1. The current chairman of the Enterprise Chamber Huub Willems (pictured) caused quite a stir last week in an interview by the Dutch newspaper Het Financieele Dagblad, that took place in view of Willems' departure as of August 1, 2009 as the court's chairman.
2. When asked about his opinion of the Dutch corporate governance code (drafted in 2003 and last updated late 2008), that is directed to listed corporations and provides both principles and corresponding best practices of good corporate governance (company's can deviate from the best practices on a comply-or-explain basis), he basically answered that the code should be way more compact and that the best practices could be deleted. His reasoning is that due to the high level of detail of the best practices, in practice officers and directors seem more concerned with complying to 'the rules' - or trying to get around them, with the help of a whole battery of lawyers looking for loopholes - than with trying to entrepreneur in a way that is also ethically sound (i.e., doing 'the right thing'). In other words: more rules lead to less concern with ethics.
3. The proposal is interesting, as it invites a revisiting of the code's framework: does it make sense, on balance, to have a code that contains:
- not just pretty much generally accepted principles of corporate governance;
- but also far more detailled best practices, that attempt to give 'hands and feet' to those principles?
I believe it does, mostly for practical reasons: the principles in itself do not provide real guidance to officers, directors and shareholders in terms of 'what is expected/preferred conduct' in specific situations in the corporate governance realm. Think of self-dealing transactions, just to name one example. That is where the real upside of the best practices comes into play. They provide an 'off-the-rack' set of rules that - although not carved in stone - give practical guidance and provide more clarity, that can be used by the actors involved, or not; the latter as long as there is a reasonable explanation - in the annual accounts - for why a different course is taken (Dutch statute provides that listed companies must explain to what extent the code is adhered to). Without these best practices, the code would have less teeth, and would arguably play a smaller role in every day corporate governance.
4. But what about the concern of Willems, that the best practice parts of the code actually tend to stand in the way of ethically sound behavior in the corporate setting? The trick, I believe, is essentially threefold:
- First, these best practices should not be seen as based in law, as legally required standards of conduct, but as a set of helpful default guidelines - based on what many believe to be sound practical adaptations of these principles, although I think discussion is possible as to some elements of these principles and best practices - that allow explained deviation depending on the circumstances (i.e., there is nothing wrong really with deviation, as long as it's the explained version). In view of this, courts should be reluctant to use terms like 'rules' or 'norms of corporate governance' when applying a legal analysis in a certain case (as the Enterprise Chamber does frequently), as this could easily muddy the waters.
Chief Justice Veasey made a clarifying distinction in the Delaware Supreme Court's 2001 Brehm v. Eisner decision: All good corporate governance practices include compliance with statutory law and case law establishing fiduciary duties. But the law of corporate fiduciary duties and remedies for violation of those duties are distinct from the aspirational goals of ideal corporate governance. Aspirational ideals of good corporate governance practices for boards of directors that go beyond the minimal legal requirements of the corporation law are highly desirable, often tend to benefit stockholders, sometimes reduce litigation and can usually help directors avoid liability. But they are not required by the corporation law and do not define standards of liability. Also see Chancellor Chandler's analysis in the Delaware Court of Chancery's 2005 decision re The Walt Disney Company Derivative Litigation (and - on appeal in the same case - Justice Jacobs' similar analysis in the Delaware Supreme Court's 2006 decision re The Walt Disney Company Derivative Litigation).
- Second, deviations from the default rules (best practices) should not in itself be perceived as 'wrong'; corporate fiduciaries should not be forced to comply with them, in fear of upheaval among shareholders and other stakeholders. This is not to say that deviations may not be subject of debate within the company, especially the general meeting; to me that seems a healthy consequence of the code, that is after all based on the notion of comply or explain, which increases - or so goes the argument - the accountability of officers and directors in key fields of corporate governance. Nothing wrong with debate.
- Third, although the code provides principles and best practices of good corporate governance, this does not mean that what is not expressly prohibited is allowed. That reasoning runs dead.
5. So where does this take us?
- In the end, at least theoretically, there should not be any significant tension between essentially aspirational and flexible best practices of good corporate governance on the one hand and sound ethical behavior on the other; one could say they're part of a continuum.
- To the extent this is perceived differently in practice, a change of mindset would be in order.
6. I am not 100% sure the Supreme Court acknowledged the above in its September 14, 2007 decision re Versatel, in which it seemed to have 'upgraded' certain best practices - regarding conflict of interests - to a legal status without providing any justification for this; if so, I belief that is a wrong course to embark on. In its July 13, 2007 decision re ABN AMRO, the Supreme Court seemed to limit the scope of it analysis to certain principles laid down in the code, but the gist of its reasoning was still far-reaching: I, for one, am not inclined to fully qualify the principles laid down in the code as expressions of the law.
7. I discussed the difference between standards of conduct that are legally binding for corporate fiduciaries and those that are not in Judicial Review of Director Conduct - Under Dutch and Delaware Corporate Law, Deventer: Kluwer 2007, no. 8 and 34. See the contribution by WinterCools to the discussion triggered by Willems here (Dutch only).
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