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Corporate Governance Report and Declaration

Pursuant to Section 289a of the German Commercial Code (HGB)

Good, responsible corporate governance geared toward sustainable, long-term value creation is what governs the actions of the Executive Board and the Supervisory Board.

Good, responsible corporate governance geared toward sustainable, long-term value creation and in the interests of all its stakeholder groups is the measure that governs the actions of the Executive Board and Supervisory Board of Continental AG, and the basis of the company’s success. In the following, the Executive Board and Supervisory Board report on corporate governance at Continental in accordance with our Corporate Governance Principles, Section 3.10 of the German Corporate Governance Code and Section 289a of the German Commercial Code (Handelsgesetzbuch – HGB). The report is supplemented by the remuneration report of Continental AG, which is a part of the company’s Management Report.

Continental AG’s Corporate Governance Principles are closely modeled on the German Corporate Governance Code. Together with the BASICS, in which we have set out our values and guidelines since 1989, our Corporate Social Responsibility Principles and our Code of Conduct, these principles form a guideline for corporate management and control at Continental.

Corporate bodies
In line with the law and the Articles of Incorporation, the company’s corporate bodies are the Executive Board, the Supervisory Board and the Shareholders’ Meeting. As a German stock corporation, Continental AG has a dual management system characterized by a strict personnel division between the Executive Board as the management body and the Supervisory Board as the monitoring body.

The Executive Board and its practices
The Executive Board has sole responsibility for managing the company free from instructions from third parties in accordance with the law, the Articles of Incorporation, and the Executive Board’s By-Laws, while taking into account the resolutions of the Shareholders’ Meeting. All members of the Executive Board share responsibility for the management of the company jointly. Regardless of this principle of joint responsibility, each Executive Board member is individually responsible for the areas entrusted to him or her. The chairman of the Executive Board is responsible for the company’s overall management and business policy. He ensures management coordination and uniformity on the Executive Board and represents the company to the public. The Executive Board currently has nine members. As a rule, a member of the Executive Board is not appointed beyond the statutory retirement age.

The Executive Board has By-Laws that regulate in particular the allocation of duties among the Executive Board members, key matters pertaining to the company and its subsidiaries that require a decision to be made by the Executive Board, the duties of the Executive Board chairman, and the process in which the Executive Board passes resolutions. The Articles of Incorporation and the Supervisory Board By-Laws require the consent of the Supervisory Board for significant actions taken by management.

The Supervisory Board and its practices
The Supervisory Board appoints the members of the Executive Board and supervises and advises the board in managing the company. The Supervisory Board is directly involved in decisions of material importance to the company. As specified by law, the Articles of Incorporation and the Supervisory Board By-Laws, certain corporate management matters require the approval of the Supervisory Board. The chairman of the Supervisory Board coordinates its work and represents it vis-à-vis third parties. He maintains regular contact between meetings with the Executive Board, and in particular with its chairman, to discuss issues relating to the company’s strategy, business development, risk management and compliance.

Composition of the Supervisory Board
The Supervisory Board comprises 20 members in accordance with the German Co-determination Act (Mitbestimmungsgesetz – MitbestG) and the company’s Articles of Incorporation. Half the members of the Supervisory Board are elected by the shareholders in the Shareholders’ Meeting, while the other half are elected by the employees of Continental AG and its German subsidiaries. For new Supervisory Board members, the company has set up an introductory program that provides them with a thorough overview of product and technologies as well as finances, controlling and corporate governance at Continental. The current term of office of the Supervisory Board members lasts until the end of the 2019 Annual Shareholders’ Meeting.

In accordance with Section 5.4.1 of the German Corporate Governance Code, the Supervisory Board has specified targets for its composition. Since January 1, 2016, the Supervisory Board of Continental AG has been subject to the requirement arising from Section 96 (2) AktG, which specifies that at least 30% of its members must be women and at least 30% must be men. The previous target for the percentage of women on the Supervisory Board therefore no longer applied. Since December 2015, the targets for the composition of the Supervisory Board have been as follows:

  • In its nominations for election to the Supervisory Board, as a rule, the Supervisory Board does not nominate candidates who have already held this position for three full terms of office at the time of the election.
  • The number of members of the Supervisory Board with international business experience or other international connections should at least remain the same. At least seven members currently fulfill this criterion.
  • The Supervisory Board should include an appropriate number of independent members. Assuming that employee representatives are generally to be considered independent in terms of the German Corporate Governance Code, the Supervisory Board should include at least 15 independent members. However, in any case at least five shareholder representatives should be independent as defined in the Code. This target has also been met.
  • An appropriate number of members of the Supervisory Board with experience in industries in which the company operates should be maintained. Far more than half of the Supervisory Board members have such experience.

