ACTING WITH INTEGRITY

Ethical business conduct is not an aspiration for us – it is a given. It translates across all our business dimensions. Sonova operates in an international context, so we appreciate the complex realities of modern supply chains and regulatory frameworks; we understand that our impact extends across the Group’s entire value chain. It is therefore our responsibility to ensure that all our business processes are run with integrity.

The following sections present a comprehensive description of the various aspects of the ‘Acting with integrity’ pillar of our IntACT ESG strategy:

Product quality, safety and reliability

Regulatory and standards

Sonova’s medical devices are regulated globally by government agencies, healthcare authorities, and other regulatory bodies who verify that we are complying with applicable health and safety regulations throughout our products’ life cycle. We work to maintain transparent, constructive, and professional relationships with all applicable regulatory authorities on matters of policy, product submission, compliance, and product performance. The requirements we meet include design controls, marketing approvals, good manufacturing practices, vigilance systems, clinical studies, and other relevant product regulations, standards, and normative documents specified by these agencies.

Each national healthcare authority has specific requirements for products that are made available in its national territory. Requirements for hearing instruments in Europe are mostly centered around European legislation, including the Medical Device Regulation 2017/745, the Radio Equipment Directive 2014/53/EU, and requirements for conformity to other applicable international standards. In the US, hearing instruments are regulated by the United States Food and Drug Administration (FDA) and classified as class I (hearing aids) and class II (wireless hearing aids) medical devices. Both categories are exempt from the requirement to submit premarket notification and can be introduced into commercial distribution without prior FDA clearance. In Europe, cochlear implants and their respective accessories from Advanced Bionics are also regulated by the Medical Device Regulation (MDR) 2017/745; and subject to technical documentation review before CE marking and placing on the market. In the US, they are classified as class III medical devices and subject to premarket approval, where FDA conducts an evaluation of the safety and effectiveness of these devices before commercialization. Sonova carefully monitors changes in the relevant worldwide regulatory environment to ensure that its products conform at all times.

Product quality and safety management

All our operation centers and major Group companies are certified according to the ISO 13485 standard and fulfill the requirements for quality management systems of the US FDA Quality System Regulation, Title 21 CFR Part 820. Third-party audits are conducted at all ISO 13485 certified operation centers and major Group companies on an annual basis to assure the quality of manufacturing, management, and products, including materials and components.

Sonova conducts internal audits of its established systems at planned intervals to determine the effectiveness of the quality management system and its conformance to the requirements of ISO standards, FDA regulations, relevant European legislation, other country-specific and Medical Device Single Audit Program (MDSAP) requirements. We have established procedures to define the responsibilities and requirements for planning and conducting audits, and for reporting results and maintaining records. We plan each audit program on the basis of past audit results, along with the significance and status of processes and areas to be audited. This process also determines the audit criteria, scope, frequency, and methods. Qualified personnel who are independent of the task being audited may conduct the audits, and management, at its discretion, may also bring in outside resources to assist. Audit findings are documented and reported to the responsible managers, who ensure that action is taken promptly to eliminate any noted instances of noncompliance, along with their causes. We document and file reports on the corrective actions, their review, and other follow-up activities, and review data to identify possible trends.

We evaluate potential product-related risks using a systematic method to estimate, evaluate, control, and monitor risks; this is governed by the ISO 14971 standard, which specifies the application of risk management to medical devices. We ensure up-to-date knowledge of regulatory and statutory requirements through initial and maintenance training programs. Employees, independent of their employment contract, are qualified to perform their tasks based on their education, training, and experience. General requirements are established based on job responsibilities and are identified in position descriptions. We provide employees with general training on the Quality Management System and on health, environment, and safety as applicable, and supplement this with any in-depth training needed to perform the work. We systematically identify and document the need for any training and verify its effectiveness.

The topic of product safety is an integrated element of the product design and development process. Design and development inputs are documented and include, but are not limited to, functionality, performance, and safety requirements – based on the intended use, applicable statutory and regulatory requirements, environmental impact, and clinical, user, and patient needs. Changes to the design inputs are approved in the same manner as the original design input. We conduct regular in-house product testing to validate design, and external third-party testing to ensure compliance with standards and regulatory requirements.

All products brought into commercial distribution by Sonova Group companies are continuously assessed to improve safety and effectiveness. Sonova uses tools such as complaint handling, post-market surveillance, vigilance reporting, reliability and trending analysis, and post-launch engineering to achieve and maintain regulatory compliance. We comply with the requirements for unique device identification, which provides unambiguous identification of specific devices and facilitates their traceability, as mandated by local regulations in various regions and countries across the globe.

We document and review customer complaints for product safety and product performance trends through a system that complies with applicable regulatory and legal requirements. Early warnings of quality problems become an input for the corrective and preventive action processes. We maintain records of customer complaints and resulting investigations. If the investigation determines that activities outside Sonova contributed to the customer complaint, we exchange relevant information with the contributing organization. If a customer complaint is not followed by corrective or preventive action, the reason is authorized and recorded. We have established documented procedures to assure that regulatory authorities are notified according to national or regional regulations whenever advisory notes or recalls are necessary and/or adverse events occur that meet specified reporting criteria. Our decisions are made based on risk analysis and health hazard evaluation, as applicable. Sonova has established a process for assessing and reporting to the FDA (and other countries’ regulatory agencies) those customer complaints which resulted in an adverse event.

