Earlier today, the Corporate Governance Monitoring Committee chaired by Jaap van Manen, presented itsproposals for a revised version of the Dutch Corporate Governance Code. The proposals have been drawn up as part of a consultation process regarding the Code that runs through 6 April 2016. It is envisaged that a revised Code will apply to reporting processes on financial years starting on or after 1 January 2017.

The Committee, which last year had been given the assignment to draw up proposals and recommendations for a revised Code, has produced a significant piece of work. The proposed revision of the Code covers a wide range of topics and contains detailed proposals. Some of the proposals reflect recent developments which were already apparent in market practice. For instance, the increased focus in the proposed revised Code on matters such as risk management, internal controls and remuneration policies is hardly surprising in view of market developments. In other areas, however, the Committee appears to have felt the need to actively influence the prevailing market practice. For example, the Committee proposes that supervisory board members after serving two terms of four years should only be put up for re-election in special circumstances and then only for a maximum of two terms of two years each. This deviates from the current Code provision which allows for three consecutive four-year terms and also from prevailing market practice.

The following proposals are of particular interest:

  • In control statement - the current Code provision on the statement of the management board regarding the effectiveness of the risk management systems will be split up into two parts. On the one hand, the new Code would require the management board to issue a backward-looking statement that the risk management systems have been effective in the relevant financial year, whereas on the other hand the management board should issue a forward-looking statement that the continuity of the company has been safeguarded for the coming twelve months. The question is how the forward-looking element of the in control statement would relate to the audit activities of the external auditor with respect to the going concern assumption. One would also wonder what the effects of the forward-looking element of the in control statement would be in the context of director liability.


  • Internal audit function - the Committee has put forward detailed proposals on the structure and activities of the internal audit function. These proposals aim to replace the current Code provision on the internal audit function which is rather general in nature. As is presently the case, having an internal audit function will not be a hard requirement under the revised Code, but emphasis that the Committee places on the internal audit function in its proposals nonetheless sends a clear signal. 


  • Response time - the management board should seek to ensure that the duration of the response time is as short as possible and should also account to the general meeting of shareholders afterwards for its conduct during the response time. The language in the existing Code provision that the management board should use the response time for further consideration, for a constructive dialogue and for assessing and pursuing alternatives is maintained in the revised code, albeit that a sentence in the explanatory notes in the Committee's report ("he management board should in any event but not limited thereto use the response time for a constructive dialogue with the relevant shareholder or shareholders") appears to indicate that the Committee perceives a certain rank in these uses. The Committee also proposes to limit instances which could lead to a change in the strategy of the company within the meaning of the response time to instances involving 'identity-changing' resolutions as defined in section 2:107a of the Dutch Civil Code. The instance in which one or more shareholders seek to dismiss one or more members of the management board and/or supervisory board which is explicitly mentioned in the current Code provision on the response time would not be included in the revised Code provision proposed by the Committee. We wonder whether this change is actually intended by the Committee as there is no language in the Committee's report to support that conclusion. 


  • Takeover - the revised Code would provide that the management board and supervisory board should form a separate committee in the event of a takeover offer being made for the company. This committee would, among other things, have to monitor instances of conflicting interests. It is possible that this new provision will later be expanded to include all general "stress instances". With the currently proposed Code provision, the phenomenon of 'steering committees' which already occurs in practice would obtain a basis in the Code. 


  • Independence - the independence requirements for supervisory board members, in particular the chairman, are further strengthened in the revised Code. On a side note, the Committee's report (p. 28) contains a drafting error which creates the impression that all but one of the supervisory board members should be non-independent as opposed to independent. In addition to the independence requirement, the revised Code would also give the supervisory board a more pronounced role in certain special situations such as the occurrence of 'material irregularities within the company' or takeover situations (see above). 


  • Stock remuneration for supervisory board members - the Committee proposes that it should be allowed under certain conditions to award shares to supervisory board members as part of their remuneration up to a maximum of 50% of their total amount of remuneration. 


  • ExCo - the Committee accepts the rise of the phenomenon of the 'Executive Committee' consisting of both management board members as well as non-board member executives as a given in market practice. Even so, the Committee requires companies to consider certain issues that a governance structure involving an ExCo entails. 
  • One tier board - the Committee's report mentions that a separate review will be published in which the current proposals of the Committee, which are primarily geared towards listed companies with a two tier board structure, will be tailored for companies with a one tier board. Possibly, this review will also be the subject of a separate consultation process.