Annual Report 2007
Corporate Governance
Standards of sound and responsible corporate management
Corporate governance generally encompasses the totality of all international and national values and principles for sound corporate management.
Good corporate governance guarantees responsible, qualified and transparent corporate management, focused on the long-term success of the Company. The Executive Board and Supervisory Board of Software AG are strongly committed to good corporate governance. This includes both compliance with the law and extensively following generally accepted standards and recommendations. The focus is on values such as sustainability, transparency and value orientation.
Software AG's Corporate Governance Report, has been prepared jointly by the Executive Board and the Supervisory Board pursuant to Section 3.10 of the German Corporate Governance Code. It describes the principles of the Company's management and control structure and the fundamental rights of Software AG shareholders.
Trust-based cooperation between the Executive Board and Supervisory Board
The corporate bodies of Software AG are the Executive Board, the Supervisory Board and the Annual Shareholders' Meeting. The duties of these corporate bodies are governed by the German Stock Corporation Act, the Articles of Incorporation and the Rules of Procedure for the Executive Board and the Supervisory Board. The Executive Board and Supervisory Board cooperate in an atmosphere of trust.
The Executive Board is solely responsible for the management of Software AG. It is committed to act in the interests of the Company and the long-term increase of the enterprise value. In addition, it represents the Company in relation to third parties. Presently the Executive Board of Software AG is comprised of six members. It is obligated to report to the Supervisory Board regularly, in a timely manner and comprehensively, concerning all relevant matters relating to the development of business activities, the condition of the Group, including the risk situation, as well as corporate planning.
The Supervisory Board of Software AG is also comprised of six members. It advises and supervises the Executive Board in managing the Company. The two bodies jointly decide on corporate strategy and the implementation thereof.
The Supervisory Board appoints the members of the Executive Board and is entitled to dismiss them for good cause. In addition, it discusses the quarterly reports and reviews and approves the financial statements and consolidated financial statements of Software AG. Key Executive Board decisions such as financing measures and acquisitions require its consent.
At Software AG, the election of the Supervisory Board is in compliance with the recommendations of the Corporate Governance Code. All Supervisory Board members are elected individually. Our Rules of Procedure stipulate that if a Supervisory Board member leaves the Board prior to expiration of his or her term of office, the successor's appointment is valid only until the next Annual Shareholders' Meeting.
Efficient committee work
The Rules of Procedure of the Supervisory Board provide for the establishment of three committees. They include the Committee for Compensation and Succession Issues, the Audit Committee and the Nominating Committee implemented on December 14, 2007 which is responsible for preparing nominations for election of members to the Supervisory Board. In the past fiscal year, the Committee for Compensation and Succession Issues met six times, the Audit Committee twice. The Nominating Committee met for the first time in early 2008. The Supervisory Board provides information concerning its responsibilities and work in the Report of the Supervisory Board. The Executive Board, Supervisory Board and committees work closely together with the objective of increasing Software AG's long-term enterprise value.
The knowledge and experience of the Chairman of the Committee for Compensation and Succession Issues also reflect the sound corporate governance of our Company. Dr. Andreas Bereczky was elected Chairman of the Committee for Compensation and Succession, replacing Karl Heinz Achinger. Dr. Bereczky has extensive experience in the industry, in particular in the IT segment. He presently serves as production director at ZDF. Previously, Dr. Bereczky was one of four managing directors of T-Systems Service Line Systems Integration, a company with €2 billion in annual revenues.
Software AG maintains no direct or indirect business relationships with Supervisory Board members. In particular, no mutual consulting agreements or other contracts for work or services exist. Both employee representatives on the Supervisory Board are employees of Software AG.
Annual Shareholders' Meeting
Software AG invites its shareholders to participate in its Annual Shareholders' Meeting. Key resolutions are decided at the Annual Shareholders' Meeting. They include the approval of the actions of the Executive and Supervisory boards, appointment of the external auditors, amendments to the Articles of Incorporation and - for the purpose of good corporate governance - corporate actions. As scheduled in the financial calendar, we inform our shareholders of business developments and the financial performance and the financial position of Software AG four times per year. In 2008, the Annual Shareholders' Meeting will be held once again in Darmstadt, as the city now has a suitable meeting forum in the "Darmstadtium" convention Center.
