Report of the Supervisory Board

Dear stockholders (signature)

During 2016, the Supervisory Board monitored the conduct of the company’s business by the Board of Management on a regular basis with the aid of detailed written and oral reports received from the Board of Management, and also acted in an advisory capacity. In addition, the Chairman of the Supervisory Board maintained a constant exchange of information with the respective Chairman of the Board of Management and with the other Management Board members. In this way the Supervisory Board was kept continuously informed about the company’s intended business strategy, corporate planning (including financial, investment and human resources planning), earnings performance, the state of the business and the situation in the company and the Group as a whole.

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

Changes on the Supervisory Board and the Board of Management

The Supervisory Board memberships of Prof. Dr. Ernst-Ludwig Winnacker and Dr. Helmut Panke ended as of midnight on April 29, 2016, the date of the Annual Stockholders’ Meeting. The Annual Stockholders’ Meeting elected Johanna (Hanneke) Faber and Prof. Dr. Wolfgang Plischke to succeed them.

The terms of office of the heads of the divisions newly appointed to the Board of Management in connection with the reorganization of the Bayer Group – Dieter Weinand (Pharmaceuticals), Erica Mann (Consumer Health) and Liam Condon (Crop Science) – began with effect from January 1, 2016. Dr. Hartmut Klusik (Human Resources, Technology & Sustainability) also joined the Board of Management effective January 1, 2016. The previous Chairman of the Board of Management, Dr. Marijn Dekkers, resigned his office effective April 30, 2016. The Supervisory Board appointed Werner Baumann as his successor.

Work of the Supervisory Board

The full Supervisory Board met five times during 2016 and resolved in writing on a special election to the Audit Committee. No member of the Supervisory Board attended only half or fewer than half of its meetings or those of the committees on which he/she served. The average attendance rate by Supervisory Board members at the meetings of the full Supervisory Board and of its committees held in 2016 was approximately 97 percent. A detailed overview of the attendance of the individual members of the Supervisory Board at the meetings of the Supervisory Board and its committees is shown in the “Further Information” section under “Governance Bodies.”

The members of the Board of Management regularly attended the meetings of the Supervisory Board.

The deliberations of the Supervisory Board focused on questions relating to Bayer’s strategy, portfolio and business activities. The discussions at the respective meetings in 2016 centered on various topics.

Werner Baumann (Strategy & Portfolio Management) (Photo)

Werner Wenning, Chairman of the Supervisory Board of Bayer AG

At its February meeting, the Supervisory Board dealt with the departure of Dr. Marijn Dekkers as Chairman of the Board of Management effective April 30, 2016, and the appointment of Werner Baumann as new Chairman of the Board of Management for a duration of five years. The Supervisory Board also discussed the Annual Report 2015, the agenda for the Annual Stockholders’ Meeting 2016, the Bayer Group’s risk management system and the status of the Pharmaceuticals pipeline. At its April meeting, the Supervisory Board examined the business performance to date in 2016 and the imminent Annual Stockholders’ Meeting.

At an extraordinary meeting in May, the Supervisory Board dealt in detail with the planned acquisition of Monsanto, including the associated financing. Following up on deliberations at earlier Supervisory Board meetings, the strategic aspects of the possible acquisition and the question of Monsanto’s valuation were discussed at length. At its September meeting, the Supervisory Board once again dealt in detail with the acquisition of Monsanto and resolved on the final offer conditions for the acquisition. At this meeting, the Supervisory Board also extended the term of office of Kemal Malik on the Board of Management by an additional five years. In the intervals between its meetings, the Supervisory Board was regularly informed in writing about the respective status of the planned acquisition of Monsanto. In addition to the customary reports, the Chairman of the Supervisory Board was also kept constantly informed in detail about all major developments.

