Corporate Governance Report / Remuneration Report

The Board of Management and the Supervisory Board report as follows on corporate governance at KSB as well as on the remuneration principles for the Board of Management in accordance with sections 3.10 and 4.2.5 of the German Corporate Governance Code:

The term “corporate governance” covers the legal and factual regulatory framework for the management and supervision of companies; it is geared towards responsible management and control with the ultimate goal of sustainable value creation. The principles of corporate governance at KSB are based on the German Corporate Governance Code. This Code provides the basic framework for the management and supervision of listed companies and formulates nationally and internationally recognised standards of good and responsible corporate governance. We welcome the work of the Government Commission of the German Corporate Governance Code as well as the ideas and recommendations contained in the Code. These were last revised on 26 May 2010 and published on 2 July 2010 in the electronic Bundesanzeiger [German Federal Gazette].

We are convinced that good, responsible corporate governance will contribute greatly to the company’s long-term success. This is why it has always ranked highly at KSB. Even before the Code was introduced, we implemented the core corporate governance and control processes in such a way that they complied with the current key requirements of the Code. We were traditionally guided in this by nationally and internationally recognised standards of transparent, comprehensible corporate governance. During the past financial year, the Board of Management and Supervisory Board of KSB Aktiengesellschaft discussed compliance with the Code’s guidelines as well as the relevant legal requirements in detail on several occasions. Our objective is to continue developing the principles of corporate governance in all parts of our company.

Statement of Compliance updated

Pursuant to section 161 of the AktG [Aktiengesetz – German Public Companies Act], the Board of Management and Supervisory Board of listed German public companies are under the obligation to declare once per year whether the German Corporate Governance Code “was complied with and will continue to be complied with or which recommendations were not or will not be applied and why”. The majority of the recommendations added to the Code in 2010 were implemented, i.e. they were integrated into internal company workflows and pending decisions. The new recommendation which states that the Supervisory Board should specify concrete objectives for its composition was not complied with, however, although, in principle, we are guided by the criteria specified in the Code in this context, and an age limit is in place. Members of the Supervisory Board shall as a rule step down at the Annual General Meeting held after they reach the age of 75, and not later than upon reaching the age of 80. The appointment of Members of the Board of Management should as a rule not extend beyond their 65th birthday, and shall end not later than upon their reaching the age of 75. These requirements are currently met without exception, although the terms of office of the Supervisory Board members Dr. Jacob and Dr. Lederer, and Board of Management member Prof. Dr. Hellmann exceed, by way of exception, the age limits recommended in the Rules of Procedure, but in each case will end well before they reach the age of 80/75 respectively.

The Board of Management and Supervisory Board once again submitted a Statement of Compliance on 7 December 2011 in accordance with section 161 of the AktG and made this accessible to shareholders on the company’s web site together with statements from previous years. The Company complies with the recommendations of the German Corporate Governance Code apart from two exceptions. The statement will be updated as required.

Going forward, we will continue to monitor and respond quickly to further developments in the German Corporate Governance Code to ensure that suggestions and recommendations that are applicable to KSB are implemented in the interests of sustained transparency and growth in our enterprise value. At the same time we want to foster the trust which investors, financial markets, employees, the public and our customers, in particular, have placed in us.

Shareholders and Annual General Meeting

KSB AG issued both no-par value ordinary shares and no-par value preference shares. The holders of these shares, our shareholders, exercise their co-determination and control rights at the Annual General Meeting which is held at least once a year.

Each shareholder is entitled to attend the Annual General Meeting in accordance with the requirements as stipulated in the Articles of Association and the law. If shareholders cannot or choose not to attend in person, they can opt to appoint a proxy who will exercise their voting rights on their behalf.

In accordance with the Articles of Association, the Chair of the Supervisory Board presides over the Annual General Meeting. The Chair determines the order in which proceedings are conducted as well as the type and form of voting. The Chair may reasonably restrict the time allocated to questions and speeches by shareholders and, at the start of or during the course of the Annual General Meeting, set time limits for the entire proceedings of the Meeting, the discussion of the various items on the agenda as well as on individual questions and speeches.

The Annual General Meeting reaches decisions pertaining to all of the duties and responsibilities assigned to it by law (e.g. appropriation of net retained earnings, amendments to the Articles of Association, election of Supervisory Board members). Each ordinary share authorises the holder to one vote. The preference shares only entitle holders to voting rights as prescribed by law but carry progressive additional dividend rights. Klein Pumpen GmbH, Frankenthal, holds approximately 80 % of the ordinary shares; the KSB Stiftung [KSB Foundation], Stuttgart, holds a majority stake in Klein Pumpen GmbH.

Responsible cooperation between the Board of Management and the
Supervisory Board

Good corporate governance requires an ongoing development of the dual management system prescribed for German public limited companies in all sections of the business. This begins with independent management by the Board of Management which is monitored and advised by the Supervisory Board. To promote effective management, the Rules of Procedure for both bodies specifically state that business shall be conducted in accordance with the German Corporate Governance Code, with any departure from compliance with the recommendations in justifiable, individual instances being disclosed by the Board of Management and the Supervisory Board.

