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ANNUAL REPORT
SGS is the world’s leading inspection,verification, testing and certification company.SGS is recognised as the global benc...
SGS LUDWIG GROUPIN OURBUSINESS,INTEGRITY ISEVERYTHINGFrank M LangeneckerGeneral Manager,SGS Ludwig GroupPeople trust in ou...
07	Financial HIGHLIGHTS FROM 201208	LETTER FROM THE CHAIRMAN & CEO12	 SGS AT A GLANCE14	 BUSINESS REVIEW22	CORPORATE GOVER...
710.2organic revenue growth in % 116.3total revenue up in %5.6total revenue in CHF billionfinancial highlights from 201216...
8 9The SGS Group results for 2012 show ayear of solid achievement. Our revenueof CHF 5.6 billion (constant currencybasis) ...
SGS CIMM T&SWE’VEALWAYS BEENLOOKING FORTHE PERFECTPARTNERRoberto CastilloManaging Director, SGS ChileWhich is why we knew ...
1312SGS has an unrivalled reputation as theindustry leader in finding innovative solutionsto the complex challenges faced ...
1514agricultural servicesminerals servicesMinerals Services delivered excellentcomparable revenue growth of 24.2%(of which...
1716Consumer Testing Services deliveredstrong double-digit comparable revenuegrowth of 12.9% (of which 10.8% organic)to CH...
1918Automotive Services deliveredcomparable revenue growth of 6.4%(of which 4.6% organic) to CHF 287 millionfor the year, ...
SGS INTECHWE KNOW VALUE,AND CAN PROVE ITChad SimontonNAM OGC Upstream TechnicalServices Manager, SGS InTechWhich is why SG...
23221GROUP STRUCTURE ANDSHAREHOLDERS1.1	 Group Structure1.2	Significant Shareholders1.3	Cross-shareholdings2CAPITAL STRUCT...
25241GROUP structureand shareholders1.1. GROUP STRUCTURESGS SA, registered in Geneva (CH),also referred to as the “Company...
2726corporate governance3board of directorsThe Board of Directors is the highestgoverning body within the Group.It is the ...
2928corporate governancePETER KALANTZIS (1945)Swiss/GreekFunction in SGSMember:•	 Board of Directors•	 Audit CommitteeInit...
3130In accordance with the Company’sinternal regulations, operationalmanagement of the Group, a functionwhich the Board of...
3332corporate governanceJEAN-LUC DE BUMAN (1953)SwissSVP, Corporate Communications, InvestorRelations & Corporate Developm...
3534corporate governance4.2. OTHER ACTIVITIES AND FUNCTIONSThe following list presents all materialactivities in governing...
3736active including our competitors in theindustries in which we operate.In assessing the adequacy of executiveremunerati...
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
SGS 2012 Annual Report
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SGS 2012 Annual Report

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The SGS Group results for 2012 show a year of solid achievement. Our revenue of CHF 5.6 billion (constant currency basis) was up 14.5% over 2011.

On a reported basis, revenue for the year increased 16.3% compared with the 2011 published figures, benefiting from a favorable foreign exchange translation effect of 1.8%.

This increase to the Group's 2012 revenues includes 4.3% from recently acquired companies as well as a strong organic revenue growth of 10.2%.

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SGS 2012 Annual Report

  1. 1. ANNUAL REPORT
  2. 2. SGS is the world’s leading inspection,verification, testing and certification company.SGS is recognised as the global benchmark forquality and integrity. With more than 75 000employees, SGS operates a network of over1 500 offices and laboratories around the world.We provide competitive advantage, drivesustainability and deliver trust. At SGS,we are continually pushing ourselves to deliverinnovative services and solutions that helpour customers move their businesses forward.
  3. 3. SGS LUDWIG GROUPIN OURBUSINESS,INTEGRITY ISEVERYTHINGFrank M LangeneckerGeneral Manager,SGS Ludwig GroupPeople trust in our ability to
keepthings together. At SGS LudwigGroup, our business is solvingmaterials fracture and weldingchallenges in one of
theharshest environments on earth.We offer services to the Albertaoil and gas sector where physicalintegrity is everything for ourcustomers’ operations. We are
a leader in specialised weldingengineering, the understanding offailure mechanisms, governmentregulations, and the codes
andstandards required to allowour customers to successfullycomplete their projects. We
helpour customers – from governmentregulators
to sophisticatedtechnologists and non-technicaldecision makers – to design,manufacture, evaluate, andmaintain their infrastructurecorrectly in order
to reducerisk. For every customer, wecommunicate solutions that theycan grasp easily. Our experts dothis by translating the mostup-to-date technologicalinnovations into a simple message:‘It won’t break.’ Our integrity restson this promise every day.
  4. 4. 07 Financial HIGHLIGHTS FROM 201208 LETTER FROM THE CHAIRMAN & CEO12 SGS AT A GLANCE14 BUSINESS REVIEW22 CORPORATE GOVERNANCE48SGS GROUP RESULTS48 Consolidated income statement48 Consolidated statementof comprehensive income49 Consolidated balance sheet50 Consolidated statement ofcash flows51 Statement of changes inconsolidated equity52 Notes to the consolidatedfinancial statements97 Report of the statutory auditorto the General Meeting of SGS SA100SGS SA RESULTS100 Income statement101 Balance sheet102 Notes to the financial statements116 Proposal of the Board of Directorsfor the appropriation of availableretained earnings117 Report of the statutory auditor tothe General Meeting of SGS SA120DATA120 SGS Group – five year statisticaldata income statements121 SGS Group – five year statisticaldata consolidated balance sheets122 SGS Group – five year statisticalshare data122 SGS Group share information124 SGS Group principal operatingcompanies and ultimate parent130SHAREHOLDER INFORMATIONcontents
  5. 5. 710.2organic revenue growth in % 116.3total revenue up in %5.6total revenue in CHF billionfinancial highlights from 201216.9adjusted operating income margin in %800cash flow from operating activitiesin CHF million30proposed ordinary dividend in CHF28proposed additional dividend per sharein CHF556net profit for the year in CHF million18acquisitions176total cash consideration in CHF millionfor the acquisitions72.97basic earnings per share in CHF1. Constant currency basis.
  6. 6. 8 9The SGS Group results for 2012 show ayear of solid achievement. Our revenueof CHF 5.6 billion (constant currencybasis) was up 14.5% over 2011. On areported basis, revenue for the yearincreased 16.3% compared with the2011 published figures, benefiting froma favourable foreign exchange translationeffect of 1.8%. This increase to theGroups 2012 revenues includes 4.3%from recently acquired companies aswell as a strong organic revenue growthof 10.2%.Our 2012 acquisitions growth benefitedmost of our regions and business lines,with South America gaining 36.2%acquisitions revenue growth andNorth America 5.3%. At the same timethe SGS Group achieved double-digitorganic revenue growth across fivebusiness lines and in all geographiesother than Europe. Minerals Servicesmaintained a healthy full-year organicgrowth rate of 13.8%, while Agricultural,Oil, Gas & Chemicals and ConsumerTesting Services exhibited double-digitgrowth rates and positive momentumthroughout the year.Our adjusted operating income for2012 increased 12.9% over 2011on a constant current basis, reachingCHF 941 million and resulting in amargin of 16.9%. Operating cash flowsremained strong at CHF 800 million,an increase of 15.9% over the prioryear. With this the Board of Directorsproposed a dividend of CHF 58 per share,CHF 30 representing an ordinarydistribution of 41% of net profit andan additional CHF 28 reflecting thehealthy cash generation capabilitiesof the Group.We had a successful 2012, despite itbeing another tough year for the globaleconomy. Market conditions continuedto be challenging and showed nosign of widespread global economicrecovery. The early months of 2012 seta slow global economic pace due to theongoing sovereign debt crisis in Europeand reduced activities in this region,the general high public debt in advancedeconomies, continued unrest in theMiddle East, and food price increasesin maize, wheat and soybeans causedby a dry summer in the US, Ukraineand Kazakhstan. The debt problems inthe Eurozone and weak growth acrossadvanced economies had a negativeeffect on developing economies too,and world trade and industrial productionslowed as a result. Subsequently,in advanced and emerging marketscommodity prices were lowered overthe course of 2012.In these difficult economic conditionsthe sustained solid revenue growthachieved by the SGS Group is testamentto our focused approach on product,market and service development andthe value of our consistent ability tolisten to our customers and deliversolutions. Our approach to innovation,investment and employee developmenthas placed us ahead of market trendsand enabled us to continue to surpassour previous results.INNOVATION AND INVESTMENTARE FUNDAMENTAL DRIVERSOF OUR GROWTH2012 was an important year in termsof our 2014 objectives. It marked themidpoint towards achieving the goalslaid out in the Plan and has set thepace for the years to come. Across theSGS Group we facilitated innovation,continued with our strategic investmentand internally enhanced our programmesto support our people and cement ouroperational integrity.We now have strong teams andprocesses in place identifying customers’needs and innovatively finding anddelivering solutions that go beyondexpectations. This has allowed us tocreate new technologies, improve onexisting technologies already in themarketplace to make them more efficientand profitable, and to establish moreeffective processes. We are continuallylooking for new opportunities to bring ourservices together in ways that add valueto our customers’ businesses.Throughout 2012 we sustained ourstrategic investment programme,developing initiatives to improve ourprocesses and productivity, as wellas to generate savings across theSGS Group. Some examples of processoptimisation investments are theLaboratory Excellence Programme,our Sales Management Programme andSales Pipeline, and our StandardisedInspections Reporting tool.Procurement has been working ondeveloping company-wide processes toensure that we have the right resourcesin the right places, when we need them.This intelligent resource managementis key if we are to continuously improveour ability to achieve more with less, aschampioned by our Sustainability team.We have implemented a system thatincreases the visibility of outsourcingexpenditure across the SGS Group,which has allowed us to integratepurchasing and generate savingsby increasing the volume of inhousetasks we handle.Sergio Marchionne Chairman of the Board Christopher KirkChief Executive OfficerDuring 2012, we have further enhancedthe foundations of the SGS business –our people. The key to continuing theglobal success of SGS is to support ouremployees and provide them with thebest platform for their success. Ourheadcount has been steadily growing,which can be attributed to boththe amalgamation of acquisitionsand our Groups strong organic growthsupported by focused recruitment andonboarding initiatives.THE SGS GROUP SAW GLOBALACQUISITION GROWTH ACROSSSEVEN BUSINESS LINESDuring 2012 we acquired a further18 businesses across 11 countries aspart of our ongoing strategic growthplan, including Herguth Laboratories andE&S Engineering Solutions, closed onDecember 31, 2012. The four acquiredcompanies in South America