Declaration on Corporate Governance

In the reporting year, the Board of Management and Supervisory Board again addressed the matter of complying with the German Corporate Governance Code and the resulting Declaration of Conformity was issued in December 2018 and posted on Covestro’s website.

In the year under review, Covestro AG was in compliance with all recommendations of the “Government Commission on the German Corporate Governance Code” as published by the Federal Ministry of Justice and Consumer Protection in the official section of the Federal Gazette (Bundesanzeiger), and will remain so in the future.

Declaration of Conformity (in accordance with the German Corporate Governance Code)

Declaration by the Board of Management and Supervisory Board concerning the German Corporate Governance Code (February 7, 2017 version) pursuant to Section 161 of the German Stock Corporation Act (AktG)

Since the last Declaration of Conformity as of December 2017, Covestro AG has complied with all recommendations of the German Corporate Governance Code in the version of February 7, 2017, and will comply with them in the future.

Leverkusen, December 2018

Composition, duties and activities of the Board of Management and Supervisory Board

Board of Management

Duties and activities of the Board of Management

The Board of Management runs the company on its own responsibility with the goal of sustainably increasing the company’s enterprise value and achieving defined corporate objectives. In doing so, it takes into account the interests of stockholders, employees and other stakeholders. The Board of Management performs its tasks according to the law, the Articles of Incorporation and the Board of Management’s rules of procedure, and the recommendations of the German Corporate Governance Code as stated in the Declaration of Conformity. It ensures compliance with the law and internal company policies, and works with the company’s other governance bodies in a spirit of trust.

The Board of Management defines the long-term goals and strategies for the company and sets forth the principles and policies for the resulting corporate policies. It coordinates and monitors the most important activities, defines the company’s portfolio, develops and deploys managerial staff, allocates resources and decides on the financial steering and reporting of the Covestro Group.

The members of the Board of Management bear joint responsibility for running the business as a whole. However, the individual members manage the areas assigned to them on their own responsibility within the framework of the decisions made by the full Board. The allocation of duties among the members of the Board of Management is defined in a written schedule appended to its rules of procedure.

The full Board of Management makes decisions on all matters of fundamental importance and in cases where a decision of the full Board is prescribed by law or otherwise mandatory. The rules of procedure of the Board of Management contain a list of topics that must be dealt with and resolved by the full Board.

Board of Management meetings are held regularly and are convened by the Chair of the Board of Management. Any member of the Board of Management may also demand that a meeting be convened, notifying the other members of the matter for discussion. The Board of Management makes decisions by a simple majority of the votes cast, except where unanimity is required by law. In the event of a tie, the Chair has the casting vote.

According to the Board of Management’s rules of procedure and schedule of duties, the Chair bears particular responsibility for coordinating all Board of Management areas. The Chair represents the Board of Management and Covestro AG and the Group in dealings with the public and other third parties.

Composition of the Board of Management

Under the schedule of duties, each Board member is assigned responsibility for particular duties and areas. The Board of Management members manage the areas assigned to them on their own responsibility within the framework of the decisions made by the full Board. The Chair of the Board of Management is appointed by the Supervisory Board.

Objectives and concept for the composition of the Board of Management

Assisted by the Human Resources Committee and the Board of Management, the Supervisory Board arranges long-term succession planning for individual Board of Management members. The Supervisory Board conducts a systematic process for selecting candidates for the Board of Management, while following the recommendations of the German Corporate Governance Code. In accordance with Covestro’s corporate values, it also observes the diversity principle, i.e. balancing the Board’s composition in terms of age, educational and professional background as well as a balanced ratio of male and female members. The Board of Management as a whole should represent a variety of backgrounds and possess extensive experience in corporate strategy, innovation, production and technology, marketing and sales, finance, leadership and sustainability management.

When filling specific Board of Management positions, the Supervisory Board also develops a skills profile that is based on the diversity criteria and used to evaluate candidates from within and outside the company. Decisions are made in the company’s interest and taking into account all of the circumstances of each individual case.

