Report of the Supervisory Board

Joachim Milberg
Chairman of the Supervisory Board

Dear Shareholders and Shareholder Representatives,

The BMW Group has again fared extremely well over the past financial year. Throughout the twelvemonth period, we diligently supervised the Board of Management’s running of the business and, in joint consultations, supported it in an advisory capacity. Our work within the Supervisory Board and in conjunction with the Board of Management was conducted openly, constructively and in a spirit of trust.

Main emphases of the Supervisory Board’s monitoring and advisory activities

In a total of five meetings, we deliberated on the BMW Group’s current situation. Other matters at the forefront of our consultations were corporate strategy and planning for the BMW Group as a whole, the strategy being pursued for the Financial Services segment in particular, risk management and levels of risk provision. Decisions were also taken with respect to the composition and compensation of the Board of Management and an examination of corporate governance within the enterprise was carried out. In 2013 we paid particular attention to the progress being made in the field of electromobility and to the efforts expended and the challenges arising for the BMW Group regarding the necessity to continue to reduce emissions.

We carefully monitored the performance of the BMW Group and were regularly kept informed of sales performance, workforce developments and other significant matters, both at scheduled meetings and at other times as the need arose. Moreover, the Chairman of the Board of Management, Dr Reithofer, informed me directly about major business transactions and projects. In addition to scheduled meetings, Dr Kley, the Chairman of the Supervisory Board’s Audit Committee, and Dr Eichiner, the Board of Management member responsible for Finance and Financial Reporting, remained in direct contact at other times.

In its regular reports on the financial condition of the Group, the Board of Management presented its assessment of economic developments in important regions of the world, commented on sales volume and competitive issues within the Automotive and Motorcycles segments and highlighted fluctuations in the size of the workforce. We were also kept informed of the performance of the Financial Services segment, including new retail business volumes, the size of the contract portfolio with dealers and retail customers, total business volume and the development of vehicle residual values on major markets.

The business status reports provided by the Board of Management also dealt with important ongoing activities and projects, such as the current status of the realigned strategy adopted for BMW Motorrad as well as the progress of cooperation discussions and projects with Toyota. The Supervisory Board was also informed of any temporary delays affecting spare parts supplies during the summer and deliberated on causes and countermeasures required.

One of the Supervisory Board meetings was held at the BMW site in Berlin, where we visited BMW Motorrad’s production facilities. The Board of Management and local management representatives took this opportunity to present their vision of the new strategic direction of the motorcycle line of business, with its focus on the premium segment. As well as receiving an insight into new product concepts, we were also informed of the range of measures currently being implemented in the fields of production, sales and marketing, aimed at attracting new motorcycle customer groups and making inroads on emerging markets with appropriate products.

We looked at the regulatory situation on the world’s major markets, particularly in the EU, China, USA and Japan, both for vehicles powered by combustion engines and those with alternative drive systems. The Board of Management elucidated numerous options for achieving further reductions in carbon emission levels for conventional vehicles and the genuine benefits that can be generated by expanding electromobility products and services in various markets. Future emission targets currently being mulled over by policymakers, the various proposals put forward in this context and their likely impact on the BMW Group as a premium manufacturer and on the competitive situation were also discussed with the Board of Management.

We devoted considerable time to deliberating on the expectations and needs of customers with respect to electric mobility. In this context, we gave careful consideration to the production and marketing concepts for the BMW i3, including complementary services and measures, such as the BMW Battery Certificate or Range Extender, both of which have been developed to meet specific customer requirements.

At one two-day meeting of the Supervisory Board, corporate and product strategies were considered, the Long-term Business Forecast examined and time set aside for a detailed look at a range of salient technical and marketing topics.

During the first part of the meeting we again discussed with the Board of Management the findings of its annual review of the Group’s Strategy Number ONE, including various potential risk scenarios. The Board of Management reported on the distribution of sales volume and added value, focusing in particular on the latest status of projects in China and on plans for building further production sites in Brazil, Russia and the NAFTA region.

In conjunction with vehicle presentations, Supervisory Board members also had the opportunity to test-drive a number of BMW, MINI and Rolls-Royce vehicles, including the BMW i3 and BMW i8. Presentations were also made by senior department heads on selected marketing and technical topics related to electromobility.

After concluding the Annual Strategy Review, the second part of the meeting included an in-depth discussion of the long-term business forecast drawn up by the Board of Management for the years from 2014 to 2019 and, after thorough examination and deliberation, we gave the required approval. We remain firm in our conviction that the strategic direction set by the Board of Management for the BMW Group is robust and sustainable.

The Board of Management reported to us on the performance and strategy of the Financial Services segment, explaining the principal aspects of its internal management and organisation. We deliberated on the role the segment plays within the Group, including a discussion of the impact of increasing regulation in the financial sector.

