Report of the Supervisory Board

Dear Shareholders, (handwriting)
Jürgen B. Steinemann (photo)

JÜRGEN B. STEINEMANN
Chairman of the Supervisory Board

Profile: Jürgen B. Steinemann has been a member of the Supervisory Board of METRO AG since September 2015 and was appointed Chairman in February 2016. He was born in Damme in 1958. Following a degree in business administration at the European Business School in Wiesbaden,London and Paris, which he completed in 1985, he held different management positions at Eridania Béghin-Say, Unilever and Nutreco before being appointed CEO of Barry Callebaut, the world's leading manufacturer of chocolate and cocoa products, in 2009. Mr Steinemann stepped down from this role, as planned, at the end of September 2015, but he continues to serve the company as a member of the Board of Directors.

For more information about the other members of the Supervisory Board,
see the website www.metrogroup.de in the section Company – Supervisory Board.

The past financial year was a particularly intense one for METRO GROUP: on the one hand, our company focused on advancing and strengthening its operations. On the other, the past financial year was one of important strategic issues and milestones.

METRO AG met its forecast issued at the start of the year: Both like-for-like sales and EBIT rose slightly compared with the previous year. In addition, net debt was reduced further. At the same time, METRO GROUP’s transformation continued to take centre stage in financial year 2015/16.

The planned demerger of the group into two independent, exchange-listed companies through the 2MORROW project is the next milestone in this transformation process aimed at fuelling our growth, our customer orientation and our entrepreneurialism. The Consumer Electronics (Media-Saturn) and Wholesale & Food Specialist (METRO Cash & Carry and Real) units, which have been managed together under the umbrella of METRO AG until now, are fundamentally different, with hardly any operational overlap and synergies between them. The demerger reflects the need to manage the two segments separately with different agendas. The goal is to give the Management Boards of both new companies full control over their own strategies.

As a result, we will focus on the customer even more: under the new structure, both new companies can intensify their relationship with our different customers. They can also recognise and fulfil specific customer requirements with even more flexibility. Structures are being simplified and two efficient, focused companies are emerging that can respond with fast implementation – particularly in times of advancing digitisation – to changes in the market environment and the associated challenges. Both will focus even more on growth, innovation and the further development of their respective operational business. Through the two companies' clear positioning, their passion for enterprise and the people who support it will become visible!

In this way we are creating a foundation that will enable both companies to create even more value in the future – for our customers and for you, our shareholders.

On behalf of the entire Supervisory Board, I would also like to use this opportunity to thank our employees for their hard work over the past financial year, not just for their ongoing commitment and their passion for our company, but also for the way in which they have endured and accepted the uncertainties caused by the demerger announcement. The Management Board and the Supervisory Board believe that the demerger is the right move to secure our company’s future growth and thus our employees’ jobs. That is why we have asked our employees to endure this phase of uncertainty. My special thanks go to all employees at Real. Their work and their willingness to waive part of their salary have made a significant contribution to the continued existence of Real as a company. We are fully aware of this and have the highest respect for them. Personally, I would like to thank all employees both in Düsseldorf and in the countries that I have visited so far for the warm welcome they have extended to me as the new Chairman of the Supervisory Board. Witnessing their engagement and their passion for our business, I immediately felt “at home”.

