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Corporate Governance Report
SAP’s global business operations and international shareholder structure mean that effective, transparent corporate governance is crucial for the Company. In their work, the Supervisory Board and Executive Board therefore attach great importance to good corporate governance. For us, corporate governance means the application of international and national values and principles of good, responsible management to the activities of a company’s executive and supervisory bodies and its employees. It is not a system of rigid rules and regulations. Rather, it is a process in which values and principles constantly evolve in line with changing requirements.
Corporate Governance at SAP
Because SAP is listed on the German stock exchange, our corporate governance is primarily based on the provisions of the German Stock Corporation Act and of the German Corporate Governance Code (the “Code” in this report) as from time to time amended. The current version of the Code is dated May 26, 2010, and was published in the Elektronischer Bundesanzeiger (Online German Federal Gazette) on July 2, 2010. SAP also complies with the provisions that are relevant to German companies listed on the New York Stock Exchange (NYSE). These include the Corporate Governance Standards of the NYSE as they apply to non-U.S. companies, the U.S. Sarbanes-Oxley Act, and the requirements of the U.S. Securities and Exchange Commission (SEC). SAP’s Executive and Supervisory Boards provide the Company’s shareholders with detailed information about its implementation of the Code’s recommendations by publishing an annual declaration of implementation, as required by the German Stock Corporation Act, section 161. In addition, the Executive Board publishes a corporate governance statement pursuant to the German Commercial Code, section 289a, describing certain aspects of the Company’s corporate governance in greater detail. This report on corporate governance at SAP in 2011, prepared by the SAP Executive and Supervisory Boards, is a requirement of the Code, section 3.10, sentence 1.
At the time this annual report was filed, the SAP Executive Board had five members. It is solely responsible for managing the Company. It has a duty to exercise its management powers in the interest of the Company and in pursuit of the sustained growth of corporate value. It discusses and agrees on its strategy for the Company with the Supervisory Board, ensures compliance with the requirements of the law throughout the Group, and maintains appropriate risk management structures and internal risk controls.
The SAP Supervisory Board has 16 members who, in equal numbers, represent the shareholders and the employees. It appoints, monitors, and advises the Executive Board. The Executive Board involves the Supervisory Board in decisions on matters of fundamental importance for the Company. The Supervisory Board has reserved to itself the approval of certain defined transactions of fundamental importance.
Concrete Objectives for the Composition of the Supervisory Board
Our 2010 corporate governance report was the first in which our Supervisory Board published concrete objectives for its own composition, as required in section 5.4.1 of the Code. We now report on the extent to which it fulfilled those objectives:
- The Supervisory Board has at all times to be composed in such a way that its members as a group possess the knowledge, ability, and expert experience required to properly complete its tasks in our global IT company. The current composition of the Supervisory Board fulfills this objective.
- The Supervisory Board must at all times have at least one independent member with significant, recent, and relevant financial or auditing experience. We fulfill this objective, which is a legal requirement.
- There should never be fewer than two people from the international stage among the shareholder representatives on the Supervisory Board, provided suitable candidates can be recommended to the General Meeting of Shareholders. We also fulfill this objective.
- No member of the Supervisory Board should be older than 75 years. None of the current members exceeds this age limit.
- Whenever there is a new appointment to the Supervisory Board, the Supervisory Board should ensure there are enough independent members in the meaning of section 5.4.2 of the Code, and, to avoid potential conflicts of interest, that there are no more than two former members of the Executive Board on the Supervisory Board. At its October 13, 2011, meeting, the Supervisory Board determined that we had a sufficient number of independent members. Only one of the Supervisory Board members is a former member of the Executive Board. This means that we fulfill both of these objectives.
- Not later than the regular Supervisory Board elections at the 2012 Annual General Meeting of Shareholders, at least one woman should be proposed for election to the Supervisory Board as an investor representative, and if any are so elected, at least one woman should then be elected to one or more of its committees, provided that there are one or more suitable candidates. We do not yet fulfill the objective that at least one woman should sit on the Supervisory Board as a shareholder representative. However, we are proposing a woman for election to the Supervisory Board at the 2012 Annual General Meeting of Shareholders.
