HomeChapter 8: Two-Tier Board Attributes Netherlands8.2 Corporate Governance in the Netherlands

8.2 Corporate Governance in the Netherlands

The formal structure of Dutch corporations is regulated by Book 2 of the Civil Code (“Burgerlijk Wetboek”). The Civil Code provides a distinction between private and public corporations. Private corporations with limited liability (“Besloten Vennootschap met beperkte aansprakelijkheid” or “BV”) issue only registered shares. Law restricts the transfer of registered shares. Owners of private corporations control the transfer of ownership, i.e., they may keep voting rights within the family. After sole proprietorships, private corporations with limited liability are by far the most popular corporate form. By October 1994, 358,950 corporations with limited liability were officially registered in the Netherlands (Glasz et al., 1997). Dutch public corporations (“Naamloze Vennootschap” or “NV”) - whether or not listed on the Amsterdam Exchanges - can issue and freely transfer registered and bearer shares. Not all public corporations are listed, however. About 7,5 percent of 1,824 public corporations incorporated in the Netherlands is listed on the Amsterdam Exchanges (Glasz et al., 1997)[34].

 

Table 8.1

The Number of Public Corporations and Corporations With Limited Liability in the Netherlands

 

Total

Number of corporations with a supervisory board

Number of board memberships

Average number of supervisory directors

Limited Liability (BV)

358,950

21,082

38,616

1.8

Public Company

(NV)

 

7,076

 

1,824

 

7,453

 

4.1

 

Source: Glasz et al. (1997).

 

Regardless of the corporate form of the corporation (public or limited by shares), the Civil Code provides four legal regimes that rule the governance structure of corporations. These are called the common regime (“Gewoon Model”), the structure regime (“Structuurmodel”), the mitigated structure regime (“Verzwakt Structuurmodel”) and the exempted regime (“Vrijgesteld Model”). In general, the rules of the common regime are applicable to small and medium-sized corporations. The structure regime is applicable to corporations that meet criteria related to the number of employees and the amount of subscribed capital. The mitigated regime and exempted regime are mostly of importance to multinationals and corporations that are part of a foreign holding structure. The four regimes provide alternative governance models in the Netherlands.

The common regime gives small and medium-sized corporations a choice between a governance structure with only a management board entirely composed of managing directors and a two-tier board model with an executive management board and an additional supervisory board comprised entirely of (non-executive) supervisory directors. Regulations on the corporate governance system of large corporations have been expanded through the structure regime. Corporations incorporated under the rules of the structure regime (the so-called structure corporations) have to adopt a two-tier board structure.

While the shareholders' meeting has been granted extensive powers to govern corporations that operate under the rules of the common regime, a substantial part of its control shifts to the mandatory supervisory board in structure corporations (Slagter, 1994; de Savornin Lohman, 1996). This transfer of rights is less extensive in corporations that operate under the rules of the mitigated structure regime and the exempted regime. The next paragraphs further explore the differences between the rules of the four regimes and their implications for the position of directors in the governance system in the Netherlands.

          

The Supervisory Board Under the Rules of the Common Regime

Corporations incorporated under the rules of the common regime meet the minimum requirement by having a management board (“Raad van Bestuur”)[35] and a general meeting of shareholders (“Algemene Vergadering van Aandeelhouders”).

 

Figure 8.1

The Governance Bodies Under the Rules of the Common Regime

The Governance Bodies Under the Rules of the Common Regime

Source: Maassen and van den Bosch (1999a).

 

Although a supervisory board (“Raad van Commissarissen”) is not required for corporations that operate under the rules of the common regime, it is a normal practice to have one in medium-sized corporations (see figure 8.1). As a general rule, the shareholders’ meeting in corporations that operate under the rules of the common regime has all the powers not held by the management board and - when formed - the supervisory board. Managing directors are nominated and appointed by the shareholders’ meeting in corporations that are incorporated under the rules of the common regime.

The shareholders’ meeting has the right to amend the articles of association, to allocate the profits of the corporation, to adopt the annual accounts and to alter the composition of the management board. If a supervisory board is formed, the shareholder’s meeting has the right to appoint, to suspend and to dismiss the supervisory directors. The articles of association can further expand the rights of the shareholders’ meeting to direct managing and supervisory directors. Under the rules of the common regime, it is not possible for directors to serve simultaneously on both the management board and the supervisory board.