We also thoroughly examined the Annual Budget for the financial year 2014, which was presented by the Board of Management in November 2013. We fully support the focus being placed on growth and quality of earnings.

We were also briefed in detail by the Board of Management on the results of regional customer surveys relating to product quality, the perception of quality and the acceptance of concepts. The assurance and improvement of quality processes and measures were explained to us and we were also afforded an interesting insight into regional and cultural differences in customer expectations. In all cases, the Board of Management emphasised its aspiration to maintain the highest level of quality.

The Supervisory Board and the Board of Management jointly addressed the topic of corporate governance within the BMW Group on several occasions in 2013. Following the amendment to the variable component of Supervisory Board compensation by the Annual General Meeting in May 2013, the remuneration structure now complies with all relevant recommendations of the German Government Corporate Governance Code Commission. In the most recent Declaration of Compliance, which was issued in December 2013, the Board of Management and the Supervisory Board resolved that the BMW Group should comply with the recommendations of the German Government Corporate Governance Code Commission published on 15 June 2013 (Code version; 15 May 2013), without exception and with effect from the applicable date.

Again in 2013, in both the Personnel Committee and the full Supervisory Board we examined both the structure and the amount of the compensation that Board of Management members receive. In order to validate the suitability of the system and the appropriateness of results, we reviewed the comparable trends for business performance and Board of Management compensation on a multi-year basis. We also gave general consideration to the development of the remuneration of executive managers and employees of BMW AG within Germany over the course of time. Moreover, we sought the expertise of an external compensation consultant, independent of both Company and Board of Management, and evaluated compensation studies for the DAX. To accommodate the desire for a consistent remuneration model throughout the Group, the Personnel Committee also made enquiries into the structure of management remuneration and the status of any planned changes to that structure. Relevant points were discussed by the full Supervisory Board, where, after deliberation, it was decided that a fundamental change to the Board of Management compensation system is not required.

Pension entitlements were also reviewed. Based on a proposal put forward by the Personnel Committee, and after discussion with an independent compensation consultant, with effect from the financial year 2013 we resolved to increase the extent to which contributions for Board of Management members are staggered. Future calculations will be based on the length of service on the board as well as previous activities and individual amounts will be increased to take account of benchmark developments in the DAX. For these purposes, we considered the estimated impact on compensation as a whole and on the probable future level of pensions.

In the course of implementing the recommendations of the German Government Corporate Governance Code Commission, we set caps for the individual components and the total amount of compensation for Board of Management members with effect from the financial year 2014. The target compensation levels for Board of Management members remain unchanged. The employment contracts of current Board of Management members were amended, with the agreement of those members, with effect from 1 January 2014. Detailed information with respect to Board of Management compensation, including a summary of remuneration caps, is shown in the Compensation Report.

In conjunction with the joint examination of corporate governance, the Board of Management informed us (both in the Personnel Committee and in the full Supervisory Board) on the status of implementation of the diversity concept throughout the BMW Group, a concept which is not merely restricted to a focus on gender, but which is aimed at promoting diversity in other areas, particularly in terms of cultural diversity and the international character of the workforce. In this context, the Board of Management informed us regarding the percentage of women occupying management positions and changes thereto, in particular at senior management level and executive level below the Board of Management, as well as the planned measures to increase this percentage.

With regard to its own composition, based on a detailed composition profile, the Supervisory Board decided upon specific appointment goals in 2010, which are discussed in detail in the Corporate Governance Report. These appointment goals were not changed in 2013. No conflicts of interest arose during the year under report on the part of members of either of the boards. Significant transactions with Supervisory Board members and other related parties as defined by IAS 24, including close relatives and intermediary entities, are examined on a quarterly basis.

We endeavour to assess and continuously improve the efficiency of the work performed by the Supervisory Board and its committees. The Chairman of the Audit Committee and myself are therefore always glad to receive comments and suggestions for improvement from Supervisory Board members. The formal examination of the Supervisory Board’s efficiency is also treated once each year as a separate agenda point for discussion, for which preparations are made with the aid of a questionnaire.

Each of the five Supervisory Board meetings in 2013 was attended on average by over 95 % of its members, a fact that can be tied in to the analysis of attendance fees for individual members, as disclosed in the Compensation Report. No member of the Supervisory Board was absent at more than two meetings during their period of office. Presiding Board and committee meetings were fully attended in the vast majority of cases.

Description of Presiding Board activities and committee work

In order to work more efficiently and prepare complex issues and decisions with greater thoroughness, the Supervisory Board has established a Presiding Board and several committees. A description of the duties, composition and work procedures of these committees is provided in the Corporate Governance Report.

The relevant committee chairpersons provided timely and comprehensive accounts of the work of the Presiding Board and committees and I personally brought the representatives of the shareholders up to date about the work of the Nomination Committee.

