Corporate Governance

QCA Principle

1. Establish a strategy and business model which promote long-term value for shareholders

Application

The board must be able to express a shared view of the company’s purpose, business model and strategy. It should go beyond the simple description of products and corporate structures and set out how the company intends to deliver shareholder value in the medium to long-term. It should demonstrate that the delivery of long-term growth is underpinned by a clear set of values aimed at protecting the company from unnecessary risk and securing its long-term future.

Faron Pharmaceuticals Ltd. (AIM: FARN, First North: FARON) is a clinical stage biopharmaceutical group focused on building the future of immunotherapy by harnessing the power of the immune system to tackle cancer.

Bexmarilimab, a novel anti-Clever-1 humanized antibody, is its investigational immunotherapy with the potential to remove immunosuppression of cancers through targeting myeloid cell function. Bexmarilimab is being investigated in Phase I/II clinical trials as a potential therapy for patients with hematological cancers in combination with other standard treatments including immune checkpoint molecules, and as a monotherapy for untreatable solid tumors. Faron is headquartered in Turku, Finland. Further information is available at www.faron.com.

There are very poor survival rates and viable treatment options for relapsed/refractory AML and MDS. The majority of leukemias develop in patients >60 years. The long-term survival (meaning 5-year survival, and the definition of cure in AML) is still at 30% and is expected to go up only a little even with the current treatments. This highlights the lack of effective 2nd and later line treatment options. AML cure rates are thus far below the 80–90% cure rates of acute lymphoblastic leukemia (ALL) or multiple myeloma (MM). Novel approaches such as immune therapies could potentially help here. Especially treatment options for patients >60 that cannot tolerate intensive chemotherapies and treatment after relapse are the high unmet need without effective standard of care therapies.

We continue to see bexmarilimab as the major value driver for Faron, and our goal is to deliver worldwide approvals to allow bexmarilimab to be used by cancer physicians to treat patients. Despite Faron’s focus on bexmarilimab, we have used partnerships to develop Traumakine®, Faron’s investigational intravenous (IV) interferon (IFN) beta-1a therapy, to prevent multiorgan dysfunction. Faron and the Fred Hutchinson Cancer Research Center in Seattle, Washington, have announced a collaboration to further develop IV IFN beta-1a in the prevention of cytokine release syndrome (CRS) and other CAR-T therapy side effects, such as neurotoxicity.

The Company acknowledges that effective communication with its shareholders on strategy and governance is an important part of its responsibilities. Interim and final results are communicated via formal meetings with roadshows, participation in conferences and additional dialogue with key investor representatives held in the intervening periods. Faron recognises the Annual General Meeting as an opportunity to meet shareholders. As an AIM and First North listed company, Faron complies the Market Abuse Regulation (both EU and UK domestic laws after year end 2020), the AIM Rules for Companies and the Nasdaq First North Growth Market Rulebook. Faron complies with other relevant legislation in all its corporate communications issues. Faron speaks to the financial community and shareholders only through authorised representatives. In accordance with Faron’s disclosure policy, the Chief Executive Officer is the designated person to make public statements. The Chief Executive Officer may delegate this authority to other members of the management team. In addition to the CEO, the CFO is able to communicate externally on behalf of Faron on financial matters.

The principal risks and uncertainties identified by the Board are set out on pages 20-23 of the 2023 Report. The Board has put in place internal controls and systems which are designed to manage rather than eliminate risk and provide reasonable but not absolute assurance against material misstatement or loss. A key element of delivering Faron’s strategy and managing the risks facing Faron is the employment of a skilled workforce and use of appropriate vendors. The Board reviews the risks and uncertainties facing Faron and the effectiveness of its systems annually. At present, Faron does not consider it necessary to have an internal audit function due to the small size of the administrative function, the frequent interaction with the auditors and the supervision of the audit committee. The Board is, however, closely following both regulatory and operational developments in this realm and plans to react appropriately if, and to the extent, considered necessary. There is a monthly review and authorisation of transactions by the Chief Financial Officer and Chief Executive Officer. A comprehensive budgeting process is completed once a year and is reviewed and approved by the Board. The Group’s results, compared with the budget, are reported to the Board on a monthly basis and discussed in detail. Faron maintains appropriate insurance cover in respect of actions taken against the Directors because of their roles, as well as against material loss or claims against Faron. The insured values and type of cover are comprehensively reviewed on a periodic basis.

