Corporate Governance Report

Corporate governance has been a central component of CENTROTEC Sustainable AG’s corporate philoso- phy for many years. The Supervisory Board and Management Board have considered the Code at length in each amended version and incorporated the recommendations into their actions. As a result, CENTROTEC Sustainable AG complies in all key respects with the recommendations of the German Corporate Governance Code as amended most recently on May 26, 2010 and with the previously valid version of the Code dated June 18, 2009. The Declaration of Compliance below indicates and clarifies the departures.

Management and governance structure
In keeping with German Stock Corporation Law, CENTROTEC Sustainable AG has a two-tier management and governance structure that comprises a five-member Management Board (at the reporting date of December 31, 2010) and, as laid down in its articles of incorporation, a three-member Supervisory Board. The Management Board and Supervisory Board work together closely in the interests of the company. The Management Board coordinates both the strategic direction and principal transactions with the Supervisory Board.

In accordance with the rules of internal procedure of CENTROTEC Sustainable AG, the Management Board is independently responsible for the running of the company and conducts its business. In doing so, it focuses on achieving a lasting improvement in the value of the company. It is bound by the law, the provi- sions of the articles of incorporation and the rules of internal procedure for the Management Board and Supervisory Board, as well as by the resolutions of the Shareholders’ Meeting. The Management Board informs the Supervisory Board regularly and promptly of all relevant topics concerning the strategy and its implementation, the targets, the company’s current performance, the opportunities and risks, and risk management.

The Supervisory Board monitors and advises the Management Board. It specifies the duties of the Man- agement Board to report and inform. The Supervisory Board issues and amends the rules of internal procedure for the Management Board. It in addition appoints and dismisses the members of the Manage- ment Board. It may appoint a Chair of the Management Board. In accordance with the rules of internal procedure for the Supervisory Board, at least two meetings of the Supervisory Board are held each year. In the 2010 financial year, four meetings of the Supervisory Board took place. The members of the Super- visory Board are appointed until the Shareholders’ Meeting that gives discharge for the fourth financial year after the start of their term of office. The financial year in which the term of office commences is discounted.

Diversity and composition of the Supervisory Board
CENTROTEC Sustainable AG welcomes the amendments to the German Corporate Governance Code dated May 26, 2010 on diversity as an important step towards increasing the participation of women and inter- national members in the management echelons of the company as well as on the Management Board and Supervisory Board.

Taking account of the company’s specific situation, the Supervisory Board has identified specific targets in respect of its composition, such as an age limit as well as efforts to ensure that women and inter- national members participate adequately. The Supervisory Board will take account of these targets when proposing candidates to the electoral bodies, and in particular the Shareholders’ Meeting.

At Management Board level, too, the Supervisory Board strives for diversity in keeping with the German Corporate Governance Code, including in particular the appropriate participation of women.

When filling management posts within the company, the Management Board is to adopt an employee-led human resources policy and in particular seek the appropriate participation of international experts and women. There are already numerous international experts in the middle management of the CENTROTEC Group, including the managing directors of the international subsidiaries. In view of the highly technical nature of the industry, there are currently only few women in the middle management of the CENTROTEC Group. CENTROTEC therefore strives to increase the number of women in management posts, bearing in mind its operational circumstances.

Shareholders and Shareholders’ Meeting
The shareholders exercise their rights through the Shareholders’ Meeting and make use of their voting rights there. Each share carries one vote. Every shareholder is entitled to take part in the Shareholders’ Meeting. The Shareholders’ Meeting takes decisions concerning in essence the appropriation of profits, discharge of the Management Board and Supervisory Board, the articles of incorporation and amendments thereto, key entrepreneurial measures, and measures that change the capital such as the issuance of new shares, the acquisition of treasury stock and the conditional capital. The participants of the Share- holders’ Meeting elect the Supervisory Board members and determine their remuneration.

Remuneration system of the Management Board and Supervisory Board
The Supervisory Board is responsible for determining the remuneration of the Management Board, includ- ing the principal contractual features. The remuneration system of the Management Board and Super- visory Board is presented in detail in the remuneration report, which forms part of this report.

Third-party financial loss insurance (D&O cover) has been taken out for the company’s Management Board and Supervisory Board members, incorporating an appropriate excess for the Management Board members in accordance with the statutory provisions. An appropriate excess has also been agreed for the members of the Supervisory Board, in agreement with the Code. The managing directors and administra- tive board members of subsidiaries are included in this D&O cover.

