The Supervisory Board again properly executed its duties in 2023 in accordance with the law as well as the company’s Articles of Association and rules of procedure. In particular, the Supervisory Board monitored the work of the Executive Board diligently and regularly.
Cooperation with the Executive Board
The cooperation with the Executive Board was characterized by an intensive dialog on the basis of mutual trust. During fiscal 2023, the Executive Board provided the Supervisory Board with regular written and verbal reports on the business development of Merck KGaA, Darmstadt, Germany, and the Group. In particular, the Supervisory Board was informed about the market and sales situation of the company in the context of macroeconomic developments, and the financial position of the company and its subsidiaries, along with their earnings development and corporate planning. Within the scope of quarterly reporting, the sales and operating results were presented for the Group as a whole and broken down by business sector. In addition to the Supervisory Board meetings, the Chair of the Supervisory Board also maintained, and continues to maintain, a regular exchange of information with the Chair of the Executive Board.
Key topics of the Supervisory Board meetings
A total of five Supervisory Board meetings were held in fiscal 2023. All of the meetings were held in person. At four of these five meetings, the Supervisory Board intensely discussed the reports of the Executive Board, as well as company developments and strategic issues together with the Executive Board. The Chair of the Audit Committee or, in the case of the meetings in May and July 2023, the Vice Chair reported comprehensively on the previous meetings of the Audit Committee at these meetings of the Supervisory Board.
At the meeting in February 2023, the Supervisory Board intensively addressed the Annual Financial Statements and Consolidated Financial Statements for 2022, the Combined Management Report, the reports of the auditor (KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, “KPMG”), including the audit report on the non-financial declaration for fiscal 2022, and the proposal for the appropriation of net retained profit. The auditor (KPMG) explained the audit reports including the focus areas of the audit. The Executive Board and the Head of Group Accounting reported on the financial statements. Furthermore, the Supervisory Board resolved on the report and the objectives of the Supervisory Board with respect to its composition and the profile of skills and expertise including the qualification matrix, the Declaration of Conformity with the German Corporate Governance Code, and the Statement on Corporate Governance. The Supervisory Board also adopted the proposals to be made to the Annual General Meeting (including the creation of new Contingent Capital II) and approved the plan to hold the Annual General Meeting in virtual form. The Executive Board reported on business performance in 2022 and presented the plans for fiscal 2023, which was likely to be challenging in light of geopolitical tensions in particular.
The Supervisory Board met in April 2023 to resolve on the amendment to the rules of procedure of the Audit Committee and the election of Daniel Thelen as the Vice Chair of the Audit Committee. The meeting was held after Helene von Roeder stepped down as a member of the Supervisory Board and the Audit Committee effective April 17, 2023. The Chair of the Supervisory Board informed the Supervisory Board members about this development at the meeting. As part of the amendment to the rules of procedure of the Audit Committee, the Supervisory Board transferred the responsibility for resolving on sustainability topics of relevance to the company to the Audit Committee.
The meeting in May 2023 focused on the report of the Executive Board on business performance in the first quarter and the forecast for fiscal 2023. The Executive Board discussed developments in the first quarter of 2023 and provided an outlook concerning expected business performance in 2023 as a whole. The Supervisory Board extensively discussed the contributions of the individual business sectors to the company’s financial performance. The report of the Research and Development Committee of the Board of Partners of E. Merck KG, Darmstadt, Germany, for Life Science and Electronics was an additional focus of the meeting. Finally, the Supervisory Board addressed our global strategy.
At the meeting in July 2023, the Executive Board reported on the comparatively good business performance in the second quarter of 2023 in spite of the challenging environment. The non-financial statement, which forms part of the Combined Management Report, was a further topic of discussion. The Supervisory Board resolved to commission the auditor (Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich) to conduct a limited assurance review of the non-financial declaration for fiscal 2023. In addition, the auditor (Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich) was commissioned to conduct the formal and material audit of the compensation report for fiscal 2023. Another topic addressed by the meeting was the amendment to the Articles of Association of Merck KGaA, Darmstadt, Germany, following the departure of Marcus Kuhnert and the appointment of Helene von Roeder to the Executive Board. All of the training undertaken by the Supervisory Board was on the subject of sustainability.
