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Supervisory Board report - Annual Report 2015 - DSM

Supervisory Board report

Introduction by the Chairman

Looking back at the Supervisory Board meetings in 2015, two topics in particular stand out amidst a range of subjects and activities. The first relates to the role of the Supervisory Board in the design of the divestment of the DSM Fibre Intermediates and DSM Composite Resins businesses. The second was the Supervisory Board’s intensive involvement in the development during the year of DSM’s Strategy 2018: Driving Profitable Growth, including the company objectives for the coming period. This new strategy takes DSM from a period of optimizing and simplifying its portfolio into a phase in which it can fully focus on driving the profitable growth for which it is very well positioned. The presentation of the new strategy during the Capital Markets Day in November was one of the highlights of the year. The Supervisory Board can also reflect on an inspiring site visit to the South of Limburg (Netherlands), during which the Supervisory Board was provided with in-depth insights into the worlds of Innovation, Emerging Business Areas (EBAs), DSM Dyneema and DSM Engineering Plastics, as well as into the performance improvement program in the Nutrition cluster.

Aside from the shocking and contemptible terrorist attacks in Paris, one of the low-points of last year was without doubt the earthquake that caused such devastation to the Nepalese region. The Supervisory Board is proud of the way DSM and its employees immediately took action to organize fundraising and donated a large amount of money. On a positive note, the climate agreement reached in Paris will help conserve the planet for future generations and give vital support to the countries most vulnerable to the effects of climate change. Business leaders played a substantial role in advocating for and supporting the COP21 agreement, and the Supervisory Board is pleased that Feike Sijbesma is one of those leaders. The Supervisory Board also supports DSM's partnership with the UN World Food Programme (WFP), for which the contract was renewed at the end of 2015. This makes DSM the WFP's longest-running partner.

This Report provides further information on the way the Supervisory Board performed its duties in 2015. These concern supervising the policy pursued by the Managing Board, the Managing Board's performance of its managerial duties and the general course of affairs within DSM and its businesses, as well as in assisting the Managing Board with advice, either upon request or proactively. Finally, these duties also include fulfilling the role of supervisor towards the Managing Board, assessing their performance and ensuring that their remuneration is both in line with that performance and provides the appropriate incentives.

Composition of the Supervisory Board

The composition of the DSM Supervisory Board is diverse in gender (four men, three women), nationality (four Dutch, one Swiss and two American), background, knowledge and experience. The Board's current members are Rob Routs (chair), Ewald Kist (deputy chair), Pierre Hochuli, Tom de Swaan, Pauline van der Meer Mohr, Victoria Haynes and Eileen Kennedy. For detailed information on their background, see 'Corporate Governance' on the DSM website and Supervisory Board of this Report. The targeted profile of the Supervisory Board is reflected in its regulations, which are published on DSM's website under Corporate Governance. The Supervisory Board has four committees to cover key areas in greater detail: auditing, nominations (of the Supervisory Board and Managing Board), remuneration (of the Supervisory Board and Managing Board) and sustainability. Information on these committees is given elsewhere in this chapter. The charters of the committees are published on the DSM website under Corporate Governance.

Information

The Managing Board is the most important source of information for the Supervisory Board. Information is mainly submitted for Supervisory Board meetings but also provided around those meetings and in bilateral contacts between Supervisory Board and Managing Board members. Whenever the Supervisory Board or a member feels the need to be informed on a specific topic, this is requested; follow-up is provided by the Managing Board. In 2015, for example, the Supervisory Board asked for an overview of and update on the supply situation of omega-3 oils. At the start of each Supervisory Board meeting, the Managing Board shares news as well as highlights and lowlights since the previous meeting. This not only keeps the Supervisory Board informed, but also enables them to indicate any topics on which they would like to receive more information or have a discussion.

The Supervisory Board furthermore regularly receives information on relevant topics from senior leaders and experts within DSM during committee meetings, full Supervisory Board meetings and as part of their ongoing professional education. In 2015, this was the case with respect to Intellectual Property, Communications, Innovation, Talent Development, Taxation and Pensions. During its annual site visit, the Supervisory Board has and actively takes the opportunity to interact with employees at different levels within the company, from the shop-, lab- and work-floor to senior leadership, thus collecting information from different sources within DSM.

