On 8 December 2016, the Corporate Governance Code Monitoring Committee (the ‘Committee’), published the revised Corporate Governance Code (the ‘Code’). The most important changes relate to the focus on long-term value creation and the introduction of culture as an element of good corporate governance. The Code has also been simplified as overlapping provisions as well as provisions that were contrary to the law and other regulations have been amended. Finally, new corporate governance developments have been added to the Code.
The new Code applies to Dutch listed companies in respect of the financial year commencing on 1 January 2017 or thereafter. This means that the first report on compliance with the new Code will be issued in 2018. Where the Code requires that regulations, rules or procedures are adjusted in line with the amended provisions, the company is expected to act in accordance with the Code if it has amended such on 31 December 2017 at the latest. The Committee recommends that companies discuss the most important aspects of corporate governance and compliance with the Code as a separate agenda item during the annual general meeting in 2018.
The Code works on the basis of the ‘apply or explain’ principle. This principle means that listed companies must apply the principles and best practice provisions or explain with reasons why a principle or best practice provision is not being applied.
On 17 January 2017, I already discussed the most important proposed changes on this knowledge page. Here, I will briefly explain them again and will also highlight which changes the Committee has made in the final revised Code compared to the proposal.
- Long-term value creation and taking interests into consideration (Best Practice Principle 1.1) The most important change the revised Code is introducing is to place long-term value creation centre stage. The Committee indicates that the malpractices of recent years (the bookkeeping scandal at Ahold and the liquidation of Imtech, for example) can in many cases be traced back to realisation of short-term profits. Long-term value creation requires directors and supervisory directors – based on the Code, the board is obliged to engage the supervisory board in a timely manner in the formulation of the strategy – to act in a sustainable manner by making deliberate choices on the sustainability of the strategy in the long term. It is essential that the interests of all stakeholders are included in this. When determining the strategy, the company must, in addition to value creation, also take account of other relevant aspects of doing business such as the environment, social and personnel matters, the chain in which the business operates, respecting human rights and combating corruption and bribery. In the board report, the board must provide an explanation of its vision relating to long-term value creation and on the strategy to realise this and set out what contributions have been made to this in the past financial year.
- Realising opportunities by taking conscious risks (Best Practice Principle 1.2 to 1.5) Best Practice Principle 1.2 is the principle that the company must have proper risk management and control systems. The board determines the risk appetite, designs the control systems and monitors the operation of the systems. In its report, the board must provide details of the defects in the effectiveness of the systems. There has to be a strong internal audit system in place, for which the board is responsible and which is monitored by the supervisory board. Contrary to that included in the consultation document, the board must not declare in the annual board report that the continuity of the company is guaranteed for the coming twelve months, but it must list the material risks and uncertainties in respect of the expectations of the continuity of the company for the coming twelve months.
- Attention for culture (Best Practice Principle 2.5) The Best Practice Principle 2.5 states that the board is responsible for shaping a culture that is aimed at long-term value creation. The supervisory board must monitor the activities of the board in this respect. The Code addresses culture but does not prescribe what culture is or should be. It is important that a culture is created that stimulates desirable behaviour and ethical actions. The board must in any event draw up a code of conduct to this end.
- Checks and balances (Section 2) The structure of the board and the supervisory board was already worked out in detail in the 2008 Code. New emphases have been introduced in this section of the Code that contribute to the checks and balances, good corporate governance and independent supervision.
Pursuant to the Code, the acuity of the supervision is strengthened by a correct composition of the supervisory board. Instead of a maximum appointment term of twelve years (three times four years), the revised Code takes an appointment term of two times four years as a starting principle. After this period, a supervisory director can be reappointed for a term of two years, which term can subsequently be extended by maximum two years. Contrary to that included in the consultation document, this reappointment must ‘only’ be substantiated after eight years and no special circumstances are required.
In addition, compared to the 2008 Code, it includes an expansion as regards the maximum number of ‘dependent’ supervisory directors. Each shareholder having a 10% shareholding or greater in the company, may have one so-called shareholder-supervisory director, on the understanding that the number of dependent supervisory directors together is less than half of the total number of supervisory directors.
If the board has an executive committee, the board must take the checks and balances that form part of the two-tier system into account. The supervisory board monitors this and pays specific attention to the dynamics and relationship between the board and the executive committee.
Finally, much attention is paid to the diverse composition of the supervisory board. The state of affairs relating to the diversity objectives is set out in the corporate governance statement.
- Simplified remuneration (Section 3) More than previously, the Code is based on the own responsibility of directors and supervisory directors. Issuing too many detailed instructions can detract attention from, and take away the motivation for, self-reflection on the structure and execution of governance. The remuneration policy must be clear and understandable. The policy must pay attention to, among other things, remuneration relationships within the company and scenario analyses performed in advance. Contrary to that included in the consultation document, the supervisory directors may not be remunerated using shares and/or options.
- The role of the shareholder (Section 4) The part of the Code dealing with the relationship with the shareholders has been lifted virtually unchanged from the 2008 Code. Although some principles and provisions could do with a brush-up, the Committee is of the opinion that it is currently expedient not to make substantive changes. This is because there are currently many developments at European and national level in respect of the position and rights of shareholders, the outcome of which is currently still uncertain. Contrary to that included in the consultation document, the 180 days response time of the board if a shareholder puts an item on the agenda that may lead to a change in strategy of the company is maintained.
Finally, section 4 of the Code includes – contrary to the provisions in the consultation document – that issuing depositary receipts for shares can be a tool to prevent that, as a result of absenteeism during the general meeting, a (coincidental) majority of shareholders forces the decision-making process in its favour. Issuing depositary receipt for shares may not be used as a protective measure.
- One-tier boards (Section 5) The Code is tailored to companies with a two-tier board. Section 5 deals with the applicability of the Code to companies with a one-tier board, where there is one board of which both executive and non-executive directors form part. As I set out earlier on this knowledge page, the relevant best practice principle and the best practice provisions for one-tier boards have been clarified on some points.