Corporate Governance System

Key principles and enhancement of the corporate governance system

In its operations, PJSC Aeroflot seeks to maintain high corporate governance standards. The Company’s corporate governance is based on the following core principles:

• Ensuring the exercise and protection of shareholder rights
• Ensuring fair and equal treatment of all shareholders in exercising their rights
• Preventing shareholders from abusing their rights, inflicting damage to the Company and other shareholders
• Efficient distribution of roles and powers among the Company’s governing bodies
• Expertise, responsibility, and accountability of the Board of Directors and executive bodies
• Establishing an efficient internal control and risk management system
• Ensuring transparency and openness of the Company’s business
• Taking material corporate actions on fair terms ensuring that the rights and interests of shareholders and other stakeholders are upheld
• Compliance with ethical norms and social responsibility standards when doing business

PJSC Aeroflot’s corporate governance principles and procedures are set out in its Articles of Association and other internal documents. The Corporate Governance Code of PJSC Aeroflot (approved by the Board of Directors on 21 December 2017) summarises and systematises the Company’s corporate governance practice.

As part of its efforts to improve corporate governance, in 2018, PJSC Aeroflot implemented the following initiatives: the Board of Directors conducted a self-assessment of its performance, and the efficiency of the corporate risk management and internal control system was assessed.

In December 2018, an external advisor, the Russian Institute of Directors, conducted another revaluation of PJSC Aeroflot’s corporate governance. Since its first scoring on the National Corporate Governance Rating scale in July 2016, PJSC Aeroflot has achieved a number of positive changes noted by independent experts.

According to the revaluation, PJSC Aeroflot scored 7++ representing Advanced Corporate Management Practices according to the approved scale. This score shows that the Company complies with Russian corporate governance regulations and adheres to a substantial number of recommendations set out in the Russian Corporate Governance Code. Shareholders of the Company have low exposure to the risk of loss due to the corporate governance quality.

Improvement of a number of internal documents including the Articles of Association has been scheduled for 2019 to further implement the recommendations of the Corporate Governance Code approved by the Bank of Russia into PJSC Aeroflot’s operations. In particular, the Company plans to extend the deadline for submitting documents and information to shareholders in preparation for the General Meeting of Shareholders.

Corporate governance at PJSC Aeroflot is exercised by the General Meeting of Shareholders, the Board of Directors, the Management Board, and the Chief Executive Officer.

The responsibilities of PJSC Aeroflot’s Corporate Secretary are vested with the Executive Secretary of the Board of Directors, also holding the position of Director of PJSC Aeroflot’s Corporate Governance Department.

^{Note. Statistics are based on the Corporate Governance Code Compliance Report (Appendix to this Annual Report).}

The Revision Committee supervises the financial and business operations of the Company, its units and services. To ensure reliability and transparency of its financial statements prepared under both the Russian Accounting Standards and the International Financial Reporting Standards, PJSC Aeroflot regularly engages external auditors. The Internal Audit Department accountable to the Audit Committee of PJSC Aeroflot’s Board of Directors also audits the Company’s financial and operational activities.

Key documents ensuring protection of PJSC Aeroflot shareholder rights include:

• Articles of Association
• Regulations on the General Meeting of Shareholders
• Regulations on the Board of Directors
• Regulations on the Management Board
• Regulations on the Revision Committee
• Corporate Governance Code
• Regulations on the Corporate Information Policy
• Dividend Policy
• Corporate Conduct Code.

PJSC Aeroflot controls interests in (holds shares in the charter capital of) a number of subsidiaries, including airlines, where PJSC Aeroflot also ensures compliance with the top standards of corporate governance by developing and implementing Group-wide policies and principles. The Company developed a cross-functional governance system for its aviation subsidiaries.

To ensure supervision over financial and business activities of its subsidiary airlines, the Group enabled each of them to have a dedicated revision committee made up of PJSC Aeroflot’s representatives. In addition to inspections by revision committees, the airlines are subject to inspections by an auditor approved pursuant to the relevant bidding procedures.

In accordance with the applicable laws and their articles of association, each subsidiary airline developed and adopted dedicated internal documents stipulating the responsibilities of its governing bodies.

General Meeting of Shareholders

The General Meeting of Shareholders is PJSC Aeroflot’s supreme governing body responsible for matters most crucial to the Company. The respective scope of authority and procedures for convening, holding, and summarising Annual General Meetings of Shareholders are set forth in PJSC Aeroflot’s Articles of Association and Regulations on the General Meeting of Shareholders. The Annual General Meeting of Shareholders is held annually no earlier than three months and no later than six months after the end of the fiscal year.

Annual General Meeting of Shareholders on 25 June 2018

In 2018, PJSC Aeroflot convened the Annual General Meeting of Shareholders in Moscow on 25 June (Minutes No. 42 dated 26 June 2018). The meeting was attended by holders of 61.6% of PJSC Aeroflot’s total share capital.

The Annual General Meeting of Shareholders approved the Annual Report, 2017 financial statements (including the profit and loss statement), and the distribution of the net profit for FY2017. The Annual General Meeting of Shareholders also approved the remunerations of members of the Board of Directors and the Revision Committee, as recommended by the Board of Directors.

New Board of Directors and Revision Committee were elected. Pursuant to the relevant bidding procedures, the Company selected an auditor for 2018 (to audit the statements prepared under the Russian Accounting Standards and the International Financial Reporting Standards).

The Company also endorsed and approved a number of interested party transactions, in particular, a major transaction related to the operating lease of 50 new МС-21-300 aircraft. Aviacapital-Service, a leasing subsidiary of Rostec State Corporation, acts as a lessor in the transaction. The delivery of cutting-edge Russian civilian aircraft to Aeroflot is planned between the first quarter of 2020 and the third quarter of 2026 (with an option to postpone/extend the delivery time).

The Annual General Meeting of Shareholders of PJSC Aeroflot approved a dividend of RUB 12.8053 per ordinary share for FY2017, with total dividend payments of RUB 14,221,775,000 (50% of Aeroflot’s net profit under the Russian Accounting Standards).

Extraordinary General Meeting of Shareholders on 23 October 2018

In 2018, PJSC Aeroflot also convened an Extraordinary General Meeting of Shareholders (EGM) in Moscow on 23 October (Minutes No. 43 dated 24 October 2018). The meeting was attended by holders of 64.7% of PJSC Aeroflot’s total share capital.