In a total of four meetings, the Presiding Board focused mainly on preparing topics for the meetings of the full Supervisory Board, unless this fell under the remit of one of the committees. Complex issues, such as the Long-term Business Forecast and the Annual Strategic Review, were dealt with on the basis of written and oral reports provided by Board of Management members and senior department heads. The Head of Financial Services, for instance, reported to us on segment strategy, business developments, credit risks and leasing vehicle residual value risks as well as providing us with detailed information on the current status of various strategic projects. The Presiding Board selected further topics of discussion for Supervisory Board meetings and made suggestions to the Board of Management regarding items to be included in its reports to the full Supervisory Board.

The Audit Committee held four meetings and three telephone conference calls during 2013. The Interim Financial Reports were discussed with the Board of Management in those telephone conference calls, prior to their publication. Representatives of the external auditors were present during the telephone conference call held to present the Interim Financial Report for the six-month period ended 30 June 2013. The report had been subjected to review by the external auditors.

The Audit Committee meeting held in spring 2013 was primarily dedicated to preparing the Supervisory Board meeting at which the financial statements were examined. Prior to proposing KPMG AG Wirtschaftsprüfungsgesellschaft for election as Company and Group auditor at the 2013 Annual General Meeting, we obtained a Declaration of Independence from KPMG.

The Audit Committee also considered the scope and composition of non-audit services, including tax advisory services provided by KPMG entities to the BMW Group. There were no indications of conflicts of interest, grounds for exclusion or lack of independence on the part of the auditor.

The fee proposals for the audit of the year-end Company and Group Financial Statements 2013 and the review of the six-month Interim Financial Report were deemed appropriate by the Audit Committee. Subsequent to the Annual General Meeting 2013, the Audit Committee therefore appointed KPMG AG for the relevant engagements and, with due consideration to the suggestions made by the full Supervisory Board, specified audit focus areas, which, in 2013, included the measurement of warranty and pension provisions as well as the recognition of development costs incurred in conjunction with cooperation agreements.

The Head of Group Financial Reporting reported to the Audit Committee on risk management processes in place throughout the BMW Group, including an in-depth description of the internal control system (ICS) underlying financial reporting. The procedures for determining the degree of maturity of a unit’s ICS were explained on an illustrative basis for a plant, a sales company and a financial services company.

The Chairman of the BMW Group Compliance Committee reported to the Audit Committee on the current compliance situation, which, as in the previous year, was deemed satisfactory overall. None of the information received relating to potential non-compliance or actual incidences of non-compliance identified in specific cases give any indication of serious or systematic non-compliance with applicable requirements.

The Head of Group Internal Audit reported to us in the Audit Committee on the significant findings of audits conducted by Group Internal Audit, on both the industrial and financial services sides of the business, and put forward suggested recommendations for improvement.

We concurred in the Audit Committee with the decision of the Board of Management to raise the Company’s share capital in accordance with § 4 (5) of the Articles of Incorporation (Authorised Capital 2009) by €265,570 and to issue a corresponding number of new non-voting bearer shares of preferred stock, each with a par value of € 1, at favourable conditions to employees.

The Personnel Committee convened four times during the financial year 2013.

In preparation of the full Supervisory Board’s meetings, we reviewed the structure and appropriateness of Board of Management compensation, including pension entitlements. We also worked on proposals to increase the extent to which pension contributions for Board of Management members are staggered and to implement the latest recommendations of the German Government Corporate Governance Code Commission relating to compensation and / or changes in employment contracts. In one case, we also gave our approval for a member of the Board of Management to accept the mandate for membership of the supervisory board of a non-BMW Group entity.

The Nomination Committee convened twice during the financial year 2013. At these meetings, we deliberated on medium and long-term successor planning for the shareholders’ representatives on the Supervisory Board and considered proposals for candidates for the Supervisory Board elections at the 2013 and 2014 Annual General Meetings, taking the composition objectives stipulated for the Supervisory Board into due account.

The statutory Mediation Committee (§ 27 (3)) of the Law on Worker Participation) was not required to be convened during the financial year 2013.

Composition and organisation of the Board of Management

It was with much regret, but also with a great deal of respect and understanding, that we accepted the decision taken by Frank-Peter Arndt to step down from his position as Board of Management member responsible for Production with effect from 31 March 2013 for reasons of health. We expressed our deep appreciation to Mr Arndt for his many years of committed and conscientious service and for the personal contribution he made to the success of the BMW Group. Details of the arrangements put in place for Mr Arndt following the termination of his board activities are provided in the Compensation Report.

