CORPORATE GOVERNANCE REPORT
In accordance with section 3.10 of the German Corporate Governance Code, the Management Board – also acting on behalf of the Supervisory Board – reports on corporate governance at
Villeroy & Boch in the following report. This report contains the declaration on corporate governance in accordance with section 289a (1) HGB and the remuneration report pursuant to sections 4.2.5 and 5.4.6 of the German Corporate Governance Code on the remuneration paid to the Management Board and Supervisory Board.
Good corporate governance aimed at creating sustainable value through responsible corporate management is traditionally of fundamental importance for Villeroy & Boch. It serves as the
foundation for promoting the trust of investors, customers, employees and the public. Accordingly, the recommendations and suggestions of the Government Commission of the German Corporate Governance Code constitute the basis for the actions of the Management Board and Supervisory Board of Villeroy & Boch AG.
DECLARATION ON CORPORATE GOVERNANCE
Responsible management
Under the dual management system prescribed by law for a German public limited company, the Management Board of Villeroy & Boch AG is responsible, as the governing body, for managing the Company with the aim of creating short-term and long-term value. The workings of the Management Board are determined by corresponding Rules of Procedure. Resolutions are adopted at meetings of the Management Board, which take place at least twice a month. In filling management positions at the Company, the Management Board seeks to take regard of diversity and, in particular, to take appropriate account of women.
The Supervisory Board appoints, advises and monitors the Management Board. Its workings are established in corresponding Rules of Procedure. Ordinary meetings of the Supervisory Board are held at least four times a year. On the basis of continuous, rapid and transparent information – both written and verbal – provided by the Management Board, the Supervisory Board is directly involved in all decisions of material importance to the Company. In appointing members of the Management Board, the Supervisory Board takes regard of diversity and will seek to ensure appropriate participation by women in future.
Composition of the Supervisory Board
The Supervisory Board of Villeroy & Boch AG is composed of twelve members, six of whom are elected by the General Meeting of Shareholders (shareholder representatives) and six of whom are elected by the Company’s employees in accordance with the provisions of the German Codetermination Act (employee representatives). The term of office of members of the Supervisory Board is normally five years.
The Supervisory Board takes its role of monitoring a globally operating company seriously. It is of the opinion that its composition is an important factor in successfully performing its diverse tasks to the optimal benefit of the Company. It therefore welcomes the recommendation by the German Corporate Governance Code to set specific targets for its composition.
In accordance with section 5.4.1 of the German Corporate Governance Code, the Supervisory Board adopted the following targets for its composition in its meeting on 10 March 2011.
“The composition of the Supervisory Board of Villeroy & Boch AG should be such that the Management Board will be subject to informed monitoring by and receive expert advice from the Supervisory Board at all times.
The candidates proposed for election to the Supervisory Board should be in a position thanks to their knowledge, skills and professional experience to perform the tasks of a Supervisory Board member in an internationally active company and to safeguard the reputation of the Villeroy & Boch Group with the public. In the process, attention should be paid to the personality, integrity, commitment, professionalism and independence of the persons proposed for election.
The individual knowledge, skills and experience of the individual members of the Supervisory Board should complement each other in such a way that there is sufficient professional expertise available for the work of the Supervisory Board as such and for the business activities of each division at all times to guarantee that the Management Board is monitored professionally and efficiently and provided with advice on a continuous basis.
In view of the Company’s international focus, attention should be paid to the fact that, as has been the case to date, there is an adequate number of members with many years of international experience.
In proposing members for election, the Supervisory Board shall also seek to ensure appropriate participation by women. Highly qualified women should be included in the selection process when examining potential candidates as new members or filling vacant positions on the Supervisory Board and should be taken into account to an appropriate extent in the members proposed for election. The Supervisory Board will strive to have at least one female member in future.
The Supervisory Board should have a sufficient number of independent members. Significant conflicts of interest that are not merely temporary should be avoided.
The Supervisory Board members should also have sufficient time to perform their functions such that they can do so with the requisite regularity and diligence.
The regulation on the age limit laid down by the Supervisory Board in the Rules of Procedure will be taken into account. No more than two former members of the Management Board of Villeroy & Boch AG should sit on the Supervisory Board.”
The Supervisory Board is of the opinion that, on the whole, its current members have the necessary knowledge, professional experience and skills to perform their tasks properly.
The precise composition of the Supervisory Board is shown in the list on page 11. Personnel changes in the year under review are presented in the Report of the Supervisory Board.
