Statement on Corporate Governance

The Statement on Corporate Governance contains the Declaration of Conformity, relevant information on practices within the company, a description of the procedures of the corporate bodies, as well as targets for the percentage of positions held by women as well as the diversity policy.

Joint report of the Executive Board and the Supervisory Board according to section 3.10 of the German ­Corporate Governance Code including the Declaration of Conformity

The German Corporate Governance Code is geared toward the conditions found in a German stock corporation (‟Aktiengesellschaft” or ‟AG”) and does not take into consideration the special characteristics of a corporation with general partners (‟Kommanditgesellschaft auf Aktien” or ‟KGaA”) such as Merck KGaA. Given the structural differences between an AG and a KGaA, several recommendations of the German Corporate Governance Code are to be applied to a KGaA only in a modified form. Major differences between the two legal forms exist in terms of liability and management. While, in the case of an AG, only the AG is liable as a legal entity, the general partners of a KGaA also have unlimited personal liability for the company’s obligations (section 278 (1) of the German Stock Corporation Act – ‟AktG”). At Merck KGaA, this pertains to both E. Merck KG – which pursuant to Article 8 (5) of the Articles of Association is excluded from management and representation – as well as to the managing general partners, who together make up the Executive Board of Merck KGaA. The members of the Executive Board of Merck KGaA are therefore subject to unlimited personal liability. Unlike an AG, their executive authority is not conferred by the Supervisory Board, but rather by their status as general partners.

Consequently, in addition to other responsibilities typical of the supervisory board of an AG (see description of the procedures of the Supervisory Board on page 192 et seq.), the supervisory board of a KGaA does not have the authority to appoint the management board, draw up management board contracts or specify compensation of the management board. This legal form also involves special features with regard to the General Meeting. For example, in a KGaA, many of the resolutions made require the consent of the general partners (section 285 (2) AktG), including in particular the adoption of the annual financial statements (section 286 (1) AktG).

Merck KGaA applies the German Corporate Governance Code analogously where these regulations are compatible with the legal form of a KGaA. In order to enable shareholders to compare the situation at other companies more easily, to a broad extent we base corporate governance on the conduct recommendations made by the Government Commission of the German Corporate Governance Code and forego having our own, equally permissible, code. The recommendations of the Code in the past two versions dated May 5, 2015 and February 7, 2017, the intent and meaning of which are applied, were complied with in the period between the last Declaration of Conformity issued on February 24, 2017 with three exceptions. In the future, the recommendations of the Code will again be adhered to with one exception. Further details can be found on page 171.

For a clearer understanding, the following gives a general explanation of the application of German company law at Merck KGaA with additional references to the General Meeting and shareholder rights.

Merck KGaA

The general partner E. Merck KG holds around 70% of the total capital of Merck KGaA (equity interest); the shareholders hold the remainder, which is divided into shares (share capital). E. Merck KG is excluded from the management of business activities. The general partners with no equity interest (Executive Board) manage the business activities. Nevertheless, due to its substantial capital investment and unlimited personal liability, E. Merck KG has a strong interest in the businesses of Merck KGaA operating efficiently in compliance with procedures, and exercises its influence accordingly. Merck KGaA’s participation in the profit/loss of E. Merck KG in accordance with Articles 26 et seq. of the Articles of Association further harmonizes the interests of the shareholders and of E. Merck KG. E. Merck KG appoints and dismisses the Executive Board. In addition, E. Merck KG has created bodies – complementing the expertise and activities of the Supervisory Board – to monitor and advise the Executive Board. This task applies primarily to the Board of Partners of E. Merck KG.

Based on the provisions of the German Stock Corporation Act, the Articles of Association of Merck KGaA and the rules of procedure of the various committees, Merck KGaA has a set of rules for the Executive Board and its supervision that meet the requirements of the German Corporate Governance Code. The investors, who bear the entrepreneurial risk, are protected as provided for by the German Corporate Governance Code.

The General Meeting of Merck KGaA

The twenty-second General Meeting of Merck KGaA was held on April 8, 2017 in Frankfurt am Main, Germany. At 64.03%, the proportion of share capital represented at the meeting was slightly higher than in the previous year. In 2016, the proportion of share capital represented was 61.92%.

In particular, the Annual General Meeting passes resolutions concerning the approval of the annual financial statements, the appropriation of net retained profit, the approval of the actions of the Executive Board members and the Supervisory Board members, as well as the election of the auditor. Changes to the Articles of Association likewise require the adoption of a resolution by the General Meeting. The shareholders of Merck KGaA exercise their rights at the General Meeting. They may exercise their voting rights personally, through an authorized representative or through a proxy appointed by the company. The proxy is in attendance throughout the duration of the General Meeting. All the documents and information concerning upcoming General Meetings (including a summary explanation of shareholder rights) are also posted on our website. Moreover, the General Meeting is webcast live on the Internet from its commencement until the end of the speech by the Chairman of the Executive Board. The introductory speeches by the Chairman of the Executive Board and the Chairman of the Supervisory Board are recorded in order to make them available to interested members of the public at any time after the meeting. In this way, we are satisfying the high transparency requirements of the Merck Group.

Declaration of Conformity

In accordance with section 161 AktG, applying the provisions of the German Corporate Governance Code correspondingly, the Executive Board and the Supervisory Board issued the following Declaration of Conformity with the recommendations of the Government Commission of the German Corporate Governance Code:

‟Declaration of the Executive Board and the Supervisory Board of Merck KGaA on the recommendations of the Government Commission of the German Corporate Governance Code pursuant to section 161 AktG.

Since the last Declaration of Conformity on February 24, 2017, we have complied with the recommendations of the Government Commission of the German Corporate Governance Code during the period of validity of the versions dated May 5, 2015 and February 7, 2017 published in the official section of the German Federal Gazette with the following exceptions:

Contrary to section 4.2.5 para 3 sentence 2 of the German Corporate Governance Code, the model tables only show the current service costs; any past service costs are shown in the footnotes. The chosen reporting serves better comparability with other companies and thus the transparency and understandability of the Compensation Report aimed for by the code (see section 4.2.5 para 1 sentence 3 of the German Corporate Governance Code).

Contrary to section 5.3.2 of the German Corporate Governance Code, the Supervisory Board has not established an audit committee. However, an audit committee does exist in the form of the Finance Committee of the Board of Partners of E. Merck KG, which to a large extent exercises the duties described in section 5.3.2 of the Code. Due to the relatively limited authority of the supervisory board of a KGaA in comparison with that of an AG, this therefore satisfies the requirements of the German Corporate Governance Code.

Contrary to section 5.4.1 para 2 sentence 1 of the German Corporate Governance Code, previously neither an age limit nor a regular limit on the length of Supervisory Board membership was taken into account when proposing candidates for election to the Supervisory Board. The age and length of membership of Supervisory Board members are not criteria for their qualifications and competence. Therefore, as in the past, we do not wish to forego the many years of experience of Supervisory Board members. Rather, a good balance among Supervisory Board members in terms of age and length of membership is crucial to the successful work of the Supervisory Board. Taking these principles into account, both a limit on age and length of membership shall nevertheless apply.

Contrary to section 7.1.2 sentence 4 of the German Corporate Governance Code, owing to scheduling difficulties, the interim report for the first quarter was only made publicly accessible slightly after the allotted 45-day time limit from the end of the reporting period. In the future, the recommendation shall be complied with in full.

In view of future compliance with the current recommendations of the Government Commission of the German Corporate Governance Code, the Executive Board and the Supervisory Board declare the following: With the exception of the aforementioned deviations from section 5.3.2 (audit committee), the company will comply with the recommendations of the Code in the version dated February 24, 2017.”

Darmstadt, February 28, 2018

For the Executive Board
s. Stefan Oschmann

For the Supervisory Board
s. Wolfgang Büchele

Compensation report

(The compensation report is part of the audited consolidated financial statements.)

Compensation Philosophy

As the world’s oldest pharmaceutical and chemical company, Merck attaches great importance to responsible governance and entrepreneurship. This is also reflected by the compensation of the members of the Executive Board of Merck KGaA. Unlike management board members of stock corporations, they are not merely employed members of a corporate board. Rather, they are personally liable general partners of both Merck KGaA and the general partner E. Merck KG, and in this capacity they receive profit sharing from E. Merck KG. Owing to the legal form as a KGaA (corporation with general partners), the stipulations of the German Corporate Governance Code concerning the compensation of management board members of publicly listed German stock corporations as well as the individual disclosure thereof do not apply to the Executive Board members of Merck KGaA. Nevertheless, we have decided to comply with the requirements of the German Corporate Governance Code.

The compensation paid to the members of the Executive Board takes into account the responsibilities and duties of the individual Executive Board members, their status as personally liable partners, their individual performance, the economic situation, as well as the performance and future prospects of the company.

Furthermore, Executive Board compensation orients towards the external peer environment of Merck KGaA, meaning in a comparison with other German blue-chip companies as well as international competitors. The relationship between Executive Board compensation and the compensation of top management and the workforce as a whole continues to be taken into account, also in a multi-year assessment. The Personnel Committee regularly commissions an independent compensation consultant to review the appropriateness of the compensation.

With respect to the specific components of compensation, the setting of individual compensation, the selection of the key performance indicators as well as the definition of payment and allocation rules, the following principles are either followed or taken into consideration:

Regulatory requirements and principles of good corporate governance

The design of the compensation system and the determination of individual compensation orient towards the German Stock Corporation Act and the German Corporate Governance Code. Within the regulatory framework conditions, the objective is to offer the Executive Board members a competitive compensation package in line with market practice.

Long-term Group strategy

The execution of the long-term Group strategy is promoted through the selection of appropriate, ambitious key performance indicators for performance-related compensation. Against this background, our performance-related compensation components (profit sharing and Merck Long-Term Incentive Plan) orient towards the key performance indicators of the Group.

Long-term interests of our shareholders

The long-term interests of our shareholders are taken into account through a significantly high amount of variable, percentage-related compensation as a proportion of total compensation as well as the compensation system’s strong focus on the share price. The performance of the Executive Board members should be properly recognized, with the failure to meet targets leading to a noticeable reduction in performance-related compensation.