In 2021/22, there were no listings associated with the Sonova Group that appear in the “Medical Devices” category of the U.S. Food and Drug Administration (FDA)’s MedWatch Safety Alerts for Human Medical Products database. There have not been any fatalities related to products as reported in the FDA Manufacturer and User Facility Device Experience. To ensure compliance with current Good Manufacturing Practice (GMP), Sonova global facilities have been inspected by several regulatory agencies during the reporting year. There have been no FDA enforcement actions in 2021/22, such as FDA Form 483 notices or FDA Warning Letters (or equivalent notices from other regulatory agencies). There were no new Class I or Class II (or equivalent) product recalls at Sonova during the 2021/22 financial year. In the 2019/20 financial year, Advanced Bionics undertook a voluntary field corrective action and retrieved from the market the unimplanted units of the initial version of its HiRes™ Ultra and Ultra 3D cochlear implants. The company took this step in an abundance of caution, having observed an increase in reports of reduced hearing performance. Most importantly, there had and have been zero reported safety events relative to this issue and these devices. For Advanced Bionics, the safety and hearing experience of recipients and the quality and reliability of our products are prime concerns, and we are committed to continuous improvement, for example by adopting more stringent test standards than those required by regulatory authorities. Details can be found in the annual Global AB 2021 Implant Reliability Report.

Hearing instruments: Product quality and safety indicators

Cochlear implants: Product quality and safety indicators

Product reliability

Our priority at Sonova is to continuously improve product reliability and reduce repairs. We have set the target of improving average product reliability rate, for both hearing instruments (HI) and cochlear implants (CI) externals/processors, by more than 20% year-over-year. We define the HI product reliability rate as the ratio between the annualized number of in-warranty product returns over the past three months and the number of hearing instruments in the market and within warranty (installed base). We define the CI product reliability rate as the annualized 3-month rolling average of Naìda pediatric and adult system product returns divided by the number of registered processors used by pediatric and adult recipients.

Product reliability rates year-over-year improvements

Global and cross-functional teams sponsored by the Sonova Management Board work on continuous process improvements and root cause analysis of product returns and repairs, with the aim of significantly improving reliability of existing and future products. In 2021/22, the average HI product reliability worsened by 3%, and the CI product reliability improved by 19% compared to the previous year. We almost achieved the annual target of >20% improvement for cochlear implants, but clearly missed it for the hearing aids. Key improvement measures implemented include product design adjustments, manufacturing process refinements, active dialog with suppliers to improve manufacturing processes of product components, hardware and software improvements to existing products, and launches of new, more reliable products. For example, we achieved over 30% reliability improvement of rechargeable technology from Audéo™ Marvel to Audéo™ Paradise. Several newly introduced HI product lines show significant improvements compared to previous product generations. Despite these improvements in new products, the HI reliability rate worsened, because the overall service volume is still strongly dominated by older product generations with lower reliability. We will focus even more closely on product reliability improvements in the coming year to achieve our ambitious target of 20% year-over-year improvements.

Responsible supply chain

Sonova operates within a highly integrated business model: all manufacturing centers are owned by Sonova. Our own manufacturing operations extend from fully automated processes, such as hybrid circuit production, to highly skilled manual work, such as assembly of hearing aids and cochlear implants. Over 90% of our hearing aids are produced in the APAC region at our owned operation centers in Vietnam and China. Cochlear implants are produced at our operations center in Valencia, United States.

Our suppliers are mainly high-tech design and component makers, or original equipment manufacturers with a high degree of automation. In 2021/22, Sonova purchased from 450 direct material suppliers: 331 direct material suppliers who deliver components for manufacturing and assembly to our Hearing Instruments business, and 119 direct material suppliers to our Cochlear Implants business. In spending terms, 66.1% of Sonova’s purchase volume is in the Asia/Pacific region, 11.7% in Switzerland, 19.1% in Europe (excluding Switzerland), 2.9% in North America, and 0.2% in Africa. The data for this year does not include Sonova’s newly created Consumer Hearing Business.

Sonova strives for long-term collaboration with its suppliers. In the 2021/22 financial year, around 80% of the total purchase volume came from suppliers with a more than 10-year business relationship with Sonova, and over 95% of the total purchase volume came from suppliers with more than 5 years of partnership.

Sonova’s relations with suppliers are guided by the Sonova Group Supplier Principles (SGSP). The SGSP, the General Conditions of Purchase, and the Sonova Code of Conduct are all incorporated into development and supply agreements. All suppliers have to certify in written form that they will now and at all times in the future comply with these standards and principles in all of their Sonova-related dealings, activities, products, and services. Sonova includes this certification in all supply agreements, and periodically requests suppliers to renew their adherence. In 2021/22, all new suppliers signed the SGSP. The SGSP document was last revised in 2019 and are published in English and German; they are publicly available on the Sonova website.