The Board and the CEO are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the preparation of financial statements and the report of the Board that give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board in Finland. The Board is responsible for the appropriate arrangement of the control of Faron’s accounts and finances, and the CEO shall see to it that the accounts of Faron are in compliance with the law and that its financial affairs have been arranged in a reliable manner. In accordance with the rules of the London Stock Exchange for companies trading securities on AIM, the Company is also required to prepare annual accounts and financial statements under IFRS.

In preparing these financial statements, the Board of Directors is required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRS as adopted by the EU, subject to any material departures disclosed and explained in the financial statements;
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Board and the CEO are responsible for keeping adequate accounting records that are sufficient to show and explain Faron’s transactions and disclose with reasonable accuracy at any time the financial position of Faron and enable them to ensure that the financial statement comply with the requirements of the Finnish Accounting Act. They are also responsible for safeguarding the assets of Faron and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for ensuring that the financial statements are made available on a website. Financial statements are published on Faron’s website in accordance with AIM Rule 26, Nasdaq First North Growth Market Rulebook and the recommendations of the QCA’s Corporate Governance Code for Small and Medium Sized Companies.

Long-term success relies upon good relations with a range of different stakeholder groups both internal (workforce) and external (suppliers, customers, regulators and others).

The board needs to identify the company’s stakeholders and understand their needs, interests and expectations.
Where matters that relate to the company’s impact on society, the communities within which it operates or the environment have the potential to affect the company’s ability to deliver shareholder value over the medium to long-term, then those matters must be integrated into the company’s strategy and business model. Feedback is an essential part of all control mechanisms. Systems need to be in place to solicit, consider and act on feedback from all stakeholder groups.

Faron is strongly committed to conducting its business affairs with honesty and integrity and in full compliance with all applicable laws, rules and regulations. All employees and Directors are required to comply with all laws, rules and regulations applicable to Faron wherever it does business. Employees and Directors should endeavour to deal honestly, ethically and fairly with Faron’s collaborators, licensors, licensees, business partners, suppliers, customers, competitors and other employees. Statements regarding Faron’s therapies and services must not be untrue, misleading, deceptive or fraudulent. Employees and Directors act in the best interests of Faron and use its assets and services solely for legitimate business purposes and not for any personal benefit or the personal benefit of anyone else.

At Faron we embrace the responsibility we have to patients, our employees, the communities where we work and the planet. We set ambitious goals for our own operations, high expectations for our suppliers and serve as an example of leadership for our industry. In the same way that it drives the development of our transformational medicines, innovation fuels our approach to practices related to environmental, social and governance (ESG) matters. We are focused on enhancing patient access to medicines, being an employer of choice and prioritizing environmental sustainability, all while operating with the highest levels of quality, integrity and ethics. Our strong governance profile includes board oversight and active participation and reporting from leadership and team members across functions and geographies Faron is committed to maintaining and promoting high standards of business integrity. Faron’s values, which incorporate the principles of corporate social responsibility and sustainability, guide its relationships with clients, employees and the communities and environment in which it operates.

By putting ESG into practice, Faron is committed, wherever possible, to:

• developing treatments for medical conditions with significant unmet needs
• conducting itself responsibly and in an ethical manner
• creating a positive and supportive working environment
• acting fairly in its dealings with suppliers and other third parties
• minimizing the impact on its environment

The principal risks and uncertainties identified by the Board are set out on pages 20-23 of the 2023 Report. The Board has put in place internal controls and systems which are designed to manage rather than eliminate risk and provide reasonable but not absolute assurance against material misstatement or loss. A key element of delivering Faron’s strategy and managing the risks facing Faron is the employment of a skilled workforce and use of appropriate vendors. The Board reviews the risks and uncertainties facing Faron and the effectiveness of its systems annually. At present, Faron does not consider it necessary to have an internal audit function due to the small size of the administrative function, the frequent interaction with the auditors and the supervision of the audit committee. The Board is, however, closely following both regulatory and operational developments in this realm and plans to react appropriately if, and to the extent, considered necessary. There is a monthly review and authorisation of transactions by the Chief Financial Officer and Chief Executive Officer. A comprehensive budgeting process is completed once a year and is reviewed and approved by the Board. The Group’s results, compared with the budget, are reported to the Board on a monthly basis and discussed in detail. Faron maintains appropriate insurance cover in respect of actions taken against the Directors because of their roles, as well as against material loss or claims against Faron. The insured values and type of cover are comprehensively reviewed on a periodic basis.