havesignificantly strengthened our marketpresence in this region, while acrossall our acquisitions we grew SGS inAustralia, the USA and Canada,South Africa and Europe and developedour services across seven of ourbusiness lines.CIMM T&S was our first acquisition ofthe year, in January 2012. It providesoutsourced analytical and technicalservices to the South American mineralsindustry. Through the integration of thisbusiness into the SGS Group weare now in a position to service majorplayers operating in this field. Theacquisition allows us to draw onexpertise gained in geometallurgicalservices, hydrometallurgical services,mineralogy, plant operation andcontrol services, production qualitycontrol, and environmental monitoringand consulting.During the year we also expandedour ability to serve the energy,infrastructure, construction and publicservices sectors across Columbia, Peruand Panama with the acquisition ofColumbian industrial services providerEstudios Técnicos SA, (ETSA) inMarch 2012. ETSA is now opening upsignificant business opportunities forSGS in the region, supported by the500 highly skilled ETSA employees thatjoined the SGS Group.We have continued to integrate eachnew acquisition into the SGS Group andutilise our integration plan to leveragethe best synergistic opportunitieswithin our planned timeframes. Thisprocess will continue throughout 2013ensuring our customers benefit from theadditional resources and expertise eachacquisition brings.THE YEAR AHEADAs we enter the third year of the 2014Plan, we are increasingly focused onthe absolute achievement of its goals.The SGS Group has been taking decisivesteps towards these targets and we aimto continue to grow the business bothorganically and through acquisitions.Strategically, we will target businessareas and geographical locations thatwill further strengthen our services,while continuing to make investmentsinto internal projects to support theachievement of The Plans objectives.Innovations, streamlining processes andsystems, and the development of ouremployees will all remain central.Thank you to every SGS employee whohelped to grow the business in 2012.Our continued success depends on yourdedication. Together, our commitmentensures SGS continues to be the leadingtesting, inspection, certification andverification company. It is through ourdesire to innovate and build customervalue that we are creating a path tosuccess in 2014 and beyond.letter from the chairman & CEOdear shareholders,
  7. 7. SGS CIMM T&SWE’VEALWAYS BEENLOOKING FORTHE PERFECTPARTNERRoberto CastilloManaging Director, SGS ChileWhich is why we knew SGS andCIMM Tecnologías y ServiciosS.A would be a great partnership.At SGS CIMM T&S, we haveover 15 years of experiencedelivering leading technologies andconsultation for mining, metallurgyand environmental managementin Chile. We offer an unrivallednetwork delivering state-of-the-artanalytical technologies andspecialised outsourcing to themajor players within the SouthAmerican mining industry. Ourteam provides unique capabilitiesin a comprehensive range ofservices including resourceand geometallurgical services,analytical services, design andcommissioning of geochemicaland metallurgical facilities,metallurgical testing
at the benchand pilot scale, hydrometallurgicalservices, mineralogy, plantoperation and control services,outsourcing, production qualitycontrol, environmental monitoringand consulting. SGS CIMM T&Scombines global expertise andintimate knowledge of the localmarket to create the perfectpartnership for innovation andnew business opportunities forour customers in South America.
  8. 8. 1312SGS has an unrivalled reputation as theindustry leader in finding innovative solutionsto the complex challenges faced everyday byorganisations. Our consultancy, outsourcing andtraining services complement our core inspection,verification, testing and certification services indelivering these solutions across all industries.Through our unique global network we deliverindependent results tailored to the preciseneeds of the industry or sector. Our customerstrust in our expertise, experience and resourcesto support them in achieving outstandingperformance in everything they do.Our focus is on innovative ways to deliverbusiness benefits. This enables us to help ourcustomers improve quality, safety, efficiency,productivity and speed to market, while reducingrisk and building trust in sustainable operations.our visionWe aim to be the most competitive andthe most productive service organisationin the world. Our core competenciesin inspection, verification, testing andcertification are being continuouslyimproved to be best-in-class. They areat the heart of what we are. Our chosenmarkets will be solely determined by ourability to be the most competitive and toconsistently deliver unequalled serviceto our customers all over the world.our valuesWe seek to be epitomised by ourpassion, integrity, entrepreneurship andour innovative spirit, as we continuallystrive to fulfil our vision. These valuesguide us in all that we do and are thebedrock upon which our organisationis built.Senior management*Christopher KirkChief Executive Officer & ITGeraldine MatchettChief Financial OfficerOlivier MerktGeneral Counsel &Chief Compliance OfficerChief Operating OfficersTeymur AbasovEastern Europe & Middle EastHelmut ChikChina & Hong KongPauline EarlWestern EuropeAlejandro Gomez de la TorreSouth AmericaAnthony HallSouth Eastern Asia & PacificDirk HellemansCentral & North West EuropeFrédéric HerrenAfricaJeffrey McDonaldNorth AmericaLadislav PapikSouth East EuropeDennis YangEastern AsiaEXECUTIVE VICE PRESIDENTSMichael BeltonMinerals ServicesOlivier CoppeyAgricultural ServicesAnne HaysLife Science ServicesFrédéric HerrenGovernments & Institutions ServicesThomas KlukasAutomotive ServicesFrançois MartiSystems & Services CertificationFrankie NgIndustrial ServicesPeter PossemiersEnvironmental ServicesMalcolm ReidConsumer Testing ServicesAlim SaidovOil, Gas & Chemicals ServicesSENIOR VICE PRESIDENTSDominique Ben DhaouHuman ResourcesJean-Luc de BumanCorporate Development,Corporate Communications& Investor RelationsFrançois MartiStrategic Transformationour managementSGS is led by a dynamic group of individuals with many years of experience in theirrespective fields, and who are committed to our success as a company and to thesuccess of our customers.We are organised into ten lines of business and operate across ten geographic regions.Each business is led by an Executive Vice President (EVP), and each region is led bya Chief Operating Officer (COO). The EVPs and the COOs, in conjunction with thefunctional Senior Vice Presidents (SVPs) and the Group’s Chief Executive Officer,Chief Financial Officer and General Counsel, make up the Operations Council, whichmeets regularly throughout the year to determine Group-wide strategies and prioritiesand review performance.* Denotes members of the Operations Councildirectly supervised by the Board of Directors(Senior Management).Organisation as at 1 February 2013.sgs at a glance
  9. 9. 1514agricultural servicesminerals servicesMinerals Services delivered excellentcomparable revenue growth of 24.2%(of which 13.8% organic) to CHF 868 millonfor the year. This growth came from allactivities in the service value chain andsustained growth in Africa, Asia andthe Americas.Despite high comparative figures in prioryear and weaker market conditions inthe second semester, the only segmentsthat experienced a slowdown were energyminerals in Australia and North Americaand, to a lesser extent, the iron ore sector.Demand for geochemistry remainedstrong overall, driven by high samplevolumes in Africa and South America,while the number of metallurgyprojects also remained high with onlya few postponements in Australia.In January 2012, the Group acquired CIMMT&S, the leading provider of technicalservices to the mining industry in Chile,through a privatisation process. Sinceacquisition, the CIMM and SGS operationshave been merged, combining locations,workforce and capabilities throughoutthe country thereby successfully extractingthe anticipated synergies. Effective31 December 2012, the Group also acquiredE&S Engineering Solutions based in theUSA, specialising in the development ofmineral processing facilities for the miningindustry throughout the world.Adjusted operating income margin forthe year decreased from 19.4% in prioryear to 18.8% (constant currency basis).The CIMM acquisition, while significantlyahead of valuation assumptions, remainsdilutive to the overall margin but thisimpact has been partly offset by strongincremental margins across the networkthanks to high capacity utilisation and afavourable product mix.During the year, the Group continued toinvest in expanding network capacity,with total investments reachingCHF 90 million. These investmentsinclude nine new on-site laboratoriesand three commercial laboratories whichwill commence operations in 2013.Agricultural Services delivered strongdouble-digit comparable revenue growthof 12.3% (of which 11.0% organic) toCHF 369 million for the year, with thepositive momentum experienced in thefirst half carrying through into the secondsemester in most regions.Revenues from trade-related servicesremained strong, sustained by high exportvolumes in the Black Sea, as well asfavourable market conditions in EasternEurope, India and Latin America for grainand in Vietnam for rice. Pest control andfumigation activities benefited from thehigh trade volumes in Europe and in NorthAmerica. Inland activities also performedwell with seed & crop services growingalmost 30% for the year. These activities,which were introduced via acquisitionsin North America, have now beensuccessfully replicated in several locationsin Europe and South America, while inAfrica soil and leaf testing volumes alsoincreased in the second semester.The adjusted operating income marginfor the year increased to 16.6% from15.7% in prior year (constant currencybasis) supported by the high volumes andfavourable geographical patterns in tradeservices as well as a stronger peak seasonfor field trials. Restructuring plans executedearly in the year also supported the overallmargin by addressing underperformanceissues in legacy operations.During the year, the Group acquiredGravena, an established contract researchprovider in Brazil with over 120 specialists infield trials, to strengthen and accelerate thegrowth of seed & crop services in SouthAmerica. In addition, the Group acquiredWare Care, a pest management companybased in the Netherlands. Investments ingrowth initiatives to sustain organic revenuegrowth also continued and the Groupsuccessfully commissioned a flagshipFood Safety and Cold Chain facility inIndia, for which client up-take and marketfeedback is very positive.1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.(CHF million)2012results2011pro-forma 22011publishedRevenue 369.5 329.0 327.1Change in % 12.3 13.0adjusted Operating income 161.3 51.8 51.2Change in % 18.3 19.7Margin % 116.6 15.7 15.7(CHF million)2012results2011pro-forma 22011publishedRevenue 868.0 698.7 677.7Change in % 24.2 28.1adjusted Operating income 1163.3 135.5 131.2Change in % 20.5 24.5Margin % 118.8 19.4 19.4REVENUE AND ADJUSTED OPERATING INCOME By BUSINESSREVENUE By regionRevenueadjusted operating income 1Asia Pacific 28.5 %Europe / Africa / Middle East 47.1 %Americas 24.4 %AGRI 6.6 %MIN 15.6 %OGC 18.7 %LIFE 3.6 %CTS 16.8 %SSC 7.1 %IND 16.1 %ENVI 5.8 %AUTO 5.1 %GIS 4.6 %AGRI 6.5 %MIN 17.4 %OGC 14.8 %LIFE 1.8 %CTS 24.8 %SSC 7.8 %IND 10.7 %ENVI 3.6 %AUTO 6.7 %GIS 5.9 %1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.business review