At the Supervisory Board meeting in November 2023, the Executive Board provided an overview of business performance in the third quarter of 2023 in an extremely challenging business environment. The background to this business performance was then discussed in detail by the Supervisory Board. Other topics discussed included the report by the Research and Development Committee for Healthcare and transactions of Merck KGaA, Darmstadt, Germany, with related parties within the meaning of section 111a et seq. of the German Stock Corporation Act (AktG). There were no transactions requiring the approval of the Supervisory Board in accordance with section 111b (1) AktG. This was followed by an overview and an intensive discussion of the Group and business sector strategies, also in the context of external developments. The Chair of the Executive Board also reported on the Global Leadership Summit (GLS), at which Group managers discussed the geopolitical environment and its impact on the Group as well as the priorities of the Group.
In parts of its meetings, the Supervisory Board regularly meets without the members of the Executive Board being present. Additionally, the employee representatives gather for a preparatory meeting ahead of each Supervisory Board meeting. The employee representatives also gather immediately after each Supervisory Board meeting to discuss the topics addressed at the meeting. Among other things, this includes a discussion of topics which should be placed on the agenda for the next Supervisory Board meeting.
Annual Financial Statements and Consolidated Financial Statements
The Annual Financial Statements of Merck KGaA, Darmstadt, Germany, the Consolidated Financial Statements of the Group, and the Combined Management Report for Merck KGaA, Darmstadt, Germany, and the Group, including the accounts, were audited by Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich.
The auditors issued an unqualified audit opinion on the Annual Financial Statements of Merck KGaA, Darmstadt, Germany, in accordance with German Auditing Standards.
For the Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards and for the Combined Management Report, the auditors issued the unqualified auditor’s report that is reproduced in the Annual Report of the Group.
In addition, the auditor audited the calculation of the participation of Merck KGaA, Darmstadt, Germany, in the profit of E. Merck KG, Darmstadt, Germany, in accordance with Article 27 (2) of the Articles of Association, as well as the combined non-financial declaration. The Annual Financial Statements of Merck KGaA, Darmstadt, Germany, the Consolidated Financial Statements of the Group, and the Combined Management Report for Merck KGaA, Darmstadt, Germany, and the Group, including the non-financial declaration and the proposal of the Executive Board for the appropriation of net retained profit, were submitted firstly to the Audit Committee and then to the Supervisory Board together with the auditor’s reports.
The Audit Committee assessed the Annual Financial Statements of Merck KGaA, Darmstadt, Germany, the proposal for the appropriation of net retained profit, and the auditor’s report. It also examined the Consolidated Financial Statements of the Group as well as the Combined Management Report for Merck KGaA, Darmstadt, Germany, and the Group, including the non-financial declaration, and took note of the auditor’s reports of Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich. In particular, it focused on the key audit matters of particular importance in the audit opinion, the resulting risks for the financial statements, the approach adopted during the audit as described, and the conclusions drawn by the auditor. On completion of its assessment, the Audit Committee raised no objections and thus recommended that the Supervisory Board approve the Annual Financial Statements for Merck KGaA, Darmstadt, Germany, the Consolidated Financial Statements of the Group, the Combined Management Report of Merck KGaA, Darmstadt, Germany, and the Group prepared by the Executive Board, and the report presented by the auditor in accordance with Article 27 (2) of the Articles of Association.
At its meeting in February 2024 to approve the financial statements, the Supervisory Board also assessed the Annual Financial Statements of Merck KGaA, Darmstadt, Germany, the proposal for the appropriation of net retained profit, the auditor’s report presented in accordance with Article 27 (2) of the Articles of Association, the Consolidated Financial Statements of the Group, and the Combined Management Report of Merck KGaA, Darmstadt, Germany, and the Group in accordance with Article 14 (2) of the Articles of Association, and took note of the auditor’s reports of Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich. The discussion of the relevant agenda item at this meeting was also attended by the auditors who sign the audit opinion on the Annual Financial Statements of Merck KGaA, Darmstadt, Germany, and the Consolidated Financial Statements of the Group. This was also the case for the meeting of the Audit Committee. Based on the recommendation of the Audit Committee and its own review, the Supervisory Board approved the Annual Financial Statements for Merck KGaA, Darmstadt, Germany, the Consolidated Financial Statements of the Group, the Combined Management Report of Merck KGaA, Darmstadt, Germany, and the Group prepared by the Executive Board, and the report presented by the auditor in accordance with Article 27 (2) of the Articles of Association. The Supervisory Board gave its consent to the proposal of the Executive Board for the appropriation of net retained profit after conducting its own review.
