5.6 What should the Dutch take over from the UK and the US; cherry picking

When studying UK and US corporate governance the Dutch should keep an open eye for examples and instances for possibly following whether or not they opt for a one-tier board or stay with a two-tier board.

I believe that the Dutch should foster a climate which favours a stronger and active team leader as chairman, both for the present supervisory board and the future optional one-tier board. One possible model is that of the strong, handson UK chairman. Another, the US example of a chairman with a lower profile. The choice will determine the answers to questions; should the chairman have direct contact with selected shareholders? And if so, should he only meet them together with the CEO? How can an active chairman keep his co-directors motivated and have them keep up with him7 Taking the Dutch corporate tradition into consideration, a chairman with an inclination to the US lead director or a non-CEO chairman seems more likely to succeed. For instance, meetings with shareholders in the UK are regularly attended by the chairman (see 2.5.7) without the presence of any executive, while in the US non-CEO chairmen or lead directors rarely meet with shareholders and if they do, they are accompanied by an executive or at least the general counsel (see 3.5.5).

In any case it is a good idea to confirm clearly in writing what the role of the chairman should be and how he relates to the CEO and other directors. This is important in a two-tier board but even more so in a one-tier board, because the Civil Code leaves many points open. A clear description and distribution of the functions of board members is important from a liability point of view as well, as became clear in the Supreme Court decision in Staleman v. Van de Ven which indicated that a description of functions in interaal regulations were going to be a factor for the courts in their judgments.

In the area of proper communication and behaviour it is important to keep in mind that the CEO and the chairman should share their thoughts and be open on the dilemmas between each other and the other directors.

Another point is that, if there is any lingering disagreement between two or more directors on either of the boards, this should be known to all directors and sorted out. In my view, there is more chance of outside directors finding out about such interaal disagreement in a one-tier than in a two-tier board.

When looking at the UK and US practice, two points spring to attention: outside director involvement in strategy development, see sub-sections 2.5.3, 2.5.4, 2.5.5, 2.5.11, 3.5.3, 3.5.6 and 3.5.9 and early and on-site information, see subsections 2.5.8, 3.5.6 and 3.5.9.

The practice of early and on-site information includes direct access to lower staff. This can be laid down in an agreement among the directors, dealing with all the points to be discussed regularly also.

There is sometimes a misunderstanding about the independence of supervisory directors and their receiving limited and late information. Many Dutch CEOs and supervisory directors say that the value of the Dutch supervisory board lies in the fact that it is clearly and formally independent and should therefore not become involved in too many details of the business. I do not agree with this argument. Every director should be independent and courageous of mind, have a straight back, in Dutch "rechte rug", but should at the same time be fully informed and involved. Substance should be over form, see sub-sections 2.4.7 and 3.4.9.

The Dutch can benefit from the US argument and practice to have directors who really understand the business of the company and have early on-site information and training.

There are better arguments in favour of a supervisory board and two-tier boards, which are to be found in Dutch corporate culture, described in sub-section 4.1.5 and sub-section 4.1.6(c) above. The Dutch had independent, supervisory, persons to support the managers with an eye for other interests in a more distant role all through the corporate history of the Netherlands.

But, even if one would stick to two-tier boards, improvements can be made. Full outside director involvement in strategy should serve as an example for the Dutch to follow, either as is practiced in the US (intense challenging, see subsection 3.5.3) or in the UK (involvement in strategy development, see subsection 2.5.5) as well as early information. There is no legal obstacle for supervisory directors in a two-tier board to become more involved with the strategy of the business as long as they do not take over the tasks allotted to management. Dutch law gives management the task to decide on "beleid", strategy, but I do not see why the two boards — the management board and the supervisory board - could not agree that the supervisory directors be informed at an early stage about strategy developments and are allowed to think along and co-pilot with management. This, of course, would require that both boards deal with each other tactfully and with respect for each other's duties. Such an arrangement would result in what is often called a one-and-a-half-tier board. Further involvement on strategy should be a regular agenda item for board meetings.

The UK and US system, where the whole board decides, i.e. outside directors are involved in decision making, as opposed to the Dutch system where the management board decides and supervisory directors are not involved in decision making but only monitor, is the main difference between the nature of board activities in those two countries and the Netherlands. Whether outside directors are involved in decision making is also the main difference between the one- and two-tier board. However, it is imaginable to have a two-tier board, where it is agreed by the boards that the supervisory directors should have a substantial involvement.

