Corporate Governance. 1 Group structure and shareholders. 1.1 Group structure

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1 73 General This report complies with the SIX Swiss Exchange Regulation Directive dated 29 October Unless otherwise indicated, the data in this report are valid as of 31 December Group structure and shareholders 1.1 Group structure Operational group structure As of 31 December 2009, the Group s operational structure comprised five divisions Heating Technology and Sanitary Equipment, Kitchens and Refrigeration, Windows and Doors, Steel Technology and Surface Technology and the cross-divisional Asia Pacific regional branch in addition to the Finance, Controlling and Reporting function and the Corporate Services (see organisation chart on page 9). The company reports in line with IFRS on the basis of this divisional structure. Pages of this report contain descriptions of the divisions Group companies The companies that make up the scope of consolidation of AFG Arbonia-Forster-Holding AG, based in Arbon (Canton Thurgau), are listed in the financial section on pages of this report. The interests held in the Group companies by the Group are also detailed on these pages. The bearer shares are listed on the SIX Swiss Exchange under Swiss security number /ISIN CH Information about market capitalisation can be found in the additional information for investors on page 154. The registered shares are not listed on the stock exchange. Besides AFG, none of the other companies that make up the basis of consolidation are listed on a stock exchange in Switzerland or abroad. 1.2 Significant shareholders in % Voting share Capital share Voting share Capital share Edgar Oehler On 31 December 2009, Dr Edgar Oehler held a % share of the votes. Given that he holds the majority of the voting rights, Dr Edgar Oehler controls AFG, which means that the shares held by Dr Edgar Oehler and AFG must be counted together for the purposes of disclosing interests. Shares held by Dr Edgar Oehler s wife, Marianne Oehler, must also be counted as part of this group s interests. After the capital increase of 29 April 2009, on 7 May 2009 the group around Dr Edgar Oehler held a total of 18,225,000 registered shares and 276,715 bearer shares, corresponding to 56.4 % of the votes. In the year under review, this group s voting share had initially increased to %, because in April 2009, AFG had

2 74 acquired registered shares in exchange for bearer shares in connection with the abovementioned capital increase (disclosure of 23 April 2009). Apart from the disclosure dated 2 April 2009 relating to AFG s and Dr Edgar Oehler s lock-up obligation in connection with the abovementioned capital increase, there were no disclosures as per Swiss stock exchange law during the year under review. As far as the company is aware, there are no shareholder agreements involving significant shareholders. 1.3 Cross-shareholdings AFG does not hold any cross-shareholdings of more than 5 % of the votes or the equity of any other company and vice versa. 2 Capital structure 2.1 Capital The ordinary capital of AFG is detailed in section 47 of the notes on the consolidated financial statements on page Category Voting share in % Number Nominal value in CHF Share capital in CHF Voting share in % Number Nominal value in CHF Share capital in CHF Registered shares Bearer shares Total Authorised and conditional capital in particular AFG has neither authorised nor conditional capital. 2.3 Changes in capital The Annual General Meeting held on 20 April 2007 authorised the Board of Directors to increase the share capital by 20 April 2009 by a maximum of CHF 1,890,063 through the issue of up to 315,015 fully paid-up bearer shares with a par value of CHF 4.20 each, and up to 675,000 fully paid-up registered shares with a par value of CHF 0.84 each. On the basis of the 20 April 2007 provision of the articles of association on the increase in authorised capital, on 3 May 2007 AFG issued 157,507 bearer shares with a par value of CHF 4.20 each and 337,500 registered shares with a par value of CHF 0.84 each, thus increasing the capital by CHF 945, There has been no further increase in the company s capital on the basis of this authorisation; the provision was deleted after the two-year period had elapsed.

