Executive Committees and the Revision of the Dutch Corporate Governance Code
February 2016, the Monitoring Committee presented a proposal for revision of the Dutch Corporate Governance Code. Considering that the Code was published in 2003 and most recently modified in 2008, the consultation of the Code is long overdue & welcome.
Since the last update of the Dutch Corporate Governance Code in 2008 by the Frijns Committee, much has changed on our views concerning corporate social responsibility. In light of the recent downfall of companies as a consequence of poor risk management and a focus on short-term value resulting in misconduct such as accounting fraud, corruption and cartel activities, there is a growing need for transparency and compliance. In short, the financial crisis has provided sufficient examples to revise the code.
The proposal for the revision of the Dutch Corporate Governance Code (the “Code”) relates to seven themes:
- Focus on long-term value creation;
- Reinforcement of risk management;
- New accents in effective management and supervision;
- Introduction of culture as an explicit matter of corporate governance;
- More comprehensive and simplified remuneration provisions in the code;
- The shareholders and the general meeting of shareholders;
- Clarification of requirements regarding ‘comply or explain’ statements.
The emphasis of the current proposal is on long-term value creation for the company. As such, the management board is required to design and implement a strategy aimed at long-term value. Certain trends, already apparent in market practice, challenge the Corporate Governance Monitoring Committee (the “Committee”) to restructure best practices for a number of governance issues (e.g. increased risk management, internal audit controls and remuneration policies).
An interesting development is the establishment of an executive committee (“Exco”) by a growing number of companies (Monitoring Report 2012). In general, an Exco consists of members of the senior management (not being statutory members) and members of the management board of the company. Dutch law does not provide statutory rules governing the internal governance of Exco’s. The legal basis is often laid down in the Articles of Association of the company and/or board rules. How a company with an Exco should organise its governance model thus depends on the specific characteristics of the company. The Committee considers that no specific requirements regarding the organisation of a governance model with an Exco should be included in the proposal.
However, the establishment of an Exco may have consequences for the checks and balances and independent supervision within the company. On average, a Dutch Exco consists of 9.17 members, the majority of whom is a member of the senior management (in general they do not need to render account to the supervisory board). As a result, a governance model that includes an Exco can have an effect on the supervision by the supervisory board of the actual management of the company due to the distance between the supervisory board and the management level where the company’s day-to-day management and decision-making is conducted. In that respect, the Committee proposes to introduce a new best practice rule for companies with an Exco. They should take into account how the checks and balances within the company are safeguarded. Furthermore, in their report management boards should explain the choice for an Exco, the role, duty and composition of the Exco and include an outline of the relationship between the supervisory board and the Exco.
It is to be welcomed that for the first time the Exco as a form of governance is included in the draft Code. Nevertheless, the Committee suggests that further discussion is necessary concerning the impact of this kind of governance form on the checks and balances and the independent supervision within the company. All stakeholders and other interested parties are invited to respond during the consultation period (11 February to 6 April 2016) to the consultation document.