Sonova identified eight critical direct material suppliers in 2021/22. For Sonova, critical suppliers include those whose items or materials have a direct impact on the performance of our products or come into direct contact with the skin of users (critical components); those whose items or materials are not substitutable (e.g. due to criteria related to technology, sustainability, quality, regulations); and those who supply high volumes. The classification of critical suppliers is carried out at the beginning of each new supplier relationship and is reviewed regularly. Due to COVID-19 restrictions, we only visited one critical supplier in 2021/22. No supplier audits were carried out. The percentage of direct material suppliers with a quality management system that is certified and audited by a third party is above 95% by purchasing volume. You can find further information on our management of risks associated with the use of critical materials in the sections Product quality, safety, and reliability and Eco-friendly products.

The corporate procurement department participates in the design and planning of Sonova products, solutions, and services. It makes sure from the early development stages that a risk assessment is performed for every component. Before entering into a supplier relationship, the procurement team may visit potential new suppliers and inspect their management capabilities to assess potential risks and identify opportunities for improvement. If deficiencies are found, we require the suppliers to take corrective and preventive actions before we begin any active business relationship. A candidate that fails to meet the requirements will not be accepted as a Sonova supplier.

After supplier screening and selection, we annually assess supplier risks and identify the risk level for each supplier. We manage our suppliers based on their risk level. If a problem occurs, we require the suppliers to take preventive and corrective measures, and we follow up on their progress until the issue is resolved. In 2021/22, we did not identify any new or existing critical supplier as having significant actual or potential negative impact related to environmental issues, labor practices, or human rights matters. No suppliers, therefore, had to take corrective or preventive actions.

Human rights and labor practices

Commitment and policies

Sonova respects and supports human rights. This commitment extends throughout our worldwide operations and along our value chain. It is reflected in our Code of Conduct and Group Supplier Principles (SGSP). In 2021/22, we devised a global policy (Sonova People Policy) setting key principles, but also providing a framework for our human rights due diligence.

Sonova is committed to maintaining high standards of business ethics and integrity in accordance with the law, and also recognizes human rights and labor standards as outlined in international human rights frameworks such as the:

Sonova is a signatory to the UN Global Compact since 2016, endorsing its ten principles in the areas of human rights, labor, the environment, and anti-corruption.

Human rights due diligence (HRDD)

Sonova is committed to aligning its human rights due diligence (HRDD) process with the United Nations Guiding Principles on Business and Human Rights (UNGP). We are set to conduct HRDD throughout our business, proactively assessing, identifying, preventing, and mitigating actual and potential adverse human rights impacts on potentially affected rightsholders across our value chain. To drive such a process effectively, we set up in 2020/21 a cross-functional internal human rights working group, which draws on the help of external business and human rights experts to implement a step-by-step HRDD project plan. The Sonova HRDD framework is outlined in the People Policy and follows the six steps required by the UNGP:

HRDD implementation

Sonova conducted in 2020/21 an overall human rights risk assessment, based on international standards such as the UNGP and OECD Guidelines. The assessment was performed by the cross-functional internal human rights working group, together with external business and human rights experts. It covered our global value chain and ranked potential human rights issues based on the severity of the risk to potentially affected people. Using a range of methods, including value chain mapping, issue mapping, consultations and interviews, desk research, and internal workshops, we identified potentially relevant salient human rights issues that are described in the table below.

Based on this initial risk assessment, Sonova planned to conduct in 2021/22 an in-depth human rights impact assessment (HRIA), including broad engagement with relevant stakeholders, in our own operations near Ho Chi Minh City in Vietnam, which has over 1,400 full-time employees. Due to COVID-19-related restrictions, however, the HRIA was replaced by a social audit. The facility was audited on-site in December 2021 by independent auditors, using ELEVATE’s Responsible Sourcing Assessment (ERSA) standard. None of the findings identified by the auditors were rated as zero tolerance or critical and the facility, as assessed by external experts, performed very well in the areas of environment, business ethics, and management system. The audit findings were discussed with local management as well as with key internal functions globally to discuss root causes. All findings were addressed through concrete actions, such as improvements in the facilities or the introduction of an automatized system to monitor working hours and limit overtime. Key lessons from this first social audit will be used to improve Sonova’s approach to HRDD at Group level.

Training

Key human rights standards are specified in the Sonova Code of Conduct, on which annual mandatory training is given to all Sonova employees worldwide. The training in 2021/22 had an ehanced focus on the topics of nondiscrimination and non-harassment, including practical advice on how to identify and report potential violations.

Focus human rights issues areas

Sonova is committed to respecting internationally recognized human rights and does not attribute more importance to one human right than to another. We do, however, assign priority to those rights that could be most salient to our business, as determined by the human rights risk assessment described above. The list, which appears below, will be adapted as required based on future human rights risk and impact assessments. In prioritizing key human rights issues according to their scale, scope and remediability, Sonova recognizes that negative impacts on human rights may be particularly severe for some people due to their vulnerability or marginalization. Sonova recognizes that the evaluation of the severity of potential impacts may change and that other issues may grow in importance over time. We will therefore regularly reevaluate the below issues based on further assessments and regular dialog with internal and external stakeholders.

Business ethics and legal compliance

Code of Conduct and internal regulations

Sonova’s commitment to compliance promotes ethical conduct between colleagues at all levels of the organization, and also in our dealings with our stakeholders. Compliance means that we follow applicable laws and regulations of each country in which we operate while also abiding by our own Code of Conduct and internal regulations. The ultimate oversight for business ethics and compliance lies with the Board of Directors.

