Report of the Supervisory Board of KION GROUP AG
Dr John Feldmann
2016 was another very successful year for KION GROUP AG. It was dominated by the acquisition of automation and supply chain optimisation specialist Dematic, which is having a lasting and significant impact on the business model of KION GROUP AG and its market positioning. This is a time of transformation for KION GROUP AG. The combination of KION GROUP AG’s excellent capabilities, expertise and experience in developing, manufacturing, marketing and servicing industrial trucks with that of Dematic in automating and increasing the efficiency of warehouse systems means that the Company is now much better placed to offer top-class intralogistics solutions and to help shape the future of intelligent logistics. The structure of KION GROUP AG is also continuing to evolve. Since December 2016, it has had a new reporting and management structure consisting of the Industrial Trucks & Services, Supply Chain Solutions and Corporate Services segments, reflecting the Group’s strategic realignment. In terms of business performance, the KION Group again generated encouraging revenue and earnings growth and achieved all of its forecasts in 2016.
Last year, the Supervisory Board continued to fulfil the tasks and responsibilities imposed on it by the law, the Company’s articles of incorporation and the German Corporate Governance Code with dedication and diligence. As in previous years, there were again many important decisions, transactions requiring approval and other matters to be discussed and resolved upon.
Monitoring and advisory role in dialogue with the Executive Board
The Supervisory Board advised the Executive Board on all significant matters relating to managing the Company and monitored the Executive Board’s running of the Company. The Supervisory Board was fully involved in all major decisions affecting the Company from an early stage. The Executive Board always notified the Supervisory Board of every significant aspect of the decisions to be made promptly and in detail, providing both written and oral reports. Between meetings of the Supervisory Board and between those of its committees, the chairman of the Supervisory Board, who is also chairman of the Executive Committee, remained in close contact at all times with the Executive Board, particularly the Chief Executive Officer and the Chief Financial Officer. There was also regular contact between the chairman of the Audit Committee and both the Chief Financial Officer and those responsible for auditing and compliance in the Company. This ensured that the Supervisory Board was always kept up to date on the Company’s performance and any significant transactions, even between meetings. The Supervisory Board satisfied itself at all times that the Company was being managed lawfully and diligently by the Executive Board. Giving the specified period of notice, the Executive Board presented to the Supervisory Board transactions that, according to the law, the Company’s articles of incorporation or the rules of procedure for the Executive Board of KION GROUP AG, require the Supervisory Board’s consent so that it could adopt resolutions. The Supervisory Board examined closely the resolutions proposed by the Executive Board and deliberated on them before adopting them.
Main focus areas discussed by the Supervisory Board
Last year, the Supervisory Board’s deliberations again centred on the implementation of the Strategy 2020, which the Executive Board and Supervisory Board adopted in 2013, the growth and profitability targets for KION GROUP AG defined in the strategy, and the further development of the portfolio.
Throughout 2016, the Company’s Supervisory Board and Executive Board intensively discussed growth opportunities arising from the organic expansion of the portfolio and from the acquisition of additional capabilities. The focus was always on growing the global business in industrial trucks of all categories, refining the product portfolio, increasing market share at regional level and examining the digital transformation of manufacturing (Industry 4.0). As in the previous year, the Supervisory Board kept a close eye on developments in this area and discussed them with KION GROUP AG’s management team. In the core business of industrial trucks, the Supervisory Board and Executive Board discussed short-, medium- and long-term aspects of strategic development, innovation and operational excellence, applying strategic parameters such as customer satisfaction, market trends and technological developments. The strategy meeting on 28 September 2016 was an opportunity for an in-depth exchange of views on innovative trends in the core industrial trucks business. The main topics of discussion were innovations relating to the integration of industrial trucks into existing end-to-end intralogistics solutions in order to increase the efficiency of customers’ processes, particularly with regard to production logistics, order picking and warehouse technology. Moreover, following on from the acquisition in 2015 of Egemin N.V., a leading warehouse automation company, KION GROUP AG continued on its journey to becoming a leading supplier of products for all areas of intralogistics by acquiring the Dematic Group, a global player and one of the world’s top providers of automated logistics solutions. This acquisition makes the KION Group the only company able to supply all intralogistics products, from hand-operated trucks to fully automated warehouses, from a single source. The Supervisory Board regularly advised the Executive Board on this strategic project and was kept informed by the Executive Board on the progress of the planning and negotiations. The implementation and operation of the new organisational structure, which had been decided upon in 2015, was closely monitored by the Supervisory Board. The core elements of this new organisation are decentralised, regional operating units, of which there were originally four. A further operating unit called Dematic was created following the acquisition of the Dematic Group. Since December 2016, the Executive Board has run the KION Group on the basis of three segments: Industrial Trucks & Services, Supply Chain Solutions and Corporate Services. The operating units are supported by a central R&D function and administrative departments. The CTO organisation, which is headed up by the Chief Technology Officer Dr Eike Böhm, assumed groupwide responsibility for product strategy, R&D, innovation, the production system, quality assurance and procurement on 1 January 2016. The new external reporting format derived from this organisation structure, which is based on the Industrial Trucks & Services, Supply Chain Solutions and Corporate Services segments, was monitored by the Audit Committee and, in particular, its chairman.
