The One-Tier Board (IVOR nr. 85) 2012/4.5.2:4.5.2 How supervisory boards have evolved in the last 30 years into a one-and-a-half-tier system

The One-Tier Board (IVOR nr. 85) 2012/4.5.2

4.5.2 How supervisory boards have evolved in the last 30 years into a one-and-a-half-tier system

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

We have seen in the chapters on the UK and the US that the positions of NEDs and chairmen in the UK changed substantially from 1993 onwards and that the position of independent directors and chairmen or lead directors in the US has changed especially since 2002. In the Netherlands the changes to the positions of supervisory board members and chairmen have occurred mainly since 2004.

Before 2000 a typical Dutch management board onder the two-tier system consisted of a managing director known as the algemeen directeur, a finance director and, possibly, another member. They operated by consensus. There was hardly any hierarchy and the managing director was a primus inter pares. This was characteristic of the Dutch style of consultation leading to consensus.1 The managing director was creative and developed and "sold" new ideas. The typical finance director was careful and cautious and in practice personified the checks and balances that existed within the management board. This was a real strength of Dutch corporate governance. Very interestingly, this idea of the CFO providing balance within the board and monitoring the CEO has recently been identified as a new phenomenon in the UK and the evolution of the CFO's role has been aptly summarized as "Number cruncher to co-pilot".2 Examples are Mark Loughridge of IBM and Simon Henry of Royal Dutch Shell, who are hailed as generalists capable of keeping their CEO onder control. CEOs are described by Simon Henry as "marketeers" who have great ideas, but, as he adds, "somebody has to bring reality to the table."

Many companies had anti-takeover defence mechanisms. The "structure regime" that conferred powers on the supervisory board and lelt few powers on shareholders was seen as an extra protection device. This encouraged managers to believe that they did not have to communicate with shareholders. Another factor was the high rate of absenteeism at shareholders' meetings, which were generally attended, in person by proxy, by no more than a third of shareholders.3 Although, technically, shareholders had the right to appoint and dismiss directors,4 alter the articles of association, vote on mergers and splitting,5 discharge directors from liability,6 declare dividends,7 issue shares, determine pre-emptive rights, redeem shares8 and call a general meeting of shareholders, they rarely made use of these rights. However, it is important to keep in mind that these rights are not part of management (bestuur).9

Supervisory boards were often management friendly. Usually the management board would propose candidates for appointment to the supervisory board. This was even the case in "structure regime" companies, where the law said that supervisory directors were appointed by the supervisory board. The role of supervisory board members was to "assist" the management board by providing advice and meeting with it for the purposes of consultation.10 They were often representatives of shareholders, for example advisors such as bankers, accountants and lawyers, and sometimes related customers and politicians.11

Management could operate without paying much attention to shareholders. This was the atmosphere in most companies, whether or not they were "structure regime" companies.

In 1982 and 1983 three serious cases of mismanagement hit the headlines in the Netherlands.

Rijn-Schelde-Verolme was a conglomerate of shipbuilders centred around a company run by maverick entrepreneur Verolme. The bankruptcy of the group led to a parliamentary inquiry whose proceedings were braadcast on TV. The inquiry revealed that:

(a) the management board was not fit for its task: although the CEO did have industrial experience, it was not in shipbuilding;

(b) the supervisory board had taken no action even in the face of disaster; in addition, the chairman had arranged for the company to pay for many of his private expenses. A moratorium on payment of the group's debts was agreed on 9 February 1983 and the government provided large amounts of state aid to the business before bankruptcy.

OGEM was a conglomerate of construction companies that went bankrupt in 1982. There was a lengthy investigation by the Enterprise Chamber. It was the first major mismanagement case and was decided by the Supreme Court in 1990.12 The main cause of the problems at OGEM was that the executives had strong egos, tended to act independently of one another and were united only in their disrespect for the supervisory board. The chairman of the supervisory board saw it as his function to blindly support the CEO. Two memoranda from supervisory board members who objected to the course of events were swept under the carpet.

The Association of Shareholders (Vereniging Effectenbeheer) instituted proceedings before the Enterprise Chamber, which in due course held that there had been mismanagement. Subsequently, the liquidator held the members of the management and supervisory boards liable. As they were not insured, the matter was settled for low amounts. However, all were kept busy with investigations, court cases and newspaper reports, and it was bad for their personal reputation.

Tilburgsche Hypotheek Bank was declared bankrupt in August 1983. At that time interest rates had soared to 14% and property values had plummeted. As a result, properties often provided insufficient security for mortgages. In response, the mortgage bank's managers transferred real estate back and forth with new "fixed" valuations. Members of the supervisory board noticed the problem and had it investigated, but did nothing. The members of both the management board and the supervisory board were held by Breda District Court to be liable to the liquidator.13 The supervisory board members were not covered by D&O insurance and paid liquidated damages.