Sonova’s Code of Conduct defines general principles for ethical behavior; it applies to all employees of the Sonova Group, all its subsidiaries, and any contractors or vendors while they are performing work for the Sonova Group. Written acknowledgment of the Code of Conduct is part of every new employment and third-party contract.

The Code of Conduct is reviewed regularly and revised when necessary. It was prepared by the office of the Group General Counsel in consultation with relevant stakeholders and was approved by the Sonova Board of Directors on August 23, 2012, updated in September 2019, and reapproved by the Board of Directors. The Code of Conduct governs all relevant aspects of Sonova’s business operations including compliance with laws and regulations, conflicts of interest, and anti-competition. It also incorporates Sonova’s commitment to social and environmental responsibility, covering such topics as dignity and human rights, diversity and inclusion, non-discrimination, and safety in the workplace. The Code of Conduct is available in 18 languages.

Annual mandatory Code of Conduct training is rolled out to all Sonova employees worldwide, including part-time employees. The training explains the content of the Code of Conduct and how to identify and report potential violations, such as conflict of interest, harassment, fraud, discrimination, corruption, or breach of secrecy. Third parties including distributors, agents, and suppliers are regularly instructed to ensure that they adequately understand and can comply with the Code of Conduct.

We have set an ambitious Group target to achieve more than 98% on-time completion of the mandatory Code of Conduct training. On-time completion means that the training is completed within the assigned standard time period, which is normally 4 weeks. In 2021/22, the overall on-time rate was 86% of employees completing their training by the assigned due date. Overall, 95.9% of all employees who had been assigned the Code of Conduct training completed it by the end of the financial year. For 2022/23, the target is more than 95% on-time completion.

The principles of the Code of Conduct are further refined in various internal guidelines and policies, including – but not limited to – anti-bribery, interaction with healthcare professionals, competition law, trade compliance, and Swiss Stock Exchange reporting obligations. Non-compliance with the company’s Code of Conduct or Sonova’s internal policies and guidelines triggers disciplinary action, up to and including termination of the employment contract.

Sonova continuously monitors adherence to policies and standard operating procedures and report findings to senior management. Sonova’s Internal Audit function independently assesses processes, policies, and procedures and reports findings to the Audit Committee.

Group Compliance program

Compliance is everyone’s responsibility at Sonova. Ultimate oversight lies with the Board of Directors, and the Management Board sets the tone at the top for a strong compliance culture. Local Compliance Champions ensure implementation of the Group Compliance program within each Group company. The Group Compliance program covers all employees, including part-time workers, contractors, and all business partners.

We have reinforced Code of Conduct compliance with SpeakUp, an internal communication and training campaign rolled out across the worldwide Sonova Group. It focuses particularly on employees with less access to online reporting channels, such as those in operations or audiological care stores. Its two main goals are to increase awareness of the revised Code of Conduct and to foster a culture where employees feel comfortable about raising compliance questions and reporting compliance issues. Posters are visibly displayed in numerous locations and clearly indicate how to easily report non-compliance.

No fines or non-monetary sanctions for non-compliance were levied against Sonova in the 2021/22 financial year.

SpeakUp process

Sonova strongly encourages every employee who knows of or suspects a violation of applicable laws, regulations, the Code of Conduct, or the company’s related policies and procedures – including those relating to accounting, internal controls, and auditing matters – to report that information through the SpeakUp platform. This 24-hour anonymous reporting platform is operated by an independent third-party provider. Employees can use the SpeakUp platform to report concerns they may not otherwise want to report directly to their supervisor or compliance manager. Employees or third parties can report a concern either by phone or via a secure website. All local phone numbers and websites are listed in the Appendix to the Code of Conduct.

Reported violations are promptly investigated and treated confidentially to the extent reasonably possible. Sonova does not tolerate any kind of retaliatory action against any employee who, in good faith, reports suspected wrongdoing, or complains about violations of the Code of Conduct or other internal policies. The Audit Committee of the Board of Directors is informed quarterly about concerns received through the SpeakUp process, the number and types of cases, and the measures taken.

In the 2021/22 financial year, a total of 129 SpeakUp complaints were reported to the Compliance Department. Of the reported cases, 75% involved allegations of inappropriate behavior. The next most recurring complaints concerned business integrity (11%) and environmental health and safety (6%). Less-reported issues included fraud related allegations (4%) and misuse and misappropriation of assets (1%). All allegations were promptly addressed by the internal investigation team, supported by external experts as needed. Over 63% of the complaints were substantiated and followed up with corrective actions, ranging from written warnings or performance improvement planning up to termination of employment.

Since December 2021, SpeakUp statistics have been published on the Sonova internal platforms to encourage employees to speak up and assure them that their concerns will be addressed in a timely manner.

Corruption and bribery

Sonova is committed to high standards of integrity in dealing with its business partners and complies with all applicable anti-bribery laws, including the Swiss Criminal Code, the UK Bribery Act, and the US Foreign Corrupt Practices Act. Sonova’s Anti-Bribery Policy was updated in 2018, refining the rules under the Code of Conduct and prohibiting all forms of corruption. Key elements of Sonovaʼs Anti-Bribery Policy are:

The Anti-Bribery Policy has been communicated to all Sonova employees worldwide and is available in 15 languages. Sonova business partners – such as distributors or suppliers – must commit to complying with the principles underlying the Anti-Bribery Policy. The content of the Anti-Bribery policy is integrated in the annual mandatory Global Compliance training for all employees.