Other administrative functions were adapted to meet the requirements of the Group’s new organisational structure during 2016, which involved centralising and harmonising them. The aim for 2017 is to further optimise the integration of the Dematic Group into the KION Group and, as a result, generate additional synergies.
Corporate governance matters
Besides the regular corporate governance matters, the issues dealt with by the Supervisory Board during the reporting year included the governance changes required due to the new organisational structure and the implementation of requirements and voluntary undertakings arising for the KION Group out of Germany’s new ‘Act for the equal participation of women and men in managerial positions in the private and public sectors’.
The new organisational structure resulted in a shift away from responsibility for brands towards responsibility for regions or functions. Within the Group, management structures and work processes across legal entities had to be redesigned worldwide, especially in the CTO organisation. The results achieved so far are very promising and instil confidence that the increased efficiency and profit expected to be delivered by the new organisational structure will be achieved.
Given the Group’s expansion into logistics process automation solutions, the Supervisory Board believed it was appropriate to supplement the targets for its composition to include valuable experience in this field of industry. In Dr Christina Reuter, the Supervisory Board has gained a highly qualified scientist with a proven track record focusing on automation. Moreover, the addition of both Dr Reuter as a shareholder representative and Ms Claudia Wenzel as an employee representative means that the Supervisory Board of KION GROUP AG now has two new and highly qualified female members. KION therefore met the statutory requirements for the proportion of women on the Supervisory Board of KION GROUP AG at the end of 2016. This provided the background for the Supervisory Board’s discussions in the fourth quarter about the upcoming election of shareholder representatives at the Annual General Meeting on 11 May 2017. The Nomination Committee has prepared the necessary nominations, applying the updated objectives for the composition of the Supervisory Board. The committee examined whether the current members, who are proposed as candidates, continue to meet the requirements for the office of shareholder representative. It paid particular attention to the need to ensure a sufficient number of Supervisory Board members considered independent. The Company believes that five of the eight shareholder representatives can be classed as independent, which is sufficient. Based on the recommendation made by the Nomination Committee, the Supervisory Board decided at its meeting on 14 December 2016 to propose that the Annual General Meeting re-elect the current shareholder representatives.
Another area of focus was the review and revision of the remuneration system and of the individual remuneration for the members of the Executive Board of KION GROUP AG. The structure of Executive Board and Supervisory Board remuneration had been defined ahead of the IPO in 2013. In spring 2016, a consultancy reviewed it, comparing it against the benchmark. Based on the findings, the Executive Board’s remuneration was revised in two phases. Firstly, the remuneration system was updated with the aim of simplifying it on the basis of past experience and bringing it closer in line with current best practice in this area. Changes were made to both the one-year and the multiple-year variable remuneration. It was also decided to introduce an obligation on Executive Board members to hold shares in the Company. Secondly, the individual remuneration of each Executive Board member was reviewed on the basis of comparative information during the Supervisory Board meeting in September. As the remuneration of the Executive Board had remained unchanged for three and a half years, a resolution was adopted to adjust the amount with effect from 1 January 2017. Further details are provided in the remuneration report. In compliance with the recommendations in the German Corporate Governance Code, the updated remuneration system will be presented to the Annual General Meeting for approval in May 2017.