Composition of the Management Board
The Management Board of Villeroy & Boch AG consists of two members at present. The members of the Management Board are appointed by the Supervisory Board in accordance with the provisions of the German Codetermination Act. In appointing members to the Management Board, the Supervisory Board pays attention to the professional suitability, experience and management quality of the candidates. With respect to the overall composition of the Management Board, it seeks to ensure diversity and to have appropriate participation by women. When examining potential candidates to fill vacant positions on the Management Board, highly qualified women are included in the selection process and are taken into account to an appropriate extent.
The precise composition of the Management Board is shown in the list on page 10. Personnel changes in the year under review are presented in the Report of the Supervisory Board.
Trust-based cooperation between the Management Board and the Supervisory Board The cooperation between the Management Board and Supervisory Board was again characterised by open, trust-based communication to the benefit of the Company in 2010. This was seen in the meetings of the Supervisory Board and in the discussions between individual members of the Management Board and the Chairman of the Supervisory Board and the Chairman of the Audit Committee. In the past financial year, the reports by the Management Board to the Supervisory Board focused specifically on the direction and implementation of corporate strategy, the Company’s business development, the Group’s position, the EU bathroom case and questions relating to the risk situation, risk management and compliance.
The Supervisory Board’s right to withhold approval in certain cases is laid down in the Rules of Procedure for the Supervisory Board and the Management Board. This applies to significant transactions or measures affecting the net assets, financial position and results of operation of Villeroy & Boch AG.
Supervisory Board committees
To allow it to perform its tasks efficiently and deal with complex issues more intensively, the Supervisory Board has formed three expert committees, each consisting of three members, in addition to the Conciliation Committee prescribed by section 27 (3) of the German Codetermination Act. The activities of the committees are governed by the Rules of Procedure for the Supervisory Board and the respective committees.
By law, the Conciliation Committee prescribed by section 27 (3) of the German Codetermination Act must be established in order to perform the task set out in section 31 (2) sentence 1 of the German Codetermination Act. It submits proposals for the appointment or the revocation of the appointment of Management Board members to the Supervisory Board if the requisite majority of two-thirds of the votes of Supervisory Board members is not reached in the first ballot. It consists of the Chairman and First Vice Chairman of the Supervisory Board, one shareholder representative and one employee representative. The current members are Wendelin von Boch-Galhau (Chairman), Ralf Runge (First Vice Chairman), Peter Prinz Wittgenstein and Ralf Sikorski.
The Human Resources Committee primarily deals with the conclusion as well as the amendment and termination of the employment contracts of Management Board members and long-term succession planning. It prepares the appointment and dismissal of members of the Management Board, the remuneration system for the Management Board and the total remuneration for the individual members of the Management Board, including contractual bonus provisions, pension provisions and other contractual benefits, for resolution by the full Supervisory Board. It is chaired by the Chairman of the Supervisory Board and also includes one employee representative and one shareholder representative. The current members are Wendelin von Boch-Galhau (Chairman), Ralf Sikorski and Dr. Jürgen Friedrich Kammer.
The tasks of the Investment Committee include advising on corporate and investment planning in advance and preparing investment decisions. The Investment Committee is chaired by the Chairman of the Supervisory Board and also includes one employee representative and one shareholder representative. The current members are Wendelin von Boch-Galhau (Chairman), Dietmar Langenfeld and Peter Prinz Wittgenstein (Vice Chairman).
The Audit Committee discusses the topics of accounting, risk management, the internal control and audit system, compliance, and issues relating to the audit of the annual financial statements. It is composed of two shareholder representatives and one employee representative. The current members are Charles Krombach (Chairman), Peter Prinz Wittgenstein and Werner Jäger (Vice Chairman). The Chairman of the Audit Committee is independent and has extensive expertise in the areas of accounting and auditing as a result of his long-standing position as managing partner of Landewyck Group S.à r.l. and Heintz van Landewyck S.à r.l.
No separate Nomination Committee has been formed to propose suitable candidates for election to the Supervisory Board. Proposals for election have been and will continue to be prepared at shareholder representatives’ meetings.
The chairmen of the committees report to the full Supervisory Board on the work of the committees. Information on the key contents of the committee meetings in the past financial year can be found in the Report of the Supervisory Board.