Pursuant to the recommendations of the Corporate Governance Code, we conduct the Annual Shareholders' Meeting in an expedient manner within a time frame of 4 hours. We transmit the Annual Shareholders' Meeting live in the Internet. The amendment to the Articles of Incorporation necessary for this was adopted in the 2006 Annual Shareholders' Meeting. Shareholders who do not wish to exercise their voting rights may authorize a member of the Company to vote by proxy in accordance with the instructions of the shareholder. The invitation to the Annual Shareholders' Meeting and related documents and information such as the agenda, the financial statements, the Articles of Incorporation, and explanations of draft resolutions are published on the Software AG website along with the date of the Meeting. The resolutions adopted by previous shareholders' meetings as well as the quarterly reports of the preceding fiscal years may also be found there.
In conformity with the Law on Corporate Integrity and Modernization of the Right of Avoidance (UMAG), we modified our registration and identification procedures for the 2006 Annual Shareholders‘ Meeting. Holders of bearer shares need only to present written confirmation of their shareholdings as of the 21st day before the Annual Shareholders‘ Meeting (“record date”) from the depository bank. UMAG also makes it possible to conduct our Annual Shareholders’ Meeting efficiently by allowing the chairperson to cut short speakers who stray from the topic at hand and to refer to detailed information already published on the website.
Open and transparent communication
Software AG communicates openly, transparently, comprehensively and in a timely manner. Our disclosure policy ensures that information of relevance to investors is dealt with uniformly all over the world. It governs the publication of financial results and significant events as well as internal processes in which the relevance of information is examined. Accordingly, the Executive Board immediately publishes insider information that affects Software AG, unless it is exempt from the publication requirement in specific cases. In accordance with legal stipulations, we maintain registries of persons with access to insider information who are instructed to maintain confidentiality. Software AG provides information to shareholders, analysts and journalists in accordance with uniform criteria. The information is transparent for all capital market participants. All ad hoc announcements and press releases as well as presentations given at press and analysts' conferences and road shows are published without delay on the website of Software AG.
The Company also publishes the purchase or sale of shares in the Company or related financial instruments, particularly derivatives, by members of the Executive and Supervisory Board of Software AG as well as certain other related parties. As soon as knowledge is acquired of these transactions, they must be posted on our website.
Pursuant to the Law to Implement Transparency Guidelines (TUG), the threshold for issuing a mandatory notification concerning shareholdings in listed companies was reduced to 3 percent of the voting rights, effective January 20, 2007. The law also stipulates that companies must make such notifications available Europe-wide. We use a suitable service provider for this purpose. In addition, we publish all information in German and English. We also fully comply with the "Act on Electronic Commercial Registers, Registers of Cooperatives and Business Registers (EHUG)," which came into force on January 1, 2007, by sending the operator of the electronic version of the Federal Gazette all documents requiring publication in electronic form as prescribed by the Act.
In order to provide relevant information in an even more user-friendly form, we restructured and enhanced our investor relations website in 2007. We also added to its content, for example a list of frequently asked questions and answers as well as an investor fact sheet.
We present our risk management concept in the "Risk Report." Please refer to the Notes for information on Group accounting.
Directors' Dealings
The following reportable transactions were announced in calendar year 2007.
