GfK Group: Annual Report 2006 Focus on the markets: Leading through knowledge GfK. Growth from Knowledge
Contents GfK. Growth from Knowledge Focus on the markets: leading through knowledge III Our corporate values IV Mission statement GfK Group 2006 in figures 1 Focus on the markets: leading through knowledge 2 2006 at a glance 4 The Supervisory Board 5 Report by the Supervisory Board 8 Letter to shareholders 12 The Management Board 14 Corporate Governance 21 GfK shares 29 GfK Special: 30 Germany Sweet dream of millions 36 Western Europe, the Middle East and Africa Like pieces of a jigsaw 42 Central and Eastern Europe A dynamic lady in a dynamic market 48 North America Data for 48 states 54 Latin America Start-up for a continent 60 Asia and the Pacific Asia: the mysterious continent Management report and financial statements of the GfK Group 66 Management report 99 Financial statements 104 Notes to the consolidated financial statements 139 Auditors report Additional information 142 Overview of years 146 Glossaries V List of GfK company abbreviations VI Index VII Financial calendar VII Acknowledgements II
Our corporate values Client-driven Our clients needs drive our business. We continuously seek to better understand our clients needs, improve all aspects of existing research products, offer innovative products and to be an integral part of our clients information systems. Accuracy, sound methodology, excellent client service, flexibility, timely delivery and cost effectiveness all ensure that we meet and even exceed our clients expectations. We build long-term partnerships with our clients, contributing to their success. Our people People are our main asset. Development through training, sharing ideas and sound experience is essential to our business. Our people have the freedom to explore and develop their talents and are empowered to achieve our common goals. We encourage and reward initiative, dedication and hard work. Fairness, good communication and working relationships at all levels and locations are key to our success. Innovation We recognize that investing in continuous innovation in both the process and the end product is a prerequisite to meeting clients requirements. Our aim is to be at the cutting edge with our key business activities. Clients needs, evolving markets, new technology and the expertise and ideas of our people throughout the world are what drive innovation. Global expertise local knowledge We respect and learn from local business practices and cultures and provide knowledge tailored to local needs. Our global network comprises international teams, tools and products to provide multinational clients with consistent services. As proud members of the GfK Group, we share local and international expertise to continually improve all aspects of our business. Growth Profitable growth results in greater opportunities. As individuals, teams and business units, we are aware of the impact of our decisions and actions at all levels. We use financial and nonfinancial measurements to review and improve performance on an ongoing basis. Our growth provides investors with a fair return on the financial resources they have entrusted to us. III
Mission statement GfK. Growth from Knowledge Companies need to make decisions. Knowledge is the basis for decision-making. Our business information services provide the essential knowledge that industry, retail, the service sector and the media need in order to make their decisions. As a knowledge provider, we aim to be at the top in all the global markets in which we operate in the interests of our clients, our employees, our company, our shareholders and the general public. GfK Group 2006 in figures 1) Change 2005 1) 2006 in % Sales in eur m 937.3 1,112.2 + 18.7 ebitda in eur m 129.3 173.1 + 33.9 Adjusted operating income 2) in eur m 125.1 150.5 + 20.3 Margin 3) in % 13.3 13.5 Operating income in eur m 80.7 118.5 + 46.9 Income from ongoing business activity in eur m 67.9 93.5 + 37.6 Consolidated total income in eur m 43.2 71.2 + 64.8 Tax ratio in % 36.3 23.8 Cash flow from operating activity in eur m 128.9 110.3 14.5 Earnings per share eur 1.05 1.86 + 77.1 Dividend per share eur 0.33 0.36 + 9.1 Total dividend in eur m 11.6 12.8 + 10.5 No. of employees at year-end full-time 7,515 7,903 + 5.1 1) Excluding profits totaling eur 24.3 m from the sale of the holding in iha ims Health, Switzerland. 2) Adjusted operating income is calculated from operating income. The following expenses and earnings have been eliminated: Integration costs arising in connection with the acquisition of companies, amortization on hidden reserves as part of purchase price allocation, personnel expenses for share-based payments and long-term incentives, other operating income and remaining other operating expenses, in particular, currency effects resulting from the reporting date valuation. 3) Adjusted operating income in relation to sales in % IV
Focus on the markets: Leading through knowledge GfK GROUP Market research does not just mean transforming numbers into information and information into knowledge. Market research also includes taking a look behind the scenes in order to analyze and understand the markets and consumers. This is a mission we pursue with great passion for our clients. 2006 has been a year of great progress in every respect. Not only did we move up into fourth place in the top ten list of market research organizations worldwide, but 2006 also saw us cross the magic sales threshold of one billion euros. At eur 1,112.2 million, sales were up by almost 19 % on the previous year. The margin was impressive at 13.5% and our adjusted operating income exceeded eur 150 million. With organic growth of around 5.4%, expert estimates indicate we have again outperformed the market research sector. The past year has been an ambitious one, largely dominated by the successful integration of the nop World Group acquired in mid-2005. Our vision of sustained expansion in the usa, the uk and Italy, as well as the enlargement and strengthening of our Custom Research, Media and HealthCare divisions, is becoming a reality. We have consistently followed our strategic aims, driving forward the planned internationalization of the Group, especially in the growth regions of Latin America and Asia and the Pacific. Beyond this, acquisitions in China and India have laid the foundations for dynamic organic growth for the future. The number of employees that have contributed considerably to the success of the company has also increased and at the year-end, the staff complement at GfK totaled almost 8,000 worldwide. GfK_1