PJSC Aeroflot’s EGM was convened at the request of the majority shareholder, the Government of the Russian Federation represented by the Federal Agency for State Property Management (Rosimushchestvo) based on the directive received in line with Resolution of the Russian Government No. 738 On Management of Shares of Public Corporations Owned by the Federal Government and Exercise of the Special Right of Participation of the Federal Government in Management of Public Corporations (“Golden Share”) dated 3 December 2004.

The EGM passed a resolution on early termination of the mandates of the Company’s directors and election of a new Board of Directors.

Board of Directors

PJSC Aeroflot’s Board of Directors has overall supervising authority over the Company. The Board of Directors is responsible for the Company’s operations, excluding matters reserved for PJSC Aeroflot’s General Meetingof Shareholders, Management Board, and Chief Executive Officer. The procedures for convening and holding the Board meetings, along with other Board activities, are stipulated by the Regulations on PJSC Aeroflot’s Board of Directors in line with the Federal Law On Joint Stock Companies.

The Board’s key focus areas include the Company’s long-term sustainable development, effective oversight of its executive bodies, uncompromising observance and protection of shareholder rights and legitimate interests.

The main objectives of the Board of Directors are to:

• define the core areas of business for the Company (including subsidiary airlines) to increase its operating profit
• operate for the benefit of shareholders, supervise the implementation of corporate initiatives
• supervise the activities of the Company’s Management Board and Chief Executive Officer
• present resolutions on matters within the authority of the General Meeting of Shareholders for approval by shareholders
• discuss and approve business plans
• determine the procedure for distributing profit and covering for loss
• develop the Company’s dividend policy, work out proposals on the amount of dividend on Company shares and dividend payout procedure, and present them for approval by the General Meeting of Shareholders
• approve the annual budget and monitor its performance
• discuss and pre-approve draft annual reports, annual accounting statements, and profit and loss statements
• analyse audit reports and opinions of the Revision Committee, and present documents featuring the results of such audits for consideration by the Company’s shareholders
• present proposals to the General Meeting of Shareholders on the appointment of the Company’s auditor
• determine the policy on issuing the Company’s securities
• approve the Company’s special registrar and the terms and conditions of the contract therewith, as well as the contract termination.

In line with the action plan for the Board of Directors, the Board meetings are held at least once a month. The action plan for the Board of Directors is approved at the end of the year preceding the year covered in the plan. As a rule, the action plan includes essential matters concerning the Company’s operations (strategy, finance, budget and risks, human resources, etc.), which are to be discussed in line with the strategic and business planning cycle. Proposals made by members of the Board of Directors and the Company’s management are factored in. Extraordinary meetings may be convened to make decisions on urgent matters.

The agenda of the Board of Directors’ meetings must include items proposed for discussion by shareholders who in aggregate hold at least 2% of shares, members of the Board of Directors, the Revision Committee, the Management Board, the Company’s auditor, and the CEO.

All items on the agenda of the Board of Directors’ meetings are generally previewed by dedicated committees to enable a more detailed discussion and prepare recommendations for voting to the Board of Directors.

The Board of Directors’ meetings held in absentia consider matters on which members of the Board of Directors do not have any material comments, as well as matters of procedure. However, a matter may be moved to the agenda of a meeting held in person upon request of two members of the Board of Directors.

In their work, the Company’s Board of Directors and its Committees use tablets with the Board of Directors software developed in Russia. The platform allows Directors to study materials for meetings in a prompt manner and have access to the Board of Directors’ earlier materials and resolutions.

Chairman of the Board of Directors

• is responsible for the general stewardship of the Board of Directors, convenes and chairs meetings, arranges for keeping the minutes of meetings, chairs the General Meeting of Shareholders
• helps ensure the timely provision to members of the Board of Directors of all the information required to pass resolutions and vote on agenda items
• ensures productive discussion of agenda items involving non-executive and independent directors
• controls the execution of resolutions passed by the Board of Directors and the General Meeting of Shareholders.

Independent directors

Independent directors promote opinions and judgements unaffected by relations with the Company’s shareholders or executive bodies, as well as decision-making which benefits different shareholder groups.

The presence of independent directors enhances corporate governance in the Company. Independent members of the Board of Directors are actively involved in the activities of the Board Committees. In accordance with the requirements of the Moscow Exchange, independent directors head the Board of Directors’ Audit Committee and Personnel and Remuneration Committee. The majority of members of the Board of Directors’ Committees are also independent directors, which helps achieve a balanced and independent position on agenda items.

Assessment of the Board of Directors’ performance

In 2018, PJSC Aeroflot’s Board of Directors conducted a self-assessment of its performance for the first time. The self-assessment for 2017/2018 corporate year was conducted as part of the Action Plan (Roadmap) to Improve Corporate Governance Practices at Aeroflot and was focused on the implementation of the key recommendations set out in the Corporate Governance Code recommended by the Bank of Russia.

The PJSC Aeroflot Board carried out a selfassessment in the form of an anonymous survey questionnaire. The questionnaire comprised over 40 questions to assess the performance of the Board of Directors, its Committees, Chairman and Executive Secretary. Members of the Board of Directors could also express their opinions on the viability of such self-assessment and make proposals on the improvement of the Board’s selfassessment procedure.

The results of the self-assessment show that the Board of Directors’ composition is wellbalanced, which enables it to perform its key functions efficiently. Members of the Board of Directors pay sufficient attention to their service on the Board of Directors and its Committees, as well as to reviewing agenda items of both the Board and its Committees. When discussing agenda items, Directors have proved to be involved and active. The presentation and quality of the materials and information for the Board meetings submitted to the Directors, as well as the performance of the Company’s Executive Secretary received a positive assessment.

Based on the self-assessment results, members of PJSC Aeroflot’s Board of Directors received recommendations to further improve the performance of the Board and its Committees. In future, the Company intends to carry out independent assessment of the Board of Directors’ performance with the help of an external advisor.

Membership of the Board of Directors

As at 31 December 2018, PJSC Aeroflot’s Board of Directors was comprised of the Chairman (non-executive director), one executive director, seven non-executive directors, and two independent directors.

In December 2018, Evgeny Ditrich, Minister of Transport of the Russian Federation, was elected as Chairman of PJSC Aeroflot’s Board of Directors. He had been elected to the Board of Directors as from 23 October 2018 by resolution of the Extraordinary General Meeting of Shareholders.

