Report of the Supervisory Board to shareholders
The Supervisory Board’s activities
The transformation of the company, which started in the second half of 2014 with the implementation of the Back in Shape programme, has continued successfully in 2016. Gradually the results of these efforts are becoming visible. The focus remains on making the organisation structurally stronger, by continuous disciplined execution of the tender stage gate process, by analysing risks and by improved process management in executing projects. In this chapter the Supervisory Board reports on its supervision activities during the year under review.
Strategy and operational plan
The BAM strategy for 2016-2020 Building the present, creating the future was developed in 2015 and announced in February of the year under review. The strategy is built on three pillars (focusing the project portfolio, shaping the business portfolio and creating the future portfolio) and is aimed at preparing the company for the future while improving current performance. This strategy is supported by a new target-operating model that creates clarity and uniformity in the way the company operates.
In order to ensure that the strategic direction set in the new strategy is followed by the entire Group, the operating companies and corporate functions developed their own strategic agendas which derive from and are aligned with the Group strategy. The process was supported by external experts. Last but not least, the company’s governance structure was evaluated and subsequently amended in order to provide an internal control framework suited to supporting the strategic goals.
The Supervisory Board was closely involved in the development of the new Group strategy but also provided input on the strategic agendas of the operating companies and a number of corporate functions. To this effect a three-day event was organised at which representatives of these companies and functions presented their strategic agendas, giving the members of the Supervisory Board the opportunity to provide comments and input.
Again in 2016 the need to avoid major loss-making projects and their potential financial consequences was high on the agenda of discussions between the Supervisory Board and the Executive Board. Order intake reduced slightly on the back of a more stringent selection process of projects.
While the tender stage gate process is aimed at identifying risks and opportunities with regard to projects upfront, the operational audit function offers a chance to learn from the past by auditing high exposure projects and applying the lessons learned to improve risk control measures.
Based on an updated authorisation schedule, a number of very large projects in the tender stage were presented to the Supervisory Board in extraordinary and regular meetings, allowing critical input and approval. The Supervisory Board reviewed in detail the projects presented in these meetings.
The Supervisory Board’s regular meetings included a discussion on the course of business as well as risks and opportunities for both the Group as a whole and for the respective segments and individual operating companies. The implications of the issues addressed in these meetings are discussed elsewhere in this report, including on page 38 and onwards.
The Supervisory Board concluded that the Group has in place internal risk management and internal control systems, financial reporting manuals and procedures for drawing up financial reports, as well as an established monitoring and reporting system. The ability of the Executive Board to monitor the operational activities of the Group improved further as a consequence of improved internal reporting requirements, the tender stage gate process and monthly meetings with the Management Board, all of which contributed to increased transparency and awareness.
The Operational Audit team was strengthened with the appointment of several audit professionals. The audit plan for 2016 was presented to and discussed with the Audit Committee and subsequently the full Supervisory Board which approved the plan. Although risk management in the Group was strengthened, continuous attention and improvement is necessary in order to protect the company against the operational risks it faces. The Supervisory Board reviewed the strategic direction of the company and the risks related to the achievement of the strategic objectives with the Executive Board and staff from the risk management corporate functions. Information about its activities and the progress made was obtained and discussed.
The financial audit process is conducted by an independent audit firm. In 2016 Ernst & Young Accountants LLP took over the role of external auditor from PricewaterhouseCoopers. The transition process as well as the collaboration with BAM management and the employees involved in the audit was constructive and satisfactory.
The Supervisory Board discussed the importance of and approach towards sustainability with the Executive Board and Management Board. The sustainability strategy 2020 and beyond is aligned with the corporate strategy and forms the basis for KPIs on people and planet. The content of the Integrated Report is based on themes identified in the materiality assessment as being most relevant for BAM and its stakeholders. The Supervisory Board supports and stimulates the proactive consultation of partners, clients and suppliers in stakeholder dialogues.
Safety continued to be a focus area for the Supervisory Board and the company. BAM's safety performance slightly deteriorated in the year under review (from 4.5 (IF BAM) in 2015 to 4.8 (IF BAM) in 2016). BAM regrettably had to record three fatal incidents on the Group’s projects (one third party, one employee and one subcontractor of a joint venture), These were extensively evaluated in the meetings with the Executive Board. The Supervisory Board also took notice of the two additional fatalities that took place in the early weeks of 2017. Together with the Executive Board, the Supervisory Board is of the opinion that the achievement of a higher safety level is one of the most important challenges for the Group. The Supervisory Board fully supports and encourages the Executive Board’s approach to further increase management’s dedication to safety.