- Our current objective is that at least one woman be proposed for election to the Supervisory Board as an investor representative in the regular Supervisory Board elections at the 2012 Annual General Meeting of Shareholders, and that if any are so elected, at least one woman be elected to one or more of its committees. That objective had not been fulfilled at the time of publication of this annual report because of the timing of the Annual General Meeting of Shareholders, which takes place in May 2012. The Supervisory Board intends to propose a woman candidate for election at that meeting.
The proposals we are making at the 2012 Annual General Meeting of Shareholders concerning candidates for election to the Supervisory Board as investor representatives will also be consistent with all of the other objectives mentioned above, in accordance with section 5.4.1 of the Code.
No New Recommendations in the Code in 2011
The Code was not amended during the report year. The commission responsible for the Code did not see any urgent need for change in view of the exacting standard of the current provisions. It has been and remains the policy of the commission to change as little as possible and only as much as needed, since each new amendment entails substantial efforts on the part of listed companies.
We welcome this approach, the more since the Code already contains 90 recommendations, which we seek to, indeed must, address anew every year in the interests of good corporate governance.
Recommendations in the Code Concerning Diversity
The main thrust of the most recent Code amendments concerns diversity. The Code calls on companies for more international diversity and for more women in leadership positions, on executive boards, and on supervisory boards. New recommendations were added to the Code in 2010 and existing recommendations were amended to reflect this objective.
The recommendation in section 4.1.5 of the Code requires executive boards to have regard to diversity when appointing people to leadership positions, and in particular to employ appropriate numbers of women in such positions. Our Executive Board follows this recommendation: Whenever it is appointing people to vacant leadership positions, it takes into account the need for diversity and especially the need to increase the percentage of women in such positions. The Executive Board has adopted a diversity policy for company leadership appointments, and in May 2011 it set a target: to increase the percentage of women in such positions from 18% at the beginning of 2011 to 25% in 2017. We believe this is an ambitious target, because there are still more men than women graduating from universities in engineering subjects, but we also believe that it is achievable. It goes without saying that ability is still the primary selection criterion for any position at SAP.
Section 5.1.2 of the Code contains the recommendation that supervisory boards should strive for an appropriate representation of women at executive board level as well. The Supervisory Board continues to follow this recommendation after the departure of Angelika Dammann. The Supervisory Board has ruled that when a new member is needed for the Executive Board, applications should be sought from within SAP and from outside, and that the shortlist should be 50% women if possible. When it decides whom to appoint, the strengths and performance of the candidates will still be more important than their sex. Another long-term aim of the diversity policy for company leadership appointments mentioned above is to build a diverse pool of potential candidates for future Executive Board vacancies.
As reported above, the Supervisory Board has defined concrete objectives to promote diversity in its own membership and achieve an appropriate percentage of women members, as envisioned in the second paragraph of section 5.4.1 in the Code.
Declaration of Implementation Pursuant to the German Stock Corporation Act, Section 161
Every year, the Supervisory Board and Executive Board issue a declaration stating whether SAP has implemented and is following the Code’s recommendations, and identifying any recommendations that the Company has not followed – with an explanation of why it has not done so. The declaration of implementation that we filed on October 29, 2011, is online at www.sap.com/corporate-en/investors/governance/statutes/declarationofimplementation.epx. Implementation declarations published in previous years are also available on this website, and links are provided to current and previous versions of the Code. The current declaration of implementation is also included in the corporate governance statement published on SAP’s website at www.sap.com/corporate-en/investors/governance/statement/index.epx.
As reported in the declaration of implementation, we follow all but three of the 90 recommendations in the current Code. As provided in the German Stock Corporation Act, section 161 (1), sentence 1, the exceptions are fully reasoned in our declaration of implementation, and we also set them out here as recommended in section 3.10, sentence 2, of the Code:
- We do not follow the recommendation in section 3.8 of the Code. In this section, the Code recommends that if a company takes out directors’ and officers’ liability (“D&O”) insurance for its supervisory board members, a deductible should be agreed. We do not believe that the motivation and responsibility that the members of the Supervisory Board bring to their duties would be improved by such a deductible element. For this reason we do not intend to change the D&O insurance policies to include a deductible for Supervisory Board members.
