Leadership

A.1 The role of the board

Main principle:

Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.

The Directors have considered the composition and structure of the Board and have concluded that it is appropriate for a company of the size and complexity of XP Power. Despite not being considered independent by the Corporate Governance guidelines, the involvement of James Peters (Non-Executive Chairman) as a founder with a substantial shareholding is considered of benefit to Shareholders, aligning the interests of Shareholders with the Board. The Senior Non-Executive Director is an independent Director.

The following matters are specifically reserved for the Board's decision:

• Opinion of the Group's viability and going concern.
• Approval of strategic plans, financial plans and budgets and any material changes to them.
• Oversight of the Group's operations, ensuring competent and prudent management, sound planning, an adequate system of internal control and adequate accounting and other records.
• Changes to the structure, size and composition of the Board.
• Consideration of the independence of Non-Executive Directors.
• Review of management structure and senior management responsibilities.
• With the assistance of the Remuneration Committee, approval of remuneration policies across the Group.
• Final approval of annual financial statements and accounting policies.
• Approval of the dividend policy.
• Approval of the acquisition or disposal of subsidiaries and major investments and capital projects.
• Delegation of the Board's powers and authorities including the division of responsibilities between the Chairman, Chief Executive Officer and the other Executive Directors.

A.2 Division of responsibilities

Main principle:

There should be a clear division of responsibilities at the head of the Company between the running of the Board and the executive responsibility for the running of the Company's business. No one individual should have unfettered power of decision.

The roles of Non-Executive Chairman (James Peters) and Chief Executive Officer (Duncan Penny) are separate and clearly defined. The Chairman is responsible for the running of Board meetings as well as taking the lead on strategy. The Chief Executive Officer is responsible for the day-to-day running of the Company and the execution of the strategy.

In order to ensure the Board is effective we review and monitor the skill set of the Directors. We also ensure there is a clear division of responsibilities. These principles are demonstrated through the skills matrix.

Skills matrix

The Directors consider that the Board and Committees have the appropriate balance of skills, experience, independence and knowledge to discharge their duties effectively.

In line with the new UK corporate governance code of 2018, we include an appropriate combination of executives and non-executives (principle G); the figures are outlined below. As Section 3, principle K proposes, there is a combination of skills, experience and knowledge. XP Power also consider the length of service in order to ensure the Board is effective in its role.

Through the above skills matrix, XP Power have proven Board strength and diversity, enabling the Board to make effective decisions which should in turn ensure long-term sustainable.

Board Experience

• Power electronics experience
• Public company experience

4 Power electronics industry experience/3 public company, financial, acquisitions and corporate governance experience

Tenure

• 0-3 Years
• 4-6 Years
• 7+ Years

4/7 appointed to their current position in the last 5 years

Exec/Non-Exec Split

• Non-Executive
• Executive

The balance of the make-up of the Board between non-executive and executive , excluding the chairman will be addressed in 2019. Mike Laver will not stand for re-election at the 2019 Annual General Meeting. We have started a search for a new non-executive director to replace Peter Bucher who retired from the Board
on 31 December 2018. We are searching for an individual with relevant experience in the markets we operate in.

A.3 The chairman

Main Principle:

The Chairman is responsible for the leadership of the Board and ensuring its effectiveness on all aspects of its role.

The Chairman sets the calendar and agenda of the Board and facilitates the discussions. The Chairman also initiates and coordinates the processes defined below which evaluate the effectiveness of the Board and of the individual Directors.

A.4 Non-Executive Directors

Main Principle:

As part of their role as members of a unitary board, Non-Executive Directors should constructively challenge and help develop proposals on strategy.

Other than their normal attendance and participation in discussions at Board meetings the Non-Executive Directors actively participate in the review and determination of the Company's strategy.

Terry Twigger is the Senior Independent Non-Executive Director.

Effectiveness

B.1 The composition of the board

Main Principle:

The Board and its Committees should have the appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their respective duties and responsibilities effectively.

The Directors consider that the Board and Committees have the appropriate balance of skills, experience, independence and knowledge to discharge their duties effectively.

The Board considers Peter Bucher, Terry Twigger and Polly Williams to be independent. Peter Bucher retired from the Board on 31 December 2018. A search for a replacement with experience in our sector is under way.

The Corporate Governance guidelines do not consider James Peters to be independent by virtue of his previous executive roles. However, as a founder and substantial Shareholder, his membership of the Board is considered beneficial to Shareholders as a whole.