Consultation and supervision in dialogue with the Management Board

In financial year 2015/16, the Supervisory Board again carried out the duties set forth by law, by the company's Articles of Association and the Code of Procedure. We advised the Management Board on the steering of METRO AG and the group and continuously supervised the operational management. The cooperation between the Management Board and the Supervisory Board was characterised by an especially intensive exchange that was triggered by the 2MORROW demerger project. In line with the legal obligations, the Management Board at all time adhered to its information duties and provided us with detailed and timely written and oral reports about all material developments at METRO GROUP during Supervisory Board meetings. In particular, it informed us about the 2MORROW demerger project, business developments, the situation of the company and the group (including the risk situation, risk management and compliance) as well as about the company’s strategy and planning. The Management Board provided detailed explanations of any deviations from planned business performance. Based on the Management Board’s reports, we discussed all transactions that were of significance to the company during Supervisory Board meetings and in the committees. The Supervisory Board was involved in all decisions of material significance to the company, including measures and transactions for which the Supervisory Board’s approval is required by law, on the basis of the Articles of Association or by proprietary determinations. We thoroughly reviewed the relevant matters and discussed their benefits, potential risks and other impacts with the Management Board. The Supervisory Board approved all matters which the Management Board presented to it for approval. As Chairman of the Supervisory Board, I regularly discussed key issues and pending decisions with the Chairman of the Management Board even outside of Supervisory Board meetings. We made no use of the rights of inspection and audit granted under § 111 Section 2 Sentence 1 and 2 of the German Stock Corporation Act (AktG) because no matters requiring clarification arose.

Eleven Supervisor Board meetings were held in financial year 2015/16. Two decisions were taken in a written procedure outside a Board meeting.

None of the members of the Supervisory Board appointed for the full financial year attended only half (or fewer) of the Supervisory Board meetings during the reporting period. Average attendance at the meetings of the Supervisory Board was about 96 per cent; average attendance at the meetings of the committees was 100 per cent.

Mr Franz M. Haniel, former Chairman of the Supervisory Board of METRO AG, resigned his mandate as member and Chairman of the Supervisory Board with effect from the end of the Annual General Meeting on 19 February 2016 and therefore attended fewer than half of the meetings of the Supervisory Board of METRO AG during the reporting period. Since Dr Angela Pilkmann only joined the Supervisory Board on 1 September 2016 as an elected representative of the employees, replacing Mr Hubert Frieling, she could only attend three meetings during the reporting period.

No conflicts of interest involving members of the Management Board and Supervisory Board arose in financial year 2015/16.

Key issues covered by Supervisory Board meetings

November 2015 – At its first meeting in financial year 2015/16, the Supervisory Board dealt primarily with Management Board remuneration. We discussed the short-term incentive for financial year 2014/15 and passed a resolution on the determination of individual performance factors for each member of the Management Board, which will enable the Supervisory Board to reduce or increase the payout amounts calculated on the basis of financial performance targets for each member of the Management Board individually by up to 30 per cent. The Supervisory Board also decided to grant a special bonus to members of the Management Board for the sale of Galeria Kaufhof. In addition, we discussed the long-term incentive and reviewed the performance targets for the tranche to be granted in financial year 2015/16. Finally, we approved the acquisition of an external shareholder’s stake in METRO Cash & Carry Romania Srl by METRO Cash & Carry International Holding B.V. and were informed about the current status of the planned disposal of METRO Cash & Carry’s wholesale business in Vietnam.

December 2015 – Our audit meeting held in December 2015 focused on the annual and consolidated financial statements for financial year 2014/15, the combined management reports for METRO AG and for the group for 2014/15, the Management Board’s proposal for the appropriation of the balance sheet profit to the Annual General Meeting 2016 as well as the Management Board’s report on relations with affiliated companies in 2014/15. The auditor attended this meeting and reported on the key findings of his audits. The Management Board also informed us about business developments in the current financial year and we received another status report on the implementation of the disposal of METRO Cash & Carry’s wholesale business in Vietnam. We passed resolutions on changes in the composition of the Supervisory Board committees, on the report of the Supervisory Board and the corporate governance report for financial year 2014/15, on the proposed resolutions for METRO AG’s 2016 Annual General Meeting, on amendments to the Code of Procedure of the Management Board, the Supervisory Board and the Accounting and Audit Committee as well as on an insider guideline for the Supervisory Board. We also discussed the results of the efficiency review of the Supervisory Board. Finally, we discussed the current situation at Media-Saturn and Real.

In December, the Supervisory Board took a decision on the preparation of the Supervisory Board’s election at the Annual General Meeting 2016 in a written procedure outside a Board meeting.

