Management & Corporate Governance

Bayer has always placed great importance on responsible corporate governance. This will remain the case in the future. In 2011 the company issued a declaration that it had complied with the recommendations of the German Corporate Governance Code [ 46 ], with one temporary exception. In February 2012 Bayer declared a deviation from the recommendations of the Corporate Governance Code in view of planned changes to the compensation of the Supervisory Board. The recommendation to which the deviation related is, however, no longer included in the new version of the Corporate Governance Code published in May 2012. Bayer is thus again in full compliance with the recommendations. Further information on corporate governance can be found in the Corporate Governance Report of the Annual Report 2011, which provides extensive information on how the Board of Management and Supervisory Board work and on their control mechanisms.

The role of the 20-member Supervisory Board is to oversee and advise the Board of Management. Under the German Codetermination Act, half the members of the Supervisory Board are elected by the stockholders, and half by the company’s employees.

With regard to the compensation of the Board of Management and the Supervisory Board, Bayer complies with the recommendations of the German Corporate Governance Code and German legislation on the appropriateness of the compensation of members of management boards (VorstAG). In 2011 the compensation of the Board of Management basically comprised five components: a fixed annual salary, a short-term incentive award on a yearly basis in relation to a target amount, a long-term incentive award for a four-year period in relation to a target amount, a further long-term compensation component introduced in 2010 involving a grant of virtual Bayer shares subject to a three-year retention period, and a company pension plan conferring pension entitlements that increase with years of service. Remuneration in kind and other benefits are also provided, such as the use of a company car for private purposes or reimbursement of the cost of health screening examinations. The compensation of the Supervisory Board will be based in the future on the provisions of the Articles of Incorporation adopted by the Annual Stockholders’ Meeting on April 27, 2012.

Further information can be found in the Compensation Report of the Annual Report 2011. Information on the provisions of the Articles of Incorporation adopted at the 2012 Annual Stockholders’ Meeting can be found on the internet [ 48 ].

Bayer expects the conduct of every employee to be characterized by integrity at all times. The company does not tolerate any violation of applicable laws, codes of conduct or internal regulations.

In the Corporate Compliance Policy [ 49 ], the Group Management Board outlines the company’s clear commitment to corporate compliance and specifically states that it will forego any business that involves violating these principles. This policy contains commitments to fair competition, integrity in business dealings (i.e. zero tolerance for corruption), the principle of sustainability and product stewardship, the upholding of foreign trade laws and insider trading laws, proper record-keeping and transparent financial accounting, fair and respectful working conditions, and avoidance of all forms of discrimination. Other requirements of the policy include protecting the company’s intellectual property and the legally recognized rights of others, keeping corporate and personal interests separate and cooperating with the authorities.

We updated the Group’s Anti-Corruption Procedure with effect from January 1, 2012. This is designed to help our employees around the world avoid possible corruption problems. In the procedure, we explicitly refer to our LIFE values system and our obligations within the framework of the United Nations Global Compact. The aforementioned principles include responsible marketing. For more information on our guidelines concerning the marketing of medicines, see the Innovation & Product Stewardship chapter.

Each Group company with business operations has at least one Compliance Officer. Some foreign companies have several local compliance functions with clearly defined responsibilities for the different business units within the respective companies. These functions in turn report to the Chief Subgroup Compliance Officers at the Group management companies or to the Group Compliance Officer appointed by the Group Management Board. At least once a year the Group Compliance Officer and the Head of Corporate Auditing report to the Audit Committee of the Supervisory Board on any compliance violations that have been identified. Corporate Auditing also regularly evaluates the effectiveness of the Corporate Compliance Policy.

We centrally trained a total of 43 compliance officers at two Compliance Officer Workshops in 2011. These workshops also serve as a platform for sharing experiences and establishing a compliance community.

Our managers have a special obligation to set an example to their employees, communicate the compliance requirements within their companies and take organizational measures to implement them. Senior managers can lose their claim to variable compensation components and must expect further disciplinary measures if systematic violations of the applicable legislation with financial damage to Bayer have occurred in their sphere of responsibility and could have been prevented if they had taken appropriate action. The issue of corporate compliance is a permanent part of the performance targets agreed with the members of the Group Leadership Circle (GLC).