2006 at a glance January Majority shareholdings acquired in merc (51%), Mexico, and KleimanSygnos (80%), Argentina enhance GfK s presence in Latin America. New York business division Audits and Surveys fully incorporated into the Retail and Technology division as part of expansion in the usa. New GfK HealthCare subsidiaries established in Singapore and Thailand. February Establishment of a joint venture in Israel under the name GfK Retail and Technology Israel, in which GfK have a 63% stake. GfK nop, uk, nominated for the Excellence Award at the esomar Automotive Congress in Lausanne. March With 2,500 investors, which is twice as many as last year, the second Nuremberg stock exchange day co-organized by GfK ag is inundated with visitors. As the main sponsor, the GfK Group supports the first annual Asia Pacific Conference for market research professionals organized by esomar in Mumbai, India, in 2006. April GfK Russia, the number 2 Russian market research organization, celebrates its 15th anniversary. May Netherlands-based Intomart GfK and Nedstat receive the Hans du Chatinier Award for their pioneering Internet target group research. GfK Hungária wins an award from the Hungarian Minister for Youth, Family and Social Affairs as a familyfriendly employer. MediaWatch iii, the newest multimedia measurement device from the Telecontrol Group, measures tv, radio and print consumption in Cyprus. June Establishment of GfK Marketing Services Baltic, a new company in the Retail and Technology division. Results of the survey sponsored by GfK-Nürnberg e.v. on what Germans think about themselves and what their European neighbors think of them are presented in a four-month special exhibition What is German? by gnm in Nuremberg. GfK Praha celebrates its 15th anniversary. 2_GfK
2006 at a glance GfK GROUP 2006 at a glance July Tagung 2006 The GfK Conference 2006 entitled Changing values in the Western world: opportunity for innovation and commercial success is attended by around 600 marketing experts from Germany and abroad. 130 GfK colleagues accompany ceo Professor Dr. Klaus L. Wübbenhorst on a charity run to mark his 50th birthday. In total eur 5,000 is donated to the Rainbow unit for children with cancer at the Cnopf schen Children s Clinic in Nuremberg. August A 51% shareholding is acquired in Latvian market research company, InMind, which now trades as GfK Custom Research Baltic. Establishment of GfK Marketing Services in Buenos Aires, Argentina, a new company in the Retail and Technology division. September GfK macon, GfK prisma and GfK Regionalforschung merge to form GfK GeoMarketing, one of the biggest providers of geomarketing solutions in Europe. The Mystery Shopping department at GfK Custom Research in the us launches the first national panel for people with disabilities. GfK is the sole gold sponsor for the sector s biggest event worldwide: the 2006 esomar Congress in London. October Integration of nop World as planned enables GfK ag to successfully refinance its syndicated credit volume of eur 430 million and usd 170 million. Around 220 GfK colleagues and their families take part in the 11th Nuremberg city run the highest number ever. GfK HealthCare Asia establishes a new office in Taiwan. November GfK Audience Research Bulgaria determines the tv ratings in Bulgaria using the tc viii measuring device from the Swiss Telecontrol Group. Intomart GfK and the Dutch Audience Research Association sko sign a three-year extension to the contract on tv ratings research in the Netherlands that has been in place since 1964. GfK colleagues from Germany, the Netherlands and the usa rise to the challenge of the New York City Marathon 2006. December GfK again wins the contract for tv audience measurement in the Ukraine. An extended panel consisting of more than 2,500 households is set up for the five-year contract and equipped with the tc viii measuring system from the Telecontrol Group. Christmas donations from the GfK Group totaling eur 35,000 are donated to the Nuremberg children s home in Reutersbrunnenstrasse, the Strassenkreuzer e.v. aid organization for people in need and the animal shelter in Feucht. Acquisition of the majority shareholding in Mode (51%), India, facilitates further expansion of the Custom Research division in one of the key economies in the Asia/Pacific region. GfK_3
The Supervisory Board Hajo Riesenbeck Chairman of the Supervisory Board Director of McKinsey & Company, Düsseldorf, Germany Dr. Christoph Achenbach Management spokesman for Robert Klingel GmbH & Co. kg, Pforzheim, Germany Dr. Wolfgang C. Berndt Member of the Board of Directors of the Institute For The Future, Menlo Park, California, usa Sandra Hofstetter Independent Works Council representative at GfK Aktiengesellschaft, Nuremberg, Germany Dr. Arno Mahlert Deputy Chairman of the Supervisory Board Member of the Management Board of Tchibo Holding ag, Hamburg, Germany Stefan Pfander Consultant at Wm. Wrigley Jr. Company, Chicago, usa hr Committee Hajo Riesenbeck (Chairman) Dr. Wolfgang C. Berndt Kerstin Döpfert Jürgen Schreiber Audit Committee Dr. Arno Mahlert (Chairman) Dr. Christoph Achenbach Stefan Pfander Dieter Wilbois Kerstin Döpfert Independent Works Council representative at GfK Aktiengesellschaft, Nuremberg, Germany Jürgen Schreiber Since June 29, 2006 ceo and President of Shopper Drug Mart, Toronto, Canada Werner Spinner Up to June 29, 2006 Business Consultant Dieter Wilbois Independent Works Council representative (Chairman of the Works Council and the Group Works Council) of GfK Aktiengesellschaft, Nuremberg, Germany Peter Zühlsdorff Honorary Chairman of the Supervisory Board Managing Shareholder of dih Deutsche Industrie-Holding GmbH, Frankfurt/Main, Germany 4_GfK
