There is currently a great deal of activity around the issue of diversity at the top of companies, both at EU level and at national level in the Netherlands (as well as elsewhere). The initiatives vary widely in their aims: from increasing transparency to imposing concrete quotas and from increasing the representation of women to improving diversity in terms of a broader range of factors such as age, experience and background. There are also differences in scope: in some cases the focus is solely on supervisory boards, although in many cases management boards are also the subject of attention. Furthermore, where some rules are directed only at listed companies, other rules apply also to other (usually large) companies. In this newsletter, we give an overview of the current state of affairs as well as a preview for 2016.
Diversity Directive proposal
In November 2012, the European Commission published a proposal for a directive aimed at improving the gender balance (i.e. increasing the number of women) in top positions at listed companies. Under the proposal, at least 40% of the non-executive directors – which includes supervisory board members in companies with a dual-board system and the non-executive board members of a company with a unitary board – must be members of the "under-represented sex". On 7 December 2015 the European Council rejected a compromise proposal by the Luxembourg presidency. The Netherlands, which will take over the presidency in January 2016, voted against the proposal on the grounds that its subject is not an appropriate one for EU-level legislation. In view of these developments, the adoption of this directive seems a distant prospect and it is equally uncertain what it will ultimately provide, if adopted.
Implementation of EU Non-Financial Reporting Directive (Directive 2014/95/EU)
Pursuant to the Non-Financial Reporting Directive, which amends the non-financial reporting provisions of the Accounting Directive, "public-interest undertakings" (in short: listed companies, banks and insurers) with more than 500 employees will be required to include in their management report a description of the diversity policy applied in relation to the undertaking's management board and supervisory board, the objectives of that policy, how it has been implemented and the results. Age, gender, and educational and professional backgrounds are given as examples of aspects of diversity that can be covered by the policy. The directive takes a "comply or explain" approach: if a diversity policy is not applied, the reasons for this must be given.
In the Netherlands consultations have recently been started on two draft implementing decrees, one that will apply to specifically to listed companies and one that will apply to all public-interest undertakings (organisaties van openbaar belang). Both decrees are necessary because, in the case of listed companies, a description of the undertaking's diversity policy must be added to the corporate governance statement it is already required to include in its management report. For all other large public-interest undertakings, a new statement will have to be added to their management reports. The consultation period on the decrees will close on 6 January 2016. Neither decree contains any surprises relative to the directive. The decrees will enter into force on 1 July 2016 and apply for financial years commencing on or after 1 January 2017.
Extension of gender diversity targets on boards
Since 1 January 2013 the Dutch Civil Code has required large companies (listed or unlisted) to strive to achieve a balanced gender distribution within their management and supervisory boards: at least 30% women and at least 30% men (sections 2:166/276 DCC). If the targets are not met, the company must disclose in its annual report the reasons for this failure, the measures that were taken in an attempt to meet the targets and the measures that will be taken to meet them in the future (section 2:391(7) DCC). Pursuant to the Management and Supervision (Companies) Act, which introduced the relevant DCC provisions, these provisions expire on 1 January 2016.
On 16 November 2015 the Minister of Education, Culture and Science announced that the government will soon be introducing a bill extending the term of the abovementioned statutory provisions. According to the Minister, this is necessary because studies have shown that although the percentage of women on boards has increased since the targets were introduced, this has only been a small increase.
Shortly after the announcement of this bill, the Minister of Security and Justice confirmed that the Management and Supervision (Companies) Act, including the provisions on targets, will be evaluated in 2016 as planned. It is unclear how this evaluation can be reconciled with the extension announced by the Minister of Education, Culture and Science, especially since the initiative for such an extension must come from the Ministry of Security and Justice.
Because the bill is highly unlikely to be adopted before the end of 2015, there will probably be a period during which the target rules do not formally apply and a failure to meet the targets need not, strictly speaking, be reported. Such reporting is nevertheless advisable both because it is prudent to comply with the announced legislative change and because the benefit of maintaining continuity in reporting outweighs the benefit of taking advantage of a temporary and unintentional legal vacuum.
Revision of Dutch Corporate Governance Code
The Corporate Governance Code states that supervisory boards must aim towards a diverse composition in terms of factors such as gender and age, and that specific diversity objectives must be set out in the board's profile (Principle III.3 and Best Practice III.3.1).
In its compliance report (for the financial year 2013) published in January 2015, the Corporate Governance Code Monitoring Committee has stated that the manner in which companies follow the guidance given by the Committee earlier with regard to the diversity policy "leaves room for improvement". Furthermore, according to the Committee, there are wide variations in the manner in which diversity objectives are formulated, companies give limited information on the achievement or non-achievement of these objectives and only a few companies have demonstrated that they are actively working towards achieving the objectives. In view of this criticism and the resulting calls by the government for improvements on this front, it is expected that the Committee will address the subject in greater depth in the announced revisions to the Code (a consultation document is to be published in early 2016).
Diversity is high on the agenda of various lawmakers and other authorities. Although it remains uncertain what direction policy on the subject will take in the Netherlands, the most likely scenario is that a combination of self-regulation and non-binding statutory targets will continue to apply, partly because studies have shown that this approach has had positive results and partly because the government appears to be reticent about imposing more coercive measures such as mandatory statutory quotas. Much will depend on developments at EU level as well as on whether the proportion of women in management boards and supervisory boards continues to increase and whether large companies improve their reporting on the extent of their progress towards meeting the targets (at present fewer than 10% report on this aspect). Otherwise, it is conceivable that a mandatory quota for women will be introduced in 2019 – assuming this is when the system of targets (if extended) will terminate – as has been done in Germany (where the relevant rules take effect on 1 January 2016). An initial important barometer will be the evaluation in 2016 of the Management and Supervision (Companies) Act.