On 8 December 2016 the Dutch Corporate Governance Code Monitoring Committee published the revised Corporate Governance Code. The new Code will take effect on 1 January 2017, which means that management reports for the year 2017 will have to comply with its provisions.
The changes will require for many companies to amend their rules governing their supervisory board ("SB"). We are in the process of drafting standard rules which meet the new Code's requirements and will make this available to you on our website.
Main differences between consultation version and final version
A consultation version of the revised Code was published in February 2016. See our newsletter of 11 February 2016. The final version differs from the consultation version in many respects. For example, the provision in the consultation version on the establishment of a special takeover committee was scrapped. The same applies to the provision requiring at least one SB member to have specific expertise in the fields of technological innovation and new business models. Another difference is that there is now more room for the appointment of SB members who are associated with major shareholders. The possibility of share-related remuneration to SB members has been eliminated. A striking change is that depositary receipts for shares may not be used as a protective device while in the consultation version this was possible under certain conditions. Noteworthy additions are the requirement that the remuneration report explain and justify the differences in internal remuneration levels and the stricter provisions on severance pay.
Highlights of the new Code
Stricter reporting requirements
- Companies must explain how they have applied the Code, not only how they have deviated from it;
- Deviations from the Code must be explained more fully; In the event of deviations longer than a year companies must indicate when application will start or resume;
- A description must be given of any alternative measures taken.
Long-term value creation now a central feature
- The management board ("MB") must formulate its view on long-term value creation and convert it into a strategy;
- The SB is engaged early on in developing the strategy;
- The view, strategy and realisation must be explained in the management report;
- The SB must explain its involvement in developing and supervising the realisation of the strategy in the SB report.
New theme: culture
- The MB is responsible for focus on long-term value creation under supervision of SB;
- The MB must adopt values and propagate these values through leading by example;
- In the management report values, incorporation thereof and compliance of the code of conduct must be explained.
Expansion of rules reporting misconduct
Risk management and internal control
- The MB is responsible for establishing the company's risk appetite;
- The risk management and internal control systems must be integrated into the company's work processes and be familiar to employees. When monitoring the effectiveness, the MB must give attention to the ‘lessons learned’;
- The in-control statement must be expanded to state, among other things that: (i) the preparation of the financial reporting on a going concern basis is justified; and (ii) the relevant material risks and uncertainties regarding the company's continuity (for the coming year) have been included in the management report.
Role of internal audit department (IAD) strengthened
- In the absence of an IAD: the audit committee must annually review the necessity of an IAD and the existence of adequate alternative measures. The SB report must include the conclusions (and recommendations, if any) from the review;
- The IAD head is appointed and removed by the MB, with advice from the audit committee and subject to the SB approval;
- The IAD head's performance must be reviewed annually by the MB, with input from the audit committee;
- After being coordinated with the external auditor, the work schedule must be submitted to the MB and SB for approval;
- The IAD must have (i) sufficient resources to implement the work schedule and (ii) direct access to the audit committee, the external auditor and all relevant information;
- The internal auditor must report investigation results in full to the MB and in summary to the audit committee; the external auditor must also be informed.
Addition of various new provisions regarding MB
- Each MB member must have the specific expertise that is necessary to perform his/her duties;
- The MB must conduct an annual self-assessment;
- Like SB members, MB members must participate in a training programme.
- There is no concrete blueprint for an executive committee, but the MB's expertise and proper performance of its duties must at all times be secured;
- The committee's role, duties and composition must be set out in the management report;
- The management report must also explain the reasons for instituting an executive committee and how its interaction with the SB will be structured.
Clarification of SB's role
- The SB must draw up a diversity policy for the MB;
- There is now more room to appoint major shareholders (≥10%) or their representatives to the SB without violating the independence requirements;
- The SB chairperson is independent;
- If an SB member resigns early the company must issue a press release stating the reasons (also applies to early resignation by an MB member or the external auditor);
- The term of appointment has been shortened to 2 four-year terms with an option to reappoint for 2 years and then for an additional 2 years. The reasons for reappointment after 8 years must be explained in the SB report;
- A company secretary with a double role (SB and MB) must report any conflict of loyalties to the SB chairperson.
Rules on remuneration simplified and rules requiring publication of remuneration partially scrapped
- MB members must give the remuneration committee input regarding their own remuneration;
- The remuneration of SB members must be in line with the time spent;
- Severence pay is limited to one year's salary and may not be awarded if MB member terminates agreement early or is guilty of seriously culpable or negligent conduct.
Clarification of how one-tier board must apply Code
- The independence requirements for non-executive directors are the same as those for SB members;
- Board chairperson is independent and not a former executive director;
- Non-executive directors must account for how they have performed their duties in report (analogous to the SB report).
Three action points
1. Update SB and MB rules of procedure
Certain changes in de Code may have to be incorporated in your SB and MB rules. Think in particular of the shortened maximum term of appointment for SB members and the changes in independence requirements.
2. Evaluate procedures and policy
It is advisable to evaluate current processes and policies following the new Code. Consider in particular the new provisions on (i) the functioning of the IAD, (ii) risk management systems and (iii) the reporting of irregularities.
3. Implement reporting changes
The management report must be expanded in a few respects. The remuneration report may be simplified while the comply-or-explain and in-control statements must be sharpened.