221 Ultimate remedies: governmental intervention?

The perspectives in Dutch corporate law provide different approaches to deal with the prospect of corporate mismanagement by the board. The partnership perspective emphasizes the fundamental voluntary nature of corporate cooperation.1 Corporations are considered to be private by nature, involving the freedom of each stakeholder to exit the partnership if they do not agree with the terms of engagement. The market environment provides stakeholders with the freedom to escape from corporations which they perceive do not sufficiently take their interests into account. For contractual stakeholders, this involves the option of terminating their contractual relationship with the corporation. For shareholders, this involves the option of selling their shares. While the limits on such a freedom to exit the corporation may be negotiated, the fundamental notion of freedom of contract seems to prevail in Dutch corporate governance, as exemplified by the rule that a transfer restriction (overdrachtsbeperking) may not result in the transfer of shares being made impossible.2 In my understanding, this market-based approach to overcoming corporate mismanagement justifies why corporations and their boards may have significant authority over the interests involved in their corporation without the need for public intervention. Stakeholders are considered free to exit the corporation and so have no fundamental need for additional public remedies to protect them against corporate mismanagement.

In relation to involuntary stakeholders who lack the capacity to exit the corporation, the partnership perspective does provide additional remedies to protect their interests, including the potential for governmental intervention.3 In the situation of involuntary harm imposed on stakeholders, the partnership perspective provides grounds for claiming damages from the board based on general liability law, including the rules governing board liability for severe mismanagement (onbehoorlijk bestuur).4 In other situations when the market mechanism fails to internalize costs burdened by involuntary stakeholders, general governmental intervention may be merited through additional regulation, such as environmental duties of care or rules of competition law preventing an abuse of a dominant market position.5 In my understanding of the partnership perspective, the guiding standard for such governmental interference is to correct the market mechanism and protect the freedom of stakeholders to voluntarily decide to join or exit the corporate partnership. All in all, this does provide voluntary and involuntary stakeholders of the corporation with remedies to overcome corporate mismanagement and provides limits on the autonomy of the board.

In contrast, the institutional perspective as I interpret it considers the corporation to be constituted by a legal concession, thereby opening the way for retracting this concession in extreme circumstances. Historically, the sovereign which chartered the corporation held a visitational right to visit the internal governance of the corporation and to inspect faithful adherence to the purpose for which the corporation was chartered.6 Arguably such visitational power is still implied in the legal authority held by the Dutch public prosecutor (openbaar ministerie) to request the dissolution of a corporation whose purpose or activities violate public order (openbare orde).7 A recent example is the case of software-provider Centric, in which the public prosecutor requested an inquiry procedure due to severe mismanagement causing a threat to the public interests involved in the continued operation of Centric.8 This authority of the public prosecutor might be extended to challenging individual board decisions on behalf of society and the public interests invested in the corporation. The appointment of state supervisors in Fortis, ABN AMRO, Aegon and ING by the Dutch government after their bail-out in 2008 could be viewed as another operationalization of state interference in the internal governance of corporations.9 Particularly the authority of the public prosecutor to request the dissolution of corporations could be considered as an ultimate remedy to prevent corporate mismanagement at the expense of social and ecological interests in extreme circumstances. In my understanding of the institutional perspective, the guiding standard for such ultimate governmental intervention should be whether the decisions of the board severely threaten the public purpose for which the corporation has been constituted and are in violation of the general principles of reasonableness and fairness. The institutional perspective therefore equally provides an ultimate remedy to overcome corporate mismanagement at the expense of social and ecological interests.

Finally, the ecosystem perspective emphasizes the need for corporate boards to preserve the integrity of their corporate ecosystem in alignment with the needs and limits of their environment. In general, such ecosystem stewardship requires an internal corporate governance framework capable of self-assessing the alignment of board decisions with the needs of its environment.10 If such internal self-assessment fails, I would argue that the ecosystem perspective equally argues for external intervention in extreme circumstances. In my understanding of the ecosystem perspective, the guiding standard for such intervention should be the preservation of the resilience of the larger ecosystems in which the corporation is embedded.11 Instead of focusing on the public purpose of the corporation or the freedom of stakeholders to exit the corporation, the focus shifts towards the integrity of the factual relationship between the corporate ecosystem and its environment. As such, the ecosystem perspective suggests that governmental intervention is merited for example when corporations abuse their systemic function in their larger environment, similar to the decision in Fortis, or when posing a severe threat to public interests, similar to the decision in Centric.12