REPORT OF THE SUPERVISORY BOARD

Throughout the last financial year, the Supervisory Board performed its tasks with great care in accordance with the law, the Articles of Association and the rules of procedure. We regularly advised the Board of Management on corporate management issues and monitored its work. The Supervisory Board was consulted directly and at an early stage with regard to decisions of fundamental importance. The Board of Management informed us about the position of the company, including but not limited to its business, financial and staffing situation, planned investments, as well as corporate planning and strategic and organisational development issues via written and oral reports prepared regularly and on an ad hoc basis in a comprehensive and timely manner. We continued to meet on a regular basis to discuss selected issues, both with and in the absence of the Board of Management.

We discussed key KSB business transactions in detail on the basis of reports drawn up by the Board of Management. Any departures in business developments from the plans and targets were reviewed and commented on in detail by the Board of Management. After thorough examination and discussion, we adopted our resolutions on reports and proposals by the Board of Management. Beyond the intensive work in the plenary sessions and in the committees, both the Chairman of the Supervisory Board and other Supervisory Board members were in frequent contact with the Board of Management to discuss the current business development and significant transactions. No conflicts of interest arose involving members of the Board of Management or the Supervisory Board that would have been required to be reported to the Supervisory Board or the Annual General Meeting in the period under review.

Main focus of work in the Supervisory Board plenary sessions and in the committees

Key topics of discussion with the Board of Management were the monitoring of measures for implementing our strategy and the further development of the organisational structure that was introduced in 2010. The analysis of the history and impact of the European debt crisis was another focus, as was the possible response to developments in some countries, such as the upheavals in the Arab world and the German decision to rapidly phase out the use of nuclear energy.

Four regular Supervisory Board meetings were held in 2011. The performance of KSB Aktiengesellschaft, the Group and the individual units was the subject of regular discussions in plenary sessions, primarily with regard to the performance of order intake, sales revenue, earnings, assets and employment levels as well as the current economic situation, the strategy and investment and acquisition decisions. We focused several times on the latter topic during the past financial year, in particular in connection with projects for implementing our corporate strategy. Once again we discussed the strengthening of our German and international service activities. Given the large number of acquisitions in recent years, an ongoing priority is the structured integration and management of these companies. The Board of Management explained to us in detail the ways in which KSB intends to achieve its overall growth targets over the next few years, including the underlying methodological and strategic considerations. All investments required to pursue these objectives were subjected to critical analysis and subsequently overseen by us. For instance, the status of modernisation and expansion work at our sites in Brazil, Russia, China and India was a topic that was discussed several times. The purpose of this work is to exploit the current potential and secure further business opportunities in these important future markets. In China in particular we need to comprehensively expand our production facilities in order to meet the high requirements to be met by nuclear products in terms of reliability and safety. We discussed the opportunities and risks associated with such upfront outlays extensively with the Board of Management, taking into account the long-term business development.

Another subject of discussion in light of our experiences to date with regard to the global financial and economic crisis was the potential effects of the worsening European debt problem on our business. We subjected the deliberations of the Board of Management on this subject to critical scrutiny, focusing in particular on the development of reliable instruments for detecting market movements at an early stage, which in turn would enable a rapid response.

Repeatedly on the agenda were the implementation status and the continued development of the corporate organisation introduced in 2010. We devoted particular attention in this respect to the structuring of our sales activities. We expect the innovations implemented in selected countries this year to provide us with sufficient insight regarding optimisation potential, on the basis of which we will need to decide on the possibility of a broader introduction of the revised structures. Another focus of our discussions was the progress of the ongoing development of our corporate culture based on established values, on which the Board of Management reported regularly.

In September the Supervisory Board convened for a meeting at the Châteauroux site in France, where it was able to assess how business was developing there and visit the high-performance production facilities. In addition, we received additional in-depth information on the situation of selected products and markets as well as individual regions. In December, we discussed and endorsed the purchase of a small manufacturer of compact pumps, a transaction that has now been successfully completed. We also looked at business performance during the year and planning for 2012.

