Corporate Governance Report
Pursuant to the recommendation of Subsection 3.10 of the German Corporate Governance Code, the Management Board and the Supervisory Board of METRO AG deliver the following report on corporate governance at METRO GROUP.
The Management Board and the Supervisory Board of METRO AG are firmly committed to the principles of transparent, responsible corporate governance and supervision. They attach great importance to good corporate governance standards. Their voluntary commitment to the German Corporate Governance Code is reinforced by the following provision in the corporate bodies’ by-laws:
“The Management Board and the Supervisory Board of METRO AG base their actions on the relevant valid recommendations of the German Corporate Governance Code and only deviate from the code’s recommendations in well-founded exceptional cases. If the Management Board or Supervisory Board intends to deviate from a recommendation, the organs inform each other of the planned move prior to its implementation.”
Implementation of the German Corporate Governance Code
During financial year 2015/16, the Management Board and the Supervisory Board of METRO AG discussed METRO GROUP’s implementation of the recommendations of the German Corporate Governance Code in detail and issued the following declaration pursuant to § 161 of the German Stock Corporation Act (AktG) in September 2016:
“The Management Board and Supervisory Board of METRO AG hereby declare that the recommendations of the Government Commission on the German Corporate Governance Code published by the Federal Ministry of Justice in the official section of the Federal Gazette in its version of 5 May 2015 have been complied with without exception since the last declaration of compliance was issued in September 2015.
The Management Board and Supervisory Board intend to comply with the recommendations of the Government Commission in its version of 5 May 2015 with the following exceptions in the future:
1. Subsection 4.2.3 Section 2 Sentence 8 of the German Corporate Governance Code
METRO AG is preparing the demerger of METRO GROUP into two independent, exchange-listed companies focusing on the business segments Wholesale & Food Specialist and Consumer Electronics, respectively. The demerger is expected to become effective in mid-2017 and thus over the course of the next financial year 2016/17. The current remuneration system for members of the Management Board, which was approved by the Supervisory Board in 2014, does not reflect the planned demerger of METRO GROUP. Against this background, new Management Board remuneration systems for both new entities are currently being developed. These will be geared specifically to the respective business activities of the new entities. These remuneration systems will be introduced as of the effective date of the demerger. In this context, the company will also decide how to handle the already granted tranches of the long-term incentive. As a result, the performance objectives and comparison parameters for the short-term incentive as well as the long-term incentive are expected to be amended over the next financial year. This intra-annual amendment is expected to lead to a one-time deviation from the recommendation pursuant to Subsection 4.2.3 Section 2 Sentence 8 of the German Corporate Governance Code. This recommendation excludes a subsequent amendment of the performance objectives or the comparison parameters with regard to the variable parts of the remuneration of the Management Board.
2. Subsection 7.1.2 Sentence 4 of the German Corporate Governance Code
In February 2017, the planned demerger of METRO GROUP will be presented to the Annual General Meeting of METRO AG for approval. Following the approval of the Annual General Meeting, the business segment Wholesale & Food Specialist would have to be recognised as a discontinued operation in the meaning of IFRS 5 in the balance sheet of METRO AG and would have to be deconsolidated once the demerger has become effective. Given the size of the business segment that will be split off, both processes will require substantial additional work. As a result, the relevant interim financial statements (most likely the interim financial statements as of 31 March 2017 and 30 June 2017) will be publicly available within the legally required time period, but probably not within 45 days after the end of the reporting period, the recommendation made in Subsection 7.1.2 Sentence 4 of the German Corporate Governance Code.”
This and the declarations pursuant to § 161 of the German Stock Corporation Act (AktG) made over the last five years are permanently available to METRO AG shareholders on the website www.metrogroup.de.
In addition to recommendations, the German Corporate Governance Code contains suggestions that listed companies can – but do not have to – address. METRO AG follows the vast majority of these suggestions. In financial year 2015/16, there was only one suggestion that the company did not fully implement:
Subsection 2.3.3 of the German Corporate Governance Code calls for enabling shareholders to follow the Annual General Meeting via modern communication media such as the internet. As in previous years, METRO AG only broadcast the speech by the Chairman of the Management Board in financial year 2015/16. This practice will be continued.
Division of duties and areas of responsibility between the Management Board and the Supervisory Board
The clear division between corporate management and corporate supervision is a key element of corporate governance for German stock corporations. Duties and areas of responsibility are clearly divided between the Management Board and the Supervisory Board.
