Hasso Plattner

REPORT OF THE SUPERVISORY BOARD

COOPERATION AND CONTROL

Dear Shareholders, 

In 2007, we exceeded our own forecasts for growth in software and software related service revenue significantly. Moreover, our share of the highly competitive software market grew faster in 2007 than it had done in 2006. These successes reflect how we systematically implemented our growth strategy, which is based primarily on organic growth complemented by targeted acquisitions. We further strengthened SAP’s position in the business software market and, at the same time, introduced breakthrough innovations in the software industry.

Our two most important milestones last year were the launch of the new SAP Business ByDesign solution for midsize companies and the announcement of the friendly takeover of French software company Business Objects S.A. With the on-demand solution SAP Business ByDesign, we are creating a completely new business model alongside our established business. Thanks to the acquisition of Business Objects S.A., SAP is taking the top spot in the market for business performance optimization, enabling management in real time. We can therefore look back on a year in which our innovativeness and policy of stable growth ensured that we again made a sustained contribution to our customers’ success.

The SAP Supervisory Board closely monitored the work of the SAP Executive Board. In-depth and cooperative dialog with the Executive Board enables us to efficiently organize and perform our duties. That is why this report starts by explaining the ongoing partnership between the two Boards. The report also focuses on the main topics discussed by the Supervisory Board, the work of its committees, corporate governance at SAP, and the audit of the SAP AG and consolidated financial statements.

 

» Cooperation Between the Executive and Supervisory Boards

» Supervisory Board Meetings  

» The Work of the Supervisory Board Committees

» Corporate Governance

» Shareholders’ Legal Proceedings Against AGM Resolutions 

» Financial Statements and Reviews of Operations  

» Changes on the Supervisory and Executive Boards

Cooperation Between the Executive and Supervisory Boards

In 2007, we discharged the duties imposed on us by the law and by the Company’s Articles of Incorporation. We were regularly consulted by the Executive Board on the running of the Company and we scrutinized and monitored the work of the management. We monitored the Executive Board’s management of the SAP Group with regard to legality, correctness, appropriateness, and cost-effectiveness. In particular, the Supervisory Board examined risk management, which included a discussion with the auditor. The Supervisory Board believes that risk management fully meets the requirements placed on it. In addition, the Executive and Supervisory Boards consulted on the Company’s strategic orientation and regularly discussed its progress in implementing the strategy. We were involved whenever decisions of fundamental importance to SAP were made.

The Supervisory Board regularly received full and timely reports from the Executive Board, both from members in person and in written documents. The reports chiefly concerned planning, the Company’s business performance including the risk situation, risk management, compliance, and transactions of special significance for SAP. The Executive Board also indicated when the course of business deviated from the plans and targets and explained these deviations.

The content and scope of the Executive Board’s reports fully met the requirements that the Supervisory Board had placed on them. In addition, the Supervisory Board received supplementary information from the Executive Board. In particular, the Executive Board was available at Supervisory Board meetings for discussions and to answer our questions. We checked the information received from the Executive Board for plausibility as well as critically examining and discussing it. The Supervisory Board maintains a list of transactions for which the Executive Board requires the Supervisory Board’s consent. We update the list regularly as required, most recently in 2006. The Supervisory Board dealt with the transactions on this list presented by the Executive Board and examined them thoroughly in cooperation with the Executive Board, focusing particularly on the benefits and effects of these transactions. The Supervisory Board agreed to all transactions where its consent was required.

The chairperson of the Supervisory Board was also kept fully informed between meetings of the Supervisory Board and its committees. For example, the CEO and the chairperson of the Supervisory Board met regularly to discuss SAP’s strategy, current progress in business, and risk management as well as other key topics and decisions that arose. The CEO informed the Supervisory Board chairperson without delay of important events that were significant in the assessment of SAP’s situation and progress or for the management of the Company.

As it does every year, the Supervisory Board discussed the Executive Board compensation regulations at the Compensation Committee’s suggestion.

