Report of the Non-executive Board members

Board meetings and activities during 2010

Meetings

The Board held eight meetings: four in person and four by conference call. Each of the Board members attended the majority of the meetings.

The Board addressed in different meetings the following main subjects:

  • The corporate strategy and main risks of the business, the result of the assessment of the design and effectiveness of the internal risk management and control systems, as well as any significant changes in such matters.
  • Financial performance of the Group.
  • Parameters to be used for measuring performance.
  • Annual budget plan for 2011.
  • Development of business activities and various investment opportunities.
  • Share buy-back and dividend policy.
  • Convocation of the AGM.
  • Reports of the Board committees following each of their meetings.
  • Performance of the Board, of the committees and of its individual members, including the CEO.
  • Succession planning and management development.
  • Remuneration of the CEO and the senior management.
  • Grants to eligible employees under the Global Equity Incentive Plan, and opportunity for eligible employees to purchase discounted shares under the Global Equity Share Purchase Plan.
  • Corporate governance requirements and developments.

The CEO was not present and did not take part in the discussion or decision-making by the Board at the part of meetings in which his remuneration and performance was discussed. The Board members met regularly in the absence of the CEO and of the senior management.

Performance evaluation

The Board evaluated its own performance, the performance of the committees and of its individual members, including the CEO. The Board followed-up on the 2009 evaluation and noted the implementation of several suggestions. Other items discussed included the composition and competencies of the Board, the setup and content of meetings and meeting materials. Also the relationship with the senior management was discussed. Suggestions for improvement either have been fully implemented, or will be implemented as it becomes feasible to do so.

Training

The Board made a visit to one of its factories for training on Gemalto’s products and held meetings with managers to further familiarize themselves with the business and the senior management team.

Board composition

For information on the composition of the Board, please refer to ‘Composition of the Board – (term of) appointment’. For information on the individual Board members, please refer to ‘The Board’.

Independence

The Board currently consists of ten Board members: nine Non-executive Board members and one Executive Board member, the CEO. The Board considers that seven Non-executive Board members are independent, within the meaning of best practice provision III.2.2; thus the Company complies with best practice provision III.8.4.

The following Non-executive Board members are considered non-independent:

  • Mr. J. Fritz, Head of the Quandt Family office.
  • Mr. A. Mandl, former Executive Chairman of Gemalto.

Report of the Audit committee

The committee advises the Board with respect to the oversight of the quality and integrity of Gemalto’s financial statements; – risk management and internal control arrangements; – compliance with legal and regulatory requirements; – the performance, qualifications and independence of the external auditor; – and the performance of the internal audit function. The committee consists of four Non-executive Board members, listed in ‘The Board’. One committee member is considered non-independent. The Board believes that at least one committee member is a financial expert within the meaning of best practice III.3.2 of the Dutch corporate governance code.

During 2010, the committee held six meetings. The Chairman, CEO, CFO, Chief Accounting Officer, the Internal Audit Director and the external auditors were invited to attend the committee meetings. The committee also met on at least one occasion privately with the CFO, the Internal Audit Director, the external auditors and the General Counsel (without other members of management being present).

During 2010, the committee reviewed the 2009 annual financial statements and the related audit report from the external auditors. The committee also reviewed the condensed interim financial statements as of June 30, 2010 and the related report by the external auditors, as well as the announcements of the 2010 quarterly revenue figures. In connection with these reviews, the committee reviewed the Company’s accounting policies and compliance with accounting standards.

During the year, the committee received and considered reports on the Company’s risk management system and key internal financial control policies and procedures.

With regard to the internal audit, the committee reviewed the revised internal audit charter, the internal audit plan for 2011 and its coverage in relation to the scope of external audit. It also reviewed the effectiveness and independence of the internal audit process. The committee received reports on the work of the internal audit department and considered their significant findings and recommendations.

With regard to the external audit, the committee reviewed the independent auditor’s audit plan for the financial year ended December 31, 2010. The committee assessed the performance and independence of the auditors and considered steps taken to ensure their independence, including receiving a report on the auditors internal procedures for maintaining independence, including policies for rotation of responsibilities of key personnel; approving key non-audit assignments; and reviewing the fees paid for non-audit services. For an overview of the aggregate fees billed by the external auditors for professional services rendered for the fiscal year 2010, please refer to note 10 of the company financial statements.

The committee considered these and other factors in concluding its recommendation to the Board for the reappointment of the external auditors.

