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1 <p align="center"><b>Corporate Governance Principles</b></p>
2 <p>With clearly defined strategic goals, PLIVA is the leading pharmaceutical company
3 in Central and Eastern Europe.</p>
4 <p>Since April 1996, the company has been listed on both the Zagreb and London
5 Stock Exchanges.</p>
6 <p>PLIVA's vision is to be a pharmaceutical company bringing superior and innovative
7 solutions to customer needs in the global market.</p>
8 <p>Within the company, there is no discrimination based on nationality, culture,
9 religion or gender.</p>
10 <p>The continual improvement of health protection, safety and the environment
11 is an integral part of PLIVA's strategy.</p>
12 <p> <b>Supervisory Board</b></p>
13 <p>The monitoring role of the Supervisory Board of the Company is regulated by
14 legislation of the Republic of Croatia principally embodied in the Companies
15 Act. It is also regulated by PLIVA's corporate by-laws.</p>
16 <p>The nine members of the Supervisory Board are elected by the General Assembly
17 to 4-year terms and can be re-appointed to two additional terms.</p>
18 <p>The Supervisory Board elects a president and a deputy president from among
19 its members by majority open vote.</p>
20 <p>Members of the Supervisory Board will possess international expertise, having
21 in mind that their experience and knowledge represent significant contributions
22 to the development and reputation of the Company.</p>
23 <p>Upon appointment, all new members of the Supervisory Board are given a comprehensive
24 introduction to the Company's business as well as to their roles and responsibilities
25 as Supervisory Board members. In addition, all members of the Supervisory Board,
26 if needed, have access to the advice and services of the Company Secretary with
27 regard to their roles and responsibilities as members of the Supervisory Board.</p>
28 <p>The Supervisory Board passes resolutions by an open majority vote of all its
29 members.</p>
30 <p>The re-appointment of the Supervisory Board members is not automatic and is
31 given careful consideration.</p>
32 <p>The Supervisory Board meets four times annually.</p>
33 <p>The Supervisory Board should meet according to a predetermined schedule.</p>
34 <p>The Supervisory Board report of its annual monitoring role is attached to the
35 Company's Annual Report.</p>
36 <p>Any business relationship between members of the Supervisory Board and the
37 Company will be published in the Annual Report. Supervisory Board members facing
38 a conflict of interest must inform the president of the Supervisory Board immediately
39 and resign before the end of their allotted term if an irreconcilable ongoing
40 conflict of interest arises. If a one-off conflict of interest arises (other
41 than by virtue of his/her interests in shares of, or otherwise in or through,
42 PLIVA), the relevant member will be required to disclose the relevant conflict
43 of interest immediately and will be prohibited from voting on the matters in
44 relation to that from which the conflict has arisen. This will also be the case
45 where the interest at issue is that of a person related to the relevant member.</p>
46 <p>The Supervisory Board is provided with regular and adequately detailed information
47 about the management of the Company, so as to be able to effectively fulfil
48 its monitoring role.</p>
49 <p>The Supervisory Board elects the president and members of the Management Board
50 of the Company (according the PLIVA's corporate by-laws) and determines their
51 remuneration.</p>
52 <p>The Supervisory Board should be well informed about the work of Company auditors,
53 who are elected by the General Assembly of the shareholders.</p>
54 <p>The Supervisory Board should consider the Company's strategy and the results
55 of the Management Board's assessment of the Company's internal systems of control.</p>
56 <p>The Supervisory Board can meet to discuss its own functioning and its relationship
57 with the Management Board. This discussion should also include an assessment
58 of the Management Board. Management Board members will not be allowed to attend
59 this meeting.</p>
60 <p><b>Management Board</b></p>
61 <p>The role of the Management Board of the Company is regulated by legislation
62 of the Republic of Croatia, principally embodied in the Companies Act. It is
63 also regulated by PLIVA's corporate by-laws.</p>
64 <p>The main task of the Management Board is to represent the best interests of
65 the Company's shareholders taken as a whole, to ensure the growth and maintenance
66 of a successful business.</p>
67 <p>All members of the Management Board should have a wide range of knowledge and
68 experience which they contribute to the Management Board's deliberations.</p>
69 <p>The Management Board has between three and seven members.</p>
