2018Leadership

Supervisory Board Report

This Report provides further information on the way the Supervisory Board performed its duties in 2018. 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 our company 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 governance 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 the updated Strategy 2021: Growth & Value - Purpose led, Performance driven and in our company culture. This is described in the chapters Strategy 2021, People and Corporate governance.

Composition of the Supervisory Board

The composition of DSM's Supervisory Board is diverse in gender, nationality, background, knowledge and experience. The Board comprises four men and three women. Two members are Dutch, two American, one Dutch-American, one British and one Singaporean. The Board's current members are Rob Routs (Chair), Pauline van der Meer Mohr (Deputy Chair), Victoria Haynes, Eileen Kennedy, Frits van Paasschen, Pradeep Pant and John Ramsay. For detailed information on their backgrounds, see the company website and Corporate Governance 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 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 (to 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'.

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 Chair of the Supervisory Board is in regular close contact with the CEO/Chairman of the Managing Board, as is the Chair 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 the yearly site visit of the Supervisory Board.

The Supervisory Board interacts with DSM employees on various occasions and in various settings. The Supervisory Board regularly receives information on relevant topics from senior leaders and experts in the company during committee meetings, full Supervisory Board meetings, annual site visits, and also as part of their ongoing professional education. In 2018, this was the case with respect to merger and acquisition opportunities, the company's innovation and customer-centricity and agility projects, its manufacturing policy, IT and cyber security (both from an IT as well as an operations perspective). During its annual site visit, the Supervisory Board actively takes the opportunity to interact with employees at different levels, from the shop floor to senior leadership, thus collecting valuable information and insights from various sources across the company.

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 reflects 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, in 2018, Rob Routs was — given his operations background in Shell, a company with a strong safety culture — involved in the revision of the DSM Life Saving Rules. Pradeep Pant, who is based in Singapore and has extensive knowledge of and experience with Asian markets, continued to be in regular contact with our senior management in that region.

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

Supervision and advice

The Supervisory Board performs its duties of supervising and advising the Managing Board with respect both to recurring standard agenda items for Supervisory Board meetings and to specific topics that become relevant at any given point in time.

The most prominent regular agenda item is an update on business performance, financials and treasury topics. As part of this agenda item, the Supervisory Board tracks the company's financial performance, approves the annual Finance and Capital Expenditure Plan, and deliberates on any additional treasury topics as needed. In 2018, the Supervisory Board discussed and approved the share buy-back program to cover the company's commitments under existing management and employee option and share plans and the company's stock dividend policy.

In 2018, the Supervisory Board was actively involved in the company's strategy update, including strategic direction and target-setting for the years till 2021 as well as dividend considerations, as presented during the Capital Markets Day on 20 June. The Supervisory Board was also extensively involved in the process for reviewing potential merger and acquisition targets and the monetization of DSM's stakes in Fibrant and DSM Sinochem Pharmaceuticals.

At the Board's request, the Supervisory Board was updated as to the company's global manufacturing plan. Customer-centricity and agility projects are being rolled out throughout the company, contributing to a top-line and customer-first mindset. Given the importance of these projects, the Supervisory Board did a deep dive on the project within DSM Nutritional Products and will continue to follow the implementation and effects of these projects going forward. In addition, the Supervisory Board was updated and involved in DSM's Innovation projects, such as Project Clean Cow, Veramaris^® and Avansya (fermentative Stevia). A continuous education session was dedicated to updating the Supervisory Board on the (latest) European and Dutch legislation and case law on acquisitions and shareholder rights and obligations.

Site visits

Every year, the Supervisory Board visits 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 India.

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

Following the visit to Switzerland in 2016 and to North America in 2017, the 2018 site visit provided an overview of the company's presence in India. It also gave an update on doing business in India, drawing on the insights of external speakers. The visit to India deepened the Board's understanding of DSM's presence and business in India as well as the opportunities that the country presents for the company.

