28 February 2024

Future-proofing the Corporate Governance Code

Reinier KleipoolSven Dumoulin+ 4 other experts

In 2022, in response to the updated Code and the 2021 Monitoring report, the Minister of Economic Affairs and Climate Policy announced the commissioning of a study on the future readiness of the Code. The aim was to consider whether and how the Code could continue to provide a basis for good governance and supervision in the coming decade. On 19 January 2024, the minister published the study's main conclusions in a letter to parliament.

In our view, several developments seem to have led to this study. First, over the years, the nature of the Code has evolved from establishing best practices focused solely on the roles and responsibilities of management and supervisory board and shareholders, to becoming a code that increasingly addresses societal issues. Second, certain topics previously covered only by the Code are now also covered by legislation, resulting in overlap between the Code and various laws. Third, in its final document published at the end of 2022, the Code Monitoring Committee observed that the increasing "juridification" of society is placing greater strain on the "principle-based" character of the Code. According to the Committee's findings, this trend makes it more difficult for the parties supporting the Code and other stakeholders to agree on ambitious, future-oriented updates of the Code.

Main conclusions of study and focus areas

The minister presented the conclusions of the study to the Dutch lower house on 19 January 2024. In response to the study, the Cabinet agreed to "strengthen the future" of the Code as part of the corporate governance system.

The main findings of the study are that stakeholders endorse the Code's relevance, and that there is strong support to continue the current Dutch corporate governance system, which includes the Code and a committee that monitors compliance with the Code (Monitoring Committee). The study's conclusions further state that the core of the Code should remain intact, and that care should be taken to prevent it from becoming an overly legalistic document containing too much detail.

The minister's letter also highlights several concerns, including the increasing overlap between laws and the Code, and the increasing "juridification" of society. The minister further addresses the differing views about the exact division of the roles between the Monitoring Committee, the supporting parties, and the government and concludes that these differing views have been an inhibiting factor in establishing the effectiveness of and support for the Code and for the Monitoring Committee's work.

Conditions

To ensure a future-proof Code and Monitoring Committee, the minister has formulated the following three conditions:

1. A meaningful and sustainable Code is distinctive and adds value.

The Code should complement or precede regulation and aim to inspire and encourage board members, shareholders and employees to pay continuous attention to good corporate governance and to openly discuss related issues. The minister notes that the Code is currently already distinctive in that it matches current practices and offers tailor-made solutions. To stay distinctive, and to keep adding value, the minister states that the Code must provide concrete and practical guidance on how to comply with open statutory and non-statutory norms, anticipate legislation and provide guidance on how to meet expectations. The supporting parties and the Monitoring Committee have the responsibility to ensure that the Code has societal value and does justice to societal and international developments. Further, the minister emphasises that the Code must adhere to the principle that if an issue is already addressed in existing law, it does not need to be in the Code.

2. The Code needs to be supported, while ensuring an appropriate level of ambition.

To succeed, the Code needs to be widely supported by listed companies, their shareholders and employees, government and society. The minister has emphasised that it is the collective responsibility of the supporting parties and the Monitoring Committee to secure and propagate this support. The minister mentions that the current self-regulation and comply-or-explain method already contributes to this. Further, it is mentioned that to ensure the support of society, it is important that the Code does justice to societal and international developments and that it has an appropriate level of ambition. Lastly, broad and public consultation of future revisions of the Code is necessary to ensure public debate.

3. The Monitoring Committee must be able to act effectively, independently and bindingly through good cooperation and mutual trust between the supporting parties, the Committee and the government

The Monitoring Committee and the supporting parties have a substantive role in shaping and guiding the Code and its monitoring, with the government acting as facilitator. The minister observes that the Monitoring Committee must reflect the following:

  • a solid composition ensuring the knowledge and experience of different areas of expertise, understanding different stakeholder perspectives;
  • enough members who have enough time and are committed to serving on the committee. This especially holds true for the chairperson;
  • clear roles and responsibilities that are periodically evaluated, including for the supporting parties and the government; and
  • independence, while having the trust of supporting parties and other stakeholders.

The minister has also pointed to the importance of having a solid back office that is well-versed in corporate governance/corporate law, as this is important for the Monitoring Committee's functioning.

Ministerial support

The minister has pledged to support the future-proofing of the Code by amending the decree on establishing the Monitoring Committee to clarify the tasks of the Committee. This includes ensuring that the Committee pays attention to the quality of any explanations in the event of deviation from the Code, and to explicitly add that the Committee's role is to prevent and eliminate overlap with legislation. The minister will also provide a robust back office to support the Committee, not only to ensure practical support, but also to act as a link between the Committee, the supporting parties, and the government.

As for the new Monitoring Committee, the selection process for the chairperson has started, who will be tasked with selecting the other members. The minister is expected to provide an update soon.