February 2016 – In a meeting held immediately before the Annual General Meeting on 19 February 2016, we approved the acquisition of the premium food supplier Rungis Express to further expand the company’s food service distribution business. Subject to the election of the auditors by the Annual General Meeting 2016, we also approved the request for the audit of the annual and consolidated financial statements and the combined management report for financial year 2015/16. As a precaution, we decided to hire a law firm in preparation for the eventuality of legal challenges or complaints for nullity against resolutions passed during the Annual General Meeting 2016. In another meeting immediately after the end of the Annual General Meeting, I was elected as Chairman of the Supervisory Board and Chairman of the Mediation Committee pursuant to § 27 Section 3 of the German Co-determination Act (MitbestG). We then re-elected Dr Florian Funck to the Supervisory Board’s Accounting and Audit Committee.

May 2016 – The Supervisory Board convened for two meetings in May of the reporting period.

After the Management Board had informed the Supervisory Board about preparations for a demerger of the group into two independent, exchange-listed companies, this planned demerger was the focal topic of the first meeting in May. The implications of the planned demerger for the composition of the Supervisory Board were one reason for our decision to hire an executive search consultant to identify suitable candidates for the Supervisory Board. In addition, the Management Board informed us about current business developments and the completed review of OTC derivative contracts in accordance with § 20 of the German Securities Trading Act (WpHG).

The second meeting in May was a two-day strategy meeting in Prague which was also attended by executives from the sales lines. On the first day, we discussed the strategy of the METRO Cash & Carry and Media-Saturn sales lines and particularly with a view to the planned demerger of the group. On the second day, the key topics on the agenda were the strategy of the Real sales line and METRO GROUP’s sustainability initiatives. We also discussed budgetary planning for METRO GROUP. Finally, the Management Board informed us about progress made in the preparations for the demerger of the group.

June 2016 – The Supervisory Board decided on a revised insider guideline for the Supervisory Board in a written procedure outside a Board meeting.

July 2016 – Two Supervisory Board meetings were held in July.

The first meeting in early July focused on the planned demerger of the group in particular. The Management Board informed us about the progress made and the individual process steps. In addition, we discussed the legal implications of the demerger and the exchange listing in great detail. We also approved the acquisition of the French food supplier for commercial customers Pro à Pro from the Belgian retail group Colruyt Group. Pro à Pro is one of the leading food service distribution providers in France, offering direct food deliveries to various customer groups including in the hotel, restaurant and catering (Horeca) sector. With this acquisition, METRO GROUP has strengthened its French wholesale business in the growing food service distribution field. Moreover, we approved the conclusion of two rental contracts as well as the required investments for warehouses to be used as national and regional distribution centres.

The second meeting in July again focused on the status of the group’s demerger project including the transaction structure. In this context, we discussed the process for the future appointment of Supervisory Board members. At this meeting, the Management Board also informed us about the latest business developments. Lastly, we passed a resolution on the proposal for the election of the auditor for financial year 2016/17 to the Annual General Meeting 2017 following a tender and selection procedure.

September 2016 – The Supervisory Board convened for three meetings in September of the reporting period.

The first meeting at the beginning of the month again focused on the planned demerger of the group. The Management Board informed us about the status of the project and we thoroughly discussed the transaction structure, the corporate and tax law parameters as well as the capital structure of the planned new units. We then approved the preparatory measures for the demerger of the group. In addition, we passed a resolution on the hiring of consultants for the development of new remuneration systems for the planned new units.

In another meeting at the end of the month, we approved the budget for financial year 2016/17. We were also informed about current business developments, the respective branding concepts of the Consumer Electronics and Wholesale & Food Specialist units as well as the group’s governance function (internal control system, risk management system, internal audit, compliance).

