Report of the Supervisory Board

Dear stockholders (signature)

During 2018, the Supervisory Board monitored the conduct of the company’s business by the Board of Management on a regular basis with the aid of detailed written and oral reports received from the Board of Management, and also acted in an advisory capacity. In addition, the Chairman of the Supervisory Board maintained a constant exchange of information with the Chairman of the Board of Management and with the other Management Board members. In this way the Supervisory Board was kept continuously informed about the company’s intended business strategy, corporate planning (including financial, investment and human resources planning), earnings performance, the state of the business and the situation in the company and the Group.

Where Board of Management decisions or actions required the approval of the Supervisory Board, whether by law or under the Articles of Incorporation or the rules of procedure, the draft resolutions were inspected by the members at the meetings of the full Supervisory Board, sometimes after preparatory work by the committees, or approved on the basis of documents circulated to the members. The Supervisory Board was involved in decisions of material importance to the company. We discussed at length the business trends described in the reports from the Board of Management and the prospects for the development of the Bayer Group as a whole, the divisions and the principal affiliated companies in Germany and abroad.

Change on the Supervisory Board

Dr. Klaus Sturany’s term of office as a member of the Supervisory Board ended at the end of the Annual Stockholders’ Meeting on May 25, 2018. The Supervisory Board elected Professor Norbert Winkeljohann to succeed him until the end of the Annual Stockholders’ Meeting 2023.

Work of the Supervisory Board

The Supervisory Board convened seven times in 2018. No member of the Supervisory Board attended only half or fewer than half of its meetings or those of the committees on which they served. The average attendance rate by Supervisory Board members at the meetings of the Supervisory Board and of its committees held in 2018 was more than 97 percent. A detailed overview of the attendance of the individual members of the Supervisory Board at the meetings of the Supervisory Board and its committees is shown under “Governance Bodies.”

The members of the Board of Management regularly attended the meetings of the Supervisory Board. Where necessary, the Supervisory Board met without the Board of Management or with only the Chairman of the Board of Management present.

The deliberations of the Supervisory Board focused on questions relating to Bayer’s strategy, portfolio, business activities and personnel matters. The work of the Supervisory Board focused particularly on two main areas that were each addressed at several meetings: First, the Monsanto transaction, including the progress of the merger control proceedings, the performance of the Monsanto business, the related risks and the integration of the business. And second, the further development of Bayer’s strategy and the portfolio, efficiency and structural measures required to implement it. Between the meetings of the Supervisory Board, these issues were also the subject of an extensive dialogue between the Chairman of the Supervisory Board and the Chairman of the Board of Management.

Werner Wenning, Chairman of the Supervisory Board of Bayer AG (Foto)

Werner Wenning,
Chairman of the Supervisory Board of Bayer AG

The discussions at the meetings held in 2018 centered on the following topics.

At its February meeting, the Supervisory Board dealt with the Annual Report 2017, the agenda for the Annual Stockholders’ Meeting 2018, the status of the merger control proceedings relating to the Monsanto acquisition and the Group’s risk management system, and adopted resolutions on the compensation of the Board of Management.

At an extraordinary meeting convened in April, the Supervisory Board looked in detail at the required divestment of parts of the Crop Science business in connection with the merger control proceedings for the Monsanto transaction. The Supervisory Board also approved a further reduction of Bayer’s interest in Covestro.

At its May meeting, the Supervisory Board discussed the business performance to date in 2018 and the upcoming Annual Stockholders’ Meeting. It also adopted resolutions pertaining to two deviations from the recommendations of the German Corporate Governance Code along with a resolution to approve the existing consulting contracts between Bayer companies and companies of the global PricewaterhouseCoopers (PwC) network in light of the proposal to the Annual Stockholders’ Meeting that Professor Norbert Winkeljohann be elected to the Supervisory Board.

At an extraordinary meeting in July, the Supervisory Board examined the divestment of the global prescription dermatology products business and adopted a resolution on this matter.