It is the role of the supervisory board to supervise management and to monitor the general course of affairs of the corporation that operates under the rules of the common regime. Moreover, the supervisory board has a role in advising the management board. According to Blanco Fernández (1993) and de Savornin Lohman (1996), the control role and service role - as a form of preventive supervision of Dutch supervisory boards - are strongly related to each other. Unless the corporation’s articles of association provide otherwise, other specific duties and powers of the supervisory board include chairing the general meeting of shareholders, the suspension of managing directors and the appointment of the accountant.

The rights of the shareholders' meeting to appoint and to dismiss managing directors can be limited by so-called “oligarchic clauses” in the articles of association of corporations that operate under the rules of the common regime. A popular clause relates to the option of corporations to issue priority shares through a trust. The supervisory council of such a trust is often composed of directors who also have a seat in the supervisory board of the corporation. The trust, i.e. members of the supervisory council of the trust, can exercise the rights attached to priority shares, such as the right to approve the appointment of managing directors. A discussion on the mechanisms that limit the rights of ordinary investors can be found in the Peters Report (see also box 8.1).

 

The Structure Regime

The structure regime provides additional requirements on the governance structure of public corporations (NVs) and corporations with limited liability (BVs). The corporate governance structure of these so-called “structure corporations” (“Structuurvennootschappen”) is regulated by the Structure Act of 1971.

According to Book 2 of the Civil Code, a structure corporation meets the following three cumulative legal criteria[36]:

  • the corporation, including its subsidiaries, regularly employs one hundred or more employees in the Netherlands;
  • the corporation has established a works council;
  • the corporation has a subscribed capital plus reserves of at least NLG 25 million in the latest balance sheet.

 

Box 8.1

The General Meeting of Shareholders

 

“In principle Dutch company law grants considerable powers to shareholders. At the same time, however, it offers possibilities, which are frequently applied, for these powers to be substantially curtailed in the company’s articles of association, for example by stipulating that the co-operation of the priority shareholder(s) is required for the adoption of resolutions in the General Meeting of Shareholders. Other circumstances can also result in the investors not enjoying these powers to an extent proportionate to their investment, for example as a result of the presence at the meeting of a dominant block of votes, which has not provided risk capital or not to an extent proportionate to its voting rights [. . .] Special powers are often vested in priority shares with respect to the appointment and dismissal of members of the Board of Directors and Supervisory Board members [. . .] It also happens that decisions made by other bodies, including the General Meeting of Shareholders, on subjects other than the composition of the Board of Directors and the Supervisory Board, such as resolutions to alter the company’s articles of association or resolutions on changes in the share capital, are subject to the approval of the holders of priority shares.”

 

Source: Peters Committee (1997:19).

          

According to Slagter (1996), the enactment of the Structure Act in 1971 was directly related to a national debate in the 1960s on employee participation (“medezeggenschap”) in the appointment of supervisory directors in large corporations. At that time, it was felt that there was a need to revise corporation laws that were originally established in 1928. According to Honée (1998), these corporation laws were originally based on a traditional stakeholder approach to the governance of corporations. The 1928 corporation laws viewed the corporation as a vehicle of shareholders to increase their financial wealth. Shareholders were seen as the most important constituents of the corporation. In the Netherlands, this view gradually changed after the second world war.

Not only shareholders, but employees as well was increasingly seen as an important interest group of the corporation. As a result, initiatives were undertaken to formally strengthen the role of employees in the appointment of supervisory directors. Of importance to this development was the formation of the Verdam Committee by the Dutch government in 1960. This committee was formed to bring together the views of the government, unions and representatives of corporations on employee participation in large corporations. Initiatives from labor unions were aiming at formal rights of employees to directly appoint supervisory directors in large corporations. Through these appointments, employees could indirectly also influence the appointment of managing directors.

Although employers did recognize a need to change the position of labor, they were not in favor of a system that would grant formal rights to employees to directly appoint supervisory directors. The Verdam Committee published a report in 1964. This report suggested a revision of corporation laws in the Netherlands (Honée, 1973). In response to the report of the Verdam Committee, a report of the Social Economic Council (“SER”) in 1969 (SER Advies inzake de herziening van het ondernemingsrecht) proposed by common consent the development of new corporation law on large NVs and BVs in the Netherlands. The recommendations of the SER finally resulted in the implementation of the Structure Act in 1971.