  10. 10. 1716Consumer Testing Services deliveredstrong double-digit comparable revenuegrowth of 12.9% (of which 10.8% organic)to CHF 936 million for the year, with allregions contributing to the top line increase.Organic revenue growth was sustainedby all activities. Traditional segments suchas food testing continued their positivemomentum delivering double-digit growthwith particularly strong market share inSouth America and Asia and benefitingfrom an extensive geographical footprintfollowing investments made by the Groupin the laboratory network. Softline testingalso remained solid, with new laboratorycapacity now in operation, supported byfocused global key account management.Newer segments, such as automotive partstesting, delivered revenues significantlyahead of prior year with the new laboratoryin Tianjin, China, further reinforcing ourposition as the market leader.The adjusted operating income margin forthe year decreased slightly from 25.7%in prior year (constant currency basis)to 24.9%, reflecting some increases inoperating costs in China. These costs wereonly partially offset by operational efficiencygains and investments in new facilities inthe network yet to reach full capacity.In addition, some of the recent acquisitions,while adding valuable new activities to thenational service portfolios, currently remaindilutive to the overall margins.During the year, the Group acquiredthe Sercovam Group headquartered inCestas, France. Sercovam is a leadinglaboratory testing group with state ofthe art facilities in Etupes and Cestasin France and sales offices in Spain andItaly. It serves the automotive, aeronauticand rail industry as well as the packagingindustry in France, Germany, Spain andItaly. Founded in 1987, Sercovam employs85 highly qualified experts.Oil, Gas & Chemicals Services deliveredstrong double-digit comparable revenuegrowth of 12.2% (of which 11.6%organic) to CHF 1 046 million for the year,becoming the first business to exceedone billion in annual turnover. All regionscontributed to this increased top line, withNorth America, Africa and Australasiamaintaining a consistently high growthrate throughout the year.Trade inspection and laboratory testingservices sustained solid revenue growth,with increased volumes in oil & gas tradeand market share gains in North America,Asia, Eastern Europe and the MiddleEast, while chemical testing volumes alsoincreased, mainly in the USA. Double-digit growth was achieved primarily innon-trade related activities. Upstreamservices delivered revenues up 35% overprior year, with key onshore contractwins in Australia, Papua New Guineaand the Middle East as well as increasedsubsurface consultancy and reservevalidation work. Strong growth was alsoachieved in Plant & Terminal Operationsand Cargo Treatment services, especiallyin North America, offsetting reducedvolumes in Europe and the Caribbean.The adjusted operating income margin forthe year declined slightly from 13.5% in prioryear (constant currency basis) to 13.3%,impacted by lower volumes in Europefollowing the closure of terminals andrefineries as well as start-up costs related tonew upstream contracts in the Middle East.During the year, the business made capitalinvestments amounting to CHF 76 millionto support its organic growth, focusingprimarily on equipment for well-sideservices, laboratory capacity expansionsand mechanical sampling facilities. TheGroup also acquired three companies:Roplex, a company specialised in supportand testing of vapour recovery systems,and EMICS, a leading independent UKAS(United Kingdom Accreditation Service)calibration laboratory, both in the UK; andon 31 December, the Group closed theacquisition of Herguth, a state-of-the-artpetroleum and lubricant testing laboratoryin California, USA.Systems & Services Certification deliveredorganic revenue growth of 6.2% overprior year to CHF 395 million, with strongprofitable growth in most regions beingpartly offset by difficult market conditionsin Spain and Italy.Despite the uncertain economicenvironment, statutory certificationdelivered solid organic revenue growthoverall. All regions contributed to thisincreased top line, with double-digit growthin China, South America, Eastern Europeand Africa compensating for a weakerperformance in Southern Europe and NorthAmerica. Other activities also performedwell, in particular second-party auditprogrammes which gained momentumin the second semester, supported byinvestments made in previous years to bothenhance the Group’s international salesand key account management structureand introduce new programmes suchas sustainability-related supplier audits.Training activities, while achieving double-digit growth in Asia and North America,did not progress as intended, hampered bya weak performance in Australia followingthe loss of an important contract with themining industry.The adjusted operating income marginfor the year declined slightly from 18.9%in prior year (constant currency basis) to18.7%, reflecting the impact of difficultmarket conditions in Southern Europe.Restructuring activities have beenundertaken throughout the year to align theorganisation to these changing markets.Also reflected in the margin are investmentsmade in line with the growth strategy todevelop new industry bespoke services aswell as expand the food safety certificationand training activities into several keycountries across Asia and South America.During the year, new servicedevelopment programmes were initiated,focusing on specific needs of thehealthcare and automotive sectors aswell as supply chain activities aroundenvironment, health and safety.Life Science Services experienced adifficult year, reporting revenues ofCHF 199 million, 3.7% above prior year ona constant currency basis (of which 0.9%organic) as the decline in clinical researchvolumes largely offset the double-digitgrowth delivered by laboratory services.Laboratory operations delivered strongorganic revenue growth of 15.5% and nowaccount for over half of the revenues andprofits of the division. This growth wasdriven by biologics-related activities inEurope, including the M-Scan operationsacquired in 2010, the upgrade of all threeNorth American quality control laboratoriesand the opening of a new state-of-the-artfacility in Mumbai. These developmentsoffset a slower than expected recoveryin bioanalysis and mass spectrometryservices in France.Revenues from clinical research activitiesdeclined further in comparison with 2011,itself a very weak year, hampered by thesmall number of molecules reaching earlyphase trial stage and clear over-capacityamongst Clinical Research Organisations.This decline in activity levels particularlyimpacted the Paris clinic due to its fixedcost base and independent infrastructure.As the early phase clinical trial marketconditions are expected to remain weak, aninitial consultation phase in view of closingthe Paris clinic has been launched and as aresult, restructuring costs of CHF 21 million(net of tax) were provisioned in 2012.Overall, the adjusted operating incomemargin declined from 10.8% in prioryear to 8.7% (constant currency basis),impacted by the deteriorating margins inclinical research.During the year, the Group acquiredVitrology, a biopharmaceutical contracttesting organisation, very active in biosafetytesting, based in Glasgow, UK. Thisacquisition completes the biologics serviceoffering, adding biosafety and synergieswith M-Scan. In addition, the Groupacquired Exprimo, a life science consultancycompany based in Belgium.business reviewconsumer testing servicesoil, gas & chemicals servicessystems & services certificationlife science services1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.(CHF million)2012results2011pro-forma 22011publishedRevenue 936.2 829.1 802.0Change in % 12.9 16.7adjusted Operating income 1233.0 213.3 202.7Change in % 9.2 14.9Margin % 124.9 25.7 25.3(CHF million)2012results2011pro-forma 22011publishedRevenue 1 046.0 932.0 911.7Change in % 12.2 14.7adjusted Operating income 1139.2 126.0 123.3Change in % 10.5 12.9Margin % 113.3 13.5 13.5(CHF million)2012results2011pro-forma 22011publishedRevenue 199.3 192.1 192.0Change in % 3.7 3.8adjusted Operating income 117.3 20.8 20.7Change in % (16.8) (16.4)Margin % 18.7 10.8 10.8(CHF million)2012results2011pro-forma 22011publishedRevenue 394.9 372.0 364.0Change in % 6.2 8.5adjusted Operating income 173.7 70.3 68.2Change in % 4.8 8.1Margin % 118.7 18.9 18.7
  11. 11. 1918Automotive Services deliveredcomparable revenue growth of 6.4%(of which 4.6% organic) to CHF 287 millionfor the year, supported by solid statutoryinspection results in all regions and theprior year acquisition of ETC, an engineand vehicle testing business in the USA,now fully integrated within the Group.Revenues from statutory inspectionactivities remained solid throughout theyear, with European operations in France,Spain and the UK benefiting from highervehicle inspection volumes while inAfrica, revenues in Ivory Coast increasedfollowing the opening of a new stationand the network in Morocco expanded asa result of stricter enforcement and highercompliance rates. In South America,revenues from the first testing centre inPeru, which opened in 2011, increasedprogressively throughout the year whilevolumes in Chile remained stable.The adjusted operating margin for theyear increased to 22.1% from 21.7%in prior year (constant currency basis),benefiting from the strong statutoryinspection results in Europe, the USA andAfrica as well as inspection fee increasesin Argentina and Uruguay granted bygovernment in view of high inflation inboth countries. This was sufficient tooffset weaker results in North Americawhere, as anticipated, significantly lowervolumes impacted the profitability ofcommercial activities despite proactiverestructuring measures.During the year, the Group continued toinvest in vehicle inspection centres inFrance, Ivory Coast and Argentina, as wellas maintaining and upgrading centres inSpain which were acquired in 2010 aspart of the ITV network.Industrial Services delivered solidcomparable revenue growth of 20.2%(of which 9.5% organic) to CHF 899 million,supported by five acquisitions in the year.Market conditions in Europe remain verychallenging with projects being delayedand austerity measures impacting publicspending. Despite this, strong organicrevenue growth was achieved thanksprimarily to positive momentum in Asia,Australia and Africa, as well as a recoveryin the Middle East. Materials Testing,Non Destructive Testing (NDT), ProjectMonitoring and Supply Chain services werethe main growth drivers, supported byrecent acquisitions which expanded thesecapabilities into a much wider geographyand capital investments made in thelaboratory network. Statutory inspectionactivities also delivered growth in the yearand remain an important segment despitethe volume decline in Spain.The adjusted operating income margin forthe year increased to 11.2% from 10.7%in prior year (constant currency basis).Accretive margins from acquisitions andhigher profitability in Asia, North Americaand the Middle East offset difficult marketconditions in Europe, which requiredsignificant restructuring to be undertaken,particularly in Spain and Italy.During the second semester, thebusiness completed three additionalacquisitions, enhancing its globalfootprint. In Canada, the Groupacquired Ludwig, a leading material