Good corporate governance is one of the fundamental principles of the HUGO BOSS Group and a crucial component for long-term success. In addition to responsible management of the Company for the benefit of employees, shareholders, and customers, good corporate governance also means appreciating and strengthening the confidence placed in the Company. For this reason, business activities focus on sustainably increasing enterprise value. As has proven effective in the past, the Managing Board and the Supervisory Board work closely together in the interest of the entire Company, using good corporate governance to ensure efficient corporate management and control aimed at value creation. In order to achieve this, the Managing Board reports regularly, promptly, and comprehensively to the Supervisory Board and its committees, both verbally and in writing, especially on all topics of relevance to corporate management, the business performance, strategic planning, and risk exposure, including risk management. In fiscal 2006, the meetings emphasized topics such as continued expansion of the Company’s own retail business, the “Columbus” project, and the sale of the textile activities of the BALDESSARINI brand. In addition, accounting issues were discussed in depth at sessions of the Audit Committee. Personnel issues affecting the HUGO BOSS AG Managing Board were discussed by the Personnel Committee.

In accordance with the recommendations of the Corporate Governance Code, care was taken in the selection of Supervisory Board members to ensure that the supervisory committees were composed only of members who possess the requisite knowledge, skills, and professional experience and who are independent within the meaning of the Corporate Governance Code. Furthermore, the Chair of the Audit Committee is endowed with special skills and experience in the application of accounting principles and internal controls. None of the Supervisory Board members has previously occupied a management position within the Company.

No conflicts of interest involving Managing or Supervisory Board members arose during the year under review. Any such conflicts of interest are required to be reported to the Supervisory Board without delay.

Responsible handling of entrepreneurial risks is also part of good corporate governance in the HUGO BOSS Group. A systematic and comprehensive risk identification process allows risks to be identified early on and the Group to manage its risk exposure accordingly. Due to constantly changing conditions, the risk early warning system of the HUGO BOSS Group is optimized on an ongoing basis and adapted to reflect current developments. Details on this topic are specified in the “Risk Report” section.

The legal requirements relating to capital markets were also implemented in fiscal 2006. An ad hoc committee consisting of representatives of different central departments was set up to review the ad hoc relevance of insider information and to ensure that such information is dealt with in conformity with statutory requirements. Since fiscal 2005, all persons having access to insider information in connection with their employment activities have been instructed on their duties under the law relating to insider information and entered in a register.

HUGO BOSS also ensures that all capital market participants are provided with the same information without delay in order to adhere to the principle of transparency, another important part of good corporate governance. Private and institutional investors are able to stay abreast of current developments in the Group by referring to HUGO BOSS’ website. All press releases and ad hoc announcements are published on the website along with information on share price and dividend performance. Moreover, updated investor relations presentations are available for download from the website. Additional information on all investor relations activities and the financial calendar are also available on the website under “Investor Relations.”

In order to make participation in the Annual Shareholders’ Meeting of HUGO BOSS easier and moreattractive, HUGO BOSS converted its registration and legitimization procedures to the “record date”procedure in 2006. To be entitled to participate in the Annual Shareholders’ Meeting and exercise their voting rights, all shareholders must provide evidence upon registration of having held shares in the Company since the beginning of the 21st day prior to the shareholders’ meeting. Such evidence must be received by the Company no later than seven days prior to the Annual Shareholders’ Meeting. Shareholders may also inform themselves by means of the Annual Report, which is published in advance of the Annual Shareholders’ Meeting, and the invitations sent. All other documents relating to the Annual Shareholders’ Meeting are made available on the Company’s website in due time. This promotes dialog between the Company and its shareholders, thus increasing Company transparency.

Pursuant to Section 15a of the German Securities Trading Act (WpHG), members of the Managing and Supervisory Boards as well as employees with management responsibilities as defined in the German Securities Trading Act are required to disclose the purchase or sale of HUGO BOSS AG securities. During the period under review, January 1 to December 31, 2006, five securities transactions subject to reporting requirements were notified to the Company and published on the website.

Members of the Supervisory Board hold a total of 0.2% of the shares issued by HUGO BOSS AG. Total holdings of members of the Managing Board amount to less than 0.01% of the shares issued by the Company.

Managing and Supervisory Board members who are members of executive or advisory bodies at other companies are shown here.

Since fiscal 2001, HUGO BOSS AG has been offering a stock appreciation rights program for Managing Board members and second-tier executives. As part of this program, members of the HUGO BOSS AG Managing Board as well as certain other executives of HUGO BOSS AG and its subsidiaries are accorded a certain number of participation rights. These rights enable them to participate in any increase in the value of the Company’s shares. The participation rights solely confer a claim to payment in cash, not a claim to HUGO BOSS AG shares.

Tranche 3 of the stock appreciation rights program has a term of four years, and tranches 4 to 7 have six-year terms. After the initial holding period of two years, the exercise period of two or four years commences. Participation rights may be exercised if growth in market capitalization of HUGO BOSS AG exceeds MDAX growth by 5 percentage points (exercise hurdle) upon expiration of the holding period or during the exercise period.

The payoff corresponds to the difference between the strike price and the market capitalization value as reflected in the average price of the relevant HUGO BOSS AG shares, divided by the total number of shares of HUGO BOSS AG during the five trading days preceding the date of exercise. The strike price corresponds to the market capitalization value based on the average price of the relevant shares, divided by the total number of HUGO BOSS AG shares during the 20 trading days preceding the date of issue.