| Date of transaction | November 22, 2007 |
| Full name | Dr. Peter Kürpick |
| Position | Chief Product Officer |
| Title of security or right | DB Software 85 CWTS 17.06.09 |
| WKN / ISIN |
DE000DB9K807 (underlying ISIN DE0003304002) |
| Type of transaction | Purchase of warrants |
| Place of transaction | EUWAX |
| Quantity | 15,000 |
| Price | 0.27 € |
| Transaction volume | 4,050.00 € |
| Date of publication | November 22, 2007 |
|
Date of transaction |
November 21, 2007 |
| Full name | Dr. Peter Kürpick |
| Position | Chief Product Officer |
| Title of security or right | DB Software 85 CWTS 17.06.09 |
| WKN / ISIN |
DE000DB9K807 (underlying ISIN DE0003304002) |
| Type of transaction | Purchase of warrants |
| Place of transaction | EUWAX |
| Quantity | 25,000 |
| Price | 0.276 € |
| Transaction volume | 6,900.00 € |
| Date of publication | November 22, 2007 |
|
Date of transaction |
November 15, 2007 |
| Full name | Arnd Zinnhardt |
| Position | Chief Financial Officer |
| Title of security or right | Software AG Share |
| WKN / ISIN | DE0003304002 |
| Type of transaction | Acquisition through exercise of options |
| Place of transaction | Frankfurt am Main |
| Quantity | 1,250 |
| Price | 9.73 € |
| Transaction volume | 12,162.00 € |
| Date of publication | November 16, 2007 |
| Date of transaction | August 16, 2007 |
| Full name | Arnd Zinnhardt |
| Position | Chief Financial Officer |
| Title of security or right | Software AG Share |
| WKN / ISIN | DE0003304002 |
| Type of transaction | Acquisition through exercise of options |
| Place of transaction | Frankfurt am Main |
| Quantity | 1,250 |
| Price | 13.58 € |
| Transaction volume | 16,975.00 € |
| Date of publication | November 16, 2007 |
| Date of transaction | August 16, 2007 |
| Full name | Arnd Zinnhardt |
| Position | Chief Financial Officer |
| Title of security or right | Software AG Share |
| WKN / ISIN | DE0003304002 |
| Type of transaction | Acquisition through exercise of options |
| Place of transaction | Frankfurt am Main |
| Quantity | 1,250 |
| Price | 9.73 € |
| Transaction volume | 12,162.00 € |
| Date of publication | November 16, 2007 |
| Date of transaction | May 21, 2007 |
| Full name | Arnd Zinnhardt |
| Position | Chief Financial Officer |
| Title of security or right | Software A Call/100 |
| WKN / ISIN |
DE000SDL11K4 (underlying ISIN DE0003304002) |
| Type of transaction | Purchase of warrants |
| Place of transaction | over the counter |
| Quantity | 66,500 |
| Price | 0.31 € |
| Transaction volume | 20,615.00 € |
| Date of publication | May 30, 2007 |
2007 declaration of Compliance pursuant to Section 161 of the German Stock Corporation Act (AktG)
On December 17, 2007, the Executive and Supervisory Boards submitted an unqualified declaration of compliance stating that the Company has followed all recommendations of the Commission of the German Corporate Governance Code as amended on June 12, 2006 and with the updated German Corporate Governance Code as amended on June 14, 2007. Software AG will continue to comply with the Code as amended on June 14, 2007.
Software AG implements the recommendations of the German Corporate Governance Code. However, separate preparation of Supervisory Board meetings by shareholder or employee representatives does not take place in a formal sense. Due to the small number of representatives, informal coordination is easily achieved.
Please see the Investor Relations section of our website at www.softwareag.com for additional details on this and corporate governance at Software AG in general.
The current version of the German Corporate Governance Code published by the Commission of the German Corporate Governance Code can be found at www.corporate-governance-code.de.
Auditor
The Annual Shareholders' Meeting of Software AG has again appointed BDO Deutsche Warentreuhand Aktiengesellschaft, Frankfurt am Main, as Company auditor. BDO advises the Company on individual tax matters in connection with tax returns and tax audits. No business, financial, personal, or other relationships that could cast doubt on the independence of the audit firm have existed at any time between BDO and its corporate bodies and audit managers on the one hand and Software AG and the members of its corporate bodies on the other.
Pursuant to the Annual Shareholders' Meeting resolution, the Supervisory Board, through the Chairman of the Audit Committee, has appointed the auditor and agreed on the fee. In connection with the audit engagement, the Chairman of the Audit Committee has also agreed with the auditor to comply with the reporting duties pursuant to the German Corporate Governance Code. BDO participates in meetings of the Supervisory Board's Audit Committee and of the Supervisory Board concerning the financial statements and consolidated financial statements and reports on key audit findings.
Remuneration report
This remuneration report provides details on remuneration amounts and the structure of the remuneration system for the Executive and Supervisory Boards. Remuneration of board members is reported as total amounts,while stating the proportion of the individual remuneration components to one another. The proportions of the individual components are indicated, and the total figure is broken down into fixed payments, performance-related components, and long-term incentive components.
