NH Hoteles

06 43 CORPORATE GOVERNANCE NH HOTELES ANNUAL CORPORATE GOVERNANCE REPORT 44 AUDIT COMMITTEE REPORT 56 06 CORPORATE GOVERNANCE

44 INTRODUCTION This Annual Corporate Governance Report complies with the provisions of article 116 of Spain’s Securities Market Law and its content conforms to the provisions of Economy Ministry Order 3722/2003, dated 26 December. This Report is structured as follows: 1. Ownership structure. 2. Board of Directors structure. 3. Related-party transactions and intragroup transactions. 4. Risk control systems. 5. Operation and action of the Shareholders’ Meeting. 6. Degree of compliance with corporate governance recommendations. I. OWNERSHIP STRUCTURE • Share capital: NH HOTELES, S.A.’s share capital amounts to 239,065,796 euros, comprising 119,532,898 subscribed and fully-paid shares of the same class each with a nominal value of 2 euros, represented by the book-entry system. NH HOTELES, S.A. is listed on the Madrid, Barcelona, Bilbao, Valencia and Amsterdam stock exchanges and forms part of Spain’s blue-chip index, the IBEX-35. • Most significant stakes, in accordance with the information available to the Company: Based on Company information, the following shareholders own over 5% of the total paid-up share capital: • Board of Directors stakes: Based on Company information, the following Directors of NH HOTELES, S.A. own the following shares of NH HOTELES, S.A. at the date of this report: • Family, commercial, contractual or corporate relationships between owners of significant stakes and the Company or among owners of significant stakes: The Company is not aware of any family, commercial, contractual or corporate relationships between owners of significant stakes and the Company or among owners of significant stakes other than those stated in section III: RELATED-PARTY TRANSACTIONS AND INTRAGROUP TRANSACTIONS. • Shareholder agreements. The Company is not aware of any shareholder agreements that relate to voting at Shareholders’ Meetings or that condition or restrict the free transferability of shares. • Percentage of own shares. At 2003 year-end, Grupo NH HOTELES, S.A. owned 204,712 own shares, representing 0.17% of capital, at a total cost of 1.54 million euros. Own shares are valued at book value, i.e. 5.14 euros per share. In 2003, there were significant changes in own shares: - Acquisition of 1,314,782 shares on various days during the year. - Sale of 2,100,000 shares (to hedge the stock option plan for employees of Grupo NH HOTELES, S.A.). NH HOTELES, S.A. ANNUAL CORPORATE GOVERNANCE REPORT % DIRECT % INDIRECT SHAREHOLDER STAKE STAKE % TOTAL ALAZAN INVERSIONES 2001, SIMCAV, S.A. 5.080 0.000 5.080 ANGELINI, FRANCESCO 0.000 5.240 5.240 CAJA DE AHORROS Y MONTE DE PIEDAD DE MADRID 0.000 5.000 5.000 CORPORACION FINANCIERA CAJA DE MADRID, S.A. 5.000 0.000 5.000 FINAF 92, S.A. 5.240 0.000 5.240 HOTELES PARTICIPADOS, S.L. 5.001 0.000 5.001 KEBLAR DE INVERSIONES, SIMCAVF, S.A. 5.190 0.000 5.190 ORTEGA GAONA, AMANCIO 0.000 10.270 10.270 CAJA DE AHORROS DE VALENCIA, CASTELLON Y ALICANTE, BANCAJA 5.000 0.000 5.000 % DIRECT % INDIRECT SHAREHOLDER STAKE STAKE % TOTAL BLANCO BALIN, JOSE RAMON 0.020 0.011 0.031 BURGIO, GABRIELE 1.260 0.000 1.260 CAJA DE AHORROS DE VALENCIA, CASTELLON Y ALICANTE, BANCAJA 5.000 0.000 5.000 DE NADAL CAPARA, JOSE 0.000 0.000 0.000 ECHENIQUE GORDILLO, RODRIGO 0.007 0.000 0.007 GIL GARCIA, ELENA 0.000 0.000 0.000 HERRANDO PRAT DE LA RIBA, MANUEL 0.003 0.000 0.003 MERRY DEL VAL GRACIE, ALFONSO 0.000 0.000 0.000 RODRIGUEZ DOMINGUEZ, MIGUEL 0.003 0.000 0.003 ROMERO GARCIA, LUIS FERNANDO 0.000 0.000 0.000 SJACOB, BERNARD 0.000 0.000 0.000 FERNANDEZ DURAN, ALFREDO 0.000 0.000 0.000

