Report of the Supervisory Board

The Supervisory Board again properly executed its duties in 2017 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 2017, 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 against the background of macroeconomic development, the financial position of the company and its subsidiaries, along with their earnings development, as well as 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 Chairman of the Executive Board.

Key topics of the Supervisory Board meetings

Four Supervisory Board meetings were held in fiscal 2017. At these meetings, the Supervisory Board intensely discussed the reports of the Executive Board and company developments and strategic issues together with the Executive Board.

At the meeting held on February 24, 2017, the Executive Board first intensively addressed the annual financial statements and consolidated financial statements for 2016, the combined management report as well as the proposal for the appropriation of the net retained profit. The auditor explained the audit report, including the focus areas of the audit. The Executive Board 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, the Declaration of Conformity with the German ­Corporate Governance Code as well as the Statement on Corporate Governance, which simultaneously includes the joint report on ­Corporate Governance of the Executive Board and Supervisory Board. The Supervisory Board also approved the proposals to be made to the General Meeting. The Executive Board reported on business performance in 2016 and presented the plans for fiscal 2017. The Supervisory Board also took note of the written risk report as well as the report from Group Internal Auditing for 2016 and approved the performance of certain non-audit services by the auditor of the annual financial statements.

The meeting held on May 12, 2017 focused on current business developments in the first quarter of 2017. The report of the Research and Development Committee Life Science/Performance Materials of the Board of Partners of E. Merck KG, Darmstadt, Germany, was a further focus of the meeting. The Supervisory Board also dealt with the Compliance and Data Protection Report for 2016. In conclusion, the Executive Board presented the ‟Vision and Future Darmstadt” project, regarding the plans for the future of the Darmstadt site.

At its meeting on July 28, 2017, the Supervisory Board focused intensively on the report of the Executive Board on business performance in the second quarter of 2017. In addition, the auditor explained the half­-year financial report. Risk management within the company was a further topic. The Head of Risk Management presented the status report for the first half of 2017. No risks that threaten the continued existence of the company were identified. In addition, the list of permitted non-audit services was updated, an external audit of the non-financial declaration was resolved upon and various developments in the Corporate Governance area were discussed.

At its fourth meeting on November 8, 2017, the Supervisory Board dealt with the report of the Executive Board on the third quarter of 2017. Additional topics of focus were the 2017 status reports of Group Internal Auditing and on compliance and data protection as well as the report of the Research and Development Committee Healthcare. Furthermore, the Group Executive Conference and the results of the efficiency review of the Supervisory Board were reported on and discussed. In addition, the implementation of new Corporate Governance requirements was discussed and the performance of various non-­audit services by the auditor of the annual financial statements was approved.

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. The audit opinion for the annual financial statements contained the following key audit matters, in other words those matters that, in the professional judgment of the auditor, were of most significance in the audit of the annual financial statements:

  • Impairment testing of interests in associates
  • Recognition and measurement of provisions for tax liabilities
  • Measurement of provisions for patent disputes

For the consolidated financial statements prepared in accordance with International Financial Reporting Standards, as well as the combined management report, the auditors issued the unqualified auditor’s report reproduced in the Annual Report of the Group. The audit opinion for the consolidated financial statements contained the following audit topics of special importance:

  • Goodwill impairment tests
  • Recognition and measurement of income tax liabilities and deferred tax liabilities
  • Measurement of provisions for patent disputes
  • Measurement of the variable purchase price receivable from the divestment of the Biosimilars business activities.

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, the combined management report for Merck KGaA, Darmstadt, Germany, and the Group, the proposal by the Executive Board for the appropriation of the net retained profit, as well as the separate combined non-financial (Group) report were presented and distributed to the Supervisory Board, together with the auditor’s reports.

In accordance with Article 14 (2) of the Articles of Association, the Supervisory Board also examined the annual financial statements of Merck KGaA, Darmstadt, Germany, the proposal for the appropriation of net retained profit and the auditor’s report presented in accordance with Article 27 (2) of the Articles of Association. 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, and took note of the auditor’s report of KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin. The Supervisory Board paid special attention to the aforementioned key audit matters contained in the respective audit opinion, to the respectively resulting risks for the financial statements, to the respectively described audit procedure as well as to the respective conclusions drawn by the auditors. Furthermore, the Supervisory Board also examined the separate combined non-­financial (Group) report and the memorandum on a limited assurance engagement prepared by the auditor on behalf of the Supervisory Board. The discussion of the relevant agenda item at the Supervisory Board’s meeting on February 28, 2018 to approve the financial statements 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 as well as the separate combined non-financial (Group) report. These auditors furthermore reported on their audit at this meeting.

The Supervisory Board took note of and approved the results of the audit. On completion of its examination, the Supervisory Board raised no objections and thus approved the annual financial statements for Merck KGaA, Darmstadt, Germany, the consolidated financial statements of the Group and the combined management report of Merck KGaA, Darmstadt, Germany, and the Group prepared by the Executive Board, the report presented by the auditor in accordance with Article 27 (2) of the Articles of Association as well as the separate combined non-­financial (Group) report. The Supervisory Board gave its consent to the proposal of the Executive Board for the appropriation of net retained profit.

Corporate governance and Declaration of Conformity

Corporate governance is a topic of high priority 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 2017.

After addressing corporate governance topics in detail, the Executive Board and Supervisory Board resolved to adopt and issue the updated Declaration of Conformity on February 14, 2018 (Executive Board) and on February 28, 2018 (Supervisory Board) and jointly issued it on February 28, 2018 in accordance with section 161 of the German Stock Corporation Act. The statement is permanently available on the website of Merck KGaA, Darmstadt, Germany (https://www.emdgroup.com/en/investors/corporate-governance.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 on pages 170 et seq. of the Annual Report.

Committees

Apart from the Nomination Committee, the Supervisory Board of Merck KGaA, Darmstadt, Germany, currently has no further committees 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 2017. No report is given on the work of further committees.

Personnel matters

With the exception of Helga Rübsamen­-Schaeff, who was excused and absent from the meeting on February 24, 2017, Edeltraud ­Glänzer, who was excused and absent from the meeting on May 12, 2017, and Alexander Putz, who was excused and absent from the meeting on July 28, 2017, all the Supervisory Board members attended all the Supervisory Board meetings.

Darmstadt, February 28, 2018

The Supervisory Board of Merck KGaA, Darmstadt, Germany

Wolfgang Büchele
Chairman