Every employee is required to report any infringement of the Corporate Compliance Policy without delay. Hotlines allowing anonymous reporting have been set up worldwide. The only exception is in France, where this reporting obligation does not apply due to the nature of national law there. In the year under review, our central compliance hotline registered 64 reports, 28 from Germany and 36 from other countries. Of these, 46 reports were received by e-mail (17 of them anonymously), 16 by phone (eight of them anonymously) and two anonymously by mail. All suspected case of compliance infringements are recorded according to uniform criteria and processed according to defined rules in line with the Directive on the Management of Compliance Incidents.

At the end of 2011 the Bayer Group decided to intensify its global activities in the area of corporate compliance. Among other steps taken in this connection, a Group Compliance Office was established to handle compliance issues of relevance to the Bayer Group as a whole. Bayer is stepping up the focus on prevention. The compliance organization aims to provide advice, education and support. For example, counseling options for employees are to be expanded and access to these services facilitated, and additional training measures are planned. Risk assessment is also to be improved, and regular checks will be carried out on Bayer’s contractual partners in certain areas of the business (third party due diligence project). Internal checks will also continue to be made. Rapid action is planned in the event of any irregularities. Bayer aims to ensure that its compliance principles are observed throughout the world. Violations can have very serious consequences, both for the company and for individual employees. A compliance program comprising seven elements is being put in place to prevent such violations. The existing Corporate Compliance Policy will retain its validity.

The new setup also requires uniform and efficient structures, along with global processes encompassing the subgroups, service companies and country organizations. With this objective in mind, a high-ranking Compliance Committee has been established to make policy decisions.

We are convinced that responsible marketing must be based on sustainable principles. Bayer does not tolerate any legal violations in the marketing of its products. Yet responsible marketing also includes further ethical and moral principles that are expressed, for example, in transparent, consistent and reliable communication, as well as in the obligation to regularly assess our products and introduce the appropriate measures where necessary.

To transparently document our commitment to responsible marketing throughout the Bayer Group as well as to increase the strength and focus of this commitment, the Community Board for Sustainable Development decided in 2011 to summarize our principles in a Responsible Marketing & Sales Policy [ 50 ]. Parallel to this process, our subgroups have begun emphasizing their commitment to compliant and ethical conduct and the observation of industry-specific requirements in product marketing. With this initiative, we are establishing the foundation for the further emphasis of this issue in ongoing training measures.

Business operations necessarily involve opportunities and risks. Their effective management is therefore a key factor in sustainably safeguarding a company’s value.

The management of opportunities and risks at Bayer is an integral part of the Group-wide corporate governance system, not the task of one particular organizational unit. Sustainability aspects are included in risk management at Bayer because they play a part in safeguarding the company’s value. Along with excellent product quality and corporate compliance, they form the basis for the long-term sustainability of our business operations and business success.

In the Bayer Group, risks are systematically and continuously identified, analyzed and documented in a database. Risks are defined as events and possible developments within or outside of the company that could jeopardize a sustained increase in corporate value. Risk-relevant information is compiled at least quarterly and also on an ad hoc basis where necessary. The documentation contains a description of the risk, an assessment of the extent of possible damage and the probability of occurrence, along with measures to monitor and counteract the risk. The criteria are set out in a special procedure (BayRisk Instruction). Risk management at the Group level is assigned to the Chief Financial Officer. Clear responsibilities within the organizational units ensure the efficiency of the risk management system. More information on risk management in the subgroups [ 51 ] can be found in our online report.

The specific sustainability-relevant risks covered by our risk management include in particular safety and environmental risks. The manufacturing of chemical products is subject to risks associated with the production, filling, storage and transportation of raw materials, products and waste. These risks may result in personal injury, property damage, environmental contamination, production stoppages, business interruptions and liability for compensation payments. We address product and environmental risks by adopting suitable quality assurance measures. An integrated quality, health, environmental protection and safety management system increases process stability (see also chapter on Ecology). An emergency response system (Bayer Emergency Response System, BayERS) to protect employees, neighbors, the environment and production facilities is an obligatory element in the integrated HSEQ management systems at all our production sites. The basis for this is set forth in a procedure on crisis management in the Bayer Group.

