The One-Tier Board (IVOR nr. 85) 2012/4.5.7:4.5.7 Dierences between supervisory board members and non-executive directors

The One-Tier Board (IVOR nr. 85) 2012/4.5.7

4.5.7 Dierences between supervisory board members and non-executive directors

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If a company with a two-tier system were to change to a one-tier system, this would involve the supervisory board members becoming non-executive directors. It is therefore useful to discuss the differences between the two. This will give an insight into the functioning of supervisory board members and nonexecutive directors under present law and under the regime introduced by the Act and in some cases make clear why it would be an improvement if the Act were to be enacted:

(a)

Involvement in decisions

Supervisory board members are not involved in decision making: they merely approve or veto decisions. Non-executive directors are involved in all decisions of the board. They vote together with the executive directors. As they are involved in decision making, they need to know more, receive more in-depth information and have a greater understanding of the reasons for the decision. They are involved in the development of strategy. Accordingly, they are more involved and have greater responsibility than supervisory board members, which is an important difference (see 4.5.5 above).

(b)

Veto on major decisions?

A supervisory board as a whole, and therefore its majority, has a right to veto major decisions.

In a one-tier board the non-executives only have a veto if they outnumber the executive directors. It is a best practice rule of the Frijns Code that there should be more non-executive than executive directors.1 To ensure that the non-executive directors can outvote the executive directors, the law allows a provision in the articles of association of the company giving nonexecutive directors a double or even treble vote.2

(c)

Instructions to the executive directors

The supervisory board may give instructions to the executive directors on general guidelines only if this is possible onder the articles of association.3 In a one-tier board non-executive directors can take initiatives, which are binding on the board. Their influence is, of course, larger if they are in the majority by number of weighted votes.

(d)

Extra powers

Supervisory board members may have extra powers if provision for this is made in the articles of association (statuten).4

(e)

Co-management

Supervisory board members may not co-manage (kunnen niet meebesturen). This creates problems if supervisory board members wish to do so anyway, as sometimes happens in a crisis. Such situations bring forth the "one-and-ahalf-tier boards" referred to above. These complicated questions involving supervisory board members acting in excess of their powers may arise in cases where a company elects to have a combined board (e.g. Reed Elsevier). The same problem crises in a different way for non-executive directors. They can manage and give instructions, but may not represent the company.

(f)

Chairman

The position of a chairman of a one-tier board differs from that of a chairman of a supervisory board. The chairman of a one-tier board runs the board as a whole, presides over the meetings and arranges for the provision of information. In such a case, the CEO can focus on the day-to-day management.

(g)

More information and at an earlier stage

The supervisory board has the right to receive information only from the executive directors and only if it is necessary for the giving or withholding of approval.5 If a supervisory board member wants extra information he must go through the chairman and afterwards the complete board. Only then is he free to approach management. Non-executive directors receive more information, in particular more in-depth information about the business and the market, and receive it at an earlier stage.6 Also non-executives can collect information at their own initiative, in most cases informing the chairman and CEO that they are doing so. Therefore it is easier for nonexecutives than for supervisory board members to sense whether there is good teamwork in the executive team. These are important differences (see 4.5.6 above).

(h)

Represent the company

Supervisory board members cannot represent the company.7 Non-executives can, in theory, represent the company, unless they are not given signing powers in the articles of association (this is likely to be the case in most companies once the Act is enacted).

(i)

Knowledge attribution

The knowledge of a supervisory board member is not attributed to the company. However, the knowledge of a non-executive can be attributed to the company unless he is excluded from representing the company, which will usually not be the case.

(j)

Representation in case of conflicting interest

Supervisory board members may represent the company in cases where the executive directors have a conflict of interest.8 Non-executive directors do not have this power. The Act solves this problem by inserting a provision in article 2:129/239, paragraph 6 DCC that precludes any director with a conflict of interest from attending the board meeting and states that, if this does not solve the problem, the shareholders' meeting may decide.9

(k)

Legal person as director

Only natural persons may be supervisory board members.10 By contrast, legal persons may be managing or executive directors. The Act determines that only natural persons may be executives. This difference is of a technical nature.

(L) Calling meetings

The supervisory board as such may call a meeting. Non-executive directors do not have this power without the majority vote of the complete board. This could have been arranged in the Act, but has not been. Naturally, however, provision for this could be made in the articles of association.

(m)

Appointment

Under the present DCC it is possible to stipulate in the articles of association that one-third of the supervisory board members are appointed by persons or bodies others than the shareholders' meeting.11 This should also apply to non-executive directors, but is not stipulated in the Act.

(n)

Who determines remuneration?

The remuneration of supervisory board members is determined by the shareholders' meeting. Under article 2:135, paragraph 3 DCC the remuneration policy in respect of the management board (and hence of non-executive directors too onder the old law) is determined by the shareholders' meeting. Remuneration policy includes share and option plans, but not the amount of remuneration as such. In order to make the same arrangement for nonexecutive directors, i.e. that their remuneration is determined by the shareholders' meeting, this would have to be arranged in the articles of association.

(o)

Structure regime

Supervisory board members are important in "structure regime" companies. The DCC regulates their powers and their nomination and appointment. Under old law a "structure regime" company cannot have a one-tier board. However, the Act makes this possible. Article 2:164/274(a) of the Act provides that the articles of the DCC on supervisory board members in a "structure regime" company apply mutatis mutandis to non-executive directors in a one-tier board of such a company.

(p)

Committee membership

Committees are deemed to be part of a supervisory board. Usually they consist solely of supervisory board members. However, there is no legal obstacle to having other persons, for example executive directors, as members of board committees.

In a company with a one-tier board it would seem logical to have only nonexecutives as members of committees because of their monitoring role. Here too, however, there is no legal obstacle to having others as members.

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