70 <p>The president and the members of the Management Board are elected by the Supervisory
71 Board for a 5-year term with the possibility of re-appointment.</p>
72 <p>The Management Board reports regularly on its work to the Supervisory Board
73 in conformance with the laws of the Republic of Croatia, principally contained
74 in the Companies Act and PLIVA's corporate by-laws.</p>
75 <p>The Management Board will present a balanced and comprehensible assessment
76 of the Company's position and prospects by ensuring that:</p>
77 <ul>
78 <li>both directors and auditors explain their reporting responsibilities in
79 financial reports;</li>
80 <li>interim and other price sensitive reports are balanced and understandable;</li>
81 <li>and financial reports are on a "going-concern" basis, including an explanation
82 of assumptions and qualifications.</li>
83 </ul>
84 <p>At least once annually, the Management Board submits a report on the Company's
85 business policy to the Supervisory Board.</p>
86 <p> The Management Board passes resolutions at its meetings by an open majority
87 vote of all its members.</p>
88 <p>The Management Board holds meetings at least once monthly.</p>
89 <p>The Management Board remuneration will be linked to corporate and individual
90 performance with clear criteria for the award of such pay.</p>
91 <p>Any real or apparent conflict of interest between any members of the Management
92 Board and the Company must be avoided. If a conflict does arise (other than
93 by virtue of an interest in shares of, or otherwise in or through, PLIVA), the
94 relevant member will be required to disclose the nature of his/her conflict
95 of interest and will be prohibited from voting on the matters in relation to
96 which it has arisen. This will also be the case where the interest at issue
97 is that of a person related to the relevant member.</p>
98 <p><b>Board Committees</b></p>
99 <p>The Supervisory Board has delegated specific powers, as set out in the terms
100 of reference to the following committees.</p>
101 <p><b>Audit Committee</b></p>
102 <p>The Audit Committee is a sub-committee of the Supervisory Board whose purpose
103 is to assist the Supervisory and Management Boards in the effective discharge
104 of their responsibilities for corporate governance, financial reporting and
105 corporate control.</p>
106 <p>The Audit Committee has no executive powers with regard to its recommendations
107 and does not relieve the Supervisory Board or the Directors of their responsibilities
108 for these matters.</p>
109 <p><b>Membership</b></p>
110 <p>The Audit Committee shall be composed of at least three members of the Supervisory
111 Board who are not officers or employees of the Company and are not linked in
112 any way to the external auditors, such members being chosen by the Supervisory
113 Board to serve for such term or terms as shall be determined by the Supervisory
114 Board. The Audit Committee's chairman will be chosen by its members in conjunction
115 with the chairman of the Supervisory Board.</p>
116 <p><b>Responsibilities</b></p>
117 <p>The Audit Committee shall have the following responsibilities and powers and
118 shall perform the following functions:</p>
119 <p><b>(a)</b> Recommend to both the Supervisory and Management Boards the engagement
120 and discharge of the firm of external auditors which performs the annual audit
121 of the Company financial statements.</p>
122 <p><b>(b)</b> Meet with the external auditors to review the proposed scope and
123 nature of the annual audit, and to review the results of the audit engagement.</p>
124 <p><b>(c)</b> Consider the amount and relationship of the audit fees.</p>
125 <p><b>(d)</b> Discuss with the external and internal auditors the results of the
126 audit(s) from the preceding year, including:</p>
127 <ul>
128 <li>A review of the audited financial statements;</li>
129 <li>A review of any memorandum containing recommendations for improving accounting
130 procedures and internal controls;</li>
131 <li> The extent to which major recommendations made by the external auditors
132 and the Company Internal Audit department have been implemented;</li>
133 <li>The adequacy of the Company's accounting principles and policies when compared
134 to the industry in general;</li>
135 <li>A determination that the Company's financial statements constitute a full
136 and meaningful report to the shareholders and creditors.</li>
137 </ul>
138 <p><b>(e)</b> Review with management and the external auditors all significant
139 issues concerning litigation, contingencies, claims, assessments and all material
140 accounting issues that require disclosure in the financial statements.</p>
141 <p><b>(f)</b> Review the services provided by the Company's Internal Audit department
142 including: The planned scope of the internal audit programme, its objectives