45 Additionally, the Company hedged, with a financial institution, the stock option plan (4,400,000 shares) for group employees, which was approved by the Shareholders’ Meeting. That transaction is detailed in the Company’s financial statements. By virtue of the resolution adopted by the Shareholders’ Meeting on 28 April 2003, the Company is authorised to pledge and/or acquire own shares, directly or indirectly, via an official secondary market and for a price not lower than their nominal value or higher than the share price at the time of acquisition, where the nominal value of the shares acquired and pledged cannot at any time exceed 5% of the total share capital. II. BOARD OF DIRECTORS STRUCTURE The Board of Directors Regulation, which was approved by a Board of Directors resolution on 20 December 1999 and subsequently amended on 28 April 2003, determines the Board of Directors’ principles of action, regulates its organisation and operation, and lays down the code of conduct for its members, the overall aim being to maximise efficiency and optimise management. The Board of Directors intends to revise the content of that Regulation so as to adapt it to Transparency Law 26/2003, dated 17 July, and to submit the final wording to the forthcoming Shareholders’ Meeting. All shareholders can read the full text of the current Regulation on the Company’s web site or request the delivery, free of charge, of an updated copy since it is the Company’s desire to make significant information such as Corporate Governance rules available to investors at all times. The Board of Directors Regulation defines the Board of Directors' role as supervising and overseeing the Company's activities, while delegating day-to-day management to the executive bodies and management team. Notwithstanding the above, and to ensure better and more diligent performance in its general supervisory role, the Board is committed to exercising directly the following responsibilities, in addition to the powers given exclusively to it by law or the Bylaws: a) Approval of the Company's general strategies; b) Appointment and, if necessary, dismissal of senior executives of the Company and other companies within the consolidated group; c) Appointment and, if necessary, dismissal of Directors in the various subsidiaries; d) Identification of the Company’s principal risks and implementation and monitoring of appropriate internal control and information systems; e) Definition of information and communication policies concerning shareholders, markets and public opinion; f) Definition of the own share policy within the framework defined by the Shareholders' Meeting; g) Authorisation of transactions between the Company and Directors or core shareholders which may present a conflict of interests; and h) In general, performance of business or financial operations of particular significance for the Company. Furthermore, the Board of Directors Regulation establishes that the Board's actions must be guided at all times by the aims of maximising the company's value and the consequent creation of shareholder value, strictly in accordance with generally accepted ethical values and principles. • Composition of the Board of Directors. The Board of Directors of NH HOTELES, S.A. currently consists of 12 Directors. In accordance with the Regulation, a distinction is made between executive and external Directors, the latter being divided into two categories: proprietary and independent. The President/CEO and remaining Directors with management duties, in whatever form, within the Company or its subsidiaries (provided that these duties are discharged on an exclusive basis) are considered to be executive Directors. Proprietary Directors are those nominated by shareholders with a significant stable stake in the Company's capital. Independent Directors must be well-known prestigious professional or business figures who are not linked to the management team or the core shareholders. In appointing these Directors, the incompatibility rules within the Board of Directors Regulation (substantially similar to the Aldama Report) are taken into account. In line with the aforementioned criteria, the names and year of appointment of the Directors are as follows: Executive Directors: Gabriele Burgio. (1993). Proprietary Directors: José de Nadal Capará. (1997). Mª Elena Gil García (2003). Caja de Ahorros de Valencia, Castellón y Alicante –Bancaja, represented by Aurelio Izquierdo Gómez (2001). Alfredo Fernández Durán (2002). Independent Directors, prestigious professionals or entrepreneurs who are not linked to the management team or the core shareholders: Manuel Herrando y Prat de la Riba. (1992). Luis F. Romero García. (1996). Ramón Blanco Balin. (1997). Rodrigo Echenique Gordillo. (1997). Alfonso Merry del Val Gracie. (1997). Bernard s´Jacob. (2000). Miguel Rodríguez Domínguez. (2003).