Members of the Board of Directors efficiently performed their functions and tasks throughout 2018 notwithstanding their service on boards of directors of other companies.

In the reporting year, no members of the Company’s Board of Directors purchased, or disposed of, their shares in the Company. No claims were filed against members of the Board of Directors.

^{* Elected by resolution of the Annual General Meeting of Shareholders on 26 June 2017 (Minutes No. 40 dated 28 June 2017).
** Elected by resolution of the Annual General Meeting of Shareholders on 25 June 2018 (Minutes No. 42 dated 26 June 2018).
*** Elected by resolution of the Extraordinary General Meeting of Shareholders on 23 October (Minutes No. 43 dated 24 October 2018).}

Membership of the Board of Directors as at 31 December 2018

Executive Secretary of the Board of Directors

The Executive Secretary of the Board of Directors is responsible for the administrative and information support of the Company’s Board of Directors and General Meeting of Shareholders, and supervises compliance by the Company’s bodies and officers with corporate governance rules and procedures stipulated by the laws of the Russian Federation, the Company’s Articles of Association and internal documents.

The proceedings of the Executive Secretary are governed by the Regulations on the Executive Secretary of the Board of Directors and the Board of Directors Office of PJSC Aeroflot.

Board of Directors performance report for 2018

In 2018, PJSC Aeroflot’s Board of Directors held 18 meetings, including 10 meetings in person and 8 meetings in absentia, which addressed over 170 matters and passed over 400 resolutions.

In its resolutions, the Board of Directors covers a number of priority areas to:

• ensure flight safety and on-time performance
• determine Aeroflot Group’s strategy and identify priority business segments
• build and maintain effective internal controls and risk management
• map out a development strategy for Aeroflot Group’s aircraft fleet and route network
• continuously upgrade the fleet through additions and aircraft mix optimisation
• improve operating, financial, and marketing practices and methods through upgrades, innovation, and implementation of best practices from global peers
• improve the performance of Aeroflot’s branches and representative offices both domestically and internationally
• enforce higher standards for airport and in-flight passenger services, expand the service mix, and improve customer experience
• promote cooperation with SkyTeam partners, use the membership to expand the Company’s route network, and boost the international flight performance
• promote strategic partnerships with airlines across key geographies
• improve operational performance of subsidiaries and streamline the non-core asset structure to cut unnecessary spending and increase returns on investments
• develop and upgrade information technologies
• ensure information transparency including procurement
• enhance shareholder and investor relations
• develop and improve corporate policies.

^{* Member of the Board of Directors up to the Extraordinary General Meeting of Shareholders held on 23 October 2018.
** Member of the Board of Directors as from the Extraordinary General Meeting of Shareholders held on 23 October 2018.
*** Member of the Board of Directors as from the Annual General Meeting of Shareholders held on 25 June 2018.
**** Member of the Board of Directors up to the Annual General Meeting of Shareholders held on 25 June 2018.
Note. Data format: the number of meetings attended by the member of the}

Key matters discussed by the Board of Directors in 2018

Committees of the Board of Directors

To improve the effectiveness of resolutions passed by the Board of Directors, ensure more detailed preliminary discussions of the most important matters, and prepare relevant recommendations, PJSC Aeroflot has three dedicated Committees of the Board of Directors:

• Audit Committee
• Personnel and Remuneration Committee
• Strategy Committee

The Board of Directors’ Committees are elected by the Board of Directors and act in compliance with relevant Committee Regulations approved by the Company’s Board of Directors. The Committees act as per the Board’s resolutions and activity plans based on the Board’s activity plan.

In 2018, the Board of Directors’ Committees held a total of 13 meetings, including joint meetings and one meeting held in absentia, addressing matters related to the operations of Aeroflot Group and submitting detailed recommendations and proposals to the Company’s Board of Directors and Management Board.

Audit Committee

The Audit Committee of the Board of Directors supervises the Company’s financial and business operations to protect shareholder interests and ensure the growth of the Company’s assets. Coordinating with the Company’s executive bodies, the Revision Committee, and the Internal Audit Department, the Audit Committee prepares and submits for consideration by the Board of Directors recommendations and proposals on matters of the Board.

In 2018, the Audit Committee held a total of 10 meetings (in person). The Committee’s meeting agendas were compiled in line with the Committee’s activity plan approved by the first post-election meeting, and reflected the instructions of the Board of Directors.

KEY MATTERS DISCUSSED IN 2018:

• Performance against Aeroflot Group’s consolidated budget targets
• Aeroflot Group’s and PJSC Aeroflot’s budgets
• Establishing and operating an internal control and risk management system
• Initiatives to reduce Aeroflot Group’s operating expenses
• Improvement of internal audit at Aeroflot Group
• Auditors’ reports on the financial and business audit results under RAS and IFRS
• Reports on audits conducted by the Internal Audit Department
• Shareholder and investor relations
• Procurement
• Transactions related to the aircraft fleet
• Measures to mitigate the risks arising from relations with ticket sales agents
• Extending and restructuring of loans
• Reports on the results of analysis of companies’ debt to PJSC Aeroflot
• Internal documents

MEMBERSHIP OF THE AUDIT COMMITTEE
(elected by resolution of the Board of Directors on 31 October 2018)

• Vasily Sidorov – Head of the Committee, Independent Director
• Igor Kamenskoy – Independent Director
• Roman Pakhomov – Non-Executive Director

Lars Erik Bergstrom and Alexey Germanovich were members of the Audit Committee up to 31 October 2018.

Personnel and Remuneration Committee

The Personnel and Remuneration Committee promotes the development of the HR policy, supervises matters concerning the Company’s organisational structure, selection and assessment of persons appointed to the Company’s governing bodies, their remuneration, and the remuneration system.

In 2018, the Personnel and Remuneration Committee held a total of 11 meetings, including one meeting held in absentia. The Committee’s meeting agendas were compiled in line with the Committee’s activity plan approved by the first post-election meeting, and reflected the instructions of the Board of Directors.

