[No. 52] Recent Response by Dutch Cabinet to 2008 Updated Dutch Corporate Governance Code

As briefly discussed here, the Netherlands has a corporate governance code - aimed at listed companies - since 2003. The idea is that the code is updated from time to time by the Dutch Corporate Governance Code Monitoring Committee. More information about the code and the committee can be found here.

The last update was presented on December 10, 2008 by the so-called Commissie Frijns, named after its current chairman (see here). The committee made various recommendations for legislative action. On May 25, 2009, the Minister of Finance responded on behalf of the Dutch cabinet in a letter sent to the second chamber of parliament. Below the fold you can find a summary of:

1. the December 2008 update by the committee; and
2. the response by the Dutch cabinet.

1. Main Amendments to the Code in the December 2008 Update

Management Board

• The procedures for determining and publishing management board remuneration have not been substantially changed, although the requirements regarding the level and structure of the remuneration have been tweeked - if not tightened - in some respects: consideration should be given to - inter alia - the remuneration granted within the rest of the company and the company's long-term objectives.
• The variable remuneration component should be in balance with the non-variable component, be linked primarily to the company's long-term objectives and be in line with its risk profile. The committee chose not to set a limit on the variable component of the remuneration.
• The maximum severance pay of one year's salary used to apply only where the employment relationship was terminated involuntarily, but now also applies where it is terminated voluntarily by the management board member. In addition, the supervisory board's grip on management board remuneration has been further strengthened in two ways.
  • The supervisory board should - as a best practice - have the power to increase or decrease previously granted variable remuneration if it believes that such remuneration will produce an unfair result.
  • The supervisory board should be given the power to "claw back" variable remuneration that has been granted to management board members based on incorrect financial or other information.
• The obligations to provide and publish information about management board remuneration have been elaborated upon or expanded. In addition to the already existing statutory obligation to publish certain information regarding management board remuneration in the explanatory notes to the annual accounts, and the provision under the 2003 code requiring  the supervisory board's report in the annual accounts to include the main points of its remuneration report, the code now also requires that the report in the annual accounts describe transparently and understandably the remuneration policy that has been pursued. The remuneration report, to be published on the company's website, should contain additional details. These include in particular information about:
  • the cost of the remuneration;
  • the shares, options and other share-based remuneration granted to each individual management board member; and
  • the performance criteria to which the variable remuneration component is linked. 
• The new code puts more emphasise on the importance of internal risk management, including the management board's responsibility in this regard, subject to supervision by the supervisory board. The management board should include in its annual report a description of the company's risk profile, internal risk management and control systems (including any deficiencies therein); also, the management board is required to issue an "in control" statement.

Supervisory Board

• The supervisory duties of the supervisory board also extends to:
  • the relations between shareholders and the management board; and
  • to the relevant social responsibility aspects of the company's business practices.
• Although the code does not specifically require the supervisory board to mediate conflicts between the management board and one or more shareholders, there is case law suggesting the supervisory board may have a duty to do so - at least in certain circumstances. The board's chairman is the main contact person for the management board and for shareholders on matters relating to the functioning of management board members and supervisory board members.
• The supervisory board should strive for diversity in its membership, also as to gender and age.

Shareholders

• As according to the committee a company should not be at the mercy of the stock markets, several rules of conduct for shareholders have been introduced, including the willingness to enter into a dialogue with the company and fellow shareholders. The code contains several best practices for shareholders, the most important of which is the introduction of a "response time": prior to exercising his right to have an item put on the agenda for a general meeting, the shareholder should enter into discussions with the company; if the shareholder seeks to have an item put on the agenda regarding a subject that can result in a change in corporate strategy or if the shareholder seeks judicial authorisation to convene a general meeting for this purpose, he should give the management board the opportunity to invoke the right to a period of not more than 180 days in which to respond to the item in question before it is handled at the meeting. The management board should use this period for further deliberation, constructive consultation and the exploration of options. The committee recommends that this "response time" option is laid down in statute, so as to increase certainty.
• The code also imposes on shareholders a special responsibility in exercising their voting rights: a shareholder who relies on a voting recommendation by a third party - such as a proxy advisor - is expected to form his own judgment on the voting policy and advice of that third party. Moreover, a shareholder who has an item put on the agenda of a general meeting is required to explain and answer questions about that item at the meeting. A bill to implement the Shareholders' Rights Directive, that is still pending, requires a shareholder who wants to have an item put on the agenda to submit a duly reasoned request in writing.
• The company is supposed to have a policy on bilateral contacts with shareholders (that can be useful), published on its website; attention must be given to possible down-sides, in terms of unequal treatment of shareholders and the disclosure of price-sensitive information.

Recommendations

The committee has recommended the following actions to be taken by the legislature:

1. designate the December 2008 updated code as the code of conduct to which listed companies must refer in their annual report, indicating the extent to which they have complied with the best practice provisions;
2. appoint a new monitoring committee;
3. explore the possibility of introducing a "put up or shut up" rule to the Dutch public offer rules; and
4. review of the bottlenecks in statutory buy-out proceedings and the solutions that have been proposed to eliminate them.

2. The Cabinet Response

• The cabinet has indicated that it endorses the December 2008 updated code. The statute will be amended to require Dutch listed companies, as from January 1, 2010 to disclose their compliance with the updated code in the preceding financial year. The cabinet will appoint a new committee.
• Although the cabinet has expressed support for the principles underlying the committee's recommendation as to the "response time", it has chosen to embark on a different course for a number of reasons. One of them is that an extension of the present statutory period for submitting an agenda item - 60 days prior to the relevant shareholders' meeting - would significantly limit this right. Another is that such a regime would deviate from the practice in other European countries and would not be in line with the Shareholders' Rights Directive (2007/36/EC), as the directive assumes that the period during which a shareholder can exercise the right to have an item put on the agenda will be the same regardless of the subject of the item. This, in turn, means that the status of the "response time" as introduced in the code as updated in December 2008 is unclear.
• The bill incorporating some of the committee's earlier recommendations (May 2007) will apparently be submitted to the second chamber of parliament this year. This includes issues like the identification of shareholders, an increase in the threshold for the right of a shareholder to have items place on the agenda of the general meeting of shareholders and the reduction of the minimum threshold for the obligation of shareholders to disclose major holdings and/or voting rights. The cabinet indicates that a shareholder who discloses a major holding should be obliged to concurrently state whether or not he/it is agreement with the company's strategy (as described on its website). Disclosure should also be required if the shareholder's viewpoint changes. The cabinet also proposes to oblige all institutional investors in Dutch listed companies to periodically make a public statement regarding their compliance with the applicable code provisions.
• As to the "put up or shut up" issue, the cabinet is taking more time for deliberation. The cabinet will also consider whether amendments are necessary to the current statutory buy-out proceedings.