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Corporate Governance

We at MorphoSys believe the essence of good Corporate Governance involves efficient cooperation between a company’s Management and Supervisory Board, respect for the shareholders’ interests, as well as openness and transparency of corporate communication. Moreover, we feel strong corporate governance is an integral part of the MorphoSys corporate value system. As such, the company believes that adherence to high Corporate Governance standards will ultimately increase shareholder value.

Statement on Corporate Governance

In the Statement on Corporate Governance under Sec. 289a of the German Commercial Code (HGB), the Management Board and the Supervisory Board report on corporate governance. In addition to the annual Declaration of Conformity in accordance with Sec. 161 of the Stock Corporation Act (AktG), the Statement on Corporate Governance also includes relevant information on corporate governance practices and other aspects of corporate governance, including a description of the working practices of the Management Board and Supervisory Board.

Declaration of Conformity with regard to the German Corporate Governance Code

Declaration of Conformity of the Management and Supervisory Board of MorphoSys AG with regard to the German Corporate Governance Code (“Code”)

The Management Board and the Supervisory Board of MorphoSys AG declare pursuant to Section 161 of the German Stock Corporation Act:

  1. From December 3, 2015, the date of its most recent Declaration of Conformity, MorphoSys AG has complied – with the exception described below – with the recommendations of the “Government Commission on the German Corporate Governance Code” in the Code version dated May 5, 2015:
  • The amount of compensation of the Management Board members does not provide for a cap, neither overall nor for individual compensation components (see item 4.2.3 para. 2 sentence 6 of the Code). Against the background of already existing means of the Supervisory Board to cap variable compensation components of the Management Board members as well as the annual allocation of such variable components, the Supervisory Board considers an additional cap relating to the overall and individual compensation components as unnecessary.
  1.  MorphoSys AG will continue to comply – with the exception described above under item 1 – with the recommendations of the “Government Commission on the German Corporate Governance Code” in the Code version dated May 5, 2015.

 

Planegg, December 2, 2016
MorphoSys AG

 

For the Management Board For the Supervisory Board
Dr. Simon E. Moroney
Chief Executive Officer
Dr. Gerald Möller
Chairman of the Supervisory Board

 

Link to German Corporate Governance Code

Archive

Relevant Information on Corporate Governance Practices

MorphoSys ensures compliance with laws and rules of conduct through the Group-wide application of the following documents: the Code of Conduct, the Compliance Management Handbook and supplementary internal guidelines.

MorphoSys’s Code of Conduct sets out the fundamental principles and key policies and practices for business behavior. The Code is a valuable tool for employees and executives, particularly in business, legal and ethical situations of conflict. It reinforces the principles of transparent and sound management and fosters trust in the Company from the financial markets, business partners, employees and the public. Compliance with the Code of Conduct is carefully monitored. The Group-wide application of the Code is overseen by the Compliance Committee, and the Code itself is routinely reviewed and updated when necessary.

The Compliance Handbook describes MorphoSys’s Compliance Management System (CMS) and is intended to ensure compliance with all legal regulations as well as set out high ethical standards that apply to both the management and all employees. The Management Board has overall responsibility for the compliance management system and is required to report regularly to the Audit Committee and the Supervisory Board. In carrying out its compliance responsibility, the Management Board has assigned the relevant tasks to various offices at MorphoSys.

The Compliance Officer arranges the exchange of information between the internal compliance-relevant posts. The Compliance Officer monitors the Company’s existing CMS and implements the CMS through appropriate measures and decisions taken on an individual basis. The Compliance Officer is the employee contact person for all compliance-related issues and implements the compliance requirements defined by the Compliance Committee.

The Compliance Officer is supported by a Compliance Committee that meets at regular intervals. The Compliance Committee supports the Compliance Officer in the implementation and monitoring of the CMS. The Compliance Committee is particularly responsible for the identification and discussion of all compliance-relevant issues and thus makes it possible for the Compliance Officer as well as the other members of the Compliance Committee to periodically verify MorphoSys’s compliance status and, if necessary, update the CMS. 

Composition of the Management Board and the
Supervisory Board

 

Management Board

The Management Board of the Company consists of a Chief Executive Officer and three other members. A schedule of responsibilities defines the different areas of responsibility as follows:

  • Dr. Simon Moroney, Chief Executive Officer, responsible for Strategy and Planning; Compliance & Quality Assurance; Internal Audit; Human Resources; Business Development & Portfolio Management; Legal; the coordination of individual areas of the Management Board; representation of the Management Board to the Supervisory Board.
  • Jens Holstein, Chief Financial Officer, responsible for Accounting and Taxes; Controlling; Corporate Finance & Corporate Development; Risk Management; IT; Technical Operations; Procurement & Logistics; Corporate Communications & Investor Relations; Environmental Social Governance (ESG).
  • Dr. Marlies Sproll, Chief Scientific Officer responsible for Development Partnerships & Technology Development; Target Molecule & Antibody Research; Protein Chemistry; Alliance Management; Intellectual Property.
  • Dr. Arndt Schottelius, Chief Development Officer (up to February 28, 2017), responsible for Preclinical Development; Clinical Research; Clinical Operations; Drug Safety & Pharmacovigilance; Regulatory Affairs; Project Management.
  • Dr. Malte Peters, Chief Development Officer (since March, 1, 2017), responsible for Preclinical Research; Clinical Development; Clinical Operations; Drug Safety & Pharmacovigilance; Regulatory Affairs; Project Management.