During the past financial year, the Supervisory Board worked through six committees and two sub-committees to ensure that its tasks were performed efficiently. These prepared the Supervisory Board’s resolutions and the special topics to be discussed in the plenary sessions. In addition, they also made their own decisions – to the extent that this is legally permissible – within the scope of their areas of responsibility. This allocation has proved worthwhile in practice. At the plenary meetings, the Chairs of the committees regularly and comprehensively reported on the content and results of the work in the committees; the relevant committees were informed of the topics discussed in the sub-committees. The Chairman of the Supervisory Board also serves as the Chair of the Personnel Committee, the Planning and Finance Committee and the Mediation Committee.

The Nomination Committee looked at the shareholder representative nominations prior to the Supervisory Board elections at the Annual General Meeting. To do so, this committee met twice during the year under review.

The Planning and Finance Committee met four times in the year under review. It focuses on corporate and investment planning and the financial situation of the company. In light of our strategic objectives, the discussion of longer-term liquidity needs and management was one focus of examination. The committee also took an in-depth look at the current and anticipated cost situation.
In addition, the committee members discussed in detail the quality of planning and the underlying planning assumptions.

The Corporate Development Committee met eight times during the year under review. It focused in particular on strategy controlling, production management and innovation, and the development of the nuclear business in Asia. Considerable attention was paid to ways of ensuring and optimising the provision of castings to our manufacturing facilities, with the possibility of expanding our own foundry facilities in Germany also being discussed. The proposals of the committee also resulted in the acquisition of the expertise of a small but innovative German manufacturer of mechanical seals. The heads of the relevant specialist departments often took part in the committee meetings, along with the responsible members of the Board of Management.

The Controlling Sub-Committee met twice. It advises the Board of Management on concrete tasks related to this corporate area, including the relevant interdisciplinary interfaces. In 2011 the focus was on determining the basic conceptual design of this important corporate function.

The Sales Management Sub-committee is looking at ways in which to systematically develop corresponding structures. In 2011, it oversaw the implementation of the above-mentioned business-type-focused new sales organisation in several pilot countries, and met twice for this purpose.

The Personnel Committee held eleven meetings in the year under review. It primarily addresses issues relating to the Board of Management’s remuneration, including the terms of the service contracts for the individual Board of Management members as well as other Board of Management issues. Decisions on the Board of Management’s remuneration are made in plenary session with the committee acting in a preparatory capacity. Personnel development issues were also discussed with the aim of recruiting candidates for the Board of Management and other management positions from within the company’s own ranks. Particular emphasis was placed on the development and implementation of an internal selection process for identifying and promoting potential Board of Management candidates within the upper levels of management. In 2011, the committee members again participated in events with potential candidates for all management levels in an effort to foster a direct exchange of ideas. In addition, the committee discussed in detail the early retirement by mutual consent of Mr. Stoop from the Board of Management with effect from the end of March 2012 and the resulting succession planning issues.

The four meetings of the Audit Committee were always attended by the Member of the Board of Management responsible for Finance and, on several occasions, by the auditors. The committee primarily examined the annual and consolidated financial statements, the audit reports submitted by the auditors and the internal auditors as well as the further development of the risk management system and compliance organisation. The half-year financial report was also discussed with the Board of Management. Furthermore, the committee defined key audit areas for the independent auditing of the Supervisory Board in accordance with section 171 of the AktG [Aktiengesetz – German Public Companies Act] and for the external auditing of the financial statements. It submitted a proposal to the plenary session for the appointment of auditors to be voted on by the Annual General Meeting, and subsequently commissioned the auditors with the task of auditing the annual and consolidated financial statements. The declaration of independence by the auditors was obtained in accordance with section 7.2.1 of the German Corporate Governance Code and the auditors’ continued independence was monitored.

There was no requirement during the year under review to convene the Mediation Committee required by section 27(3) MitbestG [Mitbestimmungsgesetz – German Co-determination Act].

