Report of the Supervisory Board

The following is a report from the Supervisory Board on its activities during financial year 2010. In summary, the fallout from the global financial and economic crisis continued to leave its mark on 2010, affecting KSB’s markets with varying intensity and, to some extent, at different times. As such, projecting its further course and potential consequences was again a prime concern in the year under review. Apart from this, our consultations with the Board of Management largely centred around strategy implementation measures, implementation of the new corporate structure, and the key elements of our corporate culture.

Throughout the last financial year, the Supervisory Board performed its tasks with great care in accordance with the law, the Articles of Association and the rules of procedure. We regularly advised the Board of Management on corporate management issues and monitored its work. The Supervisory Board was consulted directly and at an early stage with regard to decisions of fundamental importance. The Board of Management informed us about the position of the Company, including but not limited to its business, financial and staffing situation, planned investments, as well as relevant corporate planning and strategic and organisational development issues via written and oral reports prepared regularly and on an ad hoc basis in a comprehensive and timely manner.

We discussed key KSB business transactions in detail on the basis of reports drawn up by the Board of Management. Any departures in business developments from the plans and targets were reviewed and commented on in detail by the Board of Management. After thorough examination and discussion, we adopted our resolutions on reports and proposals by the Board of Management. Beyond the intensive work in the plenary sessions and in the committees, both the Chairman of the Supervisory Board and other Supervisory Board members were in frequent contact with the Board of Management to discuss the current business development and significant transactions. No conflicts of interest arose involving members of the Board of Management or the Supervisory Board that would have been required to be reported to the Supervisory Board or the Annual General Meeting in the period under review.

Main focus of work in the Supervisory Board plenary sessions and in the committees

Four regular Supervisory Board meetings were held in 2010. The performance of KSB Aktiengesellschaft, the Group and the individual units was the subject of regular discussions in plenary sessions, primarily with regard to the performance of order intake, sales revenue, earnings, assets and employment levels as well as the current economic situation, the strategy and investment and acquisition projects. The latter were the subject of multiple discussions during the past financial year, particularly in connection with the further strengthening of our German and international service activities. In the light of the many acquisitions made during the past few years, special attention was paid to their structured integration and future management within the Group, e.g. by creating uniform reporting and control structures and eradicating managerial weak points, even through partial divestment. The specific ways in which KSB intends to achieve its general growth targets, including the underlying strategic considerations, were explained in detail. We closely monitored the Company’s acquisition of a majority interest in an Italian manufacturer of innovative drive technology through which we expect to make major leaps in expertise in an area that is currently the focus of energy efficiency considerations. On several occasions, we were involved in major investment projects, especially in Asia. These initiatives serve to modernise our locations, exploit existing potential and secure future business opportunities.

In view of the crisis experience and the need to introduce correlating control measures, the Supervisory Board attached great importance to optimising the reliability of forecasting.

The instruments recently used in this context were examined with a critical eye. At the same time, the Board of Management presented a series of proposals outlining appropriate and adequately flexible responses to possible developments, with the focus clearly on driving sales activities. Numerous debates on the specific, long-term determinants that govern economic growth rounded off the analysis.

The Supervisory Board continued to pay close attention to our business activities in China, which the Board presented to us from a variety of different angles. Depending on further political decisions, supplementary investments are planned to be made in the current year in our joint venture for nuclear products founded in 2008. In addition, the Supervisory Board approved major investments in the Valves product area in order to facilitate sustained growth in this field through an increase in Chinese production capacity.

A recurring topic on the agenda were measures introduced by the Board of Management to nurture the ongoing development and consolidation of our corporate culture based on established values. Imparted and consolidated in a top-down process starting with the management, these values shall serve as a frame of reference for our staff and also define the standards we expect of them. For this reason, we attach considerable importance to this Group-wide project and its long-term outcome.

The Supervisory Board convened in September for a two-day meeting at the Pegnitz site, where it was able to assess how business was developing and observe the high-performance production facilities, including the latest site expansion. We reviewed the status of the corporate organisation that was restructured at the start of the year and obtained a detailed run-down of the strengths and weaknesses evident in the implementation phase. We also gained an insight into one of the new Business Units. At this and the following meeting, we also examined changes made over the course of the year to the German Corporate Governance Code and its impact on procedures within the Company. In December we chiefly looked at business performance during the year and planning for 2011.

To ensure its tasks are performed efficiently, the Supervisory Board established six committees and seven sub-committees in the past financial year. They prepared the Supervisory Board’s resolutions and special issues to be discussed. In addition, they also made their own decisions – to the extent that this is legally permissible – within the scope of their areas of responsibility. This allocation has proved worthwhile in practice. At the plenary meetings, the Chairs of the committees regularly and comprehensively reported on the content and results of the work in the committees; the relevant committees were informed of the topics discussed in the sub-committees. The Chairman of the Supervisory Board serves as the Chair of all committees with the exception of the Audit Committee, the Nomination Committee and the Corporate Development Committee.