The Management Board of METRO AG, which has five members, is responsible for running the company. The management duties of the Management Board of METRO AG include defining corporate objectives and determining the strategic positioning for the group as well as managing the company, monitoring and planning. In addition, the Management Board of METRO AG ensures the availability of investment funds, decides on their allocation within the group and is responsible for attracting and supporting highly qualified managers.
In accordance with the stipulations of the German Co-determination Act, the German Stock Corporation Act and the company’s Articles of Association, the Supervisory Board of METRO AG consists of ten shareholder representatives and ten employee representatives. In addition, women and men both hold at least 30 per cent of the seats on the Supervisory Board (that is at least six each). The Supervisory Board appoints the members of the Management Board, advises them and monitors their corporate management, including the attainment of long-term corporate objectives. The Supervisory Board is brought into the planning of the development of METRO GROUP by the Management Board to the same degree that it is included in decisions about important measures. Aside from its legally prescribed approval obligations, the Supervisory Board has determined its own approval requirements for certain actions and business dealings of the Management Board.
For more information about members of the Management Board and Supervisory Board, see the notes to the consolidated financial statements of METRO AG in no. 56 – Corporate Boards of METRO AG and their mandates.
The modes of operation of the Management Board and Supervisory Board, the composition and functions of the Supervisory Board committees and information on key corporate management practices are described in the annual statement on corporate management pursuant to § 289 a of the German Commercial Code (HGB). The declaration of compliance pursuant to § 161 of the German Stock Corporation Act (AktG) also appears in full in this report.
Objectives regarding the composition of the Management Board and Supervisory Board
To properly carry out their duties, the Management Board and the Supervisory Board must possess a broad range of knowledge, skills and experience.
Requirements related to appointments to the Management Board
The decisions taken by the Supervisory Board regarding the composition of the Management Board are based on careful analysis of current and future business challenges. Potential members of the Management Board must not only have solid general qualifications, but must also be individuals capable of helping the company to address its current situation and future challenges.
Diversity on the Management Board
In selecting members of the Management Board, the Supervisory Board also heeds the recommendations of the German Corporate Governance Code. In particular, the Supervisory Board considers the issue of diversity and strives to provide adequate consideration of women. In financial year 2015/16, no woman was yet a member of the Management Board of METRO AG.
According to the German law on equal participation of men and women in management positions, the Supervisory Board decided in the calendar year 2015 on targets and deadlines for the increase of the share of women on the Management Board. In accordance with the law, the first deadline may not exceed 30 June 2017. Until this due date, the Management Board is expected to continue to have no female members. In the long term – that is, until 30 June 2022 – the Supervisory Board plans the membership of at least one woman on the Management Board. In order to reach this target, the Supervisory Board will focus on the search for qualified female candidates in the years ahead.
Requirements related to appointments to the Supervisory Board
To ensure that the Supervisory Board of METRO AG can duly perform its responsibilities, the members have formulated certain objectives regarding appointments. These objectives are:
Diversity on the Supervisory Board
Bearing in mind METRO GROUP’s international expansion, the Supervisory Board should include both retail experts for Western European markets and individuals with in-depth experience in the growth regions of Eastern Europe and Asia. The current composition of the Supervisory Board fulfils this target. Employee representatives on the Board contribute experience from each of the group’s sales lines in Germany. Several shareholder representatives have national and international retail expertise. Furthermore, several have extensive experience in Eastern Europe and Asia. Two shareholder representatives are former METRO executives who have company-specific expertise.
The representation of women and men on the Supervisory Board of METRO AG follows the regulations of the law on the equal participation of men and women in private-sector and public-sector management positions that became effective in 2015. The employee and shareholder representatives aim at fulfilling the gender quota of 30 per cent for the Supervisory Board of METRO AG separately. The Supervisory Board currently (as of November 2016) includes three female representtatives on the employee and shareholder side, respectively.
Impartiality of the Supervisory Board
In accordance with legal stipulations, the Supervisory Board of METRO AG is composed of ten employee representatives and ten shareholder representatives. At least five shareholder representatives are to be impartial in accordance with Subsection 5.4.2 of the German Corporate Governance Code. The current composition of the Supervisory Board of METRO AG fulfils this objective.