143 and the staff required to attain these objectives; The activities of the Company
144 Internal Audit department during the preceding period which should be accompanied
145 by a brief summary report in writing; The working relationship between the Company
146 Internal Audit department and external auditors.</p>
147 <p><b>(g)</b> If requested either by members of the Audit Committee or the Company
148 Internal Audit Manager, meet with the Company Internal Audit Manager; and</p>
149 <p><b>(h)</b> Provide a report of Audit Committee activities and findings to the
150 subsequent Supervisory Board.</p>
151 <p><i>Authority</i></p>
152 <p>The Committee shall:</p>
153 <p><b>(a)</b> Oversee any investigation of activities which are within its terms
154 of reference.</p>
155 <p><b>(b)</b> Have the right to seek any necessary information to fulfil its responsibilities.</p>
156 <p><b>(c)</b> Have the right to obtain outside legal help and any professional
157 advice, at the Company's expense, which might be necessary for the fulfilment
158 of its duties.</p>
159 <p><b>(d)</b> Have the power to call any member of staff to be questioned at a
160 meeting of the Committee as and when required.</p>
161 <p> <i>Quorum</i></p>
162 <p>A quorum should consist of two members. All actions of the committee should
163 be subject to a majority vote with the chairman having the deciding vote. Voting
164 should be conducted verbally and the results should be recorded in the minutes.
165 Copies of the minutes of the Audit Committee shall be available to the Management
166 and Supervisory Board at the subsequent Supervisory Board.</p>
167 <p><i>Meetings</i></p>
168 <p>The Audit Committee shall meet at least twice annually, at least two weeks
169 prior to the meetings of the Supervisory Board which consider the half year
170 and full year accounts. At the meeting prior to the full year accounts, it is
171 mandatory for the external Auditors to be present in person. It is anticipated
172 that the meeting to consider the annual accounts will be the principal occasion
173 for the Committee to discharge its responsibilities. The President of the Management
174 Board, the Finance Director and the Company Internal Audit Manager shall be
175 invited to attend meetings.</p>
176 <p>The Audit Committee may meet at other times at the request of its Chairman.</p>
177 <p><i>Secretary</i></p>
178 <p>The Company Secretary will be the secretary to the Audit Committee and shall
179 keep the appropriate minutes of issues discussed.</p>
180 <p><b>Remuneration Committee</b></p>
181 <p> As a matter of good practice, the Management Board members should not be responsible
182 for determining their own remuneration.</p>
183 <p>The Company's Remuneration Committee is comprised of two members of the Supervisory
184 Board and the president of the Management Board. Other persons may attend upon
185 invitation by the president or the members of the Remuneration Committee. The
186 Company Secretary or their nominee shall be the Secretary of the Committee.</p>
187 <p>The Remuneration Committee shall make recommendations to the Supervisory Board
188 on the Company's framework of Management Board remuneration and its cost, as
189 well as specific remuneration packages for each of the members of the Management
190 Board, including pension rights and any compensation payments in the event of
191 early termination.</p>
192 <p>The Remuneration Committee should ensure that performance-related elements
193 of remuneration from a significant proportion of the total remuneration of Management
194 Board members in order to keep their interests aligned with those of shareholders,
195 giving incentives for high performance levels.</p>
196 <p><i>Meetings and quorum</i></p>
197 <p>A meeting of the Remuneration Committee may be called by any member of the
198 Committee or by the Secretary.</p>
199 <p>Notice of each meeting confirming the venue, time and date together with an
200 agenda of items to be discussed shall be forwarded to each member of the Committee
201 not fewer than five working days prior to the date of the meeting. The quorum
202 for the Committee meeting shall be a majority of its members.</p>
203 <p>In the absence of the Committee Chairman, the remaining members present shall
204 elect one of their number to chair the meeting.</p>
205 <p>The Secretary shall keep appropriate records of all meetings of the Committees
206 with appropriate minutes of the proceedings and resolutions.</p>
207 <p><i>Authority</i></p>
208 <p>The Remuneration Committee shall:</p>
209 <ul>
210 <li>oversee any investigation of activities which are within its terms of reference
211 and act as a court of the last resort;</li>
212 <li>have the right to seek any necessary information to fulfil the above duty;</li>
213 <li>have the right to obtain legal help and any professional advice which might
214 be necessary for the fulfilment of its duties;</li>
