Making Governance Work Corporate SAP. Dr. Werner Brandt CFO and member of the Executive Board, SAP AG

Transcription

1 Making Governance Work Corporate SAP Dr. Werner Brandt CFO and member of the Executive Board, SAP AG DSW Corporate Governance Conference Wiesbaden Dezember 9th, 2004

2 Evolution of SAP s Principles of Corporate Governance SAP s Principles of Corporate Governance Implementation of Sarbanes-Oxley Act Requirements Implementation of NYSE Corporate Governance Requirements Summary & Outlook

3 Evolution of SAP s Principles of Corporate Governance ( PCG ) 2001 SAP adopts its own Principles of Corporate Governance Drafted second half of 2001 Adopted by SAP before the German Corporate Governance Code (GCGC) was passed in December SAP appoints a compliance officer for Corporate Governance 2001 SAP appoints a Corporate Governance committee (committee of the Supervisory Board) The committees have since been reorganized; the general committee now monitors Corporate Governance 2001 SAP inaugurates Corporate Governance Web site Current content: SAP Principles of Corporate Governance Code of Business Conduct Corporate governance report, as required by NYSE Information about Executive Board and Supervisory Board members Committees of the Supervisory Board Articles of Incorporation Shareholder meeting dates and reports, etc SAP amends its own PCG to reflect German Corporate Governance Code 2004 SAP amends its own PCG to reflect 2003 German Corporate Governance Code amendments SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 3

4 Evolution of SAP s Principles of Corporate Governance SAP s Principles of Corporate Governance Implementation of Sarbanes-Oxley Act Requirements Implementation of NYSE Corporate Governance Requirements Summary & Outlook

5 How did SAP handle the German Corporate Governance Code Requirements? Implementation and executing the German Corporate Governance Code Content overview of PCG Special requirements according to the recent changes of the DCGK in 2003, especially Executive Board compensation Deviations according to Section 161 SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 5

6 Content Overview of SAP s Principles of Corporate Governance 1. Introduction 2. Principles for the work of the SAP Executive Board 2.1 Guidelines for the work of the Executive Board 2.2 Requirements on SAP Executive Board members 2.3 SAP Executive Board members remuneration 3. Principles for the work of the SAP Supervisory Board 3.1 Guidelines for the work of the Supervisory Board 3.2 Requirements on SAP Supervisory Board members 3.3 SAP Supervisory Board remuneration 3.4 Cooperation with the independent public accountants 4. Principles of cooperation between the SAP Executive Board and the SAP Supervisory Board 5. Principles for relations between SAP and its shareholders 6. Principles of communication with the public SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 6

7 Modification of SAP s PCG according to the Changes of the 2003 GCGC Amendments in the Area of Executive Compensation Requirements of the German Corporate Governance Code (herein GCGC) Complied Explained according to Section 161 German Stock Companies Act Criteria for determination of appropriate and reasonable Executive Board remuneration deviation regarding individual performance explained in statement according section 161 German Stock Company Act in 2004 The Supervisory Board shall agree a way of capping Executive Board variable remuneration in case of extraordinary unforeseen appreciation salient features of the compensation package shall be published on the companies web site and explained in the annual report. This shall include the value of stock options Criteria of collective performance of the Executive Board underscored and therefore added in 2.3. PCG Cap implemented in SAP s Stock Option Plan, criteria added in 2.3 PCG Requirements of inclusion in the annual report were already met. The annual report is published on the internet. Wording amendment in 2.3 PCG No individual targets: Areas of responsibility are strongly inter-related, this prevents clear definition of corporate targets for their individual areas of responsibility Details of individual Executive Board members remuneration shall be given SAP publishes remuneration since 2003 broken down into fixed and variable components. No special interest to disclose these components for every Executive Board member separately; shareholders need for transparency is satisfied appropriately by SAP s statements in the annual report SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 7

8 Modification of SAP s PCG according to the Changes of the 2003 GCGC Amendments resulting in the following Executive Compensation Principles 2.3 SAP Executive Board members remuneration The amount of remuneration that SAP Executive Board members receive overall and each different component of their remuneration must be reasonable and appropriate. The criteria for determining reasonable and appropriate remuneration are a member s responsibilities, the collective performance of the Executive Board, the size and importance of SAP, and the Company s economic situation, successes, and prospects for the future. The remuneration of Executive Board members must comprise fixed and variable elements and include longterm incentive and risk components for long-term corporate value creation. It must, to a reasonable extent, include remuneration plans that are oriented to the share price and meet the following requirements: It must not be possible to sell rights under stock options and convertible bonds until expiration of a term of several years. The exercise of rights under stock options and convertible bonds must be related to significant comparators and must therefore not be possible or yield a return unless certain performance targets (thresholds such as predetermined share prices) are achieved. Performance targets must not be altered retroactively. Exercise times must be stipulated that ensure compliance with insider trading law. The SAP Executive Board must ensure that these principles are also applied to the remuneration of senior managers. The Supervisory Board agreed an extraordinary unforeseen appreciation cap for Executive Board members stock options. The salient features of the compensation package and the details of stock option and convertible bond plans must be included in the SAP annual report. SAP s annual report can be inspected at Furthermore, the Chairperson of the Supervisory Board must report annually to the General Meeting of Shareholders about the salient features of the compensation system and any changes to it. SAP s annual report contains 5 pages regarding SAP s Board members remuneration. SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 8

