5.5 Remaining differences

Although there have been substantial changes for better corporate governance in the three countries and more and more convergence, there are still differences.

In the UK nearly all listed companies have a non-CEO chairman. The UK chairman is at the company offices 2 or 3 days a week; he is very prominent and speaks directly with shareholders.

In the US the non-CEO chairman is not yet the norm. At present about 30% of the listed companies have a separate chairman. Two reasons for the slowness of the US in introducing the non-CEO chairman are the strong CEO lobby that opposes the development as well as the culture of having respect for the exceptional individual and of giving him a chance. In US practice, lead directors in the 70% of the listed companies that still have a CEO/chairman as well as separate non-CEO chairmen in the other companies, will continue to be less visible than chairmen in the UK.

The Netherlands, with its two-tier boards, has always separated the function of CEO and chairman, but because a strong CEO is only a recent phenomenon and not natura! to Dutch culture, the role of the chairmen has still to be strengthened to give counterweight.

Regarding the position of the chairman the three countries are in different phases of development. The UK is 15 years ahead, as a leading example. It may be that because of tradition and culture US and Dutch chairmen will remain less prominent. Americans like young leaders and have respect for the successful individual. Delaware jurisprudence puts emphasis on the complete board and not just on one chairman leader. Furthermore, US development over the last 20 years has favoured the rise of even more strictly independent directors in a large majority as counterweight rather than the emphasis on the non-CEO chairman or lead director. The Dutch culture of supervisory boards, limited to monitoring does not promote chairmen who are the public face of the company. But the Dutch will realize that if they want a strong supervisory board it needs a strong team leader.

Although there is convergence in many elements of better corporate governance, such as committees, forma! nomination and evaluation procedures, there remain differences between the three countries mainly in the organization and composition of board, the degree of involvement in decision making, the role of the outside directors in strategy and in the way that the outside or supervisory board members receive information.

The main difference in composition between UK and US boards is that in the UK the typical board has around 4 executive directors, a chairman and a small majority of around 5 or 6 NEDs. The UK seeks balance.

In the US the board has only one executive — the CEO — and about 7 independent directors. The US seek counter balance. Other executive officers than the CEO do attend board meetings, but have no vote.

Why is the one executive, the CEO, in the US outnumbered to the tune of 1:7, where in the UK the foor executives are only facing five or six outsiders at the boardroom table? The reason is often sought in the difference of how companies were run in the past. In the US there was the tradition of the powerful CEO/chairman. The forces that wished to check the dangers of a dominating corporate leader thought it wise to surround him at board level with an overbearing majority of independent directors. In Britain team spirit is admired. Companies would also be run best by a team, so all top executives are on the board only slightly outnumbered by non-executives; they all form part of a team and the captain, i.e. the chairman, is not the head of management. Besides in the UK the full board is involved in running the business, so it makes sense to have all top executives on the board; in the US the board is more at a distance from day-to-day management and looks at the big picture, where the views and advice of outsiders is useful and the views of management are sufficiently represented by its leader, especially if other officers attend the meeting.

Under the two-tier board system of the Netherlands, and its tradition of teamwork, there was no need for outnumbering. The board of management performed its tasks, the supervisory board monitored, but did not take part in decision making. They can only approve or veto decisions brought to the table. The fact that supervisory boards usually have more members than management boards is not a result of a need to create counterweights, but because the tasks of both boards are different.

In practice a Dutch combined meeting, of both supervisory and management boards, would resemble the meeting of a UK board, or to a lesser extent, the meeting of a US board to which all top officers have been invited, except for the different tasks and obligations of the various directors and executives present.

Hereunder follow the main differences between the Dutch two-tier system on the one hand and the UK, US and Netherlands one-tier system on the other.

In UK, US and the Netherlands one-tier boards all directors — executive and nonexecutive — are — that is the first main difference between a two- and a one-tier board — involved in decision making, including strategy and succession planning like US and UK boards and they — the executives and non-executives — will all have to monitor each other as a team. In a two-tier system supervisory directors are not involved in decision making. They only monitor.

According to the law (DCC and jurisprudence) Dutch supervisory directors only monitor the strategy achievement. The DCC and the Frijns Code only mention achievement and do not mention strategy development. Supervisory board members are not involved in the development of strategy. This is the second main difference between a one-tier and a two-tier board.

There is also a difference of nuance between US and UK boards in strategy development. In the US the officers develop strategy and independent directors actively challenge and discuss alternatives. In the UK the whole board, including the NEDs, develops strategy. The background of this difference of approach is that the US board is slightly less hands on. If a Dutch company chooses to have a one-tier board it can choose whether it wishes to follow the US or UK example.

Under the two-tier board system Dutch supervisory directors are not involved in decision making. For this reason they receive information at a later stage than outside directors in UK and US companies do. UK and US outside directors have more on-sight information and direct information from lower staff and division heads. This is, again, a consequence of the difference between a oneand a two-tier board. If a Dutch company would opt for a one-tier board, the non-executives would also get early information.