KEY MATTERS DISCUSSED IN 2018:

• Remuneration of the Company’s management, members of the Board of Directors and the Revision Committee, Long-Term Incentive Programme, and Long- Term Incentive Programme for members of the Board of Directors
• CEO and management KPIs
• Aeroflot Group’s Long-Term Development Programme KPIs
• Assessment of the Board of Directors
• The Company’s organisational structure
• Consideration of proposals and preparation of recommendations on nominees to PJSC Aeroflot’s Board of Directors and Revision Committee representing the interests of the state in 2018/2019 corporate year
• Assessment of independence of nominees to the Company’s Board of Directors against the relevant criteria
• Internal documents

MEMBERSHIP OF THE PERSONNEL AND REMUNERATION
COMMITTEE (elected by resolution of the Board of Directors on 31 October 2018)

• Igor Kamenskoy – Head of the Committee, Independent Director
• Vasily Sidorov – Independent Director
• Mikhail Voevodin – Non-Executive Director

Lars Erik Bergstrom, Alexey Germanovich and Dmitry Peskov were members of the the Personnel and Remuneration Committee up to 31 October 2018, and Roman Pakhomov was a member of the Committee from 5 July to 31 October 2018.

Strategy Committee

The Strategy Committee was set up to prepare recommendations and proposals to the Board of Directors, enhancing the Company’s performance and improving its long-term strategy.

In 2018, the Strategy Committee held a total of nine meetings (in person). The Committee’s meeting agendas were compiled in line with the Committee’s activity plan approved by the first post-election meeting, and reflected the instructions of the Board of Directors.

KEY MATTERS DISCUSSED IN 2018:

• Implementation of the Aeroflot Group development strategy
• Implementation of Aeroflot Group’s Long-Term Development Programme
• Implementation of Aeroflot Group’s marketing strategy
• Aeroflot Group’s development strategy and Long-Term Development Programme update
• Strategic partnerships with airlines
• Dividend policy
• Aeroflot Group’s IT strategy
• Shareholder and investor relations
• Enhancement of Aeroflot Group’s subsidiary airlines
• Enhancement of maintenance and repair operators within Aeroflot Group
• Assessment of innovative development programmes update for partially state-owned companies
• Results of PJSC Aeroflot’s Innovative Development Programme
• Aircraft fleet expansion

MEMBERSHIP OF THE STRATEGY COMMITTEE
(elected by resolution of the Board of Directors on 31 October 2018)

• Roman Pakhomov – Head of the Committee, Non-Executive Director
• Igor Kamenskoy – Independent Director
• Vasily Sidorov – Independent Director
• Mikhail Voevodin – Non-Executive Director
• Dmitry Peskov – Non-Executive Director
• Yury Slyusar – Non-Executive Director
• Maxim Sokolov – Non-Executive Director
• Vadim Zingman – member of the Management Board, Deputy CEO for Customer Service
• Andrey Chikhanchin – member of the Management Board, Deputy CEO for Commerce and Finance

Lars Erik Bergstrom and Alexey Germanovich were members of the Strategy Committee up to 31 October 2018. Maxim Sokolov was elected to the Committee as from 31 October 2018.

Management Board and CEO

PJSC Aeroflot’s sole executive body, the CEO, and collective executive body, the Management Board, are charged with running the Company’s day-to-day operations. The executive bodies report directly to the Board of Directors and the General Meeting of Shareholders.

The CEO also acts as the Chairman of the Management Board, and represents the interests of the Company without power of attorney, acting in compliance with PJSC Aeroflot’s Articles of Association. The CEO is elected by the Board of Directors for a maximum term of five years.

Vitaly Saveliev has been PJSC Aeroflot’s CEO since April 2009; in August 2018, the Board of Directors resolved to extend his term of office until 2023.

The Board of Directors is authorised to appoint members of the Management Board, and remove them from office before the end of their term. The Management Board acts in compliance with PJSC Aeroflot’s Articles of Association and Regulations on the Management Board.

The scope of authority of PJSC Aeroflot’s executive bodies covers all matters pertaining to management of the Company’s day-to-day operations, except for those reserved for the General Meeting of Shareholders or the Board of Directors.

Changes to the membership of PJSC Aeroflot’s Management Board in 2018 were as follows:

• As from 11 December 2018, Andrey Chikhanchin, Deputy CEO for Commerce and Finance, was elected to the Management Board
• As from 15 March 2018, Giorgio Callegari, Deputy CEO for Strategy and Alliances, stepped down from the Management Board
• As from 5 July 2018, Shamil Kurmashov, Deputy CEO for Commerce and Finance, stepped down from the Management Board
• The size of the Management Board was reduced to 10 members

In the reporting period, members of the Management Board did not enter into transactions with PJSC Aeroflot shares. There were no claims filed against PJSC Aeroflot’s CEO or members of the Management Board in 2018.

Membership of the Management Board as at 31 December 2018

Management Board Report for 2018

In 2018, the Management Board of PJSC Aeroflot held a total of 39 meetings, including 14 meetings in absentia.

Key matters discussed in 2018:

• Flight safety
• Technical condition of the aircraft fleet
• Progress in implementing the IT strategy
• Wider application of Big Data solutions in the Company’s commercial activities
• Transactions related to the aircraft fleet
• On-time performance
• Initiatives to strengthen carry-on baggage control
• Opening of representative offices
• Launch of flights to new destinations
• Shareholder and investor relations
• Implementation of updated elements of the corporate philosophy
• Mentoring concept
• Introduction of professional standards in the Company’s operations
• Charity projects for a number of institutions
• Sponsorship and cooperation initiatives

Committees

In pursuit of recommendations and proposals aiming to boost the Company’s performance, PJSC Aeroflot set up the Committee for Innovative Development and the Committee for Finance and Investments.

Committee for Innovative Development

The Committee for Innovative Development is a permanent collective advisory body of PJSC Aeroflot’s Management Board. It was set up to develop recommendations and proposals for the Management Board to boost the Company’s performance.

In its operation, the Committee is guided by the laws of the Russian Federation, resolutions of PJSC Aeroflot’s Board of Directors and Management Board, other regulations, rules, and procedures of the Company, and the Regulations on the Committee for Innovative Development.

The Committee is charged with reviewing innovative projects and providing assessment of their efficiency, monitoring the progress of ongoing innovative projects, passing resolutions on project suspension, setting out requirements for the design and quality of innovative development materials submitted to the Management Board, and recommending projects for implementation.