andmetallurgical testing laboratory basedin Calgary and Edmonton. In Australia,the Group acquired Gladstone, a wellestablished construction material testingbusiness in Queensland, focused onroad construction and the commercialand residential building sectors. TheGroup also acquired Sentinel, a companybased in Johannesburg, South Africa,providing NDT services and consultingto the power, oil, railway, mining andmanufacturing industries.Governments & Institutions Servicesdelivered excellent organic revenuegrowth for the year of 17.3% toCHF 256 million, driven primarily byincreasing volumes on Local Solutioncontracts, the introduction of newservices and stable trade volumes in thePre-Shipment Inspection (PSI) programmes.Local Solution services, now representing69% of total revenues for the division,delivered organic revenue growth of24.0% over prior year. This was achievedthrough the continued expansion ofProduct Conformity Assessment (PCA)programmes with new contracts signedin Tanzania, Uganda, Kuwait and NorthernIraq as well as the renewal of the Kenyaprogramme. TradeNet services alsoperformed well as a result of high tradevolumes in Ghana and Madagascar andthe start-up of operations in Mozambique.Revenues from Global Solution activitiesremained solid throughout the year,with volumes on the long-establishedPSI programmes in Cameroon and Haitiremaining stable.Overall, the adjusted operating margin forthe year was strong at 21.5% supported byan established network for the executionof PCA-related inspections and the growthof new services. The margin was slightlybehind prior year which had benefited fromhigher volumes on all PSI contracts.During the year, the Group continued toinvest in the deployment of new contracts,including the completion of the TradeNetplatform for Mozambique, the finalisationof the e-Government platform for theGhana Revenue Authority and scanningequipment for Madagascar. The Groupalso implemented the first Forestrymonitoring program involving scannersin the Democratic Republic ofCongo (DRC) and has run successfultelecommunications monitoringprogrammes in Haiti, Rwanda and Uganda.Environmental Services deliveredcomparable revenue growth of 13.2%(of which 6.6% organic) to CHF 323 millionfor the year, sustained by solid growth inemerging markets and seven acquisitionsover the last two years.South America, Africa as well as Chinaand Australasia continued to drive organicrevenue growth, leveraging the Group’sclient base in the natural resources sectorwhere legislation surrounding minerals andoil & gas extraction continues to tighten.This was sufficient to offset the impact ofchallenging market conditions in Europeand North America where restructuringplans have been initiated to move theorganisation away from declining segmentsof the industry and address profitabilityissues. This applied particularly to France,Spain and Italy, while Germany, Belgiumand the UK succeeded in maintainingprofitable growth through the deploymentof integrated services combining field,laboratory and data interpretation.The adjusted operating income margin forthe year increased to 10.6% from 9.4% inprior year (constant currency basis), drivenby operational efficiency gains in Australiaand North America as well as significantgrowth in newly established activities inSouth America and Africa, capitalisingon investments made in manpower andlaboratory infrastructure. Combined withaccretive margins from acquisitions,this was sufficient to offset a weakperformance in Southern Europe.During the year the business acquiredthree companies. In the USA, the Groupacquired Analytical Perspectives in NorthCarolina, specialised in ultra-trace analysisof various persistent organic pollutants.In Brazil, the Group acquired Environ, theleading occupational health and industrialhygiene laboratory in the country. InAustralia, the Group acquired AustralianRadiation Services (ARS) in Melbourne, aninternational provider of radiation calibration,monitoring, testing and consulting services.business reviewindustrial services automotive servicesenvironmental services governments & institutions services1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.1. Before amortisation of acquisition intangibles, restructuring, transaction and integration-related costs.2. Constant currency basis.(CHF million)2012results2011pro-forma 22011publishedRevenue 898.6 747.8 747.0Change in % 20.2 20.3adjusted Operating income 1100.3 80.1 80.0Change in % 25.2 25.4Margin % 111.2 10.7 10.7(CHF million)2012results2011pro-forma 22011publishedRevenue 286.9 269.7 270.2Change in % 6.4 6.2adjusted Operating income 163.4 58.5 59.3Change in % 8.4 6.9Margin % 122.1 21.7 21.9(CHF million)2012results2011pro-forma 22011publishedRevenue 322.7 285.0 283.8Change in % 13.2 13.7adjusted Operating income 134.3 26.9 26.8Change in % 27.5 28.0Margin % 110.6 9.4 9.4(CHF million)2012results2011pro-forma 22011publishedRevenue 256.0 218.3 221.7Change in % 17.3 15.5adjusted Operating income 155.1 50.0 51.8Change in % 10.2 6.4Margin % 121.5 22.9 23.4
  12. 12. SGS INTECHWE KNOW VALUE,AND CAN PROVE ITChad SimontonNAM OGC Upstream TechnicalServices Manager, SGS InTechWhich is why SGS Innovative Technical Services (InTech) offers specialised technical consulting services to the oil andgas industry. At SGS InTech we deliver best-value services in measurement assessments, hydrocarbon allocation, projectmanagement, and process improvement within the Upstream sector. Combining our technical capabilities with SGS UpstreamAnalytical and
Field Services allows us to tailor customer specific solutions that increase accuracy, improve reliability, andmaintain continuous improvement in measurement and allocation processes. Our proven quality assurance and validationtechniques, combined with our surveillance procedures, ensure reliability in results from initial measurement to productallocation. We help our customers demonstrate accurate, unbiased, and defendable allocation of produced hydrocarbons to stayin compliance with commercial and regulatory requirements. Which is why we know value, and can reliably prove it for others.
  13. 13. 23221GROUP STRUCTURE ANDSHAREHOLDERS1.1 Group Structure1.2 Significant Shareholders1.3 Cross-shareholdings2CAPITAL STRUCTURE2.1 Issued Share Capital2.2 Authorised and ConditionalShare Capital2.3 Changes in Capital2.4 Shares and Participation Certificates2.5 Profit Sharing Certificates2.6 Limitations on Transferabilityand Admissibility of NomineeRegistrations2.7 Convertible Bonds andWarrants/Options3BOARD OF DIRECTORS3.1 Members of the Board of Directors3.2 Cross Involvement3.3 Elections and Terms of Office3.4 Internal Organisational Structure3.4.1 Allocation of Board Member Tasks3.4.2 Committees3.4.3 Board Meetings3.5 Definition of Areas ofResponsibility3.6 Information and ControlInstruments Vis-à-visthe Management4OPERATIONS COUNCIL4.1 Members of theOperations Council4.2 Other Activities and Functions4.3 Management Contracts5COMPENSATION, SHAREHOLDINGSAND LOANS5.1 Company’s Remuneration Policies5.2 Compensation for Membersof Governing Bodies5.2.1 Board of Directors5.2.2 Compensation Paid to theOperations Council, SeniorManagement and ChiefExecutive Officer5.2.3 Companys Performance6shareholdersparticipation rights6.1 Voting Rights andRepresentation Restrictions6.2 Statutory Quorums6.3 Convocation of General Meetingsof Shareholders6.4 Agenda6.5 Registration in the Share Register7Change of control anddefence measures7.1 Duty to Make an Offer7.2 Clauses on Change of Control8auditors8.1 Duration of the Mandate andTerm of Office8.2 Auditing Fees8.3 Additional Fees8.4 Supervisory and ControlInstruments vis-à-vis the Auditors9INFORMATION POLICYThis Corporate Governance Report informsshareholders, prospective investors and thepublic at large on SGS policies in matters ofcorporate governance such as the structure ofthe Group, shareholders rights, roles and dutiesof the Board of Directors and its Committees andManagement, internal controls and audits as wellas directors and executive compensation. Thisreport has been prepared in compliance with theSwiss Exchange (SIX) Directive on InformationRelating to Corporate Governance of October 29,2008 as amended and related commentaryissued by SIX.This report includes the SGS CompensationReport for 2012 (section 5), which is subject toan advisory vote at the Annual General Meetingof Shareholders, following the recommendationsof the Swiss Code of Best Practice for CorporateGovernance in this matter.The SGS Corporate Governances frameworkaims to achieve an efficient allocation andmanagement of resources, clear mechanismsfor setting strategies and targets in order tomaximise and protect shareholder value.SGS strives to attain this goal by definingclear and efficient decision-making processes,fostering a climate of performance andaccountability among managers and employeesalike and aligning employees’ remunerationwith the long-term interests of shareholders.corporate governance
  14. 14. 25241GROUP structureand shareholders1.1. GROUP STRUCTURESGS SA, registered in Geneva (CH),also referred to as the “Company”,controls directly or indirectly all entitiesworldwide belonging to the SGS Group,which provides independent inspection,verification, testing, certification andquality assurance services.The shares of SGS SA are listed onthe SIX Swiss Exchange and are tradedon SIX Europe (Swiss SecurityNumber: 249745; ISIN: CH0002497458).On 31 December 2012, the marketcapitalisation of SGS SA wasCHF 15 848 million.None of the companies under the director indirect control of SGS SA has listedits shares or other securities on anystock exchange.The principal legal entities consolidatedwithin the Group are listed on pages 124to 127 of the Annual Report, with detailsof the share capital, the percentage ofshares controlled directly or indirectlyby SGS SA and the registered office orprincipal place of business.Details of material acquisitions made bythe SGS Group during 2012 are providedin note 3 to consolidated financialstatements included in the sectionSGS Group Results (pages 59 to 60)of this Annual Report.The operations of the Group are dividedinto 10 regions, each led by a ChiefOperating Officer who is responsible forthe SGS businesses in that region andfor the local implementation of Grouppolicies and strategies.At 31 December 2012, geographicoperations were organised as follows:Europe, Africa, Middle East• Western Europe• Central & North West Europe• South East Europe• Eastern Europe & Middle East• AfricaAmericas• North America• South AmericaAsia Pacific• East Asia• China & Hong Kong• South East Asia & PacificThe Group is also structured into10 lines of business. Each businessline is responsible for the globaldevelopment of Group activities withinits own sphere of specialisation andfor the execution of strategies with thesupport of the Chief Operating Officers.At 31 December 2012, the businesslines were organised as follows:• Agricultural• Minerals• Oil, Gas & Chemicals• Life Science• Consumer Testing• Systems & Services Certification• Industrial• Environmental• Automotive• Governments & InstitutionsEach line of business is led by anExecutive Vice President.Chief Operating Officers and ExecutiveVice Presidents are members of theOperations Council, the Groups mostsenior management body.1.2. SIGNIFICANT SHAREHOLDERSAs at 31 December 2012, Exor held15.00% (2011: 15.00%), Mr. Augustvon Finck and members of his familyacting in concert held 14.97%(2011: 14.97%), the Bank of New YorkMellon Corporation