46 The Board Secretary—whose fundamental role is to supervise the good operation of the Board and the formal and material legality of its actions, to ensure that procedures and governance rules are respected, and to ensure that the minutes contain the proceedings of Board sessions and to certify any resolutions adopted—is José María Mas Millet, with J. Ignacio Aranguren González-Tarrío acting as Vice- secretary. Therefore, the composition of the NH HOTELES, S.A. Board of Directors complies with the recommendations of the Code of Good Governance, as external Directors (both proprietary and independent) greatly outnumber executive Directors (11 to 1), and independent Directors outnumber proprietary Directors (7 to 4), on account of the fact that, in the current ownership structure, free float is substantially greater than the sum of the significant stable stakes represented by the proprietary Directors. • Rules of organisation and operation of the Board of Directors: - Board selection procedures The Directors are appointed by the Shareholders’ Meeting or, provisionally, by the Board of Directors, in accordance with the provisions of the Spanish Corporations Law and the Company Bylaws. The proposed Director appointments submitted by the Board of Directors to the Shareholders’ Meeting and the appointment resolutions adopted by the Board by virtue of the legally attributed co-option powers must respect the provisions of the Board of Directors Regulation and be preceded by the corresponding report by the Appointments and Remuneration Committee, which is not binding. - Appointment of external Directors The Board of Directors Regulation makes special reference to the appointment of external Directors because of their unique features with respect to executive Directors. The basic characteristics of the appointment of external Directors are as follows: 1. Proprietary Directors Proprietary Directors must be appointed by owners of significant stable stakes, and the other Directors must vote so that such appointments or proposed appointments are approved by the Board of Directors. 2. Independent Directors Within their respective powers, the Board of Directors and the Appointments and Remuneration Committee must strive to ensure that the candidates for independent Directors are persons of acknowledged probity, ability and experience who are willing to dedicate sufficient time to the Company. For the post of independent Director, the Board of Directors cannot propose or appoint a person who has, or has had in the previous two years, stable significant relations with Company management, has family, professional or commercial relations with any executive Director or other Senior Managers of the Company, or has stable relations with proprietary Directors or the companies or business groups which they represent. In particular, the following persons cannot be proposed or appointed as independent Directors: a) persons who hold or have held senior executive positions at the Company in the previous two years; b) relatives (up to the fourth degree of kinship) of persons who are or have been executive Directors or senior managers at the Company in the previous two years; c) persons who, directly or indirectly, have made or received significant payments to or from the Company that might jeopardise their independence; d) persons who have or have had other relations with the Company which, in accordance with the Appointments and Remuneration Committee, might jeopardise their independence. - Re-election of Directors The proposal for re-election of Directors that the Board of Directors submits to the Shareholders’ Meeting must be subject to a formal drafting process, necessarily involving a report by the Appointments and Remuneration Committee in which it assesses the quality of their work and the dedication of the proposed Directors during their mandate. - Term of office Directors have a three-year term. Directors appointed by co-option will hold office until the date of the next Shareholders’ Meeting. Directors who terminate their mandate or who, for any other reason, leave their position cannot, in the following two years, provide services to another company with a similar or analogous corporate purpose to that of the Company or any of the companies comprising its Group. If the Board of Directors sees fit, it can exempt the outgoing Director from that obligation or shorten the two-year period. - Removal of Directors Directors will be removed when the period for which they were appointed has expired or when so resolved by the Shareholders’ Meeting by virtue of its legal powers. The Directors must offer their resignation to the Board of Directors and resign in the following cases: a) Upon reaching the age of 70. Directors with executive functions must retire as executives upon reaching the age of 65 although they may continue as Directors, if the Board so determines.

47 In this case, Directors will be removed at the first Board meeting after the Shareholders’ Meeting that approved the financial statements of the year in which the Director reached the age limit. b) When they cease to hold the executive positions associated with their appointment as Directors or when the reasons for which they were appointed cease to hold; this is understood to occur to a proprietary Director when the Company or business Group which he/she represents ceases to hold a significant stake in the share capital of the Company or to an independent Director when he/she becomes a member of the executive team of the Company or any of its subsidiaries. c) In the event of infringement of any of the incompatibility regulations or prohibitions established by law. d) When the Appointments and Remuneration Committee gives them a serious reprimand for failing to comply with any of their obligations as Directors. e) When their permanence on the Board jeopardises the Company’s credit or reputation in the market or any other Company interests. • Committees within the Board of Directors. - Delegate Committee. The creation of a Delegate Committee is envisaged both in the Company's Bylaws and in the Board of Directors Regulation. This committee has a general decision-making capacity and, consequently, all powers which correspond to the Board of Directors can be expressly delegated to it, except those which cannot, by law, be delegated. However, the small size of the Board of Directors has made it unnecessary to date to establish this committee and delegate power to it. - Other Committees. The Regulation empowers the Board of Directors to create one or more committees to take charge of examination and ongoing oversight of any area of particular relevance to the good governance of the Company or the monographic analysis of a particular aspect or matter of particular significance or importance. The committees in existence at this time are the Audit and Control Committee and the Appointments and Remuneration Committee. - Audit and Control Committee The main function of Audit and Control Committee, created on 30 June 2000, is to support the Board of Directors in its supervisory and oversight duties, the most important of these being to ensure the correct application of generally-accepted accounting principles and to monitor the suitability and integrity of the internal control systems followed in the preparation of individual and consolidated accounts. Specifically, the basic functions of the Audit and Control Committee are as follows: 1) To designate the Auditor, the conditions of his/her engagement, the scope of his/her professional mandate and, if necessary, the revocation or extension of that mandate. 