2.6.2.4 The United Kingdom

The Cadbury Committee was set up following the Maxwell case and a few other large accounting scandals in the United Kingdom (UK). The Cadbury Committee published its report on corporate governance, financial reporting and accountability in 1992.1 It was succeeded by the Greenbury Report

(1995), the Hampel Report (1998), the Turnbull Report (1999), the Smith

Review and the Higgs Review in early 2003. The Higgs Review contained a great number of recommendations on the composition, role and duties of executive and non-executive directors (similar to the Dutch board of directors and supervisory board), remuneration, audit and remuneration committees, responsibility of board members and the relationship with shareholders. Pursuant to the recommendations of the Smith Review and the Higgs Review, the Combined Code of Corporate Governance was amended early 2003 (Combined Code).2 The British business community was very much against the revisions to the Combined Code at first, and in particular reacted negatively to the number of detailed rules. It turned out a few months later, however, that after its coming into force on 1 November 2003, the revised Combined Code was generally applied by businesses.3 The revised Combined Code has served as a source of inspiration for the Dutch Tabaksblat Committee in drawing up the Tabaksblat Code.4 2.6.2.5 The Netherlands

In 199 the Peters Committee examined the subject of corporate governance in the Netherlands. The Committee's objective was to review the role played by capital in companies, since it believed that in the Dutch stakeholder-model, shareholders were deprived of exerting real influence. In its report it made forty recommendations for sound management, effective supervision and accountability.5

The Peters Committee recommendations concerned the composition and quality of the supervisory board, shares and options held by board members (should be for long-term investment), transparency in directors' remuneration policies, measures to avoid conflicting of interest between the company and its board members, an annual meeting of the supervisory board or the audit committee with the external auditor, corporate governance statements in annual accounts, and their implementation. The Peters Committee's recommendations also contained a proposal for introducing a proxy solicitation system (communication between shareholders about voting behaviour), a proposal for facilitating the right of the shareholder to place an item on the agenda and a proposal for making it compulsory for parties holding 50 per cent or more of a company's shares to bid for the remaining shares. The Peters Committee had limited itself to recommendations not requiring any legislative amendments and for this reason its recommendations mainly focussed on improving transparency in the board of directors' strategy and increasing accountability. The recommendations did not contain any specific measures that actually increased shareholders' influence, but they did indicate that finance and influence should be balanced properly.6

In 2002, the Dutch Corporate Governance Foundation measured compliance with the forty recommendations of the Peters Committee between 1997 and 2002.7 It found that less than half of the listed companies were still concerned with the recommendations. One of the recommendations the Dutch Corporate Governance Foundation made was to formulate a new best practice code, and to monitor compliance with this code in practice. This recommendation was very similar to that of the High Level Group of Company Law Experts that each EU Member State should draw up its own national corporate governance code with which listed companies should comply. These recommendations as well as the Ahold accounting scandal in February 2003, sparked the establishment of a new Corporate Governance Committee in the Netherlands (the Tabaksblat Commit-

tee).8 The Committee was installed in March 2003.9

This Committee was assigned the task of drawing up a code of best practices for corporate governance to provide a guide for listed companies in the Netherlands in improving their corporate governance.10 Its terms of reference explicitly demanded the Tabaksblat Committee to focus on the capital market perspective, i.e. on the relationship between listed companies and providers of capital. According to the terms of reference, CSR was not a subject to be covered by the new code.

Two reasons were given for this: (i) the subject of CSR is not linked to a national corporate structure and (ii) CSR extends far beyond the development of a new code for the functioning of Dutch companies in the capital market. The terms of reference held, furthermore, that various codes of conduct for CSR had been or were being developed (such as the GRI Guidelines and the OECD

