4.6.2 Basis for the duties of board members

The hierarchy for the duties of board members is as follows: (1) legislation;1 (2) articles of association; (3) general interaal guidelines; (4) agreements to which the company has explicitly adhered or joint venture agreements;2 (5) the Frijns Code3 and (6) other voluntary codes or guidelines. Court decisions deal with all these aspects and interpret the law.4

The general duty of the management board is to "manage" (besturen) the company. This involves the general authority and duty to manage the company internally and the enterprise externally.5 Intemal management duties include decision making by the management board, with or without the approval of other organs, and day-to-day management.6 The management board gives due information to the supervisory board and informs it at least once a year about the strategy and the risk management system it has developed and executed.7 The management board will represent the company.8 The management board may not act ultra vires.9 Each management board member must act reasonably towards other board members and shareholders.10 In addition, each management board member must discharge his duties properly,11 and article 2.9 DCC, as amended by the Act, makes clear that these duties include not only those specifically allocated to him but also the general conduct of the company's affairs (algemene gang van zaken).12 The management board must keep proper accounts 13 It must prepare the annual accounts within five months of the end of the financial year and, in the case of a listed company, the annual accounts must be published within six months and also every six months.14 The management board members must file the accounts with the trade register within 8 days of the annual general meeting that has approved them.15 Most companies with a turnover or workforce above a certain limit must have an extemal auditor appointed by the general meeting. The board must hold this general meeting of shareholders before the end of the sixth month after the close of the relevant financial year.16 At this meeting it must present its reports and accounts to the shareholders.17 The management board must file the company's articles of association and forms for registering directors as representatives with the Trade Register.18 These are the most important duties of the management board and they are among those mentioned in the DCC.

Shareholders have the right to decide on the issue of shares and on buy-backs (redemption of shares by the company), to call meetings of shareholders and decide on the agenda and to declare dividends, to adopt the accounts, to issue discharges to management and supervisory board members and to determine the remuneration of supervisory board members and the remuneration policy for management board members.19 On paper these rights certainly exceed those of shareholders in the US.

For vital decisions such as change of control of the company, acquisitions, disposals, mass redundancies, large loans and reorganizations, the management board must consult with the company's works council (ondernemingsraad).20The works council has from 3 to 15 members who are elected by and from among the employees. The works council has no veto right but there must be consultation. If the works council is not consulted, this may seriously endanger or delay the execution of the decision because the works council may have the decision reviewed by the Enterprise Chamber. The works council made use of this right in the Organon case.21 When considering terms and conditions of employment (arbeidsvoorwaarden) the board needs the works council's consent.22

If the company is in serious financial problems and is close to bankruptcy management board members have the obligation to wam the bodies that collect social security contributions.23

The management board must also comply with all securities regulations contained in the Act of Financial Supervision, which deals with many areas such as insider trading, the disclosure of controlling shareholdings (melding zeggenschap), the issue of prospectuses and offering documents.

The above is a fairly prescriptive list of duties. At present, the DCC does not make much difference in this respect between public and private companies (NVs and BVs), but a bill has been introduced allowing greater flexibility for BVs.

Supervisory board members have the duty to supervise the strategy developed and executed by the management board and to supervise the general affairs of the company.24 They assist the management board by providing advice,25 which is always given in the interests of the company and its enterprises.26 If they notice, or should notice, that the management board is seriously in default of its duties as outlined at the start of this section, the supervisory board members should take action. Their duties are different from those of a non-executive director in the proposed one-tier board. The Bodam Jachtservice case27 of 1996 clearly shows how the same set of facts results in liability for supervisory board members and management board members, albeit for different reasons. In this case a managing director had failed to keep proper accounts and to file them with the trade register. This constitutes serious negligence and can lead to liability to the liquidator under article 2.138/248 DCC. The Supreme Court ruled that the supervisory board members could not be expected to fulfil these duties of the managing director themselves, but should have either pressured him to perform them or arranged for him to be replaced. It was not sufficient to hold a shareholders' meeting to discuss the problem. However, if the same set of facts were to occur in the future in a company with a one-tier board, the non-executive directors would have to check in an early stage whether there was proper accounting and filing and take measures in advance to ensure that this happens, as they would be directors and not supervisory board members.28

The articles of association of NVs and BVs are drawn up by a civil law notary in accordance with standard models. The rights and obligations of shareholders, management board members and supervisory board members are usually described in a fairly detailed way, including their powers to represent the company and the decisions for which the supervisory board and/or the general meeting has a veto right. The articles of association are important. If directors breach the provisions of the articles of association they are liable.

Two cases are mentioned here that show the importance of articles of association.