Report by the Supervisory Board GfK GROUP Report by the Supervisory Board Hajo Riesenbeck Supervisory Board Chairman Director of McKinsey & Company, Düsseldorf In financial year 2006, the Supervisory Board kept itself informed on a regular basis of the GfK Group s business development, income and financial position, its personnel situation and impending investments. It has monitored and advised on the activities of the company s Management Board and discussed all significant business events with the Management Board. The Supervisory Board met six times in financial year 2006. At these meetings, the Management Board reports and the company s prospects for development were discussed in depth. The main topics here were the strategic direction of the GfK Group, its international acquisitions activity, the annual accounts for 2005, the development of business during 2006 and the budget for financial year 2007. In addition, the Supervisory Board dealt with the approval of the annual accounts for 2006 and the budget for 2007. In financial year 2006, the Chairman of the Supervisory Board maintained constant contact with the Management Board. Following the successful acquisition of nop World in 2005, the Supervisory Board was constantly informed of the progress of integration. The Supervisory Board has dealt with the rules of the German Corporate Governance Code and on December 12, 2006, issued a declaration of compliance pursuant to Section 161 of the German Stock Corporation Act (AktG). The company complies with the mandatory regulations with the exception of one requirement and almost all of the voluntary regulations. The few deviations are indicated on page 19 of the present Annual Report in the Corporate Governance Report. GfK_5
Report by the Supervisory Board The Supervisory Board has two committees. The Audit Committee, which met four times in the reporting period, dealt with the company s business development, income and financial position as well as impending investments. Additional focal points were the investment policy for the company s liquid funds, issues of financing, as well as questions pertaining to the accounting system including interim reporting. The hr Committee met four times in 2006. The focal points were the remuneration of the Management Board and the extension of the contract of the ceo, Professor Dr. Klaus L. Wübbenhorst, and the Management Board member Petra Heinlein by five years in each case. The hr Committee is headed by Hajo Riesenbeck and the Audit Committee by Dr. Arno Mahlert. There were the following changes on the Supervisory Board in 2006: the term of office of five of the six shareholder representatives finished at the end of the Annual General Meeting in 2006. Hajo Riesenbeck, Dr. Christoph Achenbach, Dr. Wolfgang Berndt and Stefan Pfander stood for re-election and were confirmed by the Annual General Meeting. Werner Spinner did not stand for re-election. The Supervisory Board thanked Werner Spinner for his commitment to the GfK Group. The Annual General Meeting elected the proposed candidate, Jürgen Schreiber, to the Supervisory Board in his stead. With international experience, particularly in retail and consumer goods in Asia and North America, Jürgen Schreiber strengthens the expertise of the Supervisory Board. The annual financial statements and management report for GfK ag and the GfK Group for financial year 2006 have been audited by kpmg Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Nuremberg, and provided with an unqualified auditors report. All Supervisory Board members received copies of the auditors report in good time ahead of the accounts meeting. The Audit Committee of the Supervisory Board discussed these documents at its preparatory meeting, as did the full Supervisory Board in its accounts meeting. Both these meetings were attended by the auditors, who signed the annual and consolidated financial statements. They reported on the audit in general and on the key points stipulated in the audit mandate and also gave detailed responses to questions from the members of the Supervisory Board. 6_GfK
GfK GROUP Report by the Supervisory Board The Supervisory Board has noted the audit report and, following its own examination of the annual financial statements prepared by the Management Board, has given its approval. The financial statements are therefore adopted. The Supervisory Board has seconded the proposal of the Management Board for appropriation of profits. The Supervisory Board would like to thank the members of the Management Board, the Works Councils, all GfK ag staff and the staff of affiliated companies for their hard work and commitment, especially for the successful integration of nop World, which has created the basis for further growth. Nuremberg, March 23, 2007 Hajo Riesenbeck GfK_7
To our shareholders and business associates Professor Dr. Klaus L. Wübbenhorst Chief Executive Officer of GfK ag Dear Shareholders and Business Associates, Market research means transforming numbers into information and information into knowledge, helping our clients successfully manage their business operations. This is our mission, which we pursue with great passion. There has been one number that has particularly delighted us in the past financial and that is 1,112,159,268 or one billion one hundred and twelve million one hundred and fifty nine thousand two hundred and sixty eight euros. The GfK Group has consequently significantly exceeded the magic threshold of sales of eur 1 billion and moved into a new dimension. Size alone is not what counts, but it is an expression of our successful, global presence. Research is orange and symbolizes Growth from Knowledge. Review of 2006 We have either met or outperformed all of our quantitative targets for financial year 2006. We had forecast a rise in sales of over 18 % and aimed to achieve stronger organic growth than the market and further increase our high margin. We have convincingly achieved all of these objectives. Sales rose by almost 19 %. Organic growth totaled 5.4% and according to expert estimates outstripped that of the market research sector. The margin improved by another 90 basis points to 13.5%, a level that very few of our competitors can rival. At over eur 150 million, our adjusted operating income is as high as our total sales for 1991 and the combination of simultaneous growth in sales and income we have achieved is exemplary in our industry. The global economic upswing has certainly contributed to our success, but a glance at our competitors clearly shows that there is more to it. 8_GfK