Implementation status of the objectives

Covestro’s Board of Management currently has three members. The goals regarding age structure and function-specific expertise were generally met in fiscal year 2018. In filling the position of CFO, the Board of Management met the education and professional background requirements. The Board of Management’s members ranged in age from 46 to 56 in fiscal year 2018. As a whole, the Board of Management features members with a range of different educational backgrounds. In particular, they possess many years of experience in the following areas: engineering, physics and chemistry, business administration and finance. The members of the Board of Management have extensive professional experience in Germany and abroad as well as in the petroleum and chemical industries. In the course of their careers, they have held leadership positions in marketing and sales, corporate strategy, production and technology, and finance, among others, and possess extensive experience in human resources and project management.

Promotion of equal participation of women and men in leadership positions

The German Law on equal participation of women and men in leadership positions in the private and public sectors of May 24, 2015, requires certain companies in Germany to define target quotas for appointing women to their Supervisory Boards, and Boards of Management and the two management levels below, and to establish dates by which this quota is to be achieved in each case.

In accordance with Section 96 Paragraph 2 of the Stock Corporation Act, the Supervisory Board of a company which is both listed and codetermined should be composed of at least 30% women and at least 30% men. As of December 31, 2018, the Supervisory Board of Covestro AG comprises four women and eight men. The minimum legal requirement has thus been met.

At the end of the first target attainment period on June 30, 2017, the Supervisory Board decided on a target quota of at least 40% for women on the Board of Management of Covestro AG and an implementation period through June 30, 2022.

In addition, in the past year the Board of Management set new targets for the first two management levels below the Board of Management. For the new period until June 30, 2022, the goal of Covestro AG and the Covestro Group is to achieve a minimum of 30% women at both levels.

Supervisory Board

Duties and activities of the Supervisory Board

The Supervisory Board advises and oversees the Board of Management. The Supervisory Board is directly involved in decisions on matters of fundamental importance to the company, regularly conferring with the Board of Management on the strategic alignment of Covestro AG and the Covestro Group, and on the implementation status of the business strategy. The Supervisory Board Chair coordinates its work and presides over the meetings.

Through regular and open discussions with the Board of Management, the Supervisory Board is kept informed of business policy, corporate planning and strategy. The Supervisory Board approves the annual budget and financing framework. It also approves the financial statements of Covestro AG and the consolidated financial statements of the Covestro Group, along with the combined management report, taking into account the auditor’s reports.

Composition of the Supervisory Board

The Supervisory Board has 12 members, half of whom are stockholder representatives and half employee representatives pursuant to the German Codetermination Act. The six members representing employees comprise four Covestro employees and two union representatives. The stockholder representatives are elected by the Annual General Meeting.

The Supervisory Board discussed the requirements stipulated by Section 100, Paragraph 5 of the German Stock Corporation Act. Based on its composition, the Supervisory Board as a whole has in-depth industry expertise in the chemical and polymer sector in which Covestro operates. This industry knowledge was acquired by the members either through their jobs or the requisite continuing education.

Committees of the Supervisory Board

The Supervisory Board currently has the following committees:

Presidial Committee: This comprises the Supervisory Board Chair and Vice Chair along with a further stockholder representative and a further employee representative. The Executive Committee serves primarily as the mediation committee pursuant to the German Codetermination Act. It has the task of submitting proposals to the Supervisory Board on the appointment of members of the Board of Management if the necessary two-thirds majority is not achieved in the first vote at a plenary meeting. Certain decision-making powers in connection with capital measures, including the power to amend the Articles of Incorporation, have also been delegated to this committee.