In 2018, the Committee held a total of four meetings and discussed the following key matters:

• Compilation of a list of priority R&D activities in the medium and long term
• Review of R&D projects under the Innovative Development Programme in the medium term
• Review of projects submitted via the one-stop-shop system, summarising expert reviews of proposals

Committee for Finance and Investments

The Committee for Finance and Investments is a permanent collective advisory body of PJSC Aeroflot. In its operation, the Committee is guided by the applicable laws of the Russian Federation, resolutions of PJSC Aeroflot’s Board of Directors, other regulations, rules, and procedures of the Company, and the Regulations on the Committee for Finance and Investments.

The Committee is charged, among other things, with monitoring the progress of the Company’s ongoing investment projects, providing expert reviews of such projects, passing resolutions on suspension of investment projects, determining their performance assessment criteria, and drafting proposals on Aeroflot Group’s financial, economic, and marketing policies.

In 2018, the Committee for Finance and Investments held a total of 34 meetings including 31 meetings in absentia.

Remuneration of members of the Board of Directors and the management

The Company has in place a structured remuneration system for members of the governing bodies designed to link the amount of bonus payments to the achievement of short-term targets, and align the longterm interests of the Company’s management and its shareholders. Short-term incentive is provided in the form of cash bonuses while long-term incentive implies payments based on share capitalisation benchmarked against different metrics.

Remuneration of members of the Board of Directors

Guidelines for Board remuneration calculation and payouts are set forth in the Regulations on Remuneration and Compensation Payments to the Members of the Board of Directors of PJSC Aeroflot, in line with the Federal Law On Joint Stock Companies, other applicable laws of the Russian Federation, and the Company’s internal documents. The Regulations were approved by PJSC Aeroflot’s AGM in 2017.

The Board remuneration system comprises a fixed component and the Long-Term Incentive Programme (a variable component). The size of the fixed component depends on involvement of members of the Company’s Board of Directors in the activities of the Board and its Committees and includes the fixed base pay and additional payments for discharging extra duties. The variable remuneration component is directly linked to the Company’s market capitalisation, achievement of the capitalisation target, and the market capitalisation of key foreign airline peers. The Long-Term Incentive Programme is focused on achievement of the Company’s capitalisation target.

The Long-Term Incentive Programme for 1 January 2016 to 30 June 2019 was approved in 2016 to replace the previous Stock Option Plan for 2013– 2015. During the implementation, the current Long- Term Incentive Programme is adjusted to update its metrics.

The total variable remuneration of Board members is equivalent to 0.5% of PJSC Aeroflot’s market capitalisation growth over the lifetime of the Long- Term Incentive Programme.

The 2016–2019 Long-Term Incentive Programme draws heavily on the following underlying metrics:

• Metric 1 (maximum weight of ½): PJSC Aeroflot’s market capitalisation growth in the relevant year
• Metric 2 (maximum weight of ½): PJSC Aeroflot’s ranking among five airline peers based on the market capitalisation change in the relevant year
• The annual remuneration is paid as follows:
• 1/3 of the remuneration pool accrued for the relevant interim period is paid out to Board members simultaneously with the fixed remuneration for the relevant year
• 2/3 of the remuneration pool accrued for the relevant interim period is not paid out but set aside until the end of the Long- Term Incentive Programme, added together and paid out as a lump sum upon resolution of the General Meeting of the Company’s Shareholders, subject to the achievement of the capitalisation target. Calculations incorporate the high water mark principle, i.e. if capitalisation goes below the high water mark in the current interim period, the capitalisation growth base for the next interim period shall be the peak capitalisation value reached in the past period

As the Aeroflot Group Development Strategy 2023 was updated and approved, PJSC Aeroflot’s Board of Directors approved and recommended the General Meeting of Shareholders to approve changes to the Regulations on Remuneration and Compensation Payments to the Members of the Board of Directors of PJSC Aeroflot; the adjustments are related to completion of the Long-Term Incentive Programme for members of PJSC Aeroflot’s Board of Directors (for 1 January 2016 to 30 June 2019) on 30 September 2018.

Management remuneration

The remuneration system designed for the management and the other staff enables the Company to engage and retain highly qualified professionals. Remuneration for management is comprised of the fixed component (official salary) and the variable component (current bonuses and long-term incentives).

Current bonuses depend on the Group-wide performance and are calculated in accordance with the Company’s KPI-Based Employee Bonus System. The KPI-Based Employee Bonus System is formalised by the Regulations on Bonus Payments to the Managers and Specialists of PJSC Aeroflot. The Regulations stipulate that the bonus component of the management compensation amount shall depend on their quarterly and annual performance against the KPIs approved for the relevant reporting period.

To provide for long-term incentives for PJSC Aeroflot’s management, the Long-Term Incentive Programme for 1 January 2016 to 30 June 2019 was approved by the Board of Directors on 26 May 2016 and updated by the resolutions of the Board of Directors of PJSC Aeroflot on 25 May 2017 and 31 October 2018. The Programme covers the CEO, members of the Management Board, Deputy CEOs, department heads, Chief Accountant, and other employees of the Company, on the CEO’s resolution.

The total pool of the Long-Term Management Incentive Programme is equivalent to 3.0% of PJSC Aeroflot’s market capitalisation growth over the lifetime of the Long-Term Incentive Programme. The 2016–2019 Long-Term Management Incentive Programme draws heavily on the following underlying metrics:

• PJSC Aeroflot’s market capitalisation growth in each relevant interim period
• PJSC Aeroflot’s ranking among five international airline peers based on the market capitalisation change in each relevant interim period
• achievement of the capitalisation target following the Long- Term Incentive Programme.

The annual remuneration is paid as follows:

• 2/3 of the remuneration pool is paid out for the relevant interim period
• 1/3 of the remuneration pool is set aside until the end of the Long-Term Incentive Programme and paid out subject to the achievement of the capitalisation target.

As the Aeroflot Group Development Strategy 2023 was updated and approved, PJSC Aeroflot’s Board of Directors resolved to bring PJSC Aeroflot’s Long-Term Incentive Programme (for 1 January 2016 to 30 June 2019) to completion on 30 September 2018.