The Supervisory Board has not stipulated an age limit as recommended in Section 5.4.1 of the Code. It does not consider such a general criterion to be suitable for deciding whether a candidate is eligible to be a member of the Supervisory Board. The Supervisory Board will continue to report regularly on the status of the implementation of the targets.

Both the shareholder representatives and the employee representatives have an equal duty to act in the interests of the company. The Supervisory Board’s chairman must be a shareholder representative. He has the casting vote in the event of a tie.

The Supervisory Board has drawn up its own By-Laws that supplement the law and the Articles of Incorporation with more detailed provisions, including provisions on Supervisory Board meetings, the duty of confidentiality, the handling of conflicts of interest, the Executive Board’s reporting obligations, and a list of legal transactions that require the approval of the Supervisory Board. The Supervisory Board consults, in the absence of the Executive Board, on a regular basis as needed.

Committees of the Supervisory Board
The Supervisory Board currently has four committees: the Chairman’s Committee, the Audit Committee, the Nomination Committee and the committee formed in accordance with Section 27 (3) of the MitbestG (Mediation Committee).

The members of the Mediation Committee also form the Chairman’s Committee, which comprises the Supervisory Board’s chairman, Prof. Dr.-Ing. Wolfgang Reitzle; his vice chairman, Hartmut Meine; Georg F. W. Schaeffler; and Jörg Schönfelder. Key responsibilities of the Chairman’s Committee are preparing the appointment of Executive Board members and concluding, terminating, and amending their employment contracts and other agreements with them. However, the plenum of the Supervisory Board alone is responsible for establishing the total remuneration of the Executive Board. Another key responsibility of the Chairman’s Committee is deciding on the approval of certain transactions by the company as specified in the Supervisory Board By-Laws. The Supervisory Board has conferred some of these participation rights on the Chairman’s Committee subject to the condition that, in individual cases, each of its members may demand that a matter again be submitted to the plenary session for decision.

The Audit Committee’s tasks relate to the company’s accounting, the audit of the financial statements, risk management and compliance. In particular, the committee monitors the accounting process and the effectiveness of the internal control system, the risk management system and internal audit system; performs a preliminary examination of Continental AG’s annual financial statements and the consolidated financial statements; and makes its recommendation to the plenary session of the Supervisory Board, which then passes resolutions pursuant to Section 171 of the German Stock Corporation Act (Aktiengesetz – AktG). Furthermore, the committee discusses the company’s draft interim financial reports. It is also responsible for ensuring the necessary independence of auditors and deals with additional services performed by the auditors. The committee engages the auditors, determines the focus of the report as necessary and negotiates the fee. It also gives its recommendation for the Supervisory Board’s proposal to the Annual Shareholders’ Meeting for the election of the auditor. The chairman of the Audit Committee is Prof. Dr. Rolf Nonnenmacher. He is independent and, as an auditor, has special knowledge and experience in the application of accounting principles and internal control procedures. Another committee member, Klaus Rosenfeld, is also a financial expert. The other members are Peter Hausmann, Dirk Nordmann, Georg F. W. Schaeffler and – since September 23, 2016 – Michael Iglhaut, who succeeded Erwin Wörle. Neither a former Executive Board member nor the chairman of the Supervisory Board may act as chairman of the Audit Committee.

The Nomination Committee is responsible for nominating suitable candidates for the Supervisory Board to propose to the Annual Shareholders’ Meeting for election. It consists entirely of shareholder representatives, specifically the two shareholder representatives on the Chairman’s Committee, Prof. Dr.-Ing. Wolfgang Reitzle and Georg F. W. Schaeffler, the chairman of the Audit Committee, Prof. Dr. Rolf Nonnenmacher, and Maria-Elisabeth Schaeffler-Thumann as an additional member.

In accordance with Section 31 (3) Sentence 1 of the MitbestG, the Mediation Committee becomes active only if the first round of voting on a proposal to appoint a member of the Executive Board or his/her removal by consent does not achieve the legally required two-thirds majority. This committee must then attempt mediation before a new vote is taken.

Shares held by Supervisory Board and Executive Board members
The IHO Group holds 46.0% of the shares in Continental AG. This shareholding is attributable to two members of the Supervisory Board, Maria-Elisabeth Schaeffler-Thumann, and Georg F. W. Schaeffler. As at February 6, 2017, the remaining members of the Supervisory Board held shares representing a total interest of less than 1% in the common stock of the company. The members of the Executive Board held shares also representing a total interest of less than 1% in the common stock of the company as at February 6, 2017.

