Report of the Supervisory Board
The Supervisory Board’s work in 2016 was marked by several events and topics that were, in various respects, both weighty and significant – such as the explosion at the Ludwigshafen site, changes in the chemical industry due to the announcement of major mergers and acquisitions that impacted BASF’s strategic development, and long-term succession planning for the composition of the Board of Executive Directors.
The Supervisory Board faced these challenges with a full sense of responsibility and supported the Board of Executive Directors’ activities, especially in coping with the explosion, and advised the Board of Executive Directors in its deliberations on BASF’s strategic further development in an evolving industry environment.
Monitoring and consultation in an ongoing dialog with the Board of Executive Directors
In 2016, the Supervisory Board of BASF SE exercised its duties as required by law and the Statutes with the utmost care. It regularly monitored the management of the Board of Executive Directors and provided advice on the company’s strategic development and important individual measures, about which the Supervisory Board was regularly and thoroughly informed by the Board of Executive Directors. This occurred both during and outside of the meetings of the Supervisory Board and its committees in the form of written and oral reports on, for example, all of the major ﬁnancial KPIs of the BASF Group and its segments, the economic situation in the main volumes and procurement markets, and on deviations in business developments from original plans. Furthermore, the Supervisory Board tackled fundamental questions of corporate planning, including ﬁnancial, investment, sales volumes and personnel planning, as well as measures for designing the future of research and development. The Supervisory Board discussed in detail the reports from the Board of Executive Directors, and also deliberated on prospects for the company and its individual business areas with the Board of Executive Directors. It was convinced of the lawfulness, expediency and propriety of the Board of Executive Director’s company leadership.
The Chairman of the Board of Executive Directors and the Chairman of the Supervisory Board were in regular contact outside of Supervisory Board meetings, as well. The former promptly informed the latter of current developments and signiﬁcant issues. The Supervisory Board was always involved at an early stage in decisions of major importance. The Supervisory Board passed resolutions on the individual measures that required the approval of the Supervisory Board. In the 2016 business year, this pertained to the authorization of the Chemetall acquisition. With this transaction, BASF has added the surface treatment business area to its Coatings division.
Supervisory Board meetings
The Supervisory Board held ﬁve meetings in the 2016 reporting year. With the exception of one meeting at which one member of the Supervisory Board was absent due to illness, all Supervisory Board members attended all Supervisory Board meetings in 2016. The members of the Supervisory Board elected by shareholders and those elected by the employees prepared for the meetings in separate preliminary discussions.
A signiﬁcant component of all Supervisory Board meetings was the Board of Executive Directors’ reports on the current business situation with detailed information on sales and earnings growth, as well as on opportunities and risks for business development, the status of important current and planned investment projects, developments on the capital markets, and signiﬁcant managerial measures taken by the Board of Executive Directors in addition to innovation projects. In its meetings, the Supervisory Board additionally discussed the further development of the BASF Group’s business activities through acquisitions, divestitures and investment projects. Significant consultation topics included the acquisition of Chemetall with the entrance into the surface treatment business, the divestiture of the industrial coatings business, the sale of the OLED patent portfolio, the acquisition of Henkel’s western European building material business for professional users, and the establishment of a joint venture with Avantium for the production of furandicarboxylic acid (FDCA) from renewable resources.
Important focus points of the Supervisory Board’s consultation topics over the entire business year centered on developments in the chemical industry as a result of announced mergers and acquisitions, such as the DOW and DuPont merger; the acquisition of Monsanto by Bayer and of Syngenta by ChemChina; their potential impact on BASF’s business and strategic development possibilities, especially in the Agricultural Solutions segment; and current and future courses of action.
With respect to regional opportunities and risks, the Supervisory Board was often occupied with political and economic developments in northern Africa and the Middle East as well as the development of local markets there. Possibilities for tapping these markets were discussed.
At its meeting on February 24, 2016, the Supervisory Board reviewed and approved the Consolidated Financial Statements, Management’s Report and the proposal for the appropriation of proﬁt for the 2015 business year as presented by the Board of Executive Directors. The meeting on April 29, 2016, served to prepare for the Annual Shareholders’ Meeting.