Remuneration of the Board of Directors and the Management Board in 2018

On 25 June 2018, the Annual General Meeting of Shareholders resolved to:

• approve the total amount of individual fixed remuneration payable to members of PJSC Aeroflot’s Board of Directors for the period from 1 July 2017 to 30 June 2018 totalling the maximum of RUB 77,750,695
• approve the total amount of individual fixed remuneration payable to members of PJSC Aeroflot’s Board of Directors for the period from 1 July 2016 to 30 June 2017 totalling RUB 10,387,059

According to the results of the meetings of the Board of Directors of PJSC “Aeroflot” which have taken place, the actual fixed remuneration for the period from 1 July 2017 to 30 June 2018 was RUB 77,660,000

The remuneration (salary and bonuses) paid to the members of PJSC Aeroflot’s Management Board in 2018 totalled RUB 842,366,419. Remuneration paid in 2018 (including the profitsharing plan, with payments for the reporting period linked to the prior year performance) totalled RUB 1,428,162,020 (in 2017, the total remuneration was RUB 2,933,175,802 and included payments under the Long-Term Incentive Programme, unavailable in the reporting period).

Directors and officers liability insurance

As part of its efforts to provide insurance protection, PJSC Aeroflot has signed an agreement for liability insurance of the Company’s directors and officers, as well as representatives of PJSC Aeroflot on governing bodies of its subsidiaries, providing for reimbursement for loss caused to third parties, arising from claims filed by third parties against the insured due to their wrongful acts committed in their management roles. A securities claim filed against the Company also constitutes an insured event.

The amount of insurance coverage is USD 100 million per claim and in total. The insurance period is three years. The total insurance premium for three years is USD 289,500 (USD 96,500 per year).

Internal control and audit

Aeroflot Group has in place a centralised internal audit function headed by the Director of the Internal Audit Department who functionally reports to the Board of Directors of PJSC Aeroflot and to the Audit Committee of the Board of Directors.

Depending on the scale of their business and related risks, the Company’s controlled entities arrange for internal audit to be conducted by either PJSC Aeroflot’s Internal Audit Department or the internal audit unit or permanent internal auditor of their own. Heads of such units and internal auditors of controlled entities functionally report to the Director of the Internal Audit Department of PJSC Aeroflot.

The internal control systems are designed to maximise Aeroflot Group’s transparency, financial performance, and compliance with the applicable laws.

Audit Committee and its role

The Board of Directors of PJSC Aeroflot approves internal documents regulating its general policy on risk management and internal controls and establishes principles of, and approaches to, the risk management and internal control system within PJSC Aeroflot.

The Audit Committee of PJSC Aeroflot’s Board of Directors enhances supervision over financial and business operations to optimise capex, protect shareholder interests, and ensure the growth of PJSC Aeroflot’s assets.

Coordinating with PJSC Aeroflot’s executive bodies, the Revision Committee, and the Internal Audit Department, the Audit Committee prepares and submits for consideration by the Board of Directors recommendations and proposals to:

• develop and provide for the implementation of the business plan
• establish and provide for compliance with effective internal controls
• provide for effective and transparent governance at PJSC Aeroflot, including prevention and termination of abuse by executive bodies and officers
• prevent, identify, and limit conditions giving rise to financial and operational risks
• provide for reliability of financial data used or disclosed by PJSC Aeroflot
• recommendations and proposals on other matters, as resolved by the Board of Directors of PJSC Aeroflot.

Risk management and internal controls assessment based on the reports by the Company’s Internal Audit Department is regularly discussed by the Audit Committee of the Board of Directors. When conducting audits, the Internal Audit Department draws conclusions on the performance of the risk management and internal control systems for each audited entity. To further improve risk management across key business processes within PJSC Aeroflot, the Audit Committee of the Board of Directors also receives regular reports on the Company’s key risks.

PJSC Aeroflot has in place a practice of confidential reporting to the Board of Directors (Audit Committee of the Board of Directors), its corporate Hotline. The Hotline operates on a confidential and anonymous basis. All received reports are reviewed by the Internal Audit Department, which supports the ongoing operation of the Hotline.

As part of its effort to support the ongoing operation of the Hotline, the Internal Audit Department reviewed each report submitted to the Hotline in 2018 (a total of 489 reports). Internal investigations were conducted and measures were taken to enhance Aeroflot Group’s internal controls whenever required.

The Hotline is used to:

• report violations of the applicable laws or Aeroflot Group’s executive documents and regulations on insider information and antifraud and anti-corruption practices by any employee and (or) any member of the governing bodies or the body that supervises Aeroflot Group’s financial and business operations
• report violations of the Corporate Conduct Code of PJSC Aeroflot
• make proposals on the improvement of internal controls (including anti-corruption procedures).

Results of internal and external audit assessments by the Audit Committee for 2018

The Internal Audit Department regularly reports to the Audit Committee of PJSC Aeroflot’s Board of Directors on its progress under the annual activities plan, audits conducted, execution of the Department’s recommendations, and operation of the Hotline.

In the reporting period, the Audit Committee of the Company’s Board of Directors reviewed the day-to-day operations of the Internal Audit Department and audit results. The Audit Committee reviews, on an annual basis, the results of external audit of PJSC Aeroflot’s accounting (financial) statements prepared under the RAS, and, on a quarterly basis, of the consolidated financial statements prepared under the IFRS. Opinions issued by external auditors in 2018 received a positive assessment by the Audit Committee.

In 2018, PJSC Aeroflot’s Internal Audit Department conducted over 40 audits of the Company’s business units and subsidiaries to identify potential risks and assess the performance of Aeroflot Group’s key business segments and processes.

Audits were followed by over 500 proposals on further improvement of Aeroflot Group’s operations, which were accepted by the management.

Internal Audit Department

The Internal Audit Department is an independent business unit established to provide PJSC Aeroflot’s governing bodies with independent and reliable guarantees and advisory services to enhance the operations of PJSC Aeroflot and Aeroflot Group companies by applying a holistic consistent approach to assessment and improvement of risk management, internal control, and corporate governance processes.

In 2018, an independent external assessment of PJSC Aeroflot’s internal audit function was arranged and carried out to check its compliance with the International Standards for the Professional Practice of Internal Auditing. The assessment was performed by Ernst & Young Valuation and Advisory Services LLC. The opinion issued as a result of the assessment confirmed that PJSC Aeroflot’s Internal Audit Department complies with the International Standards for the Professional Practice of Internal Auditing.

Aeroflot Group ensures independence and objectivity of its internal audit by managing its reporting lines: the Director of the Internal Audit Department functionally reports to the Board of Directors of PJSC Aeroflot and to the Audit Committee of the Board of Directors and administratively reports to PJSC Aeroflot’s CEO.