9 Deviations of SAP's PCG from German Corporate Governance Code Section 161 Statement No age limit for members of Executive Board or Supervisory Board The freedom of choice of the shareholders and of the Supervisory Board should not be restricted No deductible on D&O insurance No apparent incentive or cautionary value No extra compensation for committee work by Supervisory Board members No apparent boost to members' commitment No limit on number of Ex-Executive Board members on Supervisory Board The freedom of choice of the shareholders should not be restricted All three Ex-Executive Board members on Supervisory Board are co-founders and each controls more than 10% of the stock No individual targets as factor in Executive Board members' variable compensation element For SAP, the collective responsibility of the Executive Board is the critical success factor Individual targets would be very hard to define because the members' area of accountability are highly interdependent Disclose of Executive Board compensation fixed/variable breakdown not individualized Consequence of policy of no individual targets Of doubtful interest to shareholders; members' privacy comes first SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 9

10 Evolution of SAP s Principles of Corporate Governance SAP s Principles of Corporate Governance Implementation of Sarbanes-Oxley Act Requirements Implementation of NYSE Corporate Governance Requirements Summary & Outlook

11 SAP is getting Sarbanes-Oxley Act compliant an Overview: Scope of the Project Not restricted to financials Individual measures are tightly linked and impact entire Group Some aspects impact directors as individuals Project to implement Sarbanes-Oxley Act ("SOA") at SAP (kicked off late July 2002) Project steering committee coordinating 34 subprojects Cross-departmental project teams (employees from legal advice, corporate financial reporting, risk management, corporate controlling, corporate finance, internal audit service, investor relations, and IT) Outside consultants engaged for objective angle and to train internals Additional subproject teams to implement project in subsidiaries CFO is overall project sponsor directly involved Initial expense 2 million Projected annual expense 2 million SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 11

12 Major Subprojects for SOA-Implementation Introduction of a system of internal compliance and certification Audit committee requirements Extension of documentation of the internal control system SOA- Implementation Establishment of a whistleblower process Establishment of a disclosure committee Introduction of a code of ethics Reconciliation of pro-forma financial information SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 12

13 Introduction of a System of Internal Compliance and Certification In the 20-F annual report, the CEO and CFO confirm Accurate and complete presentation of the group s financial condition, results of operations, and cash flows Establishment, maintenance, and effectiveness of an internal control system and adequate procedures for financial reporting To do this, they obtain Certification from Non-certifying Executive Board members Extended Management Board members Regional Management Certification from the Managing Directors of subsidiaries for their reporting packages SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 13

14 Internal Certification as a Cascading Process CEO CFO Sign certification for the financial statements SAP AG Executive Board SAP AG Extended Management Board Confirmation of Adequacy Internal Certification Regional Management SAP subsidiaries SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 14

15 Wording of Certification by Rule 13a-14(a) or 15d- 14(a) in SAP s 20-F Annual Report I, Dr. Werner Brandt, certify that: 1. I have reviewed this annual report on Form 20-F of SAP AG; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) [Reserved]; c) Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this annual report any change in the registrant s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and 5. The registrant s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of registrant s board of directors (or persons performing the equivalent function): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. Date: March 23, 2004 Dr. Werner Brandt CFO * Provide a separate certification for each principal executive officer and principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The required certification must be in the exact form set forth above. SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 15

16 Extension of documentation of Internal Control System Aim Establish and monitor internal control processes to prevent inaccurate or insufficient information being included in financial reporting Implementation Documentation, monitoring, and identification of potential for improvement of processes that generate and handle financial information In three phases, at all significant subsidiaries of SAP SAP software tool in use as of 2004 Annual internal control report, including declaration by the company s management about Responsibility General concept of the internal control system Result of the efficiency evaluation The company s management must test the control systems Inaugural test prepared by external auditor SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 16

17 Internal Control System: Project Overview Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Q3 Q4 Q1 S404 Compliance S302 Certification Implementation of improvement measures from 2003 T e s t i n g Implementation of improvement measures from 2004 SAP internal testing Controls test & management report external audit SOA Readiness Project Phase I Documentation for SAP AG, Germany, U.S. Phase II Documentation for tier-1 countries Phase III Documentation for all countries in scope Planning & implementation of measures Implementation of SOA tool & data migration SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 17

