On 11 February 2016, the Dutch Corporate Governance Monitoring Committee chaired by Jaap van Manen published its proposals for a revision of the Dutch Corporate Governance Code. We already reported on this event in our brief newsletter of the same date. In this follow­up publication, we will explore a couple of important themes in the Committee's proposals for a revised Code in more detail. 

Focus on longe term value creation

The theme 'long term value creation' is a central feature in the consultation document. The Committee wants to see the notion of long term value creation embedded in the business model of listed companies. The management board is expected to formulate a vision on long term value creation. The management board should also involve the supervisory board in this process. This vision in turn should be worked out into a strategy. In formulating this strategy, which according to the Committee should be subject to approval of the supervisory board, the management board would among other things have to consider factors regarding the implementation of the strategy and the feasibility thereof, risks and opportunities pertaining to the strategy, non­financial aspects of corporate social responsibility concerning the strategy and the way in which the interests of the company's stakeholders have been considered in connection with the strategy.

Furthermore, the Committee proposes a specific best practice provision to be included in a revised Code pursuant to which the management board should provide a substantive account in the management board report of its vision on long term value creation, the strategy in furtherance thereof and the way in which the activities in the relevant financial year have contributed thereto. The aim of the Committee's proposal in this respect appears to be twofold. Firstly, the Committee wants to induce listed companies to translate their long term oriented strategy into a specific account. This account should then serve to win over shareholders and other stakeholders for the orientation on long term value creation of the relevant listed companies. We wonder whether this approach will prove effective against the background of the forces at play within the international capital markets. It is one thing for the boards of a listed company to determine a long term oriented vision and strategy for the company, but ultimately it is the market that determines whether or not the boards will be allowed to realise this vision and this strategy. Whether this can be achieved by having listed companies actively propagate their orientation on long term value creation remains to be seen.

The focus on long term value creation set out above is also relevant as background to the Committee's decision not to heed to the call of the Dutch Minister of Finance Jeroen Dijsselbloem to discourage listed companies from issuing voluntary quarterly reports. Contrary to the Minister of Finance, the Committee does not regard the publication of quarterly figures as an instigation for short termism. Even so, the Committee in its report emphasises the importance of incorporating long term perspectives into quarterly reports. This stance is to some extent similar to the recent appeal of BlackRock's CEO to listed companies worldwide to adopt a more long term perspective in periodical reporting ("…CEOs should be more focused in these reports on demonstrating progress against their strategic plans than a one­penny deviation from their EPS targets or analyst consensus estimates."). Again, one may ask whether emphasising long term perspectives in periodical disclosures to shareholders will indeed engender a shared orientation on long term value creation. In the event, the Committee's stance in this respect appears to have generated a positive response among shareholders, while at the same time the majority of the Dutch listed companies reportedly intend on maintaining the publication of quarterly figures. Meanwhile, Minister of Finance Dijsselbloem has stated after the publication of the Committee's report that he would have liked to have seen a more detailed analysis by the Committee on the issue of short term pressures that publishing quarterly figures may bring about. It is not yet clear how the Committee will respond to this appeal.

Strengthening risk management

According to the Committee, an adequate risk management system is indispensable for creating long term value. Generally speaking, the Committee's proposals in this regard aim to clarify what having an adequate risk management system in place entails, who is responsible for it, which standards are to be applied and how the interaction between the various parties involved (management board, supervisory board, audit committee, internal audit function, and the external auditor) should ideally take place. The Committee's proposals with respect to risk management have been broken down into a large number of detailed provisions and guidelines.

As concerns the structure of the risk management ­ and internal control function, it should be noted that the Committee in its report does not address the three lines of defence model which is broadly accepted as a market standard, in particular in the financial sector. For instance, in the recently revised BIS corporate governance principles, the three lines of defence model is identified as the market standard for banks. In this model, the first­ and second line responsibility for risk management rest with the business and with second line functions such as compliance or risk management respectively. The internal audit function in this model serves as a third line of defence. The revised Code provisions on risk management that the Committee has proposed focus on risk management systems as such and on the role and functioning of the internal audit function, but make no mention of the first two lines of defence. The reason for this could be a wish on the part of the Committee to allow companies a degree of flexibility in arranging their internal governance regarding risk management and internal controls. After all, the ultimate issue is not which model is used, but rather to what extent the system as a whole is effective and whether that leads to the desired results in terms of risk management. In this regard, the size and nature of the company and its business are relevant factors in determining which risk management model would be appropriate. Even so, the consultation document does not contain guidance on the Committee's considerations for not incorporating the three lines of defence model in its proposals.

