21 February 2022

Proposal for Dutch Corporate Governance Code update ready for public consultation

Sven DumoulinReinier Kleipool+ 3 other experts

A proposal to update the Dutch Corporate Governance Code was published on 21 February 2022. The proposal prepared by the Corporate Governance Code Monitoring Committee (the "Committee") is set out in a consultation document inviting interested parties to respond by 17 April 2022. The Committee aims to adopt a revised Code later this year, with such revised Code applying to financial years starting on or after 1 January 2023. Companies would have until the end of 2023 to ensure that they comply with the revised Code.

We look forward to discussing the proposal in more detail with you and we will cater for the opportunity for group and bilateral discussions. Should you have questions in the meantime, please get in touch with your contact at De Brauw or with one of our experts.

What is being proposed?

The changes to the Code focus on five themes:

  • Long-term value creation, especially regarding ESG (Environmental, Social and Governance)
  • The role of shareholders
  • Diversity and inclusion
  • Changes arising from new legislative developments
  • Responsibility for annual accounts.

By proposing the changes, the Committee aims to respond to recent developments in society, such as a greater emphasis on ESG and sustainable corporate governance.

Long-term value creation

The Committee views climate change as one of the most important themes for the coming decade, having an impact on corporate governance and on long-term value creation as its pinnacle. Insufficient attention to ESG may, according to the Committee, have significant consequences for companies, and in this light the Committee proposes several additions to the Code, including:

  • Listed companies should formulate an ESG strategy as part of their overall strategy for long-term value creation, and formulate concrete accompanying ESG objectives
  • The company's strategy should also consider a balanced contribution to the societies in which the company operates, through the payment of taxes
  • The management board should present in the management report the ESG strategy, the actions taken and the results achieved
  • The management report should also set out the effects of the company's business activities on its value and production chain, where possible quantified and expressed in terms of money, and how the interests of the company's stakeholders have been considered
  • The management board should adopt a policy for an effective stakeholder dialogue and facilitate such a dialogue, to ensure that stakeholder interests are considered when formulating the ESG-strategy
  • Shareholders, including institutional investors, should recognise the importance of a strategy focused on long-term value creation

In addition, the Committee proposes including in the Code's explanatory notes that companies can choose to formulate a "purpose" in their articles of association or as part of their strategy. Companies considering the ESG-related impact on their value chains are referred to the draft CSRD Directive and the OECD's due diligence guidelines. By requiring that the effects of the company's business activities on its value and production chains be published in the management report, the Committee seems to pre-empt the enactment of the CSRD Directive.

Role of shareholders

In the 2016 revision of the Code, the provisions on the role of shareholders were left virtually unchanged. The proposal now seeks to further specify the role of shareholders and emphasise the importance of effective and sustainable shareholder engagement in the governance of listed companies.

For this purpose, the Committee took elements from Eumedion's Stewardship Code. The proposal entails:

  • A new best practice that shareholders and companies be willing to engage in dialogue and that companies initiate this dialogue, unless the management board believes this is against the interests of the company
  • Shareholders seeking a private dialogue should, at the company's request, disclose their total share position (long and short)
  • Shareholders that make use of proxy advisors should stimulate that these advisors are willing to enter into a dialogue with companies about their voting policies and guidelines, and these shareholders should ensure that their votes are cast in line with their own voting policies
  • Shareholders holding greater short than long positions (and thus benefitting from a decrease in the share price) should not vote on their shares
  • Stock-lending arrangements should be reversed when significant matters are up for a vote at an AGM or EGM, including matters (i) of economical or strategic interest, (ii) where the outcome of the vote is uncertain or controversial, and (iii) where the shareholder disagrees with the management board's advice

Diversity & Inclusion

The Committee emphasises that diversity goes beyond gender, and that inclusion is as important as diversity. To this end, the Committee expands the Code's provisions as follows:

  • Companies are to have a D&I policy for their entire business, which should include appropriate and ambitious targets to obtain a good gender-diversity balance
  • The management board, supervisory board and executive committee (if any) are composed in such a way that there is a good balance in expertise, experience, competencies, personal capabilities, age, gender identity, nationality, and cultural and other background; and – in the case of the supervisory board – independence
  • The recently enacted one-third quota for male and female supervisory board members should, according to a new explanatory note, also be guiding for the composition of the management board, the executive committee (if any) and the company's sub-top
  • In relevant D&I aspects, companies are expected to have concrete objectives for the composition of the management board, supervisory board and executive committee (if any); and, if this is a wider group, for the company's sub-top
  • In their corporate governance statement, boards should explain the company's D&I policy and how this is applied. This includes the results achieved in the reporting year and should, where this is deemed relevant and practicable, provide insight into inflow, promotion and retention of diverse talent

Where reference is made to the management board and supervisory board, this should also be read to include executives and non-executives on a one-tier board.

Amendments arising from new legislative developments

The Code's response time

The Committee proposes an "anti-cumulative" provision on the Code's 180-day response time and the statutory 250-day response time in the Dutch Civil Code.

The Committee has observed that the statutory response time that shareholders may need to observe in relation to (i) the tabling of shareholder resolutions concerning the appointment, suspension or dismissal of managing and supervisory directors and any related amendments to the articles of association, and (ii) a hostile takeover offer that has been announced or made, has a certain overlap or concurrence with the Code's response time. The Code's response time relates to shareholder resolutions that could lead to a change in strategy, such as the dismissal of managing and supervisory directors.

The Committee wants to maintain the response time in the Code, but addresses the overlap or concurrence by adding, in short, a rule preventing companies from opting for the Code's response time if they previously invoked the statutory response time. If the reverse is the case and the Code's response time was invoked first, the court will have to determine whether the company can still make use of the statutory response time as well.

Remuneration policy and report

The Committee has also observed the relatively new Dutch statutory provisions on the remuneration policy and report to be drawn up by listed companies. These provisions include a statutory list of elements that should feature in the remuneration policy and report, and contain requirements for companies to allow shareholders to vote on the remuneration policy at least every four years and to put the remuneration report to an annual advisory shareholders vote.

This could have prompted the Committee to withdraw the Code provisions in question, but the Committee instead opted for the following changes:

  • The remuneration report should explain how the remuneration policy contributes to long-term value creation, and how the policy takes into account ESG objectives and how these contribute to long-term value creation
  • The remuneration report should also set out the manner in which scenario analyses have been taken into consideration
  • The Code's explanatory notes should include the earlier guidance on calculation of the CEO pay ratio (in short: CEO pay ratio = total CEO pay/average global employee salary).

Responsibility for annual accounts

The Dutch Minister of Finance has asked the Committee's attention for a Leiden University report into certain enhancements of companies' responsibility for their annual accounts and the external auditor's review of the accounts. Some of the report's recommendations were more "controversial", as the Committee calls it, such as the idea of an extended in-control statement for listed companies. These recommendations therefore require further consideration and consultation and have not been adopted by the Committee in the proposed Code update.

The Committee does, however, propose certain additions to the Code in relation to the internal audit function of listed companies:

  • The internal audit function should be reviewed annually in consultation with the supervisory board's audit committee, and should be subject to an external review every five years
  • The internal audit function should report to a managing director, preferably the CEO
  • The internal audit function should report its findings both to the management board and the audit committee
  • The internal audit work plan should be drawn up in consultation with the management board, the audit committee and the external auditor
  • The internal audit function should report actual or suspected signs of material irregularities to the chair of the audit committee; where this concerns a managing director, the chair of the supervisory board is informed
  • Also, it is recommended that the annual evaluations of the management board and supervisory board be performed periodically with the assistance of an external party, and that the supervisory board's report to shareholders describe the process and resulting actions.

An English translation of the Committee's consultation document with the full proposal for the revision of the Code will be available soon.