executive directors
Mr. Zhu Linan
Ms. Ma Xuezheng
Dr. Wu Yibing
Mr. Zhao John Huan
Independent non-executive directors
Professor Woo Chia-Wei (Note 1) N/A N/A
Mr. Ting Lee Sen
Dr. Tian Suning
Mr. Nicholas C. Allen
Mr. Nobuyuki Idei
Mr. William O. Grabe
Mr. William Tudor Brown (Note 2)

Notes:
(1) Professor Woo Chia-Wei resigned as independent non-executive director on July 3, 2012.
(2) An induction was conducted for Mr. William Tudor Brown, who was newly appointed to the Board in January 2013.

Board Process
The Board recognises the importance of providing timely and appropriate information to directors so as to enable them to make informed decisions and to perform their duties and responsibilities effectively.

Other key features of Board process

  • The directors are supplied in a timely manner with all relevant documentation and financial information to assist them in the discharge of their duties. Monthly updates of the financial performance of the Company are furnished to the Board between regular Board Meetings.
  • In addition to standing agenda items, there may be discussions on "deep-dive" topics. During the 2012/13 fiscal year "deep-dive" presentations included the Group's specific strategy and business in a specific market.
  • Senior management are invited to attend Board meetings, where appropriate, to report on matters relating to their areas of responsibility, and also to brief and present details to the directors on recommendations submitted for the Board's consideration. Additional information or clarification may be required to be furnished, particularly with respect to complex and technical issues tabled to the Board.
  • Separate executive sessions were arranged for the Chairman to meet with non-executive directors in the absence of management to discuss matters relating to any issue or other matters such persons would like to raise.
  • All directors have direct access to the General Counsel and Company Secretary of the Company who are responsible for advising the Board on corporate governance and compliance issues.
  • Written procedures are in place for directors to seek, at the Company's expense, independent professional advice in performing directors' duties. No request was made by any director for such advice during the 2012/13 fiscal year.
  • The Company has arranged appropriate insurance to cover the liabilities of the directors arising from corporate activities. The insurance coverage is reviewed on an annual basis.


Directors' Securities Transactions

The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the "Model Code") set out in Appendix 10 to the Listing Rules from time to time and devised based on the principles of the Model Code a comprehensive and operative company policy to govern securities transactions by directors and designated senior management of the Company. All directors of the Company have confirmed, after specific enquiry, their compliance with the required standard during the 2012/13 fiscal year.

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DELEGATION BY THE BOARD

Board's Role and Responsibilities
The Group is controlled through the Board who is responsible for steering the success of the Group by overseeing the overall strategy and directing and supervising its affairs in a responsible and effective manner. The Board also sets the Group's core values and adopts proper standards to ensure that the Company operates with integrity and complies with the relevant rules and regulations.

The Board has formulated a clear written policy that stipulates the circumstances under which the management should report to and obtain prior approval from the Board before making decisions or entering into any commitments on behalf of the Group. The Board will regularly review the policy.

The specific responsibilities reserved to the Board for its decision and consideration cover: annual budget, major capital and equity transactions, major disposals and acquisitions, connected transactions, recommendation on appointment or reappointment of external auditor; and other significant operational and financial matters.

Board activities in the financial year ended March 31, 2013
Board activities are structured to assist the Board in achieving its goal to support and advise senior management on the delivery of the Group's strategy within a transparent governance framework. The diagram below shows the key areas of focus for the Board, which appear as items on the Board's agenda at relevant times throughout the financial year. Concentrated discussion of these items assists the Board in making the most appropriate decision based on the long-term opportunities for the business.

Overview of various items on the Board's agenda for fiscal year 2012/13
During the fiscal year 2012/13, a total of seven Board meetings were held, of which four Board meetings were primarily to review quarterly business performance and strategy execution and the remaining three were for reviewing specific strategy in the geography, business or other relevant areas and also new projects. Given the geographical spread of the Group's business, in addition to the meetings in Hong Kong and New York, the Company also held meetings in Japan and India with a particular focus on reviewing the strategies and business in these areas which provided an opportunity for directors to meet with management teams in those countries.

