The Supervisory Board again properly executed its duties in 2021 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 intensive, trustworthy exchange. During fiscal 2021, 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 current and potential impact of the Covid-19 pandemic, the market and sales situation of the company against the background of macroeconomic development, 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. Aside from the Supervisory Board meetings, the Chairman 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
Four Supervisory Board meetings were held in fiscal 2021. At these meetings, the Supervisory Board intensely discussed the reports of the Executive Board as well as, together with the Executive Board, company developments and strategic issues. The Chair of the Audit Committee reported comprehensively on the previous meetings of the Audit Committee at all the meetings of the Supervisory Board (starting with the first regular meeting following its establishment in May 2021).
At the meeting in February 2021, which was held as a video conference due to the ongoing Covid-19 pandemic, the Executive Board first intensively addressed the Annual Financial Statements and Consolidated Financial Statements for 2020, the Combined Management Report, the reports of the auditor, including the audit report on the non-financial declaration for fiscal 2020, and the proposal for the appropriation of net retained profit. The auditor 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 upon the report and the objectives of the Supervisory Board with respect to its composition and the profile of skills and expertise, 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 and approved the plan to again hold the Annual General Meeting in virtual form in light of the ongoing Covid-19 pandemic. The Executive Board reported on business performance in 2020 and presented the plans for fiscal 2021 as well as the positive expectations for the Group’s global business even in light of the Covid-19 pandemic, which it discussed in detail with the Supervisory Board. The Supervisory Board also took note of the written risk report. The Head of Group Internal Auditing presented the report from Group Internal Auditing for 2020. No risks that could threaten the continued existence of the company were identified. The annual data protection and compliance report for 2020 was also presented. Furthermore, the Supervisory Board resolved the establishment of an Audit Committee with immediate effect (further details can be found under “Committees” below). The meeting also heard a report on the status of the enterprise resource planning (ERP) project in Darmstadt. Finally, the meeting resolved the formal amendment of the Articles of Association of Merck KGaA, Darmstadt, Germany, to reflect the departure of the Chairman of the Executive Board, Stefan Oschmann, the appointment of Belén Garijo as the new Chair of the Executive Board, and the appointment of the two new Executive Board members, Peter Guenter and Matthias Heinzel.
The meeting in May 2021, which was held as a video conference due to the ongoing Covid-19 pandemic, focused on the report of the Executive Board on business performance in the first quarter and the updated forecast for fiscal 2021. The Executive Board discussed developments in the first quarter of 2021 and provided an outlook concerning the expected business performance in 2021 as a whole. The Supervisory Board extensively discussed the contributions of our individual business sectors to the positive financial performance. The report of the Research and Development Committee of the Board of Partners of E. Merck KG, Darmstadt, Germany, for Life Science/Electronics was a further focus of the meeting. Finally, the Supervisory Board discussed the topic of sustainability and the fact that this has become a strategic priority for the company and a critical factor in its success.
At the meeting in July 2021, the Executive Board first reported on the positive business performance in the second quarter of 2021 and how this should be viewed compared with the previous year and in the context of the ongoing Covid-19 pandemic. The EU Chemicals Strategy was discussed at the meeting. The Supervisory Board also resolved to commission the auditor to conduct a limited assurance review of the non-financial declaration for fiscal 2021. Finally, the Supervisory Board resolved, on the basis of the recommendation by the Audit Committee and in accordance with its preference, to propose to the Annual General Meeting that Deloitte GmbH Wirtschaftsprüfungsgesellschaft be elected as the auditor of the Annual Financial Statements of the Group for fiscal 2023 and the auditor responsible for conducting the audit review of the abridged financial statements and interim management report included in the half-year financial report as of June 30, 2023.
At its fourth meeting in November 2021, the Supervisory Board first dealt with the report of the Executive Board on the third quarter of 2021. The Executive Board explained the very positive business performance, even compared with the strong prior-year quarter, and the raised forecast for fiscal, which had exceeded the expectations of the capital market. The background of the positive 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, and the Group with related parties within the meaning of section 111a et seq. AktG. In the previous year, a procedure was established to regularly assess whether the conditions of section 111a (2) sentence 1 AktG have been met for such transactions. There were no transactions requiring the approval of the Supervisory Board in accordance with section 111b (1) AktG. The Global Executive Conference was also discussed.
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 which topics should be placed on the agenda for the next Supervisory Board meeting.
Annual 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 KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin.
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 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 separate combined non-financial (Group) report. 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 examined 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 KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin. It focused particularly on the key audit matters of particular importance in the audit opinion, on 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 examination, 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 2022 to approve the financial statements, the Supervisory Board also examined 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 KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin. 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. The auditors also reported on their audit at this meeting as well as in 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 topic of high priority for the Supervisory Board. We take investor suggestions on this matter extremely seriously. 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. In fiscal 2021, the Chairman of the Supervisory Board was prepared to hold talks with investors on topics pertaining to the Supervisory Board as appropriate, and remains willing to do so. The Chairman of the Supervisory Board conducted an investor discussion with Schroders Investment Management on the Executive Board compensation system in fiscal 2021. No other discussions were requested by investors. Following the most recent self-assessment in fiscal 2020, the next self-assessment of the Supervisory Board is scheduled to take place in fiscal 2022.