Biographies of the Management Board members

Supervisory Board

As of December 31, 2016, the MorphoSys AG Supervisory Board consisted of six members who oversee and advise the Management Board. The current Supervisory Board consists of professionally qualified members who represent MorphoSys AG shareholders. Dr. Gerald Möller, acting Chairman of the Supervisory Board, coordinates the Board’s activities, chairs the Supervisory Board meetings and represents the interests of the Supervisory Board externally. All Supervisory Board members are independent, as defined in the German Corporate Governance Code, and have many years of experience in the biotechnology and pharmaceutical industries. The members were duly elected by the shareholders during the 2015 Annual General Meeting. The Chairperson of the Supervisory Board is not a former member of MorphoSys AG’s Management Board.

The members of the Supervisory Board and its committees are listed in the table below.

 

Composition of the Supervisory Board

  Postition Initial
Appointment
End of
Period
Audit
Committee
Remuneration and Nomination
Committee
Science
and Technology
Committee
Dr. Gerald Möller Chairman 1999 2018   M  
Dr. Frank Morich Deputy Chairman 2015 2017     M
Karin Eastham (FE) Member 2012 2018 M C  
Klaus Kühn (FE) Member 2015 2017 C    
Dr. Marc Cluzel Member 2012 2018   M C
Wendy Johnson Member 2015 2017 M   M

FE=Independent Financial Expert     C=Chairperson     M=Member

 

Objectives of the Supervisory Board regarding its composition

The supervisory board shall be composed in such a way that (i) the supervisory board as a whole possesses the knowledge, ability and experience required to properly complete its tasks, (ii) the international activities of the enterprise and potential conflicts of interest are taken into account, (iii) a sufficient number of independent members is ensured, (iv) an age limit and a regular limit of length of membership is specified for the members of the Supervisory Board and that (v) diversity is considered.

With respect to these aspects and whilst taking the specifics of the enterprise into account (Section 5.4.1 of the German Corporate Governance Code), the Supervisory Board established the following objectives regarding its composition in July 2015, which were reviewed and updated on July 26, 2017:

Appropriate representation of women and diversity

MorphoSys’s Supervisory Board has a total of six members, two of whom are women. The Supervisory Board believes that the current ratio of female representation within the Supervisory Board amounting to 33.33% is appropriate and intends to maintain such ratio in the future. The Supervisory Board currently meets this ratio.

The Supervisory Board further believes that a ratio of at least two non-German members, or at least two members having extensive international experience, provides a fair share of diversity given the Company’s international orientation. The Supervisory Board currently meets this ratio.

Independence

The Supervisory Board considers a number of at least four independent members as adequate (Section 5.4.2 of the German Corporate Governance Code). Members of the Supervisory Board are considered independent if they do not have any business or personal relations with MorphoSys or its Executive Management, a controlling shareholder, or an enterprise associated with the latter, which may cause a substantial and not merely temporary conflict of interests. The Supervisory Board currently meets the ratio of four independent members.

Material and lasting conflicts of interest should be avoided, particularly those arising from activities for major competitors. However, it has to be considered that the possible emergence of conflicts of interests in individual cases cannot generally be excluded. Potential conflicts of interests must be disclosed to the Chairman of the Supervisory Board and will be resolved by appropriate measures. No such conflict of interest currently exists.

Age Limit

The members of the Supervisory Board shall, as a rule, not be older than 75 years at the time they are appointed by the General Meeting. The Supervisory Board may, however, make an exception to this provision in specific cases. The age limit of 75 years is currently observed.

Term of membership

The Supervisory Board intends to submit election proposals to the General Meeting providing for an initial period of office of two years for Supervisory Board members. The Supervisory Board intends to allow reappointment twice for an additional term of three years each, but reserves the right to make exceptions in specific and well-founded cases and permit members to be reappointed for a fourth term of three years. The maximum term of membership is currently observed for all elections of Supervisory Board members following the initial establishment of these objectives.

With regard to future election proposals to the General Meeting, the Supervisory Board intends to respect the objectives of the Supervisory Board regarding its composition.

