On 8 December 2016, the Monitoring Committee Corporate Governance Code published the new Dutch Corporate Governance Code, taking into account the feedback received from various stakeholders during a consultation phase.
The new Code applies to any financial year starting on or after 1 January 2017. Every Dutch listed company needs to state in its management report to which extent it complies with the provisions of the Code. If a company does not comply, it has to explain why.
The Code has been significantly revised in both structure and content, and is based on a number of specific themes. It places greater emphasis on long-term value creation and risk management, and it introduces culture as a new element. The Monitoring Committee has simplified the Code by removing overlaps and conflicts with laws and regulations, and it has included new corporate governance developments.
As expected, the Code emphasises the importance of a solid risk and control framework. Management boards will need to provide extended statements on risk and control in the annual report. This requires timely review by companies and possibly changes to the current risk and control framework and related processes.
Noteworthy changes to the consultation documents include a narrowed scope of the going-concern statement, different appointment terms and remuneration rules for supervisory directors, the ability to use the 180-day response time, and a ban on depositary receipt structures being used as an anti-takeover measure.
Where the Code requires changes to rules, regulations or procedures, a company will be deemed compliant with the Code if those changes are implemented no later than 31 December 2017. The Monitoring Committee recommends that the key aspects of a company’s corporate governance structure and compliance with the Code will be discussed at the 2018 annual general meeting.
Below we highlight the key provisions of the Code. A more comprehensive overview of the changes to the Code will be provided in a separate Legal Alert. The Code can be found here.
There is a greater focus on long-term value creation and company culture. Boards have to pay attention to opportunities and risks while weighing the interests of all stakeholders.
The management board will need to develop a view on long-term value creation and must formulate a strategy in line with this. When developing the strategy, the interests of all stakeholders should be taken into consideration. The supervisory board should be engaged early on in the formulation of the strategy and should monitor the implementation thereof. An ongoing review of the strategy will be required and adjustments will need to be made if required.
The company’s culture, embodied in values, must also be aimed at long-term value creation. Just following rules and protocols is not sufficient. The management board should actively promote a culture of openness and approachability within the organisation, and involve the supervisory board. It should promote the company’s values through leading by example.
Risk management is reinforced and companies must have a solid framework for effective control.
As part of this solid framework, a company must have a strong and independent internal audit function, a proactive audit committee and ongoing external auditor involvement.
The management board must state in the management report that the report adequately addresses any major failings in the internal risk management and control systems. Contrary to what the consultation document provided, the management board does not need to declare that the continuity of the company is safeguarded for the next twelve months. However, it has to describe the material risks and uncertainties relevant to the company’s continuity for the next twelve months. The management board should also declare that, based on the company’s current state of affairs, it is justified that the financial reporting is prepared on a going concern basis. Another important element is that the statement has been extended to include not only financial, but also non-financial reporting risks.
The right checks and balances between boards are important. The supervisory board needs to be sufficiently independent from the management board and the company. New rules for the executive committee are introduced and there are no material changes in the guidance for one-tier boards.
A supervisory director may be appointed for two consecutive four-year periods, followed by two consecutive two-year periods. An explanation is sufficient in case of a re-appointment after an eight-year period, while the consultation document only allowed this re-appointment in specific circumstances. This limitation does not apply to supervisory directors in their third four-year term on the date on which the Code enters into force and for those directors who will be up for re-appointment for a third four-year term at a general meeting in 2017.
There is more room for non-independent supervisory directors who hold a 10% or greater stake in the company or represent a company that holds such a stake. Where this used to be limited to only one non-independent director, each major shareholder or group of major shareholders may now have one representative in the supervisory board, provided that the majority of the supervisory directors is independent.
If the company has an executive committee, the management board must explain in the management report why and clarify how this committee is set up and how the executive committee and the supervisory board interact.
The relevance of diversity is emphasised, and the supervisory board should draw up a diversity policy for the management board, the supervisory board and, if applicable, the executive committee. This policy should address diversity aspects relevant to the company such as nationality, gender, age, education and experience.
Other than initially anticipated by the Monitoring Committee, there will be no separate Code for the one-tier board. The one-tier board provisions are included in a separate chapter of the Code. The chairman of the one-tier board must be independent and the independence best practices for supervisory directors apply to non-executive directors.
The management board’s remuneration must be clear and simple and stimulate long-term value creation. Supervisory directors may not receive share-based remuneration.
Remuneration should not stimulate managing directors to act in their own interest or to take risks outside the company’s risk appetite and strategy. It should take into account how executive pay relates to other salaries paid within the company’s group. In the remuneration report the supervisory board should outline the ratio between the remuneration of the managing directors and that of a representative reference group within the company’s group. The supervisory board prepares the remuneration framework, and must also check how managing directors view their remuneration.
Supervisory directors may be not be rewarded in shares or options, contrary to what the consultation document proposed.
The Code reconfirms the principles of shareholder participation. Good governance requires full participation by all shareholders.
There is no material change to the provisions regarding the company’s relationship with shareholders. Principles addressing this relationship have been clarified and shortened, and are aimed at avoiding overlap with statutory provisions.
The 180-day response time that may be imposed on shareholders requesting a change in strategy is unchanged, contrary to what the consultation document proposed.
A depositary receipts structure is only allowed to prevent shareholder absenteeism at general meetings. The structure may not be used as an anti-takeover measure; the consultation document has not been followed on this point.