3 75 The Annual General Meeting held on 17 April 2009 approved a motion to conduct an ordinary increase of the share capital by CHF 68,042, to a maximum of CHF 76,547, through the issue of 13,163,036 fully paid-up bearer shares with a par value of CHF 4.20 each, and 15,187,500 fully paid-up registered shares with a par value of CHF 0.84 each. The full number of shares issuable was issued on 29 April Otherwise, there has been no further change in the company s capital in the last three reporting years ( ). 2.4 Shares and participation certificates The company has issued 18,225,000 registered shares and 14,580,603 bearer shares. The registered shares have a par value of CHF 0.84 and the bearer shares a par value of CHF A holder of registered shares has five times the votes of a holder of bearer shares for any given share of the capital. The company has not issued participation certificates. 2.5 Dividend-right certificates The company has not issued dividend-right certificates. 2.6 Limitations on transferability and nominee registrations The transfer of registered shares requires the consent of the Board of Directors. The Board of Directors may refuse consent, provided the company offers to acquire the shares for itself or for another shareholder or third party at their actual value at the time of the request. Consent may also be refused if the purchaser does not submit a declaration that he/she is purchasing the registered shares in his/her own name and for his/her own account. Registered shares acquired by a trust or a domiciliary company will only be entered in the share register if the identity of the beneficial owner is made known to the company. If the shares were acquired through inheritance, distribution of an estate, a matrimonial regime, compulsory enforcement or merger, the company can only deny the application for approval if it offers to buy the shares from the acquirer at their actual value. No exceptions were granted to these principles in the year under review. There is no limitation on the transferability of the listed bearer shares. There are no percentage or group clauses. Accordingly, there are no rules on the registration of nominees either. 2.7 Convertible bonds and options There are no convertible bonds or options issued by AFG outstanding.

4 76 3 Board of Directors 3.1 Members of the Board of Directors The Board of Directors consists of the following members: Dr Edgar Oehler (1942, Swiss citizen, resident in Balgach, Canton St. Gallen), Ph.D. (PR), executive member, Chairman of the Board of Directors and CEO since 2003 (for details of powers see 3.5 below) member of the Swiss National Council; member of several parliamentary committees; Editor-in-Chief of the daily newspaper Die Ostschweiz ; General Manager of AFG; Chairman of the Swiss Cigarette Industry Federation, CISC FR; owner, Chairman and CEO of STI Surface Technologies International Holding AG, Steinach (Canton St. Gallen). Paul Witschi (1943, Swiss citizen, resident in Rüschlikon, Canton Zurich), degree in engineering, non-executive member of the Board of Directors since Head of Exports and Divisional Head at Luwa AG, Uster (Canton Zurich); Head of Group Marketing and member of the Management Board of Luwa AG; Head of International Sales and Marketing and member of Group Management of the Geberit Group, Rapperswil-Jona (Canton St. Gallen). Paul Witschi has never been part of the executive management of AFG or its subsidiaries. He has no material business relationships with AFG or its subsidiaries. Dr Arthur Loepfe (1942, Swiss citizen, resident in Appenzell, Canton Appenzell Innerrhoden), Ph.D. (Econ.), non-executive member of the Board of Directors since partner and employee of BSG Business Consulting, St. Gallen; economic director of the Canton of Appenzell Innerrhoden. Dr Arthur Loepfe has never been part of the executive management of AFG or its subsidiaries. He has no material business relationships with AFG or its subsidiaries. Andreas Gühring (1963, German citizen, resident in Saarbrücken, Germany), degree in engineering, non-executive member of the Board of Directors since 2005, representing holders of bearer shares Head of Industrial Engineering at Hydac GmbH; CEO of Valeo GmbH; CEO (Technology) of ThyssenKrupp Federn GmbH; CEO of Brose Fahrzeugteile GmbH & Co. KG; CEO of ThyssenKrupp Drauz Nothelfer GmbH in Heilbronn, Germany; CEO of Knorr-Bremse, Systeme für Nutzfahrzeuge GmbH, Munich. Since 1 January 2009 Managing Partner of MHA Zentgraf GmbH & Co. KG, Merzig, Germany. Andreas Gühring has never been part of the executive management of AFG or its subsidiaries. He has no material business relationships with AFG or its subsidiaries. Christian Stambach (1970, Swiss citizen, resident in Thal, Canton St. Gallen), degree in law (lic.iur.), attorney-at-law, non-executive member of the Board of Directors since attorney with Bär & Karrer in Zurich; Group Vice President, Chief Risk Officer and Chief Legal Counsel, General Secretary and member of Group Management of Centerpulse Ltd; Group General Counsel at Adecco SA; since 2004