In our company, unlike publicly listed German stock corporations, it is not the Supervisory Board, but the Board of Partners of E. Merck KG that decides on the amount and composition of compensation received by our Executive Board members. The Board of Partners has assigned this task to its Personnel Committee. The Personnel Committee is thus primarily responsible for the followings topics as they relate to our Executive Board and the compensation thereof:

  • The design and review of performance-independent and performance-­related compensation components
  • Contents of Executive Board member contracts
  • Assumption of honorary offices, board positions and other sideline activities
  • Distribution of responsibilities within the Executive Board
  • Granting of loans and salary advances

In this context, the Personnel Committee of E. Merck KG has identified the need for change in order to conform even more thoroughly with the new organizational positioning and the principles of sustainable, performance-oriented corporate governance. As of January 1, 2017, the new Merck Long-Term Incentive Plan and the Share Ownership Guideline were introduced. Moreover, the company pensions for Belén Garijo, Kai Beckmann and Marcus Kuhnert were changed from defined-­benefit to defined-contribution pension obligations. Furthermore, for profit sharing, the Personnel Committee resolved to individually assess as of 2017 the performance of each Executive Board member using a performance factor ranging from 0.7 to 1.3.

The compensation system for fiscal 2017 was presented to the General Meeting in April 2017 for approval. However, majority approval was not granted. To account for the suggestions made by our shareholders, with support from an independent compensation consultant the compensation system has been further revised with effect from 2018, taking into consideration the regulatory requirements and the internal company strategy. The descriptions of the planned changes to the respective compensation elements can be found in the section entitled ‟Outlook”.

Overview of the structure and the components of the compensation system

The compensation system for the Executive Board basically comprises the three main components fixed compensation, profit sharing and the Merck Long-Term Incentive Plan. It is complemented by contributions to the company pension plan as well as additional benefits and possible one-time payments. The components of the compensation system are as follows:

Compensation elements and compensation structure1

1Excluding additional benefits, company pension and one-time payments.

Performance-independent compensation and additional benefits

Fixed compensation

The fixed compensation received by the members of the Executive Board comprises firmly agreed and performance-independent amounts that are paid in the form of 12 equivalent monthly installments.

Additional benefits

Moreover, the members of the Executive Board receive performance-­independent additional benefits. These consist mainly of contributions to insurance policies, personal security expenses as well as a company car, which they may use privately.

Performance-related compensation

Performance-related compensation comprises profit sharing as well as the Merck Long-Term Incentive Plan. Both performance-related compensation components are based on multi-year steering parameters. The regulatory requirements of the German Stock Corporation Act and the German Corporate Governance Code are taken into account, and particular recognition is given for sustainable corporate development.

Profit sharing
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Profit sharing

   
Key performance indicator Three-year average of the profit after tax of the E. Merck Group
Period Three years
Limit Individual, absolute maximum amount

Within the scope of profit sharing, at the end of a fiscal year the members of the Executive Board receive individually fixed per mille rates based on the three-year average of the profit after tax of the E. Merck Group. The current and the two preceding years are included in the calculation. The Personnel Committee of E. Merck KG decides at its equitable discretion whether to consider exceptional factors of particular importance. The use of profit after tax as the key performance indicator, which also serves as the basis for dividend payments, ensures very close alignment with the shareholder interests. The amount of the individually fixed per mille profit-sharing rates is staggered by intervals. Through staggering, the achievement of an average profit after tax of more than € 1 billion is more strongly incentivized than amounts below € 1 billion. However, insofar as the average profit after tax is more than € 1.5 billion, the amount greater than € 1.5 billion is not taken into account when determining profit sharing. To appropriately take into account the individual performance of the Executive Board members, since fiscal 2017 the Personnel Committee has been able to adjust the payment by applying a factor ranging from 0.7 to 1.3. The performance factor makes it possible to recognize superb performance of a member of the Executive Board by multiplying profit sharing by a value greater than 1.0 up to 1.3. Similarly, multiplying by a value less than 1 down to 0.7 can lower profit sharing if the case calls for it. The maximum profit-­sharing payment is set individually.

One-time payments until the end of fiscal 2017

Until the end of 2017 E. Merck KG had the possibility in exceptional cases to grant at its own or equitable discretion set amounts for one-time payments to the Personnel Committee responsible for the compensation of Executive Board members. One-time payments made it possible to recognize outstanding performance or successes of an Executive Board member that had a significantly positive economic impact on the Merck Group.

Outlook for fiscal 2018:

For fiscal 2018, the Personnel Committee decided to eliminate the contractually stipulated possibility of one-time payments to members of the Executive Board within the scope of performance-­related compensation. This adjustment measure serves primarily to take our international shareholder structure into account.

Moreover, the Personnel Committee resolved to define criteria applicable to the adjustment of profit sharing by applying the factor in a range of between 0.7 and 1.3. Insofar as the adjustment increases or decreases the profit sharing of a member of the Executive Board, this is to be published in the Compensation Report.

Adjustment criteria for increasing profit sharing could include the following:

  • Extraordinary success in connection with M&A activities of the Merck Group;
  • Extraordinary success in the sustainable strategic, technical, product-­related or structural further development or reorganization of the Merck Group;
  • Extraordinary performance in the execution of especially important projects or the achievement of other exceptionally important objectives in the area of responsibility;
  • Extraordinary performance leading to a clear overachievement of targets for relevant key performance indicators in the area of responsibility;
  • Extraordinary contributions to meeting the expectations and objectives of our stakeholders (for example employee satisfaction, customer satisfaction, Corporate Social Responsibility, implementation of diversity requirements).

Adjustment criteria for lowering profit sharing could include the following:

  • Violations of internal rules and regulations (for instance the Merck Code of Conduct), laws or other binding external requirements in the area of responsibility; or
  • Significant breaches of duty of care within the meaning of section 93 of the German Stock Corporation Act or other grossly non-compliant or unethical behavior; or
  • Behaviors or actions that are contradictory to our company values; or
  • Failure to execute especially important projects or failing to achieve other exceptionally important objectives in the area of responsibility; or
  • Clear failure to achieve targets for relevant key performance indicators in the area of responsibility.
Merck Long-Term Incentive Plan
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Merck Long-Term Incentive Plan (LTIP)

   
Key performance indicators
  • Relative share price development vs. the DAX® (5% weighting)
  • EBITDA pre margin (25% weighting)
  • Organic sales growth (25% weighting)
Cycle Three years
Limit Absolute maximum amounting to 250% of the individual grant
Reference price (share price for conversion into numbers or for payment) Average closing price of Merck shares in Xetra® trading during the last 60 trading days prior to the beginning or the end of the performance cycle

The LTIP is based on a three-year performance, future-oriented performance cycle. Consequently, this meets the new recommendation added to the German Corporate Governance Code dated February 7, 2017 according to which the multi-year assessment basis of variable compensation components is to essentially have forward-­looking aspects.

As part of the LTIP, the members of the Executive Board are eligible to receive a certain number of virtual shares – Merck Share Units (MSUs). The number of MSUs is calculated as follows:

At the beginning of the performance cycle, for each Executive Board member the Personnel Committee sets an individual grant in euros. This grant is then divided by the definitive reference share price at the beginning of the performance cycle, resulting in the number of MSUs they could be eligible to receive.

The final number of MSUs that are actually allocated to the Executive Board members after the performance cycle has expired depends on the development of three weighted key performance indicators over the three-year performance cycle:

a) the performance of the Merck share price compared with the performance of the DAX® with a weighting of 50%,

b) EBITDA pre margin, as a proportion of a defined target value with a weighting of 25%, and

c) The organic sales growth of the Merck Group as a proportion of a defined target value with a weighting of 25%.

The Merck Long-Term Incentive Plan thus links two key performance indicators derived from the strategy with an external, relative key performance indicator. On the one hand, this creates an incentive to achieve strategic objectives. On the other hand, the stronger share price orientation takes into account the company’s long-term development prospects and the expectations of our shareholders. To prevent distortions as a result of exceptional factors as well as to directly reflect the performance of the Executive Board members, the EBITDA pre margin is used.

Depending on the development of the KPIs, after the end of the three-year performance cycle the members of the Executive Board are definitively allocated between 0% and 150% of the MSUs they could be eligible to receive. The value of these MSUs is paid out to the Executive Board in the year after the three-year performance cycle has ended. For this, the final allocated number of MSUs it multiplied by the definitive reference share price at the end of the performance cycle. The maximum increase in the share price is limited to 200% of the reference price at the beginning of the performance cycle, thus limiting participation in external effects that contribute to share price increases. Apart from setting a limit on the final number of allocated MSUs and on the applicable share price increase, the overall LTIP payment is limited to 250% of the individual grant. If targets are clearly missed, it is also possible that absolutely no payment is made from the Merck Long-Term Incentive Plan (0%).

Outlook: Introduction of the clawback rule

Through their status as personally liable general partners of Merck KGaA and of the general partner E. Merck KG, the Executive Board members bear a very unique entrepreneurial responsibility. This is also reflected by the penalty criteria set forth in profit sharing and by the German statutory regulations on liability for damages stipulated in section 93 of the German Stock Corporation Act.

To incentivize the extent of entrepreneurial responsibility and personal liability above and beyond this, effective January 1, 2018 a clawback clause has been added to the LTIP rules. This makes it possible to withhold already allocated grants from the LTIP. Use can be made of this possibility in cases such as violations of internal rules and regulations (for instance the Merck Code of Conduct), laws or other binding external requirements in the area of responsibility; significant breaches of duty of care within the meaning of section 93 of the German Stock Corporation Act; grossly non-­compliant or unethical behavior; or behaviors or actions that are contradictory to our company values.

Outlook: Subsequent disclosure of the performance corridor

To further increase the transparency of the Executive Board compensation system, in the future the performance corridor for the key performance indicators used in the Merck Long-Term Incentive Plan will be subsequently disclosed. However, the company will continue to refrain from publishing this performance corridor in advance as this could permit market- and competitively relevant conclusions to be drawn about strategic objectives.

