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Report of the Supervisory Board

 

Dear Shareholders,

In the following, we would like to report on the work of the Supervisory Board and its committees in the 2016 fiscal year. We closely supervised, carefully monitored, and advised the Executive Board in the management of the company and comprehensively fulfilled all the tasks incumbent upon us under applicable law, the Articles of Incorporation, and our By-Laws. The Supervisory Board has satisfied itself of the legality and expediency of management. The Supervisory Board was directly involved in a timely manner in all decisions of fundamental importance to the company.

The Executive Board provided the Supervisory Board with regular, timely, and comprehensive updates in writing and verbally on all issues of relevance to the company. Specifically, these include planning, business strategy, significant business transactions in the company and the corporation, and the related risks and opportunities, as well as compliance issues. The Executive Board continually informed the Supervisory Board in detail of the sales, results, and employment development in the corporation and individual divisions as well as the financial situation of the company. Where the actual course of business deviated from the defined plans and targets, the Executive Board provided detailed explanations. It discussed the reasons for these deviations and the measures introduced in depth with the Supervisory Board and its committees. In addition, the Supervisory Board, the Chairman’s Committee, and the Audit Committee dealt intensively with other key company matters at their meetings and in separate discussions. The members of the Supervisory Board were also available to the Executive Board for consultation outside the meetings. As chairman of the Supervisory Board, I was in regular contact with the Executive Board and its chairman and discussed current company issues and developments with them.

Meetings of the Supervisory Board and the committees
The Supervisory Board held four ordinary meetings in 2016 as well as the strategy meeting and one telephone conference. At three meetings, the Supervisory Board conferred at times in the absence of the Executive Board. The Chairman’s Committee held four meetings and two telephone conferences in the year under review. The Audit Committee met four times in 2016. The Nomination Committee and the Mediation Committee in accordance with Section 27 (3) of the German Co-determination Act (Mitbestimmungsgesetz – MitbestG) did not need to meet. There are no other committees. All committees report to the plenary session on a regular basis. The Corporate Governance Report describes their duties in more detail and names their members.

Most members of the Supervisory Board attended all meetings in person. With just one exception, each member of the Supervisory Board attended in the past fiscal year more than half of the meetings of the plenary session and committees to which they belonged. Elke Volkmann was unable to take part in the Supervisory Board’s telephone conference, the strategy meeting and the September meeting.

Key topics dealt with by the Supervisory Board and the Chairman’s Committee
The Supervisory Board’s discussions repeatedly focused on the company’s strategic development and orientation. At the strategy meeting in particular, the Executive Board and the Supervisory Board once again discussed at length the strategic objectives and strategic planning of the corporation and the divisions. As always, regular subjects of the discussions in the Executive Board’s reporting on the current business development included the situation on the raw materials and sales markets as well as the share-price performance.

Other key topics of the strategy meeting related to developments in the field of electric drive systems and the focus that the company intends to place on mobility services in the future. For example, Continental expanded its fleet management expertise with the acquisition of the majority stake in Zonar Systems, Inc., Seattle, Washington, U.S.A. The Supervisory Board approved this transaction at its meeting in September 2016. At the same time, the Supervisory Board authorized the acquisition of Hoosier Racing Tire Corp., Lakeville, Indiana, U.S.A., by the Tire division, which strengthens our expertise in the field of ultra-high-performance tires.

In addition, the Supervisory Board discussed further management actions by the Executive Board that require the approval of the Supervisory Board or its Chairman’s Committee in accordance with the company’s Articles of Incorporation and the Supervisory Board By-Laws. After careful examination, approval was granted for the acquisition of the remaining shares in our company in Wuhu, China, and of the Bandvulc Group in the U.K., a leading U.K. fleetmanagement service provider and truck-tire retreader. The Supervisory Board also approved the acquisition of the Hornschuch Group by the ContiTech division as well as the structural measures at the Gifhorn location. In its meeting on December 13, 2016, the Supervisory Board discussed the annual planning for 2017 and long-term planning and also approved the planning and the investment plans for fiscal 2017.