The topics on which the Executive Board and individual managers in the Company regularly submitted reports were the internal control system, risk management, internal audit and compliance in the Group. The focus was on the processes in place as well as on the content of the individual reports. As a result of these reports, the Supervisory Board was able to gain an impression of the processes in place and to examine and comment on the proposed developments in these areas. It concluded that the systems and mechanisms at KION GROUP AG are adequate and suitable.
At its meeting on 14 December 2016, the Supervisory Board held its final discussion on the KION Group’s compliance with the recommendations of the German Corporate Governance Code, the version of which dated 5 May 2015 continued to apply in 2016. The Supervisory Board issued an unchanged comply-or-explain statement pursuant to section 161 of the German Stock Corporation Act (AktG). It has been made permanently available to the public on the KION GROUP AG website. KION GROUP AG complies with all but one of the recommendations in the German Corporate Governance Code (version dated 5 May 2015) and intends to continue to do so in future. As in the previous year, the only recommendation of the Code with which KION GROUP AG does not comply is the recommendation in section 3.8 (3) of the Code for an excess in the D&O insurance policies for members of the Supervisory Board. KION GROUP AG’s articles of incorporation do not provide for this type of excess. The Company believes that such an excess is not typical at international level and would therefore make it considerably more difficult to find independent candidates, in particular candidates from outside Germany.
In accordance with section 3.10 of the German Corporate Governance Code, the Executive Board and the Supervisory Board provide a detailed report on corporate governance in the KION Group in the corporate governance report. This is combined with the declaration on corporate governance pursuant to section 289a of the German Commercial Code (HGB) and can be found in this annual report and on the KION GROUP AG website. For details of the remuneration of the Executive Board and Supervisory Board for 2016, please refer to the remuneration report.
Work of the committees
In the run-up to the Dematic transaction, the Supervisory Board of KION GROUP AG established an ad-hoc transaction committee to ensure the Company was able to act and the Supervisory Board was able to adopt the necessary resolutions at short notice. To the extent permitted by law, the Supervisory Board’s decision-making powers were delegated to the committee. The committee was made up of three employee representatives and three shareholder representatives. The Executive Board and the transaction team at KION GROUP AG kept the committee updated on the progress of the negotiations. Following the successful completion of the transaction, the committee was dissolved on 31 December 2016. Since the last report, there have not been any other material changes to the established committees.
KION GROUP AG’s Supervisory Board had four committees last year: the Mediation Committee pursuant to section 27 (3) of the German Codetermination Act (MitbestG), the Executive Committee, the Audit Committee and the Nomination Committee. These committees, but primarily the Executive Committee, prepare the matters to be discussed at the meetings of the full Supervisory Board. In individual cases, the Supervisory Board’s decision-making powers were delegated to committees within the scope permitted by law. The chairman of the Supervisory Board is also chairman of all committees except the Audit Committee. At the meetings of the full Supervisory Board, the committee chairmen report in detail on the discussions of the committees to ensure that the Supervisory Board as a whole is always fully informed.
In 2016, the Supervisory Board and its committees dealt with the matters at hand and made the necessary decisions at a total of 22 meetings (eight full Supervisory Board meetings and 14 committee meetings). There were also several informal conference calls for the purpose of providing the members of the Supervisory Board or the relevant committees with advance information.
In 2016, all members of the Supervisory Board attended all Supervisory Board meetings and the meetings of the respective committees of which they were members apart from in the following cases: there were five Supervisory Board meetings at each of which one member sent apologies and one committee meeting at which one member sent apologies. Supervisory Board Member Tan Xuguang only participated in half of all the Supervisory Board meetings.
