Risk and Compliance Management

Managing Corporate Risks

Risk and compliance management is an integral part of corporate management at WACKER. As a global company, WACKER is exposed to numerous risks directly attributable to our operational activities. Starting from an acceptable level of overall risk, the Executive Board decides which risks we should take to utilize opportunities available to the company.

The goal of risk management at WACKER is to identify risks as early as possible, to evaluate them adequately and to take appropriate steps to reduce them. We define risks as internal and external events that may have a negative effect on the attainment of our targets and forecasts. The scope of consolidation for risk reporting purposes comprises all WACKER majority shareholdings.

As a chemical company, we have a particular responsibility to ensure plant safety and protect human health and the environment. At all our production sites, there are employees who are responsible for plant and workplace safety and for health and environmental protection. Our risk management system complies with legal requirements and is integral to all our decisions and business processes. The Executive and Supervisory Boards are regularly informed about the current risk status in the Group and at each business division.

WACKER follows the “Three Lines of Defense” model to effectively manage corporate risks and ensure compliance with legal provisions and the ethical principles of corporate management.

“Three Lines of Defense” Model

• The first line of defense is centered on operational management, which involves coordinating, monitoring and managing the risks that arise. It also includes the establishment of functioning internal control systems within the individual operational units.
• The second line of defense is formed by risk and compliance management. Risk management systematically tracks the main risks facing operational units and reports on the risks to the Executive Board. Compliance management ensures that the ethical principles of corporate management are observed. It identifies the relevant legal requirements and amendments, forwards them to all affected corporate units and holds courses on compliance for employees. The tax compliance management system ensures that Wacker Chemie AG and its subsidiaries comply fully and punctually with their obligations under tax law. Early involvement of the tax department and checks on preliminary tax-related processes help minimize the corresponding risks.
• A third line of defense is provided by the Corporate Auditing department, which acts as an independent monitoring body for the Executive Board. This department conducts audits at regular intervals to review the risk management activities in place at the various corporate units and to check whether the internal control systems run by the operational units are effective. Corporate Auditing also liaises with the Compliance Management team, for example if anti-corruption investigations are undertaken or related measures implemented.

Compliance Management

WACKER’s ethical principles of corporate management exceed legal requirements. They are summarized in our Code of Conduct. The Compliance Management department is responsible for ensuring that these principles and all related legislation are observed throughout the company. Training courses on compliance raise employees’ awareness of the relevant risks and convey binding rules of behavior for daily work routines. These aspects are covered by WACKER’s compliance regulation.

Our Compliance Regulation includes provisions on supplier management that cover information about conflict minerals.

Employees are instructed to inform their supervisors, the compliance officers, the employee council or their designated HR contacts of any violations they notice. They also have the option of reporting suspected violations anonymously via a protected channel.

WACKER has set up whistleblower hotlines in the USA, Brazil and China. WACKER Greater China has, for instance, a compliance hotline that enables employees and business partners to report any breaches anonymously. Furthermore, every year, employees in the region must sign a declaration regarding proper conduct.

The Group’s compliance officers are responsible for implementing the compliance rules and regulations, and are on hand to advise employees on all matters relating to compliance. The WACKER Group has 21 compliance officers around the world: in Germany, the USA, China, Japan, India, South Korea, Brazil, Mexico, Singapore, Russia, Norway and the United Arab Emirates. Compliance issues arising in countries not listed here are handled in Germany by the Chief Compliance Officer with assistance from the Legal department.

Prevention is a key aspect of the work of compliance officers. They train, inform and advise employees and management on, for example, strategies and measures to prevent corruption and other breaches of the law. In 2018, a focus of classroom-training sessions was on India, Lebanon, Saudi Arabia and the United Arab Emirates. A year earlier, we focused on Southeast Asia: Indonesia, Philippines, Singapore, Thailand and Vietnam. During the reporting period, training was offered not only to our own employees at the sites in question but also to our distributors’ employees in these countries. Further classroom sessions were held at the Dubai site.