held 3.26%(2011: 3.30%), of the share capitaland voting rights of the Company.SGS SA, together with certain of itssubsidiaries, held 2.43% (2011: 3.31%)of the share capital of the company.During 2012, the Company haspublished regularly on the electronicplatform of the Disclosure Office of theSIX Swiss Exchange Ltd all disclosurenotifications received from shareholdersof transactions subject to the disclosureobligations of Article 20 SESTA. Suchdisclosure notifications can be accessedat http://www.six-swiss-exchange.com/shares/companies/.1.3. CROSS-SHAREHOLDINGSNeither SGS SA nor its direct andindirect subsidiaries has anycross-shareholding in any other entity,whether publicly traded or privately held.corporate governance2capital structure2.1. ISSUED SHARE CAPITALThe share capital of SGS SA isCHF 7 822 436 and comprises7 822 436 fully paid-in, registeredshares of a par value of CHF 1.On 31 December 2012, SGS SA held,directly or indirectly, 190 394 treasuryshares (2011: 258 576).In 2012, 74 859 treasury shares weresold or released to cover option rights.These shares were sold at an averageprice of CHF 1 173. During the year,6 677 treasury shares were purchasedfor an average price of CHF 1 691in application of a CHF 250 millionShare Buy-Back programme valid from12 March 2012 to 31 December 2014.2.2. AUTHORISED AND CONDITIONALSHARE CAPITALThe Board of Directors has the authorityto increase the share capital of theCompany by a maximum of 500 000registered shares with a par value ofCHF 1 each, corresponding to amaximum increase of CHF 500 000 inshare capital. The Board is authorisedto issue the new shares at the marketconditions prevailing at the time ofissue. In the event that the new sharesare issued for the purposes of anacquisition, the Board is authorised towaive the shareholders’ preferentialright of subscription or to allocate suchsubscription rights to third parties. Theauthority delegated by the shareholdersto the Board of Directors to increase theshare capital is valid until 15 March 2013.The shareholders have conditionallyapproved an increase of share capitalby an amount of CHF 1 100 000 dividedinto 1 100 000 registered shareswith a par value of CHF 1 each. Thisconditional share capital increase isintended to obtain the shares necessaryto meet the Company’s obligationswith respect to employee share optionplans and option or conversion rightsof convertible bonds or similar equity-linked instruments that the Boardis authorised to issue. The right tosubscribe to such conditional capital isreserved to beneficiaries of employeeshare option plans and holders ofconvertible bonds or similar debtinstruments and therefore excludesshareholders’ preferential rights ofsubscription. The Board is authorisedto determine the timing and conditionsof such issues, provided that theyreflect prevailing market conditions.The term of exercise of the options orconversion rights may not exceed 10years from the date of issuance of theequity-linked instruments.2.3. CHANGES IN CAPITALThere have been no changes to theCompany’s share capital in the lastsix years.2.4. SHARES ANDPARTICIPATION CERTIFICATESAll shares, other than treasury sharesheld directly or indirectly by SGS SA,have equal rights to the dividendsdeclared by the Company and haveequal voting rights.The Company has not issued anyparticipation certificates (bons departicipation/Partizipationsscheine).2.5. PROFIT SHARING CERTIFICATESThe Company has not issued any profitsharing certificates.2.6. LIMITATIONS ONTRANSFERABILITY AND ADMISSIBILITYOF NOMINEE REGISTRATIONSSGS SA does not limit the transferabilityof its shares. The registration of sharesheld by nominees is not permitted bythe Company’s Articles of Association,except by special resolution of the Boardof Directors. By decision of the Board,made public in a note issued by SAG(then SEGA) on 4 October 2001, theCompany’s shares can be registeredin the name of a nominee acting in afiduciary capacity for an undisclosedprincipal. Such shares do not carryvoting rights except with the approvalof the Board of Directors. On 23 March2005, the Board of Directors decided toapprove the registration of such shareswith voting rights of up to 5% of theaggregate share capital of the Company.This decision was communicated to SAG.The Company has a single class ofshares and no preferential rights,statutory or otherwise, have beengranted to any shareholder.2.7. CONVERTIBLE BONDS ANDWARRANTS/OPTIONSNo convertible bonds have been issuedby the Company or by any entity under itsdirect or indirect control. Options grantedto senior managers and Directors of theGroup are detailed in section 5. Detailsof all options outstanding are providedin note 31 to the consolidated financialstatements of the Group. No otheroptions or similar instruments have beenissued by the Company nor by any ofthe Group’s subsidiaries.
  15. 15. 2726corporate governance3board of directorsThe Board of Directors is the highestgoverning body within the Group.It is the ultimate decision-makingauthority except for those decisionsreserved by law to the General Meetingof Shareholders.3.1. MEMBERS OF THE BOARDOF DIRECTORSThis section presents the Membersof the Board of Directors of theCompany, with their functions in theGroup, their professional backgroundand all their material positions ingoverning and supervisory boards,management positions and consultancyfunctions, official tenures and politicalcommitments, both in Switzerlandand abroad, as at 31 December 2012(an * denotes a listed company).Olivier Merkt, General Counsel & ChiefCompliance Officer of the Group, actsas the Company Secretary; he is not aMember of the Board of Directors.SERGIO MARCHIONNE (1952)Canadian/ItalianFunction in SGSChairman:• Board of Directors• Audit Committee• Nomination andRemuneration Committee• Professional Conduct CommitteeInitial appointment to the BoardMay 2001Professional BackgroundCEO:• *Fiat S.p.A., Turin (IT), since 2004• Chrysler Group LLC., Auburn Hill,Michigan, USA, since 2009 andChairman since 2011Other Activities and Functions*Fiat S.p.A., Turin (IT), Member ofthe Board since 2003*Fiat Industrial S.p.A., Turin (IT),Chairman since 2011*CNH Global N.V., Amsterdam (NL),Member of the Board since 2004,Chairman since 2006*Philip Morris International SA,Lausanne (CH), Member of the Boardsince 2008*Exor S.p.A., Turin (IT), Member ofthe Board since 2010European Automobile Manufacturers’Association (ACEA), Brussels (BE),Member of the Board since 2004TIBERTO RUYBRANDOLINI D’ADDA (1948)ItalianFunction in SGSMember:• Board of Directors• Audit CommitteeInitial appointment to the BoardMarch 2005Professional Background*Sequana SA, Paris (FR), Chairmansince 2005Other Activities and FunctionsExor Investissements SA, Luxembourg(LU), Chairman of the Board since 2007*Exor S.p.A., Turin (IT), Vice-Chairmansince 2009Giovanni Agnelli e C., Turin (IT), Memberof the Board since 2004*Fiat S.p.A., Turin (IT), Member of theBoard since 2004Yafa S.p.A., Turin (IT), Member of theBoard since 2011JOHN ELKANN (1976)ItalianFunction in SGSMember:• Board of Directors• Nomination andRemuneration CommitteeInitial appointment to the BoardMarch 2011Professional BackgroundChairman:• *Fiat S.p.A., Turin (IT), since 2010(member of the Board since 1997)• *Exor S.p.A., Turin (IT), since 2009• Giovanni Agnelli e C., Turin (IT),since 2010 (member of the Boardand partner since 2004)Other Activities and Functions*Fiat Industrial S.p.A., Turin (IT),Member of the Board since 2010The Economist Group, London (UK),Member of the Board since 2009Banca Leonardo, Milan (IT), Member ofthe Board since 2006Italy-China Foundation, Milan (IT),Member of the Board since 2005(Vice Chairman from 2005 to 2010)Italian Aspen Institute, Rome (IT),Vice-Chairman since 2004Giovanni Agnelli Foundation, Turin (IT),Member of the Board since 2004AUGUST VON FINCK (1930)GermanFunction in SGSMember:• Board of Directors• Nomination andRemuneration CommitteeInitial appointment to the BoardOctober 1998Professional BackgroundIndustrialistOther Activities and FunctionsGenerali Holding Vienna AG, Vienna(AT), Member of the Board since 1974AUGUST FRANÇOIS VON FINCK (1968)SwissFunction in SGSMember:• Board of Directors• Audit CommitteeInitial appointment to the BoardMay 2002Professional BackgroundIndustrialistOther Activities and Functions*Custodia Holding, Munich (DE),Member of the Board since 1999Carlton Holding, Allschwil (CH), Memberof the Board since 2001*Staatl. Mineralbrunnen AG, BadBrückenau (DE), Member of the Boardsince 2001Bank von Roll, Zürich (CH),Vice-President of the Board since 2009*Von Roll Holding AG, Breitenbach (CH),Member of the Board since 2010CORNELIUS GRUPP (1947)AustrianFunction in SGSMember:• Board of DirectorsInitial appointment to the BoardMarch 2011Professional BackgroundOwner/General Manager:• Tubex Holding GmbH,Rangendingen (DE)• CAG Holding GmbH, Marktl (AT)Other Activities and FunctionsSchoellerbank AG, Vienna (AT),Member of the Board since 1999Stölzle Oberglas, Koeflach (AT),Member of the Board since 1989Honorary Consul of Austria to theLand of Baden-Württemberg
  16. 16. 2928corporate governancePETER KALANTZIS (1945)Swiss/GreekFunction in SGSMember:• Board of Directors• Audit CommitteeInitial appointment to the BoardMarch 2009Professional BackgroundEconomist, ConsultantOther Activities and FunctionsMövenpick/Holding AG, Baar (CH),Chairman of the Board since 2001Clair AG, Cham (CH), Chairman ofthe Board since 2004*CNH Global NV, Amsterdam (NL),Member of the Board since 2006Degussa Sonne/Mond Goldhandel AG,Cham (CH), Chairman of the Boardsince 2012*Lamda Development Ltd, Athens (GR),Chairman of the Board since 2010,Member since 2004Paneuropean Oil and IndustrialHoldings SA, Luxembourg (LU),Member of the Board since 2002*Von Roll Holding AG, Breitenbach(CH), Chairman of the Board since 2010,Member of the Board since 2007Transbalkan Pipeline BV, Amsterdam(NL), Member of the Supervisory Boardsince 2008Hardstone Services SA, Geneva (CH),Member of the Board since 2009SHELBY R. DU PASQUIER (1960)SwissFunction in SGSMember:• Board of Directors• Professional Conduct CommitteeInitial appointment to the BoardMarch 2006Professional BackgroundAttorney at law, Partner Lenz &Staehelin law firm, GenevaOther Activities and Functions*Swiss National Bank, Member ofthe Board since 2012Stonehage Trust Holdings (Jersey)Limited, Member of the Board since 2012Additional biographical information onthe Members of the Board of Directorsmay be viewed on the Group website,http://www.sgs.com/en/Our-Company/About-SGS/Board-and-Executive-Management/Board-and-Committees.aspx,which is updated regularly.The Directors bring a wide range ofexperience and skills to the Board.They participate fully in decisions onkey issues facing the Group. Theircombined expertise in the areas offinance, commercial law, strategy, andtheir respective position of leadership invarious industrial sectors are importantcontributing factors to the successfulgovernance of an organisation of thesize and complexity of SGS. The Boardundertakes a periodic review of theDirectors’ interests in which all potentialor perceived conflicts of interests andissues relevant to their independenceare considered. Based on this review,the Board has concluded that all thenon-executive Directors (includingthe Chairman) are independent frommanagement and free of any relationshipthat could materially interfere with theexercise of their independent judgement.With the exception of Sergio Marchionne,who was Chief Executive Officer of theGroup between