To minimize potential sustainability-relevant risks originating from our distribution channels, we integrate our suppliers into our risk management system (see also Supplier management).

A detailed opportunity and risk report can be found in our Annual Report 2011. We also report in detail about climate-related risks and opportunities and their financial impact in our annual report to the Carbon Disclosure Project (CDP) [ 52 ].

As a global company with a diverse business portfolio, the Bayer Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax assessments and environmental protection. The outcome of any current or future proceedings cannot be predicted. It is therefore possible that legal or regulatory judgments or future settlements could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect our revenues and earnings. Legal proceedings currently considered to involve material risks are described in the Bayer Annual Report 2011.

As a socially engaged, globally operating company, we know that open and transparent dialogue with all our stakeholder groups is essential. We are convinced that we cannot achieve long-term acceptance for our business activities without this regular discourse with our stakeholders. We therefore seek targeted dialogue with our stakeholders at the local, national and international levels. Our direct partners are our employees, customers and suppliers. The group comprising financial market participants safeguards our economic foundation. Important stakeholder groups for our company also include representatives of public interest groups, such as residents in the communities near our sites, non-governmental organizations and politicians, as well as the general public. Finally, we operate within a framework of action that is determined by legislation, scientific findings and public bodies.

We regard systematic dialogue with our stakeholders as the essential global basis for building mutual understanding. In this way we want to create confidence in our activities. In discourse with representatives of our stakeholder groups, we openly explain viewpoints and courses of action to one another. Together, we identify challenges and analyze them from various perspectives.

In part through regular surveys, we determine which issues are particularly important to our stakeholders. In winter 2011, 328 external stakeholders such as suppliers, customers and financial market participants, as well as individuals from the political and scientific communities, replied to our online survey. We wanted to know how important they consider certain sustainability issues to be for Bayer and how they assess our performance in these areas. We also asked them to rate the relevance of the strategic sustainability issues Bayer has focused on so far, and to give us their opinion on the content and form of our sustainability reporting. Through this procedure, we discover areas for improvement, recognize risks more quickly and are able to exploit trends and new market opportunities at an early stage. Details on the most recent stakeholder survey, an overview of our stakeholder groups, the form and frequency of our dialogue with them and numerous practical examples from 2011 [ 53 ] are available on the internet.

In 2011 we introduced a newly developed tool for strategic investment projects: the Stakeholder Check. This tool is designed to enable us to consider the views of potentially critical stakeholders more effectively in investment decisions. At information assemblies held in all subgroups, it was clearly demonstrated that dialogue processes such as these create social trust and therefore make business sense for us as well. For this reason, starting in 2012, the systematic stakeholder analysis for strategic investment decisions with a volume of €20 million or more will play an important role in the approval of capital expenditures.

Our stakeholders at the political level include legislators, authorities and the scientific community. This is where the framework conditions of our business are decisively shaped. At the same time, our stakeholders have an active interest in industry’s expertise. We therefore see lobbying as an important and legitimate way of participating in decision-making processes. As a basis for these activities, we have set clear rules through our Code of Conduct for Responsible Lobbying [ 56 ], which reflects the principles set forth in the Green Paper on the E.U.’s European Transparency Initiative. The principles include making sure that it is clear whose interests are being represented. Within the Bayer Group, the Public and Governmental Affairs Committee is responsible for the focus and prioritization of the company’s political work. This includes Group-wide tasks such as the publication of the Bayer Policy Letter, the entry in the lobby register of the E.U., and dealing with subgroup-specific political matters. In 2011 Bayer’s political lobbying focused [ 54 ] on the acceptance of products and technologies, fostering and recognizing innovation, sustainable health care systems, chemicals management, and energy policy and climate protection.

Our liaison offices in Berlin, Brussels, Washington and Beijing serve as key interfaces to policy makers. To enhance transparency, Bayer was one of the first companies in the chemical and pharmaceutical sector to be entered in the European Commission’s lobby register [ 55 ]. We disclose the relevant costs of our lobby work at E.U. level (€2.5 million in 2011). We are expecting a similar initiative in Germany and would enter the company in a German register if one were to be introduced. In 2011 we spent €1.2 million on our liaison office in Berlin. That figure comprises personnel, operating and project costs. In the United States, Bayer discloses its lobbying costs in several public databases.