Engagement of the auditors; audit of the separate and consolidated financial statements
The Company’s independent auditors, Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft, Munich, Frankfurt am Main branch office, which on 15 June 2016 changed its registered company name to Deloitte GmbH Wirtschaftsprüfungsgesellschaft (Deloitte), audited the Company’s separate financial statements and management report and the consolidated financial statements and group management report for the year ended 31 December 2016 following their engagement by the Annual General Meeting on 12 May 2016. The corresponding proposal to the Annual General Meeting had been prepared in meetings held between the chairman of the Audit Committee and the auditors. They concerned the suitability and independence of the auditors and the fees. The proposal was discussed at the Audit Committee’s meeting on 9 March 2016 and committee members were given the opportunity to speak to the auditors in person. The key audit issues were also discussed and set out accordingly at the Audit Committee’s meeting on 26 July 2016. The auditors were appointed by the chairman of the Supervisory Board on 2 June 2016.
The auditors submitted their report and the documents relating to the 2016 financial statements to the members of the Audit Committee on 15 February 2017 and to the members of the Supervisory Board on 22 February 2017. The report was discussed in depth at the Audit Committee meeting on 22 February 2017 and at the full Supervisory Board meeting on 1 March 2017, both of which were attended by the auditors. At both of those meetings, the auditors reported in detail on the main findings of the audit and provided comprehensive answers to all questions asked by members of the Audit Committee and Supervisory Board. The auditors issued an unqualified opinion for the separate financial statements for the year ended 31 December 2016, the consolidated financial statements and the group management report which was combined with the management report for the year ended 31 December 2016 on 22 February 2017.
Having itself scrutinised the Company’s separate financial statements, consolidated financial statements and the combined management report for the year ended 31 December 2016, the Audit Committee then made a recommendation to the full Supervisory Board, which the chairman of the Audit Committee explained in more detail in his report to the meeting of the full Supervisory Board. On this basis and taking the auditors’ opinion into consideration, the Supervisory Board held a further discussion of its own and then approved the results of the independent audit at its meeting on 1 March 2017. Based on the final outcome of the Supervisory Board’s own review, no objections were raised. The Supervisory Board approved the Company’s separate financial statements and consolidated financial statements for the year ended 31 December 2016 prepared by the Executive Board, thereby adopting the annual financial statements.
At its meeting on 1 March 2017, the Supervisory Board also discussed and approved the proposal made by the Executive Board that the distributable profit of KION GROUP AG be appropriated for the payment of a dividend of €0.80 per no-par-value share. In doing so, the Supervisory Board took account of the Company’s financial situation and performance, its medium-term financial and capital-expenditure planning and the interests of the shareholders. The Supervisory Board believes the proposed dividend is appropriate.
Relationships with affiliated entities (dependency)
Joint control of the Company by Superlift S.à r.l. and Weichai Power ended on 31 March 2015 when the remaining KION GROUP AG shares held by Superlift S.à r.l. were sold. There have been no dependency relationships with shareholders since that date. A report on the Company’s relationships with affiliated entities (dependency report) therefore did not need to be prepared for 2016.
Personnel changes on the Executive Board and Supervisory Board
There were no changes on the Executive Board of KION GROUP AG last year.
There were several changes on the Supervisory Board in 2016. Mr Wolfgang Faden stepped down from the Supervisory Board on 12 May 2016. The Company’s Annual General Meeting elected Dr Christina Reuter to succeed him as a shareholder representative. In addition, Mr Kay Pietsch resigned from his position as an employee representative on the Company’s Supervisory Board with effect from the end of 31 October 2016. The courts appointed Ms Claudia Wenzel as his successor with effect from 1 November 2016. The Supervisory Board would like to thank Mr Faden and Mr Pietsch for the great dedication with which they always carried out their work in the interests of the Company.
Mr Özcan Pancarci has been deputy chairman of the Supervisory Board since 1 January 2016, replacing Mr Joachim Hartig.
The details of this report were discussed thoroughly at the Supervisory Board meeting on 1 March 2017 when it was adopted.
My colleagues on the Supervisory Board and I would like to thank the members of the Executive Board and the employees of KION GROUP AG and its Group companies in Germany and abroad for their commitment and outstanding achievements in 2016.
Dr John Feldmann