In addition to strategically signiﬁcant individual measures, the Supervisory Board also addressed BASF’s strategy and long-term business prospects in individual business areas and regions. This was the focus of its meeting on July 25/26, 2016, at which the Board of Executive Directors provided a status update on the implementation of the “We create chemistry” strategy. Main consultation topics comprised possibilities and objectives for strategic portfolio development, innovation and technology, the development of the Oil & Gas and Agricultural Solutions segments, the automotive sector as a key customer industry (especially with regard to the development of electromobility), and opportunities and risks in the Asia Pacific region.
In addition, the Supervisory Board addressed future prospects for the main site in Ludwigshafen and the further development of the Engineering & Maintenance function at its meeting on October 25, 2016.
At its meeting of December 15, 2016, the Supervisory Board discussed and approved the Board of Executive Directors’ operative and ﬁnancial planning including the investment budget for 2017, and as usual empowered the Board of Executive Directors to procure necessary ﬁnancing in 2017.
Composition and compensation of the Board of Executive Directors
In several meetings in the 2016 business year, the Supervisory Board conferred on, and passed resolutions on, personnel topics in the Board of Executive Directors as well as questions concerning the compensation of the Board of Executive Directors. Based on preparation conducted by the Personnel Committee, it determined the targets for the Board of Executive Directors for the 2016 business year at its meeting on February 24, 2016.
At its meeting on December 15, 2016, the Supervisory Board advised on long-term succession planning for the Board of Executive Directors and approved the early conclusion of the term for Dr. Harald Schwager, member of the Board of Executive Directors for many years, in order to allow for structured succession. Dr. Harald Schwager agreed on early discontinuance of his contract without severance pay by the company and will receive the contractually agreed upon interim and pension benefits in accordance with proper expiration of an appointment to the Board of Executive Directors. Dr. Harald Schwager will therefore depart the Board of Executive Directors together with Margret Suckale at the conclusion of the Annual Shareholders’ Meeting on May 12, 2017. At the same Supervisory Board meeting, Saori Dubourg and Dr. Markus Kamieth were appointed to the Board of Executive Directors, effective at the end of the 2017 Annual Shareholders’ Meeting, each with a first-time term to the end of the 2020 Annual Shareholders’ Meeting.
Furthermore, the Supervisory Board agreed at its December 15, 2016, meeting on the performance evaluation of the Board of Executive Directors for the 2016 business year as well as – based on an appropriateness test conducted by the Personnel Committee – an adjustment of the Board of Executive Directors’ compensation including an increase in the fixed salary and annual variable target compensation, effective January 1, 2017.
At several meetings, the Supervisory Board discussed the topic of the compensation of the Supervisory Board. The current configuration of the Supervisory Board’s compensation, with a fixed salary and a limited variable compensation component based on earnings per share, has existed largely unchanged since 2006. In normal business years, compensation in fact purely comprises a fixed salary, as the maximum amount of the variable compensation is for the most part reached by the high level of earnings per share. This was also the case for compensation for 2016. The Supervisory Board therefore decided to propose to the 2017 Annual Shareholders’ Meeting a formal restructuring of the BASF Supervisory Board’s compensation to a purely fixed salary, combined with a long-term obligation for the Supervisory Board members to acquire and keep shares – in line with the development of the compensation structures of the majority of large publicly traded companies in Germany.
The Supervisory Board of BASF SE has four committees: 1. the committee for personnel matters of the Board of Executive Directors and the granting of loans in accordance with Section 89(4) of the German Stock Corporation Act (Personnel Committee); 2. the Audit Committee; 3. the Nomination Committee; and 4. the Strategy Committee. Following each Committee meeting, the chairpersons of the Committees reported in detail about the meetings and the activities of the Committees at the subsequent meeting of the Supervisory Board.
The Personnel Committee met four times during the reporting period. All committee members attended the meetings. At its meeting on February 24, 2016, the Personnel Committee advised on the targets for the Board of Executive Directors for the 2016 business year. The meetings on July 25, 2016, and October 25, 2016, focused on development of leadership at the top levels of management below the Board of Executive Directors and succession planning for that Board.
