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Report Finds Broad Support and High Compliance Rate for Dutch Corporate Governance Code

By Jim Hamilton

The new Dutch Corporate Governance Code that came into force for listed companies in January 2009 has broad support and a high rate of compliance, said a report by the Corporate Governance Code Monitoring Committee. Compliance with the Code is on an apply or explain basis under which the principles and best practice provisions of the Code must be applied unconditionally or an explanation must be given for any departure from them.

According to the Monitoring Committee, a best practice provision is said to be applied if it is strictly observed. The term comply includes the application of a best practice provision and the giving of a reasoned explanation where a best practice provision is not applied. The most common explanations given for non-application of a provision was that the costs of implementing the provision was too high or that the company was too small to apply the provision

The report revealed that for the most part the Code is only of interest to and known by large institutional investors. Moreover, the Monitoring Committee noted that proxy advisory services have a major influence on how votes are cast at general meetings of shareholders.

The best practice provision for which an explanation of non-application was most commonly given was the clawback clause, under which the supervisory board may recover from the management board members any variable remuneration awarded on the basis of incorrect financial or other data. The reason usually cited for non-compliance was that the company is awaiting legislation on this point.

The remuneration report of the supervisory board must explain how the company?s remuneration policy contributes to the achievement of the long-term objectives of the company in keeping with the risk profile. The report must be posted on the company?s website. The rate of compliance with this provision varied. It was noteworthy that shareholder value was the objective most frequently mentioned in the context of remuneration policy.

The Code states that shares granted to management board members without financial consideration must be retained for at least five years and depend on the achievement of challenging targets specified beforehand. The Committee noted a high level of non-compliance or explanation of non-application with this provision

A fairness test is a new addition to the Code under which the supervisory board has the power to adjust the value of a variable remuneration component conditionally awarded in a previous financial year if this award would produce an unfair result due to extraordinary circumstances. The most common explanation of why a company did not apply the fairness test was that, although the company endorsed the new code in this respect, it would not apply it until 2010 or 2011

The rate of compliance with the new Code provisions on remuneration is good. However, in explaining why they have not applied the best practice provisions on the maximum term of office and maximum severance pay of management board members, companies often state that they wish to honor existing agreements and/or contracts. This is an explanation that should cease to apply in due course.
Unlike the management board and the supervisory board, shareholders are not, in principle, guided exclusively by the interests of the company and its business. For example, shareholders can give priority to their own interests, provided they act in accordance with the principles of reasonableness and fairness

The Monitoring Committee is aware that the auditor?s role in monitoring compliance with the Code by listed companies is unclear. Nonetheless, the Committee calls upon auditors to hold the management board of the company to account if the Code is not complied with, for example, if it is not applied and no explanation is given.

Full post as published by Jim Hamilton's World of Securities Regulation on February 23, 2011 (boomark / email).