The Dutch Corporate Governance Monitoring Committee has published its annual monitoring report on compliance by Dutch listed companies with the Corporate Governance Code for financial year 2019. The Committee has selected the following key focus areas for the coming monitoring period:

• in-depth study on long-term value creation, stakeholder dialogue, the role of shareholders, and diversity
• quality of explanations and reasons provided for deviating from the Code's provisions, which the Committee identifies as being essential for meaningful monitoring
• exploring possibilities on further tightening of the compliance study methodology
• enhancing the participation of Dutch companies with a foreign stock exchange listing in the compliance study
• examining the quality of supervisory board reports and committee reports

The Committee also issued more detailed guidance on the publication of internal pay ratios. Below, we highlight some of the Committee's main findings. An English translation of the report is expected to be published in the beginning of 2021.

High compliance rate – "assumed application"

As in previous years, there is a high rate of compliance with the Code overall (98.4%). However, as a point of criticism, the Monitoring Committee adds that 75% is "assumed application". As a result of the "comply or explain" principle, only deviations from the Code without substantiation are considered non-compliance. This means that if a company does not explicitly state that it has deviated from a provision, the company is assumed to have complied with the provision. This is especially the case with Code provisions on conduct – requiring certain behaviour from the company – where it is difficult to verify whether such conduct was indeed demonstrated. According to the Committee, the monitoring research shows that "assumed application" presents an overly optimistic view of compliance with the Code's fundamental conduct-related provisions.

Long-term value creation and culture

When reporting on themes like long-term value creation and culture, the Committee expects companies to explicitly state their core values and behaviour. Further, the connection with the company's strategy should be made clear and linked to the value the company creates on the long term. According to the Committee, reporting on these topics focuses more often on procedure and is process-driven, while the focus should be more on substance. The Committee suggests that it might be helpful if companies used the integrated reporting method by explaining which non-financial indicators contributed to long-term value creation. The monitoring report includes some examples taken from annual reports which the Committee considers best practices in terms of reporting on these themes.

Diversity

Another topic the Monitoring Committee touches on is diversity. The Committee considers the current compliance rate on the diversity provisions too low (91.6% as compared to 89.1% in 2018). In other observations, the Committee finds it remarkable that some listed companies apply a lower target than 30% for their management boards. Furthermore, the Committee notes that several companies seem to have difficulty in setting broader diversity goals aside from gender diversity. In the wake of new diversity legislation, companies are urged to report in a substantive manner when deviating from the former statutory target number (30%) which lapsed on 1 January 2020. The Committee expects the broader concept of diversity to be a key priority on the agendas of listed companies.

Foreign-listed Dutch companies

This year, for the first time, 15 Dutch companies with a foreign stock exchange listing were included in the monitoring process. According to the research, these companies deviate more often from the Code than Dutch companies with a listing on Euronext Amsterdam. The deviations often arise from cultural background differences and relate to topics such as share ownership of supervisory board members, the composition and independence of the supervisory board, terms of appointment and remuneration for management board and supervisory board members.

Monitoring Committee guidance on internal pay ratios

Pursuant to the Code, companies must disclose their internal pay ratios. The relevant best practice provision, 3.4.1.iv of the Code, provides little guidance. According to the Code, companies are in principle largely free to determine the manner of reporting. However, the Committee observes that since companies apply a variety of criteria, the published ratios of different companies are difficult to compare. For a clear and uniform approach, the Committee provides detailed guidance on page 48 of the report. In brief, it is described as the ratio between (i) the average annual remuneration of the CEO and (ii) the average annual remuneration of the employees of the company and its consolidated group companies. The Committee urges companies to include the required information in their remuneration reports as of the financial year starting on or after 1 January 2021.