Relationship and stakeholder management

In performing its duties, the Supervisory Board acts in accordance with the interests of the company and the business connected with it, taking into consideration the interests of the company's stakeholders. The Chairman of the Supervisory Board is in close contact with the CEO/Chairman of the Managing Board, as is the Chairman of the Audit Committee with the CFO. The Supervisory Board interacts with DSM employees on various occasions and in various settings. In general, bilateral contacts between Supervisory Board members and Managing Board members follow naturally from topics discussed in the Supervisory Board meetings and match the respective fields of expertise. In view of that expertise, Managing Board members also seek the advice of Supervisory Board members on specific matters. The same goes for bilateral contacts with other employees. In 2015, for example, one Supervisory Board member was, at her request, extensively briefed on the weighting factors applied in DSM’s Life Cycle Assessments; another Board member offered expertise in addressing a particular question on the subject of intellectual property; and the Chairman of the Supervisory Board shared his views on leadership with a group of senior DSM managers taking part in DSM’s executive leadership program. The Supervisory Board is informed of the position of other DSM stakeholders by the Managing Board. In addition, the Supervisory Board collects such information through its own network. The Supervisory Board has an active interest in maintaining a good understanding of shareholder's perceptions.

Supervision and advice

The Supervisory Board performs its duties of supervising and advising the Managing Board both with respect to recurring standard agenda items for Supervisory Board meetings as well as to specific topics that become relevant at a given point in time. The most prominent regular agenda item is an update on Business, Financials and Treasury topics. As part of this topic, the Supervisory Board tracks the financial performance of the company and approves the annual Finance Plan, as well as deliberating on any additional treasury topics as applicable. The Supervisory Board thus discussed and approved the share buy-back program to cover existing option plans for management, the issue of bonds and the hedging policy. Besides this regular item, most of the Supervisory Board’s meeting time in 2015 was spent on the Corporate Strategy Dialogue.

Corporate Strategy Dialogue

The Corporate Strategy Dialogue is the process within DSM that ultimately leads to the most appropriate strategy for a particular period. The development of DSM’s Strategy 2018: Driving Profitable Growth during the 2015 Corporate Strategy Dialogue was carried out in a number of work streams. These work streams focused on specific strategic aspects, ranging from portfolio questions to sustainability and innovation aspirations. The Supervisory Board’s involvement in the development of Strategy 2018 went beyond supervision and approval. Part of the Supervisory Board meetings were used by the Managing Board for working sessions to ensure that the Supervisory Board’s expertise could be utilized to the full. At various stages of the strategy’s progression, the Supervisory Board and Managing Board held break-out sessions to discuss and develop the new strategy.

Discussions on operational performance, the progress of the execution of the 2010-2015 strategy DSM in motion: driving focused growth, the competitive landscape and M&A opportunities were incorporated into the Corporate Strategy Dialogue work streams. This resulted in in-depth discussions between Managing Board and Supervisory Board on the performance, potential and composition of the current portfolio. For the Nutrition cluster, discussions were focused on organic growth and improving performance, among other things against the backdrop of a slowdown in some human nutrition end-markets and pricing pressure in several product segments (notably in vitamin E). These also included the Nutrition-specific performance improvement program. In their discussions on the Performance Materials cluster, the Supervisory Board focused on efficiencies, ongoing cost control and improving the performance of the cluster’s portfolio. Two of the work streams focused on the DSM operating model and on people, culture and organization respectively and were ultimately considered together. This led to the adjustments to DSM’s organizational and operating model as announced on 25 August 2015, with the aim of creating a more agile, focused and cost-efficient organization, with a stronger business and market focus and globally leveraged support functions. This will result in structural savings of €125-150 million, to be fully achieved by the end of 2017, and a headcount reduction of 900-1,100 FTEs, of which approximately half in the Netherlands. During discussions on this topic, the Supervisory Board challenged the Managing Board on the projected savings and on the clarity and sustainability of the chosen operating model, and stressed the need to give sufficient attention to change management.

The final outcome of the Corporate Strategy Dialogue, DSM’s Strategy 2018: Driving Profitable Growth, has the full support of the Supervisory Board, and the targets set for the coming three years bear the Supervisory Board’s clear imprint.

