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Corporate leadership

i Board structure and practices

Dutch corporate law has traditionally provided for a two-tier board structure consisting of a management board and a separate supervisory board (each of which is governed by different statutory provisions); however, the institution of a supervisory board is only mandatory for companies subject to the structure regime. A company is subject to this regime if, for a period of three consecutive years, its issued capital and reserves amount to not less than €16 million; it has a works council instituted pursuant to a statutory requirement; and it regularly employs at least 100 employees in the Netherlands.

Since 2013, Dutch corporate law has also provided a statutory basis for the one-tier board structure. However, through the influence of international developments, the one-tier board structure had made its way into Dutch corporate practice prior to this legislation. Therefore, the Corporate Governance Code of 2008 already contained provisions relating to listed companies with a one-tier board structure. In 2016, the new Code clarified how companies with a one-tier board must apply the Code by, inter alia, specifying that the current rules for supervisory board members also apply to non-executive directors.

The reasons for companies to opt for the one-tier model vary greatly. Generally, the model is considered to be suited to:

  1. companies in a highly dynamic environment such as the technology sector;
  2. complex companies that need to act quickly in crisis situations;
  3. companies that are in the process of being listed and in which a major shareholder is closely involved in the company's management or supervision (family businesses); and
  4. companies that form part of an international group or that have an international group of shareholders.

In practice, the one-tier model and the two-tier model appear to be growing closer to one another: in companies with a two-tier board structure, the supervisory board is now expected to play a more active role, while in those with a one-tier structure it is often required that the majority of board members consist of independent non-executives. According to the new Code, the latter is also mandatory. For this reason, some commentators speak of a convergence towards a 1.5-tier structure.

Management board

The management board is charged by law with the duty to manage the company, subject to restrictions imposed in the articles of association. It is generally accepted that management in any event includes directing the company's day-to-day affairs and setting out its strategy. It should be borne in mind that in accordance with the Dutch stakeholder model, the board must take into account various interests, not only those of the enterprise and shareholders, but also those of other interested parties, such as employees and creditors.

In recent years, the average size of the boards of Dutch listed companies has declined; a significant number of companies even have two-member boards. The rise of this CEO–CFO model can be explained by a number of factors, one of which is the popularity of the executive committee, in which board members as well as senior managers have seats; in these setups, a larger management board makes less sense. Although clearly desirable in terms of efficiency, executive committees also raise several governance issues that require due consideration. The new Corporate Governance Code Committee does embrace the executive committee; however, it requires companies to render account of governance issues, such as how the interaction between the executive committee and the supervisory board will be structured. Furthermore, the executive committee's role, duties and composition must be set out in the management report.

Supervisory board

The function of the supervisory board is to supervise and advise the management board and oversee the general state of affairs within the company. Like the management board, the supervisory board must take into account the interests of the company and its enterprise, as well as those of all other stakeholders.

The supervisory board of a structure-regime company has a number of important rights, including the right to appoint, suspend and remove management board members, and the right to approve (or refuse to approve) certain management board decisions, such as a decision to issue shares, enter into a joint venture, make a major acquisition or large investment, amend the articles of association or dissolve the company.

To enable the supervisory board to perform its supervisory duties, the DCC requires the management board to provide the supervisory board at least once a year with information about the company's strategic policy, its general and financial risks and its internal control system. The Corporate Governance Code expands upon the supervisory duties: if the supervisory board consists of more than four members, it must appoint from among its members an audit committee, a remuneration committee and a selection and appointment committee, whose duties are also specified.

ii Directors (both management and supervisory board)Appointment and removal

As previously stated, management board members of structure-regime companies are appointed and removed by the supervisory board. In companies not governed by this regime, the general meeting of shareholders has this power. Under the present Corporate Governance Code, management board members are in principle appointed for a maximum term of four years, but reappointment for successive four-year terms is permitted.