Continuous dialogue based on mutual trust between the Board of Management and the Supervisory Board provides an important foundation for the success of the company. Their common goal is to generate appropriate, sustainable returns through the systematic pursuit and implementation of these principles. Both bodies thus collaborate closely for the benefit of the company.

The Supervisory Board receives regular, timely, comprehensive updates from the Board of Management regarding all planning, business development, risk position and compliance issues which are relevant to the company. Decisions of fundamental importance must be approved by the Supervisory Board. Any departure in business performance from the formulated plans and objectives is discussed in depth and openly; particular importance is attached to maintaining strict confidentiality towards other persons. The principles of the company’s strategic and organisational alignment are defined in close cooperation between the Board of Management and the Supervisory Board and are reviewed constantly. At times the Supervisory Board also convened without the Board of Management in order to intensify the exchange of ideas within the Board.

Transparency

KSB considers it extremely important to provide capital market participants with regular, comprehensive, consistent and prompt information on the Group’s economic situation. Reporting takes place via annual reports, half-year financial reports and interim reports. All publications are published within the time frames specified.

In addition, we provide information by means of press releases and ad hoc statements whenever necessary. All information can be accessed online (www.ksb.com). At the web site, you will also find our financial calendar which contains the scheduled dates for major recurring events and publications.

In the event that any directors’ dealings take place which are subject to reporting requirements, you will find the relevant information at Investor Relations / Corporate Governance / Directors’ Dealings.

KSB AG created an insider directory as required by section 15b of the WpHG [Wertpapierhandelsgesetz – German Securities Trading Act]. Those persons affected are informed of their current legal obligations and potential sanctions.

At the end of the financial year, the aggregate of all shares in KSB AG held by members of the Board of Management and Supervisory Board, either directly or indirectly, did not exceed a total of 1 % of the shares issued.

Members of the Board of Management and Supervisory Board are under the obligation to act in the company’s interests. When making their decisions, they must neither pursue personal interests nor use for their own purposes any business opportunities that present themselves for the company. Any conflicts of interest must be disclosed to the Supervisory Board immediately. Should the need arise, the Annual General Meeting must be informed of any conflicts of interest and how they were dealt with.

Accounting and audit of the financial statements

The consolidated financial statements and interim financial statements of KSB are prepared in accordance with the International Financial Reporting Standards (IFRSs) as adopted by the European Union. After the consolidated financial statements have been prepared by the Board of Management, they are audited by the auditors elected by the Annual General Meeting (BDO AG Wirtschaftsprüfungsgesellschaft) and approved by the Supervisory Board. Prior to the publication of interim reports and the half-year financial report, these are discussed with the Audit Committee.

An agreement has been reached with the auditors that the Chair of the Supervisory Board or the Chair of the Audit Committee shall be notified immediately of any substantial findings or issues which emerge during the audit or of any grounds for exclusion or exemption.

Management parameters and control system

In addition to order intake and sales revenue, our key performance indicators for the management of the KSB Group are the return on sales and our net financial position (i.e. the difference between cash and cash equivalents and interest-bearing investments on the one hand, and financial liabilities on the other). We also attach great importance to managing our activities in accordance with the economic value added (EVA) concept.

Our internal control system is based both on guidelines and regulations that specify standard procedures as well as our Group-wide risk management system. The organisation and implementation of this risk management system are documented in a manual. All Group units are responsible for identifying and assessing risks and reporting these to Group headquarters. They must also initiate countermeasures to avert or limit any damage.

Reporting on identified risks and the countermeasures initiated is an integral part of the planning and controlling process. The Supervisory Board’s Audit Committee also looks at the reported risks on a regular basis.

KSB identifies and communicates the risks based on the following categories:

  • Market/ Competition
  • Products/ Projects
  • Finances/ Liquidity
  • Purchasing
  • Technology/ Research and Development
  • Environment
  • Other risks

The Internal Audits department performs regular reviews to establish to what extent the specified guidelines and regulations are observed and whether the operating units are appropriately involved in risk management.

Compliance as a key task of corporate management

Compliance in the sense of implementing measures to ensure observance of applicable law and internal guidelines by Group units is one of the Board of Management’s key management tasks. The Board of Management expressed its requirement of professional, honest conduct within our Group-wide Code of Conduct. As well as talking to designated people within the company, employees can call a whistleblower hotline or contact an ombudsman if they are or become aware of any violations of anti-trust, cartel or penal laws or guidelines. An external law firm is on hand which will promptly forward any information to the Group Compliance Officer.

Some fundamental statements contained in the Code of Conduct are addressed in more detail in other, separate guidelines. This particularly applies to the areas of anti-trust or cartel law and anti-corruption measures. The applicable laws and regulations are explained in greater detail and useful information on proper conduct in concrete situations is provided. The latter is similarly applicable to the guidelines prohibiting insider trading.

