Supervisory Board report

My colleagues and I were keen to assess how well our company is using Strategy 2018 to drive the profitable growth for which we are so well positioned. It was pleasing to see the clear focus on delivery throughout the organization in 2016.

Rob Routs, Chairman Supervisory Board

The past year brought our company an important step closer to its growth aspirations. Going into 2016, my colleagues and I on the Supervisory Board were keen to assess how well DSM is using Strategy 2018 to drive the profitable growth for which our company is so well positioned. We were pleased by the clear sense of direction that we witnessed on all sides, and by the strong focus on delivery throughout the organization.

During the year, the Supervisory Board dedicated two working sessions to assessing the execution of Strategy 2018. We were gratified to see that DSM as a whole is really in ‘delivery’ mode. The improvement programs are firmly on track and the business is growing. At the same time, the investments in talent development − the third key aim of Strategy 2018 alongside Adjusted EBITDA and ROCE growth − are bearing fruit.

A highlight of 2016 was our site visit to DSM Nutritional Products in Switzerland and Germany. This was an informative and also a very energizing trip. It gave the Supervisory Board a welcome chance to deepen our understanding of the various global industrial sectors that this business group serves. More than this, it provided valuable insights into DSM Nutritional Products’ growth opportunities, innovation platforms and philosophy of continuous improvement. We also very much welcomed the opportunity to meet some of our managers and employees in Switzerland and Germany, whose enthusiasm and commitment were inspirational.

Besides growth, we are also raising our sustainability aspirations as part of Strategy 2018. The Supervisory Board is very proud of our company’s achievements in this field in 2016. In the light of the substantial role he played in supporting the COP21 agreement, Feike Sijbesma was invited to co-chair the Carbon Pricing Leadership Coalition together with Minister Ségolène Royal of France – a great honor, and thoroughly deserved. Our CEO and Chairman also received a so-called ‘duurzaam lintje’ in the Netherlands, a decoration that recognizes his personal commitment to sustainability, which is our company’s core value.

Likewise very impressive was the professionalism with which DSM as a whole tackled the necessary improvement programs during 2016, which affected many of our colleagues. The year 2016 was a demanding one in many ways, but one in which we took a big step toward achieving our ambitions. On behalf of my colleagues on the Supervisory Board, I would like to thank our employees and Executive Committee for all their hard work and commitment in the past year, as well as thanking all the other stakeholders who continue to place their trust in our company. All in all, 2016 was a good year for DSM and we are on track for an even brighter future.

This Report provides further information on the way the Supervisory Board performed its duties in 2016. 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 assessing the Managing Board’s 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 (three Dutch, one Swiss, two American and one Singaporean), background, knowledge and experience. The Board's current members are Rob Routs (Chair), Tom de Swaan (Deputy Chair), Victoria Haynes, Pierre Hochuli, Eileen Kennedy, Pauline van der Meer Mohr, and Pradeep Pant. For detailed information on their background, see 'Corporate Governance' on the company website and Supervisory Board and Managing Board Royal DSM.

The targeted profile of the Supervisory Board is reflected in its regulations, which are published on the company 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 company 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. 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. Whenever the Supervisory Board as a whole or an individual member feels the need to be informed on a specific topic, this is requested; follow-up is provided by the Managing Board. In 2016, for example, following a continuous education session on cyber security, the Supervisory Board asked for an update of DSM’s IT strategy and on how DSM was viewing, grasping and, where applicable, pursuing opportunities and mitigating risks following developments in the digital arena.

The Supervisory Board furthermore regularly receives information on relevant topics from senior leaders and experts within DSM during committee meetings, full Supervisory Board meetings, annual site visits, and as part of their ongoing professional education. In 2016, this was the case with respect to the revision of the Dutch corporate governance code; economic and political developments in Latin America; the progress of the POET-DSM joint venture; talent development; and IT and cyber security. 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. Examples are a visit by the Chairman of the Supervisory Board to the POET-DSM plant in Emmetsburg (Iowa, USA) to gain a better understanding of the pretreatment issues at the plant and contribute his experience to solving these. Another member of the Supervisory Board met with DSM’s Senior Vice President Group Taxation to obtain a more in-depth understanding of DSM’s taxation policy. The members of the Sustainability Committee held an informal meeting to discuss how to get the most out of the Sustainability Committee meetings, as a result of which the concept of deep dives into specific topics was introduced. Our new member Pradeep Pant had numerous bilateral meetings and visited several sites as part of his introduction program. The Chairman of the Supervisory Board also met a group of senior DSM managers taking part in DSM’s executive leadership program to share his views on leadership with them. 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 shareholders' 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 agenda item, the Supervisory Board tracks the financial performance of the company, approves the annual Finance Plan and deliberates on any additional treasury topics as applicable. The Supervisory Board thus discussed and approved the share buy-back program to cover the company's commitments under existing management and employee option plans and to implement its stock dividend policy; the issue of bonds; and the hedging policy. Furthermore, the treatment of DSM’s cumulative preference shares A was discussed several times with the Supervisory Board.