5 77 partner and member of management of the law firm Bratschi Wiederkehr & Buob in St. Gallen. Christian Stambach has never been part of the executive management of AFG or its subsidiaries. In connection with the legal services of the law firm Bratschi Wiederkehr & Buob for AFG and its subsidiaries, there are material business relationships with the company (see page ). 3.2 Other activities and vested interests Dr Edgar Oehler, member of the Board of Directors of Bank für Tirol und Vorarlberg Aktiengesellschaft, Innsbruck, Austria; member of various boards of companies and foundations in Switzerland and abroad. Paul Witschi, member of the Board of Trustees of Avenir Suisse; member of the Board of Directors of Reichle & De-Massari AG, Wetzikon (Canton Zurich); member of the Board of Directors of WMH Walter Meier Holding AG, Stäfa (Canton Zurich); member of the Board of Directors of Vaillant Group, Remscheid (Germany); member of various boards of companies abroad. Dr Arthur Loepfe, member of the Swiss National Council; member of the Board of Directors of Appenzeller Alpenbitter AG, Appenzell (Canton Appenzell Innerrhoden), Brauerei Locher AG, Appenzell (Canton Appenzell Innerrhoden), Gressel AG, Aadorf (Canton Thurgau), and Blumer-Lehmann AG/Holzwerk Lehmann AG, Gossau (Canton St. Gallen); member of various boards of companies and foundations in Switzerland. Christian Stambach, member of the Board of Directors of ABD Holding AG, Rorschacherberg SG; member of various boards of companies in Switzerland. 3.3 Election and term of office Principles of election procedure and limits on terms of office The members of the Board of Directors are generally elected by the ordinary general meeting, as a rule for a period of three years. The first term of a member of the Board of Directors equals the remaining mandate of the member he/she has replaced, if applicable. The members of the Board of Directors may be re-elected an indefinite number of times First election and remaining term of office At the 2009 Annual General Meeting, Dr Edgar Oehler, Paul Witschi, Dr Arthur Loepfe and Andreas Gühring were all re-elected to the Board of Directors. At the 2009 Annual General Meeting, Christian Stambach was elected to the Board of Directors for the first time, for a term of office of three years.

6 78 The terms of office of the current members are as follows: Board of Directors Date of birth Term began Term expires Edgar Oehler, Chairman and CEO Paul Witschi Arthur Loepfe Andreas Gühring Christian Stambach Internal organisational structure Allocation of tasks within the Board of Directors The Chairman of the Board of Directors and Managing Director is Dr Edgar Oehler. Vice- Chairman of the Board of Directors is Paul Witschi. The Board of Directors is supported by an Audit Committee and a Remuneration and Nominations Committee Board committees Each committee has a written charter, approved by the Board of Directors, laying down its powers and responsibilities and working procedures. The Board of Directors appoints the members and chairs of the committees Audit Committee The Audit Committee meets at the invitation of the Chairman as often as business requires. It is composed of three independent members, all of whom have experience in finance and accounting. The committee reviews the effectiveness of the external and internal auditors, the internal control system, the financial reports and the performance, fees and independence of the external auditors. It has comprehensive rights of inspection and information in carrying out these duties. It can order investigations and consult external advisors. Reporting to the Audit Committee are the internal auditors, who perform an independent, Groupwide auditing and supervisory role (see 3.6 below). Otherwise, the Audit Committee s duties consist in monitoring and controlling, preparing individual items and putting motions before the Board of Directors for its decision. Since the 2006 Annual General Meeting, the Audit Committee has comprised the following members: Dr Arthur Loepfe, Chairman Paul Witschi, Deputy Chairman Andreas Gühring, member The Audit Committee met three times during the year under review. The members of the Board of Directors who are not members of the Audit Committee attended these meetings, which lasted around two hours on average, in an advisory capacity. At each meeting, the Chief Financial Officer (CFO), internal and external auditors and the Secretary General (who