GfK GROUP Letter to shareholders 2006 was characterized by a clear strategy and efficient operating management. The focus was the integration of the nop World Group acquired in mid-2005. Our strategic vision for this acquisition was very clear: to achieve sustained expansion in the usa, uk and Italy as well as to expand and strengthen the Custom Research, Media and HealthCare divisions. However, successful integration measures cannot start until an acquisition has been completed. It has only been 18 months since the acquisition and we can proudly report that the process of integration is complete. The companies of the nop World Group are now a firm and successful part of the GfK family. There is no more GfK on one side and nop World on the other. The integration has taken a great deal of time, energy and dedication and has involved a large number of trips and meetings. But it was worth it. The numbers speak for themselves. At the time of the acquisition, we forecast integration costs of around eur 20 million in 2005 and 2006. At eur 19.7 million, we were virtually spot on with our projections. We are very pleased with the achieved and prospective synergies, which were set to amount to up to eur 7 million in 2006 and up to eur 15 million from 2007 onwards. We have outperformed these ambitious assumptions and in 2006 synergies totaled eur 10 million. For 2007, we are expecting synergies of around twice this amount. However, this mammoth task has never distracted us from the wider strategic development of GfK as demonstrated by some excellent examples mentioned in the Annual Report. Let me just highlight a few aspects here: We pushed forward with our internationalization in growth regions in Latin America and Asia/Pacific. New additions in Mexico and Chile are rounding off our network in Latin America. Acquisitions in China and India form the basis for rapid organic growth in the future. To illustrate this dynamic growth and give an overview of the regions, we have adjusted our regional presentation for 2007 and incorporated the regional profiles in the special section of the Annual Report. GfK invests considerable sums in new methods and technologies as well as the expansion of panels and the use of online methods, consequently raising the barriers to entry for other companies. With regard to all these measures, we remain a lean organization where decision-making and entrepreneurship take precedence over formal structures and bureaucracy. And of course, any potential risks are monitored and managed by our Internal Audit department and Risk Management. GfK_9
Letter to shareholders As our shareholders, you too will benefit from this increase in income. The Management Board and Supervisory Board will be proposing a dividend of eur 0.36 per share at the Annual General Meeting on May 23, 2007. This will be the seventh rise in a row since we went public in 1999. There is one final point that should not be forgotten. Not only were we sales billionaires at the end of financial year 2006, by mid-2006 we were also the number four on the top ten list of market research organizations in the world. GfK the knowledge company GfK s positive performance worldwide also impacts on the number of employees and by the year-end the Group had almost 8,000 full-time employees from Azerbaijan to Yemen. In Germany, the staff complement rose to 1,628 full-time employees. The consistent internationalization is reflected, however, in the fact that there are 6,275 people working at our non-german subsidiaries. 8,000 GfK colleagues mean 8,000 experts for our clients. Six of these colleagues from different divisions and regions are featured in this Annual Report. These portraits provide an overview of the various GfK activities and are also representative of the people who make such a huge contribution to GfK s success. Constantly improving our knowledge through targeted professional development and ensuring knowledge transfer within the Group is a major challenge. This process is fostered and supported by the Management Board through a range of initiatives. The most recent is again the result of an idea from the Excellence Team, an elite school for young and talented employees at GfK. The initiative is Knowledge Exchange Solution, or kes for short. The idea behind kes is both simple and convincing: Progress through Knowledge. By pooling our global expertise, kes is a call for knowledge transfer, a requirement to make this process easier and to use impressive methods to facilitate the processing of this information. We are expecting great things from kes. We all know that everyone wants knowledge, but passing on knowledge is sometimes hard. kes also means: receive share contribute. Despite the stresses and strains of the daily competition for clients, we should not overlook the fact that we are a service provider and our success depends on employee satisfaction. We therefore carry out employee surveys on a regular basis. The latest employee satisfaction survey in Germany was very pleasing and the general satisfaction index rose for the third time in a row. Even though some small items remain which could be improved upon, the positive feedback is overwhelming. 10_GfK
GfK GROUP Letter to shareholders All of these aspects help build GfK s brand image and it is clear from the media that awareness of the GfK Group is increasing. Our surveys are picked up, analyzed and used as the basis for activities. Outlook 2007 Our achievements in 2006 are both an inspiration and a challenge for the new financial year. We have again set ourselves demanding, but achievable goals for 2007. We intend once more to achieve above-sector growth in sales with a rise of over 5%. We also aim to further increase our income and take advantage of opportunities to improve the margin even further. The current year will be exciting with online, outsourcing, offshoring and consolidation just some of the key words for 2007. We will closely monitor major developments in our industry and intend to both influence and help shape these changes. We hope we can count on your further support as shareholders and business associates of the company and would like to thank you for your confidence in the company to date and look forward to reporting to you on our continued success. Professor Dr. Klaus L. Wübbenhorst Chief Executive Officer GfK_11
12_GfK Knowledge behind the scenes: Christian Weller von Ahlefeld, Wilhelm R. Wessels, Dr. Gérard Hermet, Petra Heinlein, Professor Dr. Klaus L. Wübbenhorst (from left to right)
