Corporate governance: New governance code sets the Netherlands on track

Steven Schuit, Allen & Overy

With its new corporate governance code, adopted on December 9 2003, The Netherlands has jumped from being one of the worst countries in Europe for governance to one of the best. Indeed, Subject to expected changes in the Dutch large-company rules, it may catapult the Netherlands to second in Europe in corporate governance terms.

In the Netherlands the need for improved corporate governance was strongly felt. The reputation of the Netherlands was tainted in the absence of proper accountability to shareholders and weak minority protection, ranking below Italy and Portugal for the quality of its corporate governance. The Netherlands' bad reputation was due particularly to its panoply of anti-takeover devices and large-company rules. But the practical effect of these protective devices has been curtailed in recent court cases, and the new corporate governance code takes a strong position against using the most disliked device, the Dutch form of a voting trust (stichting administratiekantoor), which in most cases emasculates shareholders completely.

Corporate governance is at the heart of the Action Plan of the European Commission dated May 21 2003, which is a response to the Winter Committee Report. The Commission favours corporate governance rules set on a country-by-country basis. In the short term it proposes:

• annual corporate governance statements on the main elements of a company's corporate governance structures;
• clear rules concerning independent non-executive directors and minimum standards on composition, nomination, remuneration and audit committees, which are enforceable, at least, on a comply-or-explain basis; and
• clear rules concerning the disclosure of remuneration policy in annual accounts.

The new Dutch corporate governance code will achieve all of this and more. It is based largely on the UK Combined Code, and yet the Dutch code differs in several key ways from its UK equivalent.

The Combined Code applies to English companies that are listed on the London Stock Exchange while the Dutch code applies to all Dutch companies, wherever listed. This may create problems for companies that must comply with codes in various jurisdictions. The Dutch followed the Germans in this respect; the Deutsche Kodex applies to all German companies, irrespective of whether they are listed in Germany or elsewhere.

The Dutch code is detailed and is in many respects prescriptive, while the Combined Code is more principles based.

The Dutch code specifically states that a company is in full compliance on a specific best-practice provision, even if it does not comply with that provision of the code, if the shareholders' meeting has approved this deviation. In other words, the shareholders' meeting can cure any non-compliance of one or more best-practice provisions. It is not clear whether this approval must be given annually.

A panel consisting of representatives of various industry and shareholders' organizations, including Euronext Amsterdam, compiled the Dutch code, which the minister of finance has already approved. A Bill is pending in parliament that will allow the government to require that companies comply in their annual reports with the relevant provisions of the corporate governance code by way of the comply-or-explain rule. That legal requirement will not take effect before January 1 2005 but the code states that it comes into force with effect from the financial year starting on or after January 1 2004.

It encourages companies to explain "how they expect to comply with this code and what problems they anticipate" in their next annual general meetings (that is, during March to April 2004). Companies are recommended to add to the agendas of their annual meetings in 2004 the new chapter on corporate governance with regard to the annual report 2003. The code was adopted on December 9 2003 so Dutch companies have only a few months to prepare themselves for a sparkling debate with their shareholders. Different approaches are being taken. Certain companies have already created all the necessary instruments and made clear decisions to meet the requirements of the code. Others have taken a more relaxed approach and given priority to the hottest item: the remuneration report that must be published on the basis of a remuneration policy approved by shareholders. Discussion during the past couple of years concerning corporate remuneration has culminated in a confrontational debate about the salary, stock options, bonus shares and other perks of the new chief executive officer for Ahold. The Dutch pension funds PGGM and ABP both voiced their dissatisfaction with this remuneration plan, deemed to be inconsistent with practice in the Netherlands and badly explained to the shareholders. The corporate governance committee has taken charge of the issue and the code contains several principles and best-practice provisions to regulate these remuneration issues.

The draft code was published for consultation purposes on July 1 2003. The committee received 275 reactions from various institutions, companies and professional firms. The draft code was heavily debated in the press, during seminars of professional firms and during meetings behind closed doors between leading members of supervisory boards of large Dutch companies. These discussions were often very animated. The chairman of the corporate governance committee, former Unilever chairman Morris Tabaksblat, vigorously defended most of the provisions of the draft code including the provisions on limitation of board memberships and the independence rules. Consequently, members of a Dutch supervisory board may not hold more than five board positions with other Dutch-listed companies and their appointment cannot exceed three four-year terms. One member of the supervisory board must be a financial expert and all other members except one must be independent as defined in the code. The chairman of the supervisory board cannot be a former member of the management board of the company and cannot be the chairman of the remuneration committee.

Much attention has been given in the code to the role of the shareholders' meeting. This is a sore point, particularly in view of the large-company rules that apply to most listed companies in the Netherlands and that frustrate shareholders' rights almost completely. These rules represent the Dutch form of workers' co-determination. They require a company to have a supervisory board that appoints the management board. The supervisory board is not appointed by the shareholders' meeting, but by itself. This co-optation system is only subject to non-binding recommendations by the shareholders' meeting and the company's works council. Also, the supervisory board adopts the annual accounts - the subsequent approval by the shareholders' meeting is a mere formality. The corporate governance committee was heavily criticized throughout June to August 2003 for not making drastic proposals to change these rules, but these accusations were addressed to the wrong party. Any change to these rules requires a change in the law, which is the prerogative of the Dutch government and parliament. The Dutch government understood the message and rushed a change to the large-company rules through the Lower House that will meet some, but definitely not all, of investors' demands. The new rules are complicated and lack clarity. The Dutch senate is considering whether it will give its blessing to this Bill, and the Dutch government seems to believe that it should go for complete abolition of these large-company rules. Hopefully the direction the government and the senate are to move in will be known within weeks.

Although these large-company rules have not been amended or abolished yet, the new corporate governance code in the Netherlands is a step forward. All companies are working on improvements to their corporate governance and are focussing on corporate governance standards that are the best in continental Europe. The code is worth reading. An English translation is available on: www.commissiecorporategovernance.nl