       Profile of skills and expertise for the entire Supervisory Board

In addition to setting out concrete objectives (as outlined above), the Supervisory Board shall maintain a profile of skills and expertise for the entire Supervisory Board (Section 5.4.1 of the German Corporate Governance Code), which is set out below:

Professional expertise and experience

Supervisory Board members should possess the professional expertise and experience required to successfully carry out the responsibilities of a Supervisory Board member of MorphoSys as an internationally operating biopharmaceutical company. This requirement is met since all current members of the Supervisory Board possess relevant experience in executive functions in the pharmaceutical/biotechnology industry.

To promote additional cooperation among the Supervisory Board members, care should be taken in selecting the candidates to ensure that adequate attention is paid to ensuring diversity in occupational backgrounds, professional expertise, experiences and personalities.

General knowledge

Each member of the Supervisory Board should have general knowledge of the industry of the Company in order to be able to make sufficient commitments on substance in the Supervisory Board meetings. This requirement is currently met since all members of the Supervisory Board have relevant expertise in the pharmaceutical/biotechnology industry due to their occupational backgrounds.

Specialist knowledge

  • At least two members must have considerable experience in drug development
  • At least one member must possess expertise in the fields of accounting or auditing (Section 100 para. 5 German Stock Corporation Act)
  • At least one member must have experience in personnel matters, in particular relating to the Management Board

Currently the above-mentioned objectives are met.

Sufficient Time of availability

Each member of the Supervisory Board must ensure that it has sufficient time to dedicate to the proper fulfilment of the Supervisory Board mandate. This means ensuring that

  • the member can attend at least four ordinary Supervisory Board meetings with physical presence per year as well as the annual Strategy Meeting, each of which requires adequate preparation work
  • the member can attend extraordinary meetings of the Supervisory Board to deal with special matters as and when required
  • the member can attend the General Meeting
  • the member has sufficient time for the audit of the annual and consolidated financial statements
  • depending on possible membership in one or more of the currently three Supervisory Board committees, this involves extra time to prepare for and participate in committee meetings

With regard to future election proposals to the General Meeting, the Supervisory Board intends to respect the profile of skills and expertise for the entire Supervisory Board.

 

Working Practices of the Management Board and Supervisory Board

To ensure good corporate governance, a guiding principle of the cooperation between the Management Board and Supervisory Board at MorphoSys AG is the open, comprehensive and regular communication of information. The dual board system prescribed by the German Stock Corporation Act clearly differentiates between a company’s management and supervision. The responsibility of both boards is clearly stipulated by the legislator and the boards’ bylaws and Articles of Association. The boards work closely together to make decisions and take actions for the Company’s benefit. Their stated objective is to sustainably increase the Company’s value.

Management Board members have their own area of responsibility defined in the schedule of responsibilities and regularly report to their Management Board colleagues. Cooperation among Management Board members is governed by the bylaws. The Supervisory Board ratifies both the schedule of responsibilities and the bylaws. Management Board meetings are typically held weekly and chaired by the Chief Executive Officer. During these meetings, resolutions are passed concerning dealings and transactions that, under the bylaws, require the approval of the entire Management Board. At least half of the Management Board’s members must be present to pass a resolution. Management Board resolutions are passed by a simple majority and, in the event of a tied vote, the Chief Executive Officer’s vote decides. For material events, each Management Board or Supervisory Board member can call an extraordinary meeting of the entire Management Board. Management Board resolutions can also be passed outside of meetings by an agreement made orally, by telephone or in writing (also by email). A written protocol is completed for each meeting of the full Management Board and is submitted for approval to the full Management Board and for signature to the Chief Executive Officer at the following meeting.

Management Board strategy workshops are also held, in which the Group-wide strategic objectives are developed and prioritized.

The Management Board promptly and comprehensively informs the Supervisory Board in writing and at Supervisory Board meetings about planning, business development, the Group’s position, risk management and other compliance issues. Extraordinary meetings of the Supervisory Board are also called for material events. The Management Board involves the Supervisory Board in the strategy, planning and all fundamental Company issues. In addition to routine Supervisory Board meetings, a strategy meeting takes place between the Management Board and Supervisory Board once annually to discuss MorphoSys’s strategic direction. The Management Board’s bylaws specify that material business transactions require the approval of the Supervisory Board. Detailed information on the cooperation of the Management Board and Supervisory Board and important items of discussion during the 2016 financial year can be found in the Report of the Supervisory Board.

The Supervisory Board holds a minimum of two meetings per calendar half-year and at least six meetings per full calendar year. The Supervisory Board has supplemented the Articles of Association with rules of procedure that apply to its duties. In accordance with these rules, the Chairperson of the Supervisory Board coordinates the activities of the Supervisory Board, chairs the Supervisory Board meetings and represents the interests of the Supervisory Board externally. The Supervisory Board typically passes its resolutions in meetings but resolutions may also be passed outside of meetings in writing (also by email), by telephone or video conference.

