On 8 December 2016 the Dutch Monitoring Committee Corporate Governance Code presented the revised Dutch Corporate Governance Code (applicable to Dutch listed companies) to the Dutch Minister of Economic Affairs.
The Monitoring Committee revised the Code after it presented a consultation document with proposals for the revision of the Code on 11 February 2016. Over 100 reactions of stakeholders and other interested parties were submitted to the Monitoring Committee. Also CMS responded to the consultation document.
The revised Code shall be effective as per the financial year 2017. Companies listed in the Netherlands shall therefore have to report on the application of the revised Code in their management report over the financial year 2017 for the first time.
The revisions may be classified in seven themes:
- increased focus on long-term value creation;
- reinforced risk management;
- new accents in effective management and supervision;
- introduction of culture as explicit part of corporate governance;
- remuneration: clear and understandable;
- relationship with shareholders;
- clarification on the requirements to the quality of explanation.
1. Increased focus on long-term value creation
The revised Code focuses on the long-term value creation of the company and its affiliated enterprise. The management board shall develop a view on long-term value creation by the company and its affiliated enterprise and shall formulate a strategy in line therewith. In a best practice provision several aspects are mentioned which play a role in the strategy of the company, including several non-financial aspects, such as the environment, social and employee-related matters and the fight against corruption. In the management report, the management board shall give a more detailed explanation of its view on long-term value creation and the strategy for its realization, as well as describing which contributions were made to long-term value creation in the past financial year
2. Reinforced risk managemen
In the revised Code the provisions on risk management are extended.
- The phases of risk assessment, implementation and evaluation have been worked out in more detail in best practice provisions;
- The best practice provisions on the internal audit function have been further expanded in order to strengthen the position of the internal audit function;
- The management board shall state in the management report, with clear substantiation, that: i. the report provides sufficient insights into any failings in the effectiveness of the internal risk management and control systems; ii. the aforementioned systems provide reasonable assurance that the financial reporting does not contain any material inaccuracies; iii. based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis (new); and iv. the report states those material risks and uncertainties that are relevant to the expectation of the company's continuity for the period of twelve months after the preparation of the report (new).
- The supervisory board shall be permitted to examine the most important discussion items arising between the external auditor and the management board based on the draft management letter or the draft audit report.
3. New accents in effective management and supervision
The Code has been revised on a number of items with a view to recent developments in the field of management and supervision.
The executive committee, a management layer under the responsibility of the management board, has been given a place in the Code.
If the management board works with an executive committee, the management board shall take account of the checks and balances that are part of the two-tier system (comprising of a management board and a supervisory board). In the management report, account shall be rendered of the choice to work with an executive committee, the role, duty and composition of the executive committee and how the contacts between the supervisory board and the executive committee have been given shape.
One tier board
Contrary to earlier announcements, the Monitoring Committee shall not make a separate version of the Code applicable to companies with a one tier management system (being a system with one management body consisting of executive directors and non-executive directors). Instead, the Monitoring Committee added one principal and five best practice provisions to the Code specifically applicable to companies with a one tier management system. Provisions in the Code applicable to supervisory directors are also applicable to non-executive directors, without prejudice to their other responsibilities as non-executive director.
The best practice provision applicable to the diversity policy is expanded to the management board and, if installed, the executive committee. The Monitoring Committee is of the opinion that, apart from gender, also aspects of age, nationality, expertise, independence and experience are of importance. The corporate governance statement shall explain the diversity policy and the way that it is implemented in practice, addressing the policy objectives, how the policy has been implemented, and the results of the policy in the past financial year.
The best practice provision applicable to the expertise of supervisory directors is expanded to the management board. The earlier suggested addition that at least one supervisory director has specific expertise on current and future technological innovation and business models has not been included in the revised version of the Code.
Independence of supervisory directors
The Monitoring Committee is of the opinion that committed shareholders are beneficial to the long-term value creation. The Monitoring Committee therefore proposed that more than one supervisory director may be not independent due to him or her (or their spouse) holding more than 10% of the shares in the company or he or she representing a legal person holding more than 10% of the shares in the company. However, the majority of the supervisory directors shall be independent. Furthermore, the chairman of the supervisory board must be independent.