18 Establishment of a Disclosure Committee Mission Supporting the Executive Board, in particular the CEO and CFO, in making decisions on information for the financial markets Tasks Discussing events that are important for the financial markets With regard to ad hoc disclosure duties With regard to suitable publicity measures (content, medium, timing) Discussing communications before their publication Annual report and 20-F Quarterly press releases and reports Ad hoc notices and press releases similar to ad hoc notices Frequency of meetings Regular meetings before the publication of the quarterly results, annual report, and 20-F Extraordinary meetings when significant events occur or on any member's request Membership CEO, CFO Heads of corporate legal, corporate financial reporting, corporate controlling, investor relations, and corporate communications SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 18

19 Reconciliation of Pro-Forma Financial Information SAP s disclosures now include Explanations of which pro-forma figures have been used Explanations of why those figures are used Reconciliation of those figures to the corresponding U.S. GAAP figures Pro-forma operating income reconciliation: Q Q millions Operating Income % LTI/STAR % Settlement of stock-based compensation programs 0 2 Total stock-based compensation % Acquisition-related charges % Q Q millions Pro-forma operating income excluding stock-based compensation & acquisition-related charges % Margin as a % of sales 27% 26% % % SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 19

20 Reconciliation of Pro-Forma Financial Information Pro-forma EPS reconciliation: Earnings per share (in ) % Stock-based compensation % Acquisition-related charges % Impairment-related charges Pro-forma EPS excluding stock-based compensation, acquisition-related charges, and impairment-related charges (in ) Q Q % % SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 20

21 Audit Committee Requirements There has been a Supervisory Board audit committee since the mid-1990s The audit committee s old responsibilities are not significantly different from those now required under SOA Additional SOA requirements Additional responsibilities Preparing the Supervisory Board s proposal for the election of an auditor by the shareholders' general meeting Monitoring and approving audit services and non-audit services Receiving complaints under the whistleblower process Receiving information about cases of fraud Additional organizational requirements Independence of members Identification of a member as the financial expert SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 21

22 Regulations on Non-Audit Services from the Auditor Services forbidden by Sarbanes-Oxley Services permitted by Sarbanes-Oxley Bookkeeping or other services related to the accounting records or financial statements of the audit client Financial information systems design and implementation Appraisal or valuation services, fairness opinions, or contribution-in-kind reports Actuarial services Internal audit outsourcing services Management functions or human resources Broker or dealer, investment adviser, or investment banking services Legal services Expert services unrelated to the audit Any other services that the Supervisory Board has prohibited All services that are not prohibited (for example tax services, provided they do not include prohibited services, such as valuation) Provided they have Audit Committee preapproval Provided the total fees for the non-audit services performed for SAP are not more than 5% of the total fees that SAP pays to the auditor in the fiscal year during which the non-audit services were performed Prohibited services provided they have been approved individually, as an exception, by the Public Company Accounting Oversight Board (PCAOB) SAP Audit Committee s approach: 1) General approval for particular services up to a certain volume that is fixed each year 2) Individual approval for all other services SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 22

23 Establishment of a Whistleblower Process Issues Ensuring employee anonymity (data protection) Communication to employees Decision for or against an internal filter Focus: offenses of accounting rules The process at SAP: Access to the whistleblower process is through SAP s intranet Complaint entered in standard form Form moved to database using a dummy user Administrative sent automatically to audit committee chairperson In urgent cases: audit committee meeting called immediately Otherwise: written and oral reports at next meeting SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 23

24 Introduction of a Code of Ethics Code of Business Conduct introduced for all employees Template developed for SAP Group Template rolled out in Spring 2003 All subsidiaries have to adopt a local code that is no less stringent than the template in all points allowing for local differences with which local workforce can identify Rollout in local subsidiaries concluded in 2003 Reported since 2003 in Form 20-F SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 24

25 Evolution of SAP s Principles of Corporate Governance SAP s Principles of Corporate Governance Implementation of Sarbanes-Oxley Act Requirements Implementation of NYSE Corporate Governance Requirements Summary & Outlook

26 NYSE Requirements Beside the SEC requirements, the NYSE Corporate Governance rules include rules on audit committees: Section 303A.6 requires that listed companies have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act As SAP complies with the SEC requirements, no action was or is required Under s. 303A.11 listed foreign private issuers must disclose any significant ways in which their Corporate Governance practices differ from those followed by domestic companies under NYSE listing standards. However, the NYSE commentary on s. 303A.11 points out: [...] foreign private issuers are not required to present a detailed, itemby-item analysis of these differences. In 2004, SAP published its Corporate Governance Report on its Web site, which nevertheless does provide an item-by-item analysis of the differences SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 26