As a global healthcare company, we also recognize that many countries have specific regulations governing interactions with healthcare professionals. These impose further obligations which the company has translated into country-specific guidelines detailing what is permissible and what is not.

The Sonova Group Supplier Principles also cover ethical standards, including compliance with laws and regulations on bribery, corruption, and prohibited business practices. These have been communicated to all our suppliers who are regularly instructed to ensure that they adequately understand and are able to comply with all anti-corruption policies and procedures.

In 2021/22, there were no monetary losses as a result of legal proceedings associated with bribery or corruption.

Anti-competitive behavior

At the core of Sonova’s Code of Conduct, there is a clear commitment to fair competition. Fair competition is essential because it guarantees that customers and consumers will benefit from the most innovative products and services at the best prices and conditions. At Sonova, we respect and strictly follow antitrust and competition laws.

Sonova’s Global Competition Law Policy describes the basic principles of fair competition in doing business. All Sonova employees worldwide must comply with the principles it sets out. An updated Global Competition Law Policy became effective as of May 1, 2020. The roll-out of the revised policy was supported by bespoke global online training. Both the policy and the training are available in 19 languages.

In the 2019/20 and 2020/21 financial years, Sonova was not involved in any legal actions related to anti-competitive behavior or violations of anti-trust and monopoly legislation. In 2021/22, there was one case, which is currently still under regulatory investigation.

Data privacy and digital ethics

Sonova established a Digital Ethics Committee in 2021, tasked with the establishment and supervision of a compliance regime for digital ethics matters in the context of new technologies and/or innovative methods of processing data.

Data privacy and protection

Using both technical and organizational safeguards, Sonova protects the confidentiality and integrity of the data it holds, including the data of employees, customers, patients, and business partners. We adhere to applicable data protection laws and regulations of the jurisdictions in which we operate. We closely monitor developments in data protection law and incorporate its principles into our business processes and product design. We continue evolving our data protection program to meet the changing demands of the digital environment.

Sonova issued a Group Data Protection Policy, effective June 1, 2018, which was updated and enhanced in October 2021 to reflect the changing legal landscape. The policy covers all personal data collected or processed by Sonova, and applies to all Sonova legal entities and their employees and contractors on a worldwide basis. The policy is complemented by standard operating procedures and guidelines that break down the various data protection and privacy topics and provide more detailed guidance.

Sonova has established a Global Privacy Office, which provides subject matter guidance to the business functions and employees. The Global Privacy Office is responsible for implementing and monitoring the Sonova Data Protection Program. It is supported by a team of over 100 Privacy Champions whose task is to embed privacy protection at the Group company level. Policy effectiveness and adherence are continuously overseen by an internal monitoring program and by internal audit.

Another important part of the Global Privacy Office’s work is to raise awareness and provide training at all levels across the Group. It deploys annual mandatory online training for all employees, complemented by on- and offline training for specific departments and teams, webinars, and communication platforms for knowledge exchange. These training courses cover essential legal principles and requirements, taking into consideration Sonova’s Data Protection Policy and such legal frameworks as the EU General Data Protection Regulation (GDPR), the Health Insurance Portability and Accountability Act (HIPAA), the California Consumer Privacy Act (CCPA), the Personal Information Protection and Electronic Documents Act (PIPEDA), and relevant Chinese data protection and security laws.

IT and cyber security

At Sonova, we treat the protection of our information assets as a priority task. We are committed to securing digital and non-digital files, records, and information to prevent unauthorized access, modification, and loss. Sonova’s IT and cyber security is supported by guidelines issued by the Vice President Corporate IT, who oversees the company’s information and cyber security and acts as Chief Information Officer (CIO), reporting directly to the Group CFO. The guidelines on IT security determine security standards for all functional or business applications controlled by Sonova. The Board of Directors receives regular updates on cyber security from the CIO and the Management Board.

Sonova issued its IT Acceptable Use Directive in 2012/13; this is regularly revised and was last updated in 2020/21, effective on July 1, 2020. The directive defines the use of IT assets, the secure use of systems and programs, as well as the appropriate and secure management of data. The Information Security Guideline specifies processes and responsibilities to ensure IT and cyber security, including the security of digital information processed and stored on our products. This policy framework continues to be amended and supplemented, e.g. with directives on remote working or application security.

Sonova launched a global program in 2020/21 to maintain and inform best cyber security practice among Sonova’s employees worldwide. This continued in 2021/22, with focus on critical business applications and their security hardening. Next year’s program will focus on refining established processes.

Our continuing efforts to ensure IT and cyber security are underpinned by mandatory annual online training for all employees worldwide. During the 2021/22 financial year, training topics included best practice for password protection, information management responsibilities, appropriate online behavior, and phishing awareness. Relevant global and local staff received additional specific training in implementing the IT and cyber security guidelines.

Sonova has put in place an efficient and comprehensive system to identify and assess strategic, operational, financial, legal, and compliance risks related to the Group’s business activities – including IT and cyber security risks. Further information on how Sonova monitors and mitigates those risks is provided in the Risk Management section of this chapter.