WACKER’s compliance programs are designed to prevent misconduct, minimize the repercussions of misconduct, and – in accordance with the UN’s Global Compact – identify any cases of corruption or other legal infringements. To promote compliance, we use such organizational methods as the separation of responsibility and our dual-control policy. Separation of responsibility makes it impossible for any one employee to single-handedly carry out transactions involving payments. The purchasing unit is thus quite distinct from the ordering unit. Dual control ensures that every critical transaction is checked by a second person.

Nothing came to our attention in the period under review that would have constituted a major infringement of compliance or would have endangered the proper functioning of the control systems and for which the effect on earnings would have exceeded €5 million.

Internal Auditing

The third line of defense is provided by WACKER’s Corporate Auditing department, which acts as an independent monitoring body for the Executive Board. This department shares responsibility for effective internal control systems throughout the various operational processes and systems. When setting up an internal control system, the operational units must apply certain principles, such as a policy of dual control. These principles are defined in an internationally applicable regulation, where they are explained in more detail for critical functions.

On behalf of the Executive Board, Corporate Auditing performs – mainly process-specific – reviews of all relevant functions and corporate units, placing its focus on internal control systems. Audit topics are selected using a risk-driven approach. This takes account of risk management reporting, as well as the reports and information provided by the corporate departments, business divisions and major joint ventures/associates. The auditing schedule is supplemented and approved by the Executive Board, and discussed with the Audit Committee. If necessary, the schedule is adjusted flexibly during the year to accommodate any changes in underlying conditions.

As a rule, those processes, corporate units and sites which demonstrate a higher risk potential in risk assessment are subject to more frequent audits. Criteria for the risk assessment include:

• The relevance of the function within the Group
• Consequences of possible loss or damage
• Possible effects of infringements of compliance
• The nature of findings from previous audits
• Classification of the country in line with the Corruption Perceptions Index (CPI)

During the reporting period, Corporate Auditing

• conducted audits at a number of subsidiaries and sites worldwide, examining the suitability, appropriateness and cost-effectiveness of key business processes, and the functionality of internal control systems.
• Another focus was on information technology, where audits were performed in the areas of IT security, IT infrastructure and license usage.
• Moreover, selected processes were audited in areas such as logistics, engineering, human resources and accounting.
• The conformity and efficiency of logistics processes and functions were audited,
• as were certain hazardous-material storage facilities to make sure they were operating in compliance with regulations.

Any process-optimization measures derived from the audits are implemented and systematically monitored by the Corporate Auditing department. It provides the Executive Board and Audit Committee with regular reports on the results and implementation status of the various measures.

External Controls

When auditing our annual financial statements, the external auditor examines our early-warning system for detecting risks. The auditors then report to the Executive and Supervisory Boards.

In 2018, an external audit examined, among other things, whether our internal auditing system complied with Standard 983 of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer). The audit determined that Wacker Chemie AG’s Corporate Auditing department fulfills the International Professional Practices Framework (IPPF) requirements.

Preventing Corruption and Bribery

There is no room in our business model for bribery or corruption. Our principles on this are contained in our Code of Conduct. All WACKER employees are required to follow this code.

Training courses on compliance sensitize employees to specific risks and to the rules of conduct that apply at work. Since 2018, compliance courses have been mandatory groupwide for all WACKER employees. Such courses previously targeted only employees with external business contacts. Recently, a compliance course was launched for all industrial workers in production, workshops, laboratories and logistics.

Employees involved in import and export processes must complete online training on export control every two years. Individuals working in particularly sensitive jobs, such as managing directors of regional subsidiaries and export control representatives, must complete a refresher course every year. Export control is based on national and international laws and aims to prevent the spread of weapons of mass destruction, combat international terrorism and uphold human rights. In this regard, it is important to inspect not only the item to be exported, but also the country of destination, the customer and the end use of the products.

WACKER’s corporate culture is characterized by mutual respect and trust. However, inappropriate behavior on the part of individual employees can never be eliminated. In these cases, we rely on our internal risk assessments.

WACKER’s business activities are predominantly in countries with a low or very low risk of corruption, according to Transparency International’s Corruption Perceptions Index (CPI).

Sales Shares as a Function of Corruption Risk as per Transparency International¹