- We do not follow the recommendation in section 4.2.3, paragraph 4, of the Code. Here the Code recommends that executive board appointment contracts should not provide for severance pay, including additional benefits, on premature termination without just cause (in other words, termination by agreement), of more than two times annual compensation or more than the compensation for the remaining term of the contract. We do follow the recommendation in the fifth paragraph in section 4.2.3 of the Code that severance pay be capped in a change of control. However, we do not believe it would be practicable to conclude Executive Board member contracts that cap severance pay in cases of premature termination by agreement. To agree such a cap from the outset would be contrary to the spirit of the Executive Board contract, which is normally concluded for a fixed term and does not in principle provide for the possibility of ordinary termination by notice. Moreover, in practice the Company would find such a contractual severance pay cap difficult to enforce against an Executive Board member in the circumstances where it would be relevant. Also, an agreement in this respect that had been concluded in advance might not make adequate provision for the particular facts and surrounding circumstances that later actually give rise to the premature ending of an Executive Board member’s work. However, we will follow the thinking behind the recommendation insofar as that, in the event of premature termination of an Executive Board member’s contract by agreement, we will continue our past practice of negotiating severance pay that is reasonable.
- We do not follow the recommendation in the second paragraph of section 5.1.2 in the Code that an age limit be set for executive board members. We do not set any age limits for members of the Executive Board because this would be a general restriction on the Supervisory Board in its choice of suitable Executive Board members, and we prefer not to regard people over a set age limit as generally unsuitable for Executive Board membership.
With one exception, we voluntarily follow all 16 suggestions in the current Code. As in previous years, we have not agreed to pay Supervisory Board members performance-oriented compensation based on SAP’s long-term success as suggested in the second sentence in the second paragraph of section 5.4.6 in the Code. We doubt whether the long-term success of SAP is the right basis for Supervisory Board compensation or improves the Supervisory Board members’ motivation. Rather, variable compensation at SAP is linked to the dividend and can thus be readily determined by applying the Supervisory Board compensation provisions in the Articles of Incorporation. We believe that this ensures transparent, appropriate compensation for Supervisory Board members that reflects their legal responsibilities.
Corporate Governance Statement
The Executive Board published our corporate governance statement pursuant to the German Commercial Code, section 289a, on February 22, 2012. That section provides that companies can publish the corporate governance statement either as part of their annual report or on their website. It must include the current declaration of implementation pursuant to the German Stock Corporation Act, section 161, certain information on corporate governance practices, and an account of how the Executive Board and the Supervisory Board work, who sits on which Supervisory Board committees, and how those committees work. The current declaration of implementation is also included in the corporate governance statement published on SAP’s website at www.sap.com/corporate-en/investors/governance/statement/index.epx.
Code of Business Conduct
SAP’s corporate governance includes our Code of Business Conduct for employees and members of the Executive Board. The Code of Business Conduct expresses the high standards that we require from our employees and Executive Board members and sets out the main principles that guide our business conduct toward customers, business partners, and shareholders. We see our Code of Business Conduct as the standard for our dealings involving customers, business partners, vendors, shareholders, and competitors. By following our Code of Business Conduct, we demonstrate a commitment against all forms of unfair competitive practice, corruption, and misrepresentation. A compliance team reporting to our general counsel monitors worldwide compliance with our Code of Business Conduct and other policies applying within the Group. It regularly reviews these internal policies, revises them if necessary, and delivers related employee training.
The Work of the Executive and Supervisory Boards
The Executive Board and Supervisory Board cooperate closely for the benefit of the Company. The Executive Board regularly provides the Supervisory Board with full and timely reports on all material matters of business planning and performance, including any deviations of actual business performance from plan, the risk situation, and risk management. We provide our shareholders with in-depth information about how the Executive and Supervisory Boards work, how the Supervisory Board committees are composed, and how these committees work, in our corporate governance statement. For more information about the joint work of the Executive and Supervisory Boards and about the work of the Supervisory Board and its committees in 2011, see the Report of the Supervisory Board in this annual report.