2) To review the Company's financial statements, to ensure compliance with legal requirements and the correct application of generally-accepted accounting principles, and to advise on amendments proposed by management to the accounting principles and criteria suggested. 3) To serve as a communication channel between the Board of Directors and the Auditor, to evaluate the results of each audit and the management team's response to any recommendations, to act as mediator in the event of any dispute between the former and the latter regarding the accounting principles and criteria used to prepare the financial statements. 4) To monitor the suitability and integrity of the internal control systems followed in the preparation of individual and consolidated accounts 5) To oversee compliance with the auditing contract, ensuring that the opinion regarding the financial statements and the principal content of the Auditors' Report are written in a clear and concise manner. 6) To review the prospectuses and periodic financial information supplied by the Company to the financial markets and their supervisory bodies. 7) To ensure compliance with the Internal Code of Conduct regarding the Securities Market, the Board of Directors' Regulation and, in general, with the Company’s governance rules, and to make any necessary proposals to improve compliance. It is the particular responsibility of the Audit and Control Committee to gather information and, if necessary, issue a report regarding any disciplinary measures against members of the Company's management team. The regulations governing the Audit and Control Committee can be found on the Company's web site. The current composition of the Audit and Control Committee is as follows: Chairman: José de Nadal Capará. Members: Bernard s´Jacob. Luis F. Romero García. The committee held four meetings in 2003. In accordance with Law 44/2002 of 22 December, the Shareholders' Meeting held on 28 April 2003 approved the Board's proposal to make the appropriate amendments to the company's Bylaws to confer Bylaw status on the above committee. - Appointments and Remuneration Committee The basic functions of the Appointments and Remuneration Committee, created on 30 June 2002, are to advise on

48 appointments of Directors, members of the Board committees and the senior management of the company and its subsidiaries, to approve standard contracts and remuneration scales for senior management, to define the Director remuneration scheme, to advise on incentive plans and to create and keep a register of the status of Directors and senior management. The regulations governing the Appointments and Remuneration Committee can be found on the Company's web site. The current composition of the Appointments and Remuneration Committee is as follows: Chairman: Manuel Herrando y Prat de la Riba. Members: Ramón Blanco Balín. Aurelio Izquierdo Gómez. The committee held five meetings in 2003. • Directors' remuneration In accordance with the Board of Directors Regulation, the Appointments and Remuneration Committee is responsible for defining the Directors’ remuneration scheme, and it must endeavour to ensure that Director's payments are in keeping with market rates for similar-sized companies in the sector. This responsibility is expressly delegated to the Appointments and Remuneration Committee within the framework of the Bylaws, in particular in article 20, which reads as follows: “Director's remuneration will consist of a fixed annual allowance and per diems for attending meetings of the Board and of any advisory and delegate committees. The overall amount paid to Directors by the company will be equivalent to three percent of the consolidated group's net income for the preceding year. The Board of Directors is responsible for defining the exact amount to be paid within that limit and its distribution among the Directors. Additionally, and independently of the payments envisaged in the preceding paragraph, provision may be made for Director remuneration schemes linked to the share price or which involve shares or stock options. The application of such remuneration schemes must be approved by the Shareholder's Meeting, which will determine the share price to be used as a reference, the number of options, the strike price of the options, the period the scheme will operate and any other conditions deemed appropriate. Also, subject to compliance with the legal requirements, similar payments schemes may be established for other company employees (whether or not they are executives). The remuneration envisaged in the preceding paragraphs deriving from the status of Director will be compatible with other professional and salary payments to which the Directors are entitled by virtue of any executive or advisory functions performed for the company other than the supervision and collegiate decision functions pertaining to their status as Directors, which will be subject to the applicable legislation.” In 2003, the remuneration paid to Directors was in accordance with the criteria established by the Appointments and Remuneration Committee. The individual payments to each Director were as follows: Audit Appointments Board and Control and Remuneration Allowance Committee Committee Total GABRIELE BURGIO 36,060.60 36,060.60 MANUEL HERRANDO Y PRAT DE LA RIBA 36,060.60 11,095.56 47,156.16 RAMON BLANCO BALÍN 36,060.60 9,246.30 45,306.90 LUIS FERNANDO ROMERO GARCIA 36,060.60 4,760.48 40,821.08 JOSE DE NADAL CAPARÁ 36,060.60 7,397.04 43,457.64 RODRIGO ECHENIQUE GORDILLO 36,060.60 36,060.60 ALFONSO MERRY DEL VAL Y GRACIE 36,060.60 36,060.60 ELENA GIL GARCÍA (incoming) 24,205.06 24,205.06 JOSE Mª GARCIA (outgoing) 11,855.54 11,855.54 BERNARD S' JACOB 36,060.60 6,410.76 42,471.36 AURELIO IZQUIERDO GOMEZ 36,060.60 11,095.56 47,156.16 ALFREDO FERNANDEZ DURAN 36,060.60 36,060.60 MIGUEL RODRÍGUEZ DOMINGUEZ (incoming) 6,915.73 6,915.73 ANTHONY RUYS (outgoing) 29,144.87 29,144.87 TOTAL 432,727.20 18,568.28 31,437.42 482,732.90