Whether a company chooses for a one-tier board or keeps a two-tier board I propose, as is mentioned in sub-section 4.5.5, that the board or boards have a special meeting once a year to discuss how supervisory or non-executive directors will have a role in strategy, development, which topics are included in strategy in any case, whether points of strategy will be discussed at most meetings, what the timing of providing information to outside directors will be, whether outside directors will receive on-site information and may communicate with middle management. My proposal will be worked out in detail in paragraph 5.6 hereafter.

When it comes to evaluation and succession planning the UK has developed rigorous and formal evaluation practices; discussion about succession is regular and formai. One tries to avoid "discussions in the corridor".

The US have developed the practice for boards (in committees and the full board) to hold discussions about lower management succession and income.

In the Netherlands the nomination committee limits its work to directors' nominations. The remuneration committee limits its work to director's remuneration. Most Dutch remuneration committees stick to this limitation. Since 2008 only at banks these committees are obliged by law to check the remuneration policies of lower management. Still all nomination committees limit their succession interest to directors only.

I propose that the boards meet at least once a year on the rigorous and wider discussion about succession internally, as mentioned above and in subsection 4.5.17 on succession and in 5.6, on page 426 hereafter.

It is UK practice to describe the roles of non-executives and some chairmen in great detail. This is a consequence of the common law system and the freedom of shareholders in the UK and the board in the US to organize the company as they wish. In the Netherlands this has not been the custom, because of the greater amount of mandatory law on companies in the detailed Dutch Civil Code. However, there are many good reasons, e.g. for clear criteria when it would come to exculpation grounds for directors, to describe such roles in interaal regulations and appointment letters in the Netherlands as well. See UK chapter, sub-section 2.5.8.

Executive sessions, where independent directors meet without any officers, before or after each board meeting are a US invention first put in practice in 1993 at General Motors.

This idea finds its roots in the US emphasis on independence and the frustration of US outside directors serving with overly infiuential CEO/chairmen.

The example of holding executive sessions before and after each board meeting could be followed in the UK and in the Netherlands (both in one- or two-tier boards).

In the three jurisdictions the concepts of whom the directors are working for are converging as well. In all of the three countries there is now a greater outside pressure exercised by large shareholders, foreign shareholders, shareholder activists, voting advisers, environmentalists, employees, government supervisors and the media. Boards should consider, and in the Netherlands in many cases consult with, all interested parties and then decide on the direction that should be taken for ensuring the interest of the company and its enterprise, with a light tendency to long-term shareholder interest, see Dutch chapter, sub-section 4.2.5.

There are slight differences in the possibilities to have one-on-one meetings between directors and selected shareholders. Board members have to communicate directly with strategie long-term "stewardship" investors. The differences stem on the one hand from the opposition between the easy going UK city "clubbyness" and on the other hand US stricter laws on shareholder equality and insider trading and lastly for the Netherlands the Jack of experience in communicating with shareholders. UK, US and Dutch law makers have developed question and answer letters or guidelines to facilitate these direct selective communications or one-on-ones.

The US has more litigation, more indemnification as well as higher D&O insurance premiums, all of which are a consequence of a sue at the drop of a hat mentality and a different legal system in every state. The more limited possibility of indemnification for directors in the UK and the Netherlands lies in the law.

The UK has very few liability cases, because of the rule that the losing party pays all the costs of the winner and because of the absence of no cure no pay or large percentage of gain fee arrangements and a limited possibility of derivative actions; furthermore it is simply not part of British culture.

The Netherlands' concept of joint and several liability is opposed to UK and US practice, where liability cases are directed at individual directors.

A vital question is whether the decision of a Dutch company to opt for a one-tier board would increase the liability of outside non-executive directors, above that of the present supervisory board member directors. In theory the answer is yes: more liability, because the Dutch have the concept of joint and several liability of directors and, from a formal point of view, managing directors, including every director on a one-tier board are more likely to be held liable than supervisory directors, as they have different functions. In practice the answer is no, because the Supreme Court has decided in Staleman v. Van de Ven that liability is not a dogma, but is based on specific circumstances, including assigned functions and interaal regulations and depends on the role of each director in a specific case. And also the answer is no, because supervisory directors do at present seldom avoid liability in the rare cases that managing directors are found liable. See cases like Tilburgsche Hypotheek Bank, OGEM, Bodam and Ceteco, where managing and supervisory directos were liable, because of serious blame. Managing directors are only liable in cases of serious default. In those cases even supervisory directors should have been aware of the problems and have taken action. It is to be hoped and expected that Dutch jurisprudence will accept scope for entrepreneurial judgment of directors in good faith and accept exculpation in such cases for non-executive directors, keeping in view the difference between inside and outside directors as the US and UK courts do; compare section 1157 of the Companies Act mentioned in sub-section 2.6.6, which gives the judge a mitigation right in connection with the function. The Dutch Parliamentary Papers to the Act refer to the Staleman v. Van de Ven case and seems to support the hope for different treatment of non-executive directors depending on the circumstances of the case and the assigned functions.