Corporate Governance Statement 2020

The Corporate Governance Statement issued pursuant to Section 289f and Section 315d of the German Commercial Code (Handelsgesetzbuch – HGB) includes the Declaration of Conformity in respect of the German Corporate Governance Code, relevant details of corporate governance practices that go beyond the legal requirements, and a description of the composition and procedural methods adopted by the Management Board, the Supervisory Board, and the Committees of the Supervisory Board. This corporate governance statement is summarized for ElringKlinger AG and the Group.

Declaration of Conformity with the German Corporate Governance Code by the Supervisory Board and the Management Board pursuant to Section 161 of the German Stock Corporation Act (Aktiengesetz – AktG)

Pursuant to Section 161 of the German Stock Corporation Act (Aktiengesetz – AktG), the supervisory board and management board of exchange-listed stock corporations are obliged to issue an annual declaration stating that the recommendations of the "Code of the Government Commission on German Corporate Governance" have been and will continue to be complied with and, if applicable, specifying which recommendations have not been or will not be applied. Any departures from the recommendations must be explained.

The Management Board and Supervisory Board of ElringKlinger AG hereby issue a Declaration of Conformity pursuant to Section 161 AktG, stating that the Company has complied with, currently complies with and will in future comply with the recommendations of the "Government Commission German Corporate Governance Code" in the version dated December 16th, 2019, with the following exceptions.

B.5: No age limit has been set for members of the Management Board.
There is no general age limit for Management Board members. The main focus for ElringKlinger is on the qualifications as well as the experience required by candidates to be appointed to the board. Given the provisions set out in the German General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz – AGG), which does not apply directly to this case but at the very least provides a basis for analogous application, the company is of the opinion that the approach of specifying an age limit is inappropriate.

C.2: No age limit has been set for members of the Supervisory Board.
No general age limit has been set for members of the Supervisory Board, as the expertise of the individual members is considered an overriding priority. Within this context, experience in particular is seen as an integral element. Given the provisions set out in the German General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz – AGG), which does not apply directly to this case but at the very least provides a basis for analogous application, the company is of the opinion that the approach of specifying an age limit is inappropriate.

Relevant details of corporate governance practices

Business at ElringKlinger is based on and guided by statutory requirements and the regulations arising from the German Corporate Governance Code, as stated in the Declaration of Conformity issued by ElringKlinger. As part of their responsibilities, the Management Board and Supervisory Board are obliged to ensure compliance with these requirements. ElringKlinger has also adopted more specific internal standards and guidelines, which are outlined below.

Vision and mission
ElringKlinger has developed a vision and a mission statement for the company that define the Group's goals and fundamental values. The company's actions, and the way it treats its customers, staff and suppliers, must be geared fully towards these goals and values, which also serve as a benchmark. The mission statement revolves around the concepts of loyalty and responsibility, reliability, courage, appreciation and cost and quality leadership. The vision and mission statement can be viewed online at www.elringklinger.com.

Code of ethics and code of conduct
ElringKlinger also abides by corporate codes of ethics and conduct derived from its vision and mission statement. These codes can be found online at www.elringklinger.com. The Management Board is accountable for the implementation of these codes, whose principles form an integral part of the company's internal regulations and guidelines. ElringKlinger’s corporate code of ethics includes explicit pledges to uphold human rights and specific social standards, prohibit discrimination and corruption, and act on its responsibility for the environment. The code of conduct, which follows on from the code of ethics, sets out these principles in greater detail and provides further elaboration. The code of conduct also outlines the fundamentals of the compliance system deployed by the ElringKlinger Group. In addition to defining precise requirements for employees, the code of conduct appeals to the sense of responsibility of each individual not to act in a manner that may damage ElringKlinger's corporate values and, instead, to actively protect and promote them.

Management principles
ElringKlinger's management principles shall play a major role in shaping working relationships. Clarity and openness, respect, effectiveness, innovation and training are key elements of these principles. The leadership principles are available online at www.elringklinger.com.