Share Ownership Guideline

A Share Ownership Guideline was introduced in 2017. This obligates the Executive Board members, for the duration of their employment relationship, to permanently hold Merck shares in an amount equal to 100% of their annual gross fixed compensation. Owing to his position as Chairman of the Merck Executive Board, Stefan Oschmann is obligated to hold a higher amount, or 200% of his annual gross fixed compensation, in Merck shares. The duty to provide evidence of the complete number of shares must be met no later than on expiration of four years after having joined the Executive Board or after the introduction of the rule. The Share Ownership Guideline promotes even stronger alignment between the interests of the Executive Board members and those of our shareholders and it additionally raises the entrepreneurial responsibility of the Executive Board members. Moreover, the introduction of the Share Ownership Guideline takes into account the widespread practice of share ownership among management and executive board members in international peer comparisons.

Overall compensation limit

Compensation amounts are limited not only in terms of the performance-related components of one-time payments, profit sharing and the Merck Long Term Incentive Plan, but also overall. The maximum limits are presented in the following table:

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Executive Board member Fixed ­compensation (€ thousand) Maximum one-time payment (€ thousand) Maximum profit sharing limit (€ thousand) Maximum limit Merck Long-Term Incentive Plan (€ thousand) Maximum limit Overall compensation (€ thousand)
Stefan Oschmann 1,300 2,000 3,700 5,638 9,800
Udit Batra 1,000 1,500 2,800 4,263 8,000
Kai Beckmann 1,000 1,500 2,400 3,575 8,000
Walter Galinat 800 1,500 2,200 3,300 8,000
Belén Garijo 1,100 1,500 3,000 4,675 8,000
Marcus Kuhnert 800 1,500 2,200 3,300 8,000

Pension obligations

Effective January 1, 2017, for the Executive Board members Kai Beckmann, Belén Garijo, and Marcus Kuhnert the individual contractual pension agreements were changed from defined-benefit to defined-­contribution pension obligations, maintaining the direct commitment modality1. A defined-contribution pension agreement is also in place with Udit Batra. Within the scope of these defined-contribution pension obligations, every year an amount of € 400,000 is paid into a benefit account and interest is paid on this at standard market interest rates. Once the respective Executive Board members reach the contractually agreed age limit and are no longer employed by E. Merck KG, the amount in the benefit account is paid out either in ten annual installments or as a one-time payment. The balance in the benefit account is disbursed as a one-time payment, possibly topped up by additional contributions (maximally ten contributions, up to the age of 60) in the event of permanent disability, or in the event or death to surviving dependents. The vested amount from the former defined-benefit pension agreement was credited to the benefit account when the changeover took place.

A defined-benefit pension obligation remains in place for Stefan Oschmann and Walter Galinat. The old-age pension is determined in accordance with a certain percentage of pensionable compensation. The percentages can be found in the table below. The individual contractual pension obligations grant Stefan Oschmann and Walter Galinat entitlement to a lifelong old-age pension or surviving dependents’ pension in the event of reaching the individual contractually agreed age limit, permanent disability, or death. As an alternative to an old-age pension, the possibility also exists for the pension obligation to be paid out as a lump sum calculated in accordance with actuarial principles on reaching the individual contractually agreed age limit.

Moreover, surviving dependents of the two Executive Board members receive a surviving dependents’ pension. For spouses, this amounts to 60% of the pension entitlement. Dependent children are entitled to either a half-orphan’s or an orphan’s pension maximally until the age of 25.

The contribution amounts or pensionable compensation and the percentage obligation as well as the pension provisions and service costs are listed in the following tables:

Defined-contribution obligations
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IFRS
contribution level Service cost of pension obligations earned in the current year Present value of the ­defined-contribution pension obligation as of Dec. 31
€ thousand 2016 2017 2016 2017
Executive Board members as of Dec. 31, 2017          
Udit Batra 400 254 379 254 633
Kai Beckmann1 400 205 396 5,948 3,977
Belén Garijo2 400 688 398 1,501 4,162
Marcus ­Kuhnert3 400 315 426 868 2,512
Total 1,600 1,462 1,599 8,571 11,284
1
For 2017, in addition to current service costs of € 396 thousand, there were past service benefits of € 2,424 thousand (total service benefits: € 2,028 thousand).
2
For 2017, in addition to current service costs of € 398 thousand, there were past service costs of € 2,184 thousand (total service cost: € 2,582 thousand).
3
For 2017, in addition to current service costs of € 426 thousand, there were past service costs of € 1,178 thousand (total service cost: € 1,604 thousand).
Defined-benefit obligation
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IFRS
Pensionable compensation Percentage entitlement Service cost of pension obligations earned in the current year Present value of the ­defined-benefit pension obligation as of Dec. 31
€ thousand     2016 2017 2016 2017
Executive Board members as of Dec. 31, 2017
Stefan Oschmann1 750 62 852 1,401 8,584 9,802
Walter Galinat 490 65 157 168 6,857 6,958
Total 1,240 1,009 1,569 15,441 16,760
1
For 2016, in addition to current service costs of € 852 thousand, there were past service costs of € 3,506 thousand (total service cost: € 4,358 thousand) due to the increase in the pensionable compensation and percentage entitlement in connection with the appointment as Chairman of the Executive Board. The percentage entitlement for Stefan Oschmann increases as of 2017 until retirement by two percentage points per year of service up to 70%.

Benefits in the event of termination of duties as an Executive Board member

In the event of the early termination of the employment relationship, without notice for good cause, the employment contracts of the Executive Board members stipulate a cap on severance pay in accordance with the recommendation of the German Corporate ­Governance Code. Pursuant to this, payments in connection with the termination of an Executive Board member’s duties shall not exceed twice the annual total compensation or constitute compensation for more than the remaining term of the employment contract (severance cap).

If an Executive Board member’s duties prematurely end due to the termination of the employment contract either by the company or the Executive Board member before the performance cycle of an open tranche in the Merck Long-Term Incentive Plan expires, the obligations resulting from the plan are no longer applicable.

The employment contracts of Stefan Oschmann, Kai Beckmann and Udit Batra each contain a post-contractual non-competition clause. As compensation for each year of the two-year non-competition period, an amount equal to 50% of the average contractual benefits paid to the respective Executive Board member within the past 12 months prior to leaving the company shall be provided. During the period of the non-competition clause, other employment income and pension payments will be credited to this compensation. Within certain time limits, E. Merck KG has the possibility to dispense with adherence to the non-competition clause with the consequence that the obligation to make the compensation payments shall no longer exist. Owing to the non-competition clause, Karl-Ludwig Kley received compensation of € 936 thousand for 2016 and € 234 thousand for 2017.

The contracts of the Executive Board members further provide for the continued payment of fixed compensation to surviving dependents for a limited period of time in the event of death. Above and beyond existing pension obligations, no further obligations exist in the event of the termination of the contractual relationships of the Executive Board members.

Loans and advances

In 2017, the members of the Executive Board received no advances or loans.

Payments to former Executive Board members and their surviving dependents

Payments to former members of the Executive Board or their surviving dependents are made for a limited period of time and represent continued payment of fixed compensation in the event of death as well as pension payments. In fiscal 2017, these amounted to € 12,786 thousand (2016: € 11,850 thousand). Pension provisions for 2017 amounted to € 152,973 thousand (2016: € 143,073 thousand).

Miscellaneous

The total compensation of the Executive Board of Merck KGaA includes both the compensation received from E. Merck KG as well as possibly also from subsidiaries consolidated in the Group financial statements. Should members of the Executive Board be held liable for financial losses while executing their duties, under certain circum­stances this liability risk is covered by a D&O insurance policy from Merck KGaA. The D&O insurance policy has a deductible in accordance with the legal requirements and the recommendations of the German Corporate Governance Code.

Performance-related compensation in 2017

The compensation system for our Executive Board is geared to suitably rewarding the performance of Executive Board members in terms of sustainable corporate development and the creation of shareholder value whereas the failure to meet targets leads to a noticeable decrease in performance-related compensation. In response to the suggestions from our shareholders and to further increase the transparency of the Executive Board compensation system, the following tables present the average individual profit-sharing rates and the performance corridors for the key performance indicators used in the Merck Long-Term Incentive Plan.

Profit sharing

Within the scope of profit sharing, at the end of a fiscal year the members of the Executive Board receive individually fixed per mille rates based on the three-year average of the profit after tax of the E. Merck Group. The current and the two preceding years are relevant here.

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Key performance indicator (€ million) 2014 2015 2016 2017
Profit after tax of the E. Merck Group 1,104 1,066 1,559 2,549
Three-year average of the profit after tax of the E. Merck Group (2014 – 2016) 1,243
Three-year average of the profit after tax of the E. Merck Group (2015 – 2017) 1,724

The amount of the individually fixed per mille profit-sharing rates is staggered by intervals. This staggering incentivizes the achievement of an average profit after tax of more than € 1 billion more strongly than amounts below € 1 billion. However, insofar as the average profit after tax is more than € 1.5 billion, the amount greater than € 1.5 billion is not taken into account when determining the profit- sharing payment. The average profit-sharing rates in per mille for the members of the Executive Board in 2016 and 2017 were as follows:

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Member of the Executive Board Average profit-sharing rate in per mille 2017 Performance factor for individual performance 2017
Stefan Oschmann 2.15 1
Udit Batra 1.63 1
Kai Beckmann 1.39 1
Walter Galinat 1.28 1
Belén Garijo 1.74 1
Marcus Kuhnert 1.28 1

In fiscal 2017, the individual performance factor was not used to adjust profit sharing.

Merck Long-Term Incentive Plan

Until the beginning of fiscal 2017, payment from the Merck Long-Term Incentive Plan was based on the achievement of specific targets with respect to the development of the Merck share price compared with the DAX® as well as the development of the EBITDA pre margin during the three-year performance cycle. The following table presents the target values that lead to 100% target achievement relative to the respective key performance indicator. Below the lower target corridor limit, target achievement for the respective KPI is 0%. Above the upper target corridor limit, target achievement no longer increases.