The regular items of a Board meeting for reviewing quarterly results include a report from CEO on business performance and strategy execution, a report from Chief Financial Officer on financial performance and reporting and reports from the chairman of the respective Board committees on matters discussed and/or approved at the relevant Board committees' meetings held prior to the Board meetings. In addition to these regular reports, the Board considered and/or resolved the following non-routine matters during the 2012/13 fiscal year:


  • Formation of a joint venture with EMC Corporation
  • Resignation of Professor Woo Chia-Wei as director
  • Appointment of Mr. William Tudor Brown as director
  • Appointment of Mr. Chih-Yuan (Jerry) Yang as Board Observer
  • Acquisition of CCE (or formally known as Digiboard Eletrônica da Amazônia Ltda., Digibrás Indústria do Brasil S.A. and Dual Mix Comércio de Eletrônicos Ltda.)
  • Acquisition of Stoneware Inc.
  • Acceleration of put option in relation to the option shares in Medion AG
  • Adoption of the continuous disclosure policy of the Company
  • Discussion on Board and Board committees' evaluation results

Board Committees
As at May 23, 2013, the Company has preserved three Board committees (the "Board Committees") with defined terms of reference (which are posted on the Company's website and HKEx's website) – Audit Committee, Compensation Committee and Nomination and Governance Committee. The terms of reference of Audit Committee, Compensation Committee, and Nomination and Governance Committee reference those set out in the CG Code prevailing from time to time.

The Board may also establish committees on an ad hoc basis to approve specific projects as deemed necessary. Should the need arise, the Board will authorize an independent board committee comprising the independent non-executive directors to review, approve and monitor connected transactions (including continuing connected transactions) that should be approved by the Board.

All Board Committees follow the same principles and procedures as those of the Board and are provided with sufficient resources to perform their duties. The Board Committees will report to the Board on a regular basis, including their decisions or recommendations to the Board, unless there are legal or regulatory restrictions on their ability to do so. The member list of the Board Committees is also posted on the Company's website and HKEx's website.

Audit Committee

The Audit Committee is authorised by the Board to perform its duties within its terms of reference. Details of the Audit Committee, including its membership, terms of reference and work done during the fiscal year 2012/13, are summarized in the Audit Committee Report as stated on pages 66 to 69 of the Company's 2012/13 Annual Report.

Compensation Committee

The Compensation Committee is authorised by the Board to perform its duties within its terms of reference. Details of the Compensation Committee, including its membership, terms of reference and work done during the fiscal year 2012/13, are summarized in the Compensation Committee Report as stated on pages 70 to 79 of the Company's 2012/13 Annual Report.

Nomination and Governance Committee

Membership
The Nomination and Governance Committee (defined as "Committee" in this section) is currently composed of Mr. Yang Yuanqing (Committee Chairman), Mr. Nobuyuki Idei and Mr. William O. Grabe.

Responsibilities
The Committee is to assist the Board in overseeing Board organization, developing its corporate governance principles and policy, and assessing the independence of non-executive directors. The Committee is also responsible for making recommendation to the Board on succession planning for directors and CEO, assessment of the performance of the Chairman and/or CEO and making proposals to the Compensation Committee. The chairman of the Committee will not chair the committee meeting if it is dealing with the appointment of a successor to the Chairman.

Summary of work done
During the year ended March 31, 2013, the Committee held three meetings in which the following activities were considered and/or resolved:


  • Overseeing the process for identifying and making recommendations to the Board regarding the appointments of Mr. William Tudor Brown as independent non-executive director and Mr. Chih-Yuan (Jerry) Yang as Board Observer
  • Review of and recommendations to the Board in relation to the structure, size and composition of the Board including the diversity and balance of skill, knowledge and experience of the directors
  • Overseeing the process of the Board and Board Committees' evaluation including review and recommendation to the Board for follow up actions
  • Review of and recommendation to the Board for adoption of continuous disclosure policy
  • Assessment of the performance of the Chairman and CEO for fiscal year 2011/12 and recommendation to the Compensation Committee
  • Review of and recommendation to the Board for adoption of Diversity Policy on May 22, 2013


Board and Board Committees Meetings and Attendance

Details of directors' attendance at the annual general meeting, Board and Board Committees meetings held during the year ended March 31, 2013 are set out below:


Attendance / Meetings held in the fiscal year 2012/13
Name of directors Board Audit Committee Compensation Committee Nomination and Governance Committee Annual General Meeting
(Notes 1 & 2) (Notes 1 & 3) (Note 1) (Notes 1 & 7) (Note 3)
Executive director          
Mr. Yang Yuanqing (Chairman & CEO) 7/7 3/3 1
Non-executive directors          
Mr. Zhu Linan 5/7 1
Ms. Ma Xuezheng (Note 4) 7/7 4/4 2/2 1
Dr. Wu Yibing 7/7 1
Mr. Zhao John Huan 7/7 1
Independent non-executive directors          
Professor Woo Chia-Wei (Note 5) 1/1 1/1 1/1 1
Mr. Ting Lee Sen 7/7 4/4 4/4 1
Dr. Tian Suning 7/7 1
Mr. Nicholas C. Allen 7/7 4/4 1
Mr. Nobuyuki Idei 7/7 3/3 1
Mr. William O. Grabe 7/7 4/4 3/3 1
Mr. William Tudor Brown (Note 6) 1/1

Notes:

(1) The attendance figure represents actual attendance/the number of meetings a director is entitled to attend.