Shareholders and the Annual Shareholders’ Meeting
The company’s shareholders exercise their rights of participation and control in the Shareholders’ Meeting. The Annual Shareholders’ Meeting, which must be held in the first eight months of every fiscal year, decides on all issues assigned to it by law, such as the appropriation of profits, election of the shareholder representatives in the Supervisory Board, the dismissal of Supervisory Board and Executive Board members, appointment of auditors, and amendments to the company’s Articles of Incorporation. Each Continental AG share entitles the holder to one vote. There are no shares conferring multiple or preferential voting rights and no limitations on voting rights.

All shareholders who register in a timely manner and prove their entitlement to participate in the Annual Shareholders’ Meeting and to exercise their voting rights are entitled to participate in the Shareholders’ Meeting. To facilitate the exercise of their rights and to prepare them for the Annual Shareholders’ Meeting, the shareholders are fully informed about the past fiscal year and the points on the upcoming agenda before the Annual Shareholders’ Meeting by means of the Annual Report and the invitation to the meeting. All documents and information on the Annual Shareholders’ Meeting, including the Annual Report, are also published on the company’s website in German and English. To facilitate the exercise of shareholders’ rights, the company offers all shareholders who cannot or do not want to exercise their voting rights themselves the opportunity to vote at the Annual Shareholders’ Meeting via a proxy who is bound by instructions.

Declaration pursuant to Section 161 AktG and deviations from the German Corporate Governance Code
In December 2016, the Executive Board and the Supervisory Board issued the following annual declaration in accordance with Section 161 AktG:

“In accordance with Section 161 AktG, the Executive Board and the Supervisory Board of Continental AG declare that the Company has complied with and will comply with the recommendations issued by the Government Commission on the German Corporate Governance Code (as amended on May 5, 2015; published by the German Federal Ministry of Justice in the official section of the electronic Federal Gazette (Bundesanzeiger) on June 12, 2015), subject to the qualifications set forth below. Reference is made to the declaration of the Executive Board and the Supervisory Board of December 2015, as well as to the previous declarations pursuant to Section 161 AktG and the qualifications regarding the recommendations of the German Corporate Governance Code explained therein.

  • Pursuant to Section 5.4.1 para. 2 of the Code, the Supervisory Board shall specify concrete objectives regarding its composition, which take into account, inter alia, an age limit to be established for members of the Supervisory Board. The Supervisory Board has specified such objectives. However, the Supervisory Board did not establish an age limit, because it is of the opinion that such a general criterion is not suitable for evaluating the qualifications of an individual candidate for membership on the Supervisory Board.

Hanover, December 2016

Prof. Dr.-Ing. Wolfgang Reitzle
Chairman of the Supervisory Board

Dr. Elmar Degenhart
Chairman of the Executive Board”


The declaration was made permanently available to shareholders on Continental’s website. Earlier declarations in accordance with Section 161 AktG can also be found there. In Continental AG’s Corporate Governance Principles, the Executive Board and the Supervisory Board have undertaken to explain not only deviations from the recommendations made by the Code, but also any deviations from its suggestions as follows:

  • Section 2.3.3 of the Code suggests giving shareholders the opportunity to watch the entire Annual Shareholders’ Meeting using communication media such as the Internet. In line with widespread practice, Continental AG has so far broadcast only parts of the Annual Shareholders’ Meeting – particularly the report by the Supervisory Board and the speech by the chairman of the Executive Board – on the Internet in the framework regulated by the Articles of Incorporation.
  • Section 3.7 para. 3 of the Code suggests that the Executive Board should convene an extraordinary Shareholders’ Meeting in all cases of takeover bids. The Executive Board and the Supervisory Board consider it more expedient to decide in each specific situation whether it is advisable to convene a Shareholders’ Meeting.

Continental AG’s complete Corporate Governance Principles are published on the Internet at www.continental-ir.com.

Key corporate governance practices
In addition to the Corporate Governance Principles, the following principles are also key to our long-term responsible corporate governance:

  • The BASICS – Continental AG’s corporate guidelines. The BASICS have reflected the vision, values, and self-image of the corporation since 1989.
  • The Corporate Social Responsibility Principles.
  • Compliance with the binding Code of Conduct for all Continental employees (see details on page 22).

These documents are available on Continental’s website at: www.continental-corporation.com.

Accounting/audit of financial statements
The Continental Corporation’s accounting is prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The annual financial statements of Continental AG are prepared in accordance with the accounting regulations of the German Commercial Code (Handelsgesetzbuch – HGB). The Annual Shareholders’ Meeting on April 29, 2016, elected KPMG AG Wirtschaftsprüfungsgesellschaft, Hanover (KPMG) to audit the consolidated financial statements for fiscal 2016 as well as the interim financial reports of the company. KPMG has audited the consolidated financial statements and the separate financial statements for more than 20 years. Dirk Papenberg has been the auditor responsible at KPMG since the financial statements for fiscal 2012.