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Key performance indicator1 Lower target corridor limit Target Upper target corridor limit Actually achieved value Merck LTIP tranche 2013 Target ­achievement Merck LTIP tranche 2013
Share price development relative to the DAX® (external key performance indicator) – 20% 0% 50% 30.4% 130.5%
EBITDA pre margin (internal key performance indicator) 24% 27% 30% 28.8% 130.1%
1
The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not relevant for target achievement of the tranche in fiscal 2013.
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Key performance indicator1 Lower target corridor limit Target Upper target corridor limit Actually achieved value Merck LTIP tranche 2014 Target ­achievement Merck LTIP tranche 2014
Share price development relative to the DAX® (external key performance indicator) – 20% 0% 50% 36.3% 136.3%
EBITDA pre margin (internal key performance indicator) 25% 28% 31% 29.6% 126.7%
1
The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not relevant for target achievement of the tranche in fiscal 2014.

Total compensation

Pursuant to the German Commercial Code (HGB), the total compensation of the members of the Executive Board of Merck KGaA is as follows, broken down by performance-independent and performance-­related compensation components:

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Performance-independent components Performance-related components Total Expense (+)/Income (–) recorded in the period for share-based compensation3
Fixed ­compensation Additional benefits Profit sharing (without a long-term incentive effect) Merck Long-Term Incentive Plan (with a long-term incentive effect)
  (€ thousand) (€ thousand) (€ thousand) Grant value (€ thousand) Number of MSUs1 Time value2 (€ thousand) (€ thousand) (€ thousand)
Current members
Stefan Oschmann 2017 1,300 164 3,700 2,255 23,581 2,146 7,310 – 375
2016 1,267 24 3,278 2,000 22,748 1,549 6,118 2,279
Udit Batra (since April 30, 2016) 2017 1,000 12 2,800 1,705 17,830 1,623 5,435 – 335
2016 667 4 1,398 1,700 19,336 1,316 3,385 648
Kai Beckmann 2017 1,000 36 2,400 1,430 14,954 1,361 4,797 – 388
2016 1,000 31 2,238 1,430 16,265 1,107 4,376 2,062
Walter Galinat (since April 30, 2016) 2017 800 32 2,200 1,320 13,804 1,256 4,288 91
2016 533 50 1,098 1,150 13,081 891 2,572 438
Belén Garijo 2017 1,100 49 3,000 1,870 19,555 1,779 5,928 – 376
2016 1,067 6 2,683 1,700 19,336 1,316 5,072 840
Marcus Kuhnert 2017 800 21 2,200 1,320 13,804 1,256 4,277 – 385
2016 800 20 1,956 1,320 15,014 1,022 3,798 1,518
Karl-Ludwig Kley (until August 31, 2016) 2017
2016 867 14 2,756 1,500 17,061 1,162 4,799 2,847
Bernd Reckmann (until April 29, 2016) 2017
2016 400 17 1,353 1,000 11,374 774 2,544 1,898
Total 2017 6,000 314 16,300 9,900 103,528 9,421 32,035 – 1,768
2016 6,601 166 16,760 11,800 134,215 9,137 32,664 12,530
1
Number of the potential MSUs subject to target achievement. For details see page 175/176 et seq. The actual number of MSUs to be granted after the expiration of the three-­year performance cycle may deviate from this.
2
Time value on the date of the grant (date of the legally binding entitlement). The amount of a payment is thus not predefined. Payment is subject to target achievement and is only made on a specified date after the expiration of the three-year performance cycle. The time value of the obligations was calculated using a Monte Carlo simulation based on the previously described KPIs. The expected volatilities are based on the implicit volatility of Merck shares and the DAX® in accordance with the remaining term of the LTIP tranche. The dividend payments incorporated into the valuation model orient towards medium-term dividend expectations.
3
In accordance with IFRS the expense recorded for 2017 includes the values for the 2015, 2016 and 2017 LTIP tranches. In accordance with IFRS the expense recorded for 2016 includes the values for the 2014, 2015 and 2016 LTIP tranches.

Information in accordance with the requirements of the German Corporate Governance Code

In accordance with the requirements of the German Corporate ­Governance Code, the following tables present the compensation granted for 2017, including additional benefits and the achievable minimum and maximum values of the variable compensation components, as well as the allocation of the respective compensation components for fiscal 2017.

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BENEFITS GRANTED FOR the FISCAL YEAR

Stefan Oschmann Udit Batra Belén Garijo Marcus Kuhnert
Chairman of the Executive Board Member of the Executive Board Member of the Executive Board Member of the Executive Board
Benefits granted (€ thousand) 2016 2017 2017 (min.) 2017 (max.) 2016 2017 2017 (min.) 2017 (max.) 2016 2017 2017 (min.) 2017 (max.) 2016 2017 2017 (min.) 2017 (max.)
Fixed compensation 1,267 1,300 1,300 1,300 667 1,000 1,000 1,000 1,067 1,100 1,100 1,100 800 800 800 800
Additional benefits 24 164 164 164 4 12 12 12 6 49 49 49 20 21 21 21
Total 1,291 1,464 1,464 1,464 671 1,012 1,012 1,012 1,073 1,149 1,149 1,149 820 821 821 821
Profit sharing 3,278 3,700 3,700 1,398 2,800 2,800 2,683 3,000 3,000 1,956 2,200 2,200
Multi-year variable compensation
LTI 2016 (2016 to 2018) 1,549 1,316 1,316 1,022
LTI 2017 (2017 to 2019) 2,146 5,638 1,623 4,263 1,779 4,675 1,256 3,300
Total 6,118 7,310 1,464 10,802 3,385 5,435 1,012 8,075 5,072 5,928 1,149 8,824 3,798 4,277 821 6,321
Current service cost1 852 1,401 1,401 1,401 254 379 379 379 688 398 398 398 315 426 426 426
Total compensation 6,970 8,711 2,865 12,203 3,639 5,814 1,391 8,454 5,760 6,326 1,547 9,222 4,113 4,703 1,247 6,747
1
For 2016, in addition to current service costs of € 852 thousand, there were past service costs of € 3,506 thousand (total service cost: € 4,358 thousand) for Stefan Oschmann due to the increase in the pensionable compensation and percentage entitlement in connection with his appointment as Chairman of the Executive Board. For 2017, in addition to the current service costs of € 396 thousand, there were past service benefits of € 2,424 thousand (total service benefits: € 2,028 thousand) for Kai Beckmann.
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Kai Beckmann Walter Galinat Karl-Ludwig Kley Bernd Reckmann
Member of the Executive Board Member of the Executive Board Member of the Executive Board Member of the Executive Board
left on: August 31, 2016 left on: April 29, 2016
Benefits granted (€ thousand) 2016 2017 2017 (min.) 2017 (max.) 2016 2017 2017 (min.) 2017 (max.) 2016 2017 2017 (min.) 2017 (max.) 2016 2017 2017 (min.) 2017 (max.)
Fixed compensation 1,000 1,000 1,000 1,000 533 800 800 800 867 400
Additional benefits 31 36 36 36 50 32 32 32 14 17
Total 1,031 1,036 1,036 1,036 583 832 832 832 881 417
Profit sharing 2,238 2,400 2,400 1,098 2,200 2,200 2,756 1,353
Multi-year variable compensation
LTI 2016 (2016 to 2018) 1,107 891 1,162 774
LTI 2017 (2017 to 2019) 1,361 3,575 1,256 3,300
Total 4,376 4,797 1,036 7,011 2,572 4,288 832 6,332 4,799 2,544
Current service cost1 205 396 396 396 157 168 168 168 346
Total compensation 4,581 5,193 1,432 7,407 2,729 4,456 1,000 6,500 4,799 2,890
1
For 2017, in addition to current service costs of € 398 thousand there were past service costs of € 2,184 thousand (total service cost: € 2,582 thousand) for Belen Garijo. For 2017, in addition to current service costs of € 426 thousand, there were past service costs of € 1,178 thousand (total service cost: € 1,604 thousand) for Marcus Kuhnert.
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ALLOCATION FOR THE FISCAL YEAR

Stefan Oschmann Udit Batra Kai Beckmann
Chairman of the Executive Board Member of the Executive Board Member of the Executive Board
Allocation (€ thousand) 2016 2017 2016 2017 2016 2017
Fixed compensation 1,267 1,300 667 1,000 1,000 1,000
Additional benefits 24 164 4 12 31 36
Total 1,291 1,464 671 1,012 1,031 1,036
Profit sharing 3,278 3,700 1,398 2,800 2,238 2,400
Multi-year variable compensation
LTI 2013 (2013 to 2015) 2,290 2,290
LTI 2014 (2014 to 2016) 2,077 402 2,077
Total 6,859 7,241 2,069 4,214 5,559 5,513
Current service cost1 853 1,401 254 379 205 396
Total compensation 7,712 8,642 2,323 4,593 5,764 5,909
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Walter Galinat Belén Garijo Marcus Kuhnert
Member of the Executive Board Member of the Executive Board Member of the Executive Board
Allocation (€ thousand) 2016 2017 2016 2017 2016 2017
Fixed compensation 533 800 1,067 1,100 800 800
Additional benefits 50 32 6 49 20 21
Total 583 832 1,073 1,149 820 821
Profit sharing 1,098 2,200 2,683 3,000 1,956 2,200
Multi-year variable compensation
LTI 2013 (2013 to 2015) 292
LTI 2014 (2014 to 2016) 140 1,194 866
Total 1,681 3,172 4,048 5,343 2,776 3,887
Current service cost1 157 168 688 398 315 426
Total compensation 1,838 3,340 4,736 5,741 3,091 4,313
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Karl-Ludwig Kley Bernd Reckmann
Member of the Executive Board Member of the Executive Board
left on: August 31, 2016 left on: April 29, 2016
Allocation (€ thousand) 2016 2017 2016 2017
Fixed compensation 867 400
Additional benefits 14 17
Total 881 417
Profit sharing 2,756 1,353
Multi-year variable compensation
LTI 2013 (2013 to 2015) 3,435 2,290
LTI 2014 (2014 to 2016) 2,769 2,077
Total 7,072 4,060
Current service cost 346
Total compensation 7,072 2,769 4,406 2,077
1
For 2016, in addition to current service costs of € 852 thousand, there were past service costs of € 3,506 thousand (total service cost: € 4,358 thousand) for Stefan Oschmann due to the increase in the pensionable compensation and percentage entitlement in connection with his appointment as Chairman of the Executive Board.
For 2017, in addition to current service costs of € 396 thousand, there were past service benefits of € 2,424 thousand (total service benefits: € 2,028 thousand) for Kai Beckmann.
For 2017, in addition to current service costs of € 398 thousand, there were past service costs of € 2,184 thousand (total service cost: € 2,582 thousand) for Belén Garijo.
For 2017, in addition to current service costs of € 426 thousand, there were past service costs of € 1,178 thousand (total service cost: € 1,604 thousand) for Marcus Kuhnert.