Transparency
CENTROTEC Sustainable AG has acted openly and responsibly ever since its establishment, and therefore did so before the company pledged to observe the Corporate Governance Code. The overriding objective of CENTROTEC’s corporate communication is to provide prompt, continuous, comprehensive and consis- tent information to all target groups and to maintain a relationship with its shareholders that is characterised by transparency. In addition to financial data, the financial calendar listing all key dates for CENTROTEC Sustainable AG, ad hoc information and press releases as well as a yearly document in compliance with Section 10 of German Securities Prospectus Law (WpPG), the latest developments regarding the Corpo- rate Governance Code and notifiable securities transactions (directors’ dealings) pursuant to Section 15a of German Securities Trading Law (WpHG) as well as changes in the principal investments and in the overall voting rights pursuant to Sections 26 and 26a of German WpHG are published on the CENTROTEC homepage, following disclosure to the German Financial Supervisory Authority and the stock market. All the above information is immediately published on the company’s homepage and older information is also made publicly available, above and beyond the statutory requirements.

Article 6.6 of the Corporate Governance Code and Section 15a of German Securities Trading Law stipu- late the obligation to report immediately acquisition and sale transactions (in excess of EUR 5 thousand p. a.) by Management Board and Supervisory Board members or by other persons performing management tasks who regularly have access to inside information about the company. Those persons are fundamen- tally held on a list of insiders at CENTROTEC Sustainable AG and, where they fall under the obligation to supply notice, are obliged to notify the company immediately and the Federal Financial Supervisory Authority (BaFin) of the transactions described in the above sections. CENTROTEC Sustainable AG has passed on all such transactions to BaFin without delay and published them on its homepage. The current holdings of shares and options by the members of corporate bodies are likewise documented there.

Legal transactions with companies in which members of the Supervisory Board and management hold or might hold an interest were also conducted in the financial year. As presented in detail in the Declaration of Compliance, these did not give rise to any conflict of interests.

As in previous years, a dependence report was issued by the Management Board as a precautionary measure. We refer to the contents of the dependence report for details.

Financial reporting and auditing of financial statements
The Consolidated Financial Statements are prepared by the Management Board, audited by the independent auditors and ratified by the Supervisory Board. The Consolidated Financial Statements and interim reports are prepared in accordance with the International Financial Reporting Standards (IFRS) as applicable within the EU, and published in both German and English. 

Declaration of Compliance
The Management Board and Supervisory Board of CENTROTEC Sustainable AG declare that the recommendations of the “Government Commission on the German Corporate Governance Code” in the version dated June 18, 2009 and subsequently in the version dated May 26, 2010 are and have been complied with since the last Declaration of Conformity, dated December 2009, with the exceptions stated below.

1) Article 4.2.3 of the Code recommends that the remuneration of the Management Board should comprise a variable as well as a fixed component. The variable component is, among other things, intended to be performance-related, have a long-term incentivising effect and possess a risk character. The Code quotes stock options schemes as an example. CENTROTEC Sustainable AG has been operating a stock options scheme, applicable not only to Management Board members but also to executive staff and other employees, since 1999. We believe that the scheme reflects the spirit of the Code, but we draw attention to two aspects which might be interpreted as a departure from it.

The Code recommends reference to comparative parameters. The stock options scheme envisages a performance target based on the absolute increase in the share price. This form was chosen in order to provide an incentive for success in absolute rather than relative terms. The Code in addition recommends that the variable remuneration be capped. In the case of the options, this was realised through allowing their exercise only within a limited time frame (for the first time two years after issuance, for the last time seven years after issuance). Options received as a result of the attainment of targets are not retrospectively withdrawn by the company, nor the parameters governing them altered. In addition to the aforementioned share price target, the exercising of the options is moreover linked to further internal performance targets in order to preserve a demanding but equitable form of variable remuneration.

2) Article 5.3 of the Code recommends the formation of committees on the Supervisory Board. These shall, however, be dependent on the specific circumstances of the company and the number of members of the Supervisory Board. Our Supervisory Board consists of three members, who consider all matters concern- ing the company jointly. Consequently, we do not regard the creation of committees to be appropriate in our case. We believe that our view is compatible with the Code, but supply this information as a precautionary measure by way of clarification.

3) Article 5.4.2 of the Code recommends that the Supervisory Board includes an adequate number of members who – in the board’s own opinion – are deemed to be independent. A member is to be regarded as independent if it has no business or personal relations with the company or with its Management Board that might constitute a conflict of interests. In its own opinion, our Supervisory Board includes an adequate number of independent members. Although Supervisory Board members do have business relations with the company, this does not constitute a conflict of interests. 

Brilon, December 2010

Responsibility Statement pursuant to Section 297 (2) fourth sentence and Section 315 (1) sixth sentence of German Commercial Code
To the best of our knowledge, and in accordance with the applicable reporting principles for financial reporting, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the group, and the management report of the group includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal opportunities and risks associated with the expected development of the group.

Remuneration Report of the Management Board and Supervisory Board
The remuneration report of CENTROTEC Sustainable AG is based on the requirements of the International Financial Reporting Standards (IFRS) and German Commercial Code (HGB) while also incorporating the recommendations of the German Corporate Governance Code. The report contains disclosures that are made in the Notes to the Consolidated Financial Statements and Management Report in accordance with the above standards. It therefore forms a part of the audited Consolidated Financial Statements. The matters explained in this report are therefore not presented additionally in the management report and Notes to the Consolidated Financial Statements.

