Supervisory Board Report

This Report provides further information on the way the Supervisory Board performed its duties in 2017. This concerns 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 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 in line with that performance and that it provides the appropriate incentives. Since the inception of an Executive Committee, the Supervisory Board has also been responsible for ensuring that the checks and balances that are part of the two-tier system are still taken into account, paying specific attention to the dynamics between the Managing Board and the Executive Committee.

The responsibility of supervising the policy pursued by the Managing Board includes evaluating the way the Managing Board implements DSM's strategy for long-term value creation, and promotes a culture aimed at that value. Since the company's mission is to create brighter lives for people today and generations to come, long-term value creation is embedded both in DSM's Strategy 2018: Driving Profitable Growth and in the company culture. This is described in the chapters Strategy 2018, People and Corporate governance and risk management.

Composition of the Supervisory Board

The composition of the DSM Supervisory Board is diverse in gender, nationality, background, knowledge and experience. There are five men and three women. Three members are Dutch, two American, one Dutch-American, one British and one Singaporean. The Board's current members are Rob Routs (Chairman), Tom de Swaan (Vice Chair), Victoria Haynes, Eileen Kennedy, Pauline van der Meer Mohr, Frits van Paasschen, Pradeep Pant and John Ramsay. For detailed information on their backgrounds, see 'Corporate Governance' on the company website and Supervisory Board and Managing Board Royal DSM of this Report.

Following best practice 2.1.10 of the Dutch Corporate Governance Code, the Supervisory Board establishes that its members are able to act critically and independently of one another, the Managing Board and any particular interests involved. To safeguard this, the Supervisory Board is composed in such a way that all its members are independent in the meaning of best practice 2.1.8 of the Dutch Corporate Governance Code.

The targeted profile of the Supervisory Board is reflected in its regulation, which is 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'.

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 2017, this was the case with respect to the revision of the Dutch Corporate Governance Code, the Clean Cow and Green Ocean projects, the achievement of DSM's Group Sourcing function, the progress of the POET-DSM joint venture, talent development, and IT and cyber security. During its annual site visit, the Supervisory Board actively takes the opportunity to interact with employees at different levels within the company, from the shop floor to senior leadership, thus collecting valuable information and insights from various 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 regular close contact with the CEO/Chairman of the Managing Board, as is the Chairman of the Audit Committee with the CFO.

Furthermore, the Supervisory Board regularly interacts with members of the Executive Committee who attend parts of Supervisory Board meetings and participate in elements of the yearly site visit of the Supervisory Board that are relevant to their specific area of responsibility.

The Supervisory Board interacts with DSM employees on various occasions and in various settings. Direct, one-on-one contact between Supervisory Board members and Managing Board members generally follows naturally from topics discussed in the Supervisory Board meetings and matches the members' 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 contact with other employees. For example, Supervisory Board member Pradeep Pant, has extensive knowledge of Asian markets, and is in regular contact with our senior management in that region. In another example, Supervisory Board member Pauline van der Meer Mohr, who has a clear HR profile, was one of the keynote speakers at an internal DSM event about mentoring. The Chairman of the Sustainability Committee, Eileen Kennedy, attended one of the meetings of DSM's Sustainability Advisory Board. Our new members John Ramsay and Frits van Paasschen had numerous one-on-one meetings and visited several sites as part of their introduction program.

The Supervisory Board has an active interest in maintaining a good understanding of DSM's stakeholders and their positions on various topics related to the company's areas of business. This includes shareholders' perceptions. 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.

Meeting attendance DSM Supervisory Board

Member
Supervisory
Board
meetings1
Audit
Committee
meetings
Nomination
Committee
meetings
Remuneration
Committee
meetings
Sustainability
Committee
meetings
Rob Routs (Chairman)
100%
n.a.2
100%
100%
n.a.2
Tom de Swaan
(Deputy Chairman)
100%
100%
n.a.
100%
n.a.
Victoria Haynes
86%3
100%
n.a.
100%
n.a.
Pierre Hochuli4
100%
100%
n.a.
n.a.
100%
Eileen Kennedy
86%3
n.a.
100%
n.a.
100%
Pauline van der Meer Mohr
100%
n.a.
100%
100%
n.a.
Frits van Paasschen4
100%
n.a.
100%
100%
n.a.
Pradeep Pant
100%
100%
n.a.
n.a.
100%
John Ramsay4
100%
100%
n.a.
n.a.
n.a.

