Report of the Supervisory Board

Dr. Manfred Schneider Chairman of the Supervisory Board

During 2008 the Supervisory Board monitored the conduct of the company’s business and acted in an advisory capacity. We performed these functions on the basis of detailed written and oral reports received from the Board of Management. In addition, the Chairman of the Supervisory Board and the Chairman of the Board of Management maintained a constant exchange of information and ideas. In this way the Supervisory Board was kept continuously informed about the company’s intended business strategy, corporate planning (including financial, investment and human resources planning), earnings performance, the state of the business and the situation in the company and the Group as a whole.

The documents relating to Board of Management decisions or actions which – by law or under the articles of incorporation or the rules of procedure – required the approval of the Supervisory Board were inspected by the Supervisory Board at its plenary meetings, sometimes after preparatory work by the committees. In certain cases the Supervisory Board gave its approval on the basis of documents circulated to its members. The Supervisory Board was involved in decisions of material importance to the company. We discussed at length the business trends described in the reports from the Board of Management and the prospects for the development of the Bayer Group as a whole, the individual organizational units and the principal affiliated companies in Germany and abroad. Four plenary meetings of the Supervisory Board were held during 2008. In addition, a decision concerning the Possis Medical Inc. acquisition project was made after the relevant documents had been circulated to the members. No member of the Supervisory Board attended fewer than half of its meetings. All members of the Board of Management regularly attended the meetings of the Supervisory Board.

Principal topics discussed by the Supervisory Board

At the focus of the Supervisory Board’s deliberations were questions relating to the strategies and business activities of the Group as a whole and of the subgroups. Other selected topics were dealt with at each of the meetings. At the meeting held in February, the Supervisory Board devoted special attention to the Bayer Group’s risk management system and a sale-and-leaseback transaction entered into for financing purposes. At the focus of the September meeting were activities at the Berlin site, research in the fields of women’s healthcare and diagnostic imaging, and the acquisition of Direvo Biotech AG, which has since been completed. At the meeting in December 2008, the Board of Management presented its operational, financial and balance sheet planning for the years 2009 through 2011, which was the subject of detailed discussion, and deliberated on the new version of the German Corporate Governance Code and the issuance of a new Declaration of Conformity with the Code. The regular efficiency audit of the Supervisory Board’s work was also initiated in December 2008.

Committees of the Supervisory Board

The Supervisory Board has a Presidial Committee, an Audit Committee, a Human Resources Committee and a Nominations Committee*.

Work of the committees

The Presidial Committee of the Supervisory Board was not required to convene in 2008 in its capacity as the Mediation Committee under Section 27 Paragraph 3 of the German Codetermination Act, nor did it need to resolve on any other matters.

The Audit Committee met four times during the year, addressing in particular the company’s and the Group’s financial reporting, the Group’s risk management system, the internal control system and compliance issues. The Audit Committee also set the budget for the services of the external auditor and discussed with the auditor the main areas of the audit for the 2008 fiscal year. The auditor was present at all the meetings of the Audit Committee, reporting in detail on the audit work and the audit reviews of the interim financial statements.

The principal topics addressed at the meetings of the Audit Committee were, at the February meeting, the internal control system and the consequences of deregistering with the U.S. Securities and Exchange Commission; at the April meeting, the management of pension risk at Bayer; at the July meeting, the reports received on the status of the tax audits; and at the October meeting, the effects of the financial crisis on Bayer and the implications of the imminent entry into force of the Accounting Law Modernization Act in Germany for the financial reporting of the company and the Group.

The Human Resources Committee convened on two occasions, dealing mainly with matters relating to the remuneration of the Board of Management and the pensions of former members of the Board of Management. At its meeting in December the Committee deliberated on the division of responsibilities between the Human Resources Committee and the full Supervisory Board provided for in the June 2008 revised version of the German Corporate Governance Code and the Code’s new recommendations on limiting the severance payment to a member of the Board of Management in the event of premature contract termination. At this meeting the Human Resources Committee also discussed the reappointment of Dr. Plischke to the Bayer AG Board of Management and the renewal of his service contract.

On one occasion in 2008, in accordance with its responsibilities, the Nominations Committee discussed possible candidates for future election to the Bayer AG Supervisory Board as representatives of the stockholders.

The meetings and decisions of the committees were prepared on the basis of reports and other information provided by the Board of Management. Members of the Board of Management regularly attended the committee meetings. Reports on the committee meetings were presented at the plenary meetings of the Supervisory Board.

Corporate Governance

The Supervisory Board dealt with the ongoing development of corporate governance at Bayer, taking into account the amendments made to the German Corporate Governance Code in June 2008. In December 2008 the Board of Management and the Supervisory Board issued a new Declaration of Conformity, which is also reproduced in the Corporate Governance Report.

Financial statements and audits

The financial statements and management report of Bayer AG were drawn up according to the requirements of the German Commercial Code and Stock Corporations Act, while the consolidated financial statements and management report of the Bayer Group were prepared according to the principles of the International Financial Reporting Standards (IFRS). The financial statements of Bayer AG, the consolidated financial statements of the Bayer Group, the management report of Bayer AG and the management report of the Bayer Group have been examined by the auditor, PricewaterhouseCoopers Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Essen. The conduct of the audit is explained in the auditor’s report. The auditor finds that Bayer has complied with the requirements of the German Commercial Code and the International Financial Reporting Standards, respectively, and issues an unqualified opinion on the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group. The financial statements and management report of Bayer AG, the consolidated financial statements and management report of the Bayer Group, and the audit reports were submitted to all members of the Supervisory Board. They were discussed in detail by the Audit Committee and at a plenary meeting of the Supervisory Board. The auditor submitted a report on both occasions and was present during the discussions.

We examined the financial statements and management report of Bayer AG, the proposal for distribution of the profit, and the consolidated financial statements and management report of the Bayer Group. We found no objections, thus we concur with the result of the audit. We have approved the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group prepared by the Board of Management. The financial statements of Bayer AG are thus confirmed. We are in agreement with the management reports of Bayer AG and the Bayer Group and, in particular, with the assessment of the future development of the enterprise. We also concur with the dividend policy and the decisions concerning earnings retention by the company. We assent to the proposal for distribution of the profit, which provides for payment of a dividend of €1.40 per share.

The Supervisory Board would like to thank the Board of Management and all employees for their dedication and hard work in 2008.

Leverkusen, February 2009

For the Supervisory Board

Dr. Manfred Schneider
Chairman

* The description of the responsibilities and membership of the committees, which forms part of the Report of the Supervisory Board, can be found in the Corporate Governance Report of this Annual Report and therefore is not reproduced here.