7 79 took the minutes) were also present. The Chairman of the Audit Committee and the Head of Internal Audit met for two further meetings to discuss the findings of the internal auditors and their responsibilities Remuneration and Nominations Committee The Remuneration and Nominations Committee meets at the invitation of the Chairman as often as business requires. It comprises two independent members. The committee approves the Group s remuneration policy and lays down compensation for members of Group and top management. It determines principles for selecting candidates for election to the Board of Directors and Group Management. The Remuneration and Nominations Committee has delegated the task of identifying suitable candidates for the Board of Directors and Group Management to the Chairman of the Board of Directors and Managing Director. The full Board of Directors decides on the appointment and dismissal of members of Group Management; the Annual General Meeting decides on the appointment and dismissal of members of the Board of Directors. Since the 2008 financial year, the Remuneration and Nominations Committee has comprised only independent members, namely: Paul Witschi, Chairman Andreas Gühring, member The Remuneration and Nominations Committee met seven times during the year under review. The members of the Board of Directors who are not members of the Remuneration and Nominations Committee attended all the meetings in an advisory capacity. The meetings lasted around one hour on average. The CFO and the Secretary General (who took the minutes) attended all the meetings Work methods of the Board of Directors The Board of Directors meets at the invitation of the Chairman as often as business requires, but at least three times a year. During the year under review, the Board of Directors met for seven ordinary meetings and three extraordinary meetings. During the year under review, most of its duties were carried out by the full Board of Directors (see and above for details of the working procedures of the committees of the Board of Directors). Before their meetings, members of the Board of Directors receive documentation enabling them to prepare for the items on the agenda. As a rule, the ordinary and extraordinary meetings of the Board of Directors last one day. Members of Group Management, Executive Management and other employees, and representatives of the external auditors and external consultants, are invited as necessary to deal with specific issues.

8 Definition of areas of responsibility The Board of Directors is responsible for guiding, supervising and monitoring the executive management of the company. It is responsible for approving and regularly reviewing company strategy, enacting the necessary rules, instructions and guidelines, and establishing the organisation and risk policy. It is also responsible for supervising and monitoring the persons entrusted with running the company. The Board of Directors has designated Dr Edgar Oehler as Managing Director heading Group Management. The division of powers between the Board of Directors, Group Management and Divisional Management is set out in detail in the articles of association, by-laws and division of powers and responsibilities. Within the framework of the law and the articles of association, and based on the by-laws and division of powers and responsibilities, the Board of Directors has delegated the management of the Group to Group Management. Group Management has limited powers to decide on its own affairs and on applications from the divisions. 3.6 Information and control instruments vis-à-vis the Group Management The Board of Directors is kept regularly informed about the activities of Group Management and the divisions via a number of different channels: The management information system (MIS) provides the members of the Board of Directors with fundamental information about the financial, income and risk situation of the Group on a monthly basis. The external auditors provide the Board of Directors with written and spoken information on the main findings of the audit. The CEO oversees the members of Group Management who report to him and ensures compliance with the law, the articles of association and regulations within the Group. He reports to the Board of Directors on a regular basis, and immediately in the event of extraordinary developments. The members of Group Management and the heads of the business units are regularly involved in the meetings of the Board of Directors. The members of the Board of Directors may demand any additional information they need to carry out their tasks. Reporting to the Audit Committee are the internal auditors, who perform an independent, Group-wide auditing and supervisory role. The principal role of the internal auditors is to monitor processes and structures on a Group-wide basis. They identify business and operational risks in all five divisions, and define the audits and tests to be conducted on the basis of this risk analysis. They are in dialogue with the external auditors to share information on risks and coordinate all assurance-related activities throughout the Group. These activities are summarised in an audit plan approved by the Audit Committee. The relevant audit findings are discussed with the Audit Committee, Group Management and local management, and communicated to the Board of Directors in writing. If mater - ial risks are identified, measures are defined to reduce them. The internal auditors report to the Audit Committee regularly on the scale of risks and the status of measures implemented.