Site visit to the South of the Netherlands

Each year the Supervisory Board takes a number of days to visit DSM sites in a particular region. This year’s visit was to DSM’s sites in the South of the Netherlands. Consequently, the main focus was on: the DSM Innovation Center including the EBAs; DSM Engineering Plastics; and DSM Dyneema. The site visits offer an opportunity to interact with employees across the company as well as providing the Supervisory Board members continuing education opportunities. The visit deepened the Supervisory Board’s understanding of DSM’s activities in the material sciences and innovation space, with the Board members gaining additional insights into the technologies used, DSM’s positioning in the value chains and into the business models applied.

While visiting the Innovation Center, the Supervisory Board received extensive information about the way in which the Innovation Center operates within DSM as well as about the current state of development of the EBAs. While there, the Supervisory Board went to the DSM Advanced Surfaces demonstration lab and was also given presentations on five innovations that DSM expects to bring to market in the coming years. The visit included a tour of the Ahead R&D building (a shared research unit primarily serving the Performance Materials business groups, as well as the EBAs and some other business groups), RESOLVE (a competence center offering R&D support for products and processes servicing both DSM and third parties), a research and manufacturing unit for high-performance polymers, and the DSM Dyneema manufacturing site in Heerlen.

The Supervisory Board was presented with a full review of both the DSM Engineering Plastics as well as the DSM Dyneema business. Furthermore, the Supervisory Board was informed about the Dutch regional organization and the changes this is undergoing following the introduction of the new operating model. In addition and at their request, the Supervisory Board was informed about the pension situation in the various countries in which DSM is active. Finally, the Supervisory Board took the opportunity to meet with 'talents' working at the business groups and regional organization they visited. Each day of the site visit was concluded with a reflection meeting in which the Supervisory Board shared its impressions with the Managing Board. During these meetings, the Supervisory Board members shared any specific advice they had pertaining to the business models applied and technologies used, as well as to talent development.

Supervisory Board meetings and performance evaluation

In 2015 the Supervisory Board had seven meetings and three conference calls in the presence of the Managing Board. On three occasions, a member was excused on health grounds and once a member was excused due to a conflicting commitment. The Supervisory Board also convenes in the absence of the Managing Board, which happens either before or after each meeting.

As in previous years, a Board evaluation was carried out on the basis of written questionnaires and interviews with each of the Supervisory Board members. The review assessed the collective performance of the Board and its Committees and the performance of the Chairman. The overall feedback from the self-evaluation was that the Board is operating well and that discussions are very open and constructive.

Key areas of strategy, business performance and risk management are well covered; in the coming year more attention will be paid to talent management and currency hedging. Steps will be taken to ensure that the level of discussion within DSM’s Sustainability Committee continues to develop, among others by looking at best practices from comparable committees in this relatively young discipline. This outcome was presented and discussed in the December meeting of the Supervisory Board. The Board established that all of its members are committed to allocating sufficient time and attention to the Board's duties of supervising and advising the Managing Board. Once every three years the evaluation is performed by an external advisor, which will be the case in 2016.

Committees

The Supervisory Board has four committees to cover key areas in greater detail: nominations, remunerations, sustainability and auditing, which are described in more detail below.

Both the Nomination and the Remuneration Committee prepare the Supervisory Board's duties in its role as the Managing Board's employer.

Board nominations

Members of the Nomination Committee are Rob Routs (chair), Ewald Kist and Pauline van der Meer Mohr. Feike Sijbesma and Peter Vrijsen, Executive Vice President Group People & Organization, were also involved in these discussions. The Committee met three times in 2015; on a single occasion, a member had to excuse himself due to a scheduling clash. The recommendations and minutes of all Nomination Committee meetings were shared with the entire Supervisory Board. This feedback included advice and recommendations regarding topics to be approved by the full Supervisory Board.

In 2015, nomination discussions were focused on succession planning for both the Managing Board and the Supervisory Board, also with a view to the desire to broaden the expertise of the Supervisory Board with a member experienced in doing business in Asia. The Nomination Committee discussed the proposed nomination for reappointment of Stephan Tanda, whose term as Managing Board member ended in 2015. Discussions also covered the arrangements around the departure of Stefan Doboczky. Furthermore, it was agreed in 2015, being one of the outcomes of the 2014 evaluation, that succession planning would be a standard agenda item at each meeting of the Nomination Committee in order to assess and review the succession potential for Managing Board positions. The Supervisory Board assessed the composition of the Managing Board following Mr. Doboczky's departure. It concluded that the Managing Board is diverse in nationality (two Dutch, one Austrian and one member being a Swiss, British and French citizen), gender (three men, one woman), background, knowledge and experience, and provides a good foundation to support all clusters and business groups in achieving their targets and thus contributing to the company strategy aimed at driving profitable growth. For detailed background information on all Managing Board members see the DSM website under 'Corporate Governance' and Managing Board of this Report.