The Management Board GfK GROUP The Management Board Professor Dr. Klaus L. Wübbenhorst born February 23, 1956 in Linnich Chief Executive Officer (ceo), responsible for Strategy, Internal Audit, Method and Product Development, Corporate Communications and it Services Professional background Since 1998 Spokesman and, since 1999, ceo of GfK ag, appointed until 2012 Since 2005 President of the Chamber of Industry and Commerce for Middle Franconia in Nuremberg 1992 1997 Member of the Management Board of GfK ag, responsible for Finances, Accounting, Financial Controlling, Personnel, Purchasing, Production and it 1991 1992 Member of the Management Board of kba-planeta ag, Radebeul near Dresden 1984 1991 Employee of Bertelsmann ag, Gütersloh, becoming Managing Director of Druck- und Verlagsanstalt Wiener Verlag, Himberg near Vienna Education 2005 Awarded the title of Honorary Professor by Friedrich-Alexander University in Erlangen- Nuremberg 1984 Doctorate from the Technische Hochschule, Darmstadt 1981 Graduated in Business Administration from the University/Gesamthochschule, Essen Christian Weller von Ahlefeld born June 6, 1958 in Flensburg Chief Financial Officer (cfo) and hr Director, responsible for Finances, Financial Controlling and Accounting, Personnel and Administration Professional background Since June 1, 2005 Member of the Management Board of GfK ag, appointed until 2008 2000 2005 cfo of the Tele-München Group 1996 2000 Director and Head of Group Finance at Siemens ag and Manager of Siemens Financial Services division 1995 1996 Executive Director of sbc Warburg and member of the corporate management of J. P. Morgan 1983 1995 J. P. Morgan in New York, London and Frankfurt, becoming Vice President and member of the European Corporate Finance Executive Committee 1982 1983 Assistant to the management of Heinrich D. Hansen in Flensburg Education 1981 Graduated in Business Administration from the Freie Universität Hamburg Petra Heinlein born October 7, 1958 in Bad Staffelstein Responsible for the Custom Research division Professional background Since 2002 Member of the Management Board of GfK ag, appointed until 2011 2001-2001 Integration management on behalf of GfK ag 1992 2000 Managing Director of contest census in Frankfurt 1985 Joined GfK as project manager with GfK Marktforschung 1984 Research Assistant at the Arnold- Bergstraesser Institute, Freiburg im Breisgau Education 1984 Graduated in Political Science from the University of Bamberg Dr. Gérard Hermet born January 19, 1951 in Montpellier, France Responsible for the Retail and Technology division Wilhelm R. Wessels born October 12, 1952 in Haren Responsible for the Consumer Tracking, Media and HealthCare divisions Professional background Since 1999 Member of the Management Board of GfK ag, appointed until 2008 1998 2000 Chairman of the French Marketing Association (afm) 1988 1998 Managing Director of GfK Sofema, France 1984 1998 Managing Director of GfK France, then General Manager GfK Marketing Services, France 1978 1984 Employed by Burke Marketing Research, Paris, France Education 1978 Doctorate from the University of Grenoble 1975 mba from the French Business School (icn) Professional background Since 1996 Member of the Management Board of GfK ag, appointed until 2011 1991 1996 Managing Director of GfK ag, Gesundheitsforschung/i+g Gruppe Gesundheitsund Pharma-Marktforschung 1986 1996 Managing Director of gpi, Gesellschaft für Pharma-Informationssysteme, Nuremberg/ Frankfurt 1978 Joined GfK as a Research Associate Education 1977 Graduated in Business Administration from the University of Saarbrücken GfK_13
Corporate Governance The management of GfK is committed to increasing the value added of the company on a responsible, transparent and sustained basis. This is documented by the almost total compliance with the Corporate Governance principles. Where deviations still exist, the company will increase its endeavors to achieve its goal of total compliance. Declaration of compliance without material restrictions The Management Board and the Supervisory Board issued their declarations of compliance pursuant to Section 161 of the Joint Stock Corporation Act (AktG) on December 11 and December 12, 2006 respectively. The declaration of compliance is on page 18. The company complies with all the recommendations under the Code apart from one: in 2007, the Annual Report will be published after 94 days rather than within the 90 days prescribed by the Code. As of 2008, the company is set to comply with this deadline. GfK also complies with almost all of the non-binding suggestions in the Code. There are only two points where compliance is restricted. Since its stock market flotation, GfK has broadcast its accounts press conference and its Annual General Meeting on the Internet. The webcast lasts until the end of the speech by the Chairman of the Annual General Meeting. In 2007, the company will broadcast the event in full, unless objections to this are raised by shareholders or shareholder representatives. In future, it is also intended to make sure that shareholders representatives can be contacted during the Annual General Meeting. This is to ensure that shareholders can also issue instructions during the Annual General Meeting. Management and control structure As a German joint stock corporation (ag) GfK is subject to the German Stock Corporation Act and has a two tier management and control structure, comprising a Management Board consisting of five members and a Supervisory Board with nine members. Two thirds of the members of the Supervisory Board comprise representatives of the shareholders and one third representatives of the employees. In accordance with the standing rules of the Supervisory Board, the representatives are independent. Alongside their activity on the Supervisory Board, the majority of the members also held high-ranking positions in other companies during the past year. In our opinion, this did not impair their independence. The Supervisory Board advises and monitors the Management Board in its management of business operations. Consequently, expertise from trade and industry at both national and international level should be represented in the composition of the Supervisory Board. The Supervisory Board has formed two independent committees, the hr Committee and the Audit Committee. Further details on these committees are given in the Report by the Supervisory Board on page 5. The company has taken out a d&o insurance policy with an appropriate deductible for the members of the Management and Supervisory Boards. In 2006 there were no consultancy or other service and works contracts between members of the Supervisory Board and the company. 14_GfK