Accounting and Audit Committee, impartiality of the committee chairperson
To ensure a qualified appointment to the Accounting and Audit Committee from the members of the Supervisory Board, at least one member of the Board must fulfil the requirements stipulated for the chairperson of the Accounting and Audit Committee. Pursuant to the by-laws of the Accounting and Audit Committee, the committee chairperson must be impartial and possess professional knowledge in the areas of accounting and auditing as well as internal control measures (financial expert). The other committee members should possess sufficient professional knowledge and experience in these areas. Ideally, one potential member of the Accounting and Audit Committee should also possess special knowledge in the area of compliance.
These objectives are implemented through the current composition of the Supervisory Board and its Accounting and Audit Committee. The impartial chairman of the committee is Dr jur. Hans-Jürgen Schinzler.
Potential conflicts of interest within the Supervisory Board / term of office and age restrictions
To prevent potential conflicts of interest, members of the Supervisory Board of METRO AG may not assume board functions, consulting tasks or memberships on the supervisory boards of German or international, direct and material competitors. This requirement, which is laid down in the by-laws of the Supervisory Board, must be considered in the identification of candidates for the Supervisory Board.
The regular limit for the term of office on the Supervisory Board determined according to the recommendation of the German Corporate Governance Code is 16 years. Additionally, the members of the Supervisory Board may, as a rule, not remain in office after the end of the Annual General Meeting following their 75th birthday. The determination of justified exceptions considering the term of office as well as the age restriction is decided by the Supervisory Board in each case at its own discretion.
The Supervisory Board of METRO AG currently also meets the aforementioned targets. No member of the Supervisory Board assumes a function for direct, material competitors. The self-defined rules for the term of office on the Supervisory Board of METRO AG have been complied with in financial year 2015/16 without the detection of any exceptional case. One member of the Supervisory Board turned 75 in 2015 and is to remain on the Board until the end of the Annual General Meeting that will formally approve the actions of the Management Board for financial year 2016/17. Another member will turn 75 during this term of office. As a result, the Supervisory Board of METRO AG identified a justified exceptional case in both cases. The Board determined that the in-depth knowledge and experience of the members in question were particularly valuable to the future work of the Supervisory Board.
Compliance and risk management
The activities of METRO GROUP are subject to various legal stipulations and self-imposed standards of conduct. METRO GROUP has bundled its measures securing compliance with these rules and regulations in its group-wide compliance management system.
The aim of the compliance management system is to systematically and sustainably prevent, detect and sanction regulatory infringements within the company. To this end, METRO GROUP regularly identifies behavioural compliance risks, establishes the necessary organisational structures and rigorously monitors and controls these risks through the responsible divisions. In its group-wide systematic reporting, key compliance risks and measures are transparently communicated and documented. The need for the further development of the compliance management system is ascertained from the results of regular employee surveys, internal reviews and audits.
METRO GROUP’s risk management forms another integral component of value-oriented corporate management. This takes the form of a systematic, group-wide process that helps company management identify, assess and manage risks and opportunities. As such, risk and opportunity management is a uniform process. Risk management renders unfavourable developments and events transparent at an early stage and analyses their implications. This allows the company to put the necessary countermeasures in place. At the same time, it allows a systematic exploitation of emerging opportunities. Both the risk and opportunity management system and the compliance management system are continually refined.
Additionally, risks and opportunities are managed through internal control systems (ICS) and internal auditing. As an independent function, the latter provides auditing of key business processes, conducts event-related tests and reviews the compliance and risk management system as well as the internal control systems.
In financial year 2015/16, METRO AG further modified its management systems. In addition, selected units were tested to determine their effectiveness. The results of the reviews have confirmed that METRO GROUP has adequate management systems. The reviews also provide an important foundation for the further optimisation of the systems and their continuous modification in response to changing business processes in METRO GROUP.
For more information about the subjects of compliance and risk management, see the combined management report – risk and opportunity report – as well as the statement on corporate management pursuant to § 289 a of the German Commercial Code (HGB). The statement is available on the website www.metrogroup.de in the section Company – Corporate Governance.
Transparent corporate management
Transparency is an essential element of good corporate governance. The website www.metrogroup.de serves as an important source of information for METRO AG shareholders, the capital market and the general public. Aside from a host of information on METRO GROUP’s business segments and sales lines, the site contains the financial reports of METRO AG as well as investor news, ad hoc statements and other legal information. METRO GROUP publishes the dates for the most important regular publications and events (announcements of annual sales results, annual reports as well as quarterly and half-year reports, the annual business press conference and the Annual General Meeting) in a financial calendar on its website with a reasonable lead time. The website also offers information shown as part of annual business conferences, roadshows, investor conferences and information events for private investors.
