Report of the Supervisory Board to shareholders

The year 2018 marked the halfway point of BAM’s strategy Building the present, creating the future. This strategy for the period 2016 – 2020 aims to prepare the company for the future while improving performance and increasing predictability of results. The goal is to transform BAM from a fairly traditional, highly decentralised construction company to a much more cohesive company that uses internal synergies and its scale to improve its competitiveness and that applies digital innovation and industrialisation as key elements in the construction process. The strategy also includes clear objectives on people, planet and profit, with specific and in our view realistic targets.

In our discussions with management as part of the mid-term review of this strategy, we jointly concluded that the strategy is still valid but that the implementation requires reinforcement. To achieve this, it was decided to change the top structure of the company by establishing an Executive Committee, in addition to a two-person Executive Board. This should lead to more focus on the strategic priorities and further enhance the implementation of the One BAM philosophy.

Overall, the economies in our home markets in Europe are doing well with healthy investment levels in both construction and property and in civil, while the oil and gas market, relevant for BAM International, is gradually recovering. The outlook however shows a mixed picture, with certain developments warranting a more cautious approach. Brexit, the trade war between the USA and China, social unrest in several countries and political instability in general may have a negative impact on the global economy. On the other hand, the energy transition that is needed in view of climate change will require major investments in the built environment with lots of opportunities for BAM. 

Despite an additional €32 million cost overrun at the sea lock IJmuiden project, the margin based on adjusted profit before tax was above 2 per cent, a considerable improvement compared to 2017. Cash flow was positive, although financing issues related to the sea lock project had a negative impact. We regularly discussed cash flow developments with management and agreed with the measures taken to reinforce the working capital program. This is necessary to maintain a financially healthy condition of the Company. 

Due to the volatility and level of profitability, investor confidence in BAM and in the construction industry in general is relatively low. To become more attractive for investors, improvement of profitability and predictable performance are absolutely key. We fully support the measures management has taken to achieve this, including the tender stage gate process for early identification and mitigation of risks, strengthening of project management during the execution of projects and structured learning from past experiences. Although we are not yet where we want to be, we agree with managements’ view that with all the actions taken, the company is on the right track to prevent major project losses and achieve its strategic and financial targets. 

Most of the major project losses come from large civil projects for the public sector where BAM is not only responsible for the construction, design, and in several cases also for  financing and maintenance. This type of usually unique and complex projects should enable BAM to win work through its engineering expertise and capability, thus giving access to higher margin work. In addition, these projects are important to retain high level expertise, attract talented professionals and maintain an internationally competitive construction industry. However, these projects need to have a better balance in risk distribution and a better balance between risks and rewards. We support managements’ position that BAM will no longer tender for projects where the rewards are not in line with the risks it is willing to assume.

2018 Financial statements and dividend

This annual report, which is based on the International Integrated Reporting Framework, includes the 2018 financial statements, duly prepared by the Executive Board. The financial statements have been audited by the external auditor, Ernst & Young Accountants LLP; the unqualified independent auditor’s report is included on page 201 of this Integrated Report.

The Audit Committee discussed the draft financial statements with the Chief Executive Officer, the Chief Financial Officer and the external auditor. The Audit Committee also discussed the auditor’s report, the management letter and the quality of internal risk management and control systems and had a discussion with the external auditor without BAM’s management being present. Subsequently, our full board discussed this annual report, including the financial statements with the Executive Board in the presence of the external auditor. We took note of the reporting from the Audit Committee and reviewed the auditor’s report and the quality of internal risk management and control systems. We concluded that we agree with the 2018 financial statements. We agree with the Executive Board that a predictable dividend, based on a solid performance in line with the financial targets and taking into account the financial condition of the company, is important for the attractiveness of the BAM-share. We therefore agree with the proposal of the Executive Board to distribute a dividend of €0.14 per share.

We recommend the Annual General Meeting to be held on 17 April 2019, to adopt the 2018 financial statements. We are of the opinion that the financial statements, the report by the Executive Board and the report by the Supervisory Board provide a solid basis on which to hold the Executive Board accountable for the management policies pursued and the Supervisory Board accountable for its supervision on these policies. The members of the Supervisory Board have signed the financial statements in accordance with their statutory obligations under Article 2:101, paragraph 2 of the Dutch Civil Code.