February 2002 and June2004, none of the Directors or their closerelatives has or had any managementresponsibility within the SGS Group.None of the Members of the Board ofDirectors or their close relatives has orhad any material business connectionswith the Company or its affiliatedcompanies. The remuneration of theMembers of the Board of Directors isdetailed in section 5.2.1.The Chairman of the Board, jointly withmembers of the Board of Directors,reviews periodically the performance ofthe Board as a whole, of its Committeesand of each of its individual members.On the basis of this periodic assessment,changes to the composition of the Boardmembership are regularly proposedto the Companys Annual GeneralMeeting of Shareholders. This periodicperformance evaluation is designedto ensure that the Board is always in aposition to provide an effective oversightand leadership role to the Group.3.2. CROSS INVOLVEMENTNo member of the Board of Directorsor of the Operations Council is also amember of the executive bodies ofentities or organisations with whichthe Group has material business orcommercial relations.3.3. ELECTIONS AND TERMS OF OFFICEThe Articles of Association of SGSSA provide that the Members of theBoard of Directors are elected by theshareholders for a maximum term offour years. Each Member of the Boardis individually elected at the AnnualMeeting of Shareholders. There is nolimit to the number of terms a Directormay serve. The term of office of all thecurrent Board Members will expire atthe 2014 Annual General Meeting ofShareholders, at which time all Boardpositions will be subject to election bythe shareholders. There is no provisionfor partial, rotating or staggered renewalof the Board of Directors. By-electionsmay be held before the end of the termof office in the event of vacancies.The initial date of appointment of eachBoard Member is indicated in section 3.1.3.4. INTERNALORGANISATIONAL STRUCTUREThe duties of the Board of Directorsand its Committees are defined in theCompany’s internal regulations whichare reviewed periodically. They set out allmatters for which a decision by the Boardof Directors is required. In addition to thedecisions required by Swiss companylaw, the Board of Directors approvesthe Group’s strategies and key businesspolicies, investments, acquisitions,disposals and commitments in excess ofdelegated limits.The Members of the Board of Directorsare briefed in advance of Boardmeetings on matters to be addressedat the meeting and each Board memberreceives monthly reports on the Group’soperational results and financial position.They are regularly updated on keyaspects of the Group’s business andother material issues. The Board ofDirectors meets with all members ofthe Operations Council at least twice ayear. The Chief Executive Officer, ChiefFinancial Officer and General Counsel& Chief Compliance Officer (hereafter“Senior Management”) attend all of theBoard of Directors meetings, while otherOperations Council members attend fromtime to time to discuss matters undertheir direct responsibility. The Board ofDirectors held five meetings in 2012.3.4.1. Allocation of Board Member tasksThe Board of Directors elects itsChairman, currently Sergio Marchionne(see section 3.1.) and the members ofits committees at the beginning of eachterm, at its first meeting after the AnnualGeneral Meeting of shareholders.3.4.2. CommitteesThe Board has established thefollowing committees:• Nomination and Remuneration• Audit• Professional ConductEach committee acts within terms ofreference established by the Board ofDirectors and set out in the internalregulations of the Company. The minutesof their meetings are available to allDirectors. The Chairman of the Board alsochairs each of the Board Committees.Section 3.1. indicates the membership ofeach Board Committee.Nomination andRemuneration CommitteeSection 5.1. of this report describesthe terms of reference and activitiesduring 2012 of the Nomination andRemuneration Committee. In 2012,the Committee held one meeting andpassed one resolution in writing.Audit CommitteeThe Audit Committee supports theBoard of Directors in discharging itsduties in relation to financial reportingand control. Such duties includeconsideration of the appropriatenessof accounting policies, the adequacy ofinternal controls and risk managementand regulatory compliance. It is alsoresponsible for the supervision of theinternal and external auditors of theGroup, each of which provides regularreports to the committee on findingsarising from their work. The committeereports regularly to the Board ofDirectors on its findings. In 2012, theAudit Committee held three meetings.Professional Conduct CommitteeThe Professional Conduct Committeeassists the Board of Directors andManagement in establishing policiesrelating to professional conductand oversees their implementation.The Group’s professional conductpolicies are embodied in the Code ofIntegrity which sets out the principlesgoverning business conduct, which areapplied across the whole SGS Group.These principles reflect the BusinessPrinciples for Countering Bribery issuedby Transparency International andSocial Accountability International andincorporate the rules adopted by theInternational Federation of InspectionAgencies (IFIA), the professionalassociation for the inspection industry.The Committee met twice in 2012 andpassed several resolutions in writing.In addition to the Board Membersindicated in the section 3.1., theProfessional Conduct Committeealso comprises the Chief ExecutiveOfficer and the General Counsel &Chief Compliance Officer (GeneralCounsel). The head of Internal Auditattends all meetings of the ProfessionalConduct Committee.3.4.3. Board MeetingsThe Board of Directors convenesregularly scheduled meetings withadditional meetings held as andwhen required, in person or by phoneconference. It may pass resolutions bywritten consent.The Chairman plans and defines theagenda of the meetings of the Boardand its Committees. Each BoardMember has the right to request thata meeting be held or that an item fordiscussion and decision be includedin the agenda of a meeting. Boardand Committee members receivesupporting documentation in advanceof the meetings and are entitled torequest further information from theManagement in order to assist them toprepare for the meetings.To be adopted, resolutions need amajority vote of the members of theBoard or Committee, with the Chairmanhaving a casting vote.3.5. DEFINITION OF AREASOF RESPONSIBILITYThe Board of Directors is responsiblefor the ultimate direction of the Group.The Board discharges all duties andresponsibilities which are attributed to itby law. In particular, the Board:• Leads and oversees the conduct,management and supervision ofthe Group• Determines the organisation ofthe Group• Assesses risks facing the businessand reviews risk management andmitigation policies• Appoints and removes the Group’sChief Executive Officer and othermembers of Management• Defines the Group’s accounting andcontrol principles• Decides on major acquisitions,investments and disposals• Discusses and approves the Group’sstrategy, financial statements andannual budgets• Prepares the General Meetings ofShareholders and implements theshareholders’ resolutions• Notifies the judicial authorities in theevent of insolvency of the Company,as required by Swiss law
  17. 17. 3130In accordance with the Company’sinternal regulations, operationalmanagement of the Group, a functionwhich the Board of Directors hasdelegated, is the responsibility of theOperations Council. The OperationsCouncil has the authority andresponsibility to decide on all issueswhich are not attributed to the Boardof Directors. In the event of uncertaintyon a particular issue regarding theseparation of responsibility betweenthe Board of Directors and theManagement, the final decision is takenby the Chairman of the Board.The Chairman is regularly informed ofthe activities of the Operations Councilby the Chief Executive Officer, ChiefFinancial Officer and General Counsel.The Operations Council is chaired bythe Chief Executive Officer and consistsof those individuals entrusted with theoperational management of the Group’sactivities, as follows:• The Chief Operating Officers (COOs)are responsible for operations in theGroup’s 10 regions (see section 1.1.)• The Executive Vice Presidents (EVPs)are entrusted with the managementand development of the Group’s 10business lines (see section 1.1.)• The Senior Vice Presidents (SVPs)represent the principal Group supportfunctions (Finance, Human Resources,IT, Communications & InvestorRelations, Corporate Development,Legal & Compliance and StrategicTransformation).The composition, role and organisationof the Operations Council are detailed insection 4.3.6. INFORMATION AND CONTROLINSTRUMENTS VIS-À-VISTHE MANAGEMENTA. Responsibility of the BoardThe Board of Directors has ultimateresponsibility for the system of internalcontrols established and maintainedby the Group and for periodicallyreviewing its effectiveness. Internalcontrols are intended to providereasonable assurance against financialmisstatement and/or loss, and includethe safeguarding of assets, themaintenance of proper accountingrecords, the reliability of financialinformation and the compliance withrelevant legislation, regulation andindustry practice.B. Governance frameworkThe Group has an establishedgovernance framework which isdesigned to oversee its operationsand assist the Company in achievingits objectives. The main principles ofthis framework include the definitionof the role of the Board and itsCommittees, an organisational structurewith documented delegated authorityfrom the Board to Management andprocedures for the approval of majorinvestments, acquisitions and othercapital allocations.As a rule, the Chief Executive Officerparticipates in the meetings of the Boardof Directors and of the Committees; theChief Financial Officer participates inthe meetings of the Board of Directorsand of the Audit Committee; theGroup Controller and the Head of theInternal Audit Function participate in themeetings of the Audit Committee; theHead of Human Resources participatesin the meetings of the Nomination andRemuneration Committee and theGeneral Counsel & Chief ComplianceOfficer attends all meetings of the Boardof Directors and its Committees. Theother members of the Operations Counciland other members of management onlyparticipate in the Board and Committeemeetings by invitation.C. Information to the BoardThe Board of Directors receivesmonthly reports on the financialresults and other reports on businessand operations at each meeting. TheGroup has a dedicated Internal Auditfunction, reporting to the Chairman ofthe Board and the Audit Committee,which assesses the effectivenessand appropriateness of the Group’srisk management, internal controlsand governance processes as well asthe reliability of internal financial andoperational information and ensuresthat the standards and policies ofthe Group are respected. InternalAudit reviews and identifies areas ofpotential risk associated with the keybusiness activities performed by aparticular office, highlights opportunitiesfor improvement and proposesconstructive control solutions to reduceany exposures. All key observationsare communicated to the OperationsCouncil and the Chairman of the Boardthrough formal and informal reports.The Audit Committee is regularlyinformed about audits performedand important findings, as well asthe progress on implementing theagreed