The Supervisory Board has a quorum when at least two-thirds of its members (including either the Chairperson or Deputy Chairperson of the Supervisory Board) take part in the vote. Resolutions of the Supervisory Board are generally passed with a simple majority unless the law prescribes otherwise. In the event of a tied vote, the Chairperson of the Supervisory Board’s vote decides.

Protocols are completed for Supervisory Board meetings and resolutions passed outside of meetings. A copy of the Supervisory Board’s protocol is made available to all Supervisory Board members. The Supervisory Board conducts an efficiency evaluation regularly in accordance with the recommendation in Item 5.6 of the Code.

Composition and Working Practices of the Management Board and Supervisory Board Committees

The Management Board has not formed any committees.

The Supervisory Board has three committees: the Audit Committee, the Remuneration and Nomination Committee and the Science and Technology Committee. The members of the three committees formed by the Supervisory Board are professionally qualified.

Audit Committee

The main task of the Audit Committee is to support the Supervisory Board in fulfilling its supervisory duties with respect to the accuracy of the annual and consolidated financial statements, the activities of the auditor and internal control functions, such as risk management, compliance and internal auditing. The Audit Committee submits a recommendation to the Supervisory Board for the election at the Annual General Meeting of an independent auditor. The members of the Audit Committee are Klaus Kühn (Chairperson), Karin Eastham and Wendy Johnson. Klaus Kühn and Karin Eastham fulfill the prerequisite of being independent financial experts.

Remuneration & Nomination Committee

The Remuneration and Nomination Committee is responsible for preparing and reviewing the Management Board’s compensation system annually before its final approval. When necessary, the Committee searches for suitable candidates to appoint to the Management Board and Supervisory Board and submits appointment proposals to the Supervisory Board. The Committee also prepares the contracts made with Management Board members. The members of the Remuneration and Nomination Committee are Ms. Karin Eastham (Chairperson), Dr. Gerald Möller and Dr. Marc Cluzel.

Science & Technology Committee

The Science and Technology Committee advises the Supervisory Board on matters concerning proprietary drug and technology development and prepares the relevant Supervisory Board resolutions. The members of the Science and Technology Committee are Dr. Marc Cluzel (Chairperson), Dr. Frank Morich and Ms. Wendy Johnson.

Corporate Governance Report

At MorphoSys, responsible, sustainable and value-oriented corporate governance is a high priority. Good corporate governance is an essential aspect of MorphoSys’s corporate management and forms the framework for the Group’s management and supervision, which includes the Group’s organization, commercial principles and tools for its guidance and control. The German Corporate Governance Code (“the Code”) provides a standard for the transparent monitoring and management of companies that strongly emphasizes shareholder interests. Many of the corporate governance principles contained in the Code have been practiced at MorphoSys for many years. Corporate governance issues at MorphoSys AG are detailed in the Statement on Corporate Governance under Sec. 289a HGB. The statement also contains the annual Declaration of Conformity, relevant information on corporate governance practices and a description of the Management Board and Supervisory Board’s working practices. Additional information can be found in this Corporate Governance Report.

Communication with the Capital Markets

At MorphoSys, a key principle of corporate communication is to simultaneously and fully inform institutional investors, private shareholders, financial analysts, employees and all other stakeholders of the Company’s situation through regular, transparent and timely communication. Shareholders have immediate access to the information provided to financial analysts and similar recipients and can obtain this information in both German and English. The Company is firmly committed to following a fair information policy.
Regular meetings with analysts and investors in the context of road shows and individual meetings play a central role in investor relations at MorphoSys. Conference calls accompany publications of quarterly results and give analysts and investors an immediate opportunity to ask questions about the Company’s development. Company presentations for on-site events, visual and audio recordings of other important events as well as conference call transcripts are also available on the Company’s website to all interested parties.
This website www.morphosys.com serves as a central platform for current information on the Company and its development. Financial reports, analyst meetings and conference presentations, as well as press releases and ad hoc statements, are also available. The important regularly scheduled publications and events (annual reports, interim reports, annual general meetings and press and analyst conferences) are published in the Company’s financial calendar well in advance.

Establishment of specific targest for the composition of the Supervisory Board

The Supervisory Board believes a ratio of at least two non-German members, or at least two members having extensive international experience, provides a fair share of diversity given the Company’s international orientation. The Supervisory Board currently meets this ratio.
The Supervisory Board also strives to have at least four independent members. The Supervisory Board currently meets this ratio. Material and lasting conflicts of interest should be avoided, particularly those arising from activities for major competitors. No such conflict of interest currently exists.
It is also intended to maintain the current number of women on the Supervisory Board. The Supervisory Board has two female members and the Company intends to maintain this ratio in the future.
The age limit of 75 years contained in the Supervisory Board’s bylaws is currently respected, but the Supervisory Board may make an exception to this provision in specific cases.
At the Annual General Meeting, the Supervisory Board intends to propose an initial two-year period of office for Supervisory Board members. The Supervisory Board intends to allow reappointment only once for an additional term of three years but reserves the right to make exceptions in specific cases and permit members to be reappointed for a third or potentially fourth term of three years each.
The Supervisory Board intends to respect the targets described in future election proposals.