With regard to their removal, it should be noted that management board members have both a corporate and an employment relationship with their company. For a long time, it was unclear whether the removal of a management board member by the supervisory board or general meeting of shareholders terminated both of these relationships, or only the corporate one. In a decision rendered in April 2005, however, the Supreme Court ruled that removal also terminates the employment relationship. Every management board member having been employed for two years or more is entitled to claim a transition payment when the contract is terminated by the employer, dissolved in court at the employer's request or has ended by operation of law. Only in exceptional circumstances, such as in the event of any seriously culpable act or omission on the employer's part, or other extraordinary circumstances, could the board member be eligible for additional severance pay, referred to as fair compensation.

Under the Corporate Governance Code, the remuneration of a management board member in the event of dismissal in principle may not exceed one year's salary (fixed remuneration component). According to the reports of the Corporate Governance Code Monitoring Committee, however, compliance with this provision in particular has been limited since the Code took effect in 2004. The reason usually given for this is the need to respect existing agreements. In its report published in December 2012, the Monitoring Committee urged that employment contracts be amended on this point; however, as follows from its latest compliance report (2015, published December 2016), non-compliance remains relatively high. The new Code of 2016 introduced the best practice that no remuneration is justified if a board member ended a contract on his or her own initiative or in the case of seriously culpable or imputable acts.

Supervisory board members of structure-regime companies are appointed by the general meeting of shareholders based on a nomination by the supervisory board. The general meeting of shareholders may, however, overrule such a nomination. The general meeting of shareholders and the works council may recommend persons for nomination. An individual supervisory board member of a structure-regime company may only be removed by the Enterprise Chamber at the request of the company, the general meeting of shareholders or the works council. However, the general meeting of shareholders may pass a vote of no confidence in the supervisory board as a whole, which results in the immediate removal of all board members. This has been attempted only once; in the Stork case (2007), the Enterprise Chamber ordered a standstill by freezing both the removal of the board scheduled by two dissenting hedge funds and the anti-takeover measures enacted by the company.

Independence and expertise

The DCC and the codes contain several provisions intended to safeguard the independence of supervisory board members, such as the absence of family ties and business interests. The Dutch Central Bank (DNB), in its capacity as the regulator of banks and insurance companies, attaches great value to the independence of supervisory board members for the purpose of good corporate governance, and in 2012, further to the provisions of the code, developed its own policy rules. It requires that supervisory board members are independent in mind (independent with respect to partial interests), in state (formal independence) and in appearance (no conflicts of interest).

A great deal of attention is being paid to the expertise of supervisory board members. For example, under the Banking Code supervisory board members are expected to have knowledge of the risks of the banking business and of a bank's public functions. Moreover, banks are expected to introduce a permanent education programme, while legislation has also been enacted: since 1 July 2012, management and supervisory board members of financial institutions have been subjected to a stricter fit and proper test, to be applied by the AFM or the DNB. In 2016, an external assessment of this process of testing was conducted by the Ottow Committee. The Committee concluded in its report that the AFM and DNB 'adequately fulfil their statutory duties' in assessing members of management and supervisory boards. Nevertheless, the Committee has put forward several proposals aimed at improving and fine-tuning fit and proper assessments to allow the two supervisory authorities to fulfil their statutory mandates even better, such as communicating more transparently about their assessment procedures. The report also contains recommendations for preserving and better safeguarding careful decision-making, fostering diversity in the financial sector, and making assessment procedures more efficient and effective. The AFM and DNB reacted to the report with a list of internal follow-up actions, which correspond with the recommendations of the Committee. In 2018, the DNB started to carry out some of these follow-up actions, such as the start of a one-year pilot with the AFM relating to the involvement of external experts when assessing members of management.

In this context, European harmonisation is intensifying and will have an important impact on national legislation. This is evidenced by the 2017 guidelines on suitability assessments of the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), and the ECB's 2017 guide to assessments of board members. The AFM and DNB support this development. As shown in 2015 by the EBA Peer Review Report on suitability, Dutch assessment procedures are considered good practice, and the proposed European assessment procedures are largely in line with the current Dutch take on assessments.