In keeping with its directives, Bayer does not make any direct donations to political parties, related institutions, politicians or candidates for political office. However, associations to which we belong make donations on their own initiative, in compliance with the relevant statutory regulations, especially laws on party political activity. In the United States, individual employees utilize the opportunity to support candidates for political office by making private donations via the Bayer Corporation Political Action Committee (BayPac). Political action committees in the United States are government-regulated, legally independent associations of employees established to collect private donations to political organizations and candidates for political office. Consequently, such donations are not donations made by the company. The BayPac contributions are regularly reported to the U.S. Federal Election Commission [ 57 ]. Full details can be viewed on the Commission’s website.

As an international company, Bayer supports economic and social development in various ways in many parts of the world. We base our activities on where our customers are located, maintain production sites in all regions, invest in research and development, create jobs, forge supplier relationships and implement social needs activities at our sites around the world. This regional presence also has many advantages for Bayer. Manufacturing our products in close proximity to our customers strengthens our ties to them, lowers transport costs and reduces the burden on the environment.

Bayer regards itself as a regional employer that creates jobs locally, contributes to securing social structures at its sites and strengthens purchasing power in various regions of the world. We carefully and intensively support personnel development and talent management particularly in the growth regions. We also promote diversity, both through supporting women in management and by training local employees for management tasks. Furthermore, we contribute to economic development in the communities in which we do business through regional corporate tax payments.

We offer our employees at our sites worldwide a high level of social protection. In 2011 our personnel expenses – including social expenses and expenses for pension plans – amounted to €8,726 million. Defined-benefit obligations for pensions and other post-employment benefits totaled €19,310 million as of December 31, 2011.

Growth markets such as Asia play a central role in our corporate strategy. Bayer has had strong local roots for many years – particularly in China, India and Japan – as a result of its country organizations. Asia was the most important growth region for Bayer in 2011. The company aims to further expand its production, distribution network – including in sub-centers and rural areas – and research in order to improve the local availability of our products. Bayer plans to invest some €1.8 billion in property, plant and equipment in Asia through 2015. Major strategically relevant capital expenditures undertaken last year by the subgroups for property, plant and equipment are described in the Capital Expenditures for Property, Plant and Equipment  of the Annual Report 2011.

As an in-house consulting unit, Bayer Business Services supports the subgroups in their projects to become more international. For example, Business Excellence Day in December 2011 focused on growth in the emerging markets. As the operator of Chempark, Currenta collaborates in China with Nanjing Chemical Industry Park. Currenta also benefits from this in the marketing of the German Chempark sites to international investors.

Bayer invests in its sites around the world. This includes environmental investment that goes beyond statutory requirements. We perform a voluntary ecological assessment for all capital expenditure projects exceeding €10 million.

Growth in emerging markets also means finding solutions for the specific challenges that exist there. These include diseases that are more widespread in Asia than elsewhere, such as liver cancer and diabetes. Bayer HealthCare also wants to accelerate access to new medicines in Asia by integrating patients there into the global development programs already at an early stage. In addition, we want to submit innovative medicines for regulatory approval at the same time in Asia, Europe and the United States. Bayer MaterialScience not only supplies industrial customers with locally manufactured polymer products, it also offers the necessary technical advice and applications development know-how in its systems houses. Ground was broken for a new systems house in Qingdao, China. Bayer MaterialScience also began the further expansion of its polymer research and development center in Shanghai, China. Also in Shanghai, a new production facility for the plastics precursor TDI (toluene diisocyanate) went on stream in November 2011 that will have a capacity of 250,000 metric tons per year.

In India, Bayer HealthCare formed a joint venture in January 2011 with Zydus Cadila. Bayer Zydus Pharma will unite complementary product portfolios and specialized sales units in the areas of women’s health care, diagnostic imaging, general medicine and oncology. In February 2011 Bayer MaterialScience inaugurated a new Color Competence and Design Center in Greater Noida, India.