The Annual Shareholders’ Meeting created the framework necessary for applying the recommendations of the Corporate Governance Code to a great extent, by means of the modifications to the Articles of Association resolved on May 27, 2003.

The following recommendations of the Code are the only ones that have not been put into practice:

“In principle, each share carries one vote.” (Section 2.1.2 Sentence 1 of the Code)

As of December 31, 2006, the share capital of HUGO BOSS AG was divided into 35,860,000 voting common shares and 34,540,000 non-voting preferred shares. This division exists for historical reasons. Only non-voting preferred shares were initially issued on December 19, 1985. In order to better respond to the differing preferences of market participants, common shares were floated in 1987; nominal capital remained unchanged.


“If the company takes out a D&O (directors and officers’ liability insurance) policy for the Management Board and Supervisory Board, a suitable deductible shall be agreed.” (Section 3.8 Paragraph 2 of the Code)

HUGO BOSS AG covers the D & O risk by taking out appropriate property and liability insurance for the members of its executive bodies, which also encompasses coverage for the Supervisory Board members.

The Company’s Managing and Supervisory Boards perform their duties responsibly and in the interest of the Company. HUGO BOSS does not believe that a deductible is an appropriate means to further improve the sense of responsibility of the individuals concerned. Moreover, no significant savings in premiums would be achieved by introducing a deductible.


“Changing such performance targets or the comparison parameters retroactively shall be excluded. For extraordinary, unforeseen developments a possibility of limitation (Cap) shall be agreed for by the Supervisory Board.” (Section 4.2.3, Sentences 7 and 8 of the Code)

We do not intend to apply a cap to compensation of the Managing Board within the long-term incentive system (stock appreciation rights program) in the event of extraordinary, unforeseen developments. HUGO BOSS AG’s long-term incentive system provides a number of participation rights for members of the Managing Board and specified employees, enabling them to benefit from price increases in HUGO BOSS shares. The program was established prior to the effective date of the relevant recommendation, which could therefore not be incorporated. We do not plan a post facto change of objectives or comparative parameters.


“The total compensation of each member of the Management Board is to be disclosed by name, divided into non-performance-related, performance-related and long-term incentive components, unless decided otherwise by the General Meeting by three-quarters majority.” (Section 4.2.4 of the Code)

Pursuant to the German Disclosure of Management Board Remuneration Act (VorstOG) of August 3, 2005, the annual shareholders’ meeting is able to decide the extent to which compensation paid to management board members shall be disclosed by name. The Annual Shareholders’ Meeting made use of this option and passed the following resolution on May 4, 2006:

“The information required by Section 285 sentence 1 no. 9 letter a sentence 5 to 9 and Section 314 (1) no. 6 letter a sentence 5 to 9 of the German Commercial Code (HGB) in the version in the VorstOG and by any other statutory provisions shall be omitted for five years. This resolution applies to the financial year beginning on 1 January 2006 and to the following four financial years, i.e. until 31 December 2010.”

Therefore, the total compensation paid to individual members of the Managing Board has not been disclosed.


“Disclosure shall be made in a compensation report which as part of the Corporate Governance Report describes the compensation system for Management Board members in a generally understandable way.

The presentation of the concrete form of a stock option plan or comparable schemes for components with a long-term incentive effect and risk character shall include the value thereof. In the case of pension plans, the allocation to accrued pension liabilities or pension funds shall be stated each year.

The substantive content of severance awards for Management Board members shall be disclosed if in legal terms the awards differ not insignificantly from the awards granted to employees. The compensation report shall also include information on the nature of the fringe benefits provided by the company.” (Section 4.2.5 of the Code)

Based on the aforementioned resolution, no details are provided on the total compensation paid to individual Managing Board members.


“The compensation of the members of the Supervisory Board shall be reported individually in the Corporate Governance Report, subdivided according to components. Also payments made by the enterprise to the members of the Supervisory Board or advantages extended for services provided individually, in particular, advisory or agency services shall be listed separately in the Corporate Governance Report.” (Section 5.4.7, Paragraph 3 of the Code)

Total payments made to members of the Supervisory Board pursuant to IAS 24 are disclosed in the Notes to the Consolidated Financial Statements. A detailed disclosure of the individual amounts in the Corporate Governance Report would not provide any additional information of relevance to capital markets.

In 2006, the Annual Shareholders’ Meeting resolved on an extensive, detailed amendment to the provision regarding Supervisory Board compensation in the Articles of Association of HUGO BOSS AG.


“The ownership of shares in the company or related financial instruments by Management Board and Supervisory Board members shall be reported if these directly or indirectly exceed 1% of the shares issued by the company.” (Section 6.6, Paragraph 2, Sentence 1 of the Code)

The German Securities Trading Act prescribes certain announcements and publications in the event that voting rights in the Company exceed or fall below certain levels and in the event that certain financial instruments are held that could lead to a change in the distribution of voting rights. The same applies to the acquisition or sale of shares or related acquisition or sale rights on the part of members of the Managing or Supervisory Boards of the Company. Legislators have just recently reformed these standards to include additional thresholds, for example. In doing so, the interests of capital markets were weighed against those relating to data protection rights. Section 6.6, Paragraph 2, Sentence 1 of the Code conflicts with this legislation. It is the opinion of the Managing and the Supervisory Boards that the legislative requirements pertaining to disclosure, together with the information under Section 6.6, Paragraph 2, Sentence 2 of the Code, are sufficient.