At its September meeting, the Supervisory Board extended the service contract of Liam Condon by five years and that of Hartmut Klusik by one year, and appointed Stefan Oelrich to the company’s Board of Management for a three-year term commencing November 1, 2018. The Supervisory Board also approved Dieter Weinand’s departure from the company by mutual agreement with effect as of October 31, 2018. In addition, the Supervisory Board adjusted the performance targets for the Board of Management for 2018 in view of the closing of the Monsanto acquisition. The Supervisory Board discussed the status of the glyphosate-related litigations in detail. The Supervisory Board then examined in great detail the further development of the strategy of the Bayer Group and its individual divisions. It was established that the Supervisory Board explicitly supports the strategy of the Board of Management.

At an extraordinary meeting in November, the Supervisory Board dealt in detail with the status of the Monsanto integration and the integrated financial planning. The Supervisory Board also once again looked closely at the status of the litigations in connection with glyphosate. The discussion also addressed the extent to which these risks had been analyzed and assessed prior to the Monsanto acquisition. Following the related discussion at the previous meeting, the Supervisory Board once again conferred about the further development of the strategy and adopted resolutions on a series of portfolio, efficiency and structural measures. Specifically, it discussed the planned divestment of the Animal Health business, the sunscreen and foot care businesses of the Consumer Health Division and the 60 percent interest in the German site services provider Currenta. In connection with the planned efficiency and structural measures, the Supervisory Board examined the increased alignment of the pharmaceutical research activities toward external innovation and the reduction of inhouse capacities in this area, the concentration of production for all recombinant Factor VIII products at the Berkeley, California, site, the decision not to utilize the Factor VIII facility built in Wuppertal, and adjustments to the corporate and central functions, service functions and country platforms. The Supervisory Board also discussed the updated financial planning of the Bayer Group and was briefed on the planned Capital Markets Day.

At its meeting in December 2018, the Supervisory Board undertook the routine review of the fixed compensation of the members of the Board of Management and the pension amounts of the former members of the Board of Management. Also at this meeting, the Board of Management presented its planning for the business operations in the years 2019 through 2022 and its expectations for the company’s future rating. The Supervisory Board approved the proposed financing framework for 2019 and the securing of a new credit facility. At this meeting, the Supervisory Board took a detailed look at the efficiency audit, which had been conducted with external support. Building on the discussions at previous meetings and a detailed examination of the relevant documents undertaken in the meantime, the Supervisory Board also dealt once again with the risks arising from Monsanto’s glyphosate business. This discussion also focused on a comprehensive expert report by a prominent law firm that examined compliance with audit obligations and duty of care responsibilities in this regard when the Monsanto transaction was prepared and implemented. The report came to the conclusion that the members of the Board of Management had fulfilled their statutory duties in connection with the Monsanto transaction, particularly with regard to the examination and assessment of the liability risks related to the glyphosate business. The Supervisory Board concurred with the report’s findings. Finally, the Supervisory Board resolved to issue an unqualified declaration of future compliance with the German Corporate Governance Code. Following the December meeting, an information and discussion forum was held for the members of the Supervisory Board on the topic of innovation at Crop Science.

Committees of the Supervisory Board

The Supervisory Board has a Presidial Committee, an Audit Committee, a Human Resources Committee, a Nominations Committee and an Innovation Committee. The current membership of the committees is shown under “Governance Bodies.”

The meetings and decisions of the committees, and especially the meetings of the Audit Committee, were prepared on the basis of reports and other information provided by the Board of Management. Reports on the committee meetings were presented at the meetings of the full Supervisory Board.

Presidial Committee: This comprises the Chairman and Vice Chairman of the Supervisory Board along with a further stockholder representative and a further employee representative. The Presidial Committee serves primarily as the mediation committee pursuant to the German Codetermination Act. It has the task of submitting proposals to the Supervisory Board on the appointment of members of the Board of Management if the necessary two-thirds majority is not achieved in the first vote at a plenary meeting. Certain decision-making powers in connection with capital measures, including the power to amend the Articles of Incorporation accordingly, have also been delegated to this committee. On a case-by-case basis, furthermore, the Supervisory Board can delegate certain responsibilities to the Presidial Committee. Finally, the Presidial Committee may also undertake preparatory work for full meetings of the Supervisory Board.