Quality and environmental guidelines
The quality and environmental guidelines for suppliers of the ElringKlinger Group ensure that the company’s products always meet the highest standards of quality and that resources are treated carefully and sparingly. The guidelines are published online at www.elringklinger.com.

In addition to the above-mentioned principles and guidelines, there are further regulations, instructions and rules precisely stipulating how each division should implement both the legal requirements and other, self-imposed standards insofar as this is relevant. This particularly applies to complying with environmental standards, avoiding hazards and preventing corruption.

Procedural methods of the Management Board and Supervisory Board

Management Board
The Management Board directs the company and conducts its business. The Management Board consists of four members with one chairperson. The Management Board's tasks are divided into areas of responsibility according to functional criteria, which in turn comprise the so-called Business Units (operating units with responsibilities for revenue) and the so-called Corporate Units (supporting units). Area of Responsibility 1, directed by the Chairman of the Management Board, Dr. Stefan Wolf, consists of the Aftermarket business unit, the Original Equipment Sales, Human Resources, Legal & Compliance, Global Strategy, M&A & Innovations, Marketing & Communications, and Strategic Communications corporate units, in addition to group subsidiaries and investees of ElringKlinger AG. Theo Becker oversees Area of Responsibility 2, encompassing the Battery Technology & E-Mobility, and Drivetrain Technology business units with the respective plants and investees assigned to these units as well as the Tool Shop/Technology, Product Risk Management, Purchasing, and Real Estate & Facility Management corporate units. Within Area of Responsibility 3, Thomas Jessulat directs the Finance, Information Technology and Supply Chain Management corporate units. Reiner Drews oversees Area of Responsibility 4, consisting of the Lightweight/Elastomer Technology, Metal Sealing Systems & Drivetrain Components and Shielding Technology business units and the Quality & Environmental Management and Production corporate units as well as the domestic plants of the Original Equipment segment.

Under the by-laws defined by the Management Board, each member of the Management Board directs his area of responsibility independently. Irrespective of this, the Management Board bears overall responsibility for the management of the company. Fundamental decisions are made jointly or are presented to the Management Board as a whole for the purpose of its decision-making. Management Board meetings are to be held at least twice a month. Decisions are to be made by mutual agreement as far as possible. If this is not possible, the decision is that of the majority of the Management Board members. In the case of a majority decision, the chairperson of the Supervisory Board is to be informed of this situation as well as the underlying circumstances. The chair is responsible for conducting the Management Board meetings and reporting to the Supervisory Board. The by-laws set out in detail the Management Board’s reporting requirement to the Supervisory Board in particular regarding the risk situation, risk management and compliance. Under the provisions of the by-laws, the prior agreement of the Supervisory Board is required for important business such as acquisitions, property transactions or divestments. Beyond this, the Supervisory Board is free to decide that further deals are dependent on its agreement, taking into account the allocation of rights and duties according to stock corporation law. In addition, the by-laws dictate the approach to be taken in the event of conflicts of interest, absence of Management Board members and the taking on of further offices, which always requires the agreement of the chair of the Supervisory Board.

Supervisory Board
The Supervisory Board monitors the managerial actions of the Management Board and advises it in particular on issues relating to the strategic direction to be taken by the company. It must be involved in decisions that are fundamental for the company. The Supervisory Board is composed of six shareholder representatives and six employee representatives in accordance with the Codetermination Act (Mitbestimmungsgesetz). The Supervisory Board meets at least once a quarter so that the Management Board can report on business development and significant transactions. To aid preparation, the Management Board shall provide the members of the Supervisory Board with full written information on each of the agenda items in good time prior to the arranged meeting. If necessary, the Supervisory Board shall convene without the Management Board being present. The Supervisory Board shall be convened whenever the Management Board or a member of the Supervisory Board has good cause to request this. Furthermore, the Supervisory Board chairperson remains in regular contact with the Management Board. At the close of the financial year, the Supervisory Board undertakes an efficiency audit regarding its activities by means of a questionnaire. The results are evaluated and discussed.