Key topics dealt with by the Audit Committee
The Audit Committee was also informed by the Executive Board in detail and on an ongoing basis about sales, results and employment development in the corporation and individual divisions as well as the financial situation of the company. The Executive Board is assisted by the heads of Accounting and Corporate Controlling, who can provide the Audit Committee directly with information at its meetings. In addition, the chairman of the Audit Committee is also in contact with the chief financial officer and the auditor of the corporation outside of the meetings on a regular basis. The Audit Committee also ensures that it is regularly informed of the progress of major acquisition and investment projects. In 2016, this included Veyance Technologies and Elektrobit Automotive, both of which were acquired in 2015.

Before the half-year and quarterly financial reports were published, the Audit Committee discussed and reviewed them with the Executive Board, paying particular attention to the results for the relevant reporting period as well as the outlook for the year as a whole. The interim financial statements as at June 30, 2016, were reviewed by KPMG AG Wirtschaftsprüfungsgesellschaft, Hanover (KPMG), on behalf of the Audit Committee. The Audit Committee also issued the mandate for the audit of the 2016 annual and consolidated financial statements, as well as the Dependent Company Report, to KPMG, pursuant to the resolution adopted by the Annual Shareholders’ Meeting. The committee also defined the focal points of the reports.

The Audit Committee once again performed an assessment of the quality of the audit of the financial statements. In accordance with the EU audit regulation, which went into effect mid-2016, the Audit Committee defined an approval framework for assigning the auditor non-audit services. It obtained extensive information on new developments in accounting standards.

The Audit Committee is closely involved in compliance and risk management. The work of the Compliance department and the Corporate Audit department, as well as reporting on significant events are regular topics at each Audit Committee meeting. These included in particular the matters described in more detail in the Report on Risks and Opportunities and in the Notes to the Consolidated Financial Statements. The head of the Compliance department and the head of Corporate Audit were also available to provide information directly to the Audit Committee and its chairman in coordination with the Executive Board. The chairman of the Audit Committee shares key information as part of his regular reporting to the plenary session. In addition, the head of the Compliance department reports directly to the plenary session of the Supervisory Board once a year about the work of the Compliance department and significant compliance cases.

The Audit Committee recognized the good results of the review of the quality of Corporate Audit carried out by Pricewaterhouse-Coopers GmbH Wirtschaftsprüfungsgesellschaft. Furthermore, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, based on its audit, confirmed the effectiveness of the compliance management system in accordance with Audit Standard 980 of the Institut der Wirtschaftsprüfer e. V. (IDW). In addition, the Executive Board reported to the Audit Committee on the material risks covered by the risk management system and the corresponding measures resolved. The Audit Committee also obtained information on the Governance, Risk and Compliance (GRC) system used for the first time as at June 30, 2016. Another important topic discussed by the Audit Committee was product compliance processes. These aim to ensure that the company’s products comply with the applicable legal regulations. IT system security was once again a subject of the discussions as well. The Audit Committee has satisfied itself of the effectiveness of the internal control system, the risk management system and the internal audit system.

Corporate Governance
At its meeting in December 2016, the Supervisory Board agreed an updated declaration in accordance with Section 161 of the German Stock Corporation Act (Aktiengesetz – AktG) on the recommendations of the German Corporate Governance Code. The Supervisory Board also performed an efficiency review again in 2016 with the support of an external consultant and discussed the results in its meeting in December. This once again confirmed the positive development of the Supervisory Board’s work in the past years. The Supervisory Board will adopt the recommendations that resulted from the evaluation.

No conflicts of interest arose among the members of the Executive Board or the Supervisory Board in the year under review. In its opinion, the Supervisory Board also had an appropriate number of independent members as defined in the German Corporate Governance Code at all times in the period under review.

Further information on corporate governance is included in the Corporate Governance Report.

