Statement on Corporate Governance Pursuant to Sections 289f and 315d German Commercial Code (HGB)

Statement on Corporate Governance

The Executive Board of Softing AG reports on issues of corporate governance in this statement – also on behalf of the Supervisory Board – pursuant to both Principle 22 of the German Corporate Governance Code and Sections 289f (1) and 315d of the German Commercial Code (HGB).

The Executive Board and the Supervisory Board of Softing AG support many suggestions and rules contained in the German Corporate Governance Code and declare that in the 2020 financial year they complied with the recommendations regarding conduct contained in the Code as amended and will comply with them in the future, taking into account the exceptions and comments listed below. The Executive Board and Supervisory Board issued the Declaration of Compliance in December 2020. Below, the Executive Board and the Supervisory Board disclose and explain any deviations from the Code. You can download the full text of the Code from the Investor Relations section of our website at www.softing.com.

1.Declaration of the Executive Board and the Supervisory Board on the German Corporate Governance Code pursuant to Section 161 German Stock Corporation Act

The Executive Board and the Supervisory Board of Softing AG hereby issue the following Declaration of Compliance regarding the recommendations and suggestions of the Government Commission of the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act:

A.Softing AG (hereinafter: the Company) will comply with the recommendations and suggestions of the German Corporate Governance Code, as amended on December 16, 2019, and published by the Federal Ministry of Justice in the official section of the Federal Gazette on March 20, 2020 (hereinafter: the Code), with the following exceptions:
 1)

Diversity on the Executive Board (Code recommendation B.1)

Diversity on the Executive Board (Code recommendation B.1)
According to recommendation B.1 of the Code, the Supervisory Board shall take diversity into account when appointing Executive Board members. When appointing the members of the Executive Board, the Supervisory Board cannot also take into account diversity because the Company currently has only two Executive Board members. Given that the Executive Board comprises just two members – a number the Company believes to be adequate and whose positions will remain filled for the foreseeable future – the recommendations in the Code to aim for diversity do not appear feasible for the time being. Furthermore, the Supervisory Board does not consider it appropriate to select Executive Board members based on criteria such as orientation or race, but instead to rely on personality and expertise only.

 2)

Independence of shareholder representatives (Code recommendation C.7)

According to recommendation C. 7 of the Code, more than half of the shareholder representatives shall be independent from the Company and its Executive Board. Supervisory Board members are to be considered independent from the Company and its Executive Board if they have no personal or business relationship with the Company or its Executive Board that may cause a substantial – and not merely temporary – conflict of interest.

When assessing the independence of Supervisory Board members from the Company and its Executive Board, shareholder representatives shall particularly take into consideration the following aspects; whether the respective Supervisory Board member – or a close family member:

  • was a member of the Company's Executive Board in the two years prior to appointment;
  • currently is maintaining (or has maintained) a material business relationship with the Company or one of the entities dependent upon the Company (e.g. as customer, supplier, lender or advisor) in the year up to their appointment, directly or as a shareholder, or in a leading position of a non-group entity;
  • is a close family member of an Executive Board member; or
  • has been a member of the Supervisory Board for more than 12 years.

Dr. Horst Schiessl has been a member of the Supervisory Board of Softing AG for more than 12 years. In addition, Supervisory Board member Dr. Klaus Fuchs has a business relationship with the Company.

 3)

Explanation on independence (Code recommendation C.8)

According to recommendation C.8 of the Code, if one or more of the indicators set out in recommendation C.7 are met and the Supervisory Board member concerned is still considered independent, the reasons for this shall be given in the Corporate Governance Statement.

The Supervisory Board considers it acceptable that Dr. Horst Schiessl has been a member of the Supervisory Board of Softing AG for more than 12 years since, in the opinion of the Supervisory Board, no conclusion can be drawn from the length of membership on the Supervisory Board as to the respective member’s independence and, moreover, there has been no indication to date that Dr. Horst Schiessl lacks independence. Contrary to recommendation C.7, the Supervisory Board itself does not consider business relationships to be a suitable criterion for defining independence. With regard to Supervisory Board member Dr. Klaus Fuchs, there has also been no indication to date that he lacks independence.

