4.5.5 Boards' roles on strategy

A diagram for strategy development, achievement and supervision is given below. Dutch literature makes a distinction between developing or planning strategy (ontwikkelen) on the one hand and implementing it (realiseren) on the other hand. There is more emphasis on implementation1 than on development, whereas in the UK there is substantial emphasis on the development of strategy.

Under Dutch law supervisory board members do not actively participate in planning strategy. Jean Frijns, the chairman of the committee that produced the Frijns Code, states that in the vast majority of Dutch listed companies supervisory board members are indeed not involved in formulating business strategy. Most executive board members want their supervisory board members to limit themselves to monitoring in a reactive rather than a proactive manner. Most supervisory board members say that their main task is to supervise the strategy plans of the management board. Some say that if the management board does not develop strategy plans, they may ask questions and even make suggestions.2 In most cases the management board develops — one might even say adopts — the strategy plan and gives a draft to the supervisory board. In fact, they discuss it only once a year3 at a meeting that generally lasts half a day or, at most, one or two days. This tends to result in no more than a few minor changes to the company's strategy plans.

In a minority of companies, many of which are large companies such as Philips, Shell, Unilever, Heineken, DSM and Akzo, supervisory board members tend to be more active and wish to discuss strategy. Often this is because the supervisory boards of such companies include some very experienced CEOs (or retired CE05) of other companies as well as foreign members. These supervisory boards are actively involved in developing the strategie plan. Such practice has developed in "turbo" supervisory boards (also called the one-anda-half-tier system), but is not based on the law or the Frijns Code. A basis for these more active supervisory board members can be found in the words "assist the management board by providing advice" in article 2:140/250 DCC and "advice" in the Frijns Code III.1. In giving their advice, supervisory board members should limit themselves to broad strategy. The general view in the Netherlands is that they should not involve themselves in matters of detail.4

There has sometimes been confusion in the Netherlands about the role of supervisory board members in strategy. When Centaurus and Paulson wrote to the chairman of the supervisory board of Stork5 that they wished to discuss strategy with him, he wrote back: "I have forwarded your letter to the management board since it, as you know, deals with strategy." This was explicitly mentioned in the judgment of the Enterprise Chamber, which was mainly critical of the manner of communication rather than the fact that the supervisory board did not concern itself with strategy.

The ABN AMRO and ASMI cases have made it absolutely clear that the management board determines strategy and the supervisory board supervises strategy, and also that the supervisory board should make every effort to promote optimal communication between shareholders and the management and supervisory boards. At the same time, it is clear that the boards have no obligation to follow any instructions of shareholders or even an obligation to discuss strategy with shareholders.6

We must realize that there are many different types of companies. In small companies, the management board members develop the strategy themselves and present the strategy plan to the supervisory board for approval once a year. At the other end of the spectrum there are the large conglomerates where strategy is often developed from the bottom up in strategy groups or in "scenario development" groups. These groups discuss strategy development with the management board members, who then decide on the strategy plan and present it to the supervisory board members for approval. In some small companies supervisory board members are more actively involved in the discussions about the development of strategy. And in some of the large conglomerates supervisory board members are involved in the discussions with the bottom-up strategy groups and scenario groups, and do not wish to be asked to approve a predetermined strategy plan. In many companies the management board spends a lot of time preparing presentations for supervisory board meetings and suggesting alternatives and pointing out problems. These are, in my view, encouraging developments.

Having stressed the value of development of strategy, I add that there should also be focus on the implementation of the strategy. It is my view that supervisory directors in a two-tier board or non-executive directors in a onetier board will be better supervisors of the implementation of the strategy, if they have actively been involved in the development of the strategy and understand all the building blocks of the strategy.

Jeroen van der Veer, retired CEO of Royal Dutch Shell and present Chairman of Philips and ING and Vice-Chairman of Unilever, said in an interview concerning his vice-chairmanship of a special strategy committee of NATO that "strategy is: what do you want and do you have the means".7

The supervisory board's role in respect of the "what do you want?" aspect is merely to supervise, but it has important influence as regards the "means" and, especially, board succession.

In summary, strategy in the broader sense includes:

For points (a) to (c), general Dutch law would use the word "policy" (beleid).8The management board takes the initiative in formulating policy and the supervisory board supervises these aspects. As regards succession under (d), the supervisory board clearly plays an active role in the process of nominating and appointing directors and that the shareholders' meeting is responsible for making the appointment.9 By both tradition and law, nominations are always made by the supervisory board members. Recently, such nominations are always on a profile, as required by the Frijns Code and the DCC.10

When the Structure Regime System Act was introduced in 1971, the supervisory board of many Dutch companies attained greater powers. These supervisory boards now had the power to approve or veto many important decisions on matters such as takeovers and large-scale redundancies. Having more powers should imply more responsibility and active involvement. This has, however, not happened. The practice in most of these "structure regime" companies stayed as it was: the management board remained responsible for taking the initiative and the supervisory board limited itself to supervision and approval. This was also the case at Stork, which was a "structure regime" company; not only did the supervisory board consider that it was not responsible for strategy but it also communicated insufficiently with shareholders. This resulted in litigation: the Stork case of 2006.

Unlike the UK Cadbury Code, the Higgs Review, the Combined Code, the UK Corporate Governance Code and the Walker Review, the Frijns Code makes little mention of strategy development. The UK Codes give examples.

It is interesting to note that in the US the Delaware courts honour the concept of long-term strategy in that where the board can show that it has developed a long-term strategy this will be treated as a valid defence. In the Time Warner case it was acknowledged that the board of Time had a long-term strategy when it chose its preferred merger partner and wished to preserve Time's identity and the independence of its journaliste. In the recent case of the Dollar Thrifty merger with Herz, the court respected the long-term strategy of Dollar Thrifty.11 Similarly, in the case of Air Products v. Airgas it respected Airgas's 5-year plan.12

The Frijns Code merely states as follows:

An argument for supervisory board members to become involved in developing strategy rather than merely supervising its achievement is that there are many more views on strategy than those expressed by management. Stewardship shareholders, activist shareholders, NGOs and the media all have views that also count. For this reason alone, it is vital for supervisory board members to play a more active role in the development of strategy.

It may therefore be concluded that apart from their active role in succession planning Dutch supervisory boards do not play a very active role in developing strategy, although the supervisory board members of some companies are becoming increasingly active in this field. Holding lengthy and repeated discussions of strategy is fairly alien to Dutch corporate culture. However, external factors may pressurise supervisory boards into becoming more proactive.

I would like the next code of best practices (or the advice of one of the committees monitoring best practices) to include a step in the direction of supervisory board members being increasingly involved in the process of developing the company's strategy. This would mean that supervisory board members would have to inform themselves better about the business of their companies, listen to lower management and visit the shop floor. Moreover some supervisory board members are already playing a more proactive role in the development of strategy. In this connection, there is also a general wish for better information and access to lower management and on-site visits as is mentioned in sub-section 4.5.6 below. I propose that the boards discuss the way and means for this process at least once every year.

For example, the Corporate Governance Code could be amended as follows:

If supervisory board members wish to play a more active role in developing strategy, be involved at an earlier stage, receive more timely information and have more time to deliberate strategy in their meetings, they might consider becoming non-executive directors of a one-tier board. Even then it would be advisable for the boards to discuss the details of the process each year.

Whether a company chooses a two-tier or one-tier system, it is advisable for the boards to discuss the procedure for developing strategy, for more information and regular discussions about strategy and to confirm the outcome of the annual discussion.