The post war discussion on employee participation also resulted in the enactment of the Works Council Act (“Wet op de Ondernemingsraden”) in 1950. This act – which was originally amended in 1971 - dictates the formation of a works council for corporations with at least 35 employees regardless of the corporate form of the corporation. The underlying idea of the Works Council Act was - and still is[37] - to give employees a legal base to become more deeply involved in the decision making processes of the corporation. In general, the works council has the right to receive information on corporate decisions and to disapprove the adoption, amendment or withdrawal of certain employment conditions.

In addition, the works council has the right to give advice with respect to the appointment and dismissal of managing directors in corporations that operate under the rules of the common regime. The works council also has the right to give advice with respect to the appointment and dismissal of supervisory directors in corporations that operate under the rules of the structure regime (see also paragraph 8.3). Of importance is also the obligation of members of the supervisory board to attend at least two meetings the management board has with the works council in structure corporations.

 

The Supervisory Board Under the Rules of the Structure Regime

The structure regime provides a mandatory two-tier board structure with a management board and a supervisory board. The management board is entirely composed of managing directors. The supervisory board is entirely composed of supervisory directors with a legal minimum of three directors. Unlike the co-determined German supervisory board, the Dutch supervisory board has no labor seats and employees of a structure corporation or its dependent corporations cannot be members of the supervisory board. Approximately, a total of 447 corporations were incorporated under the rules of the structure regime by September 1994 (Glasz et al. 1997). Of these corporations, 87 were listed at the Amsterdam Exchanges in 1996 (Peters Committee Report, 1997). Corporations that do not fulfill the three criteria can voluntarily apply the rules of the structure regime or the mitigated structure regime when the corporation has established a works council. These corporations are called “vrijwillige structuur-vennootschappen.”

The supervisory board has been granted additional powers under the rules of the structure regime. As such, a substantial part of the formal rights of the shareholders' meeting shifts to the mandatory supervisory board in structure corporations[38]. The transfer of rights from the general meeting of shareholders to the supervisory board in the structure regime is fiercely debated in the Netherlands (Honée, 1996). This debate concentrates on the influence shareholders should have on the composition of supervisory and management boards in structure corporations and ultimately the strategic decision making processes of the corporation. Slagter (1994) indicates two main obstacles of shareholders in structure corporations to influence the strategic course of the corporation. (1) In the first place, shareholders have formally much less influence on the composition of both the managing and supervisory boards. Not the shareholders’ meeting but the supervisory board nominates, appoints, suspends and dismisses managing directors and supervisory directors.

 

Box 8.2

Matters Subject to the Approval of the Supervisory Board in Structure Corporations

 

  • the issuance and acquisition of shares in the corporation and the issue by the corporation of debt instruments;
  • co-operation in the issuance of registered depositary receipts for shares;
  • an application for a listing or for withdrawal of the listing of the above-mentioned debt instruments or depositary receipts on the official list of any exchange;
  • the entry into or the termination of any ongoing co-operation by the corporation or a subsidiary of the corporation with another legal entity or partnership, if such co-operation or the termination thereof is of far-reaching significance for the corporation;
  • participation by the corporation or a subsidiary of the corporation in the capital of another corporation, where the value of such participation is at least one quarter of the amount of the issued capital plus reserves or any substantial increase or decrease in such participation;
  • investment of an amount of at least one quarter of the issued capital and the reserves of the corporation as shown in the latest balance sheet with explanatory notes;
  • a proposal to amend the articles of association and a proposal to dissolve the corporation;
  • filling for bankruptcy or application for a suspension of payments;
  • termination of the employment of a substantial number of employees of the corporation or of a subsidiary either simultaneously or within a short time frame;
  • a drastic change in the employment conditions of a substantial number of employees of the corporation or of a subsidiary and finally a proposal to reduce the issued capital.

 

Source: Civil Code translated by de Savornin Lohman (1996:23).