(2) The Board held four regular meetings, two strategy meetings and one ad hoc meeting during the 2012/13 fiscal year.

(3) Representatives of the external auditor participated in every Audit Committee meeting and the annual general meeting held during the 2012/13 fiscal year.

(4) Ms. Ma Xuezheng has been re-designated from observer to member of the Compensation Committee with effect from August 15, 2012.

(5) Professor Woo Chia-Wei resigned as an independent non-executive director, member of the Audit Committee and the Compensation Committee with effect from July 3, 2012.

(6) Mr. William Tudor Brown was appointed as an independent non-executive director with effect from January 30, 2013.

(7) For corporate governance reasons, Mr. Yang Yuanqing was required to excuse himself from the agenda item relating to assessment of the performance of the Chairman and CEO of the Nomination and Governance Committee meeting to avoid conflict of interest.

During the 2012/13 fiscal year, the Chairman held two executive sessions with non-executive directors (including independent non-executive directors), the first one being a session attended by only human resources management to review the organization human resources planning of the Company while the other was without the presence of all the senior management to discuss future Board meeting matters.

Board and Board Committees' Evaluation
The Board is aware of the importance of continually assessing its own performance in support of the leadership of the Group. During the 2012/13 fiscal year, the Board has established a formal process, led by the Nomination and Governance Committee, for the annual evaluation of the performance of the Board and Board Committees, to ensure that they continue to act effectively and efficiently and to fulfill their respective duties.

In fiscal year 2012/13, the Board conducted the first formal evaluation of its own performance and that of its Committees. The aim of the evaluation was to capture open and constructive feedback from Board members that would:


  • provide insights into the effectiveness of the Board and Board Committees; and
  • determine areas within the Board and Board Committees where additional competence is needed.

The evaluation process involved each of the directors completing a comprehensive questionnaire, which was structured to include a wide range of questions that focused on the six areas shown below. The process took place between November 2012 and January 2013.

A consolidated report of the outputs from the evaluation was prepared by the Nomination and Governance Committee for review and consideration by the Board. The results of the evaluation were thoroughly discussed at a Board meeting in order to further improve the work of the Board. The evaluation report concluded that the Board and Board Committees continue to operate effectively. The Board also identified enhancement areas, which will be incorporated into the future Board program to ensure that the operation of the Board and Board Committees continue to improve. These areas will continuously be reviewed by the Board.

Management Functions
The Company has a formal schedule of matters specifically reserved to the Board and those delegated to management. The management is responsible for the daily operations and administration function of the Group under the leadership of the CEO. The Board has given clear directions to management as to the matters that must be approved by the Board before decisions are made on behalf of the Company. The types of decisions to be delegated by the Board to management include implementation of the strategy and direction determined by the Board, operation of the Group's businesses, preparation of financial statements and operating budgets, and compliance with applicable laws and regulations. These arrangements will be reviewed periodically to ensure that they remain appropriate to the Company's needs. The list of members of senior management and their biographies are set out on pages 98 to 99 of the Company's 2012/13 Annual Report.

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ACCOUNTABILITY AND AUDIT

Financial Reporting
The Board acknowledges its responsibility for presenting a balanced, clear and comprehensive assessment of the Company's performance, position and prospects. The Board is also responsible for the preparation of financial statements for each financial year which gives a true and fair view of the state of affairs of the Group on going concern basis while the external auditor's responsibilities to shareholders are set out in the Independent Auditor's Report on page 111 of the Company's 2012/13 Annual Report.

Internal Control
The Board acknowledges its responsibility to ensure the Company maintains sound and effective internal controls. This is achieved through a defined management structure with specified limits of authority and defined control responsibility to:


  • Achieve business objectives and safeguard assets against unauthorized use or disposition;
  • Ensure maintenance of proper accounting records for the provision of reliable financial information for internal use or for publication; and
  • Ensure compliance with the relevant legislation and regulations.