Internal control system and risk management
Careful corporate management and good corporate governance also require that the company deal with risks responsibly. Continental has a corporation-wide internal control and risk management system, especially in terms of the accounting process, that helps analyze and manage the company’s risk situation. The risk management system serves to identify and evaluate developments that could trigger significant disadvantages and to avoid risks that would jeopardize the continued existence of the company. We report on this in detail in the Report on Risks and Opportunities, which forms part of the management report for the consolidated financial statements.

Transparent and prompt reporting
The company regularly reports to shareholders, analysts, shareholders’ associations, the media and interested members of the public equally on significant developments in the corporation and its situation. All shareholders therefore have instant access to all the information that is also available to financial analysts and similar parties. In particular, the website of Continental AG is used to ensure the timely distribution of information. The company’s financial reports, presentations held at analyst and investor conferences, press releases, and ad hoc disclosures are also available on the website. The dates of key periodic publications (annual reports and interim reports) and events as well as of the Annual Shareholders’ Meeting and the annual financial press conference are announced in a timely manner in a financial calendar on the company’s website. The dates already set for 2017 and 2018 can be found at www.continental-ir.com.

Report pursuant to Section 289a (2) No. 4 and 5 HGB
Pursuant to Section 96 (2) AktG, the Supervisory Board of Continental AG as a listed stock corporation subject to the German Codetermination Act consists of at least 30% women and at least 30% men. These minimum quotas are mandatory from January 1, 2016. However, existing appointments may continue to be held until their regular end in accordance with Section 25 (2) Sentence 3 of the German Introductory Act to the Stock Corporation Act (Einführungsgesetz zum Aktiengesetz – EGAktG). If a seat becomes vacant before the next scheduled elections, the percentage of women must be increased in accordance with the legal requirements. Women made up 20% of the Supervisory Board of Continental AG as at December 31, 2016, and 25% at the time this report was prepared.

In accordance with Section 111 (5) AktG, the Supervisory Board must set a target quota of women on the Executive Board and a deadline for achieving this target. If the ratio of women is less than 30% at the time this is set, the target must not subsequently fall below the ratio achieved. This deadline, which had to be defined for the first time by no later than September 30, 2015, in accordance with Section 25 (1) EGAktG, must not be later than June 30, 2017. After this, a deadline of up to five years can be set. The Supervisory Board set December 31, 2016, as the first deadline, in order to bring the reference period for target achievement in line with the company’s fiscal year. Within the stipulated time limit, the Supervisory Board had set a target for the ratio of women on the Executive Board of at least maintaining the level of 11% in place at the time of the resolution. The target was met as at December 31, 2016. Based on the current composition of the Executive Board, the Supervisory Board does not anticipate any significant personnel changes in the coming years. In December 2016, the Supervisory Board therefore set a target for the ratio of women on the Executive Board of Continental AG of at least 11% again for the period up until December 31, 2021. At the same time, the Supervisory Board resolved to review the defined target as at December 31, 2019, to determine whether a target of higher than 11% can be set in view of the measures resolved.

In accordance with Section 76 (4) AktG, the Executive Board of Continental AG is also required to set targets for the ratio of women in the first two management levels below the Executive Board and a deadline for achieving these targets. The Executive Board had set the goal of achieving a ratio of at least 17% women in the first management level and more than 30% in the second management level by December 31, 2016. As at December 31, 2016, the ratio of women in the first management level was at 11%. This target was not reached primarily due to the fact that positions already held by men were elevated to the first management level as part of changes in the organization. Due to personnel changes that had already been decided upon before December 31, 2016, but become effective only during the first quarter of 2017, the ratio of women is rising to 21%. In the second management level, the target for December 31, 2016, was exceeded. For the period up until December 31, 2021, the Executive Board has now set the following target quotas for women in the first two management levels below the Executive Board at Continental AG: 26% for the first management level and 33% for the second management level. Besides the legal requirements in Germany, as a global company, Continental continues to attach high priority to the goal of steadily increasing the number of women in management positions throughout the corporation.

Corporate Governance Declaration Pursuant to Section 289a of HGB

The Corporate Governance Declaration pursuant to Section 289a of the German Commercial Code (Handelsgesetzbuch – HGB) is available to our shareholders at www.continental-corporation.com under the Corporate Governance section of our Investor Relations site.

 

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