Each of the Supervisory Board’s meetings featured a report on what had been discussed in meetings of the Board’s three permanent committees. In addition, in each meeting the Executive Board reported on the state of affairs, the financial situation and market developments for the operating companies and the risks they face, each report being based on the operational plan for the relevant financial year. Other matters discussed in 2016 included the Annual Report and financial statement for 2015, the half-yearly report and interim statement for 2016, the reserve and dividend policy and the dividend proposal for 2015, corporate governance, the various effects of International Financial Reporting Standards (IFRS) on the Group’s financial reports, management development and the quality of management, and the most important claims as well as legal proceedings involving parts of the Group.
In 2016 a delegation of the Supervisory Board met with the Central Works Council on several occasions in order to discuss the position of the employees in general and more specifically the consequences of the Back in Shape programme. The annual meeting of the Supervisory Board and the Executive Board with the Central Works Council was held on 19 August 2016.
Performance of the Supervisory Board and Executive Board
In 2016 the Supervisory Board assessed performance of the Supervisory and Executive Board, its committees and the individual members internally. The Chairman of the Supervisory Board held extensive meetings with each individual Supervisory Board member as well as the members of the Executive Board. Based on this thorough process the Supervisory Board concluded that the individual members of the Board, as well as the Board as a whole and its committees are functioning constructively and professionally.
The observations and recommendations, among other things, related to the division of tasks between the full board and the Audit Committee. The temporary absence of a responsible HR executive was noted in the Remuneration Committee and Appointment Committee. The relationship with the Executive Board was felt to be open and transparent. The Supervisory Board members expressed a broad wish for more direct contact with the members of the Management Board. The Supervisory Board identified the following priorities for the next period: the implementation of the strategy, large projects, ICT (vision, strategy and priorities) and succession planning of senior management. The importance of compliance was also noted as an issue to be placed on the agenda of the Supervisory Board at least once per year.
The Supervisory Board approved the remuneration report prepared by the Remuneration Committee. The remuneration report is included on pages 104-111 of the Integrated Report as part of the report by the Supervisory Board. The remuneration policy was not amended in 2016.
In the year under review, the Supervisory Board met on seven occasions in the presence of the Executive Board. The general attendance at the meetings in 2016 was 93 per cent.
The Supervisory Board also met without the Executive Board being present. These meetings were primarily devoted to the functioning of the Executive Board and the Supervisory Board. Internally the Supervisory Board also discussed its position and view on a number of strategic and organisational matters, as well as the remuneration of the Executive Board, including the determination of the variable portion of that remuneration.
The Supervisory Board’s committees
The Supervisory Board actively engages with the Executive Board as well as other senior management levels in order to ensure it has the right information, both quantitatively and qualitatively. Besides the regular board meetings, members of the Supervisory Board regularly meet with specific functionaries within the company in order to be briefed on general developments as well as specific topics, like HR, Corporate Governance, Finance and Operational Audit. In addition functionaries are invited in meetings in order to provide information on material matters and developments. In the year under review a joint meeting of the Supervisory Board and the Management Board was organised to discuss the strategic agendas of the individual operating companies.
The Supervisory Board has three permanent committees: an Audit Committee, a Remuneration Committee and a Nomination Committee. It is the task of these committees to support and advise the Supervisory Board concerning items under the committees’ responsibility and to prepare the Supervisory Board’s decisions regarding those items. The Supervisory Board as a whole remains responsible for the way in which it performs its tasks and for the preparatory work carried out by the committees. The committees submitted reports on their meetings to the Supervisory Board.
The Audit Committee
In the year under review the Audit Committee was composed of Messrs. Scheffers (Chairman), Hansen and Wester. The composition of the Audit Committee is in line with the provisions of the Dutch corporate governance code. The Audit Committee supports the Supervisory Board in the performance of its tasks, especially with regard to financial and accounting matters. The Committee met four times over the past financial year. The independent auditor was present at all of these meetings, with exception of the part of the meeting where the relationship with the independent auditor was reviewed as described below. The Chairman of the Executive Board, the Chief Financial Officer and the Operational Audit Director also attended all the Audit Committee's meetings.