GfK GROUP Corporate Governance The Code recommends that the Chairman of the Audit Committee has particular expertise and experience in the application of accounting principles and internal financial controlling procedures. The Committee is chaired by Dr. Mahlert. He has been the cfo of Tchibo Holding ag since 2004 and as a result of this position and his long professional career has the necessary expertise and experience. Responsible risk management Systematic risk management has been in place at the company for many years and has been reviewed by the year-end auditors. The details are provided in the Risk Report on page 90 onwards. When the general Equal Treatment Act came into force in August 2006, a new requirement was added to compliance. All employees in the Group companies in Germany were informed in detail about the new requirements in a brochure. Training measures were also arranged for executives. The company took the new regulations as an opportunity to again draw the attention of employees to the already established Complaints Department, which is featured in detail in an article in the in-house magazine, gfk insite. Transparency in communications With the aim of transparent corporate communications, the company is pursuing its objective of providing the same information to all target groups at the same time. All press releases and ad hoc notifications are available via the website. Newsletters in both electronic and printed form report on the latest news from the Group and the survey results from the five business divisions provide the findings from market research. In order to further improve the service offering, the two departments Public Affairs and Communications and Investor Relations were amalgamated to form Corporate Communications. Remuneration report The remuneration of the members of the Management Board comprises four components; a fixed element, a bonus (variable remuneration), the 5 Star Incentive Program and pension commitments. The structure of the remuneration system is reviewed regularly by the Supervisory Board at the suggestion of the hr Committee. The Supervisory Board is responsible for setting the level of the individual components in line with the recommendations of the hr Committee. The remuneration is based on the remit of the respective member of the Management Board, their personal performance and that of the full Management Board. The non-performance related remuneration components comprise a fixed element and the pension commitment. The variable remuneration elements comprise variable components and stock options or a claim under the 5 Star Incentive Program. These are based on performance targets, which are measured against the key indicators from the consolidated financial statements and against benchmarks. The variable components are calculated on the basis of certain key indicators from the consolidated financial statements. The components are definitively set by the Supervisory Board. GfK_15
Corporate Governance The 5 Star Incentive Program has the following objectives: This program continues on the same basis as the earlier stock option program, without issuing new shares. As with the previous incentive program, the intention is to bind management staff to the long-term operational and strategic corporate goals. The term amounts to three years. There are internal and external performance criteria which have to be achieved. The remuneration is paid as a cash benefit. The decision of each individual member of the Management Board to waive part of the variable remuneration components creates an entitlement to virtual GfK shares. The number of virtual shares acquired is calculated on the amount of substituted remuneration and the GfK share price, which is based on the average price of the last 20 trading days before the year-end. For every virtual GfK share acquired, the Management Board member initially receives a further virtual share. However, the number of virtual shares granted by GfK may change. The two performance criteria governing this are the increase in operating income and the development of the GfK share price, both over a period of three years. The increase in operating income is measured against the income of the companies listed in the Dow Jones Stoxx Media Index. If these targets are not met or only partially met, the virtual shares granted by GfK lapse or reduce. If the targets are exceeded, the number of virtual shares granted by GfK increases. The program is limited in accordance with the Corporate Governance Code. Remuneration of the Management Board in 2006: In eur 000 Fixed components Variable components 5 Star Incentive Program Total remuneration Pensions: annual remuneration earned to Dec. 31, 2006 Transfer to pension provisions in the financial year Professor Dr. Klaus L. Wübbenhorst (ceo) 544.3 782.1 82.3 1,408.7 464.0 626.7 Christian Weller von Ahlefeld 310.7 474.0 54.9 839.6 81.3 596.5 Petra Heinlein 373.0 473.0 54.9 900.9 191.9 337.6 Dr. Gérard Hermet 371.3 691.2 54.9 1,117.4 165.3 440.5 Wilhelm R. Wessels 361.1 511.4 54.9 927.4 237.2 459.7 2006 1,960.4 2,931.7 301.9 1) 5,194.0 1,139.7 2,461.0 2005 1,780.9 3,725.7 220.0 1) 5,726.6 2) 946.3 5,375.7 1) Invested variable components of eur 220.0 thousand in 2005 and 2006. In 2005, this corresponded to 146,664 stock options. 2) Including variable amounts invested, totaling eur 220.0 thousand. In the past financial year, Management Board members carried out share transactions involving a total of 201,805 shares. Apart from one sale of 10,000 shares, all other transactions related to the exercise of options with subsequent sale. As of December 31, 2006 the Management Board held a total of 379,287 shares and 330,329 options for GfK shares. 16_GfK
