Employee-side board members proposed for large Dutch companies

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In September 1999, a number of political parties in the Lower House of parliament and the trade unions proposed adapting Dutch legislation with respect to the supervisory boards of large companies. The introduction of members of supervisory boards appointed directly by works councils comprises part of the proposal. Employers' organisations want to postpone any legislation and propose handling possible changes to the system in conjunction with topics such as takeover bids and anti-takeover measures.

In large Dutch companies with a predominantly national character (where more than half of the employees work in the Netherlands), the supervisory board (Raad van Commissarissen, RvC) is the most powerful body: it appoints and dismisses management, adopts the annual accounts and has the right to veto board decisions. The supervisory board is appointed by means of a system of "controlled co-option", which means that its members are appointed (and reappointed) by the supervisory board itself. Representatives of the shareholders (capital) and employees (labour) exercise control over the supervisory board: the annual general meeting of shareholders (algemene vergadering van aandeelhouders, AvA) and the works council have the right to nominate supervisory directors and to object to proposed appointments (TN9809201S).

This "structural arrangement" dates back to a compromise reached in 1971 between political parties and social partners and a subsequent law on company structure. The key element is that, unlike in countries such as Germany, supervisory directors are not directly appointed by representatives of labour and capital, because of concern that a system of direct appointment would lead to undesirable polarisation in the supervisory board.

At the end of September 1999, the current structural arrangement came under renewed discussion. The senior governing coalition party, PvdA, the GroenLinks opposition party and the largest trade union federation, FNV, proposed a new method of appointment for supervisory board members. The CNV trade union federation also endorses the plan. According to the proposed new set-up, a third of the supervisory directors would be appointed by the shareholders, a third by the works council and a third by the current supervisory directors. Dutch companies would thus witness for the fist-time an explicit employee-side member of the supervisory board.

The proposal does not break any new ground; trade union confederations have championed a similar system for years. The situation differs from the debates in the late 1960s and in 1984, in that support for the proposal by a parliamentary majority is not inconceivable.

Equal rights for labour and capital?

One of the most compelling arguments in favour of changing the current system of controlled co-option is the increased transparency of supervision that this would provide in large companies. Critics point out that the supervisory body itself is rarely, if ever, monitored. In any event, studies reveal that neither shareholders nor works councils in Dutch companies make significant, if any, use of their right to appoint supervisory directors or to object to proposed appointments. This is in contrast to internationally-oriented companies (Dutch multinationals and subsidiaries of foreign groups), where shareholders are perceived to exert disproportionately weighty influence on supervisory director appointments.

Such increased transparency seems neutral as far as the balance of power between labour and capital is concerned. Similar to the existing system, the proposal at hand would grant an equal amount of influence to shareholders and the works council. However, other proposals in circulation primarily seek to increase shareholder influence at the expense of the board and the supervisory directors, as well as employees (works council). For example, the current Minister of Finance is deliberating whether to award a qualified majority in the shareholders' meeting the right to dismiss a member of the supervisory board, without granting the same right to the works council.

Under the present proposal, the trade union confederations seek to prevent any deviation from the original intention of the structural arrangement, at least as far as granting equal rights to capital and labour is concerned.

Employers not yet in favour of legislation

In the Netherlands, the discussion on the structural arrangement ties in with the debate on protective measures against hostile takeovers (NL9801154F). Both relate to the balance of power in large Dutch companies, and both received new impetus when the draft 13th EU Directive concerning takeover bids was proposed (the amended version was issued in 1996).

In general, listed companies in the Netherlands are well protected against hostile takeovers. Unlike some European countries, where protection consists of share packages held by the same hands (such as banks in Germany and families in France) or cross-shareholding, the Netherlands relies on specific legal barriers. The structural arrangement can be considered a legal barrier.

At the end of 1997, the cabinet submitted a legislative proposal to erode these barriers. The core of the proposal allows the court (the Enterprise Section of the Amsterdam Court of Appeals) to force a company to relinquish one or more protective measures against a hostile takeover. A request for court action may be filed by a shareholder which controls 70% or more of the company's shares for at least one year. The court is obliged to give a hearing to the works council in the event of such a request.

In early October 1999, the largest employers' association, VNO-NCW, urged postponing a decision on the subject. This followed earlier insistence to postpone on behalf of the Association of Securities-Issuing Companies (Vereniging van Effecten Uitgevende Ondernemingen, VEUO). Employers first wish to see the subject presented to the advisory Social and Economic Council (Sociaal-Economische Raad, SER), made up of representatives of employers' organisations, trade union confederations and independent members. The employers want the topics - including the proposed 13th EU Directive, the structural arrangement and legislation on protective measures - to be treated jointly in a single package.

Commentary

The discussion on control structures in large companies was sparked off mainly by shareholders and their representatives. To date, discussions have had little impact: corporate governance committee recommendations have received little attention, and the legislative proposal to hamper the use of protective measures has become stranded.

The question is whether the relative calm will prevail. Employers seem to be in no hurry to adapt the current decision-making structure in large companies, and it remains to be seen if parliament and the trade union confederations will succeed in making an issue of the structural arrangement.

The fact remains that the Dutch system of controlled co-option clashes with the overall European picture, which in some ways calls for adaptations along the lines of the German system of appointment of supervisory board members. However, the current arrangement fits perfectly with the consultative culture that characterises the Dutch "polder model" of consensus and dialogue. In this context, a relatively minor adjustment to the structural arrangement would seem a more obvious choice.

One of the important goals of the proposal submitted by the trade unions (among others) appears to be to take the initiative in the discussion of corporate governance, which to date has been dominated by shareholder representatives. (Robbert van het Kaar, HSI