Terms of appointment
In line with corporate governance codes applicable in other countries, the term of the appointment of supervisory directors is shortened from 3 periods of 4 years to 2 periods of 4 years. Thereafter, the supervisory director may be reappointed for a period of two years, which appointment may be extended by maximally two years. In the event of a reappointment after an eight-year period, reasons shall be given in the report of the supervisory board. In the event of the early retirement of a member of the management board or the supervisory board, the company shall issue a press release mentioning the reasons for the resignation.
The revised term of appointment for supervisory directors does not apply to supervisory directors who, as of the date of the revised Code becoming effective, have already been in office for more than 8 years, and to supervisory directors who are nominated for reappointment for a third four-year period at a general meeting in 2017.
Managing directors and supervisory directors shall report any other positions they may have to the supervisory board in advance. At least annually, such other positions shall be discussed in a supervisory board meeting. Accepting a position as supervisory director by a managing director, requires the approval of the supervisory board.
No special committee in case of takeovers
Contrary to the consultation document, the revised Code does not prescribe that in takeover situations a special committee shall be installed.
4. Introduction of culture as explicit part of corporate governance
The Monitoring Committee is of the opinion that the culture of the company is important for an effective corporate governance of the company. The revised Code therefore includes the following provisions:
- The management board is responsible for creating a culture aimed at long-term value creation for the company and its affiliated enterprise. The supervisory board shall supervise the activities of the management board in this regard. The management board and the supervisory board shall actively promote a culture of openness and approachability within the organization.
- The management board is responsible for the incorporation and maintenance of the values within the company and its affiliated enterprise and shall discuss these with the supervisory board. Attention must be paid to the following, among other things: i. the strategy and the business model; ii. the environment in which the enterprise operates; and iii. the existing culture within the enterprise, and whether it is desirable to implement any changes in this.
- The management board encourages behaviour that is in line with the values, and propagates these values through leading by example.
- The management board shall draw up a code of conduct and monitor its effectiveness and compliance with this code, both on the part of itself and of the employees of the company. The management board shall inform the supervisory board of its findings and observations relating to the effectiveness of, and compliance with, such code. The code of conduct will be published on the company's website.
- If the company has established an employee participation body, the conduct and culture in the company and its affiliated enterprise shall also be discussed in the consultations between the management board, the supervisory board and such employee participation body.
- In the management report, the management board shall explain the values and the way in which they are incorporated in the company and its affiliate enterprise and the effectiveness of, and compliance with, the code of conduct.
- The management board shall inform the chairman of the supervisory board without delay of any signs of actual or suspected material misconduct or irregularities within the company and its affiliated enterprise.
5. Clean-up and simplification of remunerations
Due to recent changes in the law and that fact that remunerations in practice are often structured in a complex and therefore non-transparent way, the Monitoring Committee proposed to abolish detailed provisions in this respect and to bring the principles and best practice provisions with regard to remunerations back to the core:
- The remuneration policy applicable to managing directors shall be clear and understandable and shall focus on long-term value creation for the company and its affiliated enterprise.
- The remuneration policy shall not encourage managing directors to act in their own interest, nor to take risks that are not in line with the strategy formulated and the risk appetite that has been established.
- In drawing up the remuneration policy, the pay ratios within the company and its affiliated enterprise are taken into account;
- In order to involve the managing directors more directly in their remuneration, the remuneration committee shall take note of the views of the individual managing directors with regard to the amount and structure of their own remuneration.
- If the management board works with an executive committee, the management board shall inform the supervisory board about the remuneration of the members of the executive committee who are not managing directors.
- The remuneration of the supervisory directors shall reflect the time spent and the responsibilities of their role.
- The earlier proposal that supervisory directors may be remunerated in shares in the company, has been deleted. Based on the reactions on the consultation document, the Monitoring Committee is of the opinion that the need for share based remuneration of supervisory directors is less than what it anticipated earlier.
6. Relationship with the shareholders
Whereas at this moment there are several discussions and developments taking place with regard to the rights and responsibilities of shareholders, the number of revisions in the Code in respect of shareholders is limited.
Managing directors and supervisory directors nominated for appointment shall attend the general meeting at which votes will be cast in respect of their nomination; they may be questioned personally by the shareholders.
7. Clarification on the requirements to the quality of explanation
The revised Code gives more guidance to the use of the comply or explain principle, by providing for a number of elements the explanation shall always need to include.