Corporate leadershipi 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.4
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. The current Corporate Governance Code specifies that the current rules for supervisory board members also apply to non-executive directors.
Generally, the one-tier model is considered to be suited to companies in a highly dynamic environment, such as those in the technology sector, complex companies that need to act quickly in crisis situations, 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 companies that form part of an international group or have an international group of shareholders.5
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 perform 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.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.6 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. The management board as a body has the power to represent the company. However, the articles of association can assign this power to any individual board. In this aspect, a two-signature clause is common. In principle, the board member(s) can represent the company without a board decision.
A significant number of companies have two-member boards (typically a chief executive officer (CEO) and a chief financial officer (CFO)). 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 (exco), in which board members and senior managers have seats; in these set-ups, a larger management board makes less sense. The latest Corporate Governance Code embraces the exco; however, it requires companies to render account of governance issues, such as how the interaction between the exco and the supervisory board will be structured. Furthermore, the exco'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.7 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, amend the articles of association or dissolve the company.8
To enable the supervisory board to perform its supervisory duties, the DCC requires the management board to provide the supervisory board with information at least once a year about the company's strategic policy, its general and financial risks and its internal control system. The Corporate Governance Code expands on 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
Directors are appointed and removed by the general meeting of shareholders. Under the Corporate Governance Code, directors are appointed, in principle, for a maximum term of four years, but reappointment for successive four-year terms is permitted. However, this is limited to only one additional four-year term for supervisory board members with a possible third and fourth term of two years. In the event of a reappointment after an eight-year period, reasons should be given in the report of the supervisory board. As previously stated, management board members of structure-regime companies are appointed and removed by the supervisory board.
Each management board member who has been employed for two years or more is entitled to claim a transition payment when the contract is (1) terminated by the employer, (2) dissolved in court at the employer's request or (3) 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, no remuneration is justified if the board member ended the contract on his or her own initiative or in the case of seriously culpable or imputable acts.9
Supervisory board members of structure-regime companies are appointed by the general meeting of shareholders based on a nomination by the supervisory board.10 However, the general meeting of shareholders may 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 be removed only by the Enterprise Chamber of the Amsterdam Court of Appeal, at the request of the company, the general meeting of shareholders or the works council.11 However, if the general meeting of shareholders passes a vote of no confidence in the supervisory board as a whole, this results in the immediate removal of all board members.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.12 The Dutch Central Bank (DNB) has developed its own policy rules for the financial sector. 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). Regarding expertise, the Corporate Governance Code states that each supervisory board member and each management board member shall have the specific expertise required for the fulfilment of his or her duties. Furthermore, each supervisory board member shall be capable of assessing the broad outline of the overall policy.
Within the financial sector, there are even more rules regarding suitability and independence 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 the individual bank's public functions. Moreover, banks are expected to introduce a permanent education programme, and legislation has been enacted; since 1 July 2012, management and supervisory board members of financial institutions have been subject to a stricter 'fit and proper' test, to be applied by the AFM or DNB.Caps on the holding of multiple supervisory board memberships
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 five supervisory positions, with a position as a management board or supervisory board chairperson counting as two.
Under the 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.13Diversity
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 that the board is at least 30 per cent female and 30 per cent male. As from 1 January 2022, a 30 per cent quota applies for both women and men for the supervisory boards of Dutch companies with a listing in The Netherlands. If a man is appointed to a vacancy on a supervisory board where fewer than 30 per cent of the seats are occupied by women, the appointment would be declared invalid. Additionally, large companies are required to set their own ambitious targets for the boardroom and senior management. The target must exceed the board's current percentage of women and should be increased gradually.
Narrower in scope but still relevant, the Non-Financial Reporting Directive (NFRD) requires certain large companies to have a description of the diversity policy applied in relation to the undertaking's administrative, management and supervisory bodies.14 Diversity under this Directive has a wider significance than gender alone, but also includes, inter alia, background, expertise, nationality and experience.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 remain valid, in principle.Internal liability
A management board member or supervisory board member who has performed his or her duties improperly may be held personally liable to the company. 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 (principle of collective responsibility). A board member may avoid liability, however, 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. In the one-tier board model, an internal allocation of duties among the board members is permitted, but 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.
It is a well-established concept of Dutch law that personal liability should arise only in situations of apparent mistakes or negligence. In this context, the concepts of, for example, 'severe fault' or 'apparent mismanagement' are developed in case law or are part of statutory provisions. Case law reminds us, however, that this does not imply immunity.15
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.16External liability
As a general rule, management board members will not be personally liable for the company's debts or other obligations as regards creditors, shareholders or other third parties. Liability might only ensue if that board member (1) can be seriously blamed for having conducted a wrongful act on the company's behalf towards a third party, (2) is subject to liability pursuant to certain specific statutory grounds or (3) 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.
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 years preceding the bankruptcy and it is likely that this was an important cause of the bankruptcy. Besides failure of the management board to comply with its accounting obligations and its obligation to file the annual accounts, 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. Case law shows that supervisory board members are not immune in this respect.17