In addition to its regular tasks and responsibilities, the Audit Committee addressed the following specific matters in 2016: the successful placement of €125 million subordinated unsecured convertible bonds due 2021 in June 2016 and subsequent renewal of its revolving credit facility until 31 March 2022, the audit plan 2016 of the new independent auditor Ernst & Young Accountants LLP, internal audit plan for 2017, material legal proceedings, development of working capital, key projects, financing of the company, possible impact of Brexit and developments relating to taxes, pensions, insurance and IT.
The Audit Committee was briefed by the independent auditor on relevant developments in the audit profession, especially those related to the EU audit reform and the proposed revision of the Dutch corporate governance code. The transition of audit responsibilities to Ernst & Young Accountants LLP as of this year was monitored closely. The committee met with the independent auditor on one occasion without the Executive Board being present and reported to the Supervisory Board on the relationship with the independent auditor subsequently. The Audit Committee believes that the relationship with the independent auditor is sound.
In the year under review, the Remuneration Committee was composed of Mrs Mahieu (Chairwoman), Mr Elverding and Mr Noy. The composition of the Remuneration Committee is in line with the provisions of the Dutch corporate governance code.
One of the tasks of the Remuneration Committee is to make proposals to the Supervisory Board with regard to remuneration policy, the terms of employment of members of the Executive Board and the remuneration of the members of the Supervisory Board and Executive Board.
The Committee submitted a proposal to the Supervisory Board relating to the remuneration of members of the Executive Board and the criteria for variable remuneration. In addition, the Remuneration Committee prepared a remuneration report on the way the remuneration policy has been implemented in practice. The developments with regard to the different pension schemes in the company were also reviewed. In the financial year, the committee consulted the Chairman of the Executive Board about the policy on terms and conditions of employment for directors of operating companies and executive officers of equivalent rank.
The Remuneration Committee met two times during the year under review. The Chairman of the Executive Board was present during parts of these meetings. The committee members consulted with each other a number of times outside the context of a formal meeting. In addition a number of teleconferences were held.
During the year under review, the Nomination Committee was composed of Mr Elverding (Chairman), Mrs Mahieu and Mr Noy. One of the tasks of the Nomination Committee is to make proposals to the Supervisory Board regarding selection criteria and appointment procedures, and regarding the size, composition, appointments and reappointments to the Supervisory Board and the Executive Board as well as assessment of their performance. The committee also monitors the Executive Board’s policy on selection criteria and appointment procedures for senior management and holds annual appraisals with the individual members of the Executive Board.
The Nomination Committee met two times in the past financial year. One item discussed was the ending of the terms of Mr Van Wingerden and Mrs Menssen (as members of the Executive Board) and Mr Noy (as a member of the Supervisory Board) at the Annual General Meeting in 2016. A proposal for reappointment was submitted to the Supervisory Board. In 2016 the Nomination Committee also initiated a search for the new members of the Supervisory Board to be appointed by the Annual General
Meeting in 2017.
Composition of the Supervisory Board
During the year under review, the Supervisory Board was composed of six members. In accordance with the retirement schedule, there was one reappointment (Mr Noy).
BAM strives for a diverse composition of its corporate bodies and senior management. Diversity in this respect is not limited to gender; it also involves age, nationality and other criteria. However, gender diversity is recognised as an important contributor to successful management. The Supervisory Board has five male members and one female member (16.7 per cent). One member of the Supervisory Board is a Belgian national. The Executive Board, whose members are all Dutch nationals, has two male members and one female member (33.3 per cent). As such the Group complies with the diversity targets as far as the Executive Board is concerned but has not yet reached the desired target in the Supervisory Board.
Both the Supervisory Board and the Executive Board endorse the importance of diversity in the Group’s managerial bodies. In order to further emphasise this, the profile of the Supervisory Board was updated in 2015 to include a 30 per cent target for female board members. For future vacancies the Supervisory Board will ensure that specific efforts will be made to identify one or more suitable female candidates and strives to comply with the diversity target by 2018.