The many bankruptcies of the 1980s and especially the abuse of empty BVs to leave national insurance contributions unpaid resulted in the inclusion of new provisions in the DCC and other legislation regulating the liability of directors in bankruptcy cases.14 Another result was that most directors took out D&O insurance. As long ago as 1986 Jaap Glasz, a well-known lawyer, dean of the Dutch Bar and an effective supervisory board member of many companies, wrote a book entitled "Recommended Rules of Conduct", which had been praised earlier at a meeting of the Dutch Centre of Directors (NCD) in 1985.15 His suggested rules contained many ideas that would later be incorporated in codes of best practices.

1995 saw the publication of the first Dutch corporate governance report: the Peters Report. Jaap Peters, retired CEO of Aegon, was a director of considerable authority. His committee produced 40 recommendations.16 The aim was to stimulate discussion in boardrooms and shareholders' meetings. Although there was initially plenty of discussion, there was not much follow-up.17

In 2001 the Ahold case caused huge turmoil. It suddenly came out that the board had overstated the group 's turnover in the accounts by including the turnover of joint ventures they did not really control and using side letters, possibly to confuse their accountants. This was even referred to as the "Ahold scandal". Although Royal Dutch Shell came in for criticism in 2001 for the way in which it had accounted for "future oil reserves", the directors were regarded as having acted in good faith. Nonetheless, this case too raised issues about better governance. The Enron and WorldCom cases in the US fuelled the debate still further. In my view, the spectacular growth in international ownership of Dutch listed shares and the rise in the number of foreign members of boards of Dutch companies have also been major factors prompting change.18

Eventually, the debate culminated in the appointment of the Tabaksblat Committee. Morris Tabaksblat, retired CEO of Unilever and Chairman of Reed Elsevier, has vast international experience in Brazil, New York and London. Despite his cosmopolitan background, Tabaksblat is also very much a Dutch polderaar at heart, in other words, someone who believes that it is best to keep on talking, compromising and soliciting support. He has been quoted as saying, "I can bring things together reasonably well, I believe."19

The Tabaksblat Committee produced a draft code in 2003 and, after wide consultation, the final Tabaksblat Code in 2004. Like the Cadbury Code, Higgs Review and Combined Code in the UK, the Tabaksblat Code introduced principles and best practice provisions on a "comply or explain" basis. In the Netherlands it is also called a "apply or explain" basis. The Tabaksblat Code also proposed legal reform, which was introduced on 1 October 2004, for more shareholder rights and, interestingly, the possible alternative of a one-tier board.20

The Tabaksblat Code was given a statutory basis in the DCC, which introduced the requirements that every listed company must mention in its annual report (jaarverslag) whether it complies with the Code and if not, explain why not.21 The government also appointed a monitoring committee onder Jean Frijns — the Frijns Committee — which reported each half year and updated the Tabaksblat Code on 10 December 2008.

All of this had an important impact, and even marked "the beginring of a revolution for supervisory board members."22 Many extra duties and roles were assigned to supervisory board members. The time needed to carry out their duties increased by 100%. Until the Tabaksblat Code supervisory board members functioned for and with management. Now they were to be independent and nominated by a nominations committee in keeping with a profile for every position. Supervisory board members were to be involved more intensely in monitoring the strategy of the management board. Greater emphasis was put on the roles of the chairman, assisted by a company secretary, and the audit, nominations and remuneration committees. There was even talk of co-management (medebestuur) by supervisory boards.23

In the area of strategy many supervisory board members take the view that they only monitor. Others — often retired CEOs of large, successful companies — wish to be more active like their US counterparts and even propose alternatives like their UK counterparts.24

The Tabaksblat Code was introduced on 1 October 2004. On that same day an important reform of Dutch company law introduced extra rights for shareholders, such as the right to appoint and dismiss supervisory board members. It also gave 1% of shareholders the right to put items on the agenda of general meetings, veto very important transactions and have a say on pay, as described above. Here the Dutch legislator may have overdone things in its zeal to adapt to foreign investors.

The Tabaksblat Code of 2004, the Act of 1 October 2004, various Enterprise Chamber cases such as OGEM and HBG,25 the rather sudden internationalization of the shareholders and of the boards of Dutch listed companies and the influence of foreign financial markets, including the indirect effect of the US Sarbanes-Oxley Act26 all combined to bring about substantial changes in the position of board members in Dutch companies. And there have, indeed, been substantial changes in practice.27 As a result of all these changes, many now speak of a one-and-a-half-tier system.28

There is a noticeable convergence with UK practice: harder working supervisory board members, independent nominations, more involvement in strategy, etc. US and Dutch boards are also converging, with harder working supervisory board members in the Netherlands and more non-CEO chairmen and the executive sessions in the US. And both US and Dutch boards now have more independent nominations and important committee work. To a large extent this is also influenced by large international investment institutions and their advisory voting institutions.

A monitoring committee — the Frijns Committee — was appointed to report on compliance at least once a year. The rate of compliance is generally good. After this committee had added a few new provisions to the existing Tabaksblat Code in 2008, the code was renamed the Frijns Code.

Deze functie is alleen te gebruiken als je bent ingelogd.