9 81 4 Group Management 4.1 Members of Group Management In the year under review, the Group Management comprised the following members: Dr Edgar Oehler (1942, Swiss citizen), Ph.D. (PR), Chairman of the Board of Directors and Managing Director heading Group Management since 2003 (see 3.1 above). Felix Bodmer (1955, Swiss citizen), lic. oec. HSG, Chief Financial Officer (CFO) since 2003; various positions at Hilti Group in finance and controlling, latterly Head of Finance and Controlling at a German subsidiary; ABB/Alstom, Commercial Director/CFO of group companies, latterly CFO/Head of Shared Services at Alstom Power (Schweiz) AG; CFO of Steiner Group. Dr Christoph Schönenberger (1968, Swiss citizen), Ph.D. in law, attorney-at-law, LL.M., Head of Corporate Services since 2007; lawyer in Legal Services at UBS AG, Zurich; attorney and partner in the law firm Probst Rechtsanwälte, Winterthur. Knut Bartsch (1968, German citizen), degree in industrial engineering, Divisional Spokesman of Heating Technology and Sanitary Equipment Division since 2004; Assistant Corporate Manager at Preussag AG/TUI AG; with Kermi GmbH since 1997, Director since Hansgeorg Derks (1965, German citizen), MA, Head of the Kitchens and Refrigeration Division since 2008; Art Director at b.a.s. direktmarketing; Head of Marketing/Director of Marketing and Distribution Development at Bang & Olufsen Deutschland; various functions at bulthaup GmbH & Co KG, latterly as Director of Marketing/Sales/Design; Head of Marketing/Sales at Hansa Metallwerke AG. Thomas Gerosa (1949, Swiss citizen), degree (FH) in business, Head of the Windows and Doors Division since 2004; since 1972 various positions at EgoKiefer AG, Director from 1987 to 2004, and since 2004 Managing Director and CEO. Thomas Reifler (1967, Swiss citizen), degree (FH) in business, Head of the Surface Technology Division and CEO of Hartchrom AG since 2007; Head of Finance/Controlling and member of the Executive Board of Spring AG; Group Controller at Kuhn Rikon Group; CFO and member of management of Hartchrom AG. Felix Aepli (1958, Swiss citizen), degree (FH) in business, Head of the Asia Pacific Regional Branch and member of extended Group Management since 2008; Managing Director of Midas Manufacturers Fine Jewelry Ltd. in Hong Kong, CEO of Spital Wil (Canton St. Gallen), Managing Director of Hiestand (Asia Pacific) Pte. Ltd. in Singapore, CEO Asia Pacific at Geberit Asia Pacific in Shanghai.