 

As indicated above, Dutch corporation law also provides oligarchic clauses that restrict the formal rights of shareholders to appoint and to dismiss supervisory directors in corporations that operate under the rules of the common regime. (2) Second, the supervisory board in structure corporations has extensive powers to ratify certain management board resolutions. These extra powers are granted by statute and optionally and usually extended by the articles of association of the corporation. Another difference between the powers of the supervisory board under the rules of the common and the structure regime is related to the determination of the annual accounts of the corporation.

In the common regime, the general meeting of shareholders has the right to determine and to adopt the annual accounts. Under the rules of the structure regime, the supervisory board has been granted the exclusive right to determine and to adopt the annual accounts of the corporation. The role of the general meeting of shareholders is limited to the approval or disapproval of the annual accounts of structure corporations. Box 8.2 summarizes the matters subject to the approval of the supervisory board in corporations that operate under the rules of the structure regime. Table 8.2 presents an overview of the formal transfer of rights from shareholders’ meeting to the supervisory board in structure corporations.

 

The Supervisory Board Under the Rules of the Mitigated Structure Regime

The Dutch Civil Code also provides a mitigated structure regime (“gedeeltelijke vrijstellingen”). Although rather complicated, the mitigated regime is of great importance to foreign corporations and/or multinationals that seek full control over subsidiaries incorporated in the Netherlands. The mitigated form of the structure regime is applicable to corporations when at least fifty percent of a corporation’s shares are held by a holding or a joint venture (a group of parent companies) and when the holding, parent company or joint venture employs a majority of its employees outside the Netherlands.

Table 8.2

Alternative Governance Models and the Transfer of Rights

Rights and other legal imperatives

The supervisory board under the rules of the structure regime.

The supervisory board under the rules of the common regime.

Supervisory board:

Mandatory.

Voluntary.

Supervisory directors:

Cannot be employees of the corporation.

Can be employees of the corporation, but cannot act simultaneously as managing director and supervisory director.

Right to propose supervisory directors:

General Meeting Works Council and management

General Meeting or holders of priority shares.

 

Right to appoint supervisory directors:

Supervisory Board

(co-opted).

General Meeting or holders of priority shares.

 

Right to suspend supervisory directors:

Supervisory Board

or governmental body in the case of a supervisory director representing the Dutch government.

General Meeting or holders of priority shares.

 

 

 

Right to dismiss supervisory directors:

Enterprise Chamber

upon request from: supervisory board, General Meeting and Works Council. Governmental body in the case of a supervisory director representing the Dutch government.

General Meeting or holders of priority shares.

 

Approval of certain decisions:

Supervisory Board

 

General Meeting

Adoption of annual accounts:

Supervisory Board

Submitted to General Meeting for approval or disapproval. Submitted to Works Council for discussion.

General Meeting

 

Table 8.2 continued

Alternative Governance Models and the Transfer of Rights

Rights and other legal imperatives

The management board under the rules of the structure regime.

 

The management board under the rules of the common regime.

Right to appoint managing directors:

Supervisory Board

General Meeting must be notified and Works Council can give advice.

General Meeting or holders of priority shares.

Right to suspend managing directors:

Supervisory Board

 

 

General Meeting or holders of priority shares.

Right to dismiss managing directors:

Supervisory Board

General Meeting must be consulted and Works Council can give advice.

General Meeting or holders of priority shares.

Sources: the following authors refer to relevant articles of the Civil Code:

Honée (1979); Blanco Fernández (1993); Gelauff and den Broeder (1996); de Savornin Lohman (1996); Glasz et al. (1997); Maeijer (1997).

 

Compared to supervisory boards that operate under the rules of the structure regime, the supervisory board has less extensive powers under the rules of the mitigated structure regime. Under the rules of the mitigated structure regime, the supervisory board does not have the formal rights to:

  • appoint and to dismiss members of the management board;
  • adopt the annual accounts of the corporation.

These rights are put in the hands of the shareholders’ meeting in mitigated structure corporations. However, an independent supervisory board is still mandatory under the rules of the mitigated form of the structure regime and the co-optation system is still in place. In addition, the supervisory board remains in the formal position to approve management decisions as identified in text box 8.2 in this chapter. The Civil Code provides these rules to secure an independent supervisory board that no only protects the rights of shareholders, but those of employees and other stakeholders as well.