Sonova has put in place detailed business continuity/disaster recovery plans and incident response procedures; these are tested regularly. In areas with heightened exposure or security risk, penetration tests are applied annually by qualified external providers. In addition, we conduct third-party vulnerability analysis from time to time, including simulated hacker attacks in selected IT security risk areas. Sonova also holds an information security risk insurance policy.

Breaches

Sonova has not experienced material information security breaches during the 2021/22 reporting period. We have also not identified any substantiated complaints concerning breaches of customer data.

Breaches overview

Corporate governance

Structure

At Sonova, corporate governance is based upon, and structured to conform with, relevant standards and practices. The company meets its legal duties under the Swiss Code of Obligations, the SIX Swiss Exchange Directive on Information relating to Corporate Governance, and the standards defined in the Swiss Code of Best Practice for Corporate Governance. The present chapter in the ESG Report gives a high-level overview of the principles of corporate governance for the Sonova Group and provides background information with a special focus on environment, social and governance (ESG) issues. More detailed information can be accessed at the corporate governance chapter of the 2021/22 Annual Report and at the corporate governance section of the Sonova website.

Sonova’s corporate structure includes a two-tier board consisting of the Board of Directors and the Management Board. In accordance with the Sonova Organizational Regulations (OrgR), the Board appoints an Audit Committee and a Nomination and Compensation Committee. In all respects not mentioned in the OrgR, or unless the law or the Articles of Association stipulate otherwise, the policy document ‘Delegation of Authority of Sonova Holding AG’ provides the basis for delegating authorities within the different levels of management in the Group.

Composition of the highest governance body and its committees

The composition of the Board of Directors and its committees is described in detail in the relevant section of the corporate governance chapter of the 2021/22 Annual Report: Board of Directors.

The Articles of Association of Sonova Holding AG state that the Board of Directors must consist of a minimum of three and a maximum of nine members. The Board of Directors is chaired by Robert F. Spoerry and currently consists of nine non-executive members.

The Nomination and Compensation Committee and the Board of Directors evaluate current and prospective members of the Board according to a skills and experience competency matrix to ensure that an appropriate mix of relevant skills and experience is represented in the Board of Directors. In the nomination and evaluation processes, by following the matrix criteria, the Nomination and Compensation Committee as well as the Board of Directors are committed to consider characteristics such as, and including but not limited to, gender, age, nationalities or country of origin, ethnicity, cultural background, competencies, ways of believing, and mindsets to establish balance in terms of diversity and inclusion.

As part of our ESG strategy, we strongly believe that a more balanced gender representation on the Board of Directors is in the best interests of the Sonova Group, and we are committed to achieving a 30% proportion of women on the Board well before the time this becomes a legal requirement in 2026.

Nomination and selection for the highest governance body and its committees

The processes for determining the composition of the Board of Directors and its committees, as well as the division of responsibility between the Board of Directors and Management Board, are set out in detail in the company’s OrgR and Committee Charters.

The members of the Board of Directors and of the Nomination and Compensation Committee of Sonova Holding AG are elected by the General Shareholders’ Meeting for a term of office until completion of the next ordinary General Shareholders’ Meeting. If a replacement is elected to the Board of Directors during a member’s term, the newly elected member finishes the predecessor’s term. The Audit Committee is elected by the Board of Directors according to Article 2 of the Committee Charters.

The members of the Management Board are proposed by the CEO and appointed by the Board of Directors upon the recommendation of the Nomination and Compensation Committee. More details on the Management Board are provided in the relevant section of the corporate governance chapter of the 2021/22 Annual Report: Management Board.

Article 4 of the OrgR governs how Sonova deals with potential conflicts of interest. Cross-board memberships of the Board of Directors and significant shareholders (holding more than 3% of shares) are disclosed in the corporate governance chapter of the 2021/22 Annual Report. Related party transactions, if any, are disclosed in the Annual Report notes to the Group consolidated financial statement.

Roles, policy, and strategy

The OrgR and the Committee Charters define the roles and the duties of the highest governance bodies. The Board of Directors of Sonova Holding AG is responsible for the overall direction of the company, except in matters reserved by law to the General Shareholders’ Meeting. It approves policy and strategy. The CEO has the duty and authority to link the company’s strategy with its operational management by preparing the corporate strategy documents, policies, and procedures for submission to the Board of Directors’ review and approval. The Management Board supports the CEO in his responsibility to direct the company’s operations by actively participating in directing, planning, and executing the business strategy.

Competencies and performance evaluation

The Board of Directors conducts an annual self-assessment evaluating its efficiency, effectiveness, and internal cooperation. The purpose is to enhance the Board’s understanding of the business and the company, evaluate and define its role, particularly in relation to management, and make best use of the human capital represented on the Board of Directors. More detailed information is available in the corporate governance report.

Consultation between stakeholders and the highest governance body

Sonova actively engages with a broad range of stakeholders on ESG topics as described in the Stakeholder engagement chapter of this ESG Report. Internal reporting procedures ensure consultation between stakeholders and the highest governance body on topics deemed highly relevant.

Compensation and incentives

The compensation report is an integral part of the 2021/22 Annual Report and covers the compensation principles, system, and key components, with a focus on the Board of Directors and Management Board as the governing bodies. Sonova complies with the Swiss Ordinance against Excessive Compensation in Stock Exchange Listed Corporations, which among other matters stipulates annual binding votes on the compensation of the Board of Directors and Management Board.