To achieve this, for many years the Company has had in place an integrated framework of internal controls which is consistent with the COSO (the Committee of Sponsoring Organizations of the Treadway Commission) framework.

Management of Internal Controls
Essential to Lenovo's internal control framework as well as the management of internal controls are well defined policies and procedures that are properly documented and communicated to employees. Corporate policies are the foundation of major guidelines and procedures and set out required control standards which guide employees' everyday work at Lenovo. The policies address legal, regulatory, and operational topics, including, for example, intellectual property, data privacy, employee health and safety, delegation of authority, information security, and business continuity.

Additionally, the Company's Code of Conduct, which applies to all employees, forms the basis of Lenovo's commitment to conducting all business with uncompromising integrity and ethical behavior. The Code also helps employees determine when to ask for advice, and where to obtain it. All Lenovo employees are required to comply with the company's Code of Conduct, which is available in seven languages and is accessible on the Company's website as well as on Lenovo's intranet, and to participate in regular training to reinforce the Company's commitment to compliance and to conducting business with integrity. Lenovo regards any violation of the Code as a serious matter and is committed to following up and investigating on all reported concerns. Furthermore, in keeping with best practices, Lenovo has developed and implemented an Anti-Bribery and Anti-Corruption Policy which reinforces the message in the Code of Conduct and provides additional specific guidance regarding compliance with rules and laws related to bribery and corruption.

The internal control system of the Company covers every activity and transaction. Within this framework, management performs periodic, enterprise-wide risk assessments and continuously monitors and reports the progress of action plans to address the key risks. Management also tracks and reports on the implementation of strategic initiatives, business plans, budgets and financial results. As part of the focus on financial integrity, all relevant senior executives regularly verify the accuracy and completeness of the quarterly financial statements and compliance with key internal controls. Additionally, the senior executives have an obligation to maintain the effectiveness of the disclosure controls, certify execution of the quarterly disclosure process, take appropriate actions to resolve disclosure items, and report to the Audit Committee as well as the Company's external auditor.

To enhance the monitoring of controls, Lenovo recognizes the importance of self testing of key controls by management in order to ensure that the internal controls are working as intended or that necessary actions have been taken to address control weaknesses. To further assist management with monitoring controls Lenovo has established a Global Business Process & Controls organization. As part of its mission, the Global Business Process & Controls organization helps to clearly communicate control requirements across all organizations and process owners, design processes, and evaluate the operating effectiveness and efficiency of designed processes and controls in order to help to mitigate risk.

While management is responsible for the design, implementation and maintenance of internal controls, the Board and its Audit Committee oversee the actions of management and monitor the effectiveness of the established controls. To assist the Audit Committee in its oversight and monitoring activities, the Company maintains an independent, worldwide Internal Audit function which provides objective assurance to the Audit Committee that the system of internal controls is effective and operating as intended. The mission of Internal Audit is to provide the Board of Directors and Lenovo management with:


  • Independent and objective assessment of Lenovo's system of internal controls;
  • Guidance in managing and controlling risks for Lenovo stakeholders;
  • Proactive support to improve Lenovo's control posture; and
  • Independent investigations regarding allegations of fraud and violations of Lenovo's Code of Conduct and other company policies.

To enable it to fulfill its mission, Internal Audit has unrestricted access to all corporate operations, records, data files, computer programs, property, and personnel. To preserve the independence of the Internal Audit function, the Head of Internal Audit reports directly to the Audit Committee on all audit matters and to the Chief Financial Officer on administrative matters. The Head of Internal Audit is authorized to communicate directly with the Chairman of the Board and other Board members. To help ensure the quality of the Internal Audit function and provide assurance that the Internal Audit function is in conformity with the standards of the Institute of Internal Auditors, Internal Audit has implemented a comprehensive and continuous quality assurance program covering all Internal Audit activities. In addition, the Audit Committee periodically commissions an independent, external quality assurance review of the Internal Audit function.

In selecting the audits to perform each year, Internal Audit uses information collected throughout the year from process owners, the risk assessment team, senior executives, external auditor and the Board. Using this information Internal Audit develops a risk based audit plan, focusing on areas with significant risks or where substantial changes have been made. The audit plan is reviewed by the Audit Committee, which is also given quarterly updates on the performance of the plan and key findings. From the audit work performed, process owners are able to confirm to senior management that internal controls are working as intended or that necessary corrections have been made where control weaknesses have been found. In keeping with best practices, Internal Audit regularly monitors the status of management action plans with respect to audit findings to ensure completion and reports to the Audit Committee. Reporting also includes identified key controls issues as well as potential controls issues in order to provide the Audit Committee full visibility into the status of Lenovo's control environment. Ad hoc reviews of areas of concern identified by management or the Audit Committee may also be performed. During the last year, Internal Audit issued multiple reports covering all significant operational and financial units worldwide.