In accordance with the provisions of the Articles of Association of ElringKlinger AG, the Rules of Procedure of the Supervisory Board define the election of the Chairman and the Deputy Chairman. They contain provisions on how Supervisory Board meetings shall be conducted and define the convening and quorum of the Supervisory Board. Supervisory Board decisions are decided by simple majority. In urgent cases, they may be made by telephone, in writing, or by e-mail, provided that no member of the Supervisory Board objects to the procedure. The Management Board members participate in the Supervisory Board meetings if the Supervisory Board does not make other arrangements on an individual basis. Minutes are to be kept of the Supervisory Board’s meetings.

Committees of the Supervisory Board
From its members, the Supervisory Board has formed an Audit Committee, a Personnel Committee, a Nomination Committee, and – pursuant to the provisions set out for codetermined entities – a Mediation Committee.

The Audit Committee is made up of Mr. Diez, Mr. Eberhardt, Mr. Merch and Mr. Strauß. The chair is held by Mr. Strauß. The Supervisory Board determines the composition of the Audit Committee in accordance with the terms of reference of the Audit Committee. Within this context, the chairperson of the committee shall have specialist knowledge and experience in the application of accounting principles and internal control processes. He shall have been independent of the company, the Management Board, and any controlling shareholder and, in particular, shall not have been a member of the Management Board of ElringKlinger AG during the last five years. The Audit Committee convenes at least twice per year, or more frequently if required. Regulations with regard to convening the Audit Committee and passing resolutions therein are largely comparable to those defined within the terms of reference of the Supervisory Board. For a quorum to be formed, all committee members must participate in the act of passing a resolution. The duties of the Audit Committee are defined more closely by the terms of reference. Under these terms, the Audit Committee monitors the financial accounting and reporting and prepares resolutions related thereto for subsequent discussion by the Supervisory Board. It analyzes the internal control system, the risk management system, the compliance system, and the efficiency of the internal audit function. It also monitors compliance with the German Corporate Governance Code and the work of the auditor. For this purpose, the auditor is required to report to the Audit Committee on the audit itself, the procedures of the audit and its focal points, in addition to any findings it makes. Furthermore, he monitors the independence of the auditor and deals with additional services provided by the audit firm, the definition of auditing focal points, and the negotiation of fees. The Audit Committee is responsible for preparing the audit of the annual financial statements of ElringKlinger AG, the consolidated financial statements, the combined management report of the company and the Group, and the audit report relating to the separate and consolidated financial statements to be performed by the Supervisory Board and submits recommendations.

The Personnel Committee is currently made up of three members. These are Mr. Eberhardt, who holds the Chair of this committee, Mr. Siegers and Mrs. Sons. The structure, procedures and duties are defined within the terms of reference. The Supervisory Board is responsible for determining the appointment and chairmanship of the Personnel Committee. The chairperson shall be independent of the company and the Management Board. The procedures to be applied with regard to convening the Personnel Committee, passing resolutions and forming a quorum are equivalent to those defined for the Audit Committee. Personnel Committee meetings are convened as required. The Personnel Committee is responsible for preparing appointments to the Management Board by selecting and recommending suitable candidates as Management Board members, drawing up suggestions with regard to the structure of the employment contract and compensation, concluding contracts of employment with the approval of the Chairman of the Personnel Committee and the Supervisory Board, conducting meetings with directors, preparing extensions to contracts and reviewing Management Board compensation on a regular basis, which also includes submitting recommendations to the Supervisory Board with regard to the adjustment of compensation levels.

The Nomination Committee was formed for the first time in 2020. Its members are Mr. Eberhardt – also its chairperson – and Mr. Strauß. The task of the Nomination Committee is to make proposals in respect of suitable candidates for the election of shareholder representatives to the Supervisory Board.