Prevention of conflicts of interest
The members of the Management Board and the Supervisory Board have a duty to uphold the interests of the Company and not to pursue any personal interests that could clash with those of the Company in fulfilling their duties. All members of the Management Board and the Supervisory Board are obliged to disclose any potential conflicts of interest to the Supervisory Board. Roles in other statutory supervisory boards and comparable domestic and foreign controlling bodies of commercial enterprises held by members of the Management Board and the Supervisory Board can be found on pages 10 and 11. Links with related parties are shown in the notes to the consolidated financial statements on page 109.
Efficiency review
The Supervisory Board of Villeroy & Boch AG again performed a regular efficiency review in 2010. This is a self-assessment of the workings of the Board and is carried out by its members. The efficient work of the Supervisory Board is driven in particular by the work of the committees, which meet as required and prepare the resolutions to be passed by the full Supervisory Board.
Directors’ dealings
In accordance with section 15a of the German Securities Trading Act, disclosures on transactions in shares of Villeroy & Boch AG requiring notification are published immediately on the Company’s website; this was the case for transactions by a member of the Management Board in the 2010 financial year.
At the end of the year under review, the members of the Supervisory Board held directly and indirectly (in the sense of sections 15a, 22 WpHG) 7.36% (2,066,230 shares) of all the shares issued by the Company. Thereof apply 4.36% (1,223,530 shares) to Wendelin von Boch-Galhau and 2.77 % (778,980 shares) to Alexander von Boch-Galhau, while the members of the Management Board cumulatively held 0.15 % (41,625 shares) of the shares in circulation.
Compliance at the Villeroy & Boch Group
The establishment of an effective compliance organisation is a vital element of good corporate governance with a view to ensuring compliance with statutory provisions, internal guidelines and corporate values. In the 2008 financial year, a compliance organisation going above and beyond the existing measures was created as part of the risk management system.
- Our compliance organisation is directly linked to the Management Board of Villeroy & Boch AG: the Chief Financial and Human Resources Officer is the Chief Compliance Officer. The Group’s compliance organisation reports to him. He is supported by the Compliance Officer at Villeroy & Boch AG.
- To ensure that compliance is present within all departments, the Compliance Officer is supported by the Compliance Advisory Board (CAB). The Compliance Advisory Board includes the senior managers of the central Legal, Treasury, Human Resources, Controlling, Internal Audit, Purchasing and Information Technology functions as well as the environment and occupational health and safety managers and the senior controllers of the “Bathroom and Wellness” and “Tableware” Divisions.
- Compliance officers are also appointed for each company at the subsidiaries’ management level to ensure that the issue of compliance is actively pursued throughout the Group. They report directly to the Chief Compliance Officer.
In the year under review, an internal whistleblower platform allowing all employees to report breaches of compliance regulations anonymously if desired was installed at the level of Villeroy & Boch AG. As in recent years, training sessions on anti‑trust and competition law issues have also been carried out internally and by external consultants.
The compliance organisation is based on corporate guidelines, ethical principles and a general Code of Conduct. These principles and guidelines apply directly to all employees throughout the world. General guidelines and guidelines on the various areas of activity are also in place; these describe the Group’s general Code of Conduct in greater detail and provide employees with specific instructions on how to behave in individual cases. These guidelines are obligatory for all employees in their respective local and professional area of application. All principles and guidelines can be viewed by all employees on the Intranet. The corporate guidelines, ethical principles and the general Code of Conduct can also be accessed in the Investor Relations / Corporate Governance section of the Company’s website at www.villeroy-boch.com.
The next measures will be to develop our compliance organisation further, particularly at the subsidiaries, to offer our employees more detailed training and to constantly analyse and improve our compliance.
Details of the controlling and risk management system can be found in the Risk Report in the Management Report.
Comprehensive information creates transparency and trust
Villeroy & Boch AG seeks to inform all target groups of the Company’s position equally and in good time and to ensure optimal transparency with regard to its management and controlling mechanisms by way of comprehensive reporting.
This includes the annual publication of the consolidated financial statements and quarterly reports, which are prepared in accordance with the International Financial Reporting Standards (IFRS). The 90-day period for the publication of the consolidated financial statements set out in section 7.1.2 of the German Corporate Governance Code was again observed this year. The single-entity financial statements of Villeroy & Boch AG are prepared in accordance with the German Commercial Code (HGB).
The website www.villeroy-boch.com also contains the latest news in the form of press releases, ad hoc disclosures and other publications. Annual and interim reports by Villeroy & Boch AG are also available to download in German and English from the Investor Relations section.