B.2 appointments to the board

Main Principle:

There should be a formal, rigorous and transparent procedure for the appointment of new Directors to the Board.

Nomination committee

The Nomination Committee consists of James Peters (Chair), Terry Twigger and Polly Williams. The Committee reviews and considers the appointment of new Directors. All Non-Executive Directors are involved in the appointment of proposed candidates. Any appointment of a new Director is voted on by the whole Board.

The Nomination Committee met once during the year. The attendees were as follows:

The Terms of Reference of the Nomination Committee are available in the Corporate Governance section of the Company's website www.xppowerplc.com

B.3 Commitment

Main Principle:

All Directors should be able to allocate sufficient time to the Company to discharge their responsibilities effectively.

There were five Board meetings during the year and all Directors attended each meeting.

B.4 Development

Main Principle:

All Directors should receive induction on joining the Board and should regularly update and refresh their knowledge and skills.

Directors receive a full induction on joining the Board. The programme is tailored to the individual needs of each Director.

The Board visited three of the Group's North American facilities in 2018. This included our RF Power facility in Massachusetts, the design centre in Southern California and the Sales and Engineering Service Group in Northern California. This visit included a number of presentations by the function heads of the Group. Non-Executive Directors were able to update and refresh their knowledge of the business first-hand and interacted with the management team and employees helping them gain a deeper understanding of the business and allowing them to contribute ideas.

The Directors have a clear Board induction and training process outlined below.

Board induction and training

All Directors should receive induction on joining the Board and should regularly update and refresh their knowledge and skills.

Directors receive a full induction on joining the Board. An example of a Board induction process is outlined below.

2018 training

The Board visited three of the Group's North American facilities in 2018. This included our RF Power facility in Massachusetts, the design centre in Southern California and the Sales and Engineering Service Group in Northern California. This visit included a number of presentations by the function heads of the Group. Non-Executive Directors were able to update and refresh their knowledge of the business first-hand and interacted with the management team and employees helping them gain a deeper understanding of the business and allowing them to contribute ideas.

During the year, the Directors also received presentations from the Operations Director and the Executive VP, Global Manufacturing. These presentations reported on systems security and the plans for expanding the Vietnam manufacturing facility, respectively.

In 2019 the Board intends to visit the manufacturing facilities in China and Vietnam and the design centre in Singapore.

B.5 information and support

Main principle:

The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

The Board receives "flash" reports, detailed management accounts and detailed financial forecasts prepared on a monthly basis to enable it to review trading performance, forecasts and strategy implementation. Board meeting materials are provided in advance of Board meetings to allow Directors sufficient time to prepare adequately. The Board also received specific presentations and information from management during the year covering the results and actions of the employee survey, the results of a strategy review by the executive management team, compliance exception reports, insurance coverage and the sustainability policy and metrics.

B.6 Evaluation

Main principle:

The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual Directors.

The Board's evaluation of its own performance and that of its committees is conducted annually using a Board effectiveness questionnaire. The questionnaire was revamped in 2016 with the help of an independent external consultant to ensure that it covered all aspects of effectiveness: capabilities and communication; culture and practice; process and organisation; as well as meeting rigour and relationships. With respect to continually improving Board effectiveness, the questionnaire also asked Directors to comment on what it should stop doing, start doing and continue doing.

The online questionnaire was circulated to each Director in relation to the Board and the committees on which they serve. The independent consultant collated the responses into an anonymous report for the Board to consider and discuss at a Board meeting.

There were no significant issues or concerns raised in the report.

Board evaluation process

In section 4, principle L, the new UK corporate governance code discusses the need to evaluate the Board. This evaluation should cover the Board's composition and diversity, and how effectively members work together to achieve objectives.

We regularly evaluate the Board and its committees, facilitated by an external consultant and the Chairman of the Board or the chair of the respective committees. The Board's evaluation of its own performance and that of its committees is conducted annually using an online Board effectiveness questionnaire. The questionnaire was revamped in 2016 with the help of an independent external consultant to ensure that it covered all aspects of effectiveness.

In order to evaluate the Board, the Directors were given a high-level questionnaire, providing the opportunity to express views on key areas:

• Capabilities and communication
• Culture and practice
• Process and organisation
• Meeting rigour
• Relationships

The questionnaire was circulated to each Director in relation to the Board and the committees on which they serve.