Compensation of the Supervisory Board members of Merck KGaA

The compensation of the Supervisory Board members is defined by Article 20 of the Articles of Association of Merck KGaA. The members of the Supervisory Board receive annual fixed compensation of € 47,000. The Chairman receives double and the Vice Chairman receives one and a half times this amount. Moreover, the members receive additional compensation of € 750 per meeting. The individual values are presented in the following table:

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Fixed compensation Compensation for meeting attendance Total compensation
in € 2017 2016 2017 2016 2017 2016
Wolfgang Büchele
(Chairman)
94,000.00 94,000.00 3,000.00 3,000.00 97,000.00 97,000.00
Michael Fletterich
(Vice Chairman)
70,500.00 70,500.00 3,000.00 3,000.00 73,500.00 73,500.00
Crocifissa Attardo 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Mechthild Auge 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Gabriele Eismann 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Edeltraud Glänzer 47,000.00 47,000.00 2,250.00 3,000.00 49,250.00 50,000.00
Michaela Freifrau von Glenck 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Siegfried Karjetta 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Albrecht Merck 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Dietmar Oeter 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Alexander Putz 47,000.00 47,000.00 2,250.00 2,250.00 49,250.00 49,250.00
Helga Rübsamen-Schaeff 47,000.00 47,000.00 2,250.00 2,250.00 49,250.00 49,250.00
Karl-Heinz Scheider1 0.00 23,500.00 0.00 1,500.00 0.00 25,000.00
Gregor Schulz 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Theo Siegert 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Tobias Thelen 47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
Veit Ulshöfer2 47,000.00 23,500.00 3,000.00 1,500.00 50,000.00 25,000.00
Total 822,500.00 822,500.00 45,750.00 46,500.00 868,250.00 869,000.00
1
Until June 30, 2016.
2
Since July 1, 2016.
As a member of corporate bodies of E. Merck KG, Supervisory Board member Wolfgang Büchele received an additional payment of € 140,000 for performing this function in 2017 (2016: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Michaela Freifrau von Glenck received an additional payment of € 80,000 for performing this function in 2017 (2016: € 80,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Siegfried Karjetta received an additional payment of € 140,000 for performing this function in 2017 (2016: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Albrecht Merck received an additional payment of € 120,000 for performing this function in 2017 (2016: € 120,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Helga Rübsamen-Schaeff received an additional payment of € 150,000 for performing this function in 2017 (2016: € 150,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Gregor Schulz received an additional payment of € 140,000 for performing this function in 2017 (2016: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Theo Siegert received an additional payment of € 150,000 for performing this function in 2017 (2016: € 150,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Tobias Thelen received an additional payment of € 140,000 for performing this function in 2017 (2016: € 140,000).

Ownership, purchase or sale of shares in the company by members of the Executive Board and of the Supervisory Board

As of December 31, 2017, the members of the Executive Board and of the Supervisory Board either directly or indirectly held 116,447 shares of Merck KGaA. Their total ownership represents less than 1% of the issued shares of Merck KGaA. Transactions executed by members of the Executive Board and of the Supervisory Board are disclosed on the Merck website at www.merckgroup.com/en/investors/corporate-­governance/directors-dealings.html

Information on corporate governance practices

Reporting

It is Merck KGaA’s objective to provide the latest information to all shareholders, media, financial analysts and interested members of the public, while creating the greatest possible transparency. For this reason, Merck uses a wide range of communication platforms to engage in a timely dialogue with all interested parties about the situation of the company and business changes. Merck’s principles include providing factually correct, comprehensive and fair information.

Information subject to disclosure requirements, as well as information that is not, can be accessed worldwide on the Merck KGaA website (www.merckgroup.com), which is the company’s most important publication platform. Apart from a detailed financial calendar, quarterly statements and/or quarterly and half-year financial reports covering the past three years are available here in German and English. In addition, in line with the legal requirements, ad hoc announcements are published on the website. These contain information on circumstances and facts that could impact the Merck share price.

Regular press conferences, investor meetings on the occasion of investor conferences as well as road shows offer another platform for dialogue. The company presentations prepared for this purpose are also available on the Merck KGaA website. In addition, the Investor Relations team is always available to private and institutional investors who wish to receive further information.

To ensure the greatest possible transparency, all documents concerning the General Meeting are available on the company website. Additionally, some parts of the General Meeting are webcast live on the Internet.

Dealing with insider information

Dealing properly with insider information is very important to us. Our insider committee examines the existence of insider information, ensures compliance with legal obligations and prepares any necessary measures. The members of the insider committee are appointed by the Executive Board; at least two members work in Group Legal & Compliance. The insider committee meets at regular intervals, yet also meets when circumstances require. The Chief Financial Officer is vested with the authority to make the final decision on handling potential insider information.

In order to ensure a high level of protection for insider information, in 2011 the Executive Board issued internal insider guidelines applicable throughout the Merck Group worldwide. The guidelines inform employees about their responsibilities under insider trading laws and give clear instructions for compliant behavior. In addition, they describe the function of the insider committee in detail. Moreover, our Code of Conduct, which is binding on all employees, also contains an explicit, detailed reference to the ban on using insider information. Within the scope of obligatory training courses on the Code of Conduct as well as specific training courses on insider law, all employees are instructed on the stipulations of insider trading.

Accounting and audits of financial statements

Merck KGaA prepares its consolidated financial statements and combined management report in accordance with International Financial Reporting Standards (IFRS), as applicable in the EU, as well as the supplementary rules applicable under section 315e (1) of the German Commercial Code (HGB) and as stipulated by our Articles of Association. The consolidated financial statements and the combined management report are prepared by the Executive Board and examined by an auditor, taking into account the generally accepted standards for the audit of financial statements promulgated by the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer – IDW).

The Supervisory Board commissioned KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, to audit the consolidated financial statements and the combined management report for 2017. Moreover, the Supervisory Board agreed with KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, that the auditor shall inform the Supervisory Board without delay of any grounds for disqualification or bias occurring during the audit if these cannot be immediately rectified. Additionally, the auditor shall immediately report to the Supervisory Board any findings and issues which emerge during the audit that have a direct bearing upon the tasks of the Supervisory Board. The auditor shall inform the Supervisory Board or note in the audit report any circumstances determined during the audit that would render inaccurate the Declaration of Conformity made by the Executive Board and the Supervisory Board. It has also been agreed with the auditor that in order to assess whether the Executive Board has fulfilled its obligations in accordance with section 91 (2) AktG, the audit will also cover the company’s early warning risk identification system. Moreover, the auditor is required to examine and evaluate the accounting-relevant internal control system insofar as this is necessary and appropriate for assessing the accuracy of financial reporting.

Since 1995, KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, has been the audit firm for the statutory audit of the annual financial statements and consolidated financial statements of Merck KGaA. The auditor responsible for auditing the consolidated financial statements changes regularly in accordance with the statutory requirements. Bodo Rackwitz is currently leading the audit engagement and has been the auditor in charge of the engagement since fiscal 2015. The Supervisory Board had KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, provide a statement regarding the scope of the business, financial, personal, and other relationships between KPMG AG, its bodies and head auditors, and Merck KGaA, its Group companies and the members of their bodies (independence declaration). The statement also covers the scope of the services provided by KPMG AG in the previous fiscal year as well as the services (other than auditing services) that are contracted for the upcoming year (especially consultancy services) for Merck KGaA and its subsidiaries. Having examined the declaration, the Supervisory Board has found no grounds to doubt the independence of KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin. Neither party identified any conflicts of interest.

Further reports

The combined management report of Merck KGaA and the Merck Group does not contain a non-financial declaration. Instead, we prepare a separate, combined non-financial (Group) report, which we issue pursuant to sections 289b – 289e and 315b – 315c HGB. This is available effective April 27, 2018 as an online version on our website at http://reports.merckgroup.com/2017/cr-report/. It is integrated into the 2017 Corporate Responsibility Report in accordance with DRS 20 subsection 252 (b). We have prepared an overview of the information contained in the combined non-financial (Group) declaration at https://www.merckgroup.com/nfr17.

The report on gender and salary equality pursuant to section 21 in conjunction with sections 25 and 22 of the German Transparency of Pay Act for fiscal 2016 is included as an appendix to the combined management report of Merck KGaA.

Values and compliance

Based on a corporate culture that places the fundamental company values – courage, achievement, responsibility, respect, integrity and transparency – at the center of our entrepreneurial actions, our Code of Conduct (https://www.merckgroup.com/en/company/who-we-are/mission-strategy-and-values.html) helps those involved in the business process to implement the values when dealing with one another on a daily basis.

With its Code of Conduct, a revised version of which was issued at the end of 2017, Merck has established a set of rules and regulations intended to help our employees to act responsibly and to make the right decisions in their daily work.