Members: Dr. Richard Pott (Chair), Peter Hausmann, Petra Kronen and Regine Stachelhaus

Audit Committee: The Audit Committee comprises three stockholder representatives and three employee representatives. The Chair of the Audit Committee in the reporting year, Prof. Dr. Rolf Nonnenmacher, satisfies the statutory requirements concerning expertise in the field of accounting or auditing that at least one member of the Supervisory Board and the Audit Committee is required to possess and is independent pursuant to Section 5.4.2 of the German Corporate Governance Code. The Audit Committee meets four times a year. It monitors the accounting and financial reporting process and is responsible for examining the financial statements, consolidated financial statements and management reports, and for discussing the quarterly and half-yearly reporting with the Board of Management. On the basis of the auditor’s report, the Audit Committee develops proposals for resolutions by the Supervisory Board relating to the confirmation of the financial statements, the approval of the consolidated financial statements and the use of the distributable profit.

The Audit Committee is also responsible for the company’s relationship with the external auditor. It submits a proposal to the full Supervisory Board concerning the auditor’s appointment and may award the audit contract to the audit firm appointed on behalf of the Supervisory Board and agree the auditor’s remuneration. It also suggests areas of focus for the audit and monitors the quality of the audit as well as the independence and qualifications of the auditor.

In addition, the Audit Committee monitors the effectiveness of the internal control system, the risk management system, the internal audit system and the compliance function.

Members: Prof. Dr. Rolf Nonnenmacher (Chair), Johannes Dietsch, Peter Hausmann, Petra Kronen, Irena Küstner and Dr. Richard Pott

Human Resources Committee: On this committee, too, there is parity of representation between stockholders and employees. It consists of the Supervisory Board Chair and three other members. The Human Resources Committee prepares the personnel decisions of the full Supervisory Board, which resolves on appointments or dismissals of members of the Board of Management. The Human Resources Committee resolves on behalf of the Supervisory Board on the service contracts of the members of the Board of Management. However, it is the task of the full Supervisory Board, based on the recommendations submitted by the Human Resources Committee, to resolve on the total compensation of the individual members of the Board of Management and the respective compensation components, as well as to regularly review the compensation system. The Human Resources Committee also discusses the long-term succession planning for the Board of Management.

Members: Dr. Richard Pott (Chair), Johannes Dietsch, Dr. Ulrich Liman and Petra Kronen

Nominations Committee: This committee carries out preparatory work when an election of stockholder representatives to the Supervisory Board is to be held. It suggests suitable candidates for the Supervisory Board to propose to the Annual General Meeting for election. The Nominations Committee comprises the Supervisory Board Chair, another stockholder representative on the Executive Committee and an elected stockholder representative.

Members: Dr. Richard Pott (Chair), Regine Stachelhaus and Ferdinando Falco Beccalli

In its report, the Supervisory Board provides detailed information about the work of the Supervisory Board and its committees.

Objectives for the composition of the Supervisory Board and diversity concept

The Supervisory Board should be composed in such a way that its members jointly possess the necessary expertise, skills and professional experience to properly perform their duties, and are sufficiently independent. The Supervisory Board assesses the independence of its members according to the recommendation contained in Section 5.4.2 of the German Corporate Governance Code.

Existing objectives for the composition

Covestro AG’s Supervisory Board has agreed the following specific goals for its composition that align with the recommendations of the German Corporate Governance Code and at the same time provide for diversity in terms of age, independence and professional experience:

• The Supervisory Board has resolved that 75% of its members and more than half of the stockholder representatives on the Supervisory Board are to be independent.
• Absent special circumstances, a Supervisory Board member shall not serve more than three full terms of office and shall not hold office beyond the end of the next Annual General Meeting following his or her 72nd birthday.
• The Supervisory Board shall not include more than two former members of the company’s Board of Management. Supervisory Board members may not perform executive functions or consulting activities for major competitors of the company or any Group company, and they must not be exposed to other significant conflicts of interest.
• At least two Supervisory Board members must have function-specific knowledge in each of the following areas:
• Accounting and/or auditing
• Strategy, mergers and acquisitions, capital markets
• Marketing, distribution, supply chain
• Research and development, innovation
• Technology, digitalization
• Human resources, change management
• Corporate governance, compliance
• The Supervisory Board must have at least two members with experience in industries, sales markets and/or divisions of importance to Covestro, e.g. (polymer) chemistry, production and technology.
• Taking into account the specific situation and international operations of Covestro and its affiliated companies, the Supervisory Board shall strive to ensure sufficient diversity among its members. Moreover, at least three members should have managerial experience in an international enterprise and/or experience serving on other supervisory boards or supervisory bodies.

