Report of the Super­visory Board

Dear stockholders (signature)

During 2017, the Supervisory Board monitored the conduct of the company’s business by the Board of Management on a regular basis with the aid of detailed written and oral reports received from the Board of Management, and also acted in an advisory capacity. In addition, the Chairman of the Supervisory Board maintained a constant exchange of information with the Chairman of the Board of Management and with the other Management Board members. In this way the Supervisory Board was kept continuously informed about the company’s intended business strategy, corporate planning (including financial, investment and human resources planning), earnings performance, the state of the business and the situation in the company and the Group.

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

Changes on the Supervisory Board

The terms of office of the Supervisory Board members Werner Wenning, Dr. Paul Achleitner, Dr. Clemens Börsig, Thomas Ebeling, Sue H. Rataj and Dr. Klaus Sturany ended at the end of the Annual Stockholders’ Meeting on April 28, 2017. The Stockholders’ Meeting re-elected Werner Wenning, Dr. Paul Achleitner, Thomas Ebeling and Dr. Klaus Sturany as members of the Supervisory Board, in all cases until the end of the Annual Stockholders’ Meeting in 2022 except for Dr. Klaus Sturany, whose term will run until the end of the Annual Stockholders’ Meeting in 2018. As successors to Dr. Clemens Börsig and Sue H. Rataj, the Stockholders’ Meeting elected Dr. Norbert W. Bischofberger and Colleen A. Goggins, likewise until the end of the Annual Stockholders’ Meeting in 2022.

Yüksel Karaaslan passed away on June 4, 2017. His seat on the Supervisory Board was taken by the elected substitute member Detlef Rennings. Petra Kronen left the Supervisory Board effective midnight on September 30, 2017, and was replaced by the elected substitute member Sabine Schaab.

Work of the Supervisory Board

The full Supervisory Board met nine times during 2017 and resolved in writing on a special election to the Human Resources Committee. No member of the Supervisory Board attended only half or fewer than half of its meetings or those of the committees on which he / she served. The average attendance rate by Supervisory Board members at the meetings of the full Supervisory Board and of its committees held in 2017 was approximately 95 percent. A detailed overview of the attendance of the individual members of the Supervisory Board at the meetings of the Supervisory Board and its committees is shown under “Governance Bodies.”

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

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

Werner Wenning,
Chairman of the Supervisory Board of Bayer AG

The deliberations of the Supervisory Board focused on questions relating to Bayer’s strategy, portfolio, business activities and personnel issues. A particular focus of the Supervisory Board’s work was the Monsanto transaction, including the progress of the merger control proceedings, which were reported on extensively at several meetings. Between the meetings of the Supervisory Board, this issue was also the subject of an extensive exchange of information between the Chairman of the Supervisory Board and the Chairman of the Board of Management. The discussions at the respective meetings in 2017 centered on various topics.

At its February meeting, the Supervisory Board discussed the Annual Report 2016, the agenda for the Annual Stockholders’ Meeting 2017 and the Bayer Group’s risk management system, and adopted resolutions on reducing the interest in Covestro and on questions relating to the compensation of the Board of Management.

At an extraordinary meeting in April, the Supervisory Board passed a resolution to extend the appointment of the Chief Financial Officer, Johannes Dietsch, until May 31, 2018. At a further meeting in April, the Supervisory Board examined business performance to date in 2017, the targets for the proportion of women on the Board of Management, and the upcoming Annual Stockholders’ Meeting. At its constitutive meeting following the Annual Stockholders’ Meeting, the Supervisory Board held the necessary elections of the Chairman and Vice Chairman of the Supervisory Board, and the Chairmen and members of the Supervisory Board committees.

At an extraordinary meeting in June, the Supervisory Board examined a further reduction of the stake in Covestro and adopted a resolution on this.

At its September meeting, the Supervisory Board appointed Wolfgang Nickl to the Board of Management effective April 26, 2018. Wolfgang Nickl will become Chief Financial Officer when Johannes Dietsch leaves the Board of Management. Further, the Supervisory Board discussed the development of the Brazilian Crop Science business, which had led to an ad-hoc statement in June on an expected negative earnings impact. The Supervisory Board agreed to undertake a further review of these occurrences, including the Board of Management’s handling of the matter. At this meeting, the Supervisory Board also agreed to the conclusion of a control termination agreement with Covestro to ensure its deconsolidation effective September 30, 2017, and also decided to increase the size of the Innovation Committee to eight members.

At an extraordinary meeting in October, the Supervisory Board looked in detail at the planned divestment of part of the Crop Science business in connection with the ongoing merger control proceedings for the acquisition of Monsanto.