The Code of Conduct explains the company principles for dealings with business associates, shareholders, colleagues and employees and within the scope of our responsibility for society. Thus, it supports all employees in acting ethically – not only in their dealings with one another, but also outside the company. The Code of Conduct is thus the main set of rules of our compliance program. In the newly published version, Merck has aligned its Code of Conduct even more closely with the Merck values. Additionally, it has expanded the Code of Conduct to include further important topics such as data privacy, Healthcare compliance and bioethics.

To Merck, compliance means observing legal and company internal regulations and the basic ethical principles anchored in the company values. With the Code of Conduct and the various unit-specific ethical compliance rules, the values are integrated into daily work and business practice. The Code of Conduct is binding on all employees, both at headquarters and in the subsidiaries. We also expect our business associates worldwide to accept these principles or to have their own comparable principles. While supplier management ensures compliant behavior of suppliers, global business partner risk management encompasses the relations with sales-related business associates such as distributors and wholesalers.

The Compliance Office monitors observance of the Code of Conduct with support from corresponding monitoring and training programs throughout the Group. All employees are called upon to report potential compliance violations to their supervisor, Legal, HR or other relevant departments. Merck created the position of Group Compliance Officer in 2002. This employee is responsible for setting up, maintaining and further developing our global compliance program. By taking appropriate measures, the Group Compliance Officer and his team, including regional compliance officers, help to lower the risk of serious legal violations of, for instance, anti-trust law, anticorruption rules, or legal regulations and requirements of industry codes in the healthcare sector.

In 2014, we began appointing compliance officers for the various business sectors. In particular, they are responsible for business-specific compliance input and they evaluate sector-specific risks that are incorporated in the design of the Compliance program.

A further focal area of the Compliance program is ensuring legally and ethically correct dealings with medical professionals and adhering to the transparency requirements. Since October 2013, the Group Compliance Officer has agreed extensive measures with the affected areas of the company in order to establish an internal framework of rules as well as the corresponding approval and documentation processes that ensure correct publication. We of course also ensure compliance with the respectively valid data protection regulations.

The role of the Group Compliance Officer is reflected in the subsidiaries, which ensure via country representatives that compliance measures are implemented in the countries. Since 2013, Compliance tasks in the countries and on a regional basis have largely been performed by full-time compliance officers. As a result, a higher level of compliance expertise is based locally and the increasing tasks in all business sectors are taken into account. At the same time, the management structure was streamlined and the reporting lines for the countries were consolidated regionally. Since the end of 2016, the compliance officers in the countries have been reporting to the dedicated compliance officers for the respective business sectors (Healthcare, Life Science and Performance Materials). A separate responsibility was also created for Group functions. Regular regional compliance meetings are held to promote the exchange of information within the Compliance organization.

Newcomer training seminars were introduced in 2010 for newly appointed compliance officers. These seminars serve to build up compliance expertise and strengthen cooperation within the Compliance organization. This Group-wide network is used to steer the global compliance program.

Within the Group Compliance function in Darmstadt, a team is occupied with continuously further developing the compliance program and shaping company-internal compliance projects. In addition, the Compliance organization is involved in the integration of new businesses and in the event of potential divestments and acquisitions. It is also part of the relevant due diligence processes and the subsequent integration of a company.

Within the scope of the global compliance program, a high degree of importance is attached to regular compliance seminars of the Merck Compliance Training Plan, which are conducted as Web-based training courses and classroom sessions. By presenting various training topics, particularly on the Code of Conduct, corruption, antitrust and competition law as well as healthcare compliance and data privacy, they serve to sensitize employees and management to the consequences of compliance violations and to show ways of avoiding them. Since Merck set up a central SpeakUp line, employees and certain business partners have been able to report compliance violations by telephone or via a Web-based application in their respective national language. The SpeakUp line is available 24 hours a day, free of charge. Case numbers enable anonymous, two-way communication. The reports received are individually reviewed. If a compliance violation exists, corresponding corrective action is taken based on concrete action plans. If necessary, disciplinary measures are taken. These can range from a simple warning up to the dismissal of the employee who violated a compliance rule. In 2010, Merck set up a Compliance Case Committee to guide these processes. The Compliance Case Committee consists of leaders from various Group governance functions; they are involved in reviewing compliance violations and introducing counter­measures. The joint work in the Compliance Case Committee enables processes between the various Group functions to be optimally co­ordinated and designed efficiently.

Further significant elements of the Compliance program include requirements on locally identifying and assessing risks and reporting these, both within the subsidiary abroad and to the Group functions. Group Compliance regularly reviews and assesses the implementation status of the Compliance program at the subsidiaries abroad. In cooperation with Group Internal Auditing, the Compliance Office ­regularly reviews the implementation of Group-wide compliance measures at the subsidiaries abroad. The audits regularly focus on the local compliance structure, the compliance measures taken, as well as the existence of corresponding compliance guidelines and processes.

The Compliance Office reports regularly to the Executive Board and the Supervisory Board, informing them of the status of compliance activities (including training status), compliance risks and serious compliance violations.

The Executive Board informs the supervisory bodies at least once a year about the key compliance issues.

Risk and opportunity management

The Executive Board, the Supervisory Board and the Finance Committee are regularly informed about the current risk portfolio of the Group and the individual companies. More detailed information can be found in the Report on Risks and Opportunities on page 140 et seq.

Avoidance of conflicts of interest

Within the framework of their work, all Executive Board and Supervisory Board members of Merck KGaA are exclusively committed to the interests of the company and neither pursue personal interests nor grant unjustified advantages to third parties.

Before an Executive Board member takes on honorary offices, board positions or other sideline activities, this must be approved by the Personnel Committee of the Board of Partners of E. Merck KG. The Chairman of the Executive Board, Stefan Oschmann, and the Chief Financial Officer, Marcus Kuhnert, are both members of the Executive Board of E. Merck KG. This does not, however, create conflicts of interest.

In its report to the General Meeting, the Supervisory Board discloses any conflicts of interest involving its members and how they were dealt with. Consultancy agreements as well as other service and work contracts of a Supervisory Board member with Merck require the approval of the Supervisory Board. In fiscal 2017, there were neither conflicts of interest nor consultancy agreements or other service or work contracts with Merck KGaA involving Supervisory Board members.

Adherence to environmental and safety standards

At Merck, closed-loop thinking guides the way in which we address environmental concerns and environmental protection issues. To this end, we integrate precautionary measures into our planning processes. Our Environment, Health and Safety Policy with its principles and strategies implements the guidelines formulated by the national and international associations of the chemical industry in the Responsible Care guidelines. The Responsible Care Global Charter developed by the International Council of Chemical Associations (ICCA) in 2006 puts even more emphasis than before on overall responsibility for products, supply chains and the community. Merck signed this expanded version of Responsible Care for the entire Group in February 2007. In addition, Merck was one of the first companies in 2014 to sign the new version of the Responsible Care Global Charter, which is currently being rolled out by Merck internationally. We report our ecological, economic and social performance transparently in accordance with the internationally recognized principles of the Global Reporting Initiative (GRI), taking into account the requirements of the German Sustainability Code and the principles of the UN Global Compact.

One of our major climate protection objectives is to achieve a 20% reduction in our greenhouse gas emissions by 2020 measured against the 2006 baseline.

Many guidelines specify how the sites and employees of the Merck Group are to observe the principles in their daily work. The Group function Environment, Health, Safety, Security & Quality steers these global activities and ensures compliance with regulatory requirements, standards and business needs throughout the entire Group. In this way, Group-wide risks are minimized and continuous improvement is promoted in the areas of Environment, Health, Safety, Security and Quality. Corporate Responsibility reports are also published at regular intervals.

Procedures of the Executive Board, Supervisory Board, Board of Partners and its Committees

Members of the Executive Board of Merck KGaA

Information on memberships of statutory supervisory boards and comparable German and foreign supervisory bodies (section 285 No. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).

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Member Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
Stefan Oschmann
Munich, Chairman
no board positions
Udit Batra
Wellesley, Massachusetts (USA), CEO Life Science
(b) – EMD Millipore Corporation, Billerica, Massachusetts (USA) (President)
Kai Beckmann
Darmstadt, CEO Performance Materials
(a) – Bundesdruckerei GmbH, Berlin
Walter Galinat
Eppertshausen, Member of the Executive Board
no board positions
Belén Garijo
Frankfurt am Main, CEO Healthcare
(b) – Banco Bilbao Vizcaya Argentaria S.A., Bilbao, Spain
– L’Oréal S.A., Clichy, France
Marcus Kuhnert
Königstein, Chief Financial Officer
no board positions

The general partners with no equity interest (Executive Board) manage the business activities in accordance with the laws, the Articles of Association and the rules of procedure. They are appointed by E. Merck KG in accordance with the consent of a simple majority of the other general partners. The members of the Executive Board are jointly responsible for the entire management of the company. Certain tasks are assigned to individual Executive Board members based on a responsibility distribution plan. Each Executive Board member promptly informs the other members of any important actions or operations in his respective business area. The Executive Board is responsible for preparing the annual financial statements of Merck KGaA and of the Merck Group as well as for approving the quarterly and half-year financial statements of the Merck Group. In addition, the Executive Board ensures that all legal provisions, official regulations and the company’s internal policies are abided by, and works to achieve compliance with them by all the companies of the Merck Group. A Group-wide guideline defines in detail which transactions require prior Executive Board approval.

The Executive Board provides the Supervisory Board with regular, up-to-date and comprehensive reports about all company-relevant issues concerning strategy, planning, business developments, the risk situation, risk management and compliance. The rules of procedure of the Executive Board and of the Supervisory Board as well as a Supervisory Board resolution regulate further details on the information and reporting duties of the Executive Board vis-à-vis the Supervisory Board.

The Executive Board informs the Board of Partners and the Supervisory Board at least quarterly of the progress of business and the situation of the company. In addition, the Executive Board informs the aforementioned boards at least annually of the company’s annual plans and strategic considerations.

The Executive Board passes its resolutions in meetings that are normally held once a month.