GfK GROUP Corporate Governance Structure of pension commitments: The pension contracts for members of the Management Board are uniformly structured. After three service years as a member of the Management Board (waiting period), the company grants a retirement pension, an early retirement pension, a disability pension and a widow s and orphan s pension upon fulfillment of the respective performance requirements. The fixed annual remuneration of the Management Board members agreed in the contract of employment at the time of leaving the company is deemed to be the pensionable income. The Management Board members receive a retirement pension when they leave the service of the company upon or after reaching the normal retirement age. After three years service as a member of the Management Board, the annual pension amounts to 30% of the pensionable income. The annual pension rises by 3 percentage points for each additional full year. The retirement pension is limited to a maximum of 60% of the pensionable income. The early retirement pension is granted upon leaving the company at the age of 60. If members of the Management Board leave the service of the company before their 62nd birthday due to a partial or total reduction in earning capacity, they receive a disability pension for the duration of the partial or total reduction in earning capacity. If this reduction in earning capacity still applies upon reaching the normal retirement age, the pension continues to be paid as a life-long pension. The disability pension is calculated in the same way as the retirement pension. The widow s pension amounts to 60% of the retirement or disability pension last paid; the orphan s pension amounts to 30% for full orphans and 15 % for half orphans. If the Management Board member leaves the company before the pension claim applies, the entitlement to all pension benefits remains in place. After the pension commences, the regular pension is increased by 2% each year. Remuneration of the Supervisory Board The remuneration of the Supervisory Board is regulated by the Annual General Meeting and stipulated in the articles of association of GfK ag. It is based on the remit and responsibility of the Supervisory Board member and the commercial success of GfK. Essentially this comprises the following elements: In addition to expenses, members of the Supervisory Board receive fixed remuneration of eur 9,000.00 payable at the end of the financial year. They also receive annual remuneration which is performance-based and dependent on earnings per share. A threshold value of eur 0.30 per share (in accordance with ifrs) was determined in 2005. If this value is achieved, each beneficiary receives a further eur 500. For every eur 0.10 that earnings per share exceed this value, each beneficiary receives a further eur 500. The threshold value increases by eur 0.10 every year. Three financial years are taken into consideration when calculating the earnings per share value. The current financial year and the two preceding years are used to establish an average. Performance-related remuneration may only amount to one and a half times the fixed annual remuneration. The Chairman of the Supervisory Board receives two and a half times the fixed and variable amounts mentioned above, and the Deputy Chairman receives one and a half times this amount. Remuneration increases by 25% per membership of a committee and by 50% per chair of a committee, up to a maximum of 100 % of the total of the fixed and variable remuneration. GfK compensates every Supervisory Board member for any vat applying to their remuneration and the reimbursement of expenses. Supervisory Board members who have only held their position for part of the financial year are compensated on a pro rata basis. GfK_17
Corporate Governance In financial year 2006, a total of 1,851 shares were sold by a former member of the Supervisory Board. Details of the individual transactions by members of the Supervisory Board and Management Board are published on the website in accordance with the Corporate Governance Code. Remuneration of the Supervisory Board in 2006: In eur 000 Fixed components Variable components Total remuneration Hajo Riesenbeck (Chairman) 27.0 18.0 45.0 Dr. Arno Mahlert (Deputy Chairman) 18.0 12.0 30.0 Dr. Christoph Achenbach 11.3 7.5 18.8 Dr. Wolfgang C. Berndt 11.3 7.5 18.8 Kerstin Döpfert 11.3 7.5 18.8 Sandra Hofstetter 9.0 6.0 15.0 Stefan Pfander 9.0 6.0 15.0 Dieter Wilbois 11.3 7.5 18.8 Werner Spinner (until June 29, 2006) 5.5 3.7 9.2 Jürgen Schreiber (from June 29, 2006) 5.5 3.8 9.5 2006 119.4 79.5 198.9 2005 117.9 79.5 196.5 The Supervisory Board members hold 3,458 shares and no stock options. Former members of the management of GfK GmbH, Nuremberg, and of the Management Board of GfK Aktiengesellschaft, Nuremberg, and their dependents received total remuneration of eur 0.9 million. There are provisions of eur 10.2 million for pension obligations to former Management Board members, their dependents and Managing Directors. The remuneration report forms part of the consolidated financial statements and the Group management report. Declaration of the Management Board and Supervisory Board pursuant to Section 161 German Stock Corporation Act (AktG) Pursuant to Section 161 of the German Stock Corporation Act (AktG), the management and supervisory boards of listed companies must declare each year, the extent to which they have complied with and will continue to comply with the recommendation of the Government Commission German Corporate Governance Code published by the German Ministry of Justice in the official section of the online Federal Gazette and which recommendations have not or will not be complied with. This declaration must be made available to shareholders at all times. The German Corporate Governance Code (the Code ) contains regulations, some of which are binding. In addition to outlining the prevailing company law, it also includes recommendations from which companies may deviate, although in this case, they are obliged to publish information on such deviations every year. The Code also proposes suggestions from which companies may deviate without the necessity for this to be disclosed. GfK ag has been publishing details of deviations from recommendations or suggestions since 2002. These are reported separately below: 18_GfK