Corporate governance and Declaration of Conformity
Corporate governance is a high-priority topic for the Supervisory Board. In its own estimation, the Supervisory Board has an adequate number of independent members. There were no conflicts of interest as defined by the German Corporate Governance Code involving Supervisory Board members during the year under review. Dialog with the stakeholder groups set out in the German Corporate Governance Code is an important aspect of opinion-forming within the company. Among other things, this takes the form of surveys in connection with the materiality analysis as well as direct discussions. For example, we take the related investor suggestions extremely seriously. In fiscal 2023, the Chair of the Supervisory Board held discussions with investors on Supervisory Board-specific topics, including investor meetings with Allianz Global Investors GmbH and DWS Investment GmbH. In particular, the topics discussed included the qualification matrix and the independence of the Supervisory Board with a view to the Supervisory Board election in 2024 as well as the remuneration of the Supervisory Board. Mr. Büchele stated that the qualification matrix plays a significant role in the selection of candidates and that a particular focus has been placed on sustainability and digitalization. Independence, internationality and diversity are other important factors. Mr. Büchele also stated that the company is planning to reduce the term of office of the Supervisory Board members. Mr. Büchele reported that consideration was being given to possibly adjusting Supervisory Board compensation to reflect the development of the market in recent years in order to remain competitive with regard to attracting the best candidates. Ahead of the Supervisory Board election in 2024, the Supervisory Board also actively engaged in dialog with the biggest investors in order to determine their expectations and opinions. Among others, initial meetings with Blackrock, Amundi and Union Invest already took place in December 2023.
The Supervisory Board has an onboarding process aimed at enabling the quick and efficient induction of new members. Most recently, Barbara Lambert received corresponding training upon joining the Supervisory Board.
After discussing corporate governance issues in detail, the Executive Board and the Supervisory Board adopted the updated Declaration of Conformity in accordance with section 161 AktG and issued it jointly in February 2024. The statement is permanently available on the website of Merck KGaA, Darmstadt, Germany (https://www.emdgroup.com/en/investors/corporate-governance/reports.html). More information about corporate governance at Merck KGaA, Darmstadt, Germany, including the compensation of the Executive Board and Supervisory Board, can be found in the Statement on Corporate Governance.
Committees
The Supervisory Board of Merck KGaA, Darmstadt, Germany, had a Nomination Committee and an Audit Committee in fiscal year 2023.
Audit Committee
The Audit Committee meets four times a year. Further meetings are convened as and when necessary. The Audit Committee is generally responsible for accounting and auditing matters. This includes sustainability reporting and auditing the sustainability reports. In particular, its responsibilities include auditing the Annual Financial Statements, the Consolidated Financial Statements, and the respective reports of the auditor, as well as the half-year financial report and the quarterly statements. The Audit Committee discusses the assessment of audit risk, the audit strategy and audit planning, and the results of the audit with the auditor. The Chair of the Audit Committee regularly discusses the progress of the audit with the auditor and reports back to the committee. The other responsibilities of the Audit Committee include assessing the performance of the auditor, and especially the performance of the auditor in charge of the engagement. The Audit Committee is also tasked with sustainability. This topic was assigned to it at the Supervisory Board meeting in April 2023.
The Audit Committee prepares the negotiations and resolutions of the Supervisory Board on the approval of the Annual Financial Statements and Consolidated Financial Statements and the proposal to the Annual General Meeting on the election of the auditor. The adoption of the Annual Financial Statements is not the responsibility of the Audit Committee or the Supervisory Board but of the Annual General Meeting. The Audit Committee also ascertains the independence of the auditor, assigns the audit mandate to the auditor, and determines the focus areas of the audit and the fee agreement. Furthermore, the Audit Committee monitors the accounting process, the effectiveness of the internal control system, the risk management system and the internal auditing system, and compliance. The Chair of the Audit Committee and the auditor also engage in a regular dialog outside of the meetings of the Audit Committee.
At the meeting in February 2023, which was held in person, the Chief Financial Officer and the Head of Group Accounting reported on the 2022 Consolidated Financial Statements and the Annual Financial Statements of Merck KGaA, Darmstadt, Germany, which were then discussed in detail by the Audit Committee. This included a discussion of the sustainability topics contained in the non-financial statement. The auditor (KPMG) also reported on the audit of the financial statements and discussed the focus areas of the audit. The declaration of auditor independence was acknowledged and evaluated. The meeting also reviewed and resolved on the proposal on the appropriation of net retained profit to be submitted to the Supervisory Board, including the dividend payment by Merck KGaA, Darmstadt, Germany, for fiscal 2022. Furthermore, the Audit Committee acknowledged and discussed the written risk report. In addition, the Audit Committee proposed that the Supervisory Board resolve the creation of a new authorization to issue convertible bonds and/or bonds with warrants, accompanied by the simultaneous creation of new Contingent Capital II. The Head of Group Internal Auditing then presented the report from Group Internal Auditing for 2022. The compliance and data protection report was also presented and discussed. The details of the non-audit services approved in fiscal 2022 were also discussed.