Supervisory Board

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Member Memberships of
(a) other statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
Wolfgang Büchele
Munich, Managing Director M+W Group GmbH, Stuttgart
(b)
– E. Merck KG, Darmstadt1
– Kemira Oyj, Helsinki, Finland
Michael Fletterich
Gernsheim, Chairman of the Works Council of Merck KGaA Darmstadt/Gernsheim, Vice Chairman
no board positions
Crocifissa Attardo
Darmstadt, Full-time member of the Works Council of Merck KGaA Darmstadt/Gernsheim
b) – Merck BKK (rotating chairperson)
Mechthild Auge
Wehrheim, Full-time member of the Works Council of Merck KGaA Darmstadt/Gernsheim
no board positions
Gabriele Eismann
Seeheim-Jugenheim, Senior Operational Product Manager
no board positions
Edeltraud Glänzer
Hannover, Vice Chairperson of IG Bergbau, Chemie, Energie (IG BCE), Hannover
(a) – B. Braun Melsungen AG, Melsungen
– Evonik Industries AG, Essen (Vice Chairperson)
Michaela Freifrau von Glenck
Zurich, Switzerland, Retired teacher
no board positions
Siegfried Karjetta2
Darmstadt, Physician
(b) – E. Merck KG, Darmstadt1
Albrecht Merck
Schriesheim, Commercial Director of the Castel Peter Winery, Bad Dürkheim
(b) – E. Merck KG, Darmstadt1
Dietmar Oeter
Seeheim-Jugenheim, Vice President Corporate Quality Assurance
no board positions
Alexander Putz
Michelstadt, Full-time member of the Works Council of Merck KGaA Darmstadt / Gernsheim
no board positions
Helga Rübsamen-Schaeff
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective Cures GmbH, Wuppertal
(a) – 4SC AG, Martinsried
– Supervisory Board of Bonn University Hospital (b) – E. Merck KG, Darmstadt1
Gregor Schulz
Umkirch, Pediatrician
(b) – E. Merck KG, Darmstadt1
Theo Siegert
Düsseldorf, Managing Partner of de Haen-Carstanjen & Söhne, Düsseldorf
(a) – E.ON SE, Düsseldorf – Henkel AG & Co KGaA, Düsseldorf (b) – E. Merck KG, Darmstadt1
– DKSH Holding Ltd., Zurich, Switzerland
Tobias Thelen2
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG, Munich
(b) – E. Merck KG, Darmstadt1
Veit Ulshöfer
Sachsenheim, Global Head of Research and Bioinformatics
no board positions
1
Internal board position.
2
Members appointed according to Article 6 (5) of the Articles of Association.

The Supervisory Board performs a monitoring function. It supervises the management of the company by the Executive Board. In comparison with the supervisory board of a German stock corporation, the role of the supervisory board of a corporation with general partners (KGaA) is limited. This is due to the fact that the members of the Executive Board are personally liable partners and therefore are themselves responsible for the management of the company. In particular, the Supervisory Board is not responsible for appointing and dismissing general partners or for regulating the terms and conditions of their contracts. This is the responsibility of E. Merck KG. Nor does the Supervisory Board have the authority to issue rules of procedure for the Executive Board or a catalogue of business transactions requiring approval. This authority likewise belongs to E. Merck KG (Article 13 (3) sentence 1 and (4) sentence 1 of the Articles of Association). However, the fact that the Supervisory Board has no possibilities to directly influence the Executive Board restricts neither its information rights nor audit duties.

The Supervisory Board must monitor the Executive Board in terms of legality, regularity, usefulness, and economic efficiency. In particular, the Supervisory Board has the duty to examine the reports provided by the Executive Board. This includes regular reports on the intended business policy, as well as other fundamental issues pertaining to corporate planning, especially financial, investment and HR planning; the profitability of the Merck Group; the progress of business; the risk situation; risk management (including compliance); and the internal auditing system. In addition, by means of consultation with the Executive Board, it creates the basis for supervision of the management of the company by the Supervisory Board according to section 111 (1) of the German Stock Corporation Act (AktG).

The Supervisory Board examines the annual financial state- ments as well as the consolidated financial statements and the combined management report, taking into account in each case the reports of the auditor. Moreover, the Supervisory Board discusses the quarterly releases and the half-year financial report, taking into account in the latter case the report of the auditor on the audit review of the abridged financial statements and the interim management report of the Group. The adoption of the annual financial statements is not the responsibility of the Supervisory Board, but of the General Meeting. The Supervisory Board normally meets four times a year. Further meetings may be convened if requested by a member of either the Supervisory Board or the Executive Board. As a rule, resolutions of the Supervisory Board are passed at meetings. At the instruction of the chairman, in exceptional cases a resolution may be passed by other means, details of which are given in the rules of procedure.

The members of the Board of Partners of E. Merck KG and of the Supervisory Board may be convened to a joint meeting if so agreed by the chairmen of the two boards.

The rules of procedure prescribe that the Supervisory Board may form committees as and when necessary. The Supervisory Board has formed a Nomination Committee comprising three shareholder representatives. Its members are Albrecht Merck, Wolfgang Büchele and Theo Siegert. The Nomination Committee is responsible for proposing to the Supervisory Board suitable candidates for its proposal to the Annual General Meeting. Apart from legal requirements and the ­recommendations of the German Corporate Governance Code, the ‟Objectives of the Supervisory Board with respect to its composition”, ‟Profile of skills and expertise” and the ‟Diversity Policy” are to be taken into consideration as well. Owing to the aforementioned limited authority, and since a corresponding need has not yet arisen, the Supervisory Board currently has no further committees.

The German Stock Corporation Act prescribes that the Supervisory Board of a publicly listed company must have at least one member who has professional expertise in accounting or auditing. Theo Siegert satisfies these requirements and is furthermore the Chairman of the Finance Committee of the Board of Partners of E. Merck KG.

Board of Partners of E. Merck KG

Some of the responsibilities that lie with the supervisory board of a German stock corporation are fulfilled at Merck by E. Merck KG. This applies primarily to the Board of Partners of E. Merck KG. Therefore, the Board of Partners and the composition and procedures of its committees are described in the following.

The Board of Partners has nine members.

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Member Memberships of
(a) other statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
Johannes Baillou
Vienna, Austria, Vice Chairman of the Executive Board and General Partner of E. Merck KG, Chairman
no board positions
Frank Stangenberg-Haverkamp
Darmstadt, Chairman of the Executive Board and General Partner of E. Merck KG, Vice Chairman
(a) – Fortas AG, Rösrath (Chairman)
(b) – Oras Invest Ltd, Helsinki, Finland
– Travel Asset Group Ltd., London, United Kingdom (Chairman)
Wolfgang Büchele
Munich, Managing Director of M+V Group GmbH, Stuttgart
(a) – Merck KGaA, Darmstadt
(b) – Kemira Oyj, Helsinki, Finland
Siegfried Karjetta
Darmstadt, Physician
(a) – Merck KGaA, Darmstadt
Albrecht Merck
Schriesheim, Commercial Director of the Castel Peter Winery, Bad Dürkheim
(a) – Merck KGaA, Darmstadt
Helga Rübsamen-Schaeff
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective Cures GmbH, Wuppertal
(a) – Merck KGaA, Darmstadt
– 4SC AG, Martinsried
– Supervisory Board of Bonn University Hospital
Gregor Schulz
Umkirch, Pediatrician
(a) – Merck KGaA, Darmstadt
Theo Siegert
Düsseldorf, Managing Partner of de Haen-Carstanjen & Söhne, Düsseldorf
(a) – Merck KGaA, Darmstadt
– E.ON SE, Düsseldorf
– Henkel AG & Co KGaA, Düsseldorf
(b) – DKSH Holding Ltd., Zurich, Switzerland
Tobias Thelen
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG, Munich
(a) – Merck KGaA, Darmstadt

The Board of Partners supervises the Executive Board in its management of the company. It informs itself about the business matters of Merck KGaA, and may inspect and examine the company’s accounts and other business documents, and the assets for this purpose. According to Article 13 (4) of the Articles of Association of Merck KGaA, the Executive Board requires the approval of E. Merck KG for transactions that are beyond the scope of the Group’s ordinary business activities. For such transactions to be approved, approval must first be obtained from the Board of Partners of E. Merck KG. The Board of Partners convenes as and when necessary; however, it normally meets four times a year. The members of the Executive Board of Merck KGaA are invited to all meetings of the Board of Partners, unless the Board of Partners resolves otherwise in individual cases. The members of the Board of Partners may convene a joint meeting with the Supervisory Board of Merck KGaA if so agreed by the chairmen of the two boards.

The Board of Partners may confer the responsibility for individual duties to committees. Currently the Board of Partners has three committees in place: the Personnel Committee, the Finance Committee, and the Research and Development Committee.

Personnel Committee

The Personnel Committee has four members. These are Johannes Baillou (Chairman), Wolfgang Büchele, Theo Siegert, and Frank Stangenberg-­Haverkamp.

The Personnel Committee meets at least twice a year. Further meetings are convened as and when necessary. Meetings of the Personnel Committee are attended by the Chairman of the Executive Board of Merck KGaA unless the Committee decides otherwise. The Personnel Committee is responsible for, among other things, the following decisions concerning members and former members of the Executive Board: contents of and entry into employment contracts and pension contracts, granting of loans and advance payments, changes to the compensation structure and adaptation of compensation, approval for taking on honorary offices, board positions and other sideline activities, as well as division of responsibilities within the Executive Board of Merck KGaA. The Personnel Committee passes its resolutions by a simple majority – in matters concerning the Chairman of the Executive Board unanimity is required. The Chairman of the Committee regularly informs the Board of Partners of its activities.

Finance Committee

The Finance Committee has four members. These are Theo Siegert (Chairman), Johannes Baillou, Wolfgang Büchele, and Tobias Thelen.

The Finance Committee holds at least four meetings a year, at least one of which is a joint meeting with the auditor of Merck KGaA. Further meetings are convened as and when necessary. Meetings of the Finance Committee are attended by the Chief Financial Officer of Merck KGaA. Other members of the Executive Board of Merck KGaA may attend the meetings upon request by the Finance Committee. These meetings regularly include the Chairman of the Executive Board.