The India visit began with a general overview of the company's activities in India, a review of talent development in the country, and a presentation from an external speaker providing an introduction to India in general, focusing primarily on the politics and economics of the country. A reception was organized at the residence of the Dutch ambassador to India for the Supervisory Board members to meet the company's Indian partners and stakeholders, including several customers. Throughout the week, the Board received updates on the company's Solar, Functional Materials and Nutrition (Animal Nutrition & Health and Human Nutrition & Health) businesses in India. To stress the importance of customer-centricity, the Supervisory Board aims to meet with customers during each site visit. In India, the Board visited Sterlite Technologies, a DSM customer which is a leading global provider of optical fiber.

The Supervisory Board then traveled to DSM Engineering Plastics in Pune — a site with high SHE standards and a low environmental footprint. The visit included a plant tour, a visit to the solar field, interactions with employees and participation in a townhall meeting. The townhall meeting was broadcast live via audio across all our sites in India.

In the second half of the week spent in India, the Supervisory Board was updated on the complete services provided globally to DSM from our India-based Shared Service Center. This update included a visit to Tata Consultancy Services (TCS), one of our partners in Information Technology. Furthermore, the Board took the opportunity to meet with DSM's India leadership and talents.

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 about doing business in India, and also about the talent development process. Both Supervisory Board and Executive Committee concurred on the relevance of India for the company and the importance of continuing to strengthen our presence there.

Supervisory Board meetings and performance evaluation

In 2018, the Supervisory Board held its five regular meetings and one regular call in the presence of the Managing Board, as well as four additional calls in the presence of the Managing Board, in order to be able to dedicate sufficient time to the company's business and financial performance as well as the strategy update process. Information on attendance of Board and Committee meetings can be found see table Supervisory Board Report.

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 Chair 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 members received feedback in the interviews conducted by the Chair. Furthermore, the Deputy Chair interacted with all Supervisory Board members to assess the performance of the Chair. 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, as well as their performance versus their individual targets in the Remuneration Committee. The Nomination and Remuneration Committees report back on these discussions to the Supervisory Board.

The overall feedback from the evaluation in 2018 was that the Supervisory Board members feel the Board generally functions well. Critical issues are raised and addressed adequately. The decision-making process is regarded as efficient. As it was recognized that is was sometimes difficult to find sufficient time to discuss all items on the agenda, it was agreed to extend the available meeting time. Besides the regularly scheduled topics, the main topics identified for focus in the coming years were the implementation of the new strategy and portfolio management, as well as new product innovation and unlocking value. Given the importance of people for the company's success, it was agreed to give the Supervisory Board more exposure to the company's talents. Finally, the Board Committees are also deemed to be operating well and the feedback of the discussions to the full Board ensures that all Supervisory Board members are familiar with the issues discussed in the Committees.

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

The Nomination Committee comprises Rob Routs (Chair), Eileen Kennedy and Pauline van der Meer Mohr. Feike Sijbesma and Judith Wiese, Executive Vice President Group People & Organization, were also involved in this Committee's discussions. The Committee met five times in 2018. 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 2018, nomination discussions focused on succession planning for both the Managing Board and the Supervisory Board. With respect to the Managing Board, the discussions focused on the talent pipeline available for the succession of Managing Board members.

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 in contributing to the company strategy. For detailed background information on all Managing Board members, see the company website under 'Corporate Governance' and Supervisory Board and Managing Board Royal DSM.

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. The Supervisory Board decided to propose Pauline van der Meer Mohr for re-appointment for a two-year term at the 2019 Annual General Meeting of Shareholders. The Supervisory Board decided to do so on the basis of her broad human resource management, corporate governance and international business experience, her extensive experience and qualities as a Supervisory Board member, as demonstrated during her past period as a member of DSM's Supervisory Board. In 2018, the Nomination Committee also discussed several profiles that could be added to the Supervisory Board. The results of these discussions will be announced with the agenda for the 2019 Annual General Meeting of Shareholders.

Board remuneration

The Remuneration Committee had five meetings in 2018. Pauline van der Meer Mohr (Chair), Victoria Haynes, Rob Routs, Tom de Swaan (until the General Meeting of Shareholders of 2018) and John Ramsay (as of the General Meeting of Shareholders of 2018) are members of this committee. Recommendations and minutes of the Remuneration Committee meetings were shared with the full Supervisory Board and were 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 Managing Board and implementation of that policy in 2018, see Remuneration of Managing Board and Supervisory Board.

