Corporate governance refers to the practice of administering and controlling a company according to strict rules of accountability and principles of responsibility. At MTU Aero Engines Holding AG, corporate governance has been held in high regard for many years. Two central elements are of overriding importance: promoting the trust of investors, customers, employees and business partners in the company’s executive and controlling bodies, and increasing the value of the company in a sustainable manner. It is MTU’s intention to implement good corporate governance in all areas of the company, since it firmly believes that corporate governance is a cornerstone of corporate success.

The basic principles of good corporate governance are that it should be based on mutual trust and efficient collaboration between the Board of Management and the Supervisory Board, should respect the shareholders’ interests, and allow for open and transparent communication. As a globally operating company, MTU acts in compliance with both national and international standards. In Germany, home of the company’s headquarters, the relevant requirements are laid down principally in the Stock Corporation Act (AktG), in the Co-Determination Act (MitbG) and in the German Corporate Governance Code (the ‘Code’).

The Code, which first came into effect in 2002, makes clear the obligation of both the Board of Management and the Supervisory Board to act in compliance with the principles of the social market economy so as to ensure the continued existence of the company and its ability to create sustainable value. In the amended version of June 18, 2009, it describes the nationally and internationally recognized standards of responsible corporate management together with the statutory regulations for the management and supervision of German listed companies. MTU’s Board of Management and Supervisory Board have actively worked towards ensuring that the recommendations of the Code are met, in particular the amendments to the Code of June 18, 2009, made by the Government Commission on the German Corporate Governance Code. Their declaration of conformity can be found on page 307.

The following contains a report by the MTU Board of Management, also on behalf of the Supervisory Board, as stipulated in Section 3.10 of the Code, on corporate governance at the company in the 2009 financial year.

MTU is a stock corporation organized under German law. In accordance with these legal provisions, its governing bodies consist of the Board of Management, the Supervisory Board and the Annual General Meeting. Corporate management relies on close and trust-based cooperation between all of these bodies as well as a reliable and constant flow of information. The Annual General Meeting, in particular, offers shareholders the opportunity to present questions to MTU executives and to exercise their voting rights, either personally or through a proxy.

The company is managed by the Board of Management, whose members work together as a team. Members complement each other with a variety of qualifications and professional experience. The Board of Management sets MTU’s strategic direction, plans and establishes the company’s budget, and monitors the individual business units. In managing the company, its goal is to create, on its own responsibility and in the company’s interest, sustainable added value and to take into account the interests of the shareholders, the employees and other groups connected with the company (stakeholders). It informs the Supervisory Board of the company’s current situation, potential risks and risk management activities, strategic decisions and their implementation, in a timely manner and on a regular basis. The Board of Management also reports on the issue of compliance, i.e. on measures to comply with both laws and regulations and company guidelines. Important Board of Management decisions require the approval of the Supervisory Board, in particular concerning the budget. For further information on this topic, please refer to the Supervisory Board report on page 316.

In line with statutory requirements, the Supervisory Board comprises six shareholder representatives and six employee representatives. It oversees the work of the Board of Management and provides advisory support. All Supervisory Board members are qualified for these tasks and perform their mandated duties correctly. In compliance with the recommendations of the German Corporate Governance Code, no more than two former members of the company’s Board of Management hold seats on the Supervisory Board of MTU Aero Engines Holding AG. The members in question are Udo Stark and Prof. Dr.-Ing. Klaus Steffens. The Supervisory Board is also entrusted with verifying the independence of its own members and, for this purpose, has established assessment principles that tie in closely with the requirements of the Code. Based on these principles, the majority of the current members of the Supervisory Board may be regarded as independent, thus ensuring that the Board of Management receives impartial advice and oversight.

The Supervisory Board’s rules of procedure make provision for its members to form committees. MTU’s Supervisory Board has four committees, details of which may be found on page 317 to 318.

In 2009, no consulting agreements or contracts for services or similar contractual agreements existed between MTU Aero Engines Holding AG or any of its associates and any member of the Supervisory Board. Thus no conflicts of interest requiring disclosure have arisen. In the financial year 2009, directors’ and officers’ liability insurance with an appropriate deductible was in effect for the MTU Board of Management and Supervisory Board members.

Compensation for the members of the Board of Management and Supervisory Board is established according to clear, transparent criteria, which are fully described in the management compensation report on pages 308 to 315.

The Board of Management is accountable for the reporting of the consolidated financial statements, which are drawn up in accordance with the International Financial Reporting Standards (IFRSs). The financial statements of group companies are compiled according to the provisions of the German Commercial Code (HGB). An internal system of controls coupled with the application of uniform principles of accounting ensure that the earnings, financial situation, net asset position and cash flows of all group companies are accurately presented. In addition, MTU has a differentiated system in place to identify and monitor business and financial risks.

At MTU, responsible management of risks is given high priority. The Board of Management is responsible for ensuring that an appropriate risk management and control system is in place. Against the backdrop of the financial and economic crisis, financial risks must be accorded special attention. As a component of value-oriented corporate management, systematic risk management ensures that risks are identified at an early stage, analyzed and assessed, and that suitable measures are taken to minimize risk exposure. The Board of Management reports regularly to the Supervisory Board on existing risks and how they are developing.

The Audit Committee of the Supervisory Board deliberates on risk management and on the findings of internal auditing. Pursuant to Section 107 (3) of the German Stock Corporation Act (AktG), as amended by the German Accounting Law Reform Act (BilMoG), the Audit Committee will in future be explicitly responsible also for monitoring the effectiveness of the risk management system, the internal systems of control, the internal auditing systems, the financial reporting process and the audit of the financial statements, and, in particular, assessing their independence.

