Corporate governance: Dutch system under fire?

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In late 1997, a legislative proposal was submitted to the Dutch Parliament to reduce the use of anti-takeover measures in listed companies. A few months earlier, the Corporate Governance Committee had issued its final report. Discussions surrounding corporate governance have focused on the position of shareholders vis-à-vis the management board and the supervisory board members. The trade union movement has particularly criticised the lack of attention paid to workers' interests.

At the end of June 1997, the Corporate Governance Committee, usually referred to as the Peters Committee, published its report (Recommendations regarding corporate governance in the Netherlands[Aanbevelingen inzake Corporate Governance in Nederland], 25 June 1997). It contained 40 recommendations on good management practice, adequate supervision and the designation of responsibility between the management board and the members of the supervisory board (details of Dutch company structure are provided below). Although the recommendations primarily concerned companies listed on the stock exchange, the committee also felt that they could be applied to other companies as well.

The trade union confederations and the most important employers' organisations had joined others in answering a request made by the committee to respond to the first discussion paper published at the end of October 1996.

However, the final recommendations have now produced mixed reactions. Important points of criticism were that they do not go far enough, that the discussion did not sufficiently address current legal anti-takeover measures and law on company structure (see below), and that the final report almost completely neglected the labour factor.

Anti-takeover measures

Many listed companies in the Netherlands use legal anti-takeover measures as a safeguard against hostile takeovers. Examples of such measures include the option of placing a package of preferential shares with a friendly business relation in times of need, or issuing priority shares with special controlling rights over the appointment of members of the management and supervisory boards. To a certain degree, the law on company structure can also serve as an anti-takeover measure.

Both employers and the trade union movement have always been relatively supportive of anti-takeover measures, partly because they guard against corporate raiders and partly because they allow for more level-headed decision-making during mergers and takeovers. However, these measures have increasingly been coming under attack by shareholder representatives and stock exchange authorities. The Ministry of Finance also wants to reduce the use of these measures, and in late 1997 submitted a legislative proposal in this regard (Introducing the option for the Enterprise Section to take special measures regarding controlling rights in companies limited by shares[Invoering van de mogelijkheid tot het treffen van bijzondere maatregelen door de ondernemingskamer over de zeggenschap in de naamloze vennootschap], Lower House [Tweede Kamer], Legislative Proposal, 1997-1998, 25 732). This proposal aims to award the Enterprise Section of the Amsterdam Court of Appeal the power to oblige companies to lift their anti-takeover measures, provided that the acquiring company possesses a 70% interest for at least one year.

In the Netherlands it is commonly felt that employees are also important stakeholders in the company. This belief is reflected in the proposal: the works council of the target company must be heard by the Enterprise Section before any measures are imposed. In practice, both works councils and trade unions have, until now, sided with their own management against the acquiring party. The right of works councils to be heard by the Enterprise Section comes in addition to their current right to advise during any merger or takeover. The fact that this can tip the scales was recently apparent in a remarkable decision made by the Enterprise Section on 23 October 1997 which stopped a takeover because the interests of the employees and the works council had not been taken into account (Enterprise Section of the Amsterdam Court of Appeal [Gerechtshof Amsterdam, ondernemingskamer] (1997), 23 October, ROR 1997, no. 21.)

Law on company structure

Since 1971, large companies in the Netherlands have been subject to the so-called "law on company structure". One of the original intentions of this was to a provide a balance between the position of capital and labour in large companies. In these companies, the members of the management board are not appointed by the general meeting of shareholders but by the supervisory board. The annual accounts are also adopted by the supervisory board. This rule succeeded in making the supervisory board the most powerful body in the company instead of the general meeting. A more moderate version of the law applies to internationally-oriented concerns: in these cases, the management board is appointed by the general meeting of shareholders.

In turn, the supervisory board appoints its own members. This system has been described as "controlled co-option": "co-option" because the supervisory board ultimately chooses its own members and "controlled" because other bodies in the company exercise some degree of influence over the appointment procedure. Regarding the latter, both capital (the general meeting of shareholders) and labour (in this case represented by the works council) have the right to nominate candidates for the post of supervisory board member, and have the right to object to a proposed appointment. In addition to the general meeting of shareholders and the works council, the management board also has the right to nominate candidates for the supervisory board.

This system has been the subject of debate for a long time. The greatest criticism is that the supervisory board has insufficient authority over the management board, and that the management board, in turn, has too much say in appointing its own supervisors. Another point of criticism is that, in practice, the regulation also functions as an anti-takeover measure in that both current and potential shareholders are unjustly deprived of their controlling rights.

Clearly, this last view is not shared by the trade unions. For a long time now, the trade unions have fought for a system such as that currently in force in Germany where shareholders and employees (trade unions and/or works councils) each appoint some (for example, a third) of the supervisory board members. These members are then responsible for appointing the rest of the supervisory board. Employers' organisations have been less explicit about their views, but generally seem to advocate maintaining the current system.

Incentives for managers

The debate on corporate governance touches on many of the same points as the discussion on management incentive schemes. Most listed companies have share-option schemes for a select group of managers. The philosophy behind this is that, since their remuneration is directly linked to their performance, this will stimulate managers to perform optimally. In the last few years, however, these schemes have led to astronomical payments to management staff due to the sharp increases in stock exchange prices over the last two years on the one hand, and due to the fact that capital gains are tax-free in the Netherlands on the other. Not surprisingly, the trade union movement has been outraged at the level of these payments. According to representatives of the Federation of Dutch Trade Unions (Federatie Nederlandse Vakbeweging, FNV) and the Christian Federation of Trade Unions (Christelijk Nationaal Vakverbond, CNV), this has also made it difficult to sell the idea to their members that moderate wage demands are necessary.

Commentary

Current thought about the structure and set-up of large companies is becoming increasingly influenced by what is called the "Anglo-Saxon" view of the company, in which management aligns itself to the interests of the shareholders. In contrast to this, the Netherlands is still dominated by the "institutional view", in which a plurality of stakeholders, including management, shareholders and employees, participate in a company.

The institutional view, reflected in the law on company structure and, to a certain extent, in the acceptance of legal anti-takeover measures as well, is now coming under fire. Shareholders, including institutional investors, are becoming increasingly active, and markets are becoming increasingly international, including the market for companies.

It appears that the current cabinet wishes to increase the influence of shareholders somewhat. However, fundamental changes to current power relations are still out of the question: the legislative proposal regarding anti-takeover measures does not go far enough for this, and keeps intact the law on company structure. (Robbert van het Kaar, HSI)