Taking into account the Supervisory Board profile as laid down in the Supervisory Board regulations, the Nomination Committee continued discussions on the overall composition of the Supervisory Board and discussed the succession planning for the entire Managing and Supervisory Board. Given the Supervisory Board’s current composition, the Nomination Committee spent a reasonable amount of time in recruiting an Asian Board member. As a result of these efforts the Supervisory Board will nominate Pradeep Pant for appointment as Supervisory Board member at the 2016 Annual General Meeting of Shareholders. Following his appointment Pradeep Pant will become a member of both the Audit Committee and Sustainability Committee.

Furthermore the Nomination Committee and, at its recommendation, the Supervisory Board, addressed the re-appointments of Victoria Haynes and Eileen Kennedy, whose terms as Supervisory Board members will expire in 2016 and who will both be proposed for re-appointment at the 2016 Annual General Meeting of Shareholders. As Ewald Kist’s third term as Supervisory Board member comes to an end in 2016, the Nomination Committee and subsequently the full Supervisory Board discussed the future composition of the Committees and the fulfilment of the role of vice-chair. As of the 2016 Annual General Meeting of Shareholders, Tom de Swaan will act as vice-chair of the Supervisory Board, Pauline van der Meer Mohr will chair the Remuneration Committee and, assuming the 2016 Annual General Meeting of Shareholders reappoints her, Eileen Kennedy will chair the Sustainability Committee.

Board remuneration

The Remuneration Committee had four meetings and one conference call in 2015. The chair was excused on two occasions, once on health grounds and once because of a conflicting commitment. Ewald Kist (chair), Rob Routs and Tom de Swaan are members of this committee. Recommendations and minutes of the Remuneration Committee meetings were shared with the full Supervisory Board and used to determine the final remuneration of the members of the Managing Board.

Discussions were focused on the performance and the related remuneration of the members of the Managing Board, both in respect of company and individual performance in 2015, as well as the way the current remuneration policy should be applied given the targets set as part of Strategy 2018: Driving Profitable Growth. Feike Sijbesma and Peter Vrijsen were also partly involved in these discussions.

At the request of the Managing Board, the Supervisory Board decided to refrain from an increase in the base salary of members of the Managing Board in 2015 in light of the various cost reduction programs being set up within the company at that time. Following a benchmark, the Remuneration Committee discussed the desirability of increasing the base salary of the Managing Board in 2016 in order to keep their remuneration at par. The same holds for the compensation received by the Supervisory Board. Advised by the Remuneration Committee, the Supervisory Board decided to raise the base salary of the members of the Managing Board by 3.5% as of 1 January 2016. At the end of 2015, the Remuneration Committee decided to benchmark the Supervisory Board fees in view of signals that the current fees may be lagging behind the market. The benchmark confirmed that the current fees (both general and some committee fees as well as the international travel allowance) are relatively low compared to peers. An increase of the fees in order for DSM to be able to continue to retain and attract highly qualified international Supervisory Board members was discussed and proposed to the full Supervisory Board. A proposal will be put before the Annual General Meeting of Shareholders to be held on 29 April 2016.

Sustainability

The Corporate Social Responsibility Committee, which prepares the Supervisory Board’s discussions on sustainability topics, was renamed the Sustainability Committee during the year. The Sustainability Committee met three times in 2015 and will continue to do so in the future (meetings were previously held twice annually). All members participated in these meetings. The members of this Committee are Pauline van der Meer Mohr (chair), Pierre Hochuli and Eileen Kennedy. The Chair of the Supervisory Board has a standing invitation and participated in all meetings. The recommendations and minutes of these meetings were shared and discussed with the entire Supervisory Board during its meetings with the Managing Board. This feedback included advice and recommendations regarding topics to be approved by the full Supervisory Board, in particular the sustainability reporting in the Report. With the 'Independent assurance report on the sustainability information' by KPMG on Independent auditor’s assurance report 2015 of this Report taken into consideration, the full Supervisory Board approved the reporting in these sections in its meeting of 29 February 2016. The Sustainability Information is in compliance with the G4 sustainability reporting guidelines of the Global Reporting Initiative and the internal reporting criteria of DSM, which are included in this Report, and is aligned with the International Integrated Reporting Council Framework where possible.