Executive Board remuneration pursuant to Section 314 (1) No. 6a German Commercial Code (HGB)
Remuneration of active Executive Board members for fiscal 2007 is composed as follows:
| in € |
Fixed remuneration |
Variable remuneration/ bonuses |
Other remuneration components* |
|
Karl-Heinz Streibich (Chief Executive Officer) |
450,000.00 | 1,782,949.72 | 19,384.30 |
| David Broadbent | 244,852.38 | 519,034.93 | 204,726.01 |
| Mark Edwards | 236,073.82 | 1,045,009.20 | 331,872.87 |
| Dr. Peter Kürpick | 200,000.04 | 606,173.06 | 26,487.52 |
| David Mitchell | 102,843.71 | 505,621.91 | 15,485.30 |
| Arnd Zinnhardt | 231,999.96 | 1,149,012.04 | 34,589.40 |
| Christian Barrios Marchant | 19,333.33 | 36,000.00 | 1,799.52 |
| Alfred Pfaff | 166,666.64 | 0.00 | 21,406.92 |
€176 thousand of other remuneration components of David Broadbent and €286 thousand of other remuneration components of Mark Edwards include employer contributions to social security.
Expenses amounting to €2,000 were charged to the pension commitments to the Executive Board members in fiscal 2007. Employer contributions to social security for two members of the Executive Board resulted in expenses of €462,000. In departure from the remuneration report in the notes to the financial statements these two items were recognized in the total remuneration of the Executive Board. This relates to remissions from the company for British social security, which will not increase the future pensions for either of the British executive board members.
Variable remuneration/bonuses
Individual Executive Board members are paid a bonus based on the Group's sales and earnings performance. In addition, a variety of quantitative and qualitative targets have been agreed on depending on area of responsibility. The bonuses are calculated based on the extent to which targets are reached.
Medium and long-term remuneration components
a) Stock option plan
The stock option plan has been in existence since 2001. No new options
have been issued in conjunction with this program since January 1,
2005. As of December 31, 2007, 43,402 subscription rights had been
issued to Executive Board members. The plan will continue until the end
of 2011. The conditions for exercising the options were again fulfilled
in fiscal year 2007. Net income rose by more than 10 percent over the
previous year, and profit from ordinary activities surpassed 10 percent
of sales. The exercise price averaged €55.29 for all persons eligible
to exercise options in the year under review. €4,416 thousand was paid
out from this plan to the members of the Executive Board in fiscal year
2007.
Medium and long-term remuneration components
| in € |
Medium and long-term remuneration components |
Pension expenses* |
Stock Appreciation Rights |
Performance Phantom Shares |
|
Karl-Heinz Streibich (Chief Executive Officer) |
1,018,351.41 | 24,150.00 | 300,000 | 16,809 |
| David Broadbent | 764,790.13 | 35,560.82 | 150,000 | 7,258 |
| Mark Edwards | 1,328,904.03 | -1,989.56 | 150,000 | 12,775 |
| Dr. Peter Kürpick | 472,916.36 | 8,571.00 | 150,000 | 7,830 |
| David Mitchell | 232,837.98 | 0.00 | 125,000 | 2,234 |
| Arnd Zinnhardt | 2,233,006.58 | -32,924.00 | 150,000 | 14,640 |
| Christian Barrios Marchant | 1,115,379.57 | 245.67 | 0 | 0 |
| Alfred Pfaff | -261,639.02 | -30,830.00 | 0 | -5,114 |
*Based on Recommendation 23 of the Corporate Governance Code and at variance with the provisions of the German Commercial Code, we have included pension expenses in this portrayal of Executive Board remuneration.
b) Phantom share plan
A portion of the variable remuneration is paid as a "long-term
component" on the basis of a phantom share plan. As in the previous
year, the portion accruing for fiscal year 2007 is converted into
virtual (phantom) shares on the basis of the average share price of
Software AG stock in February 2008 less 10 percent. The resulting
number of shares will become due in three identical tranches with terms
of one, two, and three years. On the due dates in March 2009 to 2011,
the number of phantom shares will be multiplied with the then
applicable average share price for February of the relevant year. This
amount is adjusted to reflect the amount (measured in percent) by which
the shares outperform or underperform the TecDAX30 index and is then
paid to the members of the Executive Board. The members of the
Executive Board receive an amount per phantom share equal to the
dividends paid to Software AG shareholders prior to payment of a
phantom share tranche. Personnel expenses of €1,365 thousand were
incurred under this program during fiscal year 2007. These expenses are
reflected under "long-term components" in the table above.
