Monitoring Committee presents updated corporate governance code
On 10 December 2008 the Monitoring Committee Corporate
Governance Code (the "Committee") published an adjusted
version of the corporate governance code (the "Code").
The Code applies to all listed companies with their statutory seat
in the Netherlands. The renewed Code enters into effect as of the
financial year starting on or after 1 January 2009 and replaces the
original version effective since 2004, also referred to as the
"Code Tabaksblat". This article provides a short
elaboration of the main amendments.
The intention behind
the adjustments of the Code
Partly in reaction to the various accounting scandals, the
original Code was particularly aimed at the recovery of trust in
the corporate sector, while emphasizing transparency and
accountability. Various developments in the past years, however,
have led to a call for adjustment; new legislation and case law,
the rise of activist shareholders and criticism on the
remunerations of directors which were sometimes deemed exorbitantly
high, as well as criticism on the greater power enjoyed by these
shareholders. Therefore, in the spring of 2008, a number of
interested parties, including trade unions, trade associations and
under the support of the government, requested the Committee to
proceed to update the Code.
Under the supervision of Jean Frijns, former director of ABP
Vermogensbeheer and professor occupying an endowed chair
Beleggingsleer (Research in Finance) at the Vrije
Universiteit of Amsterdam, the Committee concluded that by
adjusting the Code more emphasis must be put on stimulating
desirable behavior in directors, supervisory directors and
shareholders, in which a principle-based approach is desirable in
deviation of the earlier version which had a rule-based approach.
The Committee is of the view that too much emphasis was put on the
compliance with very detailed accounting regulations, with the
consequence of a tick-a-box mentality, whereas the really important
issues were not discussed sufficiently. The purpose therefore was
to put more emphasis on how the various parties involved perform
their duties in practice, and thus to advance that the intentions
of the Code will become guiding for their
behavior.
Amendments to the Code
The above-mentioned intentions have been elaborated by a number
of amendments of the Code, the most important of which are as
follows:
Risk Management
The importance of integral risk management is emphasized more. A
risk management and control system that is focused on the
undertaking must be created by the board of directors, under the
supervision of the supervisory board. Next, in the annual report
the board of directors must give a description of the most
important risks that are connected to the strategy of the company,
as well as a report on the operation and possible shortcomings of
the risk management and control system. To conclude, the board of
directors must state in the annual report that the above-mentioned
system provides a reasonable extent of guarantee that the financial
reporting does not contain any flagrant inaccuracies and has
functioned properly.
Response Time
When one or a number of shareholders has the intention to
initiate a change of strategy, the board of directors has the
opportunity to use a reasonable period to react thereto (the
response time). This response time is not longer than 180 days,
must be filled in actively by the board of directors and may not be
used as a disguised anti-takeover mechanism. The supervisory board
supervises this. The rationale behind this response time is,
according to the Committee, that it may be expected of the
shareholders that they are prepared to enter into a dialogue with
the board of directors. The Committee has recommended to the
legislator to lay down the response time in law
too.
Acquisition Situations
In acquisition situations, the board of directors must involve
the supervisory board earlier and more closely. The same applies if
a competitive bidder presents itself. This is meant to prevent that
in the event of the weighing of interests in the case of an
acquisition, too much value is attached to the highest price for
the shares, and the possible sectional interests for individual
directors that are connected thereto.
Remuneration
Structure
With regard to the remunerations for directors the supervisory
board has been granted more tools. For instance, for the adoption
of the remuneration policy, the supervisory board has to make an
analysis of the scenario in advance, has to observe the
remuneration proportions within the undertaking and the development
of the results, and has to guard the balance between fixed and
variable remuneration components. In addition thereto, the
supervisory board gets the opportunity to adjust an awarded
variable remuneration in the event of an unfair outcome or even to
claim back this remuneration in arrears by means of a claw-back
clause. The remuneration policy must eventually lead to a long-term
value creation. To conclude, the manner of making the remuneration
of the board of directors public has been
simplified.
Supervisory Board
In addition to the fact that the supervisory board is involved
more intensively and has received more powers, a new provision is
included entailing that in the process of composing the supervisory
board, attention must be given to diversity, amongst other things
with respect to sex and age. The other rules that apply to the
supervisory board - in particular to the chairman thereof - have
been drafted in more general wordings and are therefore more in
line with the principle-based approach of the Code.
General
Meeting of Shareholders
To conclude, a number of new provisions with regard to the
shareholders have been included. The Code is no longer only
directed at institutional investors. A distinction is now made
between the responsibility of institutional investors and the
responsibility of shareholders. As under the former Code,
institutional investors may primarily act in the interest of their
ultimate beneficiaries. However, a new provision is the
responsibility of shareholders, meaning that they are now
explicitly deemed to behave according to standards of
reasonableness and fairness and must vote at their own
discretion.
The above is a short summary of the most important amendments to
the Code. The Committee has requested the legislator to designate
the new Code, as a replacement of the former version, pursuant to
Section 2:391 (5) of the Dutch Civil Code by governmental degree as
a code of conduct with regard to which listed companies can report
in their annual report about the compliance with this code. For the
full version of the Code and additional information (in Dutch)
please visit
http://www.commissiecorporategovernance.nl/.
If you have any questions, please do not hesitate to contact one of
the persons mentioned below.
Maurits Bos
Tel: +31 20 5506 803
E-mail:
maurits.bos@kvdl.nl
Louis Bouchez
Tel: +31 20 5506 692
E-mail:
louis.bouchez@kvdl.nl