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On April 5, 2024, the Company held its Annual General Meeting (AGM). At the AGM the number of Directors was confirmed as five. Marie-Louise Fjällskog, Markku Jalkanen, John Poulos, Tuomo Pätsi and Christine Roth were re-elected to the Board. At the meeting of the Board held following the AGM, Tuomo Pätsi elected Chairman of the Board.

The Board comprises five non-executive directors. Brief biographical details for the Directors can be found on Annual Report 2023. During 2023 the Board held 21 meetings. The Board is responsible to the shareholders for the proper management of the Company and meets regularly to set the overall direction and strategy of Faron, to review scientific, operational and financial performance, to review the strategy and activities of the business, and to advise on management appointments. The Board sees to the administration of Faron and the organisation of its operations, being responsible for the appropriate arrangement of the control of Faron’s accounts and finances. All key operational and investment decisions are subject to full Board approval. The management of the Company prepares a monthly management and financial accounts pack of the Group, which is distributed to the Board every month and in advance of Board meetings. In individual cases the Board may decide in a matter falling within the general competence of the Chief Executive Officer.

The roles of non-board Chief Executive Officer and Non-Executive Chairman are well defined and clearly separated. The Chairman oversees the Board’s work, ensures that the Board’s decision-making is balanced and that the Non-Executive Directors have all relevant information on matters to be decided.

The Chairman sees to it that the Board meets when necessary. The Chief Executive Officer is responsible for implementing the strategy of the Board and managing Faron’s day-to-day business activities. The Chief Executive Officer, reviewing the operating results regularly to make decisions about the allocation of resources and to assess overall performance, is the chief operating decision-maker. The Board considers there to be sufficient independence of the Board and that all the Non-Executive Directors are of sufficient competence and calibre to add strength and objectivity to the Board, and to bring considerable experience in terms of their knowledge of the scientific, operational and financial development of biopharmaceutical products and companies. Where necessary, the Company facilitates that Non-Executive Directors obtain specialist external advice from appropriate advisers.

The term of office of each Director expires on the closing of the AGM immediately following their appointment to the Board. Under the Finnish Limited Liability Companies Act and the Company’s Articles of Association, the Directors are elected by the shareholders at general meetings annually. Under the Act, Directors may be removed from office at any time, with or without cause, by a majority of votes cast at a general meeting. Vacancies on the Board may only be filled by a majority of shareholder votes cast at a general meeting.

The Board is comprised entirely of non-executive directors. The Chief Executive and the Chief Financial Officer are not members of the Board, but report to the Board on a regular basis. It is common practice under Finnish corporate governance standards that the executive function is separated from the Board. In the Annual General Meeting 2024, a Shareholders’ Nomination Board was established. The main task of said Shareholders’ Nomination Board is to prepare proposals on the number, election and remuneration of the members of the Board for the Annual General Meeting and, if necessary, for the Extraordinary General Meeting. The five largest shareholders (as at 31 August of each year) nominate three representatives to the Shareholders’ Nomination Board.

Biographical details of the Directors can be found here & Management can be found here.

Our Management team is comprised of individuals with years of experience in the biotech, pharmaceutical and financial fields. The Board of Directors are composed of individuals with comprehensive experience in the biotech, finance and academic space.

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The Board has a process for evaluation of its own performance and that of its committees and individual Directors, including the Chairman. These evaluations are carried out at least annually. In the Board performance evaluation process adopted by the Company, Board, committee and individual effectiveness is considered against the criteria of creating and running an effective Board, professional development, strategic foresight, stewardship, managing management, value creation and corporate culture.

In conjunction with being admitted to trading on AIM, the Company has established audit, nomination and remuneration committees of the Board with formally delegated duties and responsibilities. Under the Finnish Limited Liability Companies Act, Board committees do not, generally speaking, have a formal legal status or independent decision-making powers; rather, their role is to provide support in the preparation of the decision-making. The responsibility for the decisions remains with the Board even if the matter has been delegated to a committee. Members of the Board committees were elected at the Board meeting held following the AGM on April 5, 2024.