1 Attendance is reflected for the seven Supervisory Board meetings held in 2017. In three out of the four additional Supervisory Board calls that were also held in 2017 the decision making had been delegated by the Supervisory Board to the Chair of the Board and the Chair of the Audit Committee, who both attended all the calls. During the fourth additional Supervisory Board call, that pertained to the mandate to acquire Amyris Brasil Ltda and establish a long-term manufacturing partnership for Amyris' high-volume products, Eileen Kennedy and Pauline van der Meer Mohr were unable to attend due to prior commitments and the short notice at which this call had to be planned.

2 The Chair has a standing invitation and has attended 100% of the meetings.

3 Victoria Haynes had to miss the additional, seventh Supervisory Board meeting which was planned in the course of 2017 following the decision to bring forward the regular strategy review process. That meeting conflicted with a prior commitment of Victoria Haynes. Due to very bad weather circumstances Eileen Kennedy could not travel nor dial in to one of the Supervisory Board meetings.

4 Pierre Hochuli retired as member of the Supervisory Board as from the 2017 General Meeting of Shareholders. Frits van Paasschen and John Ramsay became members of the Supervisory Board following their appointment at the 2017 General Meeting of Shareholders.

Supervision and advice

The Supervisory Board performs its duties of supervising and advising the Managing Board with respect to both recurring standard agenda items for Supervisory Board meetings and 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 DSM's financial performance, approves the annual Finance Plan, and deliberates on any additional treasury topics as needed. In 2017, the Supervisory Board discussed and approved the share buy-back program to cover the company's commitments under existing management and employee option plans and its stock dividend policy. With input from the Audit Committee, the Supervisory Board also discussed DSM's policy for foreign exchange risk management. Furthermore, the amendment of the dividend arrangements of DSM's cumulative preference shares A was discussed with the Supervisory Board prior to the 2017 General Meeting of Shareholders, where this amendment was approved.

In 2017, the Supervisory Board was actively involved in DSM's strategy review process including the assessment as to the extent DSM is on track with the execution of Strategy 2018. Working sessions were held to identify relevant trends, risks and opportunities as input for the strategy review process. DSM's approach to the opportunities and threats presented by the 'digital revolution' as expressed in the Digital Strategy were reviewed together with the 'digital aiming points' that set out measurable goals to be achieved through the application of digital technologies in the coming years.

Site visits

Each year, the Supervisory Board takes a number of days to visit DSM sites in a particular region. This fosters interaction with employees across different areas of the company and provides Supervisory Board members with opportunities for continuing education. This year's visit took the Supervisory Board to North America.

Supervisory Board
The DSM Supervisory Board (from left to right): John Ramsay, Frits van Paasschen, Pauline van der Meer Mohr, Tom de Swaan (Deputy Chairman), Victoria Haynes, Rob Routs (Chairman), Eileen Kennedy, Pradeep Pant.

Whereas in 2016 the site visit was designed in such a way that the Supervisory Board followed the manufacturing chain of DSM Nutritional Products in Switzerland, the site visit of 2017 gave an overview of a wide range of different businesses and activities in North America. The visit to North America deepened the Board's understanding of several of the company's smaller businesses, such as i-Health and DSM Biomedical, offering additional insights into their business models, growth potential and innovation opportunities.

The North America visit began with a general overview of DSM's business in the region as well as relevant political and economic developments. The Board then received an update on Venturing, a small team operating as part of DSM's Innovation Center in North America. DSM Venturing takes minority investments in start-ups, creating opportunities for DSM's businesses.

The Supervisory Board were briefed in-depth on two specific business models within DSM — the i-Health business and the DSM-Niaga joint venture. Given the importance of customer-centricity, the briefing on DSM-Niaga was combined with a presentation by and discussion with representatives of Mohawk, the second-largest flooring maker in the US. Under the brand name Air.o™, Mohawk sells recyclable carpets made from DSM-Niaga material.

During the North America visit, the Supervisory Board traveled to two facilities. The first was DSM's Biomedical facility in Exton (Pennsylvania, USA). The visit to Exton provided insights into the technologies applied and the innovation opportunities of DSM Biomedical, the largest of the company's three Emerging Business Areas. The second visit was to the Advanced Biofuels facility of the POET-DSM joint venture in Emmetsburg (Iowa, USA). This visit included interactions with employees and with DSM's North American leadership, as well as participation in a townhall meeting. The townhall meeting was broadcast live across all DSM's North American sites.

Finally, time was taken to reflect on the site visit, with the participating Executive Committee members. Supervisory Board members shared their impressions and offered specific advice pertaining to the applied business models, technologies and the talent development process.