Strategy and operational plan

We discussed the status of the implementation of the 2016 – 2020 strategy extensively with management. To reap the benefits of its scale, the One BAM philosophy was introduced in 2016 as an important part of BAM’s strategy. This means sharing knowledge, resources, systems, processes and innovation across operating companies. Since BAM comes from a very decentralised model with a high degree of local autonomy, this One BAM approach means a major change. We agreed with management that acceleration was required as a consequence of which it was decided to change the top structure. By establishing an executive committee with – besides the Executive Board – a COO for each of the two business lines, a Chief Business Excellence Officer and the Chief HR Officer, BAM will be better able to use its economies of scale while maintaining local entrepreneurship. This should lead to more synergies, additional efficiencies and cost savings, faster innovations and better project management, with the ultimate goal of achieving predictable performance in line with the financial targets.

Based on the BAM strategy, the operating companies and corporate functions have prepared operating plans for 2019, which were consolidated into the operating plan for the Group. We discussed a first draft in our meeting in November and approved an updated version in our January 2019 meeting.

Risk management

For a construction company such as BAM, risk management is key to achieve predictable performance. Risk management was therefore high on our agenda. We regularly discussed the need for selective tendering with management. The tender stage gate process plays an important role in the early identification of potential risks and taking appropriate measures to mitigate these. Although this process is continuously being improved, it cannot prevent any risk from occurring. But it certainly helps to focus on projects where BAM can achieve decent margins without running too high risks.

In 2016, the company launched a project database, which provides extensive information on projects executed by the Group. Management informed us that the database is increasingly being used as a source for management decisions. It is a good example of sharing information and data driven decision making across BAM. We were also informed on the development of a uniform project approach for large projects and the establishment of a groupwide dashboard for project information, both aimed at providing project managers with tools that support them in better managing projects. 

The Internal Audit team continued to audit a number of high exposure projects, resulting in recommendations to improve risk control. Several large projects in the tender phase were presented to the Supervisory Board in regular and extra meetings. We reviewed these projects by asking critical questions mainly focused on risks and how these were managed and how these impacted the pricing of the project.

As part of our annual risk management review, we discussed the outcome of the 2018 Enterprise Risk Management assessment in our November meeting in the presence of the Governance, Risk and Compliance officer. This annual assessment provides an overview of the biggest risks the company is facing, including an indication of the chances that these risks occur and the impact they might have on achieving the company’s objectives, both strategic and operational. The top 10 risks and related mitigation measures were discussed. In the 2019 operating plans of the operating companies and corporate functions specific attention is being given to these risks. The Governance, Risk and Compliance officer also informed us about the status of the Minimum Requirements Framework, which provides minimum standards regarding (risk) controls throughout the Group.  

We concluded that the Group has in place internal risk management and control systems, financial reporting manuals and procedures for drawing up financial reports, as well as an established monitoring and reporting system. We expect that the introduction of the new governance structure in 2019 will lead to further strengthening of the company’s business control framework and its ability to manage risks properly.

Safety and sustainability

Safety continues to be a very high priority for the company. Although zero fatalities should be the norm, we are very pleased that BAM for the first time in many years did not face any fatalities throughout the Group. BAM’s safety performance measured by the incident frequency, also improved (from IF BAM of 4.6 in 2017 to IF BAM of 4.2 in 2018). We fully support management in its continuous efforts to further increase safety, not only through guidelines and instructions but especially by giving it consistent management attention and emphasizing the behavioral aspects. The safety behaviour audits which are being held throughout the company support this effort.

Following the partially collapse of the parking garage at Eindhoven Airport in July 2017, the Dutch Safety Board investigated this serious incident and published a report in October 2018. We discussed this report and particularly the conclusions and recommendations with the Executive Board. In addition, management of the operating company responsible for the project gave a presentation on the lessons learnt and measures taken to prevent the issues identified. We concluded that BAM’s management acknowledges its responsibility for structural safety in general and has taken initiatives in order to ensure sufficient attention to structural safety, both internally and industry wide. 

