Report of the Supervisory Board
2013 was a very difficult year for LANXESS. While the company had posted very good growth in the prior years, demand in the rubber business began to slacken in 2012, a development which continued in the reporting year. In addition, the effects of a supply overhang caused by higher production capacities became evident in 2013. Changes in the competitive environment led to the recognition of impairment charges of €257 million in the fourth quarter. As a result of the difficult business situation overall, LANXESS saw a substantial decline in earnings compared to previous years and posted EBITDA pre exceptionals of just €735 million in fiscal 2013. Against the backdrop of the difficult business environment, LANXESS resolved in 2013 to take a range of efficiency measures and is continuing to implement these in 2014.
At the beginning of the current fiscal year, the Supervisory Board decided on a change of leadership of the Board of Management and approved the mutually agreed termination of the appointment of Dr. Axel C. Heitmann as member and Chairman of the Board of Management. The Supervisory Board appointed Matthias Zachert as the new Chairman of the Board of Management. Until he joined Merck KGaA in 2011, Mr. Zachert was Chief Financial Officer of LANXESS. He will take up his new position on April 1, 2014.
During 2013, the Supervisory Board duly and fully performed the tasks and duties incumbent upon it under the law, the articles of association and the rules of procedure for the Supervisory Board. It advised the Board of Management regularly on the management of the company and monitored its work. In particular, the Supervisory Board concerned itself with the company’s below-forecast business performance.
The Supervisory Board was directly involved in all decisions of fundamental importance for the company. The Board of Management informed us regularly in written and oral reports about business performance, the situation of the Group, including the risk situation, strategic development and current issues. On the basis of these reports, we discussed significant business transactions in detail. We thoroughly examined the reports and the resolutions proposed by the Board of Management and discussed them at length in meetings of the full Supervisory Board and its committees. If the law, articles of association or other provisions required the Supervisory Board to approve the actions of the Board of Management, we discussed these actions and adopted resolutions on them.
The Chairman of the Supervisory Board, the Chairman of the Board of Management and the other members of the Board of Management were in regular contact outside of the Supervisory Board’s meetings. We regularly discussed the present state of the company, matters of strategy, planning, business performance, risks, risk management and compliance, as well as material events.
Principal topics discussed by the Supervisory Board
The Supervisory Board met a total of six times in 2013.
We regularly discussed the challenging sales and earnings performance of the company and its segments, as well as the financial position. Additionally, the Board of Management kept us updated about the overall state of the economy, the situation in the chemical industry, the performance of LANXESS stock, and investment and acquisition plans. Other important issues addressed by the Supervisory Board are presented below.
The focus of the Supervisory Board meeting held on March 19, 2013 was the review of the annual financial statements and consolidated financial statements for fiscal 2012, the proposal for use of the distributable profit, and preparation of the motions for resolution by the Annual Stockholders’ Meeting. The Supervisory Board also dealt at length with issues relating to corporate governance and defined the variable compensation components on the basis of target attainment in fiscal 2012, which had been highly successful. Another of the human resources issues addressed by the Supervisory Board was the adjustment of the base salary and pension entitlements of the members of the Board of Management.
At the meeting on May 7, 2013, the Supervisory Board approved the extension of Dr. Bernhard Düttmann’s term of office as a member of the Board of Management by five years from April 1, 2014. In addition, the Board of Management reported on the status of construction of the butyl rubber plant in Singapore. We were also informed of the measures taken by the company in the areas of environmental protection and occupational and plant safety. The potential impact on LANXESS of the shale gas boom in the United States was also discussed.
At the meeting that took place immediately prior to the Annual Stockholders’ Meeting on May 23, 2013, the Board of Management reported on the status of preparations for the relocation of company headquarters to Cologne and on human resources initiatives and measures.
On August 2, 2013, the Supervisory Board elected Dr. Janssen to succeed Dr. Middelmann as a member of the Presidial Committee of the Supervisory Board. The Board of Management informed us about the portfolio and restructuring measures in the Saltigo business unit. The Supervisory Board also continued its discussion of the human resources issues that were the subject of the meeting immediately prior to the Annual Stockholders’ Meeting.
In the meeting held on November 8, 2013, the Board of Management reported on the company’s financial policy. We also discussed the compliance situation in the LANXESS Group. In addition, the Board of Management updated us about the status of the Performance Butadiene Rubbers business unit’s investment project in Singapore. In light of the revision of Section 4.2.2, Paragraph 2, Sentence 3 of the German Corporate Governance Code, the Supervisory Board approved peer groups for assessing the appropriateness of the compensation paid to members of the Board of Management within the context of vertical comparability.
At its meeting on December 11, 2013, the Supervisory Board reviewed in full and approved the corporate planning for 2014 proposed by the Board of Management. It also discussed the company’s strategic alignment and capital expenditure policy. The Supervisory Board approved the revocation of the age limit for members of both the Board of Management and the Supervisory Board and correspondingly amended the rules of procedure of the Supervisory Board. Theo Walthie was appointed as a member of the Nominations Committee and Claudia Nemat as a member of the Committee formed pursuant to Section 27, Paragraph 3 of the German Codetermination Act, thus concluding the elections to the committees. Lastly, the Supervisory Board defined the conditions for the variable compensation components for the members of the Board of Management for fiscal 2014 and approved the participation of the members of the Board of Management in a new Long-Term Stock Performance Plan for the period from 2014 to 2017.