During the year, a recurring topic has been DSM’s performance on its People and Planet targets with a focus on ECO+, People+, Responsible Care® and Inclusion & Diversity. Through these discussions, the Sustainability Committee followed-up on the implementation of the corporate strategy and the progress made with the implementation of the sustainability and safety aspirations set by the company as part of its strategy. A number of business cases were discussed in 2015, which gave the Sustainability Committee the opportunity to see how DSM applies Life Cycle Assessments and develops products to help enable the circular economy. Furthermore the Committee was updated on DSM’s performance in the Dow Jones Sustainability World Index and on DSM’s advocacy at the World Economic Forum. The Committee's view that DSM is doing well when it comes to sustainability is supported by the fact that the company has been named among the leaders in the Dow Jones Sustainability World Index for several years in a row and has returned to the so-called Gold Class in 2016.

Financials and auditing

The activities of the Supervisory Board in the area of financials and auditing are prepared by the Audit Committee. The Audit Committee met six times in 2015, of which four via conference call. The Audit Committee held one additional conference call to assess the subsequent event procedure performed between the publication of DSM’s full year results 2014 and the publication of its 2014 financial statements. Tom de Swaan (chair), Pierre Hochuli and Victoria Haynes are members of the Audit Committee. All Supervisory Board members have a standing invitation to attend Audit Committee meetings; they do so most often for the regular conference calls in which financial developments and interim results are discussed. The Chair of the Supervisory Board has a standing invitation and participated in all meetings and calls. Whenever relevant, managers responsible for corporate control, internal audit, risk management, and operational audit and compliance were invited to explain developments in their areas to the Audit Committee. The external auditor, the CFO and occasionally the CEO also participated in the Audit Committee’s meetings and calls. At least once a year, the Audit Committee meets with the external auditor without the Managing Board being present. One such meeting took place in 2015. The highlights and the minutes of all Audit Committee meetings were shared with the full Supervisory Board. This feedback included advice and recommendations regarding topics to be approved by the full Supervisory Board.

The Committee had in-depth discussions on the company’s financials, financing and guarantee plan, capital expenditure plan, dividend proposals, financial statements, accounting policy changes, internal risk management and control systems, potential risks (including Safety, Health and Environment (SHE) and security risks), compliance with recommendations and observations made by internal and external auditors, and on the role and functioning of the Operational Audit department, including the endorsement of its proposed audit plan. As part of the Corporate Risk Assessment, the company’s main risks and their mitigation were discussed. Furthermore the Committee was updated on DSM’s risk assessment methodology. The Committee also discussed and evaluated cases submitted under DSM’s whistleblower policy (DSM Alert), and mitigating actions to prevent recurrence.

In accordance with new Dutch and European legislation with regard to the independence of auditors (mandatory audit firm rotation), at the 2014 Annual General Meeting, KPMG was appointed as the new external auditor for DSM as of 2015 for an initial period of three years. Discussions were held with KPMG about the financial statements for 2015. As part of the planning process, key audit matters dealing with, among others, goodwill impairment triggers, the potential impairment of the DSM-AGI business, on-going litigation and the accounting of the results of ChemicaInvest were explained and shared with the Audit Committee.

Financial statements 2015

The Report by the Managing Board and the financial statements for 2015 were submitted by the Managing Board to the Supervisory Board, in accordance with the provisions of Article 30 of the Articles of Association, and subsequently approved by the Supervisory Board on 29 February 2016. The financial statements were audited by KPMG, who issued an unqualified opinion (see the 'Independent auditor's report on the financial statements' on Report on the audit of the annual financial statements 2015 ). The Supervisory Board established that the external auditor was independent of DSM.

The Supervisory Board will submit the 2015 financial statements to the 2016 Annual General Meeting of Shareholders, and will propose that the shareholders adopt them and release the Managing Board from all liability in respect of its managerial activities and release the Supervisory Board from all liability in respect of its supervision of the Managing Board. The profit appropriation as proposed by the Managing Board and approved by the Supervisory Board is presented in the Profit section of the 2015 Integrated Annual Report. The Supervisory Board wishes to express its sincere appreciation for the results achieved and would like to thank everyone associated with DSM, most especially the employees and the Managing Board, for their efforts.