actions by management.Formal procedures are in place forboth internal and external auditorsto report their findings andrecommendations independentlyto the Board’s Audit Committee.D. General Counsel & ChiefCompliance OfficerFurthermore, the Group has acompliance function, headed by theGeneral Counsel & Chief ComplianceOfficer, who is a member of theProfessional Conduct Committee andhas direct access to the Chairman ofthe Board. The compliance functionsupports the implementation of acompliance programme based on theSGS Code of Integrity, available in 30languages. The goal of the programme isto ensure that the highest standards ofintegrity are applied to all of the Group’sactivities worldwide in accordance withinternational best practices.E. OtherIn addition, the main business lineshave specialised technical governanceunits, which ensure compliance withinternally set quality standards andindustry best practices.F. Risk AssessmentThe Board conducts on a yearly basisan assessment of the risks facing theGroup. This process is conducted withthe active participation and input bythe Management. Once identified,risks are assessed according to theirlikelihood, severity and mitigation.The Board deliberates on the adequacyof measures in place to mitigate andmanage risks and assigns responsibilityto designated managers forimplementation of such measures.corporate governance4operations councilThe Operations Council (as defined insection 3.5.) meets on a regular basis,in principle at least six times a year.Between meetings, it holds regular phoneconferences and may make decisions onsuch calls or by electronic voting.4.1. MEMBERS OFTHE OPERATIONS COUNCILThe members of the Operations Councilat 31 December 2012 were as follows:CHRISTOPHER KIRK (1956)BritishChief Executive Officer & IT,COO South East Europe, ad interimBachelor of ScienceJoined SGS in 1981Previous responsibilities2003 – 2006: EVP, Minerals andEnvironmental Services2002 – 2003: COO, South East Asia& Pacific2000 – 2002: Managing Director andSub-regional Manager, Singapore1998 – 1999: Managing Director, ThailandGERALDINE MATCHETT (1972)Swiss/British/FrenchChief Financial OfficerMaster in Sustainable DevelopmentChartered AccountantJoined SGS in 2004Previous responsibilities2004 – 2010: Group Financial ControllerOther work experience2001 – 2004: Deloitte, Geneva1997 – 2001: KPMG, LondonOLIVIER MERKT (1962)SwissGeneral Counsel &Chief Compliance OfficerDoctorate in Law, admitted to the barin SwitzerlandJoined SGS in 2001Previous responsibilities2006 – 2008: VP, Corporate Development2001 – 2006: Senior CounselOther work experience1993 – 2001: Senior Manager Legal,Ernst & Young, GenevaTEYMUR ABASOV (1972)AzeriCOO, Eastern Europe & Middle EastDegree in Electrical EngineeringJoined SGS in 1994Previous responsibilities2006 – 2007: Managing Director,Kazakhstan & Caspian Sub-Region2004 – 2006: Managing Director,Azerbaijan and Georgia2003 – 2004: Managing Director, Georgia2001 – 2003: Operations Manager, OilGas & Chemicals Services, AzerbaijanMICHAEL BELTON (1960)BritishEVP, Minerals ServicesBSc ChemistryJoined SGS in 2002Previous responsibilities2005 – 2007: Managing Director,Minerals Services, North America2002 – 2005: VP, Global Non-FerrousMinerals ServicesOther work experience1995 – 2002: EVP, Alfred H. KnightNorth America LtdDOMINIQUE BEN DHAOU (1965)SwissSVP, Human ResourcesDegree in Hotel Industry ManagementJoined SGS in 2001Previous responsibilities2008 – 2010: VP, Human Resources2003 – 2005: additional role as AfricaRegional Resources Manager2003 – 2008: Assistant Vice PresidentHuman Resources2001 – 2003: InternationalCompensation & Benefits andHQ HR ManagerOther work experienceInternational Human Resources positions:2000 – 2001: Firmenich1999 – 2000: Novartis Consumer Health1991 – 1998: Levi Strauss
  18. 18. 3332corporate governanceJEAN-LUC DE BUMAN (1953)SwissSVP, Corporate Communications, InvestorRelations & Corporate DevelopmentLegal studiesJoined SGS in 1998Other work experience1978 – 1998: Country Head Switzerland,Sales Fixed Income, UBSHELMUT CHIK (1966)ChineseCOO, China & Hong KongMaster in Business AdministrationJoined SGS in 1991Previous responsibilities2003: Managing Director, Hong Kong2002: Global Business Manager,Softline, Consumer Testing Services2000 – 2001: Director Greater China,SBU Softline, Consumer Testing Services1999: Director, Hong Kong, ConsumerTesting ServicesPAULINE EARL (1961)BritishCOO, Western EuropeBSc in Food ScienceJoined SGS in 1995Previous responsibilities2007 – 2010: Managing Director,United Kingdom2004 – 2007: SSC Business Manager,United KingdomALEJANDROGOMEZ DE LA TORRE (1959)PeruvianCOO, South AmericaDegree in Business Administration,Postgraduate Specialisation inInternational CommerceJoined SGS in 1986Previous responsibilities1996 – 2001: National Chief Executive,Peru and Manager Central Sub-Region,Latin America (1998 – 2001)ANTHONY HALL (1963)AustralianCOO, South East Asia & PacificChemist, laboratory technicianJoined SGS in 2001Previous responsibilities2007 – 2009: Managing Director, Australia2005 – 2006: National BusinessManager Australia, OGC, Industrialand AutomotiveANNE HAYS (1959)FrenchEVP, Life Science ServicesPhD in PharmacyJoined SGS in 1984Previous responsibilities2008 – 2010: VP Business DevelopmentR&D QC, Life Science Services2001 – 2007: Global Sales QC,Life Science Services1992 – 2000: General Manager,Laboratory Simon, FranceDIRK HELLEMANS (1958)BelgianCOO, Central & North West EuropeDegree in Chemical Engineering andMaster in Business AdministrationJoined SGS in 1988Previous responsibilities2002 – 2004: COO, North West Europe1997 – 2002: Managing Director, BelgiumFRÉDÉRIC HERREN (1955)SwissEVP, Governments & Institutions ServicesCOO, AfricaMaster in EconomicsInitially joined SGS in 1986, rejoinedin 1999Previous responsibilities2003 – 2006: EVP, Automotive Services1999 – 2003: Head of Global Marketing,Trade Assurance Services (nowGovernments & Institutions Services)Other work experience1995 – 1998: CEO, Unilabs InternationalTHOMAS KLUKAS (1965)GermanEVP, Automotive ServicesPhD Engineering ScienceJoined SGS in 2005Previous responsibilities2008 – 2010: VP Automotive Services2005 – 2008: Automotive ServicesRegional Manager, North AmericaOther work experienceManager DEKRA AG Stuttgart and AtlantaFRANCOIS MARTI (1968)SwissEVP Systems & Services Certification(since March 2012)SVP, Strategic TransformationDegree in International RelationsInitially joined SGS in 2003, rejoinedin 2011Previous responsibilities2003 – 2005: VP Continuous ImprovementOther work experience2005 – 2011: CEO Fiat ServicesSenior Manager PWC and IBMJEFFREY MCDONALD (1964)AustralianCOO, North AmericaPostgraduate Diploma in EducationJoined SGS in 1995Previous responsibilities2004 – 2007: EVP, Systems &Services Certification2003: Global Project Manager,Systems & Services Certification1995 – 2003: Systems & ServicesCertification, South East Asia & Pacific,Regional Manager (Bangkok)JEFFREY NEWELL (1950)BritishEVP, Agricultural ServicesBA in Chemistry & BiologyJoined SGS in 1969Previous responsibilities2004 – 2007: SVP, Global Sales,Oil, Gas & Chemicals Services1998 – 2003: Global Business Manager,Oil, Gas & Chemicals ServicesFRANKIE NG (1966)Swiss/ChineseEVP, Industrial Services(since January 2012)BA in Economics andElectronics EngineeringJoined SGS in 1994Previous responsibilities2005 - 2011 EVP ConsumerTesting Services2002 – 2004: Managing Director,US Testing2000 – 2002: Director, Consumer TestingServices, China and Global Hardlines1997 – 2000: Operations Manager,Consumer Testing Services, ChinaMALCOLM REID (1963)BritishEVP, Consumer Testing Services(since January 2012)BSc ChemistryJoined SGS in 1987Previous responsibilities2008 - 2011: EVP Systems &Services Certification2005 – 2007: Managing Director, Australia2000 – 2005: Managing Director, Thailand1997 – 2000: Managing Director,PhilippinesALIM SAIDOV (1964)AzeriEVP, Oil, Gas & Chemicals Services andEnvironmental ServicesPhD in ScienceJoined SGS in 1993Previous responsibilities2005 – 2007: COO, Eastern Europe &Middle East2004: COO, North America andManaging Director, Canada2001 – 2004: Managing Director,Kazakhstan & Manager Caspian RegionDENNIS YANG (1949)TaiwaneseCOO, East AsiaMaster in Business AdministrationJoined SGS in 1975Previous responsibilities2000 – 2002: Managing Director, Taiwan1992 – 2000: Assistant GeneralManager, TaiwanIn January 2013, the Nomination andRemuneration Committee approved theappointment of Olivier Coppey to theposition of EVP Agricultural Services,to replace Jeffrey Newell who retires in2013. Peter Possemiers is appointed tothe role of EVP Environmental Services,taking over from Alim Saidov andLadislav Papik is appointed to the role ofCOO South East Europe. Dirk HellemansCOO Central & North West Europe,takes the extended responsibility ofPoland, Austria and Italy (previouslyreported under South East Europe).All above appointments take effect from1 February 2013.Additional information, includingbiographical details can be found onthe Company’s website:http://www.sgs.com/en/Our-Company/About-SGS/Board-and-Executive-Management/Operations-Council.aspx
  19. 19. 3534corporate governance4.2. OTHER ACTIVITIES AND FUNCTIONSThe following list presents all materialactivities in governing and supervisoryboards, management positions andconsultancy functions, official tenuresand political positions held by eachmember of the Operations Counciloutside the Group, both in Switzerlandand abroad.CHRIStopher KIRKCompass Limited, Hamilton, Bermuda,Member of the Board since 2011Geneva Trading & Shipping Association(GTSA), Member of the Executive Boardsince 2006JEAN-LUC DE BUMANAssociation pour le Développement desCompétences Bancaires, Geneva (CH),Member of the Board since 1999Hyposwiss Private Bank Genève SA,Geneva (CH), Member of the Boardsince 2006SwissHoldings, Federation of Industrialand Service Groups in Switzerland, Bern(CH), Member of the Board since 2011Federal Accreditation Commission,Bern (CH), Member since 2012ALEJANDRO GOMEZ DE LA TORRESwiss-Peruvian Chamber of Commerce,Lima (Peru), DirectorTHOMAS KLUKASCITA, International Motor VehicleInspection Committee, Brussels (BE),Member of the Bureau Permanentsince 2011FRANçOIS MARTIMember of the Board of IIOC(Independent International Organisationalfor Certification) since 2012JEFFREY NEWELLCouncil Member of GAFTA andMember of International ContractsPolicy Committee of GAFTA since 20104.3. MANAGEMENT CONTRACTSThe Company is not party to anymanagement contract delegatingmanagement tasks to companies orindividuals outside the Group.5compensation,shareholdingsand loansThis section of the CorporateGovernance Report serves as theCompany’s remuneration report.In accordance with the recommendationsof the Swiss Code of Best Practice forCorporate Governance in this matter, thissection of the Report will be subject toa consultative vote at the next AnnualGeneral Meeting of Shareholders.5.1. COMPANY’SREMUNERATION POLICIESThe Group’s overriding compensationpolicies are defined by the Board ofDirectors. The objectives of thesepolicies are twofold: a) to attractand retain the best talent available inthe industry; and b) to motivateemployees and managers to createand protect value for shareholdersby generating long-term sustainablefinancial achievements.The Board of Directors is responsiblefor determining the remunerationof the Chairman and the directors.It also decides on the remunerationand terms of employment of the ChiefExecutive Officer, based upon therecommendations of