With respect to continually improving Board effectiveness, the questionnaire also asked Directors to comment on what it should stop doing, start doing and continue doing. The independent consultant collated the responses into an anonymous report for the Board to consider and discuss at a Board meeting.

There were no significant issues or concerns raised in the report but following items were identified:

• Greater use of external consultants to assist with remuneration committee matters;
• More interface with the executive team.
• Improvements to the succession planning process.
• Make-up of the Board to include members with power solutions experience.

We expect to make improvements to all these areas in 2019.

B.7 Re-election

Main principle:

All Directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

All Directors voluntarily offer themselves for re-election annually. This is in spite of the Company's Articles of Association which require Directors to retire and offer themselves for re-election on a rotation basis and at least every three years.

Accountability

C.1 Financial and business reporting

Main principle:

The Board should present a balanced and understandable assessment of the Company's position and prospects.

The Board considers that both the Interim Report and Annual Report and Accounts, supported by quarterly trading updates which are timetabled at the beginning of each year, comprehensively fulfil this requirement. The Annual Report includes a detailed description of the Group's strategy and business model which has enabled it to generate significant value over a prolonged period of time. It also details the significant risks the Group faces and how these are mitigated and includes the Board's assessment of the longer term viability of the Group.

The Company also makes available a number of videos on its investor relations website at the time of its interim and annual reporting as well as investor videos describing products, markets, strategy, business model, growth drivers and its investment proposition.

Going concern

The Directors, after making enquiries, are of the view, as at the time of approving the accounts, that there is a reasonable expectation that the Company will have adequate resources to continue operating for the foreseeable future and therefore the going concern basis has been adopted in preparing these accounts. In addition, in accordance with C.2.2 of the revision of the Code, the Directors have considered the prospects of the Company over the longer term and provided a viability statement in the Managing Our Risks section.

C.2 Risk management and internal control

Main principle:

The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.

The Board acknowledges that it is responsible for the Group's internal controls and for reviewing their effectiveness. The Group's internal controls are designed to manage rather than eliminate the risk of failure to meet business objectives, and can only provide reasonable not absolute assurance against material misstatement or loss.

An ongoing process for identifying, evaluating and managing the significant risks faced by the Group was in place during the entire financial year and has remained in place up to the approval date of the Annual Report and Financial Statements. The identified risks and the processes by which these are addressed are documented, reviewed and updated at Board meetings. The Directors confirm that an assessment of the principal risks facing the Group was reviewed, further details of which are included in the Managing Our Risks and Viability Statement sections within the Strategic Report. The Directors also considered the Company's appetite of risk against each of the risks identified to aid in determining mitigating actions.

As might be expected in a group of this size, a key control procedure is the day-to-day supervision of the business by the Executive Directors supported by managers within the Group companies. Examples of key controls with respect to ongoing processes include:

• Authority matrices are in place to clearly define who is able to authorise particular transactions, transfer funds, commit Company resources and enter into particular agreements.
• Monthly reporting of management accounts and key metrics to senior management with performance measured to budget and material variances reported to the Board.
• Quality control checks throughout our manufacturing process, burn-in, electrical testing to detect early failures, 100% functional testing, and quality inspection.
• Disaster recovery and business continuity plans are in place at all facilities, documented and communicated to key personnel to help cope with unexpected events.
• An internal audit and risk assurance programme is operating.
• The Audit Committee reviews the effectiveness of internal controls.

C.3 Audit committee and auditor

Main principle:

The Board should establish formal and transparent arrangements for considering how it should apply the corporate reporting and risk management and internal control principles, and for maintaining an appropriate relationship with the Company's Auditor.

The Audit Committee Report sets out in detail the Group's arrangements to ensure corporate reporting complies with legal and accounting standards together with effective risk management and internal control processes and appropriate supervision and performance of the external Auditor.

The Terms of Reference of the Audit Committee are available in the Corporate Governance section of the Company's website www.xppowerplc.com

Remuneration

D.1 The level and components of remuneration

Main principle:

Levels of remuneration should be sufficient to attract, retain and motivate Directors of the quality required to run the Company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of Executive Directors' remuneration should be structured so as to link rewards to corporate and individual performance.

The Remuneration Committee report sets out in detail the Group's approach to remuneration.

D.2 Procedure

Main principle:

There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration.

The Remuneration Committee report sets out in detail the Group's policy on remuneration and the remuneration packages for the Board. No Director participates in the deciding of their own remuneration. Polly Williams is Chair of the Remuneration Committee.