Bayer CropScience wants to help raise living standards in rural areas of India by increasing value-added and reinvesting this in the community. In 2010 the subgroup therefore launched the Model Village Project [ 58 ]. In 2011 the Bayer Prayas Rural Development Organization was established for local coordination of all activities. As the project advances, other partners – including those not directly involved in agriculture, such as non-governmental organizations or local companies – will be able to join the association. As part of the project, a technology for systematic droplet irrigation in seed production and its acceptance was successfully tested in selected Indian villages in 2011. The method is to be introduced in the model villages in 2012. In November 2011 we began introducing other suitable measures. For example, we facilitated direct market access for farmers through our village service centers which now also offer products and advice on animal husbandry in conjunction with Bayer HealthCare. Since January 2012 education and training opportunities for children have been supported through the introduction of an established scholarship program under the Bayer Vidya Prayas Scholarship Scheme. Pforzheim University in Germany is our partner in the development of further concepts linked to the subject of model villages. Collaborating with an Indian non-governmental organization, the university surveyed around 2,300 people in August and September 2011. By repeating the survey at regular intervals, it should be possible to determine the progress of the project and the change in the standard of living of the village population to gain valuable findings for the further development of the project.

We are currently concentrating on this holistic project approach in model villages. Thus we are helping farmers increase productivity and improve seed quality so as to raise their income, thereby supporting the payment of fair wages to workers on the arable land contracted by Bayer CropScience.

We also invest in local research. For example, Bayer HealthCare strengthened its research activities by inaugurating a new innovation center in 2011 near San Francisco, California, United States. Bayer CropScience opened a new seed research laboratory in Singapore in 2011, while Bayer MaterialScience in January 2012 inaugurated a new process research center at the Chempark Dormagen site in Germany focusing on the primary feedstocks for polyurethane.

Bayer also supports research activities at universities in North America, Europe and Asia. At the end of 2011 the University of Rostock was granted an endowed professorship in its medical department. Bayer had already sponsored a Chair for Apparatus Engineering at Dortmund Technical University in 2009. In China, Bayer supports a total of four endowed professorships at three universities. These comprise two professorships at Tongji University focusing on sustainable development and intellectual property rights, as well as one endowed chair for health policy (Tsinghua University) and a professorship for marketing at China Europe International Business School. At Tongji University, Bayer MaterialScience is making available €1.5 million in funding for an initial period of five years for the Bayer-Tongji Eco-Construction & Material Academy so as to contribute to the development of innovative and sustainable solutions in the construction of buildings. Within the scope of its collaboration with the University of Nebraska, United States, for improving wheat breeding, Bayer CropScience has set up a professorship in that institution’s cereals breeding department.

In the following chapter you can read about how our purchasing volume represents a substantial economic development factor in many regions. In addition to business relations with customers and suppliers, Bayer also implements targeted social needs activities at its sites around the world. Further information is given in the Social Commitment chapter.

We exert considerable influence on society and the environment in many regions through our purchasing volume. In the reporting period, we purchased goods and services from about 98,000 suppliers in more than 115 countries for approximately €15.7 billion in total. Among OECD countries, Germany, the United States and Japan accounted for just under 70 percent of these expenditures. This corresponds to nearly 59 percent of total procurement spending by the Bayer Group. Three of the BRIC countries – China, Brazil and India – accounted for 11 percent of total expenditures, or more than 70 percent of total spending among the non-OECD countries.

The training concept established in 2009 for sustainability in procurement was further pursued in the reporting year. New purchasing employees completed the obligatory training course, which teaches the basics of sustainability-based supplier management and communicates our management approach.

Through various initiatives worldwide, such as a supplier day in Finland and the presentation of the BayBuy Awards in India, we want to create growing awareness among our suppliers about sustainability. Another global supplier day is planned for 2012.