The publications comply with the transparency requirements set out in the German Securities Trading Act. The annual document in accordance with section 10 of the German Securities Prospectus Act compiles all publications relating to Villeroy & Boch AG in the 2010 financial year.
To allow us to maintain a dialogue with analysts and shareholders, the financials and analysts’ press conference is held once a year and the General Meeting of Shareholders is convened at least once a year giving details of the agenda.
Publication dates and recurring events are published in the financial calendar on our website, in this annual report and also in our interim reports.
Ernst & Young confirmed as auditors
The Supervisory Board of Villeroy & Boch AG again commissioned Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft to audit the single-entity and consolidated financial statements for the 2010 financial year as the auditor appointed by the General Meeting of Shareholders. The Audit Committee and the Supervisory Board had previously satisfied themselves as to the independence of the auditor.
In accordance with the recommendations of the German Corporate Governance Code, the Supervisory Board agreed with the auditor that the Chairman of the Audit Committee would be informed immediately of any potential grounds for disqualification or partiality and any facts and events of importance for the proper performance of the tasks of the Supervisory Board arising during the performance of the audit.
If the audit gives rise to facts that show a misstatement in the declaration of conformity issued by the Management Board and the Supervisory Board in accordance with section 161 of the German Stock Corporation Act, the auditor must inform the Supervisory Board or make a corresponding note in the audit report.
Declaration of Conformity in accordance with section 161 of the German Stock Corporation Act The Management Board and the Supervisory Board are obliged to issue a Declaration of Conformity regarding the adoption of the recommendations of the German Corporate Governance Code once a year in accordance with section 161 of the German Stock Corporation Act. Following intensive discussions at the meeting of the Supervisory Board in December, the Management Board and the Supervisory Board issued the following declaration of conformity, which stated that the Company had complied with and continued to comply with all of the recommendations of the Government Commission of the German Corporate Governance Code with five exceptions.
“The Management Board and the Supervisory Board examined the Company’s compliance with the German Corporate Governance Code on 13 December 2010.
In accordance with section 161 of the German Stock Corporation Act, the Management Board and the Supervisory Board of Villeroy & Boch AG hereby declare that, since the publication of the last declaration of conformity on 16 December 2009, the Company has complied with and continues to comply with the recommendations of the Government Commission of the German Corporate Governance Code (the “Code”) in the version dated 18 June 2009 up until the announcement of the new version of the Code in the official section of the electronic Bundesanzeiger (Federal Gazette) on 2 July 2010 and, since this date, in the version dated 26 May 2010 with the exception of the small number of recommendations described below:
Section 3.8 (2) of the Code:
The existing D&O (directors’ and officers’ liability insurance) policy does not prescribe a deductible for the members of the Supervisory Board. Villeroy & Boch AG is of the opinion that a deductible is not a suitable means of influencing the level of motivation and responsibility with which the members of the Supervisory Board perform their activities.
Section 4.2.3 (2) of the Code:
In the existing employment contracts with the members of the Management Board, the variable remuneration elements take into account both positive and negative developments within the agreed assessment period insofar as a higher or lower level of variable remuneration or no remuneration is paid. When determining Management Board remuneration in future, the Supervisory Board will observe the criteria on variable remuneration set out in the German Act on the Appropriateness of Management Board Remuneration.
Section 4.2.3 (4) and (5) of the Code:
The existing employment contracts, which were concluded before the corresponding amendments to the Code, contain provisions on severance payment caps with regard to both the reason for termination and the amount of severance pay. In the small number of points where these provisions do not fully comply with the recommendations of the Code, the Supervisory Board will endeavour to ensure that a compliant agreement is concluded to the extent that this makes economic sense and is possible under employment law.
Section 5.3.3 of the Code:
The Supervisory Board has not formed a separate Nomination Committee to propose suitable candidates for election to the Supervisory Board. Proposals for election have been and will continue to be prepared at shareholder representatives’ meetings. As the Supervisory Board only has six shareholder representatives and the current practice of preparing proposals for election at shareholder meetings has proven to be efficient, the Supervisory Board does not see the need to institutionalise this practice by forming an additional Nomination Committee.
