Report of the Supervisory Board

Once again in 2010, the Supervisory Board monitored the governance of the Company on an ongoing basis and advised the Board of Management on major decisions. In addition to strategic issues such as overall strategic development and future strategy in the Asian markets, the key areas of focus in the year under review were the restructuring of financing, changes to the Board of Management, remuneration of the Board of Management (taking special account of the Act on the Appropriateness of Management Board Remuneration (VorstAG), in effect since August 2009), and the Company’s ongoing business performance – particularly with regard to the high requirements placed on the supply chain in the context of the exceedingly favourable acceleration in demand.

Furthermore the discussions focussed on measures concerning strict cost control and enhancement of engines with regard to the upcoming new exhaust emission standards.

The Board of Management ensured that it provided the Supervisory Board with comprehensive, regular and timely information at all times. The Board of Management informed the Supervisory Board, both orally and in writing, about the Company’s business performance, risk position and risk management, all relevant aspects of strategic planning and any transactions requiring the consent of the Supervisory Board. Outside the meetings, the Board of Management regularly informed the members of the Supervisory Board in writing about important events. Furthermore, the chairman of the Board of Management remained in constant contact with the Supervisory Board chairman and kept him comprehensively informed in a timely manner about all major transactions and decisions that needed to be made. The Supervisory Board adopted all resolutions required by law and by the Company’s statutes based on the reports and draft resolutions submitted by the Board of Management, as well as, if necessary, after they were prepared by the committees responsible.

Eight scheduled and one extraordinary Supervisory Board meeting were held in 2010. No Supervisory Board member was absent for more than half of the meetings.

The lengthy discussions and deliberations between the Board of Management and Supervisory Board focussed on the current operating situation and risk position, the restructuring of financing, the Company’s operational and strategic development on the Asian market in general, as well as concerning its joint venture in Dalian, China.

The strategic development process redefined by the Board of Management also played a major role in the deliberations of the Supervisory Board.

In the year under review, the Supervisory Board once again thoroughly examined the Company’s strategic planning and capital expenditure.

After the details had been prepared by the Human Resources Committee, during its meeting held 14 July 2010 the Supervisory Board approved the conclusion of a severance agreement between DEUTZ AG and Mr Biondi, as well as the resignation of Mr Biondi as a member of the Company’s Board of Management with effect from the end of 15 July 2010. The Supervisory Board would like to thank Mr Biondi for his valuable contribution.

At its meeting on 14 July 2010, the Supervisory Board held detailed discussions about the reorganisation of the Board of Management’s responsibilities following the resignation of Mr Biondi, which it then approved. As from 15 July 2010, Dr Leube will also assume the areas of research and development, mechanical assembly, production and sales, which were formerly managed by Mr Biondi. In addition to her former duties, Dr Haase is now also responsible for the areas of internal audit and DEUTZ Dalian Engines, which were formerly assigned to Dr Leube.

The Supervisory Board gave thorough consideration to the German Corporate Governance Code as amended on 18 June 2009 and 26 May 2010 and, together with the Board of Management, issued a declaration of compliance pursuant to section 161 of the German Stock Corporation Act (AktG), which only contains few exceptions, and has been available for download from the “Investors/Corporate Governance” section of the Company’s website (www.deutz.com) since 14 December 2010.

The Supervisory Board assessed the efficiency of its activities in 2010 by having each member fill out an extensive questionnaire, both at the beginning as well as at the end of the year. The analyses of these questionnaires were presented to the Supervisory Board and discussed in detail at its March and December meetings. The overall findings were positive.

The Supervisory Board has created four committees to enable it to perform its duties effectively. These committees specialise in preparing various topics and resolutions for the full Supervisory Board. The composition of the Supervisory Board and its committees, as well as the future mandates held by its members, are shown separately.

The Human Resources Committee makes preparations to enable the Supervisory Board to decide about the appointment of the members of the Board of Management, the content, conclusion and amendment of service contracts signed with members of the Board of Management appointed by the Supervisory Board, including remuneration as specified in their service contracts, and all issues between members of the Board of Management and the Company arising in this connection. The committee met five times in the year under review and its meetings focussed primarily on the changes to the Board of Management listed above (under the heading Personnel), the reorganisation of Board of Management responsibilities, as well as with Board of Management remuneration issues. A key area of focus with respect to the latter topic was the assessment of the appropriateness of remuneration pursuant to the new legal provisions of the VorstAG, in effect since August 2009.

The work of the Audit Committee in the year under review focussed on the single-entity and consolidated financial statements for 2009 and the corresponding auditors’ reports, the condensed consolidated financial statements for the first six months to 30 June 2010 and their review by the auditors, the interim reports for the periods ended 31 March and 30 September 2010, the discussion of the audit engagement for the year ended 31 December 2010, and risk management. The Audit Committee met on four occasions in 2010. The auditors attended three meetings of this committee.