The report on the net assets, financial position, and results of operations of the Group for the first quarter of 2023 was presented to the meeting in May 2023, which was held in person. The Audit Committee then discussed the report in detail. The Audit Committee also discussed the start date of the audit period with the auditors (Deloitte). The auditors shared their initial impressions following the handover of the audit engagement and provided an overview of the planning for the audit review of the half-year financial report.
The meeting of the Audit Committee in July 2023, which was also held in person, began with a detailed discussion of the report on the net assets, financial position, and results from operations of the Group for the second quarter of 2023. The auditors (Deloitte) shared their initial impressions following the handover of the audit engagement and presented the results of the audit review of the half-year financial report. The auditors also presented an overview of the process planning for the audit of the Annual Financial Statements and the planned focal points. Next, the Audit Committee resolved on the list of the individual audit and non-audit related services. A further focal point was the report on the key developments regarding the accounting-related internal control system (ICS), which the Audit Committee discussed in detail. This was followed by the risk management status report for the first half of 2023.
At the meeting in November 2023, which was held in person, the Chief Financial Officer presented the initial observations and findings of the financial reporting health check. In particular, this included a discussion of the internal control system and the IT systems used to support financial reporting. The Chief Financial Officer and the Head of Group Accounting then reported on the net assets, financial position, and results of operations of the Group in the third quarter of 2023. It was noted that the income statement was showing lower net sales than in the same quarter of the previous year due to the sustained difficult environment. The Audit Committee discussed the report on the third quarter in detail. It then reviewed the contractual terms for the annual audit of the financial statements and evaluated the audit of the financial statements and non-audit services following an extensive presentation by the Head of Group Accounting. Finally, the planned scope of the audit of the financial statements on the basis of the statutory provisions and the provisions of the European Securities and Markets Authority (ESMA) and the defined schedule were discussed with Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich. The reports on Group Internal Auditing and compliance and data protection were then presented.
Nomination Committee
The Nomination Committee met twice in fiscal 2023.
At the meeting in July 2023, which was held as a video conference, the members of the Nomination Committee met with the aim of recommending a suitable replacement for Helene von Roeder to the Supervisory Board. Following a brief discussion regarding potential candidates, Barbara Lambert was proposed to the Supervisory Board of Merck KGaA, Darmstadt, Germany, as a suitable candidate for its proposal for election by court appointment.
The meeting in October 2023, which was held as a video conference, heard a report on the search for candidates for the Supervisory Board to be proposed for election at the 2024 Annual General Meeting. In particular, a well-known headhunting firm was commissioned in order to ensure that the criteria of the candidate profiles were satisfied to the greatest possible extent. Potential candidates were selected on the basis of several selection interviews and discussed at the meeting. The Nomination Committee then resolved to propose the candidates it deemed most suitable to the Supervisory Board of Merck KGaA, Darmstadt, Germany, for election at the 2024 Annual General Meeting.
Personnel matters and training
The Supervisory Board attended all of the meetings in full. Helene von Roeder attended the meeting in February prior to stepping down from the Supervisory Board, while Barbara Lambert attended the meeting in November following her appointment to the Supervisory Board. The members of the Audit Committee attended all meetings of the Audit Committee. Helene von Roeder attended the meeting in February, while her successor Barbara Lambert attended the meeting in November. The members of the Nomination Committee attended all meetings of the Nomination Committee.
For the purposes of targeted further training, the Supervisory Board is offered an information event with internal and external speakers at least once a year. In fiscal 2023, a training event on sustainability for all Supervisory Board members was held on May 10, 2023. The event, which featured high-profile internal and external speakers, encompassed the topics of “Sustainability in the Corporate Environment” as well as the legal dimensions of aspects and developments in the area of sustainability and ESG that are relevant to the Supervisory Board (e.g. climate-related litigation, greenwashing, due diligence obligations in supply chains, and sustainability reporting in accordance with the CSRD). The company generally covers the cost of training measures for the Supervisory Board.
New members of the Supervisory Board – including Barbara Lambert in 2023 – also undergo an onboarding process prepared by employees of the Legal department in accordance with the onboarding plan.
Darmstadt, February 2024
The Supervisory Board of Merck KGaA, Darmstadt, Germany
Wolfgang Büchele
Chair