 

Womens´s quota for the Supervisory Board, Management Board and the two Management Levels below the Management Board

The Supervisory Board of MorphoSys comprises of six members, two of whom are women. The actual ratio of female representation within the Superverisory Board of MorphoSys therefore lies above 30% and amounts to 33.33%. Against this background, the Supervisory Board of MorphoSys hereby confirms its resolution dated July 22, 2015 regarding the targeted board composition for the Supervisory Board, and affirms that MorphoSys intends to maintain such ratio also in the future, namely until June 30, 2022.

The Management Board of MorphoSys comprises of five members, one of whom is a woman. The actual ratio of female representation within the Management Board of MorphoSys therefore lies below 30% and amounts to 20%. The Supervisory Board of MorphoSys refers to its resolution dated July 22, 2015 regarding the targeted board composition for the Vorstand, and affirms that MorphoSys intends to reach in the future, namely until June 30, 2022, a ratio of 25%.

The first level below the Management Board (Senior Management Group) currently comprises 22 members, 9 of whom are women. The actual ratio of female representation within the first level below the Management Board therefore lies above 30% and amounts to 40.9%. Against this background, the Management Board of MorphoSys hereby confirms its resolution dated July 14, 2015 regarding the targeted level of female representation within the first level below the Management, and affirms that MorphoSys intends to maintain a ratio at or above 30% also in the future, namely until June 30, 2022.

The second level below the Management Board (Führungskräftegruppe without SMG members) currently comprises 40 members, 14 of whom are women. The actual ratio of female representation within the second level below the Management Board therefore lies above 30% and amounts to 35%. Against this background, the Management Board of MorphoSys hereby confirms its resolution dated July 14, 2015 regarding the targeted level of female representation within the second level below the Management, and affirms that MorphoSys intends to maintain a ratio at or above 30% also in the future, namely until June 30, 2022.

 

Remuneration Report

The Remuneration Report presents the principles, structure and amount of Management Board and Supervisory Board remuneration. The report complies with the legal provisions and gives consideration to the Code’s recommendations.

Management Board Remuneration

The Management Board’s remuneration system is intended to provide an incentive for performance-oriented and sustainable corporate management. Therefore, the aggregate remuneration of the Management Board members consists of different components: fixed components, an annual cash bonus based on the achievement of corporate targets (short-term incentive – STI), a variable compensation component with a long-term incentive (long-term incentive – LTI) and other remuneration components. Variable remuneration components with long-term incentive consist of performance share plans from the current and prior years as well as a convertible bond program from the year 2013. Management Board members also receive fringe benefits in the form of non-cash benefits, mainly the use of a company car and the payment of insurance premiums. All remuneration packages are reviewed annually for their scope and appropriateness by the Remuneration and Nomination Committee and compared to the results of an annual Management Board remuneration analysis. The amount of compensation paid to Management Board members highly depends on their individual areas of responsibility, their personal achievement of goals, the Company’s economic situation and success and the Company’s business prospects versus its competition. All decisions concerning adjustments to remuneration packages are made by the entire Supervisory Board. The Management Board’s remuneration and index-linked pension scheme were last adjusted in July 2016.

Overview

In the 2016 financial year, total benefits of € 4,383,658 (2015: € 4,521,009) were granted to the Management Board in accordance with the provisions of the German Corporate Governance Code.
Of the total remuneration for the year 2016, € 2,596,366 was cash compensation and € 1,787,292, or 41 %, resulted from personnel expenses for share-based compensation (performance share plan and convertible bond plan) (remuneration with long-term incentive – LTI).
The total amount of benefits paid to the Management Board in the 2016 financial year amounted to € 5,070,618 (2015: € 9,508,884). In addition to cash compensation payments of € 2,672,333 (2015: € 2,869,901), this amount includes mainly the relevant value of the transfer of treasury stock from a performance-based share plan (share-based compensation) amounting to € 2,398,285 (2015: € 4,622,005) under German tax law. Since there were no convertible bonds exercised in 2016, the total amount for 2016 does not include proceeds from the exercise of convertible bonds (2015: € 2,016,978).
As of April 1, 2016, a total of 57,967 of the Management Board’s shares of treasury stock from the 2012 performance-based share plan were vested because the vesting period for this LTI program had expired. The beneficiaries had the option to receive the shares within a six-month period ending on October 4, 2016. All transactions in MorphoSys shares executed by members of the Management Board were reported as required by law and published in the Corporate Governance Report as well as on the Company’s website.
For a detailed tables, see the Remuneration Report as part of the Annual Report 2016 (see page 77 ff).