In choosing to strengthen the roles of the internal audit function and the audit committee of the supervisory board, the Committee clearly follows an international trend. In the Committee's proposals, the audit committee will be playing a bigger role in relation to the account that is to be given by the management board on risk management and the financial reporting processes and in relation to the functioning of the internal audit function. Important proposals with respect to the internal audit function itself relate to certain safeguards for its effectiveness (sufficient means, access to information) and to a clarification on what and to whom it should report. The increased responsibility of the internal audit function within the framework of the Committee's proposals in itself limits the leeway of listed companies to do without an internal audit function in their corporate governance arrangement. This effect is reinforced by the proposed new Code best practice pursuant to which the audit committee in addition to the currently prescribed annual review for the need of setting up an internal audit function would also have to assess whether adequate alternative measures to setting up an internal audit function have been taken.

The Committee further proposes to raise the standards with respect to disclosures on the structure and effectiveness of risk management systems. A new and expanded version of the 'in control statement' that the Committee proposes by way of best practice would be an important feature in this respect. Pursuant to this new best practice, the management board in the future would have to issue a statement that internal risk management­ and control systems have functioned properly. In the current version of the Code, this statement is limited to risks pertaining to financial reporting processes only. The new proposed statement would also cover non­financial aspects of risk management. Also, the management board under the currently proposed best practice provisions would have to issue a forward­looking statement that the continuity of the company has been safeguarded for the coming twelve months. While requiring such a statement by way of best practice sends a strong signal, we nonetheless wonder whether this proposal wouldn't put an unreasonable burden on the management board and whether it wouldn't expose the management board to undue liability risks. In this respect, it is also important to realise that not applying this Code provision will not be an attractive alternative for companies since this could send an implicit signal that the management board is worried about the continuity of the company. Moreover, one would wonder how the proposals for a more detailed in control statement would relate to recent efforts in the marketplace towards 'meaningful reporting' and towards reducing the use of boiler plate language in financial reporting. In our view, the proposed best practices concerning the detailed in control statement may well lead to the use of standard legal formulas aimed at mitigating any and all liability risks to the largest extent possible. On a separate note, it is interesting to see that the Committee's report does not contain guidance on how companies should incorporate their long term strategies in their in control statements, even though the Committee had identified this as a key issue in a separate report.


Another key theme which is inextricably linked with the notion of long term value creation is culture. Being one of the key drivers for ensuring an effective functioning of a company's corporate governance, a sound and proper culture within the company contributes significantly to the company's ability to realise long term value. The Committee's proposals with respect to culture aim to stimulate a climate of openness and approachability within companies and to foster a culture of constructive dissent by and among board members.

With its proposals on culture, the Committee follows the lead of, among others, the Dutch Central Bank which has been putting culture at the very top of its governance agenda for years and which in Europe has an exemplary role with respect to this approach. The Dutch Central Bank's agenda with respect to culture is based on fundamental questions, such as the question on the effect of personal interactions and group dynamic processes on financial results, integrity and reputation, the question on the facilitating ­ or chilling ­ effect that culture can play in this regard and the question which measures are necessary to mitigate the risks associated with conduct as much as possible. It is a good thing that the currently proposed revised Code would also have regard for the issue of culture. Still, we wonder whether the Committee in drawing up its proposals has made full use of the experiences, both domestic and abroad, with regard to culture and the notion of 'boardroom effectiveness'.


As we already remarked in our previous newsletter, the Committee has produced a significant piece of work. One of the first commentators in the media dubbed the Committee's proposed version of the Code to be topheavy. To some extent, this would seem inevitable given the developments with respect to corporate governance in recent years. Even so, the Committee's consultation document provides a significant starting point for further discussions on corporate governance. The Committee has proposed a clear agenda for the coming consultation period, which marks an important first step in working towards a widely supported, modern Code for socially responsible governance.