The Annual General Meeting
The Annual General Meeting of METRO AG gives shareholders the opportunity to use their legal rights, that is, in particular, to exercise their rights to vote (where these apply) as well as to address questions to the company’s Management Board. To help shareholders exercise their individual rights at the Annual General Meeting, METRO AG posts documents and information for each Annual General Meeting in advance on its website.
The registration and legitimisation procedure for the Annual General Meetings of METRO AG complies with German stock corporation law and international standards. Each shareholder who would like to participate in an Annual General Meeting of METRO AG and exercise his or her voting right there must register and supply proof of the right to participate and exercise voting rights. Written proof of share ownership in German or English from the institution maintaining the securities deposit account satisfies this requirement. A deposit of shares is not necessary. Proof of share ownership must correspond to the beginning of the 21st day before each Annual General Meeting. Like the registration for the Annual General Meeting, it must be submitted to METRO AG at the address specified in the invitation within the time frame specified by law and in the Articles of Association. Concrete registration and participation conditions are made public in the invitation for each Annual General Meeting.
Shareholders who are unable to attend the Annual General Meeting in person may exercise their voting rights through a proxy. The necessary voting right authorisation must be provided in written form. To the benefit of shareholders, eased formal stipulations apply in certain cases that are described in the invitation to the Annual General Meeting. These are, for example, for issuing voting right authorisations to banks or shareholder associations.
Shareholders may also authorise company-appointed proxies to exercise their voting rights (known as proxy voting). The following rules apply: In addition to voting right authorisations, shareholders must also provide instructions on how to exercise these voting rights. The proxies appointed by the company are obliged to vote according to these instructions. For the assignment of voting rights during the Annual General Meeting for those shareholders who initially participate in the Annual General Meeting but who want to leave early without forgoing the exercise of their voting rights, proxies appointed by METRO AG are also available. Of course, the right to appoint other proxies to exercise one’s voting rights is not affected by this. The details on proxy voting are listed in the invitation to each Annual General Meeting.
In the interest of shareholders, the chairperson of the Annual General Meeting, who as a rule is the chairperson of the Supervisory Board, works to ensure that the Annual General Meeting is conducted efficiently and effectively. The objective is to complete a regular METRO AG Annual General Meeting within four to six hours at the most.
Managers’ transactions, share ownership by members of the Management and Supervisory Boards
Pursuant to Section 19 of the Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation), members of the Management and Supervisory Boards as persons discharging managerial responsibilities must inform METRO AG of any transactions involving their own METRO shares or METRO bonds or related financial instruments. This notification requirement also applies to persons closely associated with members of these corporate bodies. However, a minimum threshold has been introduced for reporting such transactions, with transactions under €5,000 in any calendar year not reportable.
The ownership of METRO AG shares held by all members of the Management and Supervisory Boards totalled less than 1 per cent of the shares issued by the company as of 30 September 2016.
On 19 February 2016, the Annual General Meeting of METRO AG elected KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG) to be the auditor for financial year 2015/16. The Supervisory Board’s commissioning of the contract to carry out the audit of the financial statements considered the recommendations listed in Subsection 7.2 of the German Corporate Governance Code.
Throughout the audit, which was completed in November 2016, KPMG made no reports to the Supervisory Board regarding grounds for disqualification or conflicts. There was also no evidence that any existed. Furthermore, in the course of the audit, there were no unexpected substantial findings or events concerning Supervisory Board functions. As a result, an extraordinary report from the auditor to the Supervisory Board was not required. The auditor found no deviations from the Management and Supervisory Boards’ statements of compliance with the German Corporate Governance Code.
The auditor fulfils two key functions. The auditor supports the Supervisory Board in exercising corporate control. At the same time, the audit activities provide the basis for the trust of the general public and capital market participants, in particular, in the accuracy of the annual accounts, notes to the financial statements and the management reports. The auditor’s impartiality is a key precondition for fulfilling these two functions. METRO AG’s Accounting and Audit Committee therefore places special importance on reviewing the impartiality of the auditor. This committee also dealt with this review in the context of the implementation of a tender and selection process for the audit 2016/17 in accordance with Art. 16 Section 3 of Regulation (EU) No. 537/2014 of the European Parliament and Council of 16 April 2014 (Audit Regulation) during financial year 2015/16.