In the opinion of the Supervisory Board, the requirements of the Dutch corporate governance code with regard to independence have been met. In 2016 the Supervisory Board members did not have any other relationships of a business nature with the company. None of the Supervisory Board members had more than five memberships of Supervisory Boards at Dutch listed companies or other large institutions.
The Supervisory Board is not aware of any conflicts of interest between the company and members of the Supervisory Board, or between the company and natural persons or legal entities that hold at least 10 per cent of the shares in the company.
Composition of the Executive Board
During the financial year, the Executive Board was composed of three members. There were two scheduled reappointments (Mr Van Wingerden and Mrs Menssen).
The Supervisory Board concluded that none of the members of the Executive Board holds more than two Supervisory Board positions of large corporations and no position of Chairman of a supervisory body was held. This is in line with the Management and Supervision (Public and Private Companies) Act and the Code.
The Supervisory Board has no evidence of any conflicts of interest between the company and members of the Executive Board.
Shareholders and investor relations
The Supervisory Board prepared the Annual General Meeting and evaluated it afterwards. The Supervisory Board was very pleased with the constructive dialogue with shareholders at the meeting. The Supervisory Board reviews the Group’s investor relations activities and shareholder base on a regular basis.
During its review of the 2015 full year results and the 2016 half year results, the Supervisory Board met with PriceWaterhouseCoopers respectively Ernst & Young Accountants LLP to discuss their respective reports. The Board established that the transition from PriceWaterhouseCoopers to Ernst & Young Accountants LLP went smoothly and that the new independent auditor had received the financial information on which the financial reports were based. The independent auditors have also been given the opportunity to discuss the information provided with BAM officers and the Executive Board. The Supervisory Board took note of the reports and management letters as prepared by the independent auditors. These documents were discussed with the respective independent auditor and the Executive Board. The Supervisory Board also discussed the follow-up to the independent auditors’ findings with the Executive Board.
PricewaterhouseCoopers attended the Annual General Meeting of 20 April 2016 and was available to answer any questions.
As part of its consideration of this report and the 2016 financial statements, the Supervisory Board assessed the relationship with Ernst & Young Accountants LLP, based on reports from the Executive Board and the Audit Committee. The Supervisory Board concluded that the relation with the independent auditor is sound and constructive.
In the Annual General Meeting on 22 April 2015 Ernst & Young Accountants LLP was appointed as independent auditor for the financial years 2016, 2017 and 2018.
The company’s corporate governance structure and its compliance with the Code were discussed with the shareholders in the Annual General Meeting on 21 April 2009. The Supervisory Board and the Executive Board reviewed the corporate governance structure during the financial year and decided that there were no reasons to change it.
The Supervisory Board and the Executive Board are convinced that Royal BAM Group’s corporate governance is up to standard. Please refer to the corporate governance statement from page 87 of the Integrated Report concerning the company’s compliance with the Code.
The 2016 financial statements, duly prepared by the Executive Board, will be submitted to the Annual General Meeting for adoption. The financial statements have been audited by the independent auditor, Ernst & Young Accountants LLP; the unqualified independent auditor’s report is included on page 217 of the Integrated Report. The Supervisory Board has discussed the financial statements with the Executive Board in the presence of the independent auditor and agrees with them. The Supervisory Board agrees with the proposal of the Executive Board to distribute a dividend of €0.09 per share in accordance with the Group’s dividend policy. The Supervisory Board is of the opinion that the financial statements, the report by the Supervisory Board and the report by the Executive Board provide a solid basis on which to hold the Executive Board accountable for the management policies pursued and the Supervisory Board accountable for its supervision of the management policies pursued. The members of the Supervisory Board have signed the financial statements in accordance with their statutory obligations under Article 2:101, paragraph 2 of the Dutch Civil Code. The Supervisory Board believes that this report is presented in accordance with the International Integrated Reporting Framework.
2016 was a year of accelerated change. The development and implementation of the new 2016-2020 Group strategy Building the present, creating the future, the translation of this strategy into dedicated strategic agendas for the operating companies and corporate functions, and the introduction of the new target operating model all stretched the organisation as well as its employees. The Supervisory Board expresses its appreciation for the contribution of management and all employees to the major efforts that have been made and the results achieved so far.