The committee carried out the review and assessment of the effectiveness of internal controls. This included a review of the tax and treasury risks, and the information and communication technology risks. The committee also reviewed the effectiveness of the whistle-blowing arrangements, received reports on whistle-blowing, significant claims and disputes, including those resulting in litigation, and related party transactions.

During the year, the committee reviewed the effectiveness of its performance with input from all Board members. Changes are then implemented to make improvements. During the year, as a result of this process, the committee arranged for a technical accounting update presentation and discussion led by the technical staff of the auditors, focusing on recent and planned developments in accounting and reporting which are most likely to affect the Company.

Report of the Compensation committee

The committee advises the Board with a proposal for a Remuneration Policy for the CEO, which is reviewed annually, and with a proposal for the remuneration of the Non-executive Board members, which is reviewed from time to time, to be adopted by the General Meeting. The committee proposes the remuneration of the CEO within the limits of the Remuneration Policy. Furthermore, the committee oversees the general remuneration policy of Gemalto and discusses the grant of Awards, i.e. options, restricted share units and/or share appreciation rights, and the opportunity for eligible employees of Gemalto to purchase shares in the Company at a discount to the prevailing market price.

The committee consists of three Non-executive Board members, listed in ‘The Board’. All committee members are considered independent.

During 2010, the committee held five meetings. In these meetings, the committee reviewed the 2009 achievements and associated bonus payments for the CEO and senior management, as well as the 2010 salary increases, objectives and bonus levels. The remuneration for the CEO was determined within the limits of the Remuneration Policy for the CEO. The committee prepared the 2010 Remuneration Report, which report can be found in ‘2010 Remuneration report of the Board’.

The committee made recommendations to the Board on the grant of restricted share units to eligible employees, as well as on the performance conditions relating to such share incentive. Details of the grant of restricted share units to the CEO are disclosed in ‘Compensation of the CEO for the financial year 2010’.

The committee also recommended to the Board that eligible employees be offered the opportunity to purchase shares in the Company at a discount of 15% to the prevailing market price within the Global Employee Share Purchase Plan (`GESPP´), as described in more detail here. As part of their duties, the committee requested external advice from Mercer, an independent internationally recognized firm of compensation specialists, which firm did not provide advice services to management, but only to the Board via the committee.

Report of the Nomination and Governance committee

The committee advises the Board with respect to overseeing new candidates for service on the Board, as well as new members of the senior management of Gemalto. The committee reviews the corporate governance principles applicable to Gemalto and advises the Board on any changes to these principles as it deems appropriate.

The committee consists of three Non-executive Board members, listed in ‘The Board’. One committee member is considered non-independent.

During 2010, the committee held four meetings. The committee advised the Board in 2010 on the appointment of Mr. Ph. Alfroid as Non-executive Board member. The committee advised the Board on a new reappointment schedule following the appointment of a new Board member.

The committee discussed further steps that the Company could take to improve its corporate governance, reviewed the Governance section of the Annual Report and the agenda for the AGM. The committee also reviewed the Sustainability report that was prepared for the first time in 2010. The committee proposed changes to the insider trading policy. The committee prepared and coordinated with the Chairman of the Board the annual self-assessment of the Board and of the committees, which took place in the second half year of 2010.

Report of the Strategy and M&A committee

The Strategy and M&A committee advises the Board with respect to Gemalto’s strategy and the major features of its merger, acquisition and divestiture activities.

The committee consists of five Non-executive Board members, listed in ‘The Board’. One committee member is considered non-independent.

During 2010, the committee held six meetings. The committee reviewed all material investment and divestiture proposals. It advised and submitted recommendations to the Board on Gemalto’s M&A and divestiture activities, and Gemalto’s strategic plans and their implementation.

Financial statements 2010

The financial statements of the Company for 2010, as presented by the Board, have been audited by PricewaterhouseCoopers Accountants N.V., the Company’s external auditors. Please refer to the ‘Auditor’s report’. All individual Board members have signed the financial statements. The Board proposes that the financial statements for the year 2010 be adopted by the AGM of May 18, 2011 and that the other resolutions proposed to the shareholders be approved.

Finally, we would like to express our thanks to the CEO, the senior management and all employees of the Group for their continued dedication and contribution during the past twelve months, making 2010 a successful year for Gemalto.

The Non-executive Board members

Amsterdam, March 8, 2011