Discussions focused on the performance and the related remuneration of the members of the Managing Board, in respect of both company and individual performance in 2018. The majority of discussion time in 2018 was spent on possible adjustments to the company's remuneration policy. A corresponding proposal will be submitted to the 2019 Annual General Meeting of Shareholders for approval. The performance and remuneration of the Executive Committee members were also shared with the Remuneration Committee. Feike Sijbesma and Judith Wiese 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 2018. This Committee comprises Eileen Kennedy (Chair), Pradeep Pant and Frits van Paasschen. 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. 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 on 27 February 2019. The Sustainability Information complies with the Standards of the Global Reporting Initiative and our internal reporting criteria, 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 the company's performance against its People and Planet aspirations, with a focus on Brighter Living Solutions, responsible care, and inclusion and diversity. Through these discussions, the Sustainability Committee followed up on the progress made with the implementation of the sustainability and safety aspirations set as part of Strategy 2018. Deep dives were made into several topics. One was on preparing for a low-carbon future as well as setting science-based targets. The Committee discussed actions that were being undertaken to further future-proof the company by improving our climate impact and climate risk exposure, by enabling a low-carbon economy, and by advocating appropriate action externally and internally. Other topics addressed more extensively were Safety (including the revitalization of DSM's Life Saving Rules), the outcome of the Employee Engagement Survey, and finally, the process through which the company identifies risk and materiality topics and how these processes are intertwined.

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 2018, three of these times via conference call. Tom de Swaan (Chair until the 2018 Annual General Meeting), John Ramsay (Chair as of the 2018 Annual General Meeting), Victoria Haynes, Pradeep Pant and Frits van Paasschen are members of the Audit Committee. The Chair of the Supervisory Board participated in all meetings and calls. All Supervisory Board members have a standing invitation to attend Audit Committee meetings; in 2018, they used this standing invitation for the two 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 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. In 2018, these included the appointment of the SVP of Corporate Operational Audit (COA) as proposed by the Managing Board, the approval of the 2019 COA Audit plan and the proposed reappointment of the external auditor (to be approved by the 2019 Annual General Meeting of Shareholders). All Supervisory Board members also have access to all the meeting materials posted for the Audit Committee meetings.

DSM's external auditor KPMG and the CFO 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. The managers responsible for corporate control, internal audit, risk management and compliance also participated in these two meetings and this call. The manager responsible for corporate control also participated in the two calls in which the financial developments and interim results for the first and third quarter 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 2018.

The Committee had in-depth discussions on the company's financials; the Finance 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 and security risks); compliance with recommendations and observations made by internal and external auditors; and the role and functioning of COA, including the endorsement of its proposed audit plan for 2019, 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 the company 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 audit plan, management letter, audit report and financial statements for 2018, including management's judgments and key accounting estimates. In its management letter KPMG shared the outcome of its evaluation of the company's procedures and system of internal controls to the extent necessary within the scope of the audit of the financial statements. The observations of KPMG were presented along the pillars that support DSM's in-control statement (for the Statements of the Managing Board, and for a visualization of DSM's control environment see Introduction). The management letter contained constructive recommendations for further strengthening of DSM's internal controls. The most important element was KPMG's encouragement to continue to take the pillar 'Internal Control Framework' to a higher level of maturity. In line with our own assessment no material weaknesses were reported by KPMG.

Finally, in 2018, the Audit Committee formally evaluated the external auditor, and discussed the reappointment of KPMG. Other specific topics addressed during the Audit Committee meetings in 2018 were cyber security, both from an IT and an Operations perspective, and the internal control framework.

Financial statements 2018

The Report by the Managing Board and the financial statements for 2018 were submitted by the Managing Board to the Supervisory Board, in accordance with the provisions of Article 30 of the Articles of Association, and were subsequently approved by the Supervisory Board on 27 February 2019. 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 2018 financial statements to the 2019 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 this Report.