With respect to sustainability, we believe that BAM is a leader in the construction industry. BAM’s Corporate Sustainability Director gave a presentation on progress regarding the relevant key performance indicators included in BAM’s strategy and on the roadmap towards the 2020 targets. Management informed us on the stakeholder dialogue with clients, partners and suppliers in which important challenges in society were addressed, such as energy transition, the circular economy and smart cities and the impact these challenges will have on all the participants in the dialogue.

Shareholders and investor relations

We are of the opinion that an open and regular dialogue with shareholders and investors is important to explain the company’s strategy and performance and to receive their feedback. We regularly reviewed the Group’s investor relations activities and shareholder base and were informed on the feedback given by shareholders, investors and analysts. 

Together with the Executive Board, we prepared the Annual General Meeting and evaluated it afterwards. Based on last year’s rejection of the proposal to restrict or exclude preferential rights upon issuing respectively granting rights to acquire ordinary shares, we limited the proposal to authorise the Executive Board to issue and/or grant rights to acquire shares up to a maximum of 10 per cent. We were pleased to note that this amended proposal was adopted by the General Meeting. 

Corporate governance

In April 2018 the outline of our corporate governance structure and compliance with the new Dutch Corporate Governance Code was submitted to the General Meeting. BAM complies with the principles and best practices of this code. A corporate governance compliance overview was published on BAM’s website, providing transparency on how BAM complies with the code. At the meeting shareholders were given the opportunity to discuss this topic. 

In addition, the amended profile of the Supervisory Board, including a diversity policy which is also applicable to the Executive Board were submitted to the General Meeting for discussion. The changes to the profile relate particularly to the required experience and expertise in the construction industry and in the field of information technology and digital innovation and the related organisational transformation.

The Supervisory Board and the Executive Board are of the opinion that Royal BAM Group’s corporate governance is up to standard. Please refer to the corporate governance statement in this report and the overview on the company’s website concerning the company’s compliance with the Code.

Discussions with external auditor

In the Annual General Meeting on 22 April 2015 Ernst & Young Accountants LLP was appointed as external auditor for the financial years 2016, 2017 and 2018. In early 2018, we assessed the performance of and relationship with the external auditor, based on a report from the Executive Board and the evaluation and recommendation of the Audit Committee. Based on this assessment, our experience with the external auditor and the external auditor’s expertise with regard to the construction industry in general and Royal BAM Group in particular, we recommended the General Meeting to re-appoint Ernst & Young Accountants LLP as external auditor responsible for auditing the 2019 financial statements of Royal BAM Group, which the General Meeting subsequently approved. Ernst & Young Accountants LLP attended the Annual General Meeting of 18 April 2018 and was available to answer questions.

The audit plan for 2018 was presented to and discussed with the Audit Committee and our full Board and subsequently approved. During our review of the 2017 full year results and the 2018 half year results, we met with Ernst & Young Accountants LLP to discuss their reports. We established that the external auditor had received the financial information on which the financial reports were based and noted that the external auditor had discussed the information provided with BAM officers and the Executive Board. We took note of the reports and management letters as prepared by the external auditor. 

In our February 2018 meeting, we discussed with the external auditor and the Executive Board the key items as presented by the auditor, being: revenue recognition (including variation orders and claims), company tied costs, capitalisation of development costs, valuation of goodwill, treatment of success fees with PPP’s, IFRS 15, classification of German joint arrangements, compliance non-financial reporting requirements, valuation of deferred tax assets and completeness of registration of safety incidents. Several of these topics were also discussed with the external auditor during our meeting in August. In preparation of that meeting several bilateral discussions with the external auditor took place on the impact of IFRS 15, on the figures of 2018 and the comparable figures of 2017.

Other activities and meetings

In addition to the items mentioned before, in each of our regular meetings, we discussed with the Executive Board the state of affairs, the financial performance of the Group and the operating companies, market developments and order intake, working capital and cash flow, the financial condition of the Group as reflected by the balance sheet, investments and divestments, major projects with a higher risk profile and the quarterly press releases. If applicable, our meetings featured a report on what had been discussed in meetings of the committees of our board.