The Nomination Committee looked at the shareholder representative nominations prior to the Supervisory Board elections at the Annual General Meeting. To do so, this committee met once during the year under review.

The Planning and Finance Committee met four times in the year under review. It addressed corporate and investment planning and the financial situation of the Company, and prepared the Supervisory Board’s resolutions on these matters. One focus was the regular examination of the Board of Management’s “rolling forecast” report which continuously covers medium-term time frames. The committee members also discussed in detail the underlying planning assumptions and the quality of planning. To this end, they requested an in-depth presentation of the planning process.

The Innovation sub-committee met three times and discussed fundamental aspects of the research, development and innovation organisation within the Company. A focus of attention was the need to intermesh corporate topics and assign them to different specialist departments.

The Nuclear sub-committee met on three occasions and primarily discussed fundamental questions regarding the expansion of business activities for products with nuclear applications. As in the previous year, the development of the joint venture founded in conjunction with a Chinese partner in 2008 for the purpose of manufacturing such products was thus the subject of closer scrutiny.

The Sales and Production Management sub-committees are looking at ways in which to systematically develop their respective corporate areas on an ongoing basis. In 2010, they were principally involved in implementing the new organisational structure, meeting on five and two occasions respectively.

The Corporate Development sub-committee met twice to discuss issues of strategy implementation and the status of current and planned projects.

In September 2010, we created the Corporate Development Committee. The new Committee focuses on topics such as corporate development and strategy, innovation, nuclear markets and production management; the corresponding sub-committees were dissolved. Meeting on two occasions in the year under review, it looked at innovative business models and fundamental new trends in technology, in addition to the associated communication aspects.

The Controlling sub-committee established in December 2010 has its origins in corresponding deliberations of the Audit Committee, and convened four times in the year under review. It advises the Board on tasks related to this corporate area, including the relevant interdisciplinary interfaces.

The Personnel Committee held five meetings in the year under review. It primarily addresses issues relating to the Board of Management’s remuneration, including the terms of the service contracts for the individual Board of Management members as well as other Board of Management issues. Decisions on the Board of Management’s remuneration are made in plenary session with the committee acting in a preparatory capacity. On the committee’s recommendation, the plenary session extended the appointment of Dr. Wolfgang Schmitt and Jan Stoop to the Board of Management, with the new terms ending on 30 June 2014 and 30 June 2013 respectively. Dr. Peter Buthmann took over from Dr. Schmitt as Human Resources Director with effect from 8 February 2011. These changes took place against the backdrop of the reorganisation of the Board of Management’s responsibilities, which had been the subject of intense discussions in prior committee and plenary meetings. They will ensure that our strategy and new corporate structure come to the fore. Personnel development issues were also discussed with the aim of recruiting candidates for the Board of Management and other management positions from within the Company’s own ranks. In 2010, the committee members again participated in events with potential candidates of all management levels in an effort to foster a direct exchange of ideas. Special emphasis was also placed on conceptional aspects related to the deployment of staff abroad.

The Leadership and Corporate Culture sub-committee met on one occasion to discuss fundamental considerations relating to the topics defined, as well as specific practical experience in these areas. After a policy paper had been produced and then debated in the Supervisory Board plenary session, the committee was disbanded at the end of the year.

The four meetings of the Audit Committee were always attended by the Member of the Board responsible for Finance and, on several occasions, by the auditors. The committee primarily examined the annual and consolidated financial statements, the audit reports submitted by the auditors and the internal auditors as well as the further development of the risk management system and compliance organisation. The half-year financial report was also discussed with the Board of Management. Furthermore, the committee defined key audit areas for the independent auditing of the Supervisory Board in accordance with section 171 of the AktG [Aktiengesetz – German Public Companies Act] and for the external auditing of the financial statements. It submitted a proposal to the plenary session for the appointment of auditors to be voted on by the Annual General Meeting, and subsequently commissioned the auditors with the task of auditing the annual and consolidated financial statements. The declaration of independence by the auditors was obtained in accordance with section 7.2.1 of the German Corporate Governance Code and the auditors’ continued independence was monitored. In 2010 too, an ongoing debate as part of the preparations for the work performed in the plenary session, concerned the course and impact of the global financial and economic crisis.

There was no requirement during the year under review to convene the Mediation Committee required by section 27(3) MitbestG [Mitbestimmungsgesetz – German Co-determination Act].