Fixed Remunertation and Fringe Benefits

The non-performance-related remuneration of the Management Board consists of fixed remuneration and additional benefits, which primarily include the use of company cars, as well as subsidies for health, welfare and disability insurance. The Chief Financial Officer, Mr. Jens Holstein, receives an additional expense allowance for maintaining two households.

Pension Expense

The Company also provides payments to Management Board members equal to a maximum of 10 % of the member’s fixed annual salary plus any payable taxes. This compensation is intended for the members’ individual retirement plans. Additionally, all Management Board members participate in a pension plan in the form of a provident fund, which was introduced in cooperation with Allianz Pensions-Management e.V. The pension obligations of the provident fund will be met by Allianz Pensions-Management e.V. These pension obligations are not pension benefit plans.

Performance-Based Compensation (Short-Term Incentive - STI)

Members of the Management Board each receive performance- based compensation in the form of an annual bonus payment of up to 70 % of the gross base salary when 100 % of the member’s targets have been achieved. These bonus payments are dependent on the achievement of corporate targets specified by the Supervisory Board at the start of each financial year. They are based on the Company’s performance measured by revenue, operating result, the progress of the partnered pipeline and the Company’s proprietary pipeline. At the start of the year, the Supervisory Board assesses the degree to which corporate goals were achieved in the prior year and uses this information to determine the bonus. The bonus may not exceed 125 % of the target amount (corresponding to 87.5 % of the gross base salary). Performance based compensation can be omitted if goals are not achieved. The bonus for the 2016 financial year will be paid in February 2017.

Long-Term incentive Compensation (Long-Term Incentive - LTI)

In 2011, MorphoSys introduced a new, long-term incentive compensation plan (Performance Share Plan) for the Management Board and members of the Senior Management Group. The LTI program is based on the allocation of shares linked to the achievement of predefined performance targets over a four-year period.

Each year, the Supervisory Board determines the number of shares to be allocated to the Management Board. On April 1, 2016, the Management Board was granted 35,681 shares. Each Management Board member received an entitlement benefit for a specific number of shares. For more information, please refer to Item 7.2.5 in the Notes to the Consolidated Financial Statements as part of the Annual Report 2016 (see page 138 ff).

The Supervisory Board sets the long-term performance targets along with the allocation of shares for a given year. The target for the 2016 LTI program was the performance of the MorphoSys share compared to a benchmark index consisting equally of the NASDAQ Biotechnology Index and the German TecDAX Index. LTI program participants are awarded shares annually based on the daily relative performance of the MorphoSys share versus the benchmark index. There is a hurdle of 50 % and a cap of 200 % for the price performance in any given year. For example, if the relative performance of the MorphoSys shares versus the benchmark index is less than 50 %, participants will not receive any entitlement benefits for the relevant year. Participants also do not receive entitlement benefits for additional shares when the share price performance exceeds 200 %.

The ultimate number of performance shares allocated to the LTI program participants is determined at the completion of the program, namely after four years. This calculation incorporates the number of shares initially allocated after adjusting for the share price development of the MorphoSys share versus the benchmark index and a “company factor” that is determined at the Supervisory Board’s discretion. This company factor is a number between zero and two that is set by the Supervisory Board based on the Company’s situation. The company factor’s predefined default value is one.

Miscellaneous

Management Board members were not granted any loans or similar benefits in the reporting year nor have they received any benefits from third parties that were promised or granted based on their position as a member of the Management Board.

Termination of Management Board Empoyemnt Contracts / Change of Control

If a Management Board member’s employment contract terminates due to member’s death, the member’s spouse or life partner is entitled to the fixed monthly salary for the month of death and the 12 months thereafter. In the event of a change of control, Management Board members are entitled to exercise their extraordinary right to terminate their employment contracts and receive any outstanding fixed salary for the remainder of the agreed contract period. Moreover, in such a case, all convertible bonds and performance shares granted will become vested immediately and can be exercised after the expiration of the statutory vesting period. A change of control has occurred when (i) MorphoSys transfers assets or a substantial portion of its assets to unaffiliated third parties, (ii) MorphoSys merges with an unaffiliated company or (iii) a shareholder or third party holds 30 % or more of MorphoSys’s voting rights

Supervisory Board Remuneration

The remuneration of Supervisory Board members is governed by the Company’s Articles of Association and a corresponding Annual General Meeting resolution on Supervisory Board remuneration. In the 2016 financial year, Supervisory Board members received fixed compensation, attendance fees and expense allowances for their participation in Supervisory Board and committee meetings. Each Supervisory Board member has received annual fixed compensation (€ 85,400 for Chairpersons, € 51,240 for Deputy Chairpersons and € 34,160 for all other members) for their membership of the Supervisory Board. The Chairperson receives € 4,000 for each Supervisory Board meeting chaired and the other members receive € 2,000 for each Supervisory Board meeting attended. For committee work, the committee Chairperson receives € 12,000 and other committee members each receive € 6,000. Committee members also receive € 1,200 for their participation in a committee meeting. Participation in a Supervisory Board or committee meeting by telephone or video conference results in a 50 % reduction in compensation for meeting participation. In certain cases, a fixed expense allowance is granted for travel time for meetings personally attended. Therefore, Supervisory Board members residing outside of Europe who personally take part in a Supervisory Board or committee meeting are entitled to a fixed expense allowance of € 2,000 (plus any sales tax due) for additional travel time in addition to attendance fees and reimbursed expenses.