Caps on the holding of multiple supervisory board memberships

In the Netherlands, no fewer than four different regimes apply governing maximum numbers of board positions held, depending on legal form and business activity. Notwithstanding these rules, overboarding is also under close scrutiny, by investors as well as regulators.

The number of supervisory positions a management board member or supervisory board member is allowed to hold at large legal entities is limited by the DCC. In principle, a management board member may hold a maximum of two positions as a supervisory board member in addition to his or her management board position; for a supervisory board member, the limit is a total of five supervisory positions, with a position as a management board or supervisory board chair counting double. The purpose of this is not only to improve the quality of supervision, but also to eradicate the old boy network.

For listed companies, the Corporate Governance Code also contains specific anti-overboarding provisions. A management board member may not hold more than two directorships at listed companies; for a director, the maximum number of directorships at listed companies is five. Under the new Code, the approval of the supervisory board is required for a management board member of the company intending to accept a supervisory board membership elsewhere.

For banks and certain types of investment firms, the CRD IV Directive has introduced limitations for significant institutions (a concept that is elaborated upon at national level under guidance of the EBA). As a rule, a management board member is limited to two directorships, while a director can hold a maximum of four directorships (in total), or one management board position combined with one other directorship. The Dutch implementing rules, which stay very close to the CRD IV regime, entered into force in August 2014.

Diversity

Over and above these measures to improve the quality of management and supervision, rules to promote gender diversity within the management boards and supervisory boards of large companies have applied in the Netherlands since 1 January 2013, the target being a division within the board of at least 30 per cent females and 30 per cent males. The rules are of a comply or explain nature: if the target is not met this will not lead to the imposition of sanctions, but an explanation must be given in the management report as to why the target was not met and what steps will be taken towards meeting it. At the end of 2015 it was announced that these rules, which were originally meant to be abolished as of 1 January 2016, will be extended to 2019. In April 2017, the rules were formally adopted again.

At EU level, negotiations are still ongoing between the European Parliament and the Council on a draft directive promoting gender diversity within the management of large listed companies. Pursuant to the draft directive, by 2020 at least 40 per cent of the non-executive directors of such companies must be women, and heavy sanctions will apply in the event of non-compliance. However, there are strong objections on the part of a number of EU Member States, including the Netherlands, and it therefore remains to be seen in what form the directive will cross the finish line.

Finally, narrower in scope but still relevant, EU Directive 2014/95 requires large companies to have a description of the diversity policy applied in relation to the undertaking's administrative, management and supervisory bodies. This Directive was implemented in Dutch law in December 2016 and entered into force on 1 January 2017. Diversity under this Directive has a wider significance than gender alone, but also includes, inter alia, background, expertise, nationality and experience.

Collective responsibility

Under Dutch corporate law, the management of a company is in principle the responsibility of the board members collectively as well as of each board member individually. The company's articles of association or internal rules may, to some extent, assign certain specific duties to individual board members, but the board as a whole remains responsible. The Management and Supervision Act, which has created a basis for the one-tier board model, expressly authorises the allocation of duties between one or more non-executive members and one or more executive members of a one-tier board. In this case, too, however, the board as a whole remains responsible for the company's management, including the non-executive members (see below).

Representation

The power to manage the company entails, inter alia, the power to represent it in transactions with third parties. Under the DCC, both the management board as a whole and each board member individually have this power. The articles of association may, however, limit or exclude the individual representative power of one or more board members. For example, the articles may provide that the company may only be represented by the board as a whole or by the chair and the financial director acting together.

Conflicts of interest

Neither a management board member nor a supervisory board member will be permitted to take part in any discussion or decision-making that involves a subject or transaction in relation to which he or she has a conflict of interest. The DCC provides subsequently that if the board member nevertheless does take part, he or she may be liable towards the company, but the transaction with the third party will in principle remain valid.

