2.2.2 Corporate governance

Corporate governance has gained attention since the early 1990s. The ever increasing internationalisation of the economy on the one hand and public attention for the added value of businesses and the position of financiers on the other hand, sparked the corporate governance debate. The (British) Maxwell case, concerning pension funds fraud in the early 1990s, was the first in a series of accounting scandals. The Maxwell case and a number of other large scandals catalysed the establishment of the Cadbury Committee in the UK. This Committee launched the first report on corporate governance in 1992.1 Many European countries and the US showed interest in the report. Other surveys and reports containing recommendations for improving private business structures followed.2 The subject was thrown into the public arena.

Shortly after the economy and stock market boom of the 1990s had ended, the Western world was faced with several large accounting scandals from the year 2000 onwards: e.g. Enron, Arthur Andersen, Parmalat, Bankgesellschaft Berlin, WorldCom, Tyco, BCCI, Ahold and Shell. The scandals were not confined to one country or one corporate governance model but occurred in various countries and with all sorts of businesses. It was for this reason that the issue of corporate governance (including the fight against financial malpractice) became acute. The accounting scandals established a pattern that pointed towards conflicts of interest within companies and professional organisations, poor supervision over boards of directors, inadequate accountability systems for boards of directors and a lack of adequate repercussions in case of mismanagement.

The legal structure of legal bodies with limited liability provides for a separation of ownership and management of a business. There are two sides to this separation.

The positive side is that businesses can attract professional board members and that shareholders can easily spread out their risks over various businesses. The negative side is that members of the board of directors do not run the business with their own capital. Consequently, an apparent risk of conflict of professional and private interests and careless management of the company's assets exists. In these kinds of situations members of the board of directors do not always act in accordance with the company's interests. They sometimes merely act in their own interest by awarding themselves huge remunerations or by concluding expensive takeovers, thinking that this augments their status. In this legal structure adequate supervision of the board of directors by members of the supervisory board is often lacking. Moreover, a commonly held belief is that there simply cannot be effective supervision of the board of directors by members of the supervisory board, often part of the same old boys' network', because they identify to a large extent with the board of directors. The net effect of the above is that the directors are left with too much scope to pursue their own interests. In addition, the supervision of the board of directors' company policy by the general meeting of shareholders leaves a lot to be desired. This is partly due to shareholders having been kept at bay by anti-takeover measures and the two-tier board system (Netherlands) and partly because of passive voting behaviour on the part of shareholders.3 Indeed, even the supervision by independent auditors of the board of directors' company policy often seems to have been influenced by the board of directors.

The cases of abuse of power that came to light cast doubt on the ethics of members of the board of directors. Moreover, it led to dissatisfaction with the manner in which the power within listed companies was divided and with the dominant position of the board of directors. It has also affected confidence in the capital market, which in turn had a negative effect on the shareholder value in general.4 As a result of this, nowadays, much attention is paid to 'corporate governance', literally meaning: controlling a business. Controlling a business is about the ability to direct processes and thus about exercising power. Corporate governance has to do with the manner in which the power within a company has been distributed (internal structure), who plays a role in conveying and supervising this power, and the manner in which this power is exercised (the decision-making process).5 Although generally speaking the concept of corporate governance is more or less similarly interpreted internationally, its meaning is slightly different in Anglo-Saxon countries than in continental Europe.

In Anglo-Saxon countries corporate governance is mainly aimed at controlling the board of directors for the purposes of increasing shareholder value whereas in the European countries shareholders are considered to be not the only stakeholders. Aside from shareholders' interests, European businesses also need to take into account the interests of employees and creditors on the basis of the so-called 'stakeholder-model'. Corporate governance in European countries requires that the board of directors of a business keeps in mind the various interests involved.6 It should be noted, however, that the long-term shareholder interest has also taken a prominent place in the recent corporate governance debate in the Netherlands.

The Dutch corporate governance structure for large companies has a few more peculiarities. The Dutch two-tier system, in which the supervisory board is separate from the board of directors, contributes to its independence and autonomy, at least in theory. In the Dutch system, the supervisory board fulfils an important role as a supervisor within the company. The two-tier system, the restricted two-tier system and the voluntary two-tier system in Dutch law are internationally unique.7 In a two-tier company the supervisory board is awarded extra powers which, in other types of companies, usually belong to the general meeting of shareholders. In addition to the two-tier system other measures that limit shareholders' influence have been taken in the Netherlands, such as issuing depositary receipts for shares and conferring special powers on holders of priority shares.