To effectively address the wide-ranging challenges of a sustainable supply chain and the constantly growing demands of stakeholder groups while at the same time identifying synergies, Bayer joined two industrial initiatives in 2011. This was also done with the intention of reducing the administrative workload and costs both for suppliers and within our own procurement organizations. The audits planned as part of these industrial initiatives supplement our own audit program. In April 2011 Bayer joined the Pharmaceutical Supply Chain Initiative (PSCI) [ 62 ]. The main focus in 2011 was on the development of a PSCI standard for joint audits. Further objectives are the exchange of audit results and the conduct of audits at shared suppliers by qualified, independent auditors. Together with five other chemical companies, Bayer also established a Supply Chain Initiative of the chemical industry in 2011. The first step involved the consolidation of the participating companies’ sustainability requirements and the evaluation of opportunities to exchange sustainability evaluations and audits. In 2012 a pilot phase is planned in which supplier self-assessments and audits for shared suppliers will be performed. In 2011 we decided, together with the chemical industry initiative, to manage the reporting and monitoring of sustainability evaluations in the future through a joint IT platform. An interface to the Bayer supplier management system will ensure that the results of the sustainability evaluations of our suppliers will be integrated into purchasing decisions.

An important focus of our work with suppliers in developing countries and emerging markets is the prohibition of child labor. Unfortunately, child labor is still widespread in many regions of the world. In a number of countries in which we are present and maintain business operations, children are still used for activities such as field work to contribute to the subsistence of their families. In keeping with our commitment to human rights worldwide and our own dedicated position, we oblige suppliers along our entire supply chain to refrain from using child labor. In the developed markets of the West, child labor is not only considered unethical, it also potentially threatens the reputation of companies involved, which can have economic consequences.

For many years Bayer CropScience has taken resolute and systematic action against child labor in our cotton seed supply chain in India with its Child Care Program [ 61 ]. Education plays a key role in securing a lasting improvement in living circumstances. As part of the Child Care Program, our “Learning for Life” initiative, which comprises projects established in conjunction with local non-governmental organizations and educational institutions, is helping to achieve this. More than 2,700 children and young people benefited from this initiative between 2005 and 2011. The focus of the program is currently on vocational training. These educational activities are supported by contractual agreements with seed producers. In addition, the fields used in cotton seed production are checked at least six times each season. The table shows the trend since the main 2007/2008 season.

We pay a bonus to suppliers who strictly enforce the ban on child labor, and run training sessions to enhance agricultural efficiency. Graduated sanctions are applied for non-compliance. These range from oral warnings to termination of the contract in the case of repeated non-compliance. In addition, auditing firm Ernst & Young, India, once a year conducts an unannounced on-site inspection of farms selected on a random basis. Two indicators are used to measure the success of this extensive range of activities. These are highlighted in Table 5.

The success of our sustainability- and value-based corporate governance is reflected partly in the performance of Bayer stock in sustainability indices and rankings. Investors increasingly pay attention to how companies integrate ecological, social and corporate governance aspects into their strategies and business activities. They also use sustainability ratings as an additional risk indicator. That is particularly true of long-term institutional investors such as pension funds.

The United Nations Principles for Responsible Investment (UNPRI) [ 63 ], a network which works closely together with the financial initiative of the United Nations Environment Programme (UNEP) and the UN Global Compact, is also very popular among investors. In 2011 more than 900 major investors, asset managers and financial services providers from around the world – with combined assets under management of more than US$30 trillion – committed to uphold the six principles of the UNPRI.

In 2011 we reported to sustainability-minded investors during one-on-one meetings and an SRI (socially responsible investment) roadshow on Bayer’s commitment in this area.

Bayer stock is listed in numerous sustainability funds and indices [ 64 ]. We have been continuously listed in the Dow Jones Sustainability World Index (DJSI World) since the establishment of that index in 1999. The evaluation of corporate sustainability performance is performed on behalf of the index provider Dow Jones by the Swiss rating agency SAM. Bayer is one of three chemical companies worldwide whose sustainability commitment SAM has honored in its assessment for 2012 with the designation SAM Gold Class.

Bayer stock has also been listed in the U.K.-based FTSE4Good index since this was established in 2001. In 2011 we were again listed in the Carbon Disclosure Leadership Index (CDLI) of the Carbon Disclosure Project (CDP) [ 65 ] in recognition of our transparent reporting – this time as one of the four best companies in all sectors worldwide. Bayer was also included in the Carbon Performance Leadership Index (CPLI) with an “A” ranking in light of our efforts to reduce carbon dioxide emissions.