The articles of association are important to a one-tier board and should provide for a clear division of roles and duties between executive and non-executive directors. As a complete board all directors have the duty to manage the company.31 Managing means they have a duty to develop, implement and monitor all aspects of the company, the "general affairs of the company" (algemene gang van zaken). These include strategy, annual accounts, risk management and Corporate Social Responsibility (CSR). When they divide up their duties among themselves, they must take account of the executive and non-executive roles defined in the articles of association.32 The executive roles may also be divided into specialisms (CEO, CFO, COO — Chief Operations Officer, CRO — Chief Risk Officer, and CHO Chief Human Resources Officer). Non-executives can devide tasks too. Any such division must be recorded in writing and be based on a provision in the articles of association.33

As the duties of the executive directors of a one-tier board — and even a two-tier board for that matter — are divided among them, they have an obligation to perform a specialised management task on a day-to-day basis. Under the present article 2:9 DCC this is still called the director's area of work (werkkring), but the word used in the new article 2:9 DCC (Act) is task (taak). Article 2:129a/2:239a, paragraph 3 DCC (Act) gives executive directors the right to assume a specific task. This is worded as follows: "validly decide on matters that come within their remit". At the same time, however, they still have the general duty to manage, i.e. to develop, implement and monitor the general affairs of the company and hence also to monitor their colleagues. This second task of monitoring has also been discussed above in sub-section 4.5.9. The basic joint and several liability of executive and non-executive directors with the possibility of an exculpation defence for a director where the act or omission falls outside his area of responsibility (i.e. outside his "task") and there are no other serious grounds for holding him liable, is discussed below in sub-section 4.7.2.7.

Although the non-executive directors in a one-tier board specifically have the task of monitoring,34 this does not mean that this duty is confined to monitoring their colleagues. Besides monitoring generally, they also have a duty — as directors — to be active in relation to strategy development, the annual accounts (including the report of directors), risk management and corporate social responsibility as well as all aspects of general management. It is sometimes incorrectly thought that a non-executive director is a soit of "turbo" supervisory board member or an extra active monitor. While monitoring may be his specialised role, a non-executive director also has the general duty of a director.

In the example of Bodam Jachtservice, mentioned earlier in this section, where management had not kept proper books and had failed to file any accounts, it seems reasonable to assume that if the supervisory board members had been non-executive directors on a one-tier board they themselves would have had a duty to arrange for the accounting and filing. As the term for drawing up and filing the annual accounts had expired, they would have had to inquire how these formalities were going to be fulfilled and would have needed to keep their finger on the pulse. The same analogy as in the Bodam case could be applied in cases where risk management systems are non-existent or inadequate. Supervisory board members in a two-tier system should supervise and check, ideally in advance, whether systems are in place and take corrective action in the event of deficiencies. Non-executive directors in a one-tier system should ask in advance whether systems are in place and help to develop or challenge them. Hence there is a formal difference between the task of supervisory board members in a two-tier system and non-executive directors in a one-tier system, but in practice it is mainly a difference in timing and level of involvement.35

This is comparable to the position of a UK executive director who has to manage the affairs of the company, develop general strategy and monitor, and to the position of a UK non-executive director who has to monitor and develop strategy, risk management systems, CSR etc.

In my view one of the Act's strengths is that article 2:129a/239a DCC (as introduced by the Act) provides that the division of tasks is to be described in the articles of association. When the Act becomes law anyone will be able to find which director is responsible for what by consulting the company's articles of association and the names of the executive and non-executive directors in the public registers. At this point it will no longer be necessary to rely on detailed facts to establish the different duties and responsibilities. It is clearly an advantage for the directors to describe their functions transparently for the case that they might need to seek exculpation from liability.36

Most companies have directors' regulations next to the articles of association. These can be general policies and/or guidelines. They can also be divisions of tasks as suggested by article 2:129/239a, paragraph 3 DCC. The Staleman v. Van de Ven judgment explicitly mentions division of tasks and general guidelines for the board as an important factor to determine directors' duties. See 4.7.2.1. Interaal guidelines are important in case of legal disputes, because they are meant to be interrally generally applicable and can be produced in court.

Codes such as UN codes for multinationals to which a company has adhered, as mentioned above in the first lines of this sub-section 4.6.2 in the Batco case, rank higher in the hierarchy than the Frijns Code because the company has explicitly bound itself to such code. Joint venture and shareholder agreements governed by Dutch law are also binding. Many foreign enterprises choose the Netherlands as the locus of their joint venture because Dutch joint venture agreements are binding and enforceable internally in the long-term.37 It is advisable to have the agreements countersigned by the company and even by the board members.38

The Frijns Code of 2008 describes in detail the duties of management board members and supervisory board members. It makes very clear that the management board has a duty to formulate and develop strategy, draw up annual accounts and develop and follow risk management systems and CSR plans,39 and that supervisory board members only have the duty to supervise these activities.40 Both the Frijns Code and its predecessor — the Tabaksblat Code of 2004 — have been largely instrumental in raising the standard by which the duties of the managing directors and the supervisory board members are judged.41 Both Codes mention the possibility of a one-tier board.

There are many other codes and guidelines such as the Global Compact Rules,42 the draft Dutch Code of Conduct for Supervisory Board Members and the Observations for Chairmen,43 which will hopefully lead to further discussion.

Civil cases for liability onder articles 2:9 (the company), 2:138/148 (liquidator in the case of bankruptcy) and 6:162 (tort) DCC and criminal cases will be discussed in section 4.7. First, in sub-sections 4.6.3 and 4.6.4, I will consider the Enterprise Chamber procedures and some Supreme Court cases. These cases, and the media attention they have attracted, have since 1990 had a growing impact on the standard of duties of managing directors.