The Terms of Reference of the Remuneration Committee are available in the Corporate Governance section of the Company's website www.xppowerplc.com

Relations with shareholders

E.1 Dialogue with shareholders

Main principle:

There should be a dialogue with Shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with Shareholders takes place.

The Group engages in two-way communication with both its institutional and private investors and responds quickly to all queries received. The Group uses its website www.xppowerplc.com to give private investors access to the same information that institutional investors receive in terms of investor presentations. This includes video interviews with the Chief Executive Officer and Chief Financial Officer available on the morning of the day that the interim and annual results are published. The Company also makes available a number of informational videos on its investor relations website which cover products, markets, strategy, business model, growth drivers and its investment proposition.

Interested parties are also able to register for the Group's email alert service on this website to receive timely announcements and other information published from time to time.

The Chairman and Senior Independent Director are available to meet Shareholders if required. The Board members receive any feedback prepared by brokers or our financial PR company following meetings with Shareholders in order to keep in touch with Shareholders' opinions.

The Remuneration Committee consulted with major Shareholders in respect of significant decisions on Executive remuneration.

The Board members receive any feedback prepared by brokers or our financial PR company following meetings with Shareholders in order to keep in touch with Shareholders' opinions.

The Remuneration Committee consulted with major Shareholders in respect of significant decisions on Executive remuneration.

E.2 Constructive use of the annual general meeting

Main principle:

The Board should use the Annual General Meeting to communicate with investors and to encourage their participation.

Certain Directors are available at the Annual General Meeting to answer any questions from Shareholders. However, given we have a Singaporean parent company we recognise it is not generally convenient for our UK based investors to attend this meeting. The Chief Executive Officer and Chief Financial Officer do however make themselves readily available throughout the year to answer questions from Shareholders.

Stakeholder engagement

As stated within the new UK corporate governance code, the Board should ensure effective engagement with and encourage participation with shareholders and stakeholders (section 1, principle D). Outlined below are how XP Power engages with stakeholders.

How we engaged with shareholders this year

Formal investor meetings

The Group engages in two-way communication with both its institutional and private investors and responds quickly to all queries received. The Chairman and Senior Independent Director are available to meet Shareholders if required.

Annual report and accounts

Through our annual report and accounts we provide key information on the previous year's performance. This enables stakeholders to understand our marketplace, business model, strategy and performance in more detail.

Corporate website

The Group uses its website www.xppowerplc.com to give private investors access to the same information that institutional investors receive in terms of investor presentations. This includes video interviews with the Chief Executive Officer and Chief Financial Officer available on the morning of the day that the interim and annual results are published. The Company also makes available a number of informational videos on its investor relations website which cover products, markets, strategy, business model, growth drivers and its investment proposition. Interested parties are also able to register for the Group's email alert service on this website to receive timely announcements and other information published from time to time.

Consultations

The Remuneration Committee consulted with major Shareholders in respect of significant decisions on Executive remuneration.

Feedback from brokers and financial public relations

The Board members receive any feedback prepared by brokers or our financial Public Relations company following meetings with Shareholders in order to keep in touch with Shareholders' opinions.

Key themes discussed with shareholders

The key themes discussed with Shareholders in 2018 include the following:

• Sustainability of margins as the Company grows
• Supply chain shortages and increasing component lead times resulting increased component costs and higher inventory positions
• Potential effects of Section 301 trade tariffs in the USA
• Implications of Brexit for the Group
• Cyclicality of the semiconductor equipment manufacturing sector
• Opportunities in Radio Frequency (RF) Power and high power/high voltage products from the acquisitions of Comdel and Glassman respectively

How we engaged with other stakeholders

Employees

We hold a minimum of three live global communications meetings where employees are encouraged to ask questions of management. We undertake an annual anonymous employee engagement survey and report the results to the workforce.

Customers

We receive feedback from our customers and use this to inform future strategic decisions. The Board visited a customer site to see how the power converter is used in an end product and gain the customer's perspective of the product and customer experience.

Suppliers

We are committed to a focus on supply chain ethics. In order to achieve this we visit, audit and evaluate suppliers.

Communities

In order to engage with the local communities in which we operate we have committed paid time off to support local initiatives. This is an ongoing agenda as part of our local environmental team's periodic meeting on how XP Power can make a difference.

The environment

Our sustainability committee focuses on our commitment to the environment promoting awareness and best practice throughout our Company. This is then reported within our annual report.