Corporate Social Responsibility (IVOR nr. 77) 2010/3.5.4:3.5.4 Eumedion Position Paper

Corporate Social Responsibility (IVOR nr. 77) 2010/3.5.4

3.5.4 Eumedion Position Paper

Documentgegevens:

Mr. T.E. Lambooy, datum 17-11-2010

Datum: 17-11-2010
Auteur: Mr. T.E. Lambooy
JCDI: JCDI:ADS368306:1
Vakgebied(en): Ondernemingsrecht (V)

In March 2010, Eumedion, the Dutch corporate governance forum, issued a position paper on engaged shareholdership.1 Eumedion noted that the debate on the role of shareholders in the system of corporate governance had taken a new direction'. Shortly after the appearance of the Tabaksblat Code and the amendment of corporate law provisions in 2004, the emphasis was on encouraging shareholders to use their new rights. However, according to Eumedion: Following the actions of some reputedly activist shareholders involving a number of Dutch listed companies, the discussion is now mainly concerned with the manner in which shareholders use their rights. Shareholders are presently being increasingly reminded of their obligations.' The paper pointed to the Dutch government's quest for a long-term agenda2 and the Monitoring Committee's reference to the 'citizenship' of the shareholder.3 It affirmed that greater responsibility is expected from institutional investors in particular, on the basis of the idea that they hold the majority of the shares in Dutch listed companies and manage other people's money.4

The critical view of the role of the shareholder has been reinforced by the financial crisis. A frequently heard point of criticism by society is that shareholders sometimes used their control rights to exert pressure on management boards of listed companies to focus first and foremost on achieving short-term results, which interferes with the implementation of a strategy focused on the long term. At the same time, it has also asserted that shareholders did not sufficiently scrutinise decisions taken by the management board and that they did not hold the management board sufficiently to account for its performance.5 The views of Eumedion6 resulted in recommendations to institutional investors, including the following: (i) substantial investments in personnel and training or to mandate -based on its own ESG policy - an external asset manager to act as an engaged shareholder; (ii) integration of ESG factors into the investment process; (iii) willingness to cooperate with other institutional investors; (iv) remuneration of fund managers that is more strongly linked to the long term and to the interests of the client and the ultimate beneficiaries; (v) a mandate to asset managers that covers a longer period and addresses engaged shareholdership; (vi) the drafting of internal rules on dealing with a number of different interests; (vii) the recall of lent shares when there are important matters on the agenda for the shareholders' meeting and openness on the subject of control positions during dialogue with enterprises. Of listed companies, Eumedion expects a good corporate governance structure and a high degree of transparency, and willingness on the part of the management board and the supervisory board to enter into dialogue with institutional investors. Finally, Eumedion itself will undertake research into (i) increasing the involvement of major shareholders in the selection of supervisory directors, and (ii) the added value of drafting a Dutch code for institutional investors.7

Furthermore, from the Eumedion position paper it becomes apparent that although institutional investors have a long-term investment philosophy, this is not synonymous with keeping shares in companies for the long term. Their position is that the emphasis in the social debate should not be placed so much on the encouragement of keeping shares for a longer term, but on the encouragement of engaged shareholdership on the part of institutional investors.' By 'engaged 'shareholdership', it is meant that the investor at least exercises his voting rights during shareholders' meetings and/or engages in a dialogue with the company.8

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Eumedion, 'Position paper on engaged shareholdership', adopted on 12 March 2010, at: www.eumedion.nl/page/downloads/Position_Paper_Engaged_shareholdership_DEF.pdf, accessed on 2 April 2010. Compare the ICGN/Eumedion seminar held in Amsterdam on 2 March 2009 where in a vote 49 per cent (versus 44.9 per cent) ofthe participants indicated that the financial crisis had undermined the reliance in the shareholder model of corporate governance.

'Working on the future', a policy agreement augmenting 'working together, living together', 25 March 2009, at: www.government.nl/Government/Supplementary_policy_agreement, accessed on 2 April 2010.

Corporate Governance Code Monitoring Committee, First Report on Compliance with the Dutch Corporate Governance Code, Summary 5, December 2009, at: www.commissiecor-porategovernance.nl/Information%20in%20English, accessed on 2 April 2010.

Eumedion supra note 85, p. 1.

Idem. See also: G. Kirkpatrick, OECD-rapport, 'The Corporate Governance Lessons from the Financial Crisis',in Financial Market Trends, 2009. It argues: 'that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements.(...) Accounting standards and regulatory requirements have also proved insufficient in some areas leading the relevant standard setters to undertake a review. Last but not least, remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests'; at: http://www.oecd.org/dataoecd/32/1/42229620.pdf, visited on 3 June 2010; and Report of The High-Level Group on Financial Supervision in the EU', 25 February 2009, pp. 29 and 30. It states: '[Corporate Governance] (110) This is one of the most important failures of the present crisis. (111) Corporate governance has never been spoken about as much as over the last decade. (Procedural progress has no doubt been achieved, establishment of board committees, standards set by the banking supervision committee) but looking back at the causes of the crisis, it is clear that the financial system at large did not carry out its tasks with enough consideration for the long-term interest of its stakeholders. Most of the incentives (. ) encouraged financial institutions to act in a short-term perspective and to make as much profit as possible (...) the new accounting rules were systematically biased towards short-term performance (indeed these rules led to immediate mark-to-market recognition of profit without allowing a discount for future potential losses). As a result of all this, the long-term, 'through the cycle' perspective has been neglected. (112) In such an environment, investors and shareholders became accustomed to higher and higher revenues and returns on equity which hugely outpaced for many years real economic growth rates. Few managers avoided the 'herd instinct' - (...) (114) There should be no illusion that regulation alone can solve all these problems and transform the mindset that presided over the functioning (and downward spiral) of the system'; at: http://ec.europa.eu/economy _finance/publications/publication14527_en.pdf, accessed on 2 June 2010. See also B.R. Cheffins, Did Corporate Governance Fail' During the 2008 Stock Market Meltdown? The Case of the S&P 500', News Item, May 2009. This paper argued that corporate governance did not fail, based on a study of a sample of companies at ground zero' of the stock market meltdown, namely the 37 firms removed from the iconic S&P 500 index during 2008.

Based on the research report by A.G.Z. Kemna and E.L.H.M. van de Loo, 'Role of institutional investors in relation to management boards and supervisory directors: a triangular survey', commissioned by Eumedion, October 2009, at: www.eumedion.nl/page/downloads/Onderzoeksrapport_DEF_III.pdf, accessed on 2 April 2010.

Eumedion supra note 85, p. 3.

Idem.