Supervisory Board Meetings

In 2007, there were four ordinary, one constituent, and four extraordinary Supervisory Board meetings. All resolutions of the Supervisory Board were made by the full committee in these meetings. The Supervisory Board discussed the following topics and, where necessary, adopted resolutions:

At our February 15, 2007, meeting, we discussed the 2006 fourth quarter and full-year results, business over the year, and implementation of the Company’s strategy in 2006. We also received and discussed a report on the strategy for 2007 from the Executive Board and agreed to the planning for 2007 presented by the Executive Board, particularly the capital expenditure budget and cash plan. After an in-depth discussion, the Supervisory Board consented to the maximum total budget for awarding virtual stock options under the new SAP Stock Option Plan (SOP) 2007 and for awarding stock appreciation rights (STARs). It also consented to the appointment of a corporate officer of the SAP Group and approved a legal transaction between SAP AG and a Supervisory Board member. The meeting received annual reports from the corporate governance officer and the compliance officer. The reports did not identify any breaches of the applicable rules or any special occurrences. We also received a summary from the Executive Board of the equity investments made in 2006. The Compensation Committee, Finance and Investment Committee, Technology Committee, and Audit Committee reported on topics discussed at their recent meetings. The Technology Committee’s report dealt with medium-term product planning and the latest technological developments. Following the Compensation Committee’s report and at its recommendation, the Supervisory Board decided to extend Henning Kagermann’s term as CEO of SAP AG from January 1, 2008, through May 31, 2009. This extension is in line with the usual practice of the Supervisory Board when extending the term of office of Executive Board members over the age of 60, which is to only grant an extension of approximately one year.

At its March 21, 2007, meeting, the Supervisory Board focused on the documents concerning the 2006 financial statements, the audit conducted by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (KPMG), and the Executive Board’s proposed resolution on the appropriation of retained earnings for 2006. The Audit Committee reported, among other things, on the form and scope of its examination of the documents concerning the financial statements and recommended that the Supervisory Board approve them. The auditor attended the meeting and reported in detail on the results of its audit. The auditor then discussed the results with the Supervisory Board and answered its questions. The Supervisory Board approved the audit. After the final result of its own audit, the Supervisory Board did not raise any objections to the financial statements for 2006 and it approved them. We checked and endorsed the Executive Board’s proposal to appropriate retained earnings. In addition, we passed our proposed resolutions for the agenda of the May 2007 Annual General Meeting of Shareholders, which included approving the proposal to the Meeting concerning the election of an auditor. Also in relation to the agenda for the May 2007 Annual General Meeting of Shareholders, the shareholder representatives on the Supervisory Board voted on the proposed candidates for election as shareholder representatives on the Supervisory Board. A further item on the agenda at this meeting was a report on business in the first quarter of 2007. The Supervisory Board approved various legal trans actions between SAP and individual Executive and Supervisory Board members. The General Committee, Compensation Committee, Technology Committee, and Finance and Investment Committee gave reports on their recent committee meetings.

In our extraordinary meeting on March 28, 2007, we dealt with personnel changes on the Executive Board. The chairperson of the Supervisory Board explained the wish of Executive Board member Shai Agassi to leave the company by mutual agreement. The Supervisory Board consented to this and asked the Compensation Committee to negotiate and conclude a termination agreement with Shai Agassi. The Supervisory Board then decided to appoint Léo Apotheker as deputy CEO. The Supervisory Board also approved the appointment of a corporate officer of the SAP Group.

Our extraordinary meeting on May 4, 2007, focused on the acquisition of OutlookSoft Corporation of Stamford, Connecticut, United States. The Executive Board presented the planned transaction to the Supervisory Board for approval. As preparation for the resolution, the Finance and Investment Committee reported on its meeting of May 3, 2007, at which it had concentrated on the possible acquisition of OutlookSoft and come to a positive conclusion. We discussed the technological and financial aspects of the acquisition in detail with the Executive Board. The Supervisory Board then approved the acquisition of the company.

At the close of the Annual General Meeting of Shareholders on May 10, 2007, the term of office of all Supervisory Board members then in office ended. Therefore, the Annual General Meeting of Shareholders elected eight shareholder representatives. The regular election of the eight employee representatives on the Supervisory Board had taken place previously in April 2007. Immediately after the Annual General Meeting of Shareholders, the newly elected Supervisory Board held its constituent session and elected Hasso Plattner as its chairperson and Lars Lamadé as his deputy. The Supervisory Board also appointed the members of its individual committees.