 4)

Independence of the Chairman of the Supervisory Board, the Chairman of the Audit Committee and the Chairman of the committee that addresses Executive Board remuneration (Code recommendation C.10)

According to recommendation C.10 of the Code, the Chairman of the Supervisory Board, the Chairman of the Audit Committee and the Chairman of the committee that addresses Executive Board remuneration, shall be independent from the Company and its Executive Board. The Chairman of the Audit Committee shall also be independent from the controlling shareholder.

The Chairman of the Supervisory Board, Dr. Horst Schiessl, has been a member of the Supervisory Board of Softing AG for more than 12 years, but is considered independent from the Company in reference to recommendation C.8 of the Code.

 5)

Remuneration system (Code recommendation G.1)

The remuneration system shall define in particular:

  • how the target remuneration and total remuneration is determined for each Executive Board member;
  • the proportion of (i) fixed remuneration and (ii) short-term and long-term variable remuneration in the target total remuneration;
  • the financial and non-financial performance criteria relevant for the granting of variable remuneration components;
  • what kind of relationship exists between achieving previously agreed performance criteria and variable remuneration; and
  • when and in what form Executive Board members have access to variable remuneration components they have been granted.

A remuneration system implementing this recommendation has not yet been adopted. The Supervisory Board will adopt such a remuneration system in good time before sending out the notice to the 2021 General Shareholders’ Meeting and submit it to the shareholders for approval at the General Shareholders’ Meeting following December 31, 2020, in accordance with the transitional provision of Section 26j of the Introductory Act to the Stock Corporation Act.

 6)

Target and maximum total remuneration (Code recommendation G.2)

According to recommendation G.2 of the Code, the Supervisory Board shall set the specific target and maximum total remuneration for each Executive Board member on the basis of the remuneration system. This shall be appropriate to the Executive Board member’s own tasks and performance as well as to the enterprises’ overall situation and performance, and it shall not exceed the usual level of remuneration without specific reasons.
The remuneration system specifically recommended in Section G.1 of the Code has not yet been adopted. The current directors’ contracts do not expire until March 31, 2021 (Dr. Wolfgang Trier) and April 30, 2023 (Mr. Ernst Homolka) and are binding until that date. Before the beginning of each financial year, the Supervisory Board sets the targets, the achievement of which is then relevant. Following the resolution on the new remuneration system adopted by the General Shareholders’ Meeting, the Supervisory Board intends to implement the determination of the specific target total remuneration recommended by the Code in advance of each forthcoming financial year when entering into new directors’ contracts.

 7)

Peer group (Code recommendation G.3)

In order to assess whether the specific total remuneration of Executive Board members is in line with usual levels compared to other enterprises, the Supervisory Board shall determine an appropriate peer group of other third-party entities, and shall disclose the composition of that group. The peer-group comparison shall be applied with a sense of perspective in order to prevent an automatic upward trend. Recommendation G.3 of the Code was introduced in the context of the Executive Board’s specific total remuneration, which is why the composition of the peer group has not been disclosed to date. The Supervisory Board intends to implement recommendation G.3 of the Code when entering into new directors’ contracts, which will then also take into account the specific total remuneration in accordance with recommendation G.2 of the Code.

 8)

No consideration was given to the relationship between the remuneration of senior managers and the workforce as a whole when determining the remuneration for the Executive Board (Code recommendation G.4)

Recommendation G.4 of the Code recommends that the Supervisory Board consider the relationship between the remuneration of the Executive Board and that of senior management and the relevant workforce as a whole, particularly in terms of its development over time. When the current directors’ contracts of the Executive Board members were concluded, the Supervisory Board ensured – in compliance with the requirements of the German Stock Corporation Act – that the overall remuneration appropriately reflects the tasks and performance of the respective Executive Board member and does not exceed what is a customary level of remuneration.

Using the customary calculation method, the determination of the Executive Board’s remuneration was oriented on the Company’s scope of business, its economic and financial position and the structure of the Executive Board remuneration in place at comparable companies. Furthermore, consideration was given to the respective Executive Board member’s individual tasks and scope of responsibilities. To the extent that the Code, as amended, specifies reviewing the vertical appropriateness of Executive Board remuneration, which is required by the German Stock Corporation Act, and provides a more detailed definition of both the peer groups relevant for comparison and the time period to which such a comparison applies, the Company as a precaution declares that it deviates from the Code. When reviewing vertical appropriateness, the Supervisory Board did not distinguish between the peer groups of the recommendation and did not collect any data regarding the development over time of the wage and salary structure, either, because no comparison parameters exist due to the absence of a senior management group.