Furthermore, Internal Audit is responsible for investigating any allegations of potential violations of Lenovo's Code of Conduct, the Anti-Bribery and Anti-Corruption Policy, or any other company policies as appropriate. Internal Audit partners with Legal, Ethics and Compliance, Human Resources, and subject matter experts where necessary to ensure the appropriate expertise when performing these investigations. Management and the Audit Committee are informed of any required actions resulting from these reviews, and Internal Audit monitors the corrective actions to completion.

Inside Information
Regarding procedures and internal controls for the handling and dissemination of inside information, the Company is aware of its obligations under the Securities and Futures Ordinance and the Listing Rules as well as the overriding principle that inside information should be announced immediately if it is the subject of a decision. The Company conducts its affairs with close regard to the applicable laws and regulations prevailing in Hong Kong and has implemented policies and procedures which strictly prohibit unauthorized use of confidential and inside information, and has communicated to all relevant staff regarding this matter.

Control Effectiveness
The Board, through the Audit Committee of the Company, conducts a continuous review of the effectiveness of the internal control system operating in the Company and considers it to be adequate and effective. The review covers all material controls, including financial, operational and compliance controls, and risk management functions. The Board is not aware of any significant areas of concern which may affect the shareholders. The Board is satisfied that the Company has fully complied with the code provisions on internal controls as set forth in the Corporate Governance Code.

Enterprise Risk Management
At Lenovo, risk is defined as a potential action, event or circumstance that could impact the Group's ability, favorably or unfavorably, to meet its strategic goals. Risk is an inherent part of the Group and needs to be understood and managed properly to provide a foundation for the Group's sustained growth. In line with the commitment to deliver sustainable value, Lenovo has implemented an Enterprise Risk Management (ERM) framework to proactively manage risks.

Lenovo's ERM framework is effected by Lenovo's Board of Directors and management team, and is applied in strategy setting and across all major functions of the Group. It involves:


  • The ERM team, who is responsible to design, implement, review, and update Lenovo ERM framework.
  • All Lenovo major functions, where risk ownership is established via the appointment of Risk Champions in each function.

Within this framework, critical and major risks of the business functions, especially in view of the changing business environment, are identified and assessed at the business planning stage. For each of these risks, decisions are made on the appropriate risk strategy to adopt to manage the risk (i.e. avoidance, retention, reduction, or transference) and resources are allocated accordingly. These risks, as well as the effectiveness of the relevant risk strategies, are monitored and reviewed by each business function. Where necessary, Internal Audit or the Business Control teams are engaged to reinforce the effectiveness of the risk strategies. At the group level, the risks are also reviewed by the ERM team, and cross-functional cooperation engaged where relevant. At least annually, top risks and corresponding risk strategies are highlighted to the Audit Committee.

The ERM framework covers all types of risks faced by the Group, both external and internal, and has helped enhance the Group's efforts to provide strong support for its rapid growing business, across all markets. This framework will continue to be strengthened, so as to create a robust risk management culture which safeguards the value of the Group.

External Auditor

Independence of External Auditor
The Group's external auditor is PricewaterhouseCoopers ("PwC"), who is remunerated mainly for its audit services provided to the Group. The Company has adopted a policy on engagement of the external auditor for non-audit services, under which the external auditor is required to comply with the independence requirements under the Code of Ethics for Professional Accountants issued by the Hong Kong Institute of Certified Public Accountants. The external auditor may provide certain non-audit services to the Group given that these do not involve any management or decision making functions for and on behalf of the Group; do not perform any self assessments; and do not act in an advocacy role for the Company. The engagement of the external auditor for permitted and approved non-audit services shall be approved by the Audit Committee if the value of such non-audit services is equal to or above US$320,000.

During the 2012/13 fiscal year, PwC provided audit and insignificant non-audit services to the Group.