c) Stock appreciation rights program
A new incentive program based on the performance of Software AG
stock was initiated for Executive Board members and officers in the
third quarter. So far, 1,025,000 ownership rights have been issued to
Executive Board members. If the performance targets are reached by June
30, 2016, the holders of these ownership rights are entitled to a
payment of the value by which the Software AG stock surpasses the base
price of €72.36. The attainment of Group revenues of €1,000,000 with a
simultaneous doubling of earnings after taxes compared to fiscal year
2006 by no later than 2011 was defined as the performance target.
Total remuneration for members of the Executive Board amounted to €14,858 thousand in the fiscal year.
A total of 1,025,000 stock appreciation rights were granted to the Executive Board members.
The Executive Board members received a total of 56,432 performance phantom under the phantom share plan.
Remuneration for former Executive Board members totaled €2,833 thousand.
Pension provisions for former Executive Board members amounted to €1,886 thousand.
Other remuneration components
If a member of the Executive Board resigns due to a change of control within 12 months of such change and without good cause will receive a severance payment equal to three annual salaries based on the annual target remuneration most recently agreed and the average target performance ratio for the preceding three full fiscal years. In case of resignation the above mentioned regulation is not applicable if the position of the Executive Board member has only been altered marginally with the change of control. This change of control clause for Executive Board members is intended to replace the existing regulations of paying the remaining term of the contract in the event of termination by the Company as well as the agreed escalation bonus in the amount of 0.5 percent of the increase of the Company's market capitalization as a result of a takeover bid.
In the event of illness, five members of the Executive Board will receive full pay based on the annual target remuneration for a period of six months. After six months, the variable remuneration component will be reduced by 1/12 for every month that follows. Salary payments will cease at the end of the term of the contract in any event. Any health insurance benefits received by the Board member must be credited against such payments. In the event of illness, one Executive Board member will continue to be paid 90 percent of his average after-tax annual remuneration for the preceding three years for a period of six months.
In case of permanent disability, the employment contract of the Executive Board member concerned will terminate at the end of the month in which the permanent disability was determined or at the end of the month in which the Executive Board member has been incapacitated for work for an uninterrupted period of twelve months. In such a case, severance pay will be provided for one Executive Board member in the amount of €158 thousand, plus an additional severance payment equal to the total of the members' fixed salary for the remainder of the contract for a period not to exceed six months. The remaining Executive Board members will receive no severance pay in such a case. From the time of their departure until completion of their 65th year of age, the German members of the Executive Board will receive a disability pension of €11,000 per month, and the CEO will receive €15,000 per month. British members of the Executive Board are subject to the provisions of the Permanent Health Insurance Plan applicable in the United Kingdom. Under this plan, British members of the Executive Board will receive 90 percent of their average annual after-tax remuneration for the preceding three years until they reach the pensionable age of 60 years. This entitlement will be adjusted to reflect inflation in years in which the inflation rate is less than 5 percent. If the inflation rate exceeds 5 percent, the entitlement will be adjusted annually by 5 percent.
The Company maintains life insurance policies for five Executive Board members. For four Executive Board members, the insured amount equals €500 thousand in the event of death and €1,000 thousand in the event of disability. For one Executive Board member, the insured amount equals four times his fixed annual remuneration.
Four members of the Executive Board will receive pensions of €11,000 per month for life after completing their 65th year of age, regardless of their number of years at the Company. The CEO's pension amounts to €15,000. This pension commitment also comprises a widow's annuity of €6,000 per month, with €9.000 per month for the widow of the CEO. In the event an Executive Board member leaves the Company prior to the age of 65, such Executive Board member will still be entitled to pension benefits, but they will be reduced on a pro rata temporis basis. The beneficiary will not be entitled to claim an adjustment or indexation of the entitlement. One member of the Executive Board will receive an annual pension for life after completing his 60th year in the amount of 1.66 percent of the average fixed remuneration for the preceding three years multiplied by the members number of service years. This entitlement will be adjusted to reflect inflation in years in which the inflation rate is less than 5 percent. If the inflation rate exceeds 5 percent, the entitlement will be adjusted annually by 5 percent.