 9)

Determining the total amount of variable remuneration components (Code recommendations G.6 to G.11)

Recommendations G.6 to G.11 of the Code were introduced when the Code was amended. The Supervisory Board intends to implement recommendations G.6 to G.11 when entering into new directors’ contracts.

 10)

Benefits granted at contract termination (Code recommendation G.12)

According to recommendation G.12 of the Code, if an Executive Board member’s contract is terminated, the disbursement of any remaining variable remuneration components attributable to the period up until contract termination shall be based on the originally agreed targets and comparison parameters, and on the due dates or holding periods stipulated in the contract. Recommendation G.12 of the Code was introduced when the Code was amended. In the event of termination of the contract, the current directors’ service agreements provide for early payment of the outstanding variable remuneration components (in Dr. Wolfgang Trier’s director’s service agreement) and a compensation payment as part of the variable remuneration (in Mr. Ernst Homolka’s director’s service agreement). The Supervisory Board intends to implement recommendation G.12 when entering into new directors’ service agreements.

 11)

Termination of employment contracts due to a change of control (Code recommendation G.14)

Change of control clauses that commit to benefits in the case of early termination of an Executive Board member’s contract due to a change of control should not be agreed upon. Recommendation G.14 of the Code was introduced when the Code was amended. Dr. Wolfgang Trier’s director’s service agreement provides for a compensation payment if the Executive Board member terminates his employment contract prematurely due to a change of control.

 12)

Performance-related remuneration shall be geared to the long-term development of the Company (Code recommendation G.18).

In addition to fixed remuneration, the members of the Supervisory Board also receive performance-related remuneration based on consolidated EBIT before taking into account the Supervisory Board’s variable remuneration. The Company’s Articles of Incorporation do not expressly require a link to the Company’s long-term development. The Company continues to believe that basing performance-related remuneration on consolidated EBIT of the respective financial year is a sensible approach, because due to the nature of its business, deliberate deferrals of expenses and income are hardly possible. Consolidated EBIT is a key performance indicator. Furthermore, no generally accepted model for basing the remuneration of Supervisory Board members on a company’s long-term development has established itself in the capital markets to date. For the time being, the Company will continue to monitor the situation.

B.

Since the publication of its most recent Declaration of Compliance in December 2019, Softing AG has generally been in compliance with the recommendations contained in the German Corporate Governance Code as amended on December 16, 2019. The recommendations and suggestions contained in sections B.1, C.7, C.8, C.10, G.1, G.2, G.3, G.4, G.6, G.7, G.8, G.9, G.10, G.11, G.12, G.14 and G.18 were not applied.

Please see the explanations in section A. for the reasons for not observing the Code’s recommendations and suggestions stated here in section B.

2.

Working practices of the Executive Board and Supervisory Board

Softing AG is a stock corporation under German law. The two-tier system comprising the Executive Board and the Supervisory Board as corporate bodies, each of which having distinct responsibilities, is a fundamental element of German corporate law. The collaboration between the Executive Board and the Supervisory Board of Softing AG in managing and supervising the Company is very close and trusting.

Both the Executive Board and the Supervisory Board are committed to safeguarding and furthering the corporate interests of Softing AG. There were no conflicts of interest in the financial year just ended that would have had to be disclosed to the Supervisory Board without delay. The members of the Executive Board did not hold any positions on supervisory boards of listed stock corporations outside of the Group.

2.1

Executive Board

Softing AG's Executive Board may comprise one or several persons. The Executive Board currently comprises two members: Dr.-Ing. Dr. rer. oec. Wolfgang Trier and Ernst Homolka. Dr. Trier is currently responsible for the Industrial, Automotive and IT Networks operating segments and for Investor Relations, while Mr. Ernst Homolka is responsible for Finance and Human Resources.

The members of the Executive Board are jointly responsible for corporate management as a whole. They work together in a spirit of cooperation and keep each other informed of important activities and events in their areas of responsibility on an ongoing basis. Each individual member of the Executive Board is responsible for managing the area of responsibility assigned to them. The Executive Board generally adopts its resolutions in meetings that shall take place on a weekly basis. Every member of the Executive Board may ask that a meeting be convened, subject to notification of the issue to be deliberated. Likewise, every Executive Board member may ask that a topic be included in the agenda of a particular meeting. The Executive Board adopts its resolutions by the simple majority of all votes cast. The subsidiaries' managing directors receive regular information from the members of the Executive Board on important measures and matters concerning the respective functions.