In December, the Supervisory Board also visited the Rosalind Franklin Laboratory in Delft (Netherlands) and learned more about the biotechnology capabilities of DSM.

Supervisory Board meetings and performance evaluation

In 2017, the Supervisory Board held its six regular meetings in the presence of the Managing Board, as well as one additional meeting in the presence of the Managing Board, in order to be able to dedicate sufficient time to the strategy review process. The Supervisory Board also held four additional conference calls. These were held to assess the procedure carried out between the publication of DSM's full-year results 2016 and the publication of its 2016 financial statements; to approve the external auditor's fee for 2018; to approve the amendment of the Articles of Association to adjust the way the dividend percentage on the cumulative preference shares A is calculated; and, finally, to give a mandate for the divestment of Patheon and for the acquisition of Amyris Brasil Ltda. Information on attendance of Board and Committee meetings can be found on SB Meeting attendance.

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

An evaluation of the Supervisory Board is performed once every three years by an external advisor; this was the case in 2016. In the other two years, the evaluation of the Supervisory Board is performed by means of a self-assessment consisting of a written questionnaire, followed by in-depth, one-on-one interviews between the Chairman and individual Supervisory Board members.

As part of this evaluation, not only the collective performance of the Supervisory Board and its Committees, but also that of individual Supervisory Board members, was evaluated and received feedback in the interviews conducted by the Chairman. Furthermore, the Vice Chair interacted with all Supervisory Board members to assess the performance of the Chairman. The outcome of the evaluation was presented to, and discussed with, the Supervisory Board in December, in the absence of the Managing Board. While the Managing Board's performance is also assessed as part of the evaluation, this happens throughout the year as part of the discussions on succession planning in the Nomination Committee, and particularly when the performance appraisals of the Managing Board members are discussed. The Nomination Committee reports back on these discussions to the full Board.

The overall feedback from the evaluation in 2017 was that the Supervisory Board members work well together, and that discussions are open and candid. The diversity of thinking within the Supervisory Board and the willingness to engage and challenge within the Supervisory Board and between Supervisory Board and Managing Board are much appreciated. The composition of the Supervisory Board is viewed as balanced, and also its size of seven to eight members works well. Key areas of strategy, business performance and risk management are well covered. Although already dealt with regularly, the Supervisory Board would be pleased to spend even more time on major market developments, DSM's external operating environment, and lessons learned from major investments and acquisitions.

Committees

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

Board nominations

Members of the Nomination Committee are Rob Routs (Chairman), 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. As of October 2017, Judith Wiese, who succeeded Peter Vrijsen as of 1 January 2018 participated as part of her on-boarding. The Committee met five times in 2017. 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. The Supervisory Board also has access to all the meeting materials posted for the Nomination Committee meetings.

In 2017, 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 Geraldine Matchett, whose first term as Managing Board member will end in 2018. The nomination for reappointment was fully endorsed by the Supervisory Board. The Supervisory Board concluded that DSM greatly benefitted from Mrs. Matchett's first tenure on the Managing Board, her qualities as a well-rounded and international CFO, and her extensive experience with external stakeholders.

The Supervisory Board established that the composition of the Managing Board is diverse in nationality (with two Dutch citizens, and one member with joint Swiss, British and French citizenship), gender (two men, one woman), background, knowledge and experience, and that it provides a good foundation to support all clusters and business groups in achieving their targets and thus to contributing to the company strategy to drive profitable growth. For detailed background information on all Managing Board members, see the company website under 'Corporate Governance' and Managing Board.

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 succession planning for the Supervisory Board. It concluded that no specific profile is currently lacking within the Board. With Tom de Swaan reaching the maximum tenure as a member of the Supervisory Board (with effect from the 2018 Annual General Meeting of Shareholders), John Ramsay was appointed at the Annual General Meeting of Shareholders of 2017 to ensure a smooth transfer of the chairmanship of the Audit Committee in particular. Based on the advice of the Nomination Committee, the Supervisory Board also agreed to nominate Rob Routs for reappointment to the 2018 General Meeting of Shareholders for a two-year term. This nomination for reappointment is founded on his extensive international experience, his knowledge of the petrochemical industry, his broad experience in the management of corporations, and his qualities as Chairman of DSM's Supervisory Board, as demonstrated during the past eight years. The on-going regular strategic review and the fact that the Vice Chair will be stepping down with effect from the 2018 Annual General Meeting are additional reasons to safeguard continuity in the Chairman's role, especially given the much-valued way in which Rob Routs has fulfilled this role.