27 Evolution of SAP s Principles of Corporate Governance SAP s Principles of Corporate Governance Implementation of Sarbanes-Oxley Act Requirements Implementation of NYSE Corporate Governance Requirements Summary & Outlook

28 Summary and Outlook To keep investors confidence SAP is committed to live its Principles of Corporate Governance inform the public via a transparent financial reporting However, we see the risk that due to political pressures legal Corporate Governance requirements are issued which lack the balance between cost and benefits => negative impact on the companies performance without compensating benefit for the stakeholders different jurisdictions increasingly enter into a competition for the strictest Corporate Governance system without sufficient convergence of the requriements => the burden for global companies grows even further SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 28

29 Making Governance Work Corporate SAP Dr. Werner Brandt CFO and member of the Executive Board, SAP AG DSW Corporate Governance Conference Wiesbaden Dezember 9th, 2004

30 Appendix

31 Compensation of SAP s Executive Board Members Reason for Deviations from DCGK Remuneration of individual Executive Board members SAP AG does not consider it necessary or appropriate to publish these kinds of details about individual Executive Board members remuneration in the notes to the financial statements. Since 2003, SAP AG has published individual Executive Board members total remuneration in the annual report. The statements are given in a very detailed manner on 6 pages in the explanatory notes to the consolidated financial statements. SAP believes due attention is thus paid to the shareholders need for transparency. Shareholder interest in the details of individual Executive Board members remuneration broken down into fixed and variable components must, in SAP s opinion, take second place to Executive Board members justified interest in protecting their private sphere. Furthermore, for the individual shareholders and other parties interested in such publication of individual Executive Board members remuneration, the incentive components of the remuneration of the Executive Board as a whole are crucial. SAP also fears that publication of individual Executive Board members remuneration would lead to the equalizing of individual members remuneration in the long term, which would remove the intended incentive aspect. Therefore, SAP s Principles of Corporate Governance do not contain any such provision. SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 31

32 Overview Differences between Corporate Governance at SAP and NYSE Corporate Governance Rules NYSE Corporate Governance Rules SAP s Principles of Corporate Governance Majority of independent directors (Section 303 A.01 and 02) Non-management board of each company must meet at regular scheduled executive sessions without management (Section 303 A.03) Regulations about independent Supervisory Board members as well as about non directorship, similar positions or advisor tasks for important competitors Supervisory Board is entitled to exclude Executive Board members from its meetings. (No obligation to do so according to the German Stock Corporation Act and the German Corporate Governance Code) SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 32

33 Overview Differences between Corporate Governance at SAP and NYSE Corporate Governance Rules NYSE Corporate Governance Rules SAP s Principles of Corporate Governance Listed companies have to set up a nominating/ Corporate Governance and compensation committee, each composed entirely of independent directors that have a written charter specifying the committees purpose and responsibilities, as well as annual performance evaluation of the committee (Section 303 A. 04 and 05) SAP has the following committees, which are in compliance with the German Corporate Governance Code - General committee - Compensation committee - Audit committee - Technology committee - Finance and investment committee The general committee is responsible for all Corporate Governance related issues Listed companies are required to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act (Section 303 A. 06) (The German Stock Corporation Act does not mandate any committee, but however it is required according to the German Co Determination Act of 1976.) SAP has an audit committee but needs to comply with Rule 10A-3 by July 2005 only SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 33

34 Overview Differences between Corporate Governance at SAP and NYSE Corporate Governance Rules NYSE Corporate Governance Rules SAP s Principles of Corporate Governance Audit committee must have at a minimum three independent members (Section 303A.07) SAP has set up an Audit Committee, which is currently composed of four members Shareholders must be given the opportunity to vote on all equity- compensation plans and material revisions (Section 303 A. 08 ) Listed companies must adopt and disclose corporate guidelines (Section 303 A. 09) According to the German Stock Compensation Act there is an approval required by the General Shareholder Meeting in case of a conditional capital increase. Because of this legal provision there is no additional regulation in SAP s Principal of Corporate Governance (The management only may approve repurchase of shares to offer to employees at a discount without Supervisory Board approval and shareholder approval ) Although not required under German Law SAP has adopted its own Principles of Corporate Governance Listed companies has to adopt and disclose a code of business conduct and ethics for directors and officers and employees and to promptly disclose any waivers of the code for directors or executive officers (Section 303 A. 10) Although not required under German Law SAP has adopted a code of conduct and ethics for employees. This code is also applicable to members of the Executive Board and managers. SAP AG 2004, Making Governance Work SAP / Dr. Werner Brandt / 34