2.2

Supervisory Board

The Supervisory Board advises and monitors the Executive Board with regard to its management of the Company. The Supervisory Board is integrated in corporate strategy and planning, as well as all aspects of fundamental importance to the Company. Under the rules of procedure for the Executive Board, significant transactions — for example, determining the Company's annual planning or major investments — require the approval of the Supervisory Board. The Chairman of the Supervisory Board coordinates the work of the Supervisory Board, chairs its meetings and represents the Supervisory Board externally.

The Executive Board informs the Supervisory Board in a timely and comprehensive manner — both in writing and at regularly scheduled meetings — of the Group's planning, performance, situation and risk management. Extraordinary Supervisory Board meetings are convened as necessary in connection with material events. The Supervisory Board adopted Rules of Procedure for its own work.

Pursuant to the Company's Articles of Incorporation, the Supervisory Board of Softing AG comprises three members, who are elected by the shareholders. These three members have identical terms of office. The Supervisory Board's term of office is four years. Its members’ current terms of office end with the General Shareholders' Meeting in 2023. The Supervisory Board has established an Audit Committee in spite of its size. The full Supervisory Board is responsible for all other tasks and decisions. The current members of the Supervisory Board are: Dr. Horst Schiessl (Chairman), Dr. Klaus Fuchs (Deputy Chairman) and Mr. Andreas Kratzer.

In accordance with recommendation C. 1 of the German Corporate Governance Code, the Supervisory Board has drawn up a profile of skills and identified the following objectives, taking into account the diversity of the Supervisory Board as well:

  • The Supervisory Board shall not include any persons who are officers or directors of or serve in an advisory capacity for any of the Company’s principal competitors or who have a personal relationship with a principal competitor.
  • The Supervisory Board aims to achieve sufficient diversity in its composition with regard to age distribution, gender, professional background, expertise and experience, and internationality, taking into account the following criteria:
    • At least one third of the Supervisory Board members to be elected by the General Shareholders’ Meeting shall differ in terms of nationality and/or gender and/or age (there shall be an age difference of at least 20 years between the oldest and the youngest Supervisory Board member).
    • In addition, at least one third of the Supervisory Board members to be elected by the General Shareholders’ Meeting shall have relevant international professional experience and English-language skills as well as an understanding of global economic contexts („internationality“).
  • The age limit for Supervisory Board members is set at the age of eighty at the time of election.
  • No more than two former members of the Executive Board shall be members of the Supervisory Board.
  • A regular limit of 15 years (i.e. three full terms of office) applies to members of the Supervisory Board. The Company may deviate from the regular maximum limit with the approval of the Supervisory Board if it is in the Company’s interest, in particular if it serves to meet other composition criteria.

The Supervisory Board assesses its effectiveness in discharging its duties at least once a year by way of a self-assessment using an extensive questionnaire that scrutinizes various areas and aspects of the Supervisory Board's work. During this process, all members of the Supervisory Board can submit their assessment of the effectiveness of the Supervisory Board's working practices and suggest potential improvements. After the questionnaires have been evaluated, the results and potential improvements are usually discussed at the next regular Supervisory Board meeting. The Supervisory Board examines the results in detail and derives any necessary improvements from them. The most recent self-assessment was carried out at the Supervisory Board meeting on March 18, 2020.

For the Report of the Supervisory Board, please see the 2019 annual report.

3.

Provisions according to the German Act on the Equal Participation of Women and Men in Executive Positions in the Private and Public Sector

On May 1, 2015, the Act on Equal Participation of Women and Men in Executive Positions in the Private and Public Sector (Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen in der Privatwirtschaft und im öffentlichen Dienst) entered into force. For listed companies, Section 111 (5) of the German Stock Corporation Act now stipulates that the Supervisory Board must set targets for the proportion of women on the Supervisory Board and the Executive Board along with deadlines for their achievement.