Corporate governance and statement of compliance

The Supervisory Board continuously monitored the ongoing development of corporate governance standards. We held several meetings to discuss the implementation of changes made to the German Corporate Governance Code and the associated statutory changes. The Board of Management and the Supervisory Board report on corporate governance at KSB in accordance with section 3.10 of the German Corporate Governance Code on pages 121 to 125 of this Annual Report. On both 30 March and 8 December 2010 they jointly issued an updated statement of compliance in accordance with section 312 AktG and made this available to shareholders on the Company’s web site*. With two exceptions, KSB Aktiengesellschaft complies with the recommendations contained in the 26 May 2010 version of the Code which was published by the Federal Ministry of Justice on 2 July 2010.

Audit of the annual and consolidated financial statements

The accounting documentation, in addition to the proposal by the Board of Management on the appropriation of net retained earnings and the audit reports submitted by the auditors, was provided in good time to all members of the Supervisory Board. It was addressed in detail by the Audit Committee on 22 March 2011 as well as by the Supervisory Board plenary session on 29 March 2011 and explained in depth in both cases by the Board of Management. The auditors attended the meetings of both bodies, reported on the findings of the audit and were available to provide additional information.

The Supervisory Board examined the annual financial statements and the management report of KSB Aktiengesellschaft for the year ended 31 December 2010, which were prepared in accordance with the provisions of the Handelsgesetzbuch [HGB – German Commercial Code], as well as the consolidated financial statements and the Group management report for the year ended 31 December 2010, which were prepared in accordance with the International Financial Reporting Standards (IFRS**) and the proposal by the Board of Management on the appropriation of net retained earnings.

The Frankfurt/Main offices of BDO AG Wirtschaftsprüfungsgesellschaft, Hamburg, audited the annual financial statements and the management report of KSB Aktiengesellschaft for the year ended 31 December 2010, as well as the consolidated financial statements and the Group management report for the year ended 31 December 2010, and issued an unqualified auditors’ opinion. The Audit Committee defined key audit areas for the year under review, such as the structure and efficacy of the accounting process, the validity of planning, the mapping of risks in connection with the adequacy of risk provisioning and the treatment for accounting purposes of company acquisitions and the associated purchase price allocations (the information contained in the Notes and the accounting treatment of conditional purchase price payments were also scrutinised). The auditors reported their findings on these key audit areas both orally and in writing.

The Supervisory Board concurs with the auditors’ findings. Based on its own final examination results, the Supervisory Board plenary session did not raise any objections to the annual financial statements, consolidated financial statements, management report and Group management report. In accordance with the recommendation of the Audit Committee the Supervisory Board approved the financial statements prepared by the Board of Management; the annual financial statements are thus adopted. After its own examination, the Supervisory Board deems the proposal by the Board of Management on the appropriation of net retained earnings of KSB Aktiengesellschaft to be appropriate and concurs with it.

Dependent company report

The auditors also audited the dependent company report prepared by the Board of Management in accordance with section 312 AktG and issued the following unqualified opinion on this report:

“On completion of our audit and assessment in accordance with professional standards, we confirm that:

1. the actual amounts and disclosures in the report are correct;
2. the consideration paid by the Company for the transactions listed in the report was not inappropriately high;

3. there are no circumstances relating to the measures listed in the report that would indicate an assessment that is materially different from that of the Board of Management.”

The reports by the Board of Management and the auditors were provided in good time to all members of the Supervisory Board and were also discussed by the Audit Committee and at plenary sessions. The auditors attended the meetings of both bodies, reported on the material findings of the audit and were available to provide additional information. The Supervisory Board concurs with the auditors’ findings. Both the recommendation by the Audit Committee and the final results of the Supervisory Board plenary session’s examination did not give rise to any objections to the dependent company report prepared by the Board of Management and to the statement by the Board of Management at the end of the dependent company report.

Changes in the Supervisory Board and Board of Management

Dr. Stefan Bross joined the Supervisory Board with effect from 1 January 2010 as an elected reserve member for Carl-Wilhelm Schell-Lind, who left the Supervisory Board with effect from 31 December 2009. Ludwig Udo Kontz’s term of office on the Supervisory Board ended upon the conclusion of the Annual General Meeting on 19 May 2010; his place as elected member of the Supervisory Board was taken by Dr. Martin Auer. With effect from 1 September 2010, Reiner Euler joined the Supervisory Board as an elected reserve member for Dieter Müller, who left the Supervisory Board with effect from 31 August 2010 in order to enter retirement. The Supervisory Board extends its gratitude to the retiring members of the Boards for their constructive and expert contributions and for many years of work in an atmosphere of mutual trust.

The Supervisory Board would also like to acknowledge and thank the Board of Management, the employees and employee representatives of all Group companies for their work in the year under review. They significantly contributed to another successful year for KSB.

Frankenthal, 29 March 2011

For the Supervisory Board

Dr. Hans-Joachim Jacob
(Chairman of the Supervisory Board)