Board remuneration

The Remuneration Committee had five meetings and one conference call in 2017. Pauline van der Meer Mohr (Chairman), 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. The Supervisory Board also has access to all the meeting materials posted for the Remuneration Committee meetings. For more information on the remuneration policy see Remuneration policy for the Managing Board and implementation of that policy in 2017, see Remuneration of Managing Board and Supervisory Board.

Discussions were focused on the performance and the related remuneration of the members of the Managing Board, in respect of both company and individual performance in 2017, as well as concerning the way the current remuneration policy should be applied, given the targets set as part of Strategy 2018: Driving Profitable Growth. The performance and remuneration of the Executive Committee members were also discussed with the Remuneration Committee. Feike Sijbesma and Peter Vrijsen were also partly involved in these discussions, and, as of October 2017, so was Judith Wiese, as part of her on-boarding. Mrs. Wiese succeeded Peter Vrijsen as of 1 January 2018.

Sustainability

The Sustainability Committee prepares the Supervisory Board's discussions on sustainability topics. The Sustainability Committee met three times in 2017. This Committee comprises Eileen Kennedy (Chairman), Pierre Hochuli (until the Annual General Meeting of 2017), Pradeep Pant and, as of the Annual General Meeting of 2017, Frits van Paasschen. The Chairman 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. The Supervisory Board also has access to all the meeting materials posted for the Sustainability Committee meetings. The feedback from the Committee to the full Board included advice and recommendations regarding topics to be approved by the Supervisory Board, in particular the sustainability reporting in this Report. Taking into consideration the Assurance report of the independent auditor on the sustainability information by KPMG of this Report, the full Supervisory Board approved the reporting in these sections in its meeting on 27 February 2018. The Sustainability Information complies 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 was 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 several topics. One of them was the way DSM monitors and manages possible issues that can arise with DSM products. As an example, DSM's positioning on industrial biotechnology was discussed with the Committee. Another in-depth discussion took place on the Brighter Living Solutions, specifically, on the way this key performance indicator is impacted by new innovations entering the market and the effect of product / market mix performance fluctuations caused by changing markets and changing mainstream reference solutions. Time was also spent discussing the actions being undertaken to further future-proof DSM by reducing the company's climate impact and climate risk exposure, by enabling a low-carbon economy, and by advocating action externally and internally.

Furthermore, the Committee was updated on DSM's performance in the various Environmental, Social and Governance indices such as CDP, Sustainalytics, Fortune's 'Change the World' list and the Dow Jones Sustainability World Index.

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 five times in 2017, of which three times via conference call. Tom de Swaan (Chairman), Victoria Haynes, Pierre Hochuli until the 2017 Annual General Meeting, Pradeep Pant, and, both as of the 2017 Annual General Meeting, John Ramsay and Frits van Paasschen are members of the Audit Committee. All Supervisory Board members have a standing invitation to attend Audit Committee meetings; in 2017, they used this standing invitation for the regular conference calls in which the financial developments and interim results for the first and third quarter were discussed, as these are not followed by a full Board meeting. The Chairman of the Supervisory Board participated in all meetings and calls. Whenever relevant, managers responsible for corporate control, internal audit, risk management and compliance were invited to explain developments in their areas to the Audit Committee.

DSM's external auditor KPMG and the CFO also participated in the Audit Committee's meetings and calls. The CEO participated in the Audit Committee meetings and the call in which the half-year results were discussed. 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 2017. 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. All Supervisory Board members also have access to all the meeting materials posted for the Audit Committee meetings.

The Committee had in-depth discussions on the company's financials; the financing and guarantee plan; the capital expenditure plan; dividend proposals; the 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 COA, including the endorsement of its proposed audit plan for 2018, which was subsequently approved by the full Board. 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), fraud cases, and on-going litigation. All these discussions included mitigating actions to prevent recurrence. Discussions were held with KPMG about the management letter, the audit report and the financial statements for 2017. In 2017, the Audit Committee formally evaluated the external auditor, and discussed the reappointment of KPMG. Other specific topics addressed during the Audit Committee meetings in 2017 were cyber security, DSM's foreign exchange risk management, and the foundation for the broadened in-control statement included on Statements of the Managing Board of this Report.

Financial statements 2017

The Report by the Managing Board and the financial statements for 2017 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 27 February 2018. 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 2017 financial statements to the 2018 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 Profit.