Corporate governance and statement of compliance

The Supervisory Board continuously monitored the ongoing development of corporate governance standards. The Board of Management and the Supervisory Board report on corporate governance at KSB in accordance with section 3.10 of the German Corporate Governance Code on pages 127 to 133 of this annual report. On 7 December 2011 they issued a joint updated statement of compliance in accordance with Section 161 AktG and made it permanently available to shareholders on the company’s web site. With two exceptions, KSB Aktiengesellschaft complies with the recommendations contained in the 26 May 2010 version of the Code which was published by the Federal Ministry of Justice on 2 July 2010.

Audit of the annual and consolidated financial statements

The accounting documentation, in addition to the proposal by the Board of Management on the appropriation of net retained earnings and the audit reports submitted by the auditors, was provided in good time to all members of the Supervisory Board. The documents were dealt with in detail by the Audit Committee on 20 March 2012 as well as by the Supervisory Board plenary session on 27 March 2012 and explained in depth in both cases by the Board of Management. The auditors attended the meetings of both bodies, reported on the findings of the audit and were available to provide additional information.

The Supervisory Board examined the annual financial statements and the management report of KSB Aktiengesellschaft for the year ended 31 December 2011, which were prepared in accordance with the provisions of the Handelsgesetzbuch [HGB – German Commercial Code], as well as the consolidated financial statements and the Group management report for the year ended 31 December 2011, which were prepared in accordance with the International Financial Reporting Standards (IFRS), and the proposal by the Board of Management on the appropriation of net retained earnings.

The Frankfurt am Main offices of BDO AG Wirtschaftsprüfungsgesellschaft based in Hamburg audited the annual financial statements and the management report of KSB Aktiengesellschaft for the year ended 31 December 2011, as well as the consolidated financial statements and the Group management report for the year ended 31 December 2011, and issued an unqualified opinion. The Audit Committee defined key audit areas for the year under review: review of the activities of selected companies as part of impairment tests for financial investments and goodwill, examination of the investigative process and the validity of individual disclosures in the Notes, and review of the accounting treatment of corporate acquisitions and related purchase price allocations (including information in the Notes and the treatment of contingent consideration payments). The auditors reported their findings on these key audit areas both orally and in writing.

The Supervisory Board concurs with the auditors’ findings. Based on its own final examination results, the Supervisory Board plenary session did not raise any objections to the annual financial statements, consolidated financial statements, management report and Group management report. In accordance with the recommendation of the Audit Committee the Supervisory Board approved the financial statements prepared by the Board of Management; the annual financial statements are thus adopted. After its own examination, the Supervisory Board deems the proposal by the Board of Management on the appropriation of net retained earnings of KSB Aktiengesellschaft to be appropriate and concurs with it.

Dependent company report

The auditors also audited the dependent company report prepared by the Board of Management in accordance with section 312 AktG and issued the following unqualified opinion on this ­report:

“On completion of our audit and assessment in accordance with professional standards, we confirm that:

1. the actual amounts and disclosures in the report are correct;
2. the consideration paid by the company for the transactions listed in the report was not inappropriately high.”


The reports by the Board of Management and the auditors were provided in good time to all members of the Supervisory Board and were also discussed by the Audit Committee and at plenary sessions. The auditors attended the meetings of both bodies, reported on the material findings of the audit and were available to provide additional information. The Supervisory Board concurs with the auditors’ findings. Both the recommendation by the Audit Committee and the final results of the Supervisory Board plenary session’s examination did not give rise to any objections to the dependent company report prepared by the Board of Management and to the statement by the Board of Management at the end of the dependent company report.

Changes on the Supervisory Board and Board of Management

The composition of the Board of Management and Supervisory Board remained unchanged during the year. Dr. Jacob and Mr. Lederer were re-elected to the Supervisory Board at the Annual General Meeting of KSB Aktiengesellschaft on 18 May 2011; Dr Jacob was re-elected as Chairman of the Supervisory Board on the same day. The change on the Board of Management has been described above. In this context, the Supervisory Board wishes to thank Mr. Stoop for many years of cooperation in an atmosphere of mutual trust.

The Supervisory Board would like to acknowledge and thank the Board of Management, the employees and employee representatives of all Group companies for their good work in the year under review.

Frankenthal, 27 March 2012

For the Supervisory Board

Dr. Hans-Joachim Jacob (Chairman of the Supervisory Board)