215 <li> have the power to call any member of staff to be questioned at a meeting
216 of the Committee as and when requested.</li>
217 </ul>
218 <p>The Remuneration Committee should account directly to the Supervisory Board
219 for the decisions the committee reaches.</p>
220 <p> <b>General Assembly</b></p>
221 <p>The approval of the annual financial results and the policy of the Management
222 Board as well as the Supervisory Board's supervising function are separate items
223 on the agenda of the General Assembly.</p>
224 <p>Members of the Management Board and the Supervisory Board report to the General
225 Assembly. Shareholders' confidence in the Management Board and the Supervisory
226 Board is one of the essential prerequisites of the Company's successful performance.</p>
227 <p>The General Assembly of shareholders is convened in compliance with Croatian
228 law.</p>
229 <p>The General Assembly can pass valid resolutions only when shareholders or their
230 proxies holding shares of a nominal value exceeding 50% of the Company's total
231 share capital are present at its meeting.</p>
232 <p>If there is a lack of quorum, the subsequent General Assembly can pass valid
233 decisions regardless of the number of shareholders present.</p>
234 <p>Shareholders who represent at least one-twentieth of the share capital have
235 a right to request a General Assembly meeting to be convened by the Management
236 Board.</p>
237 <p><b>General</b></p>
238 <p>One of the most important characteristics of a successful company aiming to
239 generate value for its shareholders is its intention to elect experienced and
240 independent persons as members of the Supervisory Board, as well as skilful
241 members of the Management Board in order to protect the best interest of the
242 shareholders and achieve the long-term objectives of the Company.</p>
243 <p>The work of the Management Board and the Supervisory Board is regulated by
244 the Company's corporate by-laws.</p>
245 <p>The Management and Supervisory Boards (each in its own capacity) are responsible
246 for ensuring that the Company is run with integrity, complies with legal and
247 regulatory requirements and best practice and conducts its business in accordance
248 with high ethical standards.</p>
249 <p>Members of the Management and Supervisory Board will not disclose confidential
250 information about the business activities of PLIVA to third parties (other than
251 to PLIVA's legal or financial advisers).</p>
252 <p>PLIVA has adopted a Code on Share Dealings in line with the Model Code contained
253 in the Listing Rules of the London Stock Exchange.</p>
254 <p>The Company complies with its Zagreb and London Stock Exchanges requirements
255 to notify shareholders or obtain their consent in relation to material transactions
256 of the Company or its subsidiaries and transactions with related parties.</p>
257 <p>All shareholders will be treated on an equal basis. The Company's policy is
258 to enter into dialogue with its shareholders based on a mutual understanding
259 of objectives.</p>
260 <p>The Company has established a strong system of regular internal control to
261 safeguard the shareholders' investment and the Company's assets involving the
262 ultimate reporting to the president of the Management Board. If there is a risk
263 of material fraud or comparable problems, the president of the Management Board
264 is obliged to notify the Supervisory Board without delay.</p>
265 <p>The shareholdings and options held by members of the Supervisory Board and
266 the Management Board have been conceived as long-term investments, and the data
267 on the aggregate shares and options held by each is contained in the Company's
268 Annual Report. Supervisory Board and the Management Board members must report
269 to the Company Secretary on any share acquisitions or disposals by them.</p>
270 <p>The remuneration of the members of the Supervisory Board is not related to
271 the financial results of the Company.</p>
272 <p>The Company will maintain an objective and professional relationship with its
273 auditors.</p>
274 <p>In conformity with the rules of the Zagreb and London Stock Exchanges, the
275 Company has undertaken to report on its results to shareholders and investors
276 on a half-year basis.</p>
277 <p>The Company has a system of disclosure of information which includes regular
278 reporting on events having a significant influence on the price of the Company's
279 shares in Croatia or the United Kingdom.</p>
280 <p>There should be a formal and transparent management remuneration policy.</p>
281 <p>An employee stock option plan was introduced to motivate employees to increase
282 the Company's market value.</p>
283 <p>The main principles of Corporate Governance in the Company will be stated in
284 the Annual Report.</p>

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