82 | Novartis Annual Report 2017 Corporate governance Contents Dear shareholder, Letter from the Chairman 82 2017 was an important and successful year for our Our corporate governance approach 84 company and our Board. We made good progress in pursuing our mission, managed the selection of the new Our shares and our shareholders 85 CEO, reinforced the Board’s membership, increased Our Board of Directors 92 our strategic focus on digital technology, accelerated Our management 106 our corporate culture change, and further improved our Our independent external auditors 111 corporate governance. Our corporate governance framework 113 Further information 114 Progress in pursuing our mission At a time of big geopolitical uncertainties and increas- ing regulatory, pricing and enforcement pressure, we achieved a solid business performance, launched import- ant new products, and made further efficiency gains. Strong and diverse Board We have a strong, diverse and independent Board. A key to our achievements is the excellent collaboration between our Board and our CEO and his Executive Committee. The diversity of our Board was further strengthened when Ton Buechner and Liz Doherty joined in February 2016, and Frans van Houten in February 2017, re inforc- ing our expertise in finance and accounting, in digital health solutions, as well as in leadership and manage- ment. With their arrival, we have substantially refreshed our Board. Two-thirds of our members have a tenure of less than six years, balancing the benefits of continuity and experience with new perspectives. We appointed new members of the Audit and Compliance Committee; the Risk Committee; and the Governance, Nomination and Corporate Responsibilities Committee, benefiting from the experience and know- ledge of new Board members. At the 2018 Annual General Meeting (AGM), Pierre Landolt will leave our Board, having reached the statu- tory retirement age of 70. I would like to thank Pierre for his many contributions over the years, including his chair- manship of the Governance, Nomination and Corporate Responsibilities Committee. During his chairmanship, the committee extended its mandate to also cover cor porate responsibility, and Pierre was instrumental in driving the Novartis corporate responsibility strategy as well as the Board’s oversight of the many corporate responsibility programs at Novartis. At the end of 2017, we initiated a performance and effectiveness evaluation of the Board’s work by an independent expert. The outcome is encouraging. We have made significant progress over the last few years in our efforts to continuously improve our performance. CORPORATE GOVERNANCE Novartis Annual Report 2017 | 83 Letter from the Chairman CEO succession Auditor rotation One of the most important tasks of a Board is selecting In 2017, we discussed the question of changing our the right CEO. After Joe Jimenez informed us that he long-standing auditor. While the Board is open to a change was considering stepping down, we conducted a thor- in the foreseeable future, we concluded that it is in the ough evaluation of internal and external candidates with best interest of Novartis, our investors and other stake- the help of an executive search firm, building on our CEO holders to continue with our current auditor. We will, of succession plan. We concluded that Vas Narasimhan course, continue with the yearly assessments of Price- is the right choice to build on Joe’s heritage and lead waterhouseCoopers’ effectiveness and independence, Novartis in our next growth phase. It is a phase that we and with the regular rotation of the audit partner in charge. expect will be characterized by new technologies that The matter remains high on our agenda and will be con- transform science, our business, and our interactions tinuously reassessed. with people and societies. Vas will take the helm from Joe on February 1, 2018, completing a smooth transition facilitated by the strong leadership team that Joe built. Shareholder engagement I sincerely thank Joe for his dedication to our company and for his achievements, which span a period of 10 years. Let me end by addressing our engagement with you, our shareholders. As you know, shareholder engagement is an important aspect of our corporate governance frame- Strategy and culture work. Although I believe our engagement program has in many instances aligned the views of the Board with Other key areas for our Board are the strategy and cul- those of our shareholders, we recognize that a signifi- ture of Novartis. During our strategy retreat in August, cant number of you did not support at our 2017 AGM the one of the conclusions was that we should strengthen advisory vote on the 2016 Compensation Report. As a our strategic focus on digital technologies to improve how result, we have intensified our engagement with you and we use data in drug discovery and development; how we we are confident that we can further align our views. engage with patients, doctors and other stakeholders; I encourage you to actively participate and share your and how we automate business processes. Our Chief perspectives. Digital Officer, a newly created role, will lead the compa- While we achieved quite a lot in 2017, I believe there nywide implementation of our digital strategy. is more work to be done. Our Board and our Executive In 2017, we also accelerated our corporate culture Committee must continue to sharpen our strategy, change. The Executive Committee took action to further strengthen our corporate culture, and accelerate the improve collaboration, reduce bureaucracy, speed up evolution of our business model. I am very confident that decision-making, support smart risk-taking, increase with your support, we will continue to make progress. empowerment and trust throughout the organization, and reinforce our interactions with the external world and society at large. Joerg Reinhardt Chairman of the Board of Directors 84 | Novartis Annual Report 2017 Our corporate governance approach Governance bodies General Meeting of Shareholders Approves operating and financial review, Novartis Group consolidated financial statements and financial statements of Novartis AG; decides appropriation of available earnings and dividend; approves compensation of Board and Executive Committee; elects Board members, Chairman, Compensation Committee members, Independent Proxy and external auditors; adopts and modifies Articles of Incorporation Board of Directors External auditor Audit and Compensation Governance, Research & Risk Provides opinion on compliance Compliance Committee Nomi nation and Development Committee of Novartis Group consolidated Committee Corporate Committee financial statements and Responsibilities the financial statements of Committee Novartis AG with applicable standards and Sets strategic direction of Novartis, appoints and oversees Swiss law, on compliance of key executives, approves major transactions and investments the Compensation Report with applicable law, on effectiveness of internal control over financial reporting, and on the corporate Executive Committee responsibility reporting of Novartis Responsible for operational management of Novartis Leadership structure Processes The Board’s processes significantly influence its effective- Independent, non-executive Chairman and separate CEO ness. The Board has implemented best practices for all such processes. Important elements include Board meet- ing agendas (to address all important topics), information Board governance submitted to the Board (to ensure the Board receives sufficient information from management to perform its Structure supervisory duty and to make decisions that are reserved All Board members are non-executive and independent, for it), and boardroom behavior (to promote an efficient as defined by our rules. The Board has assigned respon- and balanced decision-making process). sibilities to five committees: • Audit and Compliance Committee • Compensation Committee Board and Executive Committee • Governance, Nomination and Corporate Responsibili- compensation ties Committee • Research & Development Committee Information on Board and Executive Committee com- • Risk Committee pensation is outlined in our Compensation Report, begin- ning on page 118. Composition Board members have diverse education, experience, nationalities and interpersonal skills. Their biographies (beginning on page 102) describe their specific qualifications. CORPORATE GOVERNANCE Novartis Annual Report 2017 | 85 Our shares and our shareholders Our shares and our shareholders Our shares Capital changes Share capital of Novartis AG Number of shares As of December 31, 2017, the share capital of Novartis Changes Changes AG is CHF 1 308 422 410 fully paid-in and divided into Year As of Jan 1 in shares As of Dec 31 in CHF 2 616 844 820 registered shares, each with a nominal 2015 2 706 193 000 – 29 200 000 2 676 993 000 – 14 600 000 value of CHF 0.50 (Novartis share). Novartis AG has 2016 2 676 993 000 – 49 878 180 2 627 114 820 – 24 939 090 neither authorized nor conditional capital. There are 2017 2 627 114 820 – 10 270 000 2 616 844 820 – 5 135 000 no preferential voting shares; all Novartis shares have equal voting rights. No participation certificates, non-vot- ing equity securities (Genussscheine), or profit-sharing A table with additional information on changes in the certificates have been issued. Novartis AG share capital can be found in Note 7 to the Novartis shares are listed on the SIX Swiss Exchange financial statements