The audit committee, which comprises Markku Jalkanen as Chair together with Marie-Louise Fjällskog and John Poulos, meets not less than twice a year. The audit committee has the task of supervising and developing the internal audit of the Group and advising and making recommendations to the Board on related issues. During 2023, the audit committee held two meetings.

As of April 5, 2024, the nomination committee comprises Tuomo Pätsi as Chair together with Markku Jalkanen and Christine Roth. The nomination committee has the task, in co-operation with the Board, of advising on and making recommendations to the Board on issues relating to the composition and nomination of the Executive Management. During 2023, the nomination committee held four meetings. The nomination committee considers succession planning for Directors and other senior executives in the course of its work, bearing in mind the challenges and opportunities facing the Company, and makes recommendations to the Board concerning formulating plans for succession for senior executives.

As of April 5, 2024, the remuneration committee comprises John Poulos as Chair together with Tuomo Pätsi and Christine Roth. The remuneration committee has the task of advising on and making recommendations to the Board in relation to the remuneration paid to the Directors and supervising the development of any other remuneration or reward systems of Faron. During 2023, the remuneration committee held three meetings.

In June 2023 the Board established a business development committee with John Poulos as Chair together with Markku Jalkanen and Juho Jalkanen. The same members continue in 2024. During 2023 the business development committee did not have any formal meetings.

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The Board continues to promote a healthy corporate culture that is based on ethical values and behaviours consistent with Faron’s objectives, strategy and business model described on Faron’s website and with the description of principal risks and uncertainties set out in this document. As good corporate governance is fundamentally about culture, rather than procedure, Faron’s corporate culture is monitored on a regular basis, and appropriate action is taken if, and to the extent, deemed necessary.

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The company should maintain governance structures and processes in line with its corporate culture and appropriate to its:

• size and complexity; and
• capacity, appetite and tolerance for risk.

The governance structures should evolve over time in parallel with its objectives, strategy and business model to reflect the development of the company.

Faron is not required to comply with the UK Corporate Governance Code by virtue of being an AIM and Nasdaq First North Growth Market quoted company. The Board does, however, seek to apply the QCA Corporate Governance Code (as devised by the Quoted Companies Alliance in consultation with a number of significant institutional small company investors) in its updated form. After the year end 2020 and the UK leaving the European Union, Faron has to follow applicable domestic laws of the UK in addition to Finnish national and European Union’s legislation.

The Board is responsible to the shareholders for the proper management of the Company and meets regularly to set the overall direction and strategy of Faron, to review scientific, operational and financial performance, to review the strategy and activities of the business, and to advise on management appointments. The Board sees to the administration of Faron and the organisation of its operations, being responsible for the appropriate arrangement of the control of Faron’s accounts and finances. All key operational and investment decisions are subject to full Board approval. The management of the Company prepares a monthly management and financial accounts pack of the Group, which is distributed to the Board every month and in advance of Board meetings. In individual cases the Board may decide in a matter falling within the general competence of the Chief Executive Officer.

A healthy dialogue should exist between the board and all of its stakeholders, including shareholders, to enable all interested parties to come to informed decisions about the company. In particular, appropriate communication and reporting structures should exist between the board and all constituent parts of its shareholder base. This will assist:

• the communication of shareholders’ views to the board; and
• the shareholders’ understanding of the unique circumstances and constraints faced by the company. It should be clear where these communication practices are described (annual report or website).

During 2023, the Board held 21 meetings.

The Board is responsible to the shareholders for the proper management of the Company and meets regularly to set the overall direction and strategy of Faron, to review scientific, operational and financial performance, to review the strategy and activities of the business, and to advise on management appointments. The Board sees to the administration of Faron and the organisation of its operations, being responsible for the appropriate arrangement of the control of Faron’s accounts and finances.

All key operational and investment decisions are subject to full Board approval. The management of the Company prepares a monthly management and financial accounts pack of the Group, which is distributed to the Board every month and in advance of Board meetings. In individual cases the Board may decide in a matter falling within the general competence of the Chief Executive Officer.

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