The objectives described refer to the Supervisory Board as a whole unless resolved otherwise. However, since the Supervisory Board can only nominate candidates for election as stockholder representatives, it can only consider the objectives in making these nominations.

Implementation status of the objectives

The Supervisory Board has several members with international business experience and an international background. The objectives pertaining to age limits, length of service and independence are being met. In the opinion of the Supervisory Board, the stockholder representatives Dr. Richard Pott, Ferdinando Falco Beccalli, Dr. Christine Bortenlänger, Johannes Dietsch, Prof. Dr. Rolf Nonnenmacher and Regine Stachelhaus are independent pursuant to Section 5.4.2 of the German Corporate Governance Code. The requirements for function-specific knowledge are generally being met, but the specific goal of having at least two stockholders per field of expertise is not fulfilled in all areas.

Information about Covestro AG’s current Supervisory Board members is available on our website at: www.covestro.com/en/company/management/supervisory-board 

Stockholdings and reportable securities transactions by members of the Board of Management or Supervisory Board

Members of the Board of Management and Supervisory Board and their close relatives are legally required to disclose all transactions involving the purchase or sale of Covestro AG securities where such transactions total €5,000 or more in a calendar year. Covestro publishes details of such transactions immediately on its website and also notifies the German Federal Financial Supervisory Authority accordingly. This information is provided to the company register for archiving. Information on securities transactions by members of the Board of Management or Supervisory Board can be found at: investor.covestro.com/en/stock/shareholder-structure/disclosure-of-securities-transactions 

Common values and leadership principles

Covestro is guided by three corporate values that reflect the way people at the company think and act: curious, courageous and colorful.

Systematic risk management

Our enterprise risk management system ensures early identification of any financial or nonfinancial risks. We attempt to avoid or mitigate identified risks, or to transfer them to third parties (such as insurers) to the extent possible and economically acceptable.

The internal control system for accounting and financial reporting enables the timely monitoring of risks to prevent or correct potential errors in accounting for business transactions. It thus ensures the availability of reliable data on the company’s financial situation.

However, the control and risk management system cannot provide absolute protection against losses arising from business risks or fraudulent actions.

Detailed reporting

To maximize transparency, we provide regular and timely information on the Covestro Group’s position and significant changes in business activities to stockholders, financial analysts, stockholders’ associations, the media and the general public. Four times a year we report to our stockholders about the company’s business performance, its net assets, financial position, and results of operations, and the risks it faces. Our company’s reporting thus complies with the provisions of the German Corporate Governance Code.

In line with statutory requirements, the members of the company’s Board of Management provide an assurance that, to the best of their knowledge, the financial statements of Covestro AG, the consolidated financial statements of the Covestro Group, and the combined management report provide a true and fair view.

The financial statements of Covestro AG, the consolidated financial statements of the Covestro Group and the combined management report are published within 90 days following the end of each fiscal year. During the fiscal year, Covestro informs stockholders and other interested parties about developments by means of the half-year financial report and additional interim reports for the first and third quarters. The half-year financial report is voluntarily subjected to a review by the auditor appointed by the Annual General Meeting.

Covestro additionally provides information about the current corporate strategy, important growth areas, the financial position and results of operations, and financial targets at regular news conferences and analysts’ meetings. The company uses the internet as a platform for the timely disclosure of information, with the dates of major publications and events, such as the annual report, interim financial reports and the Annual General Meeting posted on the Group’s website.

In line with the principle of fair disclosure, all stockholders and other main target groups are treated equally as regards the communication of valuation-relevant information. All significant new facts are disclosed immediately to the general public. In addition to our regular reporting, we issue ad-hoc statements on developments that otherwise might not become publicly known but have the potential to materially affect the price of Covestro stock.