The variable cash compensation (VCC) for the Management Board is based on Group, business unit, and individual performance objectives. 10% of the overall VCC targets for each member of the Management Board are linked to specific, tangible ESG-related initiatives. The performance objectives that must be met to achieve the target VCC are mutually agreed at the beginning of the financial year. ESG targets for the 2021/22 financial year were defined around eight categories, with energy and climate, as well as employee engagement, set as a target for all Management Board members. Additionally, each members had a selection of targets set depending on their role and responsibilities. These targets included diversity & inclusion, talent development, product quality and reliability, customer satisfaction, environmentally friendly packaging, and responsible supply chain.

Sonova is committed to the principle of equal pay for equal work and is taking necessary steps in its position management and grading processes to ensure a fair compensation system. The company regularly reviews its compensation in terms of relevant local legal and regulatory equal pay requirements as they continue to evolve.

Risk management

Sonova has implemented an efficient system to identify and assess strategic, operational, financial, legal, reputational, and compliance risks related to the Group’s business activities. The risk management function categorizes risks by impact and likelihood and supports the Management Board in determining the measures necessary to address or mitigate them. In accordance with the Audit Committee Charter, the Audit Committee reviews the company’s risk assessment prepared by Risk Management before it is presented to the Board of Directors. The Board of Directors approves the risk assessment and provides guidance from a strategic point of view. To continuously monitor key risks and their mitigation, Risk Management prepares risk status reports, which are discussed by the Management Board and presented to the Audit Committee on a quarterly basis. Currently, Sonova’s Group Risk Map consists of 39 risks, of which 13 are designated as key risks.

ESG issues are an integrated part of Sonova’s strategic risk management process. Topics such as climate change, human rights and labor practices, loss of key talent, infringement of data privacy, cyber security and infringement of information security are evaluated in the regular risk assessment process together with all other business risks.

Internal Audit carries out compliance and operational audits and assists the business units in attaining their goals by providing assurance from independent evaluation of the effectiveness of internal controls in processes. Management is responsible for the control of business risks and for compliance with laws and regulations. The Senior Director Internal Audit & Risk reports to the Chair of the Audit Committee. The Audit Committee approves the annual work plans of Internal Audit and ensures that the relevant Group companies are adequately reviewed according to their risk scoring. The Audit Committee also reviews and discusses the reports on completed audits submitted by Internal Audit. Internal Audit, together with Business Controlling, monitors the implementation by Group companies of any measures necessary to address findings from previous audits, and provides quarterly reports to the Audit Committee.

The Group has a comprehensive compliance program in place which is administered by the Head of Global Compliance and Data Privacy and overseen by the General Counsel & Compliance Officer. Quarterly compliance reports are provided to the Audit Committee, and an annual compliance report is addressed to the Board of Directors.

Ethical marketing and sales practices

Policies and guidelines

Sonova strictly adheres to ethical marketing practices in all our businesses and takes active steps to prevent inappropriate actions or false claims. We ensure that our advertising, packaging, and promotional materials provide accurate, balanced, and non-misleading information. This commitment is laid out in our Group Code of Conduct and further refined in policies, guidelines, and standard operating procedures, e.g. on claims management (see below).

Interactions with healthcare professionals

Sonova is committed to ethical interactions with healthcare professionals (HCPs). We interact with HCPs on a daily basis, in a variety of roles and settings. HCPs include audiologists and acousticians, professors, surgeons, ear nose and throat specialists, or researchers. The following “Four-Leaf Clover Principles” govern our cooperation with healthcare professionals:

More detailed information on how we ensure ethical interactions with healthcare professionals is provided in the Sonova Global Antibribery Policy as well as internal standard operating procedures and country-specific guidelines for interactions with HCPs.

Claims management

We are committed to ensuring that all statements declaring or implying that a Sonova product, service, or other solution will provide a benefit to customers or consumers are truthful, non-misleading, and fair. Our claims management standard operating procedure sets out clearly how to assess, substantiate, and monitor claims of benefit for all Sonova brands. Before being disseminated, all such claims go through a standardized review and approval process by a dedicated committee to ensure both quality and compliance with global regulatory requirements. Relevant employees must complete annual training on the claims management procedure; mandatory training for all employees was introduced in 2021. The claims management procedure has been subject to regular external audit since 2020.

Sonova took the lead in establishing the European Hearing Instrument Manufacturers Association (EHIMA) Claims Substantiation Guidelines, to be published in mid-2022. Their purpose is to ensure regulatory compliance and appropriate supporting evidence for manufacturers’ claims, and to provide a basis for manufacturers to resolve disputes over claims and/or corresponding evidence. Sonova also contributed to the US Hearing Industries Association (HIA) Claims Substantiation Guidelines (2020).

In 2021/22, there were no monetary losses because of legal proceedings associated with false marketing claims.

Taxes

Sonova is a Swiss-based multinational enterprise with operations almost entirely headquartered in the canton of Zurich, where the Group develops, manufactures, and distributes products marketed under multiple brands. Sonova operates in more than 100 countries and owns local wholesale distribution and retail audiological care subsidiaries in over 30 countries. With this business structure, Sonova’s tax obligations encompass various direct and indirect, corporate and employee taxes, as well as customs duties, making a significant contribution to societies around the world. Sonova is listed on the SIX Swiss Stock Exchange.