The Supervisory Board of Softing AG has discussed this matter at length. Currently, the proportion of women on the Executive Board and Supervisory Board is 0% in each case. Up to now, the Supervisory Board of Softing AG has exclusively based its proposals for the nomination of Supervisory Board members and executives to fill Executive Board positions on the suitability of the male and female candidates with the aim of creating a Supervisory Board and an Executive Board whose members as a group possess the knowledge, skills and professional experience required to properly complete its tasks. Since the Supervisory Board comprises only three members, the Supervisory Board is of the opinion that taking other criteria into consideration would impose a disproportionate limitation on the selection of candidates. What is more, the term of office of the current Supervisory Board members still runs until the end of the General Shareholders’ Meeting that formally approves their actions for financial year 2022. This General Shareholders’ Meeting will probably be held in May 2023, which means that changes in the composition of the Supervisory Board prior to that date would require one of the current members to step down or the Supervisory Board to be expanded to six members. However, this is not even envisaged for the statutory minimum quota applicable to listed companies and companies subject to codetermination legislation. The Company's Executive Board currently comprises two members, a number the Supervisory Board considers adequate at the present time. In respect of the term of office of the Executive Board members, no changes in the composition of the Executive Board are planned in the medium term, i.e., up to April 2021 at least. It was therefore not yet possible to implement a quota of women on the Executive Board without expanding the Executive Board.

4.

Diversity plan

The Executive Board and Supervisory Board have not yet developed a diversity plan. Since the Executive Board currently comprises just two members – a number the Company believes to be adequate and whose positions will remain filled for the foreseeable future – the recommendations in the Code to aim for diversity do not appear feasible for the time being. Furthermore, the Supervisory Board does not consider it appropriate to select Executive Board members based on criteria such as orientation or race, but instead to rely on personality and expertise only. Nevertheless, the Supervisory Board has adopted a profile of skills according to which at least one third of the Supervisory Board members to be elected by the General Shareholders’ Meeting should differ with regard to gender, among other things. The Executive Board and the Supervisory Board also believe that, in addition to the objectives for the composition of the Executive Board and Supervisory Board and the diversity measures implemented and targeted in the Company to date, an additional diversity plan does not entail any substantial added value. Rather, the individual professional and personal suitability of the candidate is decisive in each case. Irrespective of this, age limits have been set for members of the Executive Board and the Supervisory Board: Members of the Executive Board must not have reached the age of 70 at the time of appointment; members of the Supervisory Board should not have reached the age of 80 at the time of appointment. In the 2021 financial year, the Executive Board and Supervisory Board will again examine whether it makes sense to draw up a separate diversity plan.

5.

Corporate governance practices

Acting responsibly with a view toward the long term and in a spirit of social awareness has always been fundamental to Softing AG's corporate culture. Among other things, this includes integrity in the Company's relationships with customers, employees, business partners, shareholders and the public at large.

Softing defines compliance as abiding by requirements under the law and the Company's Articles of Incorporation as well as internal rules and regulations. The Company has not committed itself voluntarily to any external codes or rules and regulations. Instead, it has given itself a comprehensive mission statement and a set of written management principles. The Company's mission statement expresses the way the Company, its executive bodies and its employees perceive themselves. It also includes recommendations regarding proper dealings with customers, business partners and co-workers.

Please see the Company's web page for more information on quality assurance at Softing AG, as certified under DIN ISO 9001.

6.

Remuneration of the Executive Board and the Supervisory Board

The Supervisory Board is responsible for determining and reviewing the remuneration of the Executive Board and the remuneration system.

A remuneration system pursuant to Section 87a (1) and (2) sentence 2 of the German Stock Corporation Act has not yet been adopted. The Supervisory Board will adopt such a remuneration system in good time before sending out the notice to the 2021 General Shareholders’ Meeting and submit it to the shareholders for approval at the General Shareholders’ Meeting following December 31, 2020, in accordance with the transitional provision of Section 26j of the Introductory Act to the Stock Corporation Act.

Nevertheless, in addition to fixed remuneration, the current directors’ service agreements already include variable remuneration components based on consolidated EBITDA.

The terms of the contracts of the Executive Board members are linked to the term of their appointment as a member of the Executive Board. The contracts of the Executive Board members provide for a post-contractual non-compete clause covering a period of two years. After their departure, the members of the Executive Board are contractually prohibited from providing services to or for a competitor during this period.

Remuneration for the members of the Executive Board and the active members of the Supervisory Board in the 2019 financial year is presented in the Group management report of the 2019 annual report.

Haar, Germany, December 2020

Chief Executive Officer / Chairman of the Supervisory Board

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