At the meeting on July 27, 2007, we mainly discussed business in the second quarter of 2007, an assessment of the first half of the year and the forecast for the second half, and further planning. The Executive Board informed us about progress in the development of SAP Business ByDesign and about SAP’s competitive situation in general.

Furthermore, the Supervisory Board approved the foundation of two new companies in Saudi Arabia and one in Dubai to take over the software licensing and maintenance business of previous partner SAP Arabia, including the conditions of the acquisition, which the Executive Board explained. The Executive Board also reported to us on the status of the lawsuit filed by Oracle against SAP AG and its subsidiary TomorrowNow. The Finance and Investment Committee, Audit Committee, Technology Committee, and Compensation Committee reported on the work at their last committee meetings.

At two extraordinary meetings on September 27, 2007, and October 7, 2007, the Supervisory Board thoroughly discussed the preparation and structure of SAP’s tender offer to the shareholders of Business Objects S.A. In the September 27, 2007, meeting, the Executive Board provided extensive information about the main reasons behind the planned acquisition and about its financing. It also talked in detail about Business Object S.A.’s rating in relation to the planned transaction, the integration strategy, possible synergy effects, and the risks of the acquisition. Afterwards, the Supervisory Board authorized the Executive Board to enter into negotiations on the conclusion of a tender offer agreement with Business Objects S.A. It also authorized the Finance and Investment Committee to approve a purchase price range for the Business Objects shares to enable the Executive Board to negotiate with the management of Business Objects S.A. on the basis of a specific purchase price indication. In the October 7, 2007, meeting, the Executive Board provided us with detailed information about the progress and outcome of the negotiations that had been held in the meantime and about the structure of the tender offer’s financing. Moreover, it explained the individual legal steps and the conditions of the tender offer. After an in-depth discussion, the Supervisory Board consented to the conclusion of the tender offer agreement with Business Objects S.A. and the conclusion of financing contracts at the conditions presented by the Executive Board.

The topics covered at the Supervisory Board meeting on October 26, 2007, were business in the third quarter 2007, the forecast for the fourth quarter 2007, and the forecast for fiscal year 2008. The Executive Board reported to us on SAP’s competitive situation, the activities of the main competitors, and the status of the legal proceedings with Oracle in the United States. We approved an amendment to the Articles of Incorporation, which was required due to the cancellation of 23 million shares and the resulting decrease in capital stock from €1,269,040,112 to €1,246,040,112. To implement the new and extended requirements of the German Corporate Governance Code (“Code”), the Supervisory Board decided to amend the rules of procedure of the Audit Committee, adding to them responsibility for monitoring compliance and ensuring the compliance of the control structures implemented by the Executive Board. To reflect new recommendations in the Code, we decided to form a Supervisory Board Nomination Committee. In addition, the Supervisory Board determined the independence of Supervisory Board members and approved the declaration of implementation of the Code. In relation to this, we agreed to stop updating SAP’s Principles of Corporate Governance because the continuously evolving Code, together with the increase in pertinent legislation, has made the maintenance of our own Principles redundant. The Finance and Investment Committee, Audit Committee, Compensation Committee, and Technology Committee reported on the work at their last committee meetings.

The Work of the Supervisory Board Committees

The work of the Supervisory Board Committees supported us effectively. The General Committee, Compensation Committee, Finance and Investment Committee, Audit Committee, and Technology Committee all convened regular meetings.

Due to the election of new shareholder representatives and employee representatives on the Supervisory Board, there were changes to the committees’ membership. The Compensation Committee grew from three to five members, while the Technology Committee increased from six to seven members.

The duties of the six-strong General Committee include coordinating the Supervisory Board’s work, dealing with corporate governance topics, and allocating virtual stock options to employees under the new SAP SOP 2007. Its chairperson is Hasso Plattner.

The five-member Compensation Committee, also chaired by Hasso Plattner, carries out the preparatory work necessary for the personnel decisions made by the Supervisory Board, particularly with regard to the compensation – including share-based compensation – of Executive Board members and the conclusion of, amendments to, and termination of their employment contracts.

The Finance and Investment Committee, with four members, is responsible for matters related to financing as well as acquisitions and minority investments. Its chairperson was August-Wilhelm Scheer in 2007.