Further consultation topics comprised a review of the appropriateness of the compensation of the Board of Executive Directors, both in terms of amount and configuration of the compensation system, as well as the structure of the compensation of the Supervisory Board. The basis for this was developed and intensively discussed with an independent compensation consultant. The focus of the December 15, 2016, meeting was the discussion of and resolution on the Supervisory Board’s proposal for new appointments to the Board of Executive Directors, the adjustment of that Board’s compensation, and a redesign of the Supervisory Board’s compensation. In addition, the Personnel Committee advised on the performance evaluation of the Board of Executive Directors as well as the target figures for the proportion of women in that Board.
The Audit Committee is responsible for all the tasks listed in Section 107(3)(2) of the German Stock Corporation Act and in Subsection 5.3.2 of the German Corporate Governance Code in its version of May 5, 2015. The Audit Committee met ﬁve times during the reporting period. All committee members attended all meetings. Its core duties were to review BASF SE’s Financial Statements and Consolidated Financial Statements, as well as to discuss the quarterly and ﬁrst-half ﬁnancial reports with the Board of Executive Directors prior to their publication.
At the meeting on February 21, 2017, the auditor reported in detail on its audits of BASF SE’s separate and consolidated ﬁnancial statements for the 2016 business year and discussed the results of its audit with the Audit Committee.
At the meeting on July 25, 2016, KPMG AG Wirtschaftsprüfungsgesellschaft – the auditor elected at the Annual Shareholders’ Meeting – was charged with the audit for the 2016 reporting year and auditing fees were agreed upon. The focus areas for the annual audit were discussed and deﬁned together with the auditor. The Audit Committee categorically excluded any service relationships between auditor and BASF Group companies outside of the audit of the annual ﬁnancial statements, including beyond prevailing legal limitations. These services may only be performed upon approval by the Audit Committee. For certain nonaudit services beyond the scope of the audit of the ﬁnancial reports, the Audit Committee either granted approval for individual cases or authorized the Board of Executive Directors to engage KPMG AG Wirtschaftsprüfungsgesellschaft for such services. The authorization of each service applies for one reporting year and is limited in amount.
Other important activities included advising the Board of Executive Directors on accounting issues and the internal control system. The internal auditing system and compliance in the BASF Group were each a focus at one meeting of the Audit Committee. In these meetings, the head of the Corporate Audit department and the Chief Compliance Ofﬁcer reported to the Audit Committee and answered its questions. In all meetings, the Audit Committee also received information on the development of risks from litigation.
The Nomination Committee is responsible for preparing candidate proposals for the election of those Supervisory Board members who are elected by the Annual Shareholders’ Meeting. The Nomination Committee is guided by the objectives for the composition of the Supervisory Board adopted by the Supervisory Board. The Nomination Committee met once in 2016. All committee members attended the meeting. Its focus was the discussion of suitable candidates for the case of the early departure from the Supervisory Board of one of the members elected by the Annual Shareholder’s Meeting.
The Strategy Committee, formed to consult on strategic options for the further development of the BASF Group, did not meet in 2016.
Corporate Governance and Declaration of Conformity
The Supervisory Board places great value on ensuring good corporate governance: In 2016, it was therefore once again intensely occupied with the corporate governance standards practiced in the company and the implementation of the German Corporate Governance Code’s recommendations and suggestions. A further topic was the implementation of legal stipulations in BASF SE. This included the E.U.’s regulation on market abuse with the first-time introduction of legal “closed periods” in which share transactions are not permissible, as well as the Law on Equal Participation of Women and Men in Leadership Positions in the Private and Public Sector. The Corporate Governance Report of the BASF Group provides extensive information on BASF’s corporate governance. It also includes the Compensation Report, containing full details on the compensation for the Board of Executive Directors and the Supervisory Board.
At the meeting on December 15, 2016, current recommendations and proposals made for the German Corporate Governance Code and their implementation at BASF were discussed, along with the joint Declaration of Conformity by the Supervisory Board and Board of Executive Directors in accordance with Section 161 of the Stock Corporation Act. BASF complies with the recommendations of the German Corporate Governance Code in its version of May 5, 2015, without exception.