Supervisory Board members are also reimbursed for travel expenses and value-added taxes (VAT) on their compensation.

In the 2016 financial year, Supervisory Board members received a total of € 529,680 (2015: € 529,270) excluding the reimbursement of travel expenses. This amount consists of fixed compensation and attendance fees for participating in Supervisory Board and committee meetings.

No loans were granted to Supervisory Board members by the Company.

For a list of remuneration relating to individual Supervisory Board members, see the Remuneration Report as part of the Annual Report 2016 (see page 77 ff).

 

Holdings of Management Board and Supervisory Board Members

The members of the Management Board and the Supervisory Board hold more than 1 % of the shares issued by the Company. All shares, performance shares and convertible bonds held by each member of the Management Board and the Supervisory Board are listed below.

Holdings of the Boards as of June 30, 2017

  Shares Stock Options Convertible Bonds Performance Shares  
Management Board  
Dr. Simon Moroney 526,238 12,511 88,386 30,060
Jens Holstein 11,000 8,197 60,537 20,086
Dr. Malte Peters 9,505 8,197 0 3,187
Dr. Marlies Sproll 65,747 6,148 60,537 19,289
Dr. Markus Enzelberger 4,906 5,266 0 5,987
Supervisory Board  
Dr. Gerald Möller (Chairman) 11,000 0 0 0
Dr. Frank Morich 1,000 0 0 0
Dr. Marc Cluzel 500 0 0 0
Krisja Vermeylen 350 0 0 0
Wendy Johnson 500 0 0 0
Klaus Kühn 0 0 0 0

For a detailed description of the stock option schemes and convertible bonds programs for the employees of MorphoSys Group, we refer to the latest financial reports.

 

Managers' Transactions (formerly known as "Directors' Dealings")

Pursuant to Art. 19 para. 5 subparagraph 1, sentence 1 of the European Market Abuse Regulation (“MAR”) the Members of the Management and Supervisory Boards of MorphoSys AG, as well as persons closely associated with them , are legally bound to report trading in MorphoSys stock to the German Federal Financial Supervisory Authority (BaFin). Every transaction conducted on their own account relating to the shares or debt instruments of MorphoSys or to derivatives or other financial instruments linked thereto must be reported.

All transactions have to be published unless the total value of these tradings executed by such person within one calendar year does not exceed EUR 5,000.

Notes:
Participants in the MorphoSys stock option and/or convertible bonds programs who choose to “exercise and sell” receive the difference between the so-called exercise price (price determined at the time of issuing the options) and the Xetra closing price of the MorphoSys stock on the day of exercise, as a taxable income.

All reported transactions of MorphoSys AG are published via GlobeNewswire.

Managers' Transactions

Published Transaktions

Avoiding Conflits of Interst

Management Board and Supervisory Board members are required to refrain from any actions that could lead to a conflict of interest with their duties at MorphoSys AG. Such transactions or the secondary employment of Management Board members must be disclosed immediately to the Supervisory Board and are subject to the Board’s approval. The Supervisory Board, in turn, must inform the Annual General Meeting of any conflicts of interest and their handling. In the 2016 financial year, a potential conflict of interest arose regarding a possible transaction. As a precautionary measure, the affected Supervisory Board member did not take part in the corresponding meeting of the Supervisory Board. The transaction in question was not consummated.

Stock Pepurchases

By resolution of the Annual General Meeting on May 23, 2014, MorphoSys is authorized in accordance with Sec. 71 Para. 1 no. 8 AktG to repurchase its own shares in an amount of up to 10 % of the existing common stock. This authorization can be exercised in whole or in part, once or several times by the Company or a third party on the Company’s behalf for the purposes specified in the authorizing resolution. It is at the Management Board’s discretion to decide whether to carry out a repurchase on a stock exchange, via a public offer or through a public invitation to submit a bid.

In March 2016, MorphoSys repurchased a total of 52,295 of its own shares based on the authorization from the year 2014. The Company plans to use these shares for a long-term incentive program for the Management Board and Senior Management Group. The authorization also permits the shares to be used for other lawful purposes.

Information Technology

The main topics for the Information Technology department in the 2016 financial year included IT security and compliance and the design and construction of a new, future-oriented IT infrastructure for the move to the Company’s new premises.

In designing the new IT infrastructure, emphasis was placed on achieving less complexity, more flexibility and a high level of security. Our new data centers are protected by state-of-the-art building technology and fire extinguishing systems.