Other matters discussed included the Integrated Report and financial statements for 2017, the 2018 half-year report and interim statements, the reserve and dividend policy and the dividend proposal for 2017, the various effects of changes in the International Financial Reporting Standards (IFRS) on the Group’s financial reports, as well as compliance reports and material legal proceedings in which the Group is engaged.

The Executive Board regularly updated us on the situation regarding the sea lock IJmuiden project and other critical projects and tenders. Management of operating companies and key staff involved gave presentations on several large projects, including the redevelopment of the Bajes Kwartier in Amsterdam, development of the Zalmhaven project in Rotterdam and the reconstruction of the Afsluitdijk. Discussions focused mainly on the risks in these projects and how these are managed and on the financial aspects.

The corporate HR director informed us on the outcomes of the first Employee Engagement Survey that was introduced in BAM. The corporate Compliance officer gave an update on compliance within the Group and we discussed the procedures the company has in place for reporting misconduct. The corporate director Procurement gave a presentation on what is being done to further professionalise procurement.

In September 2018, we stayed in the Netherlands for our annual work visit. Key items during this multiple day event were the mid-term review of the strategy implementation and the preferred governance model going forward. The corporate Strategy director gave a presentation on profitability of projects which showed that overall the company is making progress regarding margin improvement. We had an extensive discussion with the Executive Board on the governance changes regarding both the business and the functions. Management of BAM International presented the strategy for their operating company. We met with management and key staff of BAM Bouw en Vastgoed and BAM Infra Nederland and got presentations on market developments, business performance and major projects. We visited the sea lock IJmuiden project and discussed progress and lessons learned with the project team. We also visited the Homestudios in Utrecht, an initiative of BAM Wonen (part of BAM Bouw en Vastgoed) to assist buyers of newbuilt houses with ideas and inspiration for the interior of their future home. 

A delegation of our Board met with the Central Works Council on several occasions. In addition, our full Board together with the Executive Board met with the Central Works Council to discuss developments in BAM.

Our Board actively engages with the Executive Board as well as other senior management in order to ensure we receive the right information. The chairman of our Board had regular contact with the Chief Executive Officer while the chairman and other members met with senior managers in order to be briefed on specific topics such as HR, Finance, Corporate Governance and Operational Audit.

In consultation with the Chief Executive Officer, the chairman of our Board together with other board members met with each of the managing directors of the operating companies individually to get their views on BAM’s strategy, including the One BAM philosophy and the intended changes in BAM’s governance structure. This provided valuable insights that we shared with the Executive Board.

We approved the remuneration report prepared by the Remuneration Committee. The remuneration report is included in chapter 6.2 of the Integrated Report. The remuneration policy was not amended in 2018. 

In 2018, we met on eight occasions in the presence of the Executive Board. In addition, one telephone conference call was organised. The attendance rate of the individual members at the meetings was as follows: 

51 - The attendance rate of the individual members at the meetings






Mr H.L.J. Noy





Mr K.S. Wester





Mr G. Boon





Mrs C.M.C. Mahieu





Mr M.P. Sheffield





Mrs H. Valentin





We also met without the Executive Board being present, to prepare for and evaluate each board meeting. In addition, we met without the Executive Board to evaluate the functioning of the Executive Board, to perform our self-assessment, to discuss a number of strategic and organisational matters and to discuss the remuneration of the Executive Board, including the determination of the variable portion of their remuneration for 2017 and the targets for 2018. 

The Supervisory Board’s committees

The Supervisory Board has three permanent committees: an Audit Committee, a Remuneration Committee and a Nomination Committee. It is the task of these committees to support and advise the Supervisory Board concerning items under the committees’ responsibility and to prepare the Supervisory Board’s decisions regarding those items. The Supervisory Board as a whole remains responsible for the way in which it performs its tasks and for the preparatory work carried out by the committees. The committees submitted reports on their meetings to the Supervisory Board.

The Audit Committee
During 2018 the Audit Committee was composed of Mr Boon (chairman), Mr Wester and Mr Sheffield. The composition of the Audit Committee is in line with the provisions of the Dutch corporate governance code.