Declaration of Conformity
Independence and efficiency review
An important aspect of good corporate governance is the independence of Supervisory Board members and their freedom from conﬂicts of interest. According to assessments of the Supervisory Board, all of its members can be considered independent as deﬁned by the German Corporate Governance Code. The criteria used for this evaluation can be found in the Corporate Governance Report. In cases where Supervisory Board members hold supervisory or management positions at companies with which BASF has business relations, we see no impairment of their independence. The scope of these businesses is relatively marginal and furthermore takes place under conditions similar to those of a third party.
The Supervisory Board reviews the efficiency of its activities every year in the form of a self-assessment. This took place in 2016 as well, as the Chairman of the Supervisory Board conducted individual dialogs with each Supervisory Board member using a structured questionnaire. Topics especially centered on Supervisory Board meeting agendas; cooperation with the Board of Executive Directors; information supply of the Supervisory Board; the Committees’ duties, composition and work; and cooperation with shareholder and employee representatives. The results of these individual meetings were presented and thoroughly discussed at the Supervisory Board meeting on December 15, 2016. Overall, its members rated the Supervisory Board’s activity as efficient.
The Audit Committee once again conducted a self-assessment of its activities in 2016, apart from the efficiency review. Material topic areas were the organization and content of the meetings and the supply of information as the basis of the Committees’ work. No notable need for action was identified.
Separate and consolidated financial statements
KPMG AG Wirtschaftsprüfungsgesellschaft, the auditor elected by the Annual Shareholders’ Meeting for the 2016 reporting year, has audited the Financial Statements of BASF SE and the BASF Group Consolidated Financial Statements, including the Management’s Report and the accounting records from which they were prepared, and have approved them free of qualiﬁcation. Furthermore, the auditor certiﬁed that the Board of Executive Directors had taken the measures incumbent on it under Section 91(2) of the German Stock Corporation Act in an appropriate manner. In particular, it had instituted an appropriate information and monitoring system that fulﬁlled the requirements of the company and is applicable for the early identiﬁcation of developments that could pose a risk to the continued existence of the BASF Group.
The documents to be examined and the auditor’s reports were sent in a timely manner to every member of the Supervisory Board. The auditor attended the accounts review meeting of the Audit Committee on February 21, 2017, as well as the accounts meeting of the Supervisory Board on February 22, 2017, and reported on the main ﬁndings of the audit. The auditor also provided detailed explanations of the reports on the day before the accounts meeting of the Supervisory Board.
The Audit Committee reviewed the Financial Statements and Management’s Report at its meeting on February 21, 2017, and discussed them in detail with the auditor. The Chairwoman of the Audit Committee gave a detailed account of the preliminary review at the Supervisory Board meeting on February 22, 2017. On the basis of this preliminary review by the Audit Committee, the Supervisory Board has examined the Financial Statements and Management’s Report of BASF SE for 2016, the proposal by the Board of Executive Directors for the appropriation of proﬁt as well as the Consolidated Financial Statements and Management’s Report for the BASF Group for 2016. The Supervisory Board has reviewed, acknowledged and approved the auditor’s reports. The results of the preliminary review by the Audit Committee and the results of the Supervisory Board’s examination fully concur with those of the audit. The Supervisory Board sees no grounds for objection to the management and submitted reports.
At the Supervisory Board’s accounts meeting on February 22, 2017, it approved the Financial Statements of BASF SE and the Consolidated Financial Statements of the BASF Group prepared by the Board of Executive Directors, making the 2016 Financial Statements of BASF SE ﬁnal. The Supervisory Board concurs with the proposal of the Board of Executive Directors regarding the appropriation of proﬁt and the payment of a dividend of €3.00 per share.
Composition of the Supervisory Board
Employee representative Wolfgang Daniel left the Supervisory Board at the conclusion of the Annual Shareholders’ Meeting on April 29, 2016. He was succeeded by Waldemar Helber, who joined the Supervisory Board as the successor appointed by the BASF Works Council Europe on December 4, 2013, in accordance with the Employee Participation Agreement of November 15, 2007. The Supervisory Board thanks Wolfgang Daniel, who had been a member of the Supervisory Board since 1996, for his many years of service.
The Supervisory Board thanks all employees of the BASF Group worldwide and the management for their personal contribution in the 2016 business year.
Ludwigshafen, February 22, 2017
The Supervisory Board
Chairman of the Supervisory Board