The Finance Committee is responsible for, among other things, analyzing and discussing the annual financial statements, the consolidated financial statements and the respective reports of the auditor, as well as the half-year financial report (including the report of the auditors for the audit review of the abridged financial statements and interim management report contained in the half-year report) and the quarterly statements. Moreover, the Finance Committee recommends to the Chairman of the Supervisory Board annual audit focuses for the auditors of the annual financial statements. It also recommends to the Supervisory Board an auditor for the annual financial statements as well as auditors for the audit review of the abridged financial statements and interim management report contained in the half-year financial report for the Supervisory Board’s corresponding suggestion to the General Meeting. In addition, the Finance Committee is concerned with the net assets, financial position, results of operations and liquidity of Merck, as well as accounting, internal auditing, risk management and compliance issues. Upon request of the Board of Partners, the Finance Committee examines investment projects that must be approved by the Board of Partners and provides recommendations pertaining thereto. It passes its resolutions with a simple majority. The Committee Chairman regularly informs the Board of Partners of the activities of the Finance Committee.

Research and Development Committee

The Research and Development Committee has four members. These are Helga Rübsamen-Schaeff (Chairperson), Johannes Baillou, Siegfried Karjetta, and Gregor Schulz.

The Research and Development Committee is convened as and when necessary, but holds at least two meetings a year. Meetings of the Research and Development Committee are attended by members of the Executive Board of Merck KGaA upon request of the Committee. These meetings regularly include the Chairman of the Executive Board as well as the CEO Healthcare, the CEO Life Science and the CEO Performance Materials. The Research and Development Committee is responsible, among other things, for reviewing and discussing the research activities of the Healthcare as well as Life Science/ Performance Materials business sectors. It passes its resolutions with a simple majority. The Chairperson of the Committee reports to the Board of Partners on the insights gained from the meetings held.

Stipulations to promote the ­percentage of management positions held by women pursuant to section 76 (4) and section 111 (5) AktG (German Stock Corporation Act)

Stipulations pursuant to section 76 (4) AktG (target for the percentage of positions held by women on the two upper management levels below the Executive Board)

We foster diversity within the company, which also includes ensuring a balance of genders in management. To this end, we pursue both voluntary and statutory objectives, and we work continuously and sustainably on achieving them.

On December 15, 2016, the Executive Board of Merck KGaA set the new targets for the percentage of positions held by women on the two management levels below the Executive Board as follows:

  • First management level below the Executive Board: 21% of positions held by women
  • Second management level below the Executive Board: 26% of positions held by women

The deadline set for reaching the new targets is December 31, 2021.

The first management level comprises all managers of Merck KGaA with a direct reporting line to the Executive Board of Merck KGaA or who belong to the global executive group. The second management level comprises all managers of Merck KGaA who report to managers with a direct reporting line to the Executive Board of Merck KGaA or the global executive group.

In addition, as a global company with correspondingly aligned global (leadership) structures, Merck continues to pursue a (voluntary) global target of maintaining the proportion of leadership positions held by women (managers, experts and project managers in roles 4 and above1) at a stable level of 30% in the period until 2021.

1 Merck has changed its employee grading from Global Grades to a role-based approach. The relevant group continues to represent approximately 6% of the entire workforce; see the section entitled ‟Diversity and Management” on page 97 et seq.).

Stipulations pursuant to section 111 (5) AktG (target for the percentage of positions on the Supervisory Board held by women)

Pursuant to section 111 (5) AktG, the Supervisory Board of companies that are listed or subject to co-determination stipulates binding targets for the percentage of positions on the Supervisory Board and on the Management Board held by women. However, for Merck KGaA, stipulations pursuant to section 111 (5) AktG need not be set for the following reasons:

The statutory target of 30% pursuant to section 96 (2) AktG is already applied on the Supervisory Board of Merck KGaA. This eliminates the obligation to stipulate a further target for the percentage of positions held by women on the Supervisory Board (see section 111 (5) sentence 5 AktG).

The obligation to stipulate a target for the percentage of positions held by women on the Management Board pursuant to section 111 (5) AktG is not applicable to the legal form of a corporation with general partners (Kommanditgesellschaft auf Aktien) as a corporation with general partners neither has a management board comparable to that of a stock corporation nor does the Supervisory Board have personnel authority over the Executive Board. Instead, the Executive Board consists of personally liable general partners (see also page 192 et seq. for the description of Supervisory Board procedures).

Diversity policy pursuant to section 289f (2) No. 6 of the German ­Commercial Code

Merck is pursuing a Group-wide, global diversity program. At Merck, diversity stands for a culture of inclusion, mutual esteem and respect. To demonstrate this open and dynamic company culture, we promote diversity throughout the Group – and do so at all levels, including the Executive Board and Supervisory Board.

We believe that our innovative strength is driven by a diverse workforce and that an inclusive working environment sustainably contributes to entrepreneurial success. That is why we are furthering a culture of diversity independent of age, gender, disability, ethnic or cultural background, religion, industry experience, and educational background. The diversity policy to strategically steer the topics of diversity and inclusion at Merck thus focuses on the following key criteria:

Our Group-wide diversity policy encompasses both voluntary as well as legally defined objectives that we continuously and sustainably work on to achieve.

In this context, it should be noted that with respect to the Executive Board of Merck KGaA, many rules can only be applied correspondingly. This is because the Executive Board comprises personally liable general partners of Merck KGaA and is not a management board with employed members of a corporate body (for details, please also see the ‟Joint Report of the Executive Board and the Supervisory Board” page 170 et seq.). In addition to the aspects presented in the following, reference is made to the objectives of the Supervisory Board with respect to its composition and the competency profile of the Supervisory Board (see the information on the ‟Objectives of the Supervisory Board with respect to its composition and profile of skills and expertise” on page 200 et seq.). The statements made there are part of the diversity policy for the Supervisory Board presented here.

Age

Our boards are to have a balanced age structure. This permits future-­oriented and consistent succession planning and is a key element of sustainable company management and monitoring. Our diversity policy aims for an age range of at least ten years between the youngest and the oldest member of the respective board.

In their current composition, both boards meet this objective. The age range of the Executive Board is 15 years; that of the Supervisory Board is 30 years.

In addition, maximum age limits apply to both boards (for the Supervisory Board please see the information regarding the ‟Objectives of the Supervisory Board with respect to its composition and profile of skills and expertise” on page 200 et seq.). For Executive Board members, a maximum age of 70 applies.

Gender

Gender diversity also plays a crucial role since it enables us to benefit from a larger talent pool, and allows us as a company to develop a better understanding of important customer groups. We have set ourselves the (global) strategic objective of maintaining the proportion of women in leadership positions (managers, experts and project managers in role 4 and higher1) at a stable level of 30% by 2021 (please also refer to the description on page 97 under ‟Diversity and Management”).

Additionally, Merck continues to pursue representation of both genders as an objective for the Executive Board. With Ms. Belén Garijo as CEO Healthcare, at Merck a woman is currently responsible for our largest business sector in terms of sales.

The statutory 30% quota pursuant to section 96 para 2 of the German Stock Corporation Act has already been applied to the Supervisory Board of Merck KGaA. We consider further targets to be dispensable here.

Internationality and global mindset

As a global science and technology company with key sales markets on five continents and around 50,000 employees at sites in 662 countries, internationality and a global mindset are key success ­factors for us.

According to our diversity policy, the Executive Board’s internationality derives from leadership experience or national origin, relative to our key sales markets or those locations that are organizationally and culturally relevant to our employee development efforts. For both criteria, Europe, North America and Asia-Pacific are currently the key regions.

The Executive Board meets this objective with management experience in the named regions, for instance in the following countries: France, Spain, Switzerland, the United States, Singapore, India, Taiwan, Malaysia, and Australia. One-third of the Executive Board members are not German citizens.

Management experience

The key prerequisites for high-performance leadership teams are both the diversity of the individual competency profiles and a balance between a Group-internal and external management perspective. Therefore, as a whole the Executive Board must have in-depth knowledge and experience in the following key areas of importance to the company: Strategy & Planning, Finance & Accounting, Sales & Operations, Human Resources, Legal & Compliance as well as Information Technology. In addition, for the composition of the Executive Board it is important to ensure a good balance of members from within and outside the company. Our diversity policy seeks to derive inspiration and innovation from outside the company and to identify the latest trends of relevance to the core businesses of the company while ensuring the sustainability and continuity in line with our corporate culture. We have therefore set ourselves the global objective of filling two-thirds of our leadership positions with candidates from within the company.

The current Executive Board meets both the aforementioned objectives: All required aspects of the competency profile are covered by at least one member of the Executive Board. Likewise, four members of the Executive Board possess multiple years of experience working within the Merck Group prior to their appointment to the Executive Board.

Industry experience

To efficiently lead and manage the Group, the Executive Board must have in-depth knowledge of the key industries and business sectors that the company operates in. In accordance with the diversity policy, there should be at least one member of the Executive Board with in-depth expertise of Healthcare, Life Science or Performance Materials, respectively.

Currently, the Executive Board has the full breadth of the sector-­specific experience required.

Educational background

In order to translate the tremendous innovative potential of a science and technology company into sustainable business success, interdisciplinary educational backgrounds are a key element of our diversity policy both for the Executive Board and for the Supervisory Board. The current composition of both boards illustrates this interdisciplinary aspect to a very high degree.

The members of the Executive Board bring together expertise in the fields of veterinary medicine, industrial engineering and management as well as medicine (pharmacology) and information technology, among others. In addition, one member of the Executive Board joined Merck as an apprentice. More than 80% of the members of the Executive Board hold doctorates from universities either in Germany or abroad.

Moreover, the members of the Supervisory Board have a background in one or more the following fields of specialization: chemistry, biochemistry, nutrition, human medicine, business administration and economics, education, and physics, among others.

More than one-half of our Supervisory Board members are university graduates and hold doctorates.

1 Merck has changed its role architecture from Global Grades to a role-based approach.
2 Merck also has employees at sites which are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the financial section of this report.