At its meeting in December 2016, the Supervisory Board undertook the routine review of the fixed compensation of the members of the Board of Management and the pension amounts of the former members of the Board of Management. Also at this meeting, the Board of Management presented its planning for the business operations in the years 2017 through 2019. The Supervisory Board approved the proposed financing framework for 2017 and also dealt with the strategy of the Bayer Group and possible courses of action with regard to the remaining interest in Covestro. In addition, the Supervisory Board resolved to issue an unqualified declaration of compliance with the German Corporate Governance Code.

Committees of the Supervisory Board

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

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

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

In 2016, the Presidial Committee was not required to convene in its capacity as the mediation committee. At a meeting in November 2016, it approved the issue of a mandatory convertible bond in connection with the financing of the planned acquisition of Monsanto based on a corresponding authorization by the full Supervisory Board.

Audit Committee: The Audit Committee comprises three stockholder representatives and three employee representatives. The Chairman of the Audit Committee in 2016, Dr. Klaus Sturany, satisfies the statutory requirements concerning the expertise in the field of accounting or auditing that a member of the Supervisory Board and the Audit Committee is required to possess. The Audit Committee meets regularly four times a year.

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

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

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

The meetings focused on a number of topics. At the February meeting, the Audit Committee discussed the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group. It also carefully considered the risk report, which covered the risk management system, operational risks, planning and financial market risks, legal risks, corporate compliance, process and organizational risks, and the internal control system. At this meeting, the Audit Committee also made a recommendation to the full Supervisory Board concerning the resolution to be submitted to the Annual Stockholders’ Meeting on the appointment of the auditor of the financial statements.

The April meeting mainly dealt with the yearly reports of the Group Compliance Officer and the Internal Audit department and with determining the main areas of focus for the audit of the 2016 financial statements. At its July meeting, the Audit Committee addressed the audit budget for 2017 and the scope of non-audit-related services by the external auditor. As at each meeting, it also discussed the interim financial report and legal and compliance issues. At its meeting in October, the Audit Committee dealt with the regular agenda items and with the tax strategy of the Bayer Group, value management, the audit conducted pursuant to Section 20 of the German Securities Trading Act (WpHG) (EMIR), the new requirements for the Independent Auditor’s Report pursuant to ISA 700 / 701, and the upcoming change of external auditor.

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

The Human Resources Committee convened on three occasions in 2016. The matters discussed at these meetings concerned the compensation and contracts of the members of the Board of Management, as well as the preparation of the departure of Dr. Marijn Dekkers as Chairman of the Board of Management and the appointment of Werner Baumann as his successor.

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

During four conference calls in 2016, the members of the Nominations Committee discussed candidates for the special elections to the Supervisory Board that took place at the 2016 Annual Stockholders’ Meeting and for the elections to the Supervisory Board at the 2017 Annual Stockholders’ Meeting.

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

The Innovation Committee convened twice in 2016. At its February meeting, it dealt with innovation management at Bayer and the development of the Bayer Lifescience Center. At its September meeting, it dealt once again with the development of the Bayer Lifescience Center, as well as with digital innovations at Bayer.

Corporate governance

The Supervisory Board dealt with the principles of corporate governance at Bayer. Among the topics discussed were the scope of dialogue between the Chairman of the Supervisory Board and investors. In December, the Board of Management and the Supervisory Board issued a new declaration concerning the German Corporate Governance Code.

Financial statements and audits

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

We examined the financial statements of Bayer AG, the proposal for the use of the distributable profit, the consolidated financial statements of the Bayer Group and the combined management report. We have no objections, thus we concur with the result of the audit.

We have approved the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group prepared by the Board of Management. The financial statements of Bayer AG are thus confirmed. We are in agreement with the combined management report and, in particular, with the assessment of the future development of the enterprise. We also concur with the dividend policy and the decisions concerning earnings retention by the company. We assent to the proposal for the use of the distributable profit, which provides for payment of a dividend of €2.70 per share.

The Supervisory Board would like to thank the Board of Management and all employees for their dedication and hard work in 2016.

Leverkusen, February 21, 2017
For the Supervisory Board:

Werner Wenning (signature)

Werner Wenning
Chairman