I propose that the Monitoring Committee would make the following amendment to the Frijns Code as mentioned in sub-section 4.5.5:

Alternatively this text could be added to 111.1 .8 or 111.1 .9.

While in meetings of the supervisory board with the management board in many Dutch companies 90% of the time is spent on presentations with slides by management, more time should in my view be reserved for open discussion with and by all directors.

In my view an annual discussion about the involvement of supervisory directors as proposed above will be a step in the direction and will bring more involvement of supervisory directors in the development of strategy of the company in a one-and-a-half-tier board. I believe that such a step will ease the way for an eventual, later, change to a one-tier board. I favour step-by-step change of culture over abrupt change.

The US example of executive sessions of independent directors only, before or after each board meeting, is a good example to follow, both in a one- and a twotier board. It can be an institutionalised pre-meeting of all non-executive directors or supervisory directors, thus getting away from informal pre-meetings of 2 or 3 directors. The advantages of having regular executive sessions before or after each board meeting is that all outside directors speak up and that the fact that an executive session is scheduled regularly does not alarm the executive officers, see sub-section 3.4.7.

The UK practice of formal and regular meetings on evaluation and succession is a good example, see sub-section 2.5.9, as is the US practice to include succession and compensation of lower management in the board and committee discussion, see sub-section 3.5.7.

I propose that the Monitoring Committee would add the following text to 111.2 of the Frijns Code, as mentioned in sub-section 4.5.17: "The supervisory and management boards will deliberate with each other at least once a year about the ways and means of discussion, the frequency and timing of the evaluation and succession of the supervisory and management board members and about the desirability and, if so, the frequency, to ask outside advisers to assist in this process, as well as about the terras of office of all the directors, and which middle management persons should fall onder the evaluation and succession process. If there is a one-tier board, the complete board should hold these annual deliberations."

The UK example of a senior and independent person as company secretary who is the conscience of the company and mainly supports the chairman and the outside directors is worthwhile to keep in mind for Dutch companies. See subsection 4.4.3.

The co-pilot model, where the chief financial officer — "from number cruncher to co-pilot" — and other managing directors give counterbalance to the CEO on an equal level fits well in the Dutch culture of a consensus board and could be considered in other countries, where hierarchy is decreasing. See sub-section 4.5.2.

The Dutch concept of "the interest in the company" as taking into account the interest of all stakeholders, but with a more important place for the long-term interest of shareholder value described above in sub-section 4.2.5, also underlies the UK section 172 of the Companies Act of 2006 mentioned in sub-section 5.3 and sub-section 2.6.3 and US literature and jurisprudence. At this stage the Dutch are slightly more a "stakeholder model" and the US and UK slightly more shareholder oriented. Dutch boards will continue to weigh all interests, but can improve on communication with long-term shareholders.

The UK and US examples of shareholder one-to-one or one-on-one communication with stewardship shareholders are in my view useful, with due consideration of equality of shareholder tules and insider trading regulations, especially paying attention to the manner of conducting such meetings and the art of sounding out shareholders. The Dutch should emulate the British habit of listening quietly, without reacting, see sub-sections 2.5.7(viii) and 4.2.5.

Every country has its litigation culture which is difficult to change. Dutch lawyers study the Delaware cases and some argue that the business judgment rule is a good example. The Social Economie Council (SER) has noted that a strong point of the business judgment rule is that it brings judges to motivate their decisions according to several criteria. The Enterprise Chamber is giving more leeway to entrepreneurial decisions. There is hope that jurisprudence on non-executive directors' liability will develop in the direction of leeway for entrepreneurial decisions, taking into account that there is an argument for less liability of outside directors than inside directors in some fact specific cases. The Dutch Staleman v. Van de Ven case has pointed in the same direction and mentions that factors for liability are the division of tasks and interaal directors' guidelines and the Parliamentary Papers of the Minister of Justice have repeatedly referred to this case. It is for this reason that it is advisable to have clear interaal directors' guidelines and descriptions of divisions of tasks. See the last sentences of sub-section 4.6.1 and sub-section 4.6.2.

Indemnification of directors by the company should be expanded in the Netherlands.

Insurance policies are already similar to the UK and the US. Apparently there is no difference in premium in the Netherlands between a one- and a two-tier board. Premiums in the UK are higher, and in the US much higher, than in the Netherlands.