Internal liability

A management board member who has performed his or her duties improperly may be held personally liable to the company. The same liability rules also apply to supervisory board members. In principle, each board member is liable for the company's general affairs and for the entire damage resulting from mismanagement by any other board member (under the principle of collective responsibility). A board member may, however, avoid liability by proving that he or she cannot be blamed for the mismanagement. The allocation of duties between the board member and his or her fellow board members is one of the relevant factors in that respect. With respect to the one-tier board model, the explanatory memorandum to the Management and Supervision Act specifically states that an internal allocation of duties among the board members is permitted, but that this does not change the directors' collective responsibility for the company's management. The non-executive board members (i.e., those not charged with attending to the company's day-to-day affairs) may therefore be held liable for the mismanagement of an executive board member. For that reason, it is advisable that board members keep each other informed of their actions and actively inform each other, sometimes also referred to as a monitoring duty.

Personal liability of directors (in particular of non-executive directors) is not established easily. It is a well-established concept of Dutch law that personal liability should only arise in situations of apparent mistakes or negligence. In this context, the concepts of, for example, severe fault and apparent mismanagement are developed in case law or are part of statutory provisions. Recent case law, however, reminds us that this does not imply immunity.

The Supreme Court has held that only the company, or a bankruptcy trustee in cases of insolvency, may sue a board member for mismanagement under Article 2:9 of the DCC; there is no shareholder derivative action under Dutch law. However, in certain situations directors may incur personal liability as regards third parties, such as shareholders or creditors of the company on account of tort or on account of specific provisions in the law, such as in the case of insolvency caused by apparent mismanagement.

External liability

As a general rule, management board members will not be personally liable for the company's debts or other obligations as regards creditors or other third parties. Liability might only ensue if that board member can be seriously blamed for having conducted a wrongful act on the company's behalf towards a third party; is subject to liability pursuant to certain specific statutory grounds; or is penalised pursuant to criminal or administrative law. A parent company or its directors may, under certain circumstances, also be liable for the debts of a subsidiary. In an important case at the end of 2015 concerning a takeover of a listed company, both the management board members and the supervisory board members were held liable, the latter for inadequate supervision.

If a company is declared bankrupt, special rules – including certain evidentiary presumptions – apply. Under these rules, each management board member is personally liable for debts that cannot be satisfied from the assets of the bankruptcy estate if the management board was guilty of clear mismanagement during the three-year period preceding the bankruptcy and it is likely that this was an important cause of the bankruptcy. Under Article 2:138(2) of the DCC, the failure of the management board to comply with its accounting obligations and its obligation to file the annual accounts constitutes an instance of clear mismanagement and a presumption that the mismanagement was an important cause of the bankruptcy. Persons who have co-determined the company's policy can also be held liable under these rules. Beyond the situations described above, clear mismanagement constitutes conduct that is seriously irresponsible, reckless or rash; the trustee in bankruptcy must show that no reasonably thinking board member would have acted in this way under the same circumstances. Supervisory board members are not immune in this respect. In two major bankruptcies of listed companies in 2013, both the management board members and the supervisory board members were held liable, the latter for inadequate supervision. Subsequently, in another large bankruptcy in 2015, the Enterprise Division of the Amsterdam Court of Appeal also held the management board members and supervisory board members liable, ruling that they were responsible for mismanagement.

In an important ruling in 2016, the Dutch Supreme Court ruled that if, in the light of what is generally accepted in society, a tortious act committed by the founder of a private foundation (stichting particulier fonds: a specific variant of the legal form of a foundation) is to be considered an act of the private foundation, the private foundation can be held liable for the act, resulting in a tort liability of the private foundation.

Standardisation of rules for all legal entities

As of 2014, draft legislation had been drawn up with the aim of standardising the rules on the responsibilities of management board members and supervisory board members for all the different types of legal entities. This also applies to the rules on conflicts of interest and on liability. The new legislation will not result in any substantive changes for companies with a share capital. A draft bill was presented to Parliament in 2016 and was expected to be implemented no later than July 2017. However, after a number of critical questions of Parliament, the draft bill was amended to a considerable extent, which has slowed down the process. A new date of entry into force is unknown.