Remuneration of External Auditor
The fees paid or payable to PwC for audit and non-audit services for the financial year ended March 31, 2013 and the comparative figures for the financial year ended March 31, 2012 are as follows:


  2013 2012
  US$mn US$mn
Audit    
   – 2011/12 5.5
   – 2012/13 5.6
  5.6 5.5
Non-audit 0.8 1.9
Total 6.4 7.4

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REMUNERATION OF DIRECTORS AND SENIOR MANAGEMENT

A formal and transparent procedure for fixing the remuneration packages of individual directors and senior management is in place. Details of remuneration policies and other relevant information are set out in the Compensation Committee Report of the Company's 2012/13 Annual Report while particulars of directors' remuneration (including the CEO) and the five highest paid employees are set out in note 11 to the financial statements. The remuneration of senior management as disclosed in of the Company's 2012/13 Annual Report is as follows:

Remuneration of Senior Management
The remuneration of senior management fell within the following bands for the year ended March 31, 2013:


Remuneration bands Number of senior management
US$2,189,847 to US$2,254,253 1
US$2,898,327 to US$2,962,733 1
US$3,155,956 to US$3,220,362 1
US$3,413,585 to US$3,477,991 1
US$3,800,028 to US$3,864,435 1
US$4,122,065 to US$4,186,471 1
US$4,186,472 to US$4,250,878 1
US$4,315,287 to US$4,379,693 1

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COMPANY SECRETARY

The Company Secretary, Mr. Mok Chung Fu is responsible for facilitating the Board process, as well as communications among Board members with shareholders and management. During the financial year ended March 31, 2013, the Company Secretary undertook appropriate professional training to update his skills and knowledge.

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COMMUNICATION WITH SHAREHOLDERS

The Company is committed to safeguard shareholders' interests and believes that effective communication with shareholders and other stakeholders is essential for enhancing investor relations and investor understanding of the business performance and strategies of the Group. To achieve this, the Company has established the Shareholders' Communication Policy setting out various formal channels of communication with shareholders and other stakeholders for ensuring fair disclosure and comprehensive and transparent reporting of the Company's performance and activities. The Nomination and Governance Committee of the Company will review the Shareholders' Communication Policy on a regular basis to ensure its effectiveness.

Constructive Use of the General Meetings
The annual general meeting and other general meetings of the Company are the primary forum for communication by the Company with its shareholders and for shareholder participation. The Board encourages shareholders to participate in general meetings as it provides a valuable opportunity to discuss the Company, its corporate governance and other important matters. Notice of the annual general meeting and related papers are sent to shareholders at least 20 clear business days prior to the date of the annual general meeting. The information sent to shareholders includes a summary of the business to be covered at the annual general meeting, where a separate resolution is prepared for each substantive matter.

2012 Annual General Meeting
The 2012 annual general meeting of the Company held on July 3, 2012 was attended by, among others, the CEO, Chief Financial Officer, chairmen of the Audit Committee and Compensation Committee, and representatives of the external auditor PwC and other professional consultant to answer questions raised by shareholders at the meeting.

Separate resolutions were proposed on each issue, including the re-election of individual retiring directors. The matters resolved and the percentages of votes cast in favour of the resolutions are summarised below:


Matters being voted upon Percentage of
affirmative votes
   
Received the Group's audited accounts for the year ended March 31, 2012 together with the directors' report and independent auditor's report 99.99%
   
Declaration of a final dividend for the issued ordinary shares for the year ended March 31, 2012 100%
   
Re-election of retiring directors and authorization of the Board to fix directors' fees 96.57% to 99.95%
with respect to each
individual resolution
   
Re-appointment of PwC as auditor and authorization of the Board to fix auditor's remuneration 99.89%
   
Approval of granting the general mandate to the directors to allot, issue and deal with the additional Company's ordinary shares 69.42%
   
Approval of granting the general mandate to the directors to repurchase the Company's ordinary shares 99.96%
   
Approval of authorisation to directors to extend the general mandate to issue new ordinary shares by adding the number of ordinary shares repurchased 70.53%

All of the resolutions proposed at the 2012 annual general meeting were decided by way of poll voting. Procedures for conducting the poll were explained by the Chairman at the commencement of this meeting. The poll was conducted by Tricor Abacus Limited, the Company's share registrar, as scrutineer and the details of poll voting results were posted on the Company's website (www.lenovo.com/hk/publication) and HKEx's website (www.hkex.com.hk) on July 3, 2012.

2013 Annual General Meeting
All shareholders are encouraged to attend and participate in the Company's 2013 annual general meeting. Details of the proposed resolutions for the 2013 annual general meeting are set out in the circular which will be dispatched to the Company's shareholders with the Company's 2012/13 Annual Report.

Constitutional Documents
During the 2012/13 fiscal year, there was no change to the Company's constitutional documents. An updated version of Memorandum and Articles of Association of the Company is available on the Company's website and the HKEx's website.

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