In the meeting on the following day, the Management Board informed us about progress made in the group’s demerger project and related personnel issues. In this context, we also decided to modify the assignment of responsibilities within the Management Board. Management Board remuneration was another focal topic at this meeting. We agreed on the performance targets for the short-term incentive for financial year 2016/17 and on the modalities for the settlement of the short-term incentive over the course of the financial year in case the demerger of the group is effected before the end of financial year 2016/17. Finally, we passed a resolution on investments in a regional distribution and customer fulfilment centre in Prague as well as on the annual declaration of compliance pursuant to § 161 of the German Stock Corporation Act (AktG).

Work of the committees

Five committees support the Supervisory Board in its work, contributing greatly to the Board’s overall efficiency: the Presidential Committee, the Personnel Committee, the Accounting and Audit Committee, the Nomination Committee and the Mediation Committee pursuant to § 27 Section 3 of the German Co-determination Act (MitbestG). The committees prepare the Board-level consultations and resolutions. In addition, decision-making responsibilities have been transferred to the committees within legally allowed parameters. The contents and results of committee meetings are reported to the Supervisory Board in a timely manner. The work of the committees is described in detail in the annual statement on corporate management pursuant to § 289 a of the German Commercial Code (HGB). It can be found on the website www.metrogroup.de in the section Company – Corporate Governance.

The committees of the Supervisory Board currently is composed as follows:

  • Presidential Committee:
    Jürgen B. Steinemann (Chairman), Werner Klockhaus (Vice Chairman), Jürgen Fitschen, Xaver Schiller
  • Personnel Committee:
    Jürgen B. Steinemann (Chairman), Werner Klockhaus (Vice Chairman), Jürgen Fitschen, Xaver Schiller
  • Accounting and Audit Committee:
    Dr jur. Hans-Jürgen Schinzler (Chairman), Werner Klockhaus (Vice Chairman), Dr Florian Funck, Andreas Herwarth, Rainer Kuschewski, Dr Fredy Raas
  • Nomination Committee:
    Jürgen B. Steinemann (Chairman), Jürgen Fitschen, Dr jur. Hans-Jürgen Schinzler
  • Mediation Committee pursuant to § 27 Section 3 of the German Co-determination Act (MitbestG):
    Jürgen B. Steinemann (Chairman), Werner Klockhaus (Vice Chairman), Xaver Schiller, Dr jur. Hans-Jürgen Schinzler

Date: 8 December 2016

Presidential Committee – The Presidential Committee monitors compliance with legal regulations and the application of the German Corporate Governance Code. In consideration of § 107 Section 3 Sentence 3 of the German Stock Corporation Act (AktG), the Presidential Committee takes decisions about urgent matters and matters submitted to it by the Supervisory Board. The Presidential Committee met twice during financial year 2015/16, each time with the Personnel Committee. Key issues addressed by the Presidential Committee included corporate governance at METRO GROUP, including the corporate governance report for financial year 2014/15, the implementation of the recommendations of the German Corporate Governance Code and the preparation of the latest declaration of compliance in accordance with § 161 of the German Stock Corporation Act (AktG).

Personnel Committee – The Personnel Committee deals primarily with personnel issues concerning the Management Board. Five committee meetings were held in financial year 2015/16. Two meetings were held together with the Presidential Committee. The implications of the planned demerger of the group for Management Board remuneration were one focal point of the committee work during the reporting period: in particular, the committee discussed the treatment of existing single-year and perennial performance-based remuneration for the Management Board as well as the development of new Management Board remuneration systems for the new units geared specially towards the respective business operations. The Supervisory Board resolutions prepared by the committee included, in particular, the resolutions on Management Board members’ individual performance factors for the short-term incentive 2014/15, the granting of a special bonus for the sale of Galeria Kaufhof as well as the performance targets for the tranche of the long-term incentive to be granted in financial year 2015/16. In addition, the Personnel Committee prepared the resolution on the hiring of consultants for the development of a new remuneration system and issued a recommendation regarding the performance targets for the short-term incentive for financial year 2016/17 as well as the modalities of a settlement of the short-term incentive over the course of the financial year in case the demerger of the group is effected before the end of financial year 2016/17. The Personnel Committee also discussed succession planning for the Management Board and regularly considered the review of expenses on the basis of the travel cost guidelines that apply to the Management Board as well as Management Board members’ ancillary activities.