In 2015, 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. In the spirit of these working sessions and in order for the Supervisory Board to track the execution of Strategy 2018, working sessions were again organized in 2016, one focusing on materials, and another on health and nutrition. During these sessions, the Supervisory Board was provided with a performance update as well as a growth outlook for the respective businesses. Break-out group discussions subsequently focused on whether enough was being done to execute the current strategy and the extent to which all relevant trends had been identified, either in terms of risks or opportunities. The Supervisory Board started the year assessing past acquisitions, investments and divestments to identify lessons learned going forward.

Site visit to DSM Nutritional Products (Switzerland and Germany)

Each year the Supervisory Board takes a number of days to visit DSM sites in a particular region. This year’s visit was fully dedicated to DSM Nutritional Products. The site visits offer an opportunity to interact with employees across the company as well as providing the Supervisory Board members with continuing education opportunities. The visit deepened the Supervisory Board’s understanding of DSM’s Nutrition activities, with the Board members gaining additional insights into the technologies used, DSM’s positioning in the value chains, and the business models applied.

The site visit began with a general overview of DSM’s largest business group, its organizational principles, people and financials. DSM Nutritional Products combines global production capabilities with customized local formulations. The site visit was designed in such a way that the Supervisory Board followed the manufacturing chain, starting with the manufacturing of base products, which was witnessed at the Lalden (Switzerland) site. These products are subsequently used to produce DSM’s final products in Animal Nutrition & Health, Human Nutrition & Health and Personal Care & Aroma Ingredients at locations around the world. Moving along the value chain, the Supervisory Board also visited the site in Grenzach (Germany), which produces vitamins B1, B2 and D3. Presentations on the different business units as well as on DSM’s current nutritional products innovation platforms completed the visit. Given the importance the Supervisory Board always attaches to customer intimacy and understanding, the program included a visit to the Nestlé Research Centre in Lausanne (Switzerland), Nestlé being one of DSM Nutritional Product’s major customers.

Supervisory Board
Town hall meeting with the DSM Supervisory Board in Switzerland

During the site visit, time was also spent to enable employees and the Supervisory Board to get to know each other. For the first time, the Supervisory Board held a ‘town hall’ meeting with employees, which met with overwhelmingly positive feedback. An evening was spent with local executives discussing the execution of the strategy, culture and talent development, and the future of Nutrition. Finally, time was taken for reflection meetings in which the Supervisory Board shared its impressions with the Executive Committee members who participated. 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 2016, the Supervisory Board had six meetings in the presence of the Managing Board. On two occasions, a member was excused on health grounds and on two other occasions a member was excused due to conflicting commitments. The Supervisory Board held one additional conference call to assess the subsequent event procedure performed between the publication of DSM’s full year results 2015 and the publication of its 2015 financial statements.

The Supervisory Board also convenes in the absence of the Managing Board, which happens either before or after each meeting.

A Supervisory Board evaluation is performed once every three years by an external advisor; this was again the case in 2016. The evaluation was carried out on the basis of a short written questionnaire, followed by more in-depth one-on-one interviews between the external advisor and individual Supervisory Board members. In completing his assessment, the external advisor also interviewed the members of the Managing Board, the Executive Vice President Group People & Organization, and DSM’s Company Secretary. As part of the evaluation, the collective performance of the Board and its Committees and the performance of the Chairman were assessed.

The overall feedback from the evaluation is that the Board has made good progress in its development as a team: it has a balanced composition and works well together in a very open atmosphere, also in the discussions with the Managing Board. Interactions are both supportive and respectful as well as challenging; there is a constructive and collegial meeting culture. The advice going forward was to maintain or perhaps even increase the amount of time spent on strategy, including insights into DSM’s competitive environment, customer focus, developments in the markets in which DSM operates, and the impact of digitization. This outcome was presented to and discussed with the Supervisory Board in December, in the absence of the Managing 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. Given some of the conflicting commitments that arose during the year, it was agreed to come to an additional planning effort to avoid such conflicts in the future.