The Audit Committee is responsible for matters relating to financial reporting and auditing as well as risk management. It has four members and is chaired by Erhard Schipporeit. In line with the new and extended recommendations of the Code, compliance as one of the Audit Committee’s supervisory functions has been added to the committee’s rules of procedure for the sake of clarity.

The Technology Committee, which has seven members, regularly reviews the Company’s strategy with regard to the development and deployment of technologies and software. It advises the Executive Board on technological and strategic decisions and on planned investments in research and development. It also monitors the implementation of the Company’s strategy in terms of its technological direction and spending in this area. Hasso Plattner chairs the committee.

German law requires a Mediation Committee, which is responsible solely for drawing up personnel proposals if the required two-thirds majority is not reached when appointing and dismissing Executive Board members. Thus far, SAP has not required action from the Mediation Committee.

A new addition is the Nomination Committee, which the Supervisory Board decided to form at its meeting on October 26, 2007. It is composed solely of shareholder representatives. The Nomination Committee has three members and is chaired by Hasso Plattner. Its task is to define the requirements for SAP Supervisory Board members and suggest suitable candidates for nomination for election at the Annual General Meeting of Shareholders.

More information about the Supervisory Board committees, particularly their members, is available on SAP’s Web site at www.sap.com/about/governance/supervisory.

During 2007, the committees focused on the following topics:

The regular reports from the committees ensured that we received comprehensive information about all matters covered by the committees and were therefore able to discuss and deliberate on these topics thoroughly.

Corporate Governance

SAP’s corporate governance officer monitored, and reported in detail to the Supervisory Board on, adherence to the recommendations in the Code with which SAP complies and to SAP’s Principles of Corporate Governance, which have been discontinued. There were no conflicts of interests with regard to Supervisory Board members pursuant to the Code, section 5.5.2. The Supervisory Board granted its consent to the conclusion of contracts with Supervisory Board members where its consent was required. Prior to the constituent session of the newly elected Supervisory Board, the Supervisory Board then in office had held four meetings, although one Supervisory Board member attended less than half of these meetings. Moreover, one of the newly elected Supervisory Board members, who has been in office since May 10, 2007, attended less than half of the five meetings of the new Supervisory Board.

Corporate governance is a process of continuous development at SAP. Thus, we examined the new and extended recommendations and suggestions of the Code that were announced in June 2007. In the past, SAP has continually reviewed its Principles of Corporate Governance and, where necessary, adapted them to changes and additions to the Code as they were introduced. When we reviewed our Principles in October 2007, we concluded that the gap between them and the Code had greatly reduced over time and that changes to the legislation and current practice had made provisions in the Principles obsolete. The continuously evolving Code, together with the increase in pertinent legislation, has made the maintenance of our own Principles redundant. SAP has therefore discontinued its Principles of Corporate Governance. In the future, when discussing corporate governance standards, we will refer to the Code only. Detailed information about compliance with the Code is available in the Executive and Supervisory Boards’ corporate governance report, as required by section 3.10 of the Code.

Shareholders’ Legal Proceedings Against AGM Resolutions

Shareholders brought legal proceedings against individual resolutions of the Annual General Meeting of Shareholders on May 9, 2006. As well as the increase in subscribed capital from corporate resources, they challenged the resolutions formally approving the acts of the Executive and Supervisory Boards, the change to Supervisory Board compensation, the powers to acquire and use treasury shares, and the powers to use equity derivatives to repurchase shares. The increase in subscribed capital from corporate resources and further changes to the Articles of Incorporation approved by the Annual General Meeting of Shareholders on May 9, 2006, were entered in the commercial register on December 15, 2006, after the court granted an interim release, and thus became effective. The Heidelberg district court had already ruled against the main actions at the first instance. The plaintiffs then filed an appeal against the ruling with the regional appellate court in Karlsruhe, which means the main actions have not yet ended. Both the Supervisory and Executive Boards see no reason for nullifying or challenging the resolutions of the Annual General Meeting of Shareholders and are therefore jointly defending them.

Financial Statements and Reviews of Operations

KPMG again audited the SAP AG and consolidated accounts in 2007. The Annual General Meeting of Shareholders on May 10, 2007, elected that firm as the SAP AG and SAP Group auditor. Before proposing KPMG to the Annual General Meeting of Shareholders as auditor for the year, the chairperson of the Supervisory Board and the Audit Committee had obtained confirmation from the firm that circumstances did not exist that might prejudice its independence as the auditor.