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 2022. The statement is permanently available on the website of Merck KGaA, Darmstadt, Germany (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, is given in the Statement on Corporate Governance of the Annual Report.
Committees
Apart from the Nomination Committee and the Audit Committee, the Supervisory Board of Merck KGaA, Darmstadt, Germany, did not have any further committees in fiscal 2021 on account of the special features that apply to the Supervisory Board of a corporation with general partners (KGaA) under German company law, and because a corresponding need for this has not emerged to date. The members of the Nomination Committee did not convene in fiscal 2021.
In February 2021, the Supervisory Board established an Audit Committee comprising three shareholder representatives and three employee representatives. The members of the Audit Committee are Helene von Roeder (Chair), Wolfgang Büchele, Edeltraud Glänzer, Sascha Held, Christian Raabe, and Daniel Thelen. 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. In particular, its responsibilities include examining the Annual Financial Statements and Consolidated Financial Statements and the respective reports of the auditor, the half-year financial report, and the quarterly reports. It also reviews the performance of the auditing firm, particularly the auditor in charge of the engagement. It 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 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, 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 its first regular meeting in May 2021, the Audit Committee primarily addressed the selection process for the new auditor. The results of an intensive preliminary assessment by the company based on objective, predefined criteria for selection were discussed in detail by the Audit Committee, and the shortlisted candidates were given the opportunity to present themselves at length in person. Ahead of the meeting, all candidates had been given extensive opportunities to present themselves to the company and outline their plans in the event of being selected as the auditor. The candidates were then discussed in detail. The Chair of the Executive Board and the Chief Financial Officer subsequently presented the report on the net assets, financial position, and results of operations of the Group for the first quarter of 2021, which the Audit Committee then discussed.
The meeting in July 2021 again focused on the selection recommendation in connection with the mandatory change of auditor. The system for deciding on the auditor was addressed. This was followed by a final discussion of the results of the assessment model and the presentation of the remaining candidates. Based on this discussion, the Audit Committee resolved a recommendation that the Supervisory Board propose to the Annual General Meeting the election of either one of the two remaining candidates as the auditor of the Annual Financial Statements of the company and the Consolidated Financial Statements of the Group for fiscal 2023. The Audit Committee stated and explained to the Supervisory Board its preference that Deloitte GmbH Wirtschaftsprüfungsgesellschaft, one of the two remaining candidates, be proposed to the Annual General Meeting as the auditor of the Annual Financial Statements and Consolidated Financial Statements for fiscal 2023. The Chief Financial Officer and the Head of Group Accounting subsequently presented the report on the net assets, financial position, and results of operations of the Group for the second quarter of 2021, which the Audit Committee then discussed. The auditor presented its half-year financial report. Another focal point of the meeting was the resolution of the list of audit and non-audit services to be performed by the auditor up until the end of 2021. The system for monitoring the performance of non-audit services, which is to be introduced effective January 1, 2022, in light of the new and more stringent statutory regulations arising from the German Act to Strengthen Financial Market Integrity (FISG), was then discussed and adopted. The risk management status report was presented and discussed.
At the meeting in November 2021, the Chief Financial Officer and the Head of Group Accounting reported on the net assets, financial position, and results of operations of the Group in the extremely successful third quarter of 2021. The Audit Committee then extensively discussed the report on the third quarter. The meeting then reviewed the contractual terms for the annual audit of the financial statements and evaluated the audit of the financial statements, the audit fees, and the contractual terms following an extensive presentation by the Head of Group Accounting. Finally, the planning for the audit of the financial statements as of December 31, 2021, was discussed with the auditor. The company’s internal control system was a further topic of discussion. It was reported that the internal control system had been fundamentally revised and subjected to an external audit by an auditing firm. Finally, the report on Group Internal Auditing and compliance and data protection was presented.
Personnel matters and training
With one exception, all the Supervisory Board meetings were attended by all Supervisory Board members. Jürgen Glaser excused himself from attending the meeting in July 2021. The members of the Audit Committee attended all meetings of the Audit Committee. There were no changes to the composition of the Supervisory Board in fiscal 2021.
The members of the Audit Committee participated in a two-day training session organized by the company in conjunction with the Frankfurt School of Finance & Management on the responsibilities and obligations of an audit committee and on the subject of finance. The members of the Supervisory Board participated in a one-day training session on accounting and balance sheet analysis. The cost of the training was borne by the company.
Darmstadt, February 2022
The Supervisory Board of Merck KGaA, Darmstadt, Germany
Wolfgang Büchele
Chairman