In its operation, the Department is guided by the International Standards for the Professional Practice of Internal Auditing and the underlying principles of independence, objectivity, proficiency, and professional care. The purpose of the Internal Audit Department is to support: financial and business performance of PJSC Aeroflot; achievement of financial and operational targets; protection of assets; fair disclosures of the Company’s financial and business data; compliance with the applicable laws.

PJSC Aeroflot carried out the following initiatives in 2018 to optimise auditing and ensure compliance with the International Standards for the Professional Practice of Internal Auditing:

• Developed a methodology for making an Assurance Chart (Assurance Map) as part of the process to update risk-based planning methodology and internal audit reporting and thus ensure compliance with Standard 2050 of the International Standards for the Professional Practice of Internal Auditing. This document makes it possible to identify gaps and duplication of efforts in assurance coverage, which enables the Head of the Internal Audit Department to assess the sufficiency of assurance offered by the Department and review the Department’s scope of work if needed
• Drew up an Assurance Map and gained a clear understanding of the work performed by other internal and external providers of assurance and consulting services (assurance providers) while preparing a risk-based plan of the Internal Audit Department for 2019 to ensure an adequate scope of the risk-based plan, minimise duplication of efforts and use the outputs of assurance providers in the work of the Internal Audit Department in the future
• Developed and implemented the Professional Competence Map of PJSC Aeroflot’s Internal Auditor and a guidance on how to use it. The Competence Map seeks to address the following HR tasks within the Internal Audit Department: training and development, succession planning, recruitment, and employee performance assessment. Updated the Internal Audit Assessment and Improvement Programme
• Standardized audit programmes for the Company’s key business processes to adopt a uniform approach to auditing relying on risk-based analysis

PJSC Aeroflot’s Internal Audit Department once again confirmed its undisputed leadership having won the Internal Auditor of the Year Award, a national award that recognises the best internal audit professionals.

Revision Committee

The Revision Committee supervises PJSC Aeroflot’s financial and business operations to provide reasonable assurance of the Company’s business fully meeting the interests of its shareholders and requirements set forth in the applicable Russian laws. In its operation, the Revision Committee is guided by PJSC Aeroflot’s Articles of Association and the Regulations on the Revision Committee.

The Revision Committee comprises five members who are elected at the Annual General Meeting of Shareholders for a period until the next Annual General Meeting of Shareholders.

As prescribed by the Regulations, the Revision Committee checked for accuracy the information contained in the RAS-based annual financial statements for 2018, including the income statement and other documents submitted to the Annual General Meeting of Shareholders. The Committee benchmarked the metrics of the Company’s financial and business operations in 2012–2018 and the Company’s compliance with the applicable laws in 2018.

Based on these audits, the Revision Committee prepared and approved a relevant report on the balance sheet and financial performance assessment results. The Committee’s report reflected changes in the balance sheet structure and key change drivers, assessing a number of the Company’s financial and business operations, including risk management, internal control, and compliance. The audits and checks for compliance with the applicable laws enabled the Committee to develop recommendations on improvement of the Company’s performance and thereby increase earnings and cut costs.

In its report, the Revision Committee passed a positive opinion on the overall accuracy of the Company’s financial statements citing no material grounds to disprove the information provided in the balance sheet and income statement of PJSC Aeroflot as at 31 December 2018. The report also listed the Committee’s recommendations on the Company’s financial and business performance and legal compliance.

The Annual General Meeting of Shareholders held on 25 June 2018 elected the following members of PJSC Aeroflot’s Revision Committee:

• Igor Belikov – Director of the Russian Institute of Directors and Chairman of the Revision Committee at PJSC Aeroflot
• Ekaterina Nikitina – Advisor to the President of PJSC Transneft
• Mikhail Sorokin – Head of the Management Department of the Federal Agency for State Property Management
• Sergey Ubugunov – Head of Division at the Russian Ministry of Transport
• Vasily Shipilov – Deputy Head of Division at the Russian Ministry of Economic Development

Remuneration to Revision Committee members is paid upon resolution of the General Meeting of Shareholders. The total annual remuneration paid to members of the Revision Committee in 2018 amounted to RUB 3,334,453.

External audit

As required by law, PJSC Aeroflot’s annual accounting statements are subject to statutory audit to confirm their accuracy and reliability. External auditors are engaged for three years through public tenders which ensure unbiased selection of the successful bidder based on auditing experience, the proposed audit scope and timeline, and the nature of the Company’s operations. The audit firm which won the public tender for conducting an audit of the Company’s accounting (financial) statements is approved annually by the Annual General Meeting of Shareholders in accordance with the applicable laws.

The Annual General Meeting of Shareholders held on 25 June 2018 approved HLB Vneshaudit as the Company’s auditor to provide an independent review of PJSC Aeroflot’s 2018 accounting (financial) statements prepared under the Russian Accounting Standards (RAS). PricewaterhouseCoopers Audit was approved as the auditor of the Company’s consolidated financial statements for 2018 prepared under the International Financial Reporting Standards (IFRS).

The total fees paid to HLB Vneshaudit under the contract for audit services and the contract for advisory services amounted to RUB 10,754,000 (net of VAT). The contracted scope of services rendered by HLB Vneshaudit included the audit of interim and annual statements for 2018, as well as accounting and tax advisory services.

The total fees paid to PricewaterhouseCoopers International Limited for audit, audit-related, and other services in 2018 amounted to RUB 115,330,000 (net of VAT). The key scope of services rendered under the 2018 contract included a general review of the IFRS interim and condensed consolidated financial statements for 3M, 6M, and 9M 2018, audit of the IFRS consolidated financial statements for 2018, guidance, as well as streamlining, automation, and diagnostics of the Company’s business processes.

Anti-corruption policy and regulation of possible conflicts of interest

Aeroflot Group openly states zero tolerance for unfair and illegal business practices and takes additional voluntary anti-corruption commitments recommended by international and Russian laws. PJSC Aeroflot’s official website has an Anti- Corruption Practices section that features an official public statement of the Company’s CEO declaring zero tolerance for corruption, and prohibition of corruption at all times and in all forms.

PJSC Aeroflot is committed to public anti-corruption measures, transparent and open procurement processes, and rejection of illicit benefits; it creates effective feedback channels, runs anti-corruption training programmes for its employees, fights corruption by sharing information, and takes measures to prevent and resolve conflicts of interest.

In 2014, PJSC Aeroflot signed up to the Anti- Corruption Charter of the Russian Business.