The Presidial Committee convened twice in 2018. At a meeting in April, the Presidial Committee dealt with the issuance of shares to Temasek without granting subscription rights and adopted the necessary resolution on the partial use of the Authorized Capital II. At a meeting in June 2018, the Presidial Committee dealt with the capital increase with subscription rights to be implemented as well as with the issuance of bonds to implement an exchange offer for existing Monsanto bonds, and adopted resolutions on both items. By way of a written resolution in May 2018, the Presidial Committee amended the proposal for the use of the distributable profit that had been included in the Notice of the Annual Stockholders’ Meeting because the number of shares had risen since its publication as a result of the capital increase for which subscription rights were excluded.

Audit Committee: The Audit Committee comprises three stockholder representatives and three employee representatives. In the year under review, Dr. Klaus Sturany served as Chairman of the Audit Committee until the day of the Annual Stockholders’ Meeting, May 25, 2018, and Professor Norbert Winkeljohann succeeded him in this function following his election to the Supervisory Board on May 25, 2018. Both satisfied the statutory requirements concerning the expertise in the field of accounting or auditing that a member of the Supervisory Board and the Audit Committee is required to possess. The Audit Committee meets regularly four times a year.

Its tasks include in particular oversight of the accounting, the financial reporting process, the effectiveness and ongoing development of the internal control system, the risk management system, the internal audit system, the compliance system and the audit of the financial statements. The Audit Committee prepares the resolutions of the Supervisory Board concerning the financial statements and management report of Bayer AG and the proposal for the use of the distributable profit, the consolidated financial statements and management report of the Bayer Group and the agreements with the auditor (particularly the awarding of the audit contract, the determination of the main areas of focus for the audit and the audit fee agreement). The committee submits a reasoned proposal to the full Supervisory Board concerning the auditor’s appointment, and takes appropriate measures to determine and monitor the auditor’s independence. The audit focuses particularly on whether the financial statements have been prepared in compliance with the statutory requirements and whether the financial reporting provides a true and fair view of the financial position and results of operations of the company and the Group.

The Audit Committee discussed developments in the area of corporate compliance at each of its meetings, where necessary.

The Chairman of the Board of Management and the Chief Financial Officer at the respective time regularly attended the meetings of the Audit Committee. Representatives of the auditor were also present at all the meetings and reported in detail on the audit work and the audit reviews of the interim financial reports.

The Audit Committee devoted special attention in 2018 to the effects of the Monsanto transaction on the financial reporting and to the litigations related to glyphosate. The individual meetings focused mainly on the following topics: At the February meeting, the Audit Committee discussed the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group. It also carefully considered the risk report, which covers the risk early warning system, and the report on the internal control system (ICS). The Audit Committee discussed the further developed policies for risk reporting. Further, the Audit Committee examined the development of legal and compliance cases. Finally, the Audit Committee made a recommendation to the full Supervisory Board concerning the resolution to be submitted to the Annual Stockholders’ Meeting on the appointment of the auditor of the financial statements. The principal topics at the April meeting were the yearly reports by the Group Compliance Officer and Internal Audit, digitization and process optimization initiatives in the CFO’s area, and determining the main areas of focus for the audit of the 2018 financial statements.

At the August meeting, the interim financial report and, in particular, the glyphosate-related litigations were discussed in detail. At its November meeting, the Audit Committee discussed the yearly report of the Tax department, the audit conducted pursuant to Section 32 of the German Securities Trading Act (WpHG) (EMIR), the audit budget for the external auditor for 2019 and the framework for the auditor’s non-audit services.

Human Resources Committee: On this committee, too, there is parity of representation between stockholders and employees. It consists of the Chairman of the Supervisory Board and three other Supervisory Board members. The Human Resources Committee prepares the personnel decisions of the full Supervisory Board, which resolves on appointments or dismissals of members of the Board of Management. The Human Resources Committee resolves on behalf of the Supervisory Board on the service contracts of the members of the Board of Management. However, it is the task of the full Supervisory Board to resolve on the total compensation of the individual members of the Board of Management and the respective compensation components, as well as to regularly review the compensation system on the basis of recommendations submitted by the Human Resources Committee. The Human Resources Committee also discusses the long-term succession planning for the Board of Management.

