19 Say-on-pay

A final conclusion concerns the authority of the general meeting to determine the remuneration policy and to vote (or to discuss) the application of this policy in the previous financial year. The aim of these say-on-pay regulations in the Netherlands for listed and unlisted public limited companies is in my opinion to guarantee sound supervision of the way that the supervisory board exercises its authority to determine executive compensation. Another aim of these regulations relates to the determination of the maximum amount of remuneration for executives by the general meeting. The authority to establish individual remuneration and the remuneration policy, as well as the authority to discuss or to vote on the remuneration report, must be seen and weighed in that light. When assessing – and perhaps amending – the existing say-on-pay regulations, I believe that the legislator must beware of introducing legislation whereby the general meeting of listed companies acquires more power over the determination of executive compensation than is necessary to exercise adequate supervision. There are a number of consequences linked to this.

First, it should be considered whether the determination of individual remuneration should primarily lie with the general meeting. One option would be to amend Art. 2:135.4 DCC so that the authority to determine executive compensation is transferred to the supervisory board, if there is one. If there is no supervisory board, the general meeting could be granted the authority, or the authority could be delegated to a different body in accordance with the articles of association. In practice this modification would have only limited value, however. Public limited companies over a certain size will as a rule have a supervisory board to which the authority to determine the individual remuneration of executives has as a rule been delegated in accordance with the articles of association. This is without exception the case with listed companies.

Second, it must be emphasised that the binding say-on-pay regulation regarding remuneration policy as we know it in the Netherlands concerns a rather far-reaching form of supervision. This regulation came into effect at a time when a large majority was in favour of strengthening the position of shareholders. After a number of negative experiences with shareholder activism, the mood at present seems to be against strengthening the position of shareholders. In addition, the determination of the remuneration policy by shareholders, given the modern remuneration practice, no longer seems to dovetail with the duty of the board of management to bear the interests of the company in mind at all times. After all, the current remuneration structure is designed to motivate (i.e. monitor) executives by bringing their own interests in line with achieving certain goals. In theory, the shareholders could use the remuneration policy to design these goals in such a way that executives would be encouraged to serve the interests of one of the stakeholders, the shareholders, in a disproportionate way. This does not mesh with the fact that it is up to the board of management and the supervisory board to determine the best possible route to long-term value creation.

The legislator could thus choose to weaken the position of the general meeting by assigning the authority to determine the remuneration policy under the articles of association to the body that also determines individual remuneration, in the case of listed companies usually the supervisory board. In that case the general meeting should always have an advisory role to play in the remuneration policy to ensure that shareholders can adequately exercise supervision.

A more obvious solution would be to ensure that the supervisory boards of Dutch listed companies always have the authority to draw up the remuneration policy. The above is already present in the 2016 Code. It states that the supervisory board is the body that presents the remuneration policy to the general meeting for approval. This route appears mandatory to me, and could be laid down by law. If this legal route is not chosen, the supervisory board must test whether a particular remuneration policy that is being proposed for approval by a shareholder or group of shareholders is in accordance with the interests of the company and its affiliated enterprise. If this is not the case, or only partly the case, for example because the remuneration policy concentrates too much on aligning the interests of executives with the interests of the shareholder(s) in the medium to short term, then in my view the supervisory board is obliged to reject the proposal to put the policy to a vote at the general meeting of shareholders. If the supervisory board is side-lined, for example because the board of management has put the proposal on the agenda, then the supervisory board will have to fight the adoption of the remuneration policy via the courts, either before or in retrospect.

Third, when granting individual remuneration, the supervision of the general meeting must be taken as the starting point. The general meeting should thus be granted a reticent role in the introduction of an advisory say-on-pay regarding the remuneration report. This is a result of the view included in the revised shareholders directive which says that this vote is primarily intended to guarantee that the remuneration policy is implemented in accordance with that policy. The informative value of that vote would in that framework mainly concern the question of whether the implementation of the approved policy in practice satisfies the expectations that that remuneration policy raised when it was approved. If individual remuneration is clearly in conflict with the remuneration policy, then that remuneration is null and void. It goes without saying that a negative vote could also be the result of a different sort of dissatisfaction, for example with the chosen strategy. The supervisory board would be well advised to enter into discussions with the relevant shareholders in the event of a substantial number of negative votes to try to ascertain where the dissatisfaction is coming from. In the event of a negative vote, the next remuneration report must explain how the company has taken this sentiment into account. In my opinion, it would be going too far to link consequences to a negative vote. I am thus not in favour of the regulations that apply, for example, in the United Kingdom, where a negative vote by the general meeting means that the remuneration policy must once again be presented for approval to the general meeting. That would mean that the general meeting, in combination with its right of approval, would have too much control over individual executive compensation. This would only work in favour of an improper use of the right to vote on the remuneration report. It also fails to recognise that dissatisfaction can often be resolved by a different interpretation of individual remuneration within the policy previously approved by the general meeting. Further, it also fails to recognise that there could be other reasons behind a negative vote. Within this framework, and in line with the revised shareholders’ directive, we should not forget that the remuneration policy must be presented for approval to the general meeting once every four years. It seems to me that an annual advisory vote on the remuneration report without further consequences would be the most suitable in the Dutch situation.