Accounting and Audit Committee – The key responsibilities of the Accounting and Audit Committee include supervising the accounting process and the audit and monitoring the effectiveness and further development of the internal control system, the risk management system and compliance. Six meetings were held in financial year 2015/16. The CFO attended all six meetings; the Chairman of the Management Board attended five of the six meetings. Representatives of the auditor and managers of the relevant departments of METRO AG attended certain meetings to address particular agenda items.

The Accounting and Audit Committee conducted an in-depth review of the annual and consolidated financial statements for financial year 2014/15, the combined management report of METRO AG and the group for 2014/15 as well as the report of the Management Board on relations with affiliated companies. The results of the audit were discussed in the presence of the auditors. On this basis, the Accounting and Audit Committee made concrete recommendations to the Supervisory Board. These included, in particular, the recommendation to approve the annual and consolidated financial statements for 2014/15 and to approve the Management Board’s proposal to the Annual General Meeting 2016 on the appropriation of the balance sheet profit. Moreover, the Accounting and Audit Committee made a recommendation for the Supervisory Board regarding the Supervisory Board’s proposal to the Annual General Meeting on the election of the auditor for financial year 2015/16 and prepared the request for the audit. During the reporting period, the committee reviewed the quarterly and half-year financial reports and discussed these with the Management Board prior to their publication. Another focal point of the committee work was 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).

As a result of this work, the committee issued a recommendation to the Supervisory Board regarding the Supervisory Board’s proposal to the Annual General Meeting 2017 on the election of the auditor for financial year 2016/17. Other issues addressed by the Accounting and Audit Committee were the audit plans for the selected auditor and the concept for the approval of so-called non-audit services. In addition, the committee discussed the group’s governance functions (internal control system, risk management system, internal audit and compliance), the Management Board’s budget plan and group tax planning. Other topics included donations, amendments to the Code of Procedure of the committee and the result of the efficiency review of the Supervisory Board and its implications for the committee work. The committee also obtained information about the continued development of international accounting standards as well as the completed review of OTC derivative contracts in accordance with § 20 of the German Securities Trading Act (WpHG). Finally, the Management Board discussed key events, projects and legal issues with the Accounting and Audit Committee. These include the acquisition of Rungis Express, the planned demerger of the group, the real estate strategy and the management and status of antitrust law proceedings within METRO GROUP.

Nomination Committee – The Nomination Committee is responsible for proposing suitable candidates for the Supervisory Board’s election proposals to the Annual General Meeting. Three committee meetings were held in financial year 2015/16, including one meeting by telephone. Following the recommendations made by the Nomination Committee, the Supervisory Board proposed to the Annual General Meeting 2016 to re-elect Prof. Dr oec. Dr iur. Ann-Kristin Achleitner and Mr Peter Küpfer to the Supervisory Board of METRO AG. Both proposals were accepted. In addition, the Nomination Committee discussed the composition of the Supervisory Board following the demerger of the group.

Mediation Committee – The Mediation Committee formulates proposals for the appointment and dismissal of members of the Management Board in cases pursuant to § 31 of the German Co-determination Act (MitbestG). The Mediation Committee did not have to meet during financial year 2015/16.

Corporate governance

The Management Board and the Supervisory Board report on METRO GROUP’s corporate governance in the corporate governance report for financial year 2015/16. Together with the statement on corporate management pursuant to § 289 a of the German Commercial Code (HGB), the report is also published in the section Company – Corporate Governance of the website www.metrogroup.de.