GfK GROUP Corporate Governance I. Recommendations The Management Board and Supervisory Board of GfK ag declare that they have complied with and will continue to comply with the recommendations of the Government Commission German Corporate Governance Code in the version of June 12, 2006 published by the Germany Ministry of Justice on July 24, 2006 in the official section of the online Federal Gazette. Only the following recommendations have not been applied: 1) Point 4.2.3 deals with variable remuneration components for the Management Board. With regard to stock options, there is a request for the Supervisory Board to agree a limitation option (cap) for extraordinary, unforeseeable developments. GfK s stock option program expired on December 31, 2004 and there is no cap on this program. Tranches already issued or still to be issued may be exercised up to and including December 31, 2011. The Management and Supervisory Boards agreed on a new program on December 12 and December 14, 2005 which complies with the requirements of point 4.2.3. 2) Point 7.1.2 regulates the publication of the consolidated financial statements within 90 days and interim reports within 45 days. The company has complied with the 45-day period for publication of its quarterly results since January 1, 2005. In 2006, the Annual Report was published within 122 days. The company was unable to comply with the desired 90-day publication period and had announced this in its declaration of compliance in December 2005. The main reason for this was the acquisition of nop World on June 1, 2005. Based on sales in 2004, nop World was around half the size of GfK. nop World also previously applied us gaap accounting standards and as of the 2005 year-end, GfK switched from us gaap to ifrs. As a result, GfK announced in its quarterly report as of September 30, 2005 that it would publish its 2005 financial statements on May 2, 2006. This corresponds to a period of 122 days. GfK is seeking to considerably shorten this period in 2007. Publication of the Annual Report is scheduled for April 4, 2007, that is within a period of 94 days. For 2008, the company is aiming to comply with the 90-day period. II. Suggestions (n.b.: there is no obligation to explain any deviations from suggestions) The Management and Supervisory Boards of GfK ag declare that they have complied with and will continue to comply with the suggestions of the Government Commission German Corporate Governance Code in the version of June 12, 2006 published by the German Ministry of Justice on July 24, 2006 in the official section of the online Federal Gazette. Only the following suggestions are not applied: 1) Point 2.3.3: the Management Board should ensure the appointment of a representative to exercise voting rights for shareholders in accordance with instructions: such persons should also be contactable during the Annual General Meeting. In the past, the company has appointed a proxy to exercise the voting rights before the Annual General Meeting and will continue to do so in the future. Voting proxies shall be determined in accordance with the regulations listed in the invitation convening the Annual General Meeting. The details are published in the agenda and on the website under www.gfk.com/investor. Voting during the Annual General Meeting is currently difficult for GfK_19
Corporate Governance technical reasons. As soon as a practicable solution has been found for the secure transmission of votes, the company will look at introducing such a system. 2) Point 2.3.4: pursuant to point 2.3.4 of the Code, the company should enable shareholders to follow the Annual General Meeting using modern communication media (e.g. the Internet). Since GfK has been listed on the stock exchange, the Annual General Meeting has been broadcast on the Internet. The webcast lasts until the end of the report by the Management Board. The company has refrained and will continue to refrain from broadcasting more of the meeting in order to protect the privacy rights of the shareholders. Compliance Officer: Bernhard Wolf Tel. + 49 911 395 2012 Fax + 49 911 395 4075 bernhard.wolf@gfk.com 20_GfK
GfK shares GfK GROUP GfK shares The upward trend in the global economy made for a pleasing year for the stock market. All the relevant indices reported significant gains. Although the hikes in the oil price in early summer put a brake on the positive performance of shares in the international equity markets, robust company profits and the associated improvement in the labor markets, especially in the euro-zone and Asia, ensured a sustained upswing through to the yearend. The winners in economic terms in the Far East are India and China. As a result of the positive development in exports and increased investment, Germany recorded its fastest growth since the turn of the millennium. GfK shares closed 2006 with a rise of 16% on the prior year. Stock markets 2006: equity markets outperform expectations The players in the German equity market had one of their most successful stock market years. While the Dow Jones Index climbed by almost 17%, the s&p 500 Index rose by around 14 % and the Nikkei 225 Index by nearly 7%, the Deutscher Aktienindex (Dax) gained around 22% over the course of the year. Only the stock exchange in Madrid topped this figure. Closing at 6,597 points, the Dax was at its highest level since February 2001. In the last two years, it has risen by more than 50%. Optimistic forecasts by experts at the beginning of the year had put the index at around 6000 points. GfK shares: key data German securities code 587530 isin (International Stock DE0005875306 Identification Number) Reuters Bloomberg Datastream First Call GFK.DE GFK GR D:GFKX GFK.DE With a rise of 29%, the MDax, the index for mid-caps, outstripped the blue chip index to reach a new all-time high of 9,405 points on the last trading day. The TecDax also outperformed expectations with a gain of 25%. Climbing 31%, the SDax was the top performer among the German indices. This positive trend was driven primarily by successful consolidation and good corporate profits, especially by major German groups, which saw earnings rise by 25% in 2006. This led to increased tax revenue and a revival in the labor market. The economic upturn was also boosted by private consumption. GfK s consumer climate survey confirmed the positive consumer sentiment and the index more than doubled from 4.0 points in January to 9.2 points in December of the prior year. Performance in the indices in the usa was moderate by comparison as a result of the rapid jumps in the oil price in early summer and subsequent fears regarding inflation and growth, which in turn triggered significant price corrections in the international stock markets. According to the experts, the risk of a recession in the United States rose considerably from 20% in the middle of the year to 27% at the end of the year. These price rises and the increase in key lending rates sought by the American Central Bank and the European Central Bank narrowed the expectations of the financial markets and ensured a correction in fixed-income markets. GfK_21