The Supervisory Board again properly executed its duties in 2022 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 2022, 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 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
Four Supervisory Board meetings were held in fiscal 2022, one of which was held as a video conference. 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. The Chair of the Audit Committee reported comprehensively on the previous meetings of the Audit Committee at all the meetings of the Supervisory Board.
At the meeting in February 2022, which was held as a video conference due to the ongoing Covid-19 pandemic, the Executive Board began by intensively addressing the Annual Financial Statements and Consolidated Financial Statements for 2021, the Combined Management Report, the reports of the auditor, including the audit report on the non-financial declaration for fiscal 2021, 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 on 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 2021 and presented the plans for fiscal 2022 as well as the positive expectations for the Group’s global business in spite of the volatile nature of the Covid-19 pandemic, which it discussed in detail with the Supervisory Board. Cyber security and the arrangements taken to ensure it were also discussed. The Supervisory Board intensively addressed the new organization for combating cyber threats.
The meeting in May 2022, which was held in person, focused on the report of the Executive Board on business performance in the first quarter and the updated forecast for fiscal 2022. The Executive Board discussed developments in the first quarter of 2022 and provided an outlook concerning expected business performance in 2022 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 an additional focus of the meeting. Finally, the Supervisory Board discussed the topic of sustainability, which is a strategic priority for the company and a critical factor in its success.
At the meeting in July 2022, which was held in person, the Executive Board began by reporting on the successful business performance in the second quarter of 2022 in spite of the challenging global environment. The non-financial statement, which forms part of the management report, was a further topic of discussion. The Supervisory Board resolved to commission the auditor to conduct a limited assurance review of the non-financial declaration for fiscal 2022. The meeting also discussed the restructuring of the financial controlling process. The planned changes were presented and explained by the Chief Financial Officer. The Supervisory Board also intensively addressed business development in China.
At the fourth Supervisory Board meeting in November 2022, which was also held in person, the Executive Board began by providing an overview of business performance in the third quarter of 2022, which saw the company achieving organic sales growth even in a challenging environment. The background of this 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 by 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 Executive Conference, at which Group managers discussed the geopolitical environment and its impact on our company as well as the priorities of the Group. Finally, the Supervisory Board addressed the self-assessment and its profile of skills and expertise.
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 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 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 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 KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin. 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 2023 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 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. 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. 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 2022, the Chair 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 Chair of the Supervisory Board conducted an investor discussion with Allianz Global Investors GmbH in fiscal 2022. In particular, the topics discussed included the profile of skills and expertise and the independence of the Supervisory Board with a view to the Supervisory Board election in 2024 and the transparency of the remuneration report. The Chair of the Supervisory Board stated that the profile of skills and expertise would play a significant role in the election of future candidates and that an even greater focus had been placed on sustainability and digitalization since the last election. Independence, overboarding internationality and diversity are other important factors. The Supervisory Board intends to begin the search at an early stage and make use of internal and external resources in order to find the most qualified and suitable candidates possible. Discussing the Group’s remuneration report, the Chair of the Supervisory Board noted the continuous improvement in the transparency of the reports from year to year. With regard to sustainability in the Supervisory Board, the Chair of the Supervisory Board said that reporting-relevant topics such as the EU taxonomy are matters for the Audit Committee in particular, while sustainability is an overarching topic for the entire Supervisory Board, meaning that it is discussed at Supervisory Board meetings and is the subject of specific training.
The Supervisory Board has an onboarding process aimed at enabling the quick and efficient induction of new members. Most recently, Birgit Biermann received corresponding training upon joining the Supervisory Board.
The Supervisory Board also conducted a self-assessment in fiscal 2022. The self-assessment of the Supervisory Board took the form of an internal efficiency review based on an extensive questionnaire and resulted in a positive opinion on all topics. Potential improvements to further optimize the work of the committees in individual areas were disclosed and corresponding measures initiated. The next self-assessment of the Supervisory Board is scheduled for 2024.
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 2023. 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, 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 2022. The members of the Nomination Committee did not convene in fiscal 2022.
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 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 2022, which was held as a video conference, the Chief Financial Officer and the Head of Group Accounting reported on the 2021 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 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 2021. Furthermore, the Audit Committee acknowledged and discussed the written risk report. Based on an assessment of the quality of the previous audits, it also resolved to recommend that the Supervisory Board of Merck KGaA, Darmstadt, Germany, propose to the Annual General Meeting of Merck KGaA, Darmstadt, Germany, that KPMG Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Berlin, be elected as the auditor of the Annual Financial Statements and Consolidated Financial Statements for fiscal 2022 and as 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, 2022. Additionally, it resolved to recommend that the Supervisory Board propose the resolution of authorized capital to the 2022 Annual General Meeting. The Head of Group Internal Auditing then presented the report from Group Internal Auditing for 2021. The compliance and data protection report was also presented and discussed.
The report on the net assets, financial position, and results of operations of the Group for the first quarter of 2022 was presented to the meeting in May 2022, which was held in person. The Audit Committee then discussed the report in detail.
The meeting of the Audit Committee in July 2022, 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 2022. The auditor then presented its half-year financial report, including a reference to the updated version of the German Corporate Governance Code (GCGC). 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. The Audit Committee then discussed the planned changes to the financial controlling process in detail. This was followed by the risk management status report for the first half of 2022.
At the meeting in November 2022, which was held in person, 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 third quarter of 2022. The income statement showed substantial sales growth compared with the same period of the previous year, which represented a considerable success in light of the 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. Next, the planned scope of the audit of the financial statements was discussed with KPMG AG on the basis of the statutory provisions and the defined schedule. The company’s internal control system was a further topic of discussion. In particular, this included a discussion of the IT systems used to support financial reporting. Next, the report on Group Internal Auditing and compliance and data protection was presented. Finally, the very positive results of the self-assessment by the Audit Committee were presented.
Personnel matters and training
The Supervisory Board attended all the meetings in full. Edeltraud Glänzer attended the meetings in February and May prior to stepping down from the Supervisory Board, while Birgit Biermann attended the meetings in July and November after joining the Supervisory Board. The members of the Audit Committee attended all meetings of the Audit Committee. Edeltraud Glänzer attended the meetings in February and May, while her successor, Jürgen Glaser, attended the meetings in July and November.
The members of the Supervisory Board participated in a training on the implementation of the German Supply Chain Due Diligence Act and on sustainability.
Darmstadt, February 2023
The Supervisory Board of Merck KGaA, Darmstadt, Germany
Wolfgang Büchele
Chair