The Committee met four times. The external auditor was present at all of these meetings. The Chairman of the Executive Board, the Chief Financial Officer and the Internal Audit Director also attended all Audit Committee meetings.

In addition to its regular tasks and responsibilities, the Audit Committee addressed the following specific matters in 2018: assurance plan 2018 of the external auditor EY, internal audit plan for 2019, impact of new reporting standards IFRS 15 and 16, material legal proceedings, development of working capital, developments and valuation of key projects, valuation of assets, accounting treatment of German joint operations, financing of the company and developments relating to taxes, IT, insurance and governance, risk and compliance. 

The Audit Committee was briefed by the external auditor on relevant developments in the audit profession, especially those related to new IFRS reporting standards. The committee met with the external auditor without the Executive Board being present and reported to the Supervisory Board on the performance of and the relationship with the external auditor. Furthermore, the chairman of the Committee regularly communicated on a one to one basis with the external auditor and the CFO. The Audit Committee considers the relationship with the external auditor to be effective.

Remuneration Committee
During 2018 the Remuneration Committee was composed of Mrs Mahieu (Chairwoman), Mrs Valentin and Mr Noy. The composition of the Remuneration Committee is in line with the provisions of the Dutch corporate governance code.

One of the tasks of the Remuneration Committee is to make proposals to the Supervisory Board with regard to the remuneration policy, the terms of employment of members of the Executive Board and the remuneration of the members of the Executive Board and the Supervisory Board.

The Committee submitted a proposal to the Supervisory Board regarding the short term incentive for members of the Executive Board, based on the 2017 performance and the applicable criteria. The committee also prepared a proposal for the vesting of the long term incentive plan 2015-2017. In addition, the Committee submitted a proposal for the target setting 2018 for variable remuneration (both short and long term incentive). The Remuneration Committee prepared the remuneration report which explains how the remuneration policy has been implemented in practice.

The Remuneration Committee met five times. The Chairman of the Executive Board was present during parts of these meetings as was the corporate HR director. The committee members consulted each other a number of times outside the context of a formal meeting. 

Nomination Committee
During 2018, the Nomination Committee was composed of Mr Noy (Chairman), Mrs Mahieu and Mrs Valentin. Key task of the Nomination Committee is to make proposals to the Supervisory Board regarding the size and composition of the Supervisory Board and the Executive Board, regarding selection criteria, selection procedures, appointments and reappointments to both Boards as well as regarding assessment of their performance. The committee also monitors the Executive Board’s policy on selection criteria and appointment procedures for senior management and holds annual appraisals with the individual members of the Executive Board.

The Nomination Committee met four times and members consulted each other a number of times outside the context of a formal meeting. Items discussed were the vacancies in the Executive Board, the required profile for the individual positions, review of and interviews with a number of candidates and the final selection of the preferred candidates. A proposal for the re-appointment of Mr Bax and the appointment of Mr Den Houter was submitted to the Supervisory Board. The Committee discussed with the Chief Executive Officer and with the corporate HR director the succession planning process within the company, the changes in the top structure and the profile for the members of the newly to be established Executive Committee.

Composition and functioning of the Executive Board and the Supervisory Board

Executive Board
As announced in a press release on 22 January 2018, Mrs T. Menssen stepped down as CFO and member of the Executive Board of the company effective 1 July 2018. This decision was reached by mutual agreement as the further implementation of the strategic agenda required a different fulfilment of the CFO role. We thank Thessa Menssen for her contribution and dedication to BAM.

At the General Meeting of 18 April 2018, Mr E. J. Bax was re-appointed as a member of the Executive Board for a period of one year. Mr E. J. Bax had informed the Supervisory Board that he wished to explore other opportunities and would therefore not seek re-appointment for four years. The Supervisory Board therefore decided to nominate Mr Bax for re-appointment as member of the Executive Board for a term of one year. This also ensured continuity and a smooth transition of responsibilities, also in light of Mrs Menssen stepping down as described above.

In an extraordinary General Meeting on 26 June 2018, Mr L.F. den Houter was appointed as a member of the Executive Board per 1 August 2018 for a period which will end at the closing of the Annual General Meeting in 2022. Mr Den Houter succeeded Mrs Menssen as the Chief Financial Officer of the company.