All members of the Supervisory Board and its committees performed their duties diligently and conscientiously. The Supervisory Board’s meetings in 2013 were attended by all members, with the exception of one meeting at which two of the twelve members were absent. Committee meetings were attended by all members, with the exception of one meeting that one member was unable to attend. The stockholder representatives and employee representatives to the Supervisory Board worked together in a spirit of trust. They regularly held separate meetings at which they prepared the meetings of the full Supervisory Board.
Work of the committees
The Supervisory Board has four committees: the Audit Committee, the Presidial Committee, the Nominations Committee and the Committee formed pursuant to Section 27, Paragraph 3 of the German Codetermination Act. The committees are tasked with preparing the topics and resolutions to be discussed at meetings of the full Supervisory Board. They also, at times, exercise decision-making powers conferred on them by the Supervisory Board.
The Audit Committee met four times during the year. It dealt in particular with the annual financial statements of LANXESS AG for fiscal 2012, the consolidated financial statements and combined management report for fiscal 2012, the interim reports issued during fiscal 2013, and the condensed consolidated financial statements and interim management report included in the 2013 half-year financial report. It also extensively reviewed the risk management and internal control systems. Other topics discussed were the significant findings by the internal audit department, corporate planning, corporate governance, compliance, IT security and know-how protection, and the determination of the principal areas of focus for the audit of the 2013 financial statements. The external auditor attended two of the Audit Committee’s four meetings and reported on the auditing activities.
The Presidial Committee convened five times during 2013 to prepare the meetings of the Supervisory Board and the decisions to be reached by the full Supervisory Board concerning human resources issues.
The Nominations Committee met once in fiscal 2013. The Committee formed pursuant to Section 27, Paragraph 3 of the German Codetermination Act did not have to convene.
The chairmen of the committees each reported on the meetings and the work of the committees at the meetings of the full Supervisory Board.
Corporate governance and declaration of compliance
In the year under review, the Supervisory Board discussed the German Corporate Governance Code (the Code) and its further development arising from the amendments of May 13, 2013. The joint declaration of compliance made on December 11, 2013 by the Board of Management and Supervisory Board pursuant to Section 161 of the German Stock Corporation Act can be viewed by stockholders at any time on the company’s website. As expressed in the declaration, LANXESS AG complies with the Code’s recommendations and suggestions except in a few justified cases. No conflicts of interest on the part of Supervisory Board members became known last year. Further information about corporate governance can be found in the Corporate Governance Report.
Financial statements of LANXESS AG and consolidated financial statements of the LANXESS Group
The Board of Management of LANXESS AG prepared the financial statements for the 2013 fiscal year in accordance with the rules of the German Commercial Code, the consolidated financial statements for fiscal 2012 in accordance with the International Financial Reporting Standards (IFRS) and the combined management report for 2012. These were all audited by PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, the auditor appointed by the Annual Stockholders’ Meeting and engaged by the Supervisory Board. The auditor issued an unqualified opinion in each case.
The Supervisory Board convinced itself of the independence of the auditor and the persons acting on the auditor’s behalf.
The audit reports and the documents relating to the financial statements were discussed at length with the Board of Management and the auditor at the Audit Committee meeting held on March 10, 2014. They were also discussed in detail on the basis of the required documents and notes at the Supervisory Board’s financial statements meeting held on March 18, 2014. The responsible auditor was present for the discussions concerning the financial statements of LANXESS AG and the consolidated financial statements of the LANXESS Group. He reported on the material results of the audits. He was also available to the Audit Committee and full Supervisory Board to provide additional information.
Based on the recommendation of the Audit Committee as well as on its own review and in-depth discussions about the financial statements of LANXESS AG, the consolidated financial statements of the LANXESS Group, the combined management report and the proposal for appropriation of the profit, the Supervisory Board endorsed the auditor’s conclusions and had no objections to raise. The Supervisory Board has approved the annual financial statements of LANXESS AG and the consolidated financial statements of the LANXESS Group, which were prepared by the Board of Management. The Supervisory Board endorsed the Board of Management’s proposal for use of the distributable profit after close examination and extensive deliberations that carefully weighed the best interests of the company and the stockholders.
Composition of the Supervisory Board
The composition of the Supervisory Board changed during fiscal 2013. With the unexpected death of Dr. Middelmann in early July 2013, we lost an experienced Supervisory Board member who had been with us from the start. The Supervisory Board greatly valued Dr. Middelmann’s commitment and input and will continue to hold his memory in high esteem. On July 25, 2013, the Local Court of Cologne appointed Ms. Claudia Nemat to replace him as a stockholder representative and member of the Supervisory Board of LANXESS AG. She will be standing for election by the stockholders at the 2014 Annual Stockholders’ Meeting.
The Supervisory Board thanks the Board of Management, all of the Group’s employees and the employee representatives for their enormous dedication and tremendous work.
Cologne, March 18, 2014
The Supervisory Board
Dr. Rolf Stomberg