The One-Tier Board (IVOR nr. 85) 2012/4.7.4:4.7.4 Aspects of liability:• difference between supervisory board member and non-executive director

The One-Tier Board (IVOR nr. 85) 2012/4.7.4

4.7.4 Aspects of liability:• difference between supervisory board member and non-executive director

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.

This study has examined many different aspects of the various ways in which the management of companies is organized in the UK, the US and the Netherlands. Given the now pending choice between a two-tier and a one-tier board system in the Netherlands, there is a general worry that if supervisory board members become non-executive directors, they will be exposed to higher liability.1 Non-executive directors of a one-tier board will not merely be a more active version of supervisory board members; instead, they will have a different role as managing directors (bestuurders).

Non-executive directors in a one-tier board are described in the Frijns Code in 111.8, which mentions the possibility of a one-tier board. "The composition and functioning of a management board comprising both members having responsibility for the day-to-day running of the company (dagelijkse gang van zaken), i.e. the executive directors, and members not having such responsibility, i.e. the non-executive directors shall be such that proper and independent supervision by the latter category of members is assured."2

Non-executive directors will not only supervise. They will have wider responsibility than supervisory board members, because they will not only monitor but also be involved in decision making and developing strategy. They will receive more information and receive it at an earlier stage. They will actively challenge management while it is developing strategy, risk management and CSR (as in the US), or even be actively involved in the development of these strategie items (as in the UK). This means that non-executives will have more chance to prevent mistakes and damage for the company and therefore avoid liability. The biggest problem for supervisory board members and for the future non-executive directors as well — is to get good information. Non-executive directors will be better placed to obtain that information than supervisory board members in the traditional two-tier board system.

Below are some quotes of the Minister of Justice in explaining the new Act:

"Non-executive directors must supervise the executive directors and each other. Executive directors must supervise each other and the non-executive directors."3

"All directors are jointly and severally liable even for specific tasks, subject to the possibility of exculpation."4 "Non-executive directors participate in the development of decisions concerning the day-to-day running of the company.”5

"The tasks of non-executive directors are wider than supervising and advising. They have management board responsibility. They are involved in strategy to a greater extent than supervisory board members. They must not only take action when they see mistakes; the directors in a unitary, `monistic' board have joint responsibility for board policy. They receive more information and receive it an earlier stage. As they should know of problems at an earlier stage, they are more likely to be held liable. Liability depends on the circumstances of the case.”6

Clearly, there is a convergence with the roles of UK NEDs and US independent directors. Executive directors run the day-to-day business and develop and monitor the general strategy. Non-executive directors are not involved in the day-to-day affairs of the company, but develop and monitor the general strategy. Although there is joint and several liability, a non-executive director may be exculpated where he has received less information than an executive director and because he understandably spends less time on the specific point than an executive (see Schedule B to the UK Combined Code of 2008).

It is understandable that potential non-executive directors could be concerned about increased liability because of (1) the extra role of being a general director (bestuurder) and (2) the uncertainty caused by variable standards of liability.7

But is this concern justified? In my view not. First, it is important to note that in his reply of 2 May 2011 to questions of members of the Senate (upper house of parliament) the present Minister of Safety and Justice states on three occasions that liability will depend on the specific facts of the case, with a reference to the Staleman v. Van de Ven decision (in which a much more nuanced view is expressed and a factor is the description of the function), which is consistent with earlier comments of his predecessor.8 Second, the Act on the one-tier board makes a clear distinction between executive and non-executive directors. Third, onder the existing case law on the liability of management and supervisory board members, the laffer have often been held liable in the same way as management board members, subject always to the proviso that they have incurred serious blame. As supervisory board members are already in many cases held liable together with management board members under the two-tier system, the concern that non-executive directors will have greater liability than supervisory board members is in practice not impending.

When managing directors are judged under the present two-tier system to have managed the company improperly and to have been seriously culpable, it is usually the case that the supervisory board has failed in some way in the performance of its supervisory role.9 The same level of diligent supervision will be expected by the courts from the new non-executive directors of a onetier board. The difference, however, is that they will be better informed and can and should take earlier action to avoid default and damage.

I believe that my view is supported by the following case law:

1.

Mismanagement

Mismanagement judgments by the Enterprise Chamber are never against specific directors but against the company. However, the Enterprise Chamber can naturally rule against a specific director or group of directors in the case of a tied vote or other deadlock in the running of the company, but in most cases of mismanagement the ruling is for or against the whole management board and supervisory board, albeit sometimes for different standards of conduct. I would mention the cases of OGEM, Landis, Bobel and De Vries Robbé, all of which were held by the Enterprise Chamber to have gone bankrupt because of mismanagement on the part of the directors of both boards. In Textlite and Laurus the supervisory board was regarded in a different light from the management board, but mainly for technical procedural reasons. In HBG, RNA, DSM, ABN AM RO and ASMI the Enterprise Chamber held that there had been mismanagement by the company and therefore by all members of both boards. The main point is that these rulings were relevant to the company and both of its boards.

2.

Liability

In liability cases (Ceteco, Bodam, OGEM and Tilburgsche Hypotheek Bank) the supervisory board members are nearly always held to be liable when the management board members are also liable.

3.

Standard of conduct

It is interesting to note that the standard of conduct for liability of supervisory board members is often slightly different from that for liability of management board members; this is attributable to the different nature of their functions:

— Tilburgsche:

management:

fraud

supervisory:

failure to check the report they had ordered from the auditor

— OGEM:

management:

fraud

supervisory:

entrenched, i.e. always slavishly following whatever the CEO wished, not even reading documents

— Bodam:

management:

no accounting or filing

supervisory:

no action taken

— Ceteco:

management:

no action taken despite red flags

supervisory:

no action on red flags

4.

Let me now return to the straightforward case of Bodam. Management had failed to provide proper accounting and to file accounts and was liable. The supervisory board members were also liable as they had taken no remedial action after discovering the failures of management, such as dismissing the responsible director and fixing the accounting and filing. In the case of a one-tier board system a non-executive director would be liable if he fails to inquire at the beginring of the year about how the company arranges its accounting and also fails to follow up on the answer. It is a question of timing and involvement. The same would apply to risk management systems.

The supervisory board member must be active if he discovers something, the non-executive director must be proactive. At first sight this would imply that the non-executive director has a greater risk of being held liable than the present supervisory board member, but because he is a member of the one and only board he will also receive full and timely information, thereby enabling him to minimise the risk.

I would like to repeat that although the possibility of a difference of liability between a supervisory board member and a non-executive director exists in theory because of the formal difference in their functions, this is less so in practice because (a) directors are not easily held liable owing to the far off threshold of serious blame, and (b) if management board members are liable because it is so serious, the supervisory board members will usually be liable as well.

Deze functie is alleen te gebruiken als je bent ingelogd.