the Nominationand Remuneration Committee.It additionally determines the financialtargets upon which the variableelement of the remuneration of theOperations Council and other Groupsenior executives is based, and definesthe conditions of all share option plans(including Long Term Incentive (LTI)plans) as well as the allocation of suchoptions and the conditions of theirgranting, vesting and exercise. Allgeneral executive remuneration policies,including the criteria and weightingof financial targets relevant to theassessment of the variable element ofexecutive remuneration, are approved bythe Board of Directors.The Board of Directors is assisted in itswork by a Nomination and RemunerationCommittee (the Committee), whichconsists of independent non-executiveDirectors. The Committee acts in part inan advisory capacity to the Board, andin part as a decision-making body onmatters that the Board has delegatedto the Committee. The Committeereviews regularly, at least once a year,the compensation of each member ofthe Operations Council (other than theChief Executive Officer), and decides onall matters relating to the remunerationof these executives.Neither the Chairman of the Board northe Chief Executive Officer is allowed toparticipate in discussions and decisionson their own compensation. Generalexecutive remuneration policies,including the implementation oflong term incentive plans, are decidedby the Board, on the recommendationof the Committee.The following Directors served onthe Nomination and RemunerationCommittee in 2012:• Sergio Marchionne (Chairman)• August von Finck• John ElkannThe Chief Executive Officer attends allmeetings of the Committee, except whenhis own remuneration is being discussed.This chart summarises the authorisationlevels for the main decisions relating tocompensation of Board and OperationsCouncil Members.Subject matter Recommendation DecisionCompensation of Board Members Committee 1Board of DirectorsCompensation of Chairman Committee 1Board of DirectorsRemuneration of CEO Committee 1Board of DirectorsRemuneration of other Operations Council Members CEO Committee 1Issuance of Long Term Incentive Plans Committee 1Board of DirectorsSetting of annual financial targets for variable remunerationof Operations Council MembersCEO Board of DirectorsIssuance of Annual Share Options Plans CEO Committee 11. Nomination and Remuneration Committee.When reviewing and deciding onexecutive remuneration policies, theCommittee and the Board have accessto the Group Human Resources staffand may use third party consultantsspecialising in compensation matters.In 2012, neither the Committee nor theBoard had recourse to such externaladvisors. In discharging their dutiesin relation to compensation, they haverelied on advice from the Group HumanResources department and on publiclyavailable information on director andexecutive management remunerationpaid by the companies against which theGroup performs periodic benchmarks.Elements of executive remunerationbenchmarked include long- andshort-term incentive compensation,annual base salary, benefits andallowances. Companies againstwhich the Group performs periodicbenchmarks are SMI listed companies,large companies that are internationally
  20. 20. 3736active including our competitors in theindustries in which we operate.In assessing the adequacy of executiveremuneration for executives whoare based outside Switzerland, theGroup relies on relevant local marketintelligence published by externalbenchmarking consulting firms.Compensation Principlesa) Board of DirectorsThe members of the Board of Directorsare entitled to a fixed annual BoardMembership fee, and additionalannual fees for participation in BoardCommittees. Board members do notreceive additional compensation forattending meetings. With the exceptionof the Chairman, Board members donot receive any variable remuneration,options or shares.The Chairman receives a fixed annualfee and additional fixed fees for chairingthe Board Committees. He alsoreceives share options issued by theCompany under its annual and longterm incentive plans. The conditions ofgrant, vesting and exercise of optionsawarded to the Chairman are the sameas those applicable to the membersof the Operations Council. In principle,the Chairman receives 25% of theoptions granted to the Chief ExecutiveOfficer. The Board has the discretion togrant more options to the Chairman torecognise personal performance. TheChairman does not receive any variablecash remuneration.b) Operations CouncilThe remuneration earned by the ChiefExecutive Officer and by membersof the Operations Council comprises:(i) a fixed base salary including benefits;(ii) an annual performance bonus, settledin part in cash and in part by way ofoptions with deferred vesting, grantedunder annual share options plan; and (iii)long term incentive plan(s). The Companyconsiders that payment of variableremuneration in the form of equity linkedinstruments whose vesting and exerciseis deferred is a key mechanism to alignmanagement’s incentives to the interestsof shareholders.Employment ContractsDirectors do not hold service contractsand are not entitled to any terminationor severance payments. They do notparticipate in the Company’s shareoption plans (except for the Chairman)or other benefit schemes and theCompany does not make any pensioncontributions on their behalf.Employment contracts of OperationsCouncil members have no fixed termand can be terminated at any time byeither party, provided a standard noticeperiod (six months) is respected. TheChief Executive Officer’s employmentcontract provides for a severancepayment equivalent to two years totalremuneration payable in the event thatthe employment contract is terminatedor constructively terminated (includingin the event of a change of control) bythe Company, other than for cause.No severance payment is due if theemployment relationship is terminatedin any other circumstance. No otherexecutive contract provides for anymaterial change of control protection.corporate governanceThe table below summarises the various components of the compensation of Operations Council members, including theChief Executive Officer:COMPENSATION ELEMENT COMPENSATION VEHICLE DRIVERS PERFORMANCE MEASURES PURPOSEBase Salary Monthly cash salary Position andexperience,market practiceMarket practice,executive benchmark ofinternational companiesin relevant marketsAttract and retainkey executivesAnnual Bonus 50% cash / 50%allocation of stockoptions, withdeferred vesting andblocking periodsAchievement ofannual business andfinancial objectivesFinancial targets: (i) GroupNet Profit After Tax andAdjusted Operating Incomefor the Group as a whole, forregional or business units;(ii) measures of EconomicValue Added; and (iii)Earnings Per Share (EPS)Pay for performanceDiscretionary Bonus Cash Rewarding individualachievementsor exceptionalperformanceDiscretionary allocationsdo not exceed 10% ofOC overall remunerationAttract and retain keyexecutives, recogniseindividual performanceLong Term Incentives Stock options award,with vesting conditionalupon achieving theGroup objectivesAchievement of long-term strategic plansstated by the GroupEarnings per Share targets Align executivecompensationwith interests ofshareholdersBase salaryThe base salary of the Chief ExecutiveOfficer and each Operations Councilmembers is reviewed annually, on thebasis of market data for similar positionsat the companies against which theGroup benchmarks itself. It takes intoaccount the individual’s performance,scope and complexity of the position.Additional employment benefits arepaid depending on standard practicein the location of employment. Suchemployment benefits include a carallowance and, for expatriate personnel,a housing allowance and tuition feesallowance for children.Geneva based Operations Councilmembers participate, on the same basisas other Swiss employees of the Group,in the Company’s pension schemes,being one defined benefit schemeestablished in accordance with theSwiss LPP regulations up to an insuredamount of CHF 100 thousand andone defined contribution scheme forpensionable remuneration in excess ofCHF 100 thousand up to a maximumof CHF 821 thousand per year.Employees contribute 8% of their basesalary and the Company contributes anamount equal to one and a half timesthe contributions paid by all employeesto the scheme.Annual bonusIn addition to the base salary, membersof the Operations Council (including theChief Executive Officer) are entitled toa performance-related annual bonus.For this purpose, the Company definesannual targets at the beginning of theyear for the Chief Executive Officer andfor each Operations Council member.Relevant targets for the calculation ofthe Annual Bonus of the CEO are basedon the Group Earnings per Shares (EPS).For the heads of corporate functions(SVPs) targets are based 100% on theGroup Net Profit After Tax. For EVPs,the relevant targets relate for 50% tothe Adjusted Operating Income of theirrespective business and for 50% to theGroup Net Profit After Tax. For COOs,the relevant targets are for 62.5% theirrespective regions Adjusted OperatingIncome and Economic Value Added andfor 37.5% the Group Net Profit After Tax.Bonuses are assessed and awarded tothe Operations Council members on thebasis of the actual performance againstthe predefined targets.If targets are achieved they triggerthe entitlement to an annual incentivebonus. Once the amount of a bonusis determined, it is settled 50% incash and 50% in options. The cashcomponent of the bonus is payableimmediately. The economic value of theoptions which is used to convert a bonusentitlement into a number of options isfixed by the Company on the basis of acalculation of the value of the optionsat grant, taking into account a discountfor the three years blocking periodduring which the options cannot betraded or exercised. The share optionsare granted immediately, but they vestrateably in three equal instalments overa period of three years and are onlyexercisable in the fourth and fifth yearafter grant. Unvested options are subjectto forfeiture if the beneficiary leaves theGroup for reasons other than retirement,disability or death.For this purpose, the Company issuesAnnual Share Option plans, in theform of traded warrants which arelisted on the Swiss Stock Exchange.These warrants incorporate a rightto buy shares in the Company at apredetermined fixed price through thegrant of traded options. The strike priceis determined for each plan on thebasis of the average trading price ofthe Company’s shares in the last threemonths prior to the year of grant.These Annual Share Option plans serve(i) to pay part of the annual performancebonuses to Members of the OperationsCouncil; (ii) to allocate options to theChairman; and (iii) to be awarded as anincentive to other selected employeesof the Group. All beneficiaries receivethese options under the same conditionsof vesting and exercise.The table below summarises the components of the annual performance targets and how these components are weighted,depending on the function of the respective Operations Council member:Earningsper sharE(EPS)PERFORMANCEOF THE GROUP(Net Profit After Tax)BUSINESS PERFORMANCE(Adjusted Operating Incomeof the relevant business)REGIONAL PERFORMANCE(Adjusted Operating Incomeand Economic Value Addedof the relevant region)CEO 100% - - -SVPs (heads of corporate functions) - 100% - -EVPs - 50% 50% -COOs - 37.5% - 62.5%Annual bonus formula

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