Applying International Corporate Governance Standards
As noted above, SAP is an NYSE-listed company and is therefore subject to certain U.S. financial legislation (including among others the Sarbanes-Oxley Act) and to the applicable SEC and NYSE regulations. Besides implementing the requirements of the Sarbanes-Oxley Act, section 404, and other Sarbanes-Oxley Act requirements, including conducting an annual audit of our internal control over financial reporting, we comply with those of the corporate governance standards codified in the NYSE Listed Company Manual, section 303A, that bind non-U.S. companies. The section 303A standards that apply to SAP include the requirement to have an audit committee composed of members who are independent in the meaning of the Sarbanes-Oxley Act and related requirements concerning reporting to NYSE. In accordance with the SEC and NYSE corporate governance rules, we have also published, at Item 16G in our annual report on Form 20-F, a report on the significant differences between the NYSE corporate governance rules and the German corporate governance rules, which we apply. We publish our annual report on Form 20-F on our website at www.sap.com/corporate-en/investors/reports/2007-2011 in English only.
Transparency, Communication, and Service for Shareholders
Our shareholders can obtain full and timely information about SAP on our website and can access current and historical Company data. Among other information, we post all of our financial reports, all relevant news about the Company’s governing bodies and their corporate governance documentation, information requiring ad-hoc (current) disclosure, press releases, and news of directors’ dealings notifiable pursuant to the German Securities Trading Act, section 15a. Shareholders and the public are able to watch a live broadcast of the entire Annual General Meeting of Shareholders on the Internet. They can vote their shares at the meeting or instruct a proxy of their choice or one of the proxies provided for that purpose by SAP. Since 2011, our shareholders have also been able to participate in the Annual General Meeting of Shareholders on the Internet and to vote their shares by postal ballot. The details are in the invitation to the Annual General Meeting of Shareholders. All of the documentation relating to the Annual General Meeting of Shareholders is posted in good time on SAP’s website at www.sap.com/AGM.
Financial Accounting, Risk Management, and Internal Control
The May 2011 Annual General Meeting of Shareholders appointed KPMG to audit the Company’s financial statements. We prepare the SAP AG financial statements in accordance with the German Commercial Code and our consolidated financial statements in accordance with IFRSs. We prepare a management report, as required by the German Commercial Code, and the Form 20-F annual report in accordance with SEC requirements. The Executive Board is responsible for financial accounting. The Supervisory Board approves the SAP AG financial statements, the consolidated financial statements, and the management report.
In addition to our annual financial statements, we also prepare quarterly reports for the first, second, and third quarters. Our quarterly reports comply with the German Securities Trading Act and are submitted to the Audit Committee of the Supervisory Board before they are published.
In German stock-corporation and commercial law, there are special requirements for internal risk management that apply to SAP. To meet them, our global risk management system supports risk planning, identification, analysis, handling, and resolution. We maintain standard documentation of all our internal control structures and continually evaluate their effectiveness. As a company listed on the NYSE, we instruct our auditor, KPMG, to conduct an annual audit of our internal control over financial reporting in accordance with the requirements of the U.S. Sarbanes-Oxley Act, section 404. The audit as at December 31, 2011, confirmed that our internal control is effective. In compliance with the reporting obligations under the German Commercial Code, sections 289 (5) and 315 (2)(5), the SAP AG management report contains comprehensive information about the principal features of the internal control and risk management structure for SAP AG and consolidated financial reporting.
Executive Board and Supervisory Board Compensation
The Code recommends that certain details of executive and supervisory board member compensation and share ownership, share options, and similar share-based incentives be included in the corporate governance report or in the compensation report as part of the corporate governance report. These details, as well as the legally required information about Executive and Supervisory Board members’ compensation, are all available in the compensation report. The compensation report is an integral part of the audited management report and is also part of this corporate governance report. The Supervisory Board has approved the management report, including the compensation report, and adopted the compensation report’s content for the purpose of corporate governance and compensation reporting as required by the Code.
Share-Based Plans for Employees
Section 7.1.3 in the Code recommends that information be provided in the corporate governance report about share option plans and similar share-based incentive plans for employees. In fulfillment of this recommendation we refer to the Notes to the consolidated financial statements, Note (28) section.