The Chairman of the Board of Management regularly attended the meetings of the Human Resources Committee where the issues discussed did not relate to him personally.

The Human Resources Committee convened on three occasions and also passed one resolution in writing outside a meeting. In each case, the meetings involved deliberations and the adoption of resolutions relating to the compensation of the Board of Management and the service contracts of Board of Management members, the extension of the terms of office of Liam Condon and Hartmut Klusik, the departure of Dieter Weinand and the appointment of Stefan Oelrich to the Board of Management.

Nominations Committee: This committee carries out preparatory work when an election of stockholder representatives to the Supervisory Board is to be held. It suggests suitable candidates for the Supervisory Board to propose to the Annual Stockholders’ Meeting for election. The Nominations Committee comprises the Chairman of the Supervisory Board and the other stockholder representative on the Presidial Committee.

The Nominations Committee met once in 2018 and adopted a recommendation for an election proposal to the Annual Stockholders’ Meeting 2019.

Innovation Committee: The Innovation Committee is primarily concerned with the innovation strategy and innovation management, the strategy for the protection of intellectual property, and major research and development programs at Bayer. Within its area of responsibility, the committee advises and oversees the management and prepares any Supervisory Board decisions. The Committee comprises the Chairman of the Supervisory Board and five other members of the Supervisory Board, with parity of representation between stockholder and employee representatives. The Chairman of the Board of Management and the member of the Board of Management responsible for Innovation regularly attend the meetings of the Innovation Committee.

The Innovation Committee convened once in 2018. At this meeting, it dealt with digital transformation at Bayer and the further development of the Bayer Lifescience Center (Leaps) after the latter topic had been discussed at earlier meetings.

Corporate governance

The Supervisory Board dealt with the principles of corporate governance at Bayer. In particular, it resolved in its May meeting on a declaration on two temporary deviations from the recommendations of the German Corporate Governance Code. At its December meeting, the Supervisory Board then resolved to issue an unqualified declaration of future compliance. Further, at the meetings of the Supervisory Board the Chairman of the Supervisory Board gave a summary of his dialogue with investors.

Financial statements and audits

The financial statements of Bayer AG were prepared according to the requirements of the German Commercial Code and Stock Corporation Act. The consolidated financial statements of the Bayer Group were prepared according to the German Commercial Code and the International Financial Reporting Standards (IFRS). The combined management report was prepared according to the German Commercial Code. The auditor, Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, has audited the financial statements of Bayer AG, the consolidated financial statements of the Bayer Group and the combined management report. The auditor responsible for the audit was Professor Frank Beine. The conduct of the audit is explained in the auditor’s reports. The auditor finds that Bayer has complied, as appropriate, with the German Commercial Code, the German Stock Corporation Act and / or the International Financial Reporting Standards endorsed by the European Union, and issues an unqualified opinion on the financial statements of Bayer AG, the consolidated financial statements of the Bayer Group and the combined management report. The financial statements of Bayer AG, the consolidated financial statements of the Bayer Group, the combined management report and the audit reports were submitted to all members of the Supervisory Board. They were discussed in detail by the Audit Committee and at a meeting of the full Supervisory Board. The auditor submitted a report on both occasions and was present during the discussions.

We examined the financial statements of Bayer AG, the proposal for the use of the distributable profit, the consolidated financial statements of the Bayer Group and the combined management report. While examining the combined management report, we also examined in particular the nonfinancial statement that is fully integrated in the management report. This statement was also examined by the auditor. We have no objections, thus we concur with the result of the audit.

We have approved the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group prepared by the Board of Management. The financial statements of Bayer AG are thus confirmed. We are in agreement with the combined management report and, in particular, with the assessment of the future development of the enterprise. We also concur with the dividend policy and the decisions concerning earnings retention by the company. We assent to the proposal for the use of the distributable profit, which provides for payment of a dividend of €2.80 per share.

The Supervisory Board would like to thank the Board of Management and all employees for their dedication and hard work in 2018.

Leverkusen, February 26, 2019
For the Supervisory Board

Werner Wenning (signature)

Werner Wenning
Chairman

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