The corporate culture at MTU places great store on the values of trust and mutual respect. Nevertheless, the risk can never be entirely excluded that the unauthorized behavior of isolated individuals might lead to contravention of the law. MTU does everything in its power to minimize this risk as far as possible, and is committed to uncovering and pursuing all acts of misconduct, as in the case of corruption.

The applied preventive measures include awareness training and regular scheduled inspections of all business units by the internal auditing teams.

The observance of judicial and ethical rules and principles plays a central role in this respect. These include observance of the law and the upholding of professional values in dealings with customers, suppliers, competitors, public authorities, holders of public office, and members of the general public, both in Germany and abroad, and the strict separation of professional and personal affairs in order to avoid conflicts of interest. All of these aspects of compliance are documented in a code of conduct drawn up and introduced by the MTU Board of Management and the Group Works Council, which also deals with responsible use of insider information. It embodies MTU’s corporate culture and reflects its resolve to strictly comply with the stipulations of the relevant public laws and internal regulations. The code of conduct is intended as a company-wide guide to ethical business relations and as a public statement of MTU’s commitment to corporate social responsibility and environmental protection.

Compliance is an important aspect of all management functions at MTU. All managers are expected to verify that each and every member of their staff has read and understood the code of conduct and is abiding by its rules. These activities are supplemented by internal training courses designed to raise employees’ awareness of compliance risks and to reinforce and augment their knowledge of the relevant requirements. Corruption is one of the major topics dealt with during these training courses

MTU has set up a Compliance Board, which reports directly to the Board of Management and offers its advice on relevant issues. The members of the Compliance Board, which consists of the heads of the legal, auditing and security departments, meet ordinarily once a quarter. The board’s duties include identifying and evaluating legal and reputational risks. If the Compliance Board recognizes a need to introduce additional compliance rules, it makes appropriate recommendations to the Board of Management. Above and beyond this, the Compliance Board is charged with dealing appropriately with the suspected cases of non-compliance reported to it.

As a result of an agreement with the Works Council, the company has created an internal contact office for unethical conduct. It allows employees, customers and suppliers to report suspected cases of non-compliant behavior.

The Supervisory Board oversees the Board of Management’s compliance activities with the assistance of the Audit Committee. In the year under review, it was briefed on the awareness training courses, the meetings of the Compliance Board, and the information submitted to the contact office charged with dealing with suspected cases of illegal or unethical conduct. Other issues dealt with by the supervisory bodies included updates to the compliance guidelines, the audits carried out by the Compliance Board and the training measures planned for 2010.

In keeping with the principles of good corporate governance, MTU issues a regular flow of comprehensive, timely information on the company’s activities and any major changes in its business situation to shareholders, shareholder associations, financial analysts, the media and other interested parties. The company publishes a full range of informative documentation, press releases and a financial calendar on the MTU website at www.mtu.de. MTU also publishes quarterly reviews of its business activities. Through these interim reports and related publications, the Board of Management keeps investors, analysts and the media up to date on the company’s quarterly and yearly business results. Any new developments likely to have a significant impact on the MTU share price are disclosed in accordance with statutory requirements in the form of ad hoc releases.

Information is also posted on the MTU website whenever members of the Board of Management or Supervisory Board or related persons have purchased or sold MTU shares or related derivatives. Section 15a of the German Securities Trading Act (WpHG) stipulates that such transactions must be disclosed if and when their value reaches or exceeds € 5,000 within a single calendar year.

Declaration of conformity with the German Corporate Governance Code by the Board of Management and the Supervisory Board of MTU Aero Engines Holding AG, pursuant to Section 161 of the German Stock Corporation Act (AktG)
The Board of Management and the Supervisory Board of MTU Aero Engines Holding AG declare that the recommendations of the Government Commission on the German Corporate Governance Code, as published in the amended version of June 18, 2009, by the Federal Ministry of Justice in the official section of the electronic Federal Gazette, have been and are being complied with. The Board of Management and the Supervisory Board of MTU Aero Engines Holding AG also intend to follow these recommendations in the future. The only recommendations of the German Corporate Governance Code that have not been and will not be applied are the following:

Form and details of Supervisory Board compensation (Section 5.4.6, paragraph 2 of the Code)
The members of the Supervisory Board do not receive performance-related compensation. It is our considered view that a fixed compensation arrangement is appropriate and that compensation should not be linked to the company’s performance. In our opinion, performance-based compensation is not suitable to furthering the control function exercised by the Supervisory Board.

D&O deductible (Section 3.8, paragraph 2 of the Code)
At the time that the amended version of the German Corporate Governance Code of June 18, 2009, was made public, i.e. on August 5, 2009, the company had already taken out D&O insurance cover for the members of its Board of Management and Supervisory Board that contained an appropriate deductible and thus complied with the previously valid Section 3.8 of the German Corporate Governance Code. The D&O insurance cover must be amended to comply with the new provisions within a certain transitional period. The company will amend this insurance in early 2010, i.e. within the stated transitional period, in order to comply with the new Section 3.8 of the German Corporate Governance Code and will agree a new deductible amounting to at least 10 % of the loss and up to at least 150 % of the fixed portion of the annual compensation of each board member.

Compensation of board members (Sections 4.2.2 and 4.2.3 of the Code)
At the time that the amended version of the German Corporate Governance Code of June 18, 2009, was made public, i.e. on August 5, 2009, the compensation paid to members of the Board of Management complied with the then valid Sections 4.2.2 and 4.2.3 of the German Corporate Governance Code. Since it is not customary to make ulterior amendments to board members’ employment contracts once they have been signed, the company will, at the next opportunity, adjust the compensation paid to members of the Board of Management in accordance with the provisions of the German Act on the Appropriateness of Management Board Compensation (VorstAG) so as to comply with the new Sections 4.2.2 and 4.2.3 of the German Corporate Governance Code.

Munich, December 2009