The Mediation Committee, the formation and composition of which conforms with applicable regulations under the German Codetermination Act, essentially comprises four members. They include the ex-officio members Mr. Eberhardt and Mr. Siegers as Chairman and Deputy Chairman of the Supervisory Board, as well as Mrs. Monteiro Munz and Mrs. Sons. The sole duty of the Mediation Committee is to submit to the full Supervisory Board recommendations for the appointment of Management Board members if the full Supervisory Board is unable to agree on a candidate with the requisite majority.

Independent shareholder representatives on the Supervisory Board
According to the assessment by the shareholder representatives of the Supervisory Board, the following members of the Supervisory Board are to be considered independent of the Management Board and the company within the meaning of the German Corporate Governance Code: Mr. Eberhardt, Ms. Forst, Mr. Kraut, Mr. Merch, and Ms. Sons. With the exception of Mr. Eberhardt, the aforementioned Supervisory Board members are also independent of the controlling shareholder. This corresponds to a share of five-sixths and two-thirds respectively of the shareholder representatives of the Supervisory Board and is considered appropriate.

Target figures for filling management positions, diversity and competences, succession planning

The Supervisory Board has agreed a target figure of 0% in respect of the proportion of women appointed to the Management Board, taking into account the current term of Management Board appointments. Thus, Supervisory Board has not set binding quotas with regard to specific groups of persons. In the case of a comparatively small Management Board, such as that of ElringKlinger AG, it is instead considered to be in the interest of the company to retain the greatest possible flexibility in this respect. The Management Board has determined target figures of 10% and 15% respectively for the first and second management level below the Management Board; they are to be achieved by June 30, 2022. Irrespective of the attainment of its targets and the definition of target figures, ElringKlinger is committed to steadily increasing the percentage of women appointed to executive and specialist positions. One of the essential prerequisites is that women with relevant qualifications can be attracted for such positions and that their skills can be developed accordingly. ElringKlinger AG will report on the implementation of its target figures in accordance with statutory provisions Alongside its efforts to steadily increase the proportion of women in management positions, ElringKlinger's aim is to reflect the diversity of an international Group even more effectively when filling and developing management positions. To this end, existing development programs were expanded, with suitable employees from all regions in which ElringKlinger operates being included in appropriate programs. The composition of the Supervisory Board in respect of male and female members was fully compliant with statutory provisions in the reporting period.

The company does not yet have a formal definition of a diversity concept and competence profile in respect of the Supervisory Board and the Management Board. Nevertheless, when appointing members to the Management Board and proposing candidates for election to the Supervisory Board, the Supervisory Board ensures that the personal, professional, and strategic competences required by the company as well as the necessary experience are represented on both boards to the largest extent possible. In this respect, not only the competence and the experience-related background of the respective person intended or proposed for a certain function shall be considered but also to a particular extent the circumstances of how the Management Board and the Supervisory Board as a whole are composed so that they can meet the different requirements for the management or supervision of the company in all its facets. The Supervisory Board therefore ensures that diversity of skills and experience is appropriately represented within the boards. In this respect, the focus is not only on requisite industry-related experience but also on knowledge of the various international markets as well as different professional and personal biographies. These criteria were applied in particular to the proposals for the election of shareholder representatives to the Supervisory Board by the Annual General Meeting in the 2020 financial year. Furthermore, the Supervisory Board has set itself the goal of specifying the aforementioned criteria and competences in a uniform document.

The criteria and competences outlined above form the basis for long-term succession planning as regards the filling of Management Board positions by the Supervisory Board. This includes planning in good time when which board functions are to be newly filled and with which areas of responsibility. Strategic developments relating to the company must be taken into account, particularly with regard to the competence profile. ElringKlinger has always endeavored to fill Management Board positions with successors from within the company. This requires that potential candidates are identified in good time, fostered, and developed and prepared through various functions at home and abroad. This does not mean, however, that internal candidates would be afforded a priority status as a matter of principle. A key factor in this respect is also which function shall be filled with which requirements in the future. Regular exchange, especially between the Chairman of the Supervisory Board and the CEO, and the involvement of the Personnel Committee are essential elements of succession planning.