Annual and consolidated financial statements
KPMG audited the annual financial statements as at December 31, 2016, prepared by the Executive Board in accordance with the provisions of the German Commercial Code (Handelsgesetzbuch – HGB), the 2016 consolidated financial statements, and the summarized management report for the corporation and Continental AG, including the accounts, the accounting-related internal control system, and the system for early risk recognition. The 2016 consolidated financial statements of Continental AG were prepared in accordance with the International Financial Reporting Standards (IFRS). The auditor issued unqualified opinions. In terms of the system for early risk recognition, the auditor found that the Executive Board had taken the necessary measures under Section 91 (2) AktG and that the company’s system for early risk recognition is suitable for identifying developments at an early stage that pose a risk to the company as a going concern. KPMG issued the following unqualified opinion on the Dependent Company Report in accordance with Section 313 (3) AktG:

“Based on the results of our statutory audit and evaluation we confirm that:

  • the actual information included in the report is correct,
  • with respect to the transactions listed in the report, payments by the company were not unduly high or that detrimental effects had been compensated for, and
  • there are no circumstances in favor of a significantly different assessment than that made by the Executive Board in regard to the measures listed in the report.”

The Audit Committee discussed the documents relating to the annual financial statements, including the Dependent Company Report, and the audit reports with the Executive Board and the auditor on February 28, 2017. Furthermore, the plenary session of the Supervisory Board discussed these at length at its meeting to approve the annual financial statements on March 10, 2017. The required documents were distributed to all members of the Audit Committee and the Supervisory Board in good time before these meetings so that the members had sufficient opportunity to review them. The auditor was present at these discussions. The auditor reported on the main results of the audits and was available to provide additional information to the Audit Committee and the Supervisory Board. Based on its own review of the annual financial statements, the consolidated financial statements, the company management report, the combined management report of Continental AG and of the corporation, as well as the Dependent Company Report including the final declaration of the Executive Board, and based on the report and the recommendation of the Audit Committee, the Supervisory Board concurred with the results of the auditor’s audit. There were no objections. The Supervisory Board approved the annual financial statements and the consolidated financial statements. The annual financial statements are thereby adopted. In addition, the Supervisory Board together with the Executive Board will propose a dividend distribution of €4.25 per share for the past fiscal year at the Annual Shareholders’ Meeting on April 28, 2017.

Personnel changes in the Supervisory Board and Executive Board
There was only one personnel change in the Supervisory Board. Hans Fischl stepped down as at December 31, 2016 to begin a well-earned retirement at the end of January 2017. His successor is Gudrun Valten, a member of the works council of Continental Automotive GmbH, Regensburg. The Supervisory Board would like to thank Hans Fischl for his many years of dedicated work on behalf of the company and its employees, and for his major contribution to the Supervisory Board’s work. For more information on the members of the Supervisory Board and its committees who were in office in the year under review, see pages 19, 214 and 215.

At its meeting in September, the Supervisory Board extended the appointment of Helmut Matschi and Nikolai Setzer as members of the Executive Board by another five years until August 2022. At its meeting in December, it also extended the appointment of Dr. Ariane Reinhart by another five years until the end of September 2022.

As a listed stock corporation subject to the German Co-determination Act (Mitbestimmungsgesetz – MitbestG), Continental AG is also subject to the German law for the equal participation of women and men in managerial positions in the private and public sectors, which came into force on May 1, 2015. At its meeting in December, the Supervisory Board once again set a target for the percentage of women on the Executive Board to be achieved by December 31, 2021, in accordance with the act. Details of this target, of the achievement of the target set for December 31, 2016, and of the other obligations arising from the act are described in the Corporate Governance Declaration (Corporate Governance Report).

The Supervisory Board would like to thank the Executive Board, all the employees, and the employee representatives for their excellent work, which enabled the company to develop well overall in the past year. Hanover, March 10, 2017 For the Supervisory Board,

Hanover, March 10, 2017

For the Supervisory Board

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

Prof. Dr.-Ing. Wolfgang Reitzle
Chairman

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

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