The Arbitration Committee set up pursuant to section 27 (3) of the German Codetermination Act (MitbestG) is responsible for the activities described in section 31 (3) of the Act. It did not need to be convened during the year under review.

The Nominations Committee consists of three Supervisory Board members appointed by the Annual General Meeting. In 2010, the Nominations Committee discussed two appointments of shareholder representatives to the members of the Supervisory Board of DEUTZ AG, namely the appointment of Dr Lichtenauer by the Annual General Meeting on 6 May 2010, as well as the appointment of Dr Bussolati by the District Court of Cologne.

The entire Supervisory Board was informed of the outcome of all discussions in the committees; insofar as the committees made decision recommendations, they were approved by the Supervisory Board.

The single-entity annual financial statements of DEUTZ AG prepared by the Board of Management in accordance with the German Commercial Code (HGB), the consolidated annual financial statements prepared in accordance with International Financial Reporting Standards (IFRS) and the respective management reports (in each case for the year ended 31 December 2010) were audited by Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft, Düsseldorf, Germany, the auditors appointed by the Annual General Meeting on 6 May 2010. The auditors issued unqualified opinions. They also audited the report on relationships with subsidiaries (dependency report) prepared by the Board of Management pursuant to section 312 of the German Stock Corporation Act (AktG).

The single-entity annual financial statements of DEUTZ AG and the consolidated annual financial statements, the respective management reports, the dependency report, the proposed appropriation of profits, and the auditors’ reports were made available to all Supervisory Board members and were examined by the Supervisory Board. The auditors explained their findings to the Audit Committee in detail during its meeting on 28 February, as well as to the Supervisory Board during its meeting on 9 March 2011 and answered any supplementary questions raised.

The Supervisory Board noted with approval the findings of the auditors’ reports on DEUTZ AG and the DEUTZ Group. The conclusive findings of the Supervisory Board’s own audit have not led to any reservations about either the single-entity annual financial statements or the consolidated annual financial statements, and the Supervisory Board has therefore approved them. The annual financial statements have thus been adopted.

The auditors endorsed the dependency report submitted by the Board of Management pursuant to section 312 of the German Stock Corporation Act (AktG) for the 2010 financial year and issued the following opinion:

“Having conducted our audit and assessment in accordance with the terms of our engagement, we hereby confirm that

1. the actual disclosures in the report are accurate,
2. in the legal transactions mentioned in the report, payments made by the Company were not unreasonably high,
3. in the activities listed in the report, there is no reason that would give rise to a materially different assessment from that of the Board of Management.”

Having conducted its own audit of the dependency report, the Supervisory Board has no reservations. Furthermore, it agrees with the findings of the audit of the dependency report conducted by the auditors. The conclusive findings of the Supervisory Board’s audit have not led to any reservations about the statements made by the Board of Management at the end of the dependency report.

The following changes to the Supervisory Board and its committees took place in the year under review:

Ms. Susanne Scholtyssek resigned as representative of IG Metall on the Supervisory Board of DEUTZ AG at the end of the Annual General Meeting on 6 May 2010. With effect from the same date, the District Court of Cologne appointed Ms. Caterina Messina as a member of the Supervisory Board in its ruling of 22 April 2010.

Mr Massimo Bordi resigned as shareholder representative on the Supervisory Board of DEUTZ AG as at 30 September 2010. In its ruling of 23 September 2010, the District Court of Cologne, at the request of the Board of Management and upon the recommendation of the Nominations Committee, appointed Dr Lodovico Bussolati as a member of the Supervisory Board with effect from 1 October 2010. The Supervisory Board would like to thank Ms. Scholtyssek and Mr Bordi for their outstanding work and valuable contributions.

At the Supervisory Board meeting on 7 October 2010, the shareholder representatives in the Supervisory Board of DEUTZ AG appointed Dr Bussolati as successor to Mr Bordi as a member of the Nominations Committee.

The Supervisory Board members Massimo Bordi, Dr Francesco Carozza and Dr Lodovico Bussolati were/are subject to a conflict of interest because of their functions in the SAME DEUTZ-FAHR Group, which are also major customers of DEUTZ AG. The chairman of the Supervisory Board reviewed/reviews each individual case to establish whether this conflict of interest restricts the opportunity for the involvement of Mr Bordi, Dr Carozza and/or Dr Bussolati in the work of the Supervisory Board.

The Supervisory Board would like to express its thanks and appreciation to all employees in Germany and abroad, to the elected employee representatives and to the Board of Management for their valuable efforts and the considerable dedication they have shown in 2010.

Cologne, March 2011

The Supervisory Board

Lars-Göran Moberg
Chairman