One major focus of compliance activities in 2011 was the start of work on aligning and further developing our compliance management system in accordance with the new auditing standards introduced by the Institut der Wirtschaftsprüfer [Institute of Public Auditors] in Germany (IDW), which describe the basic elements to be included in a proper compliance system and the necessary framework conditions. To this end, the probability of occurrence of basic compliance risks were first of all re-recorded and re-evaluated across the Group. In the current financial year we will continue with this work and focus in particular on selected operative organisational structures and processes to identify any potential for optimisation. In 2011, to ensure a uniform, international quality standard, the training offering was revised, with the focus on tightening administrative expenditure and introducing more flexibility forparticipants. These requirements will in future be realised through the use of e-learning, which will largely replace the classroom training conducted up until now. Once again, international projects were randomly audited for compliance with specific compliance issues within the scope of correlated control measures aimed at securing the targeted preventive effects.

Remuneration of the Supervisory Board

The Supervisory Board’s remuneration system is set out in our Articles of Association. According to this, Supervisory Board members shall receive lump sum remuneration in the amount of € 6,000 for the financial year. The chair is entitled to twice this amount and the deputy chair is entitled to one and a half times the amount. In addition, the members of the Supervisory Board receive an attendance fee of € 2,000 per meeting of the Supervisory Board and its committees they attend; the attendance fee for committee chairpersons is € 3,000 per committee meeting attended. No attendance fees are paid for meetings of the Committee pursuant to section 27(3) of the MitbestG [German Co-determination Act]. The members of the Supervisory Board are also covered by directors’ and officers’ liability insurance taken out by the company on behalf of the members of the Board of Management and the Supervisory Board at standard market conditions.

Finally, Supervisory Board members receive dividend-dependent remuneration for the financial year. For every 25 cents by which the dividend distributed to ordinary shareholders exceeds the amount of € 1.0, the remuneration paid out to Supervisory Board members amounts to € 1,200 for the chair, € 900 for the deputy chair and € 600 for the remaining members.

Any additional remuneration is reserved for determination by the Annual General Meeting. The total remuneration paid to members of the Supervisory Board in 2011 amounted to € 1,332 thousand (previous year: € 1,310 thousand).

Remuneration of the Board of Management (Remuneration Report)

The Remuneration Report summarises the principles applied when determining the remuneration arrangements for the Board of Management of KSB Aktiengesellschaft. It is geared towards the recommendations of the German Corporate Governance Code (section 4.2.5) and explains the remuneration system in place for Board of Management members. This system is geared towards sustainable corporate development. It is adopted by the Supervisory Board plenary session based on the recommendation of the Personnel Committee and reviewed at regular intervals. The same applies to individual Board of Management compensation amounts.

The remuneration arrangements for the Board of Management are structured as clearly and transparently as possible. The total amount of remuneration for the individual Board of Management members is determined based on various parameters. Criteria for assessing the appropriateness of the remuneration include the responsibilities of the individual Board of Management members, their personal performance, the economic situation, the company’s results and prospects as well as customary remuneration amounts when taking peer companies and the remuneration structure used elsewhere within the company into consideration.

The remuneration of the Board of Management consists of fixed and variable components. Fixed components are granted regardless of performance and consist of a fixed sum plus benefits, as well as pension commitments (retirement, disability, widow’s or orphan’s pension). The fixed sum makes up 60% of the maximum annual salary and is paid out as a monthly basic remuneration. All Board of Management members are equally entitled to the accompanying fringe benefits which include the private use of a company car, payment of insurance premiums and any payments associated with a post-contractual non-competition clause. No loans or advance payments were granted to members of the Board of Management in the year under review.

The variable component of remuneration is linked to the return on sales achieved during the financial year in question, with a weighting factor of 15% of the maximum annual salary. Board of Management members also receive variable remuneration components which serve as a long-term incentive. These are determined based on an economic value added approach over a three-year period; a weighting factor of 25% of the member’s maximum annual salary is applied. Any negative developments during this period are also taken into consideration when calculating payments for the third year. The total amount of the variable remuneration components is limited in order to take extraordinary, unforeseen developments into account. The weighting factors above do not reflect the additional possibility of a premium, to be paid out in individual cases at the discretion of the Supervisory Board, of no more than three monthly salary payments per financial year in recognition of any special performance of individual members of the Board of Management. Decisions in this respect are only considered on an irregular basis meaning that they are not necessarily made annually.

Furthermore, when entering into any Board of Management contract it is agreed that payments made to a Board of Management member in the event that his or her Board of Management tenure is terminated prematurely without good reason shall not exceed the value of two years’ remuneration including fringe benefits (settlement cap in accordance with section 4.2.3 of the German Corporate Governance Code). No other payments have been promised to any Board of Management members in the event of termination of service; similarly no compensation will be paid in the event of a takeover offer.

On 19 May 2010 – using a legally permissible option – the Annual General Meeting once again resolved not to disclose the details of the compensation for individual members of the Board of Management for a period of five years. The total remuneration paid to Board of Management members for services provided during the past financial year amounted to € 3,327 thousand. During this period of time, additions of € 2,361 thousand were made to the pension provisions for active and retired members of the Board of Management. No stock options or other sharebased payment arrangements are granted to members of the Board of Management. Further disclosures on the remuneration of the Board of Management are to be found on pages 111 to 112 of the annual report.