In September 2016, the Management Board and the Supervisory Board of METRO AG issued their most recent declaration of compliance with regard to the recommendations of the Government Commission on the German Corporate Governance Code pursuant to § 161 of the German Stock Corporation Act (AktG). The declaration was made permanently available to shareholders on the website www.metrogroup.de. It also appears in full in the corporate governance report for 2015/16.

Annual and consolidated financial statements

KPMG AG Wirtschaftsprüfungsgesellschaft has reviewed the consolidated financial statements for financial year 2015/16 submitted by the Management Board in accordance with the International Financial Reporting Standards (IFRS) and has given its unqualified approval. The same applies to the annual financial statements 2015/16 of METRO AG prepared in accordance with the regulations of the German Commercial Code (HGB) and the combined management report for METRO AG and the group. The auditor provided a written report on the findings.

The documents for the annual financial statements and the audit reports were discussed and reviewed in great detail during the meeting of the Accounting and Audit Committee on 6 December 2016 and in the Supervisory Board’s audit meeting on 8 December 2016 in the presence of the auditor. Prior to these meetings, the required documents were distributed to all members of the Accounting and Audit Committee as well as the Supervisory Board, giving them sufficient time to review them. In both meetings, the auditor reported about the key findings of his audit and was at the Supervisory Board’s disposal to answer questions and provide additional information even in the absence of the Management Board. The auditor did not report any material weaknesses of the internal control and risk management system with regard to the accounting process.

KPMG also provided information on services rendered in addition to auditing services. No disqualification or bias issues arose. Based on our own review of the annual financial statements, the consolidated financial statements and the combined management report for financial year 2015/16, we had no objections and the Supervisory Board approved the result of the audit. We have endorsed the annual financial statements and the consolidated financial statements submitted by the Management Board. The annual financial statements of METRO AG are thus released. Following a careful own review and consideration of the interests involved, we endorsed the Management Board’s proposal for the appropriation of the balance sheet profit.

Appointments and resignations

Upon the order of the District Court in Düsseldorf, Mr Jürgen Schulz and Mr Thomas Dommel were elected to the Supervisory Board as employee representatives on 10 December 2015. Their appointment expires at the end of the Annual General Meeting 2018. Mr Schulz and Mr Dommel succeeded Ms Gabriele Schendel and Mr Uwe Hoepfel whose mandates ended due to the sale of Galeria Kaufhof on 30 September 2015.

Prof. Dr. oec. Dr iur. Ann-Kristin Achleitner and Mr Peter Küpfer, whose mandates ended with the end of the Annual General Meeting 2016, were re-elected to the Supervisory Board. Mr Franz M. Haniel resigned his mandate as member and Chairman of the Supervisory Board of METRO AG with effect from the end of the Annual General Meeting 2016. The Annual General Meeting elected Ms Karin Dohm as a new member of the Supervisory Board.

As requested, my court-approved appointment ended with the conclusion of the Annual General Meeting on 19 February 2016. On the same day, the Annual General Meeting elected me as a representative of the shareholders on the Supervisory Board. Immediately after the Annual General Meeting, the Supervisory Board elected me as its Chairman.

Mr Hubert Frieling retired and therefore resigned his Supervisory Board mandate effective 31 August 2016. Dr Angela Pilkmann succeeded him on the Supervisory Board as an elected representative of the employees.

On behalf of the entire Supervisory Board, I would like to take this opportunity to extend my special thanks to Mr Haniel for many years of outstanding commitment to and support of METRO GROUP as a key driver of necessary change. Under his leadership, the Supervisory Board of METRO AG served as an active advisor and sparring partner for the Management Board and thus enabled the Management Board to tackle the far-reaching changes needed to make METRO GROUP fit for the future. I also wish to thank the other members of the Supervisory Board who stepped down from their positions over the past financial year for their consistently constructive cooperation in the interest of our company.

Düsseldorf, 8 December 2016

The Supervisory Board

Signature Jürgen B. Steinemann – Chairman Supervisory Board (handwriting)

JÜRGEN B. STEINEMANN
Chairman