Instead of a pension plan, one member of the Executive Board receives a monthly allowance for maintaining a second place of residence in the amount of €2,000 (USD 3,000) as well as weekend flights home.
In addition, all members of the Executive Board are entitled to be provided with a suitable company car.
No additional commitments have been made regarding severance pay in the event an employment contract is not extended or a change in shareholder occurs, nor regarding bridging payments, continuation of salary payments in the event of early termination of employment, or interest on severance payments. There are also no entitlements to payments based on customary practice.
Supervisory Board remuneration
Remuneration for Supervisory Board members is made up of fixed and performance-related components. Members receive separate remuneration for their work on the Committee for Compensation and Succession Issues and the Audit Committee as well as the Nominating Committee which was established on December 14, 2007.
In addition to reimbursement of their expenses, members of the Supervisory Board receive a fixed annual remuneration in the amount of €25,000 as well as annual performance-related remuneration of €2,000 for each percentage point or fraction thereof in excess of 5 percent by which the growth of currency-adjusted net income has exceeded the previous year's figure. (Variable Remuneration I).
The figures reported in the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) for the relevant fiscal year or fiscal years are utilized for calculating performance- related remuneration.
Furthermore, Supervisory Board members receive annual compensation based on long-term corporate profits in the amount of €200 for each percentage point or fraction thereof by which the growth in value of Software AG stock exceeds the growth of value of the TecDAX30 index for the same period (Variable Remuneration II). The growth in value of the stock will be assessed on the basis of a 3-year comparison of the XETRA closing rates starting in fiscal year 2008, and the growth in value of the TecDAX30 will be assessed on the basis of a 3-year comparison of the index.
Remuneration of the Chairman/Deputy Chairman
The Chairman of the Supervisory Board receives twice the remuneration stated, and the Deputy Chairman one and a half times such amount.
Other arrangements
In addition, members of the Supervisory Board receive an attendance fee of €1,500 each time they participate in person in a meeting of one of their committees. Attendance fees are paid only once for multiple committee sessions occurring on the same day or for a session that takes place on consecutive days. The attendance fee is €2,500 for the committee chairmen.
Remuneration is payable one week after approval of the financial statements for the year by the Supervisory Board or, if applicable, the Annual Shareholders' Meeting. Members of the Supervisory Board who were on the Board for only a part of the fiscal year will receive remuneration for each day of their first month of activity and one-twelfth of the annual remuneration for each additional month.
Remuneration of Supervisory Board members for fiscal year 2007 is composed as follows:
| in € |
Fixed remuneration |
Variable remuneration I |
Variable remuneration II |
Remuneration for committee work |
|
Frank F. Beelitz (Chairman) |
50,000.00 | 116,000.00 | 28,000.00 | 15,000.00 |
|
Karl Heinz Achinger (Deputy Chairman until May 11, 2007) |
13,458.90 | 31,224.66 | 7,536.99 | 6,500.00 |
|
Dr. Andreas Bereczky (Deputy Chairman as of May 11, 2007) |
33,013.70 | 76,591.78 | 18,487.67 | 4,500.00 |
|
Rainer Burckhardt as of May 11, 2007 |
16,027.40 | 37,183.56 | 8,975.34 | 0.00 |
| Justus Mische | 25,000.00 | 58,000.00 | 14,000.00 | 9,000.00 |
| Monika Neumann | 25,000.00 | 58,000.00 | 14,000.00 | 9,000.00 |
|
Reinhard Springer until May 11, 2007 |
8,972.60 | 20,816.44 | 5,024.66 | 3,000.00 |
|
Alf Henry Wulf as of May 11, 2007 |
16,027.40 | 37,183.56 | 8,975.34 | 0.00 |
Total remuneration for members of the Supervisory Board amounted to €775 thousand in the year under review.