MNE Guidelines).11

In July 2003, the Tabaksblat Committee presented a draft corporate governance code and called upon the Dutch business community to comment. After the closing of the consultation period the Tabaksblat Code was adopted in December 2003. The Code contains principles and best practice provisions which should be observed by those involved in a company (including members of the board of directors and supervisory board members) and by stakeholders (including institutional investors) in relation to one another. According to the Code, its principles may be regarded as reflecting the latest general views on good corporate governance which now enjoy wide support. It also states that the principles have been translated into specific best practice provisions that reflect national and international ' best practices'; additionally they create a set of standards governing the conduct of directors, supervisory board members and shareholders.12 An overview of the major principles and best practice provisions of the Tabaksblat Code is included in Annex 2.1 to this chapter. An important feature of the Tabaksblat Code is the comply or explain' rule: companies have to report on their corporate governance structure and compliance with the best practice provisions of the Tabaksblat Code in their annual reports. Deviation from the best practice provisions may be justified if the specific circumstances so require. The board of directors needs to explain to the shareholders, however, why the best practice provisions have not been not applied. If the general meeting of shareholders approves the deviation from the Code provisions, the company is deemed to comply with the Code as far as good corporate governance is concerned. What matters is that shareholders, the board of directors and the supervisory board enter into a dialogue regarding the reasons for non-application of the provisions of the Code. The preamble to the Tabaksblat Code states that the Code will come into force with effect from the financial year starting on or after 1 January 2004. According to the preamble, the Code applies to all companies whose registered office is in the Netherlands and whose shares or depository receipts for shares are officially listed on a government-recognised stock exchange.13 Having regard to the self-regulatory nature of the Tabaksblat Code, section 2.8.2 will address the question whether listed companies are actually legally bound by it.

The starting point of the Tabaksblat Code is Dutch company law.14 Owing to the divergent national systems of company law, foreign corporate governance initiatives differ as to content. The Tabaksblat Code does, however, mirror international developments in corporate governance. It takes into consideration SOX, the Combined Code, the EU Action Plan (see section 2.6.2.2), the OECD Principles and the new listing standards of the New York Stock Exchange and NASDAQ.15

In 2004, the Dutch government responded positively to the Tabakblat Code by stipulating that its entire unaltered content will serve as a code of conduct for listed companies.16 The government also opted for introducing the ' comply or explain' rule. In accordance with the recommendations of the Tabaksblat Committee the government favours legally enshrined self-regulation' over the introduction of new legislation. The reasons given by the government for this are, firstly, the existing differences in corporate structure and corporate governance within companies, which they consider to be better served by a system of self-regulatory rules. Secondly, a code is more flexible than legislation, thus allowing companies to respond to rapid changes on international financial markets, which in turn may influence the public opinion on what constitutes good corporate governance. Moreover, unlike legislation, a code may contain best practice provisions that set an example for companies.

The government established the Dutch Corporate Governance Code Monitoring Committee' by the end of 2004. Its task is to annually review the operation of the Tabaksblat Code in the light of experiences gained with the code and new developments in corporate governance. 17 The government has also announced several legislative amendments as recommended by the Tabaksblat Code.18 On 1 October 2004, the Dual-Board Company Structure Reform Act (Wet Aanpassing Structuurregeling) came into effect, amending Book 2 (Legal Entities) of the Dutch Civil Code (DCC). It introduced a new paragraph 5 to article 2: 391 DCC.19 This new paragraph states that further requirements, with respect to the content of the annual report, may be set by governmental decree (AmvB). Such requirements may relate in particular to compliance with the codes of conduct designated in the decree. In this way the Tabaksblat Code was designated by Decree of 23 December 2004 as a code to which the comply or explain' rule applies. As per the financial year 2004-2005 the new reporting requirements had to be followed.20

The Dual-Board Company Structure Reform Act has brought about some significant changes to the Dutch two-tier board system. In addition, it has altered some aspects of the distribution of power among corporate bodies of companies not subject to the statutory two-tier board rules. Shareholders have been vested with extra powers vis-à-vis the board of directors. In Annex 2.2 to this chapter an outline will be given of the most important amendments introduced by the Dual-Board Company Structure Reform Act. By enacting the Dual-Board Company Structure Reform Act the Dutch legislator has taken the first steps in acting upon the Tabaksblat Committee recommendations.

As part of its duty to supervise the financial reporting of listed companies, the Netherlands Authority for the Financial Markets (AFM) can examine whether a listed company has indeed included a statement on its corporate governance structure and compliance with the Tabaksblat Code in its annual report.21