Tax strategy and policies

As laid down in Sonova’s Code of Conduct, Sonova strives to attain the highest standards in complying with laws, rules, regulations, and requirements for reporting, filing, and disclosure. This also applies to tax matters. The Sonova Group Tax Principles are publicly available and provide high level information on the procedures and internal guidelines for tax compliance within the Sonova Group, applying to all entities that are majority-owned or otherwise directly or indirectly controlled by Sonova Holding AG. The Sonova Group Tax Principles were approved by the Board of Directors and released by the CFO in February 2019.

Sonova is committed to the highest level of tax compliance and directs its international flow of goods and services in line with all applicable tax regulations. Sonova’s tax approach is fully compliant with the spirit and letter of local tax laws and regulations, and reporting and filing obligations, in all countries of operation; it is also in complete alignment with relevant international standards.

Approach towards taxation

Key elements of Sonova’s approach towards taxation are:

Organization and reporting

The responsibility for tax compliance lies with the Corporate Tax team, located in Switzerland, the US, Germany, and Brazil. The Head of the Corporate Tax team reports directly to the Group CFO. This function coordinates, educates, and supports local controllers in all Group companies to ensure that they achieve tax compliance in line with local and international laws, rules, regulations, reporting, filing and disclosure requirements, as well as Sonova’s standards and policies. The Transfer Pricing Master File is prepared by Corporate Tax, along with a master Local File. Local Files are completed by the local organizations according to the OECD guideline Action 13 and Sonova’s Transfer Pricing Processes with Corporate Tax support.

Sonova has been preparing a Country-by-Country Report (CbCR) since 2017 and has filed this with the Swiss Federal Tax Administration since 2018. The Swiss Federal Tax Administration shares the file through automatic information exchange with tax authorities worldwide, as foreseen by the BEPS initiative. Sonova is prepared to make the CbCR public once this becomes mandatory.

Information on earnings before tax, reported taxes, reported tax rate, cash taxes paid, and cash tax rate can be found in the 2021/22 Sonova Financial Report. Sonova’s tax rates might be lower than industry group averages because of group-wide net operating losses largely not being capitalized as well as net operating losses from previous periods in subsidiaries of acquired groups. Furthermore, Sonova is a Swiss-based multinational enterprise with large activities, substance, risks and assets in Switzerland, and the Swiss tax rate is lower than the global average tax rate. Cash tax paid is largely influenced by provisional advanced as well as final adjustment payments.

Sonova has also introduced a reporting tool to monitor, collect, and – where applicable – report information under Mandatory Disclosure Reporting, as introduced under EU Council directive 218/822 (DAC-6; enacted as of 2018). Since the first European country started applying the new directive, Sonova has checked over 200 cases and in over twenty cases has opted to report to comply beyond any reasonable doubt with the formal nature of the Directive.

As a multinational with a turnover above 750m CHF/Euro, Sonova is also preparing for the requirements of the minimum tax under BEPS Pillar II.

Public policy

Donations to political parties

As a general rule, Sonova does not allow donations to political parties. This principle is stipulated in our Global Anti-Bribery Policy.

Association memberships

Sonova actively participates in associations and external initiatives to share its specialist knowledge and to ensure high quality standards for hearing instruments and cochlear implants. We are a member of the following organizations, amongst others:

We are also represented in governance bodies of certain organizations: CEO Arnd Kaldowski is a member of EHIMA’s Board of Directors; Stefan Launer, VP Audiology and Health Innovation, is Chair of HIMPP’s Board of Directors; and Sandra Brandmeier, President Sonova USA, is Vice Chair of HIA’s Board of Directors. We are also represented in various professional and scientific associations related to core science and technologies relevant to our business.

In 2021/22, Sonova contributed around CHF 1.1 million in membership fees to trade associations and non-commercial organizations. Amongst the largest contributions (including membership fees) are those to the Hearing Industries Association (HIA), a forum for hearing aid manufacturers, suppliers, distributors, and hearing health professionals in the United States; Hear-it AISBL, an international non-profit information resource for hearing loss; and the British Irish Hearing Instrument Manufacturers Association (BIHIMA), which represents the world’s leading hearing instrument manufacturers in Britain and Ireland.

Sonova has been a signatory to the UN Global Compact since 2016. This is a United Nations initiative that focuses on corporate citizenship, dialogue with stakeholders, partnerships, and communication. Sonova is part of both the global and local Swiss networks of the UN Global Compact.

Animal welfare

As a manufacturer of medical devices, Sonova is required by regulatory authorities to demonstrate the biological safety of any product with body contact by complying with the ISO 10993-1 international standard. Under this standard, animal tests need to be considered in biological safety evaluations and, in some cases, cannot be completely avoided. Sonova also provides components of cochlear implants to cochlear implant research centers and universities where they are tested on animals for basic research into e.g., safety, feasibility, or efficacy of new technologies.

Sonova does not carry out any animal testing in-house and only works with third parties. We are committed to the “Three Rs” principle – replacement, reduction, and refinement – to limit animal testing as far as possible.

Replacement

Reduction

Refinement