At another extraordinary meeting in November, the Supervisory Board appointed Heiko Schipper to the Board of Management effective March 1, 2018. He will head the Consumer Health Division when Erica Mann leaves the Board of Management. At this meeting, the Supervisory Board also discussed the in-licensing of two development candidates from the U.S. biotech company Loxo Oncology and the development of female managers in the Bayer Group.

At its meeting in December 2017, the Supervisory Board undertook the routine review of the fixed compensation of the members of the Board of Management and the pension amounts of the former members of the Board of Management. At this meeting, the Supervisory Board agreed that Erica Mann could leave the Board of Management effective March 31, 2018. The Board of Management furthermore presented its planning for business operations in the period 2018 through 2020 at this meeting, and reported on the financing concept for the Monsanto transaction, Monsanto’s valuation and the impact of the transaction on the company’s credit rating. The Supervisory Board approved the proposed financing framework for 2018. In addition, on the basis of two detailed reports to the Audit Committee and the associated discussions, the Supervisory Board held a further, final discussion on the developments at Crop Science in Brazil and the action taken by the Board of Management. Finally, the Supervisory Board elected two further members to the enlarged Innovation Committee and issued a new declaration on the German Corporate Governance Code.

Committees of the Supervisory Board

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

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

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

No meeting of the Presidial Committee had to be convened in 2017.

Audit Committee: The Audit Committee comprises three stockholder representatives and three employee representatives. The Chairman of the Audit Committee in 2017, Dr. Klaus Sturany, meets the statutory requirements concerning the expertise in the field of accounting or auditing that a member of the Supervisory Board and the Audit Committee is required to possess. The Audit Committee meets regularly four times a year.

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

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

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

The meetings focused on a number of topics. At the February meeting, the Audit Committee discussed the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group. It also carefully considered the risk report, which covers the risk early warning system, the report on the internal control system (ICS) and ongoing developments, especially the integrated risk management system. Further, the Audit Committee examined the development of legal and compliance cases. Finally, the Audit Committee made a recommendation to the full Supervisory Board concerning the resolution to be submitted to the Annual Stockholders’ Meeting on the appointment of the auditor of the financial statements. The April meeting mainly dealt with the yearly report of the Group Compliance Officer, a report on a compliance project in China, the yearly report of the Internal Audit department and the determination of the main areas of focus for the audit of the 2017 financial statements.

The July meeting looked at the interim financial report and, in particular, the development of business at Crop Science in Brazil. Other topics discussed by the Audit Committee were information security, CSR reporting and the status of the ongoing random sampling of the consolidated financial statements as of December 31, 2016, and the combined management report for the 2016 fiscal year by the German Financial Reporting Enforcement Panel, which was ultimately completed without identifying any faulty reporting. Moreover, as at all meetings, legal and compliance issues were discussed. At its meeting in October, the Audit Committee once more discussed the development of the Brazilian Crop Science business in addition to the regular items on the agenda. Supplementary to its report at the July meeting, the Board of Management outlined the further development and responded to a number of questions that the Audit Committee had submitted following the report at the previous meeting. Furthermore, the Audit Committee discussed the yearly report of the Tax department, the audit conducted pursuant to Section 20 of the German Securities Trading Act (WpHG) (EMIR), the audit budget for 2018 and the framework for non-audit services.

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

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

The Human Resources Committee convened on five occasions in 2017. The matters discussed were the compensation and contracts of the members of the Board of Management, the extension of the appointment of Johannes Dietsch, the upcoming departure of Erica Mann and the appointment of Wolfgang Nickl and Heiko Schipper to the Board of Management.

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

The Nominations Committee did not meet in 2017. The members of the committee had discussed the recommended nominations to the Annual Stockholders’ Meeting in December 2016.

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

The Innovation Committee convened twice in 2017. At its February meeting, it dealt with the research and development process in the Pharmaceuticals Division, especially the organization and strategy in the area of drug discovery. At its meeting in September, it examined the Consumer Health Division’s innovation concept and open innovation at Pharmaceuticals and Crop Science.

Corporate governance

The Supervisory Board dealt with the principles of corporate governance at Bayer. In particular, at its December meeting it discussed the implementation of the new recommendations of the German Corporate Governance Code and adopted corresponding changes to its rules of procedure. In December, the Board of Management and the Supervisory Board again issued an unreserved declaration on the German Corporate Governance Code. Further, at the meetings of the Supervisory Board the Chairman of the Supervisory Board gave a summary of his dialog with investors.

Financial statements and audits

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

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

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

The Supervisory Board would like to thank the Board of Management and all employees for their dedication and hard work in 2017.

Leverkusen, February 27, 2018
For the Supervisory Board

Werner Wenning (signature)

Werner Wenning
Chairman

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