The planning and construction of the new building’s network and media technology infrastructure is based on the latest standards combining both safety and user-friendliness.

An internal CERT (Computer Emergency Response Team) has been established and is trained regularly in areas such as IT forensics and hacking methods to deal appropriately with any threats. Securityrelated system messages or user notifications are analyzed in detail. In a few cases, additional external IT security experts were used for a detailed analysis, whereby no serious security incidents occurred.

As part of the Company’s IT Security Awareness Campaign (ISAC) established in the prior year, additional campaigns were conducted in the reporting year to raise employees’ awareness with respect to their shared responsibility and essential contribution to the Company’s IT security

INFORMATION ON THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM WITH REGARD TO THE ACCOUNTING PROCESS UNDER SEC. 289 PARA. 5 AND SEC. 315 PARA. 2 NO. 5 HGB

In the 2016 financial year, MorphoSys completed a routine update of the documentation for its existing internal control and risk management system. This update serves to maintain adequate internal control over financial reporting and to ensure the availability of all controls so that financial figures can be reported as precisely and accurately as possible. The COSO (Committee of Sponsoring Organizations of the Treadway Commission) defines the corresponding COSO framework (“Internal Control – Integrated Framework”). This is the framework used by MorphoSys and is the most commonly used for the internal control of financial reporting.

System constraints make it impossible to give absolute assurance that internal controls will always prevent or completely detect all misrepresentations made in the context of financial reporting. Internal controls can only provide reasonable assurance that financial reporting is reliable and verify that the financial statements were prepared in accordance with the IFRS standards adopted by the European Union for external purposes.

The consolidated financial statements are subjected to numerous preparation, review and control processes so that the statements can be reported promptly to the market and shareholders. To accomplish this, the Company’s executives have a coordinated plan for which all internal and external resources are made available. MorphoSys also uses a strict four-eyes principle to ensure the accuracy of the key financial ratios reported and the underlying execution of all accounting processes. Numerous rules and guidelines are also followed to ensure the strict separation of the planning, posting and execution of financial transactions. This functional separation of processes is ensured by all of the Company’s operating IT systems through the appropriate assignment of rights. External service providers routinely review the implementation of and compliance with these guidelines as well as the efficiency of the accounting processes. The reporting year’s most recent review showed insignificant cause for action. The appropriate corrective actions are being planned, and their implementation will be reviewed again in the following year.

Predicting future events is not the job of MorphoSys’s internal control and risk management system. The Company’s risk management system does, however, guarantee that business risks are detected and assessed early. The risks identified are eliminated or at least brought to an acceptable level using appropriate corrective measures. Special attention is given to risks that could jeopardize the Company.

The Management Board ensures that risks are always dealt with responsibly and keeps the Supervisory Board informed of any risks and their development.

ACCOUNTING AND EXTERNAL AUDIT

MorphoSys AG prepares its financial statements in accordance with the provisions of the German Commercial Code (HGB) and the Stock Corporation Act (AktG). The consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS), as applicable in the European Union.

For the election of the Company auditor, the Audit Committee of the Supervisory Board submits a nomination proposal to the Supervisory Board. At the 2016 Annual General Meeting, PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft was appointed auditor for the 2016 financial year. As proof of its independence, the auditor submitted a Declaration of Independence to the Supervisory Board. The lead auditor of these consolidated financial statements was Mr. Dietmar Eglauer, who has audited the consolidated financial statements since 2014. PricewaterhouseCoopers GmbH has been the auditor for MorphoSys AG since the 2011 financial year. Information on other consulting, audit and valuation services provided by PricewaterhouseCoopers GmbH to MorphoSys AG during the 2016 financial year can be found in the Notes under Item 6.1. (see page 128)

 

Comliance Management System

The basic mechanisms of the compliance management system at MorphoSys are presented in the section “Relevant Information on Corporate Governance Practices”.

Internal Audit Department

As an element of corporate governance, the Internal Audit Department plays a key role in the Company’s compliance management system. The department’s main duty is to provide the MorphoSys Group with a systematic and uniform approach for evaluating and improving the effectiveness of risk management and supporting the management and monitoring activities when meeting set targets. The accounting and consulting firm KPMG was reappointed by the Internal Audit Department in 2016 to perform the audit as a co-sourcing partner.

Internal auditing is based on a risk-oriented internal audit plan that is largely based on the results of the most recent risk surveys. The Management Board and Supervisory Board Committee’s audit requirements and recommendations are included in the audit plan.

The Internal Audit Department reports regularly to the Management Board. The head of Internal Audit and the Chief Executive Officer both report to the Supervisory Board’s Audit Committee twice annually or on an ad hoc basis when necessary.

Four audits were conducted successfully in the course of 2016. Some areas requiring action were identified and corrections were initiated or performed. Appropriate corrective action was initiated during the reporting year for any complaints. The Internal Audit Department is planning four audits in 2017.