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Report of the Supervisory Board

The Supervisory Board again properly executed its duties in 2018 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 2018, 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 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 Chairman of the Executive Board.

Key topics of the Supervisory Board meetings

Four Supervisory Board meetings were held in fiscal 2018. At these 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.

At the meeting held on February 28, 2018, the Executive Board first intensively addressed the annual financial statements and consolidated financial statements for 2017, the combined management report, the audit report of the auditor on the separate non-financial report (of the Group) for fiscal 2017 and the proposal for the appropriation of the net retained profit. The auditor explained the audit reports including the focus areas of the audit p. 198, 2017. The Executive Board and the Head of Accounting reported on the financial statements. The Supervisory Board took note of the information on the ‟Operational Infrastructure” project, the restructuring of Merck KGaA, Darmstadt, Germany. 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, 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 2017 and presented the plans for fiscal 2018. The ‟Roda” project, the divestment of the global Consumer Health business, was the subject of intense deliberations. The Supervisory Board also took note of the written risk report as well as the report from Group Internal Auditing for 2017.

The meeting held on May 9, 2018, focused on current business developments in the first quarter of 2018. 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 2017.

At its meeting on July 31, 2018, the Supervisory Board focused intensively on the report of the Executive Board on business performance in the second quarter of 2018. 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 2018. 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. Finally, the Supervisory Board elected the new members of the Nomination Committee as regularly scheduled.

At its fourth meeting on November 9, 2018, the Supervisory Board dealt with the report of the Executive Board on the third quarter of 2018. Additional topics of focus were the 2018 status reports of Group Internal Auditing, status reports on compliance and data protection, and the report of the Research and Development Committee Healthcare. Furthermore, the Group Executive Conference and the strategy of the Business Services of Merck KGaA, Darmstadt, Germany, were reported on and discussed. In addition, a revision of the Articles of Association due to the departure of Walter Galinat was discussed.

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, i.e. 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
  • Spin-off of the Healthcare, Life Science and Performance Materials business sectors to three subsidiaries and leaseback of business sectors as part of business leases.

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. The audit opinion for the consolidated financial statements contained the following audit topics of special importance:

  • Goodwill impairment tests
  • Recognisition and measurement of income tax liabilities and deferred tax liabilities
  • Measurement of provisions for patent disputes
  • Measurement of disposal gains/losses from the divestment of the Consumer Health business

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 of the Executive Board for the appropriation of net retained profit and the separate combined non-financial (Group) report were submitted to the Supervisory Board together with the auditor’s report.

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. It focused particularly on the aforementioned 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. 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 26, 2019, 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, 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 and the separate 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 the year under review. In fiscal 2018, 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 next efficiency review of the Supervisory Board will be held in the coming fiscal year, following the last efficiency audit in fiscal 2017.

After discussing corporate governance issues in detail, the Executive Board and the Supervisory Board on February 14, 2019 (Executive Board), and February 26, 2019 (Supervisory Board), respectively, adopted the updated Declaration of Conformity and issued it jointly on February 26, 2019 in accordance with section 161 AktG. The statement is permanently available on the website of Merck KGaA, Darmstadt, Germany (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 166 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 convened on November 9, 2018, in order to recommend suitable candidates to the Supervisory Board for the Supervisory Board elections in 2019. At its meeting, the committee discussed potential candidates. The discussion took into account the statutory requirements as well as the candidate’s fit into the full Supervisory Board, the objectives of the Supervisory Board regarding its composition, its profile of skills and expertise and the diversity policy. No report is given on the work of further committees.

personnel matters

With the exception of Michael Fletterich, who was excused and absent from the meeting on November 9, 2018, all the Supervisory Board members attended all the Supervisory Board meetings.

Darmstadt, February 26, 2019

The Supervisory Board of Merck KGaA, Darmstadt, Germany

Wolfgang Büchele
Chairman