Section 5.4.1 (2) of the Code:
The Supervisory Board has still not announced any specific targets for its composition in 2010. It had previously set an age limit for its members and taken this into consideration when proposing members for election. The Supervisory Board will also set specific targets for its composition by mid-March, which, with due regard for the Company-specific situation, will take account of the Company’s international operations, potential conflicts of interest, an age limit for members of the Supervisory Board and diversity and, in particular, provide for appropriate participation by women.”
SUPERVISORY BOARD AND MANAGEMENT BOARD REMUNERATION
Basic features of the remuneration system
The remuneration system established for members of the Management Board is performanceoriented, with the fixed remuneration of the Management Board members being supplemented by a performance-based variable component. The value of the variable component is dependent on the extent to which targets laid out in the annual objectives are met. The objectives comprise individual targets as well as financial Company targets. The target parameters for the variable remuneration component for the 2010 financial year were preliminarily agreed upon by the Human Resources Committee of the Supervisory Board together with the members of the Management Board before being approved by the full Supervisory Board. Performance targets and remuneration parameters cannot be amended subsequently. In addition, a company car for private usage is offered to members of the Management Board. The existing contracts of the acting members of the Management Board provide for defined benefit pension commitments. Based on the assessment of the Supervisory Board, total remuneration and the individual remuneration components maintain an appropriate relationship to the responsibilities and achievements of the respective Management Board members and the financial situation of the Company.
A reassessment of the Management Board remuneration has not been made since the entry into force of the German Act on the Appropriateness of Management Board Remuneration on 31 July 2009. The existing contracts of the members of the Management Board were also unchanged in the 2010 financial year. The Supervisory Board commissioned an independent remuneration consultant for the review of its remuneration system.
Supervisory Board remuneration is also composed of a fixed and a variable component. The performance-based variable component is based on the dividend paid to shareholders.
Supervisory Board remuneration
In accordance with the Articles of Association of Villeroy & Boch AG, the members of the Supervisory Board are entitled to claim reimbursement for the expenses incurred as a result of their work. They also receive fixed basic remuneration and a variable remuneration component.
The fixed annual basic remuneration is Euro 20,000. The Chairman receives an additional Euro 45,000, while the Deputy Chairman receives an additional Euro 13,500. Members of the Supervisory Board receive a meeting fee of Euro 1,250 for each meeting of the full Supervisory Board.
The Chairman of the Investment Committee, the Human Resources Committee and the Audit Committee each receive Euro 4,000 p.a. in addition to their basic remuneration, while the members of the respective committees each receive an additional Euro 2,500 p.a.
The variable remuneration amounts to Euro 195.00 per member of the Supervisory Board for each cent by which the dividend payable to shareholders exceeds 10.5 cents per share (calculated as the average of the dividends paid for one preference share and one ordinary share).
The aforementioned remuneration is paid together with any value added tax incurred. Members are only entitled to receive remuneration on a pro rata basis for their term of office.
The members of the Supervisory Board of Villeroy & Boch AG received the following remuneration in the financial year:
A total expense of Euro 459 thousand was reported in the consolidated result for the 2010 financial year (previous year: Euro 400 thousand). Besides the fixed remuneration paid and the meeting fees 2010, the expense further includes Euro 25 thousand for the provision for variable remuneration as well as other reimbursements of expenses.
Management Board remuneration
An expense of Euro 1,968 thousand (previous year: Euro 1,756 thousand) is reported in the income statement for the 2010 financial year. This figure is composed of fixed (Euro 1,144 thousand; previous year: Euro 954 thousand) and variable salary components (Euro 824 thousand; previous year: Euro 802 thousand). In the past financial year, the Villeroy & Boch Group paid insurance premiums for Management Board members in the amount of Euro 2 thousand (previous year: Euro 4 thousand). The members of the Management Board received remuneration in kind totalling Euro 43 thousand (previous year: Euro 50 thousand). The above-mentioned payments also include remuneration paid to a member who has left the Management Board.
The pension entitlements of Management Board members in the amount of Euro 2,752 thousand (previous year: Euro 2,451 thousand) are included in provisions for pensions. Provisions for pensions for former members of the Management Board amount to Euro 13,174 thousand (previous year: Euro 13,220 thousand). In the past financial year, former members of the Management Board received pension benefits totalling Euro 1,135 thousand (previous year: Euro 1,363 thousand).
The provisions of section 314 (2) sentence 2 in conjunction with section 286 (5) HGB apply with respect to the disclosure of the individual remuneration paid to members of the Management Board up to and including the 2010 financial year.