Committees

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

Board nominations

Members of the Nomination Committee are Rob Routs (Chair), Eileen Kennedy and Pauline van der Meer Mohr. Feike Sijbesma and Peter Vrijsen, Executive Vice President Group People & Organization, were also involved in the discussions of the Committee. The Committee met five times in 2016, once via conference call. 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 2016, nomination discussions were focused on succession planning for both the Managing Board and the Supervisory Board. With respect to the Managing Board, the discussions were focused on the talent pipeline available for succession of Managing Board members. The Nomination Committee also discussed the proposed nomination for reappointment of Dimitri de Vreeze, whose first term as Managing Board member will end in 2017. At the end of the year, discussions also covered the arrangements around the departure of Stephan Tanda. The responsibilities of Stephan Tanda have been re-arranged among the Managing Board and Executive Committee members.

The Supervisory Board assessed the composition of the Managing Board following Stephan Tanda’s departure. It concluded that the Managing Board is still diverse in nationality (two Dutch and one member being a Swiss, British and French citizen), gender (two 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 company website under 'Corporate Governance' and Supervisory Board and Managing Board Royal DSM 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 Supervisory Board. Both Pierre Hochuli and Tom de Swaan are approaching the maximum tenure as members of the Supervisory Board (as per the 2017 and 2018 Annual General Meetings of Shareholders respectively). The Nomination Committee consequently spent a reasonable amount of time on the profiles of new Supervisory Board members to be attracted in the coming years, and searches for new Board members were initiated in the year.

Board remuneration

The Remuneration Committee had five meetings and two conference calls in 2016. Pauline van der Meer Mohr (Chair), Victoria Haynes, 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 2016, 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.

Sustainability

The Sustainability Committee prepares the Supervisory Board’s discussions on sustainability topics. The Sustainability Committee met three times in 2016. One member had to excuse himself once for health reasons. The members of this Committee are Eileen Kennedy (Chair), Pierre Hochuli and Pradeep Pant. 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 this Report. With the 'Independent assurance report on the sustainability information' by KPMG on Independent auditor's assurance report of this Report taken into consideration, the full Supervisory Board approved the reporting in these sections in its meeting of 2 March 2017. The Sustainability Information is in compliance with the Standards of the Global Reporting Initiative and the internal reporting criteria of DSM, which are included in this Report, and is also aligned with the International Integrated Reporting Council <IR> Framework where possible.

During the year, a recurring topic has been DSM’s performance on its People and Planet aspirations with a focus on Brighter Living Solutions, Responsible Care and Inclusion & Diversity. Through these discussions, the Sustainability Committee followed up on the progress made with the implementation of the sustainability and safety aspirations set by the company as part of its Strategy 2018. Deep dives were made into Planet (DSM’s road to reducing greenhouse-gas emissions) and People (DSM’s Personal Care product Alpaflor® Edelweiss was discussed as an example of the People+ assessment for Brighter Living Solutions). The Committee was also briefed on the newly introduced Product Category Sustainability Report, which identifies environmental and social impact differentiators for each of DSM's product categories and confirms minimum compliance levels. Furthermore the Committee was updated on DSM’s performance in the Dow Jones Sustainability World Index (DJSI). The Committee's view that DSM is doing well when it comes to sustainability is supported by the fact that in 2016 DSM was named the leader in its industry in the DJSI and has thereby maintained its position in the so-called Gold Class.

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 2016, of which three times via conference call. Tom de Swaan (Chair), Victoria Haynes, Pierre Hochuli and Pradeep Pant 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 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. DSM's external auditor KPMG, 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. Two such meetings took place in 2016. 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. The Committee also discussed and evaluated cases submitted under DSM’s whistleblower policy (DSM Alert), and mitigating actions to prevent recurrence. Discussions were held with KPMG about the Management Letter and financial statements for 2016. As part of the planning process, key audit matters dealing with, among other topics, impairment triggers, on-going litigation and the accounting of the results of ChemicaInvest were explained and shared with the Audit Committee.

Financial statements 2016

The Report by the Managing Board and the financial statements for 2016 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 2 March 2017. The financial statements were audited by KPMG, who issued an unqualified opinion (see the Independent auditor's report). The Supervisory Board established that the external auditor was independent of DSM.

The Supervisory Board will submit the 2016 financial statements to the 2017 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 2016 Integrated Annual Report.