In December 2018 it was announced that in the first quarter of 2019 an Executive Committee will be established and  the size of the Executive Board will be reduced to two members, being the Chief Executive Officer and the Chief Financial Officer. In that context, Mr Bax decided to step down as Chief Operating Officer and member of the Executive Board of the company, effective 1 March 2019. We thank Erik Bax for his contribution and commitment to BAM.

We reviewed the performance of the Executive Board, also based on the discussions we had with management of the operating companies. The Nomination Committee met with the individual Executive Board members and gave feedback on personal performance. The non-financial targets that had been set were evaluated as well as the functioning of the Executive Board as a team. 

We have established that none of the Executive Board members holds more than two supervisory board positions at large organisations or a position as chairman of such supervisory body. This is in line with the Management and Supervision (Public and Private Companies) Act and the Code.
We have no evidence of any conflicts of interest between the company and members of the Executive Board.

Information about the individual members of the Executive Board is available in chapter 5.3 of the Integrated Report.

Supervisory Board
In 2018 the composition of the Supervisory Board did not change. The profile of the board was updated and submitted to the General Meeting for discussion in April 2018. There were no regular re-appointments. Information about the individual members of the Supervisory Board is available in chapter 5.3 of the Integrated Report, which is an integral part of this report.

The Supervisory Board meets the requirements of the new Dutch corporate governance code with regard to independence. In 2018 the Supervisory Board members did not have any other relationships of a business nature with the company. None of the Supervisory Board members had more than five memberships of Supervisory Boards at Dutch listed companies or other large institutions. The Supervisory Board is not aware of any conflicts of interest between the company and members of the Supervisory Board, or between the company and natural persons or legal entities that hold at least 10 per cent of the shares in the company.

In early 2019 we performed our annual self-assessment. It was based on an extensive questionnaire that was completed by all board members prior to the evaluation session. We concluded that the board is operating well, with open discussions and constructive contributions from all members. We also assessed the expertise of the individual board members and concluded that the combined expertise is in line with the characteristics of the company and its business. Several suggestions were made for further improvement. These relate among others to continuous professional development, timely provision of information, succession planning and the need for continuous attention to strategic matters and compliance.

Both the Supervisory Board and the Executive Board recognise the importance of diversity in the Group’s managerial bodies. In our view diversity is not limited to gender, it also involves age, nationality and background. The profile for the Supervisory Board includes a minimum 30 per cent target for female and male board members. This gender target applies mutatis mutandis to the Executive Board.

We note that our present composition is in line with the profile for our board. We meet the specific target on gender diversity. However, since Mrs Menssen stepped down from the Executive Board and was succeeded by Mr Den Houter, this no longer applies to the Executive Board.

With the new top structure in place in the first quarter of 2019, the gender diversity target should apply to the Executive Committee (which includes the Executive Board). In filling the vacancies in this Committee, gender diversity got a high priority, without compromising on the other criteria for these roles. Although serious efforts are being made to find suitable female candidates, this appears to be challenging. This is due to the nature of the business – the construction industry is traditionally  male dominated – and the lack of female candidates with sufficient managerial experience in this industry. Gender diversity at the top should also come from a more balanced composition in terms of gender at other layers in the organisation. Therefore, the company pays specific attention to women in its management development programs to assure that the rise of women to senior management positions is warranted. In addition, external recruitment agencies are specifically instructed to identify and submit capable female candidates for senior management positions. Finally, the company will give preference to women in case of equal suitability. It will however take time before these measures lead to achieving the target on gender diversity at the executive level. 

Final comments

BAM is going through a major transformation process. At the same time, winning work and executing projects in cooperation with clients, have to continue. We are aware that this causes a stretch for many people in the organisation. The company made good progress with the implementation of its strategic agenda, and although not yet fully visible in the financial results, we are on the right track to achieve a better and more predictable performance. We want to thank all involved for their contribution and dedication to BAM. 

Bunnik, the Netherlands, 19 February 2019

On behalf of the Supervisory Board, 
Harrie Noy, Chairman