10 Other activities and vested interests Thomas Gerosa, since 2000 Chairman of the Board of Directors of Alpha RHEINTAL Bank, Heerbrugg, Canton St. Gallen. 4.3 Management contracts AFG has not signed any management agreements with companies or natural persons outside the Group. 5 Compensations, shareholdings and loans Information on compensation practice can be found in the remuneration report on page and in the notes to the financial statements on page Shareholders participation 6.1 Voting-rights and representation restrictions The articles of association contain no regulations that deviate from the law, and in particular no percentage limit on voting rights. Every share entitles the bearer to one vote. Every shareholder is entitled to be represented at the Annual General Meeting by a proxy furnishing written power of attorney. 6.2 Statutory quorums Under Article 13 (3) of the articles of association, the rules on the transferability of registered shares can only be eased by a resolution of the Annual General Meeting, approved by at least two thirds of the voting shares represented and the absolute majority of the nominal share value represented. Otherwise, the articles of association contain no regulations that deviate from the law. 6.3 Convocation of the General Meeting of Shareholders The articles of association contain no regulations that deviate from the law. 6.4 Inclusion of item on the agenda Shareholders who hold at least CHF 1 million of nominal share capital have the right to request that an item be put on the agenda. Requests for items to be put on the agenda must be submitted to the Board of Directors in writing, specifying proposals, at least 40 days before the date of the Annual General Meeting. 6.5 Inscriptions into the share register Holders of registered shares whose names are entered in the share register receive direct invitations to the Annual General Meeting together with the list of proposals from the Board of Directors and admission tickets.

11 83 7 Changes of control and defence measures 7.1 Duty to make an offer Article 6 of the articles of association exempts the purchasers of shares from the duty to make an offer as stipulated by sections 32 and 52 of the Swiss Stock Market Act (optingout clause). 7.2 Clauses on changes of control AFG has no arrangements or plans in favour of members of the Board of Directors and/ or Group Management or other members of upper management that would constitute change in control clauses. 8 Auditing body 8.1 Duration of mandate and term of office of the lead auditor Date of assumption of existing auditing mandate PricewaterhouseCoopers AG, St. Gallen, has acted as statutory and Group auditor since the 2006 financial year. It audits AFG Arbonia-Forster-Holding AG s statutory and consolidated financial statements Commencement of term of lead auditor Lorenz Lipp has held the position of lead auditor since Auditing fees In 2009, the various auditors billed a total of CHF 1,173,000 (prior year CHF 1,092,000) for auditing the statutory accounts and consolidated financial statements of AFG Arbonia- Forster-Holding AG and the financial statements of Group companies. Of this amount, CHF 773,000 (prior year CHF 728,000) was paid to the statutory auditor Pricewaterhouse- Coopers. 8.3 Additional fees In 2009, the statutory auditor PricewaterhouseCoopers and other statutory auditors billed AFG CHF 319,000 (prior year CHF 336,000) for additional services. CHF 206,000 (prior year CHF 271,000) of this was paid to PricewaterhouseCoopers. The amount paid to PricewaterhouseCoopers for additional services in 2009 broke down as follows: CHF 98,000 for tax advice, CHF 96,000 for services related to the capital increase, and CHF 12,000 for auditrelated services. 8.4 Informational instruments pertaining to the external audit The Audit Committee monitors the professional qualifications, independence and performance of the external auditors on behalf of the Board of Directors, and reports to the Board of Directors on its findings. In the year under review, additional measures taken by the Audit Committee to oversee the activities of the external auditors included having the

12 84 reports (statutory accounts, consolidated financial statements and management letters) explained directly by the external auditor (see above). The external and internal auditors also discussed the methodology for and development of the internal control system. The following factors are considered in the choice of the external auditor: professional expertise, international network (representation in the relevant countries), value for money, industry experience, and the continuity of personnel and rapid availability of the audit team. At the request of the external auditor, the Audit Committee approves the audit fees after checking to ensure that they are appropriate. In accordance with the law, the external auditors lead auditor is rotated every seven years at the latest. 9 Information policy AFG pursues an open information policy vis-à-vis the public and financial markets, based on the principles set out in the SIX Swiss Exchange Regulation listing rules and directives and in the Swiss Code of Best Practice for. The annual report provides information about the business performance, organisation and strategy of the Group. An integral part of the annual report is the report on remuneration on page 85. AFG s semi-annual report contains the income statement, balance sheet and cash flow statement for the first six months of the financial year. In addition to this, AFG gives comprehensive reports on its business at its annual press and analysts conference and at the Annual General Meeting. AFG s regularly updated website at and press releases on important events, provide additional information. AFG also fosters dialogue with investors and the media at special events and roadshows.