Remuneration of the Management Board
The remuneration system for the Management Board including the key contractual elements is agreed by the Supervisory Board and regularly examined. The remuneration of the members of the Management Board comprises a non-performance-related fixed salary and a performance-related remuneration component. In addition to this there are retirement benefits, other pledges and fringe benefits. The level of the remuneration of the Management Board members reflects the size as well as the economic and financial position of the company, together with how typical the remuneration is when measured against its peer companies. Task areas, personal performance and experience as well as attainment of targets by the Management Board members are moreover taken into account in determining their remuneration. The remuneration system thus sets long-term behavioural incentives and focuses on sustainable development of the company.

The Management Board of CENTROTEC Sustainable AG comprised four and then five members in the 2010 financial year.

The non-performance-related Management Board remuneration is paid in the form of a fixed monthly salary. In the 2010 financial year these fixed salaries, including the employer’s social contributions on them, amounted to EUR 1,215 thousand (previous year EUR 1,043 thousand).

In individual cases a monetary bonus is granted; its granting and level are dependent on the attainment of certain targets specified at the start of the financial year. Bonuses amounted to EUR 161 thousand in the 2010 financial year (previous year EUR 162 thousand).

The greater portion of the variable remuneration with long-term behavioural incentives is granted in the form of stock options via the CENTROTEC stock options scheme. It is dependent on the attainment of certain targets based on the specific performance of the company, as well as individual targets. Depend- ing on attainment of the targets, the Management Board members receive a certain number of stock options, which have a long-term incentivising effect in view of the statutory vesting period and the thresh- old requirements for their exercising. The rules on the stock options scheme and the number of options that Management Board members are able to exercise are shown in detail in the Notes to the Consolidated Financial Statements in this Annual Report. In the year under review of 2010, the Management Board was offered the prospect of a maximum total of 131,000 options (previous year 125,000 options). Each of these options entitles the beneficiary to purchase one CENTROTEC share at an exercise price of EUR 8.50 (previous year EUR 8.30), provided certain conditions are met. The maximum number of all exercisable options was used as the calculation basis for determining the personnel expense pursuant to IFRS 2. The value of the stock options received in 2010 has been determined using a binominal model in accordance with the rules in IFRS 2 „Share-based Payments“ and totals EUR 448 thousand (previous year EUR 428 thousand).

The third category of remuneration for Management Board members comprises miscellaneous remuneration that is made substantially in the form of contributions towards pension schemes, the use of company cars, and insurance premiums, with a total cost of EUR 182 thousand (previous year EUR 119 thousand). No other fringe benefits are provided.

The remuneration of the Management Board of CENTROTEC fundamentally does not include pension contributions for Management Board members. German management board members are able to use the company agreement on company pension schemes. Like all other employees, they then make tax- advantaged contributions from their gross salary. In the Netherlands, as for all employees there, payments are made into an industry-specific fund, which guarantees an additional retirement pension on top of the state pension. The employee contributes 40 % and the employer the remaining 60 %. The pension entitlement for one Management Board member was topped up over and above the specified ceiling. This is customary for other employees, too.

The total remuneration for active and retired members of the Management Board of CENTROTEC Sustainable AG in the 2010 financial year amounted to EUR 2,006 thousand (previous year EUR 1,752 thousand). The remuneration of the individual Management Board members, broken down into non-per-formance-related and performance-related components, components with a long-term incentivising effect and miscellaneous remuneration, is shown in the following table in thousand euros:

Remuneration of the Supervisory Board
The remuneration of the Supervisory Board is regulated by Section 18 of the articles of incorporation of CENTROTEC Sustainable AG. This specifies that, in addition to reimbursement of their out-of-pocket ex- penses, the members of the Supervisory Board receive a fixed annual remuneration that was determined by the Shareholders’ Meeting on May 20, 2010, and also a variable, performance-related remuneration. The fixed remuneration amounts to EUR 24 thousand per member of the Supervisory Board for each full year of service. The Chairman receives double and the Deputy Chairman one and a half times the amount due to a member of the Supervisory Board. This remuneration of members of the Supervisory Board of CENTROTEC Sustainable AG amounted to EUR 108 thousand in the past financial year (previous year EUR 54 thousand). There were in addition other expenses amounting to EUR 2 thousand (previous year EUR 2 thousand). The statutory level of sales tax due on this remuneration is furthermore paid by the company to the extent that it is billed by a Supervisory Board member. No separate remuneration is paid for service on committees, because the three-member Supervisory Board of CENTROTEC Sustainable AG does not form separate sub-committees in view of its size. By way of variable and performance-related remuneration, in accordance with the articles of incorporation, each member of the Supervisory Board receives remuneration amounting to 0.1 % of the dividend payable for a given financial year; as in previous years, however, no dividends were distributed in the 2010 financial year.