PJSC Aeroflot’s Board of Directors approved Aeroflot Group’s Anti-Corruption Policy designed to create a uniform approach to Federal Law No. 273-FZ On Countering Corruption dated 25 December 2008, which provides for development and adoption of measures to prevent and counter corruption, and the Corporate Conduct Code, a list of ethical and moral standards and rules that are accepted and shared by PJSC Aeroflot’s Board of Directors and employees irrespective of their position. PJSC Aeroflot issued a set of internal regulations establishing the procedure for reporting to the management personal interest that leads or may lead to a conflict of interest and all attempts by any persons to lead employees into corrupt practices.

These and other anti-corruption documents are publicly available in the Anti-Corruption Practices section on PJSC Aeroflot’s official website.

In accordance with the National Anti-Corruption Plan for 2018–2020 approved by Decree of the President of the Russian Federation No. 378 dated 29 June 2018, and Instruction of the Russian Government No. DM-P17-4575 dated 23 July 2018, PJSC Aeroflot adopted an Anti-Corruption Action Plan for 2018–2020, and arranged for the actions outlined in the plan to be carried out.

The Company conducts professional development training for employees who are in charge of countering corruption, and supports collective initiatives involving the Russian Government, the Prosecutor General’s Office of the Russian Federation, the Investigative Committee of the Russian Federation, relevant federal and regional government bodies, and other organisations. It also runs awareness programmes that help build an anti-corruption culture and promote anti-corruption practices.

For the first time in the Company’s history, PJSC Aeroflot held a round-table discussion on counteracting corruption in business and on business partnership in the current context, in collaboration with the Prosecutor General’s Office. PJSC Aeroflot’s Deputy CEO for Legal and Property Matters made a report on consistent anti-corruption policy as the Company’s strategic objective.

First Deputy Director of the Department for Economic Security responsible for preventing and countering corruption, who reports directply to Deputy CEO for Legal and Property Matters is in charge of compliance management.

First Deputy Director of the Department for Economic Security responsible for preventing and countering corruption oversees the work of the Division for Preventing and Countering Corruption of the Economic Security Department.

PJSC Aeroflot ensures compliance with the Russian laws on counteracting corruption and preventing and resolving conflicts of interest. The Company has the Anti-Corruption and Conflict of Interest Commission chaired by First Deputy Director of the Department for Economic Security responsible for preventing and countering corruption. A procedure for reporting conflicts of interest to the management is in place. The Regulations on Procurement of Goods, Works, and Services and other documents that regulate procurement practices include provisions aimed to prevent conflicts of interest. Also, the Company reviews its contractors for conflicts of interest.

We are also consistently working to integrate the Guidelines on Anti-Corruption Risk Management and Internal Controls in Partially State-Owned Joint Stock Companies approved by Order of the Federal Agency for State Property Management No. 80 dated 2 March 2016.

PJSC Aeroflot’s business units make comprehensive efforts to identify and assess corruption risks and prepare a Risk Register and a Risk Map. The Company has also developed and adopted documents regulating risk assessment and management procedures for its key business processes. Aeroflot Group’s Risk Register and Risk Map are annually reviewed and approved by PJSC Aeroflot’s Board of Directors.

PJSC Aeroflot has set up a dedicated incident reporting channel – okb@aeroflot.ru, which is described on the Company’s website. The Company guarantees confidentiality when receiving and reviewing incident reports, and no negative consequences for individuals who raised their concerns in good faith.

Information disclosure

To enhance its corporate transparency and equity story, the Company strives to ensure timely disclosure of complete and accurate material information on its operations. The Company’s disclosure is guided by requirements and recommendations of federal laws, the Bank of Russia, Russian and foreign trading hubs where the Company’s securities are listed, as well as corporate documents such as the Regulations on the Corporate Information Policy and the Regulations on Providing Access to Insider Information.

The main objectives of PJSC Aeroflot’s corporate information policy are to:

• ensure compliance with the Russian laws and regulatory requirements of the securities market
• enhance information transparency and confidence in communications with the Company’s shareholders, security holders, investors, creditors, and other stakeholders, and ensure protection of their rights and legitimate interests
• focus on fully meeting the demand of shareholders, investors, professional security traders, and other stakeholders for fair disclosures of the corporate and business information
• secure shareholders’ rights to receive material information required to exercise their corporate governance rights
• maintain professional and trust-based relationships of the Company with mass media providing for free information sharing without prejudice to the rights and legitimate interests of shareholders, investors, and other parties
• protect insider information.

Information on PJSC Aeroflot is promptly communicated to the widest possible audience through publication of relevant messages, press and news releases in the news feed updated in real time on PJSC Aeroflot’s disclosure page (http://disclosure.skrin.ru/disclosure/7712040126), and in the Shareholders and Investors section of Aeroflot’s website (http://ir.aeroflot.ru).

For more details on information disclosure see the Investor Relations section.

INTERNAL REGULATIONS GUIDING THE ANNUAL REPORT

Baseline internal regulations used to prepare this Annual Report, including key internal regulations governing the internal audit, as well as the risk management and internal control system, are:

• Articles of Association of PJSC Aeroflot
• Corporate Governance Code of PJSC Aeroflot
• Corporate Conduct Code of PJSC Aeroflot
• Regulations on the General Meeting of Shareholders of PJSC Aeroflot
• Regulations on the Board of Directors of PJSC Aeroflot
• Regulations on the Management Board of PJSC Aeroflot
• Regulations on the Executive Secretary of the Board of Directors and the Board of Directors Office of PJSC Aeroflot
• Regulations on the Personnel and Remuneration Committee of the Board of Directors of PJSC Aeroflot
• Regulations on the Audit Committee of the Board of Directors of PJSC Aeroflot
• Regulations on the Strategy Committee of the Board of Directors of PJSC Aeroflot
• Regulations on the Revision Committee of PJSC Aeroflot
• Regulations on Internal Audit at Aeroflot Group
• Regulations on Aeroflot Group’s Risk Management System
• Dividend Policy of PJSC Aeroflot
• Regulations on the Corporate Information Policy
• Regulations on Providing Access to Insider Information
• Aeroflot Group’s Anti-Corruption Policy
• Regulations on the System of Disclosure of Confidential Information to the Board of Directors (Audit Committee of the Board of Directors) – Hotline
• Environmental Policy of PJSC Aeroflot.