KPMG examined the SAP AG financial statements prepared in accordance with the German Commercial Code, the SAP AG review of operations, the consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as required by the German Commercial Code, section 315a, the consolidated financial statements voluntarily prepared in accordance with U.S. GAAP, and the reviews of SAP Group operations based on these consolidated financial statements, comparing them with the records on which they were based, and certified them without qualification. The auditor thus confirmed that, in its opinion based on the findings of the audit, the SAP AG and consolidated financial statements, in accordance with the applicable accounting regulations, accurately present SAP AG’s and the SAP Group’s assets, finances, and income.

All Audit Committee and Supervisory Board members received the documents concerning the financial statements mentioned above, the audit reports prepared by KPMG, and the Executive Board’s proposal for the appropriation of retained earnings in good time.

Taking KPMG’s audit reports into account, the Audit Committee and Supervisory Board audited the documents concerning the financial statements themselves after the Executive Board had explained them. The auditor attended the meeting of the Audit Committee on April 1, 2008, and the audit meeting of the full Supervisory Board on April 2, 2008, and reported on the audit and the results of the audit in detail. During the discussion with the auditor, both the Audit Committee and the Supervisory Board asked detailed questions about the form, scope, and results of the audit. Furthermore, the Audit Committee reported to the Supervisory Board on its audit of the financial statements, its discussions with the auditor, and its examination of the internal control structure. The Audit Committee and Supervisory Board were able to satisfy themselves that KPMG had conducted the audit properly. In particular, they concluded that both the audit reports and the audit itself fulfilled the legal requirements.

The Supervisory Board approved the audit and, because it did not raise any objections after the final result of its audit, gave its consent to the SAP AG financial statements, the consolidated financial statements, and the reviews of SAP AG and SAP Group operations. The financial statements and reviews of operations were thus formally adopted. The Supervisory Board’s opinion of the Company and the Group coincided with that of the Executive Board as set out in the reviews of SAP AG and SAP Group operations. The Supervisory Board checked the proposal presented by the Executive Board for the appropriation of retained earnings, focusing on the stringency of the payout policy, the effects on liquidity, creditworthiness, and future financing requirements of SAP AG, as well as taking shareholders’ interests into account – which included a discussion with the auditor. It then endorsed the Executive Board’s proposal.

Changes on the Supervisory and Executive Boards

At the end of the Annual General Meeting of Shareholders on May 10, 2007, Christiane Kuntz-Mayr, Barbara Schennerlein, Bernhard Koller, Klaus Tschira, and Dieter Spöri stepped down from the Supervisory Board. Thomas Bamberger, Panagiotis Bissiritsas, Peter Koop, Joachim Milberg, and Klaus Wucherer were elected to the Supervisory Board for the first time, joining existing Supervisory Board members who had been reelected. With effect from April 1, 2007, Shai Agassi left the Executive Board. Following the successful acquisition of Business Objects S.A., its chief executive officer John Schwarz was appointed to the SAP AG Executive Board, effective March 1, 2008.

Supervisory Board member August-Wilhelm Scheer, who was a member of our Company’s first Supervisory Board, stepped down from the Supervisory Board with effect from April 3, 2008. The Supervisory Board would like to thank August-Wilhelm Scheer for his many years of work on the Supervisory Board and for his valuable contributions to our business and product strategies. At its meeting on April 2, 2008, the Supervisory Board resolved to propose to the Annual General Meeting of Shareholders that Bernard Liautaud, the founder of Business Objects S.A., be elected to the Supervisory Board as August-Wilhelm Scheer’s successor.

Léo Apotheker, previously deputy CEO of SAP AG, was appointed as co-CEO alongside Henning Kagermann, effective April 2, 2008. 

The Supervisory Board thanks the Executive Board, the managers of the group companies, and all employees for their strong commitment and their work in 2007. We would also like to thank our customers and partners, who contributed significantly to our Company’s success as well. 

Prof. Dr. h.c. Plattner

Prof. Dr. h.c. Plattner
for the Supervisory Board