In conjunction with a reassignment of responsibilities within the Board of Management with effect from
1 April 2013, responsibility for Production was entrusted to Harald Krüger, who had been in charge of the MINI, BMW Motorrad, Rolls-Royce and BMW Group Aftersales division since its creation in 2012. With effect from 1 April 2013, the Supervisory Board appointed Peter Schwarzenbauer as member of the Board of Management. With many years of management experience in the premium segment of the automobile industry behind him, Mr Schwarzenbauer took over responsibility for the MINI, BMW Motorrad, Rolls-Royce, Aftersales BMW Group division from Mr Krüger as part of the reallocation of responsibilities within the Board of Management. The appointment of one member of the Board of Management was renewed by the Supervisory Board.

Composition of the Supervisory Board, the Presiding Board and Supervisory Board Committees

Following the resignation of Oliver Zipse as executive staff representative on the Supervisory Board with effect from 31 March 2013, in order to take up a new management position within the BMW Group, the District Court of Munich – based on a proposal made by executive staff – appointed Dr Markus Schramm (Head of Aftersales Business Management and Mobility Services BMW Group) as executive staff representative on the Supervisory Board for the remaining term of office. Maria Schmidt retired on 30 June 2013 and therefore ceased to be a member of the Supervisory Board. The Supervisory Board thanked the members leaving office for their constructive work within the Supervisory Board. The District Court of Munich appointed Brigitte Rödig as employee representative on the Supervisory Board to replace Maria Schmidt for the remaining term of office. Following these changes, the proportion of women in the Supervisory Board remains at 20 %.

Following my own re-election to the Supervisory Board at the Annual General Meeting 2013, the Supervisory Board again decided to elect me as its Chairman and member of the Audit Committee. In accordance with the relevant terms of reference, I remained Chairman of the Personnel and Nomination Committees. Following his re-election to the Supervisory Board, Dr Kley was again elected as the 4th Deputy Chairman of the Supervisory Board, as member of the Personnel and Nomination Committees and also Chairman of the Audit Committee. The Corporate Governance Report includes an overview of the composition of the Supervisory Board and its committees.

Examination of financial statements and the profit distribution proposal

KPMG AG Wirtschaftsprüfungsgesellschaft conducted a review of the abridged Interim Group Financial Statements and Interim Group Management Report for the six-month period ended 30 June 2013. The results of the review were also reported orally to the Audit Committee. No issues were identified that might indicate that the abridged Interim Group Financial Statements and Interim Group Management Report had not been prepared, in all material respects, in accordance with the applicable provisions.

The Group and Company Financial Statements of Bayerische Motoren Werke Aktiengesellschaft for the year ended 31 December 2013 and the Combined Management Report – as authorised for issue by the Board of Management on 20 February 2014 – were audited by KPMG AG Wirtschaftsprüfungsgesellschaft and given an unqualified audit opinion.

The Financial Statements and the Combined Management Report, the long-form audit reports of the external auditors and the Board of Management’s profit distribution proposal were made available to all members of the Supervisory Board in a timely manner. At the meeting held on 5 March 2014, these documents were examined and discussed in detail by the Audit Committee. The Supervisory Board subsequently examined these documents at its meeting on 13 March 2014, after hearing the committee chairman’s report on the meeting of the Audit Committee. In both meetings, the Board of Management gave a detailed explanation of the financial reports it had prepared. Representatives of KPMG attended both meetings, reported on significant findings and answered any additional questions raised by the members of the Supervisory Board. They also confirmed that the risk management system established by the Board of Management is capable of identifying any events or developments that might impair the going-concern status of the Company and that no material weaknesses in the internal control system and risk management system were found with regard to the financial reporting process. Similarly, they confirmed that they had not identified any facts in the course of their audit work that were inconsistent with the contents of the Declaration of Compliance issued jointly by the two boards.

Based on thorough examination by the Audit Committee and the full Supervisory Board, we concurred with the results of the external audit. In accordance with the conclusion reached after the examination by the Audit Committee and Supervisory Board, no objections were raised. The Group and Company Financial Statements of Bayerische Motoren Werke Aktiengesellschaft for the financial year 2013 prepared by the Board of Management were approved at the Supervisory Meeting held on 13 March 2014. The separate financial statements have therefore been adopted.

Both in the Audit Committee and in the full Supervisory Board, we examined the proposal of the Board of Management to use the unappropriated profit to pay a dividend of € 2.60 per share of common stock and € 2.62 per share of non-voting preferred stock. Taking account of the financial condition of the BMW Group, we consider the proposal appropriate and concur with it.

Expression of appreciation by the Supervisory Board

We are well aware that the motivation of our employees and their strong sense of identification with the BMW Group are key factors for its success and future prospects. We wish to express our appreciation to the members of the Board of Management and the entire workforce worldwide for their hard work and valuable contribution towards the successful financial statements for the year ended 31 December 2013.

Munich, 13 March 2014

On behalf of the Supervisory Board

Joachim Milberg
Chairman of the Supervisory Board

Updated March 13, 2014