There are two main reasons why the Dutch Civil Code provides the mitigated structure regime (Honée, 1979). (1) The Civil Code recognizes the need to support the position of parent companies in a group of corporations. Through the shareholders’ general meeting, the parent company can formally exert its powers to influence the top decision making processes of subsidiaries. It not only gives the parent company the possibility to appoint managing directors to management boards of its subsidiaries. By means of the formal rights of the general meeting of shareholders, the parent company has also the right to dismiss managing directors whose visions do not coincide with those of the parent company. The appointment and/or dismissal of managing directors would be more complicated if the parent company were to have subsidiaries that operate under the rules of the full structure regime. In such a case, the position of a parent company in a group of corporations could be weakened by an independent co-opted supervisory board that holds the exclusive rights to appoint and to dismiss managing directors and that holds the right to adopt the annual accounts of the subsidiary. As such, through the rules of the mitigated structure regime, the Dutch Civil Code provides legislation that supports the position of a parent company as majority shareholder in a group of corporations. (2) The internationalization of the Dutch economy has also stimulated the growing importance of the mitigated structure regime. The rules of the Civil Code are designed to stimulate foreign investments in the Netherlands and to provide large groups some flexibility in the design of their governance structures.

 

The Supervisory Board Under the Rules of the Exempted Regime

The Dutch Civil Code also provides rules that exempt corporations from the structure and the mitigated structure regimes (the exempted regime or “volledige vrijstellingen”). Of importance to groups is the rule that corporations are exempted from the structure and mitigated structure regimes when corporations are dependent of a holding, parent company or group that is already subject to the structure regime or the mitigated structure regime. Although these dependent corporations may meet the three cumulative criteria of structure corporations, the formation of a supervisory board in these dependent corporations is not mandatory. If a supervisory board is formed, the general meeting of shareholders appoints and dismisses supervisory directors. The general meeting of shareholders has also the formal right to appoint and dismiss managing directors and to approve certain decisions (see text box 8.1 in this chapter). Corporations can be also exempted from the rules of the mitigated and structure regimes when the corporation:

 

  • is a mere holding company belonging to an international group of corporations, provided that the majority of the employees of the entire group are employed outside the Netherlands, and/or;
  • acts exclusively as a service corporation for affiliated corporations.

Source: Civil Code, translated by de Savornin Lohman (1996:24). See also Honée (1979).

 

Due to its flexibility, the Dutch Civil Code provides corporations that operate under the rules of the mitigated and exempted regimes the possibility to practically adhere to board practices that are common to large corporations in the US and the UK. The Dutch supervisory board has less extensive powers under the rules of these regimes while the formal rights to appoint and to nominate managing directors are granted to the general meeting of shareholders.

 

Table 8.3

The Four Regimes Summarized

The Common Regime

 

Applicable to all NVs and BVs that do not operate under the rules of the other three regimes.

 

 

 

 

 

 

General Meeting of Shareholders

(mandatory)

 

Holds all formal rights such as the appointment and the dismissal of managing directors and supervisory directors if not transferred to a trust or the supervisory board.

 

Supervisory Board

(not mandatory)

 

Holders of priority shares can be granted rights to appoint managing directors.

The Structure Regime

 

The corporation, including its subsidiaries, regularly employs one hundred or more employees in the Netherlands, the corporation has established a works council and the corporation has a subscribed capital plus reserves of at least NLG 25 million in the latest balance sheet.

 

General Meeting of Shareholders

(mandatory)

 

Certain rights of the general meeting are transferred to the supervisory board.

 

 

 

Supervisory Board

(mandatory)

 

The co-optation system is in place, the supervisory board adopts the annual accounts, appoints and dismisses managing directors and approves certain management decisions.

 

 

Table 8.3

The Four Regimes Summarized (continued)

The Mitigated Structure Regime

 

At least fifty percent of a corporation’s shares are held by a holding or a joint venture (a group of parent companies) and the holding, parent company or joint venture employs a majority of its employees outside the Netherlands.

 

 

 

 

 

 

 

General Meeting of Shareholders

(mandatory)

 

Appoints and dismisses members of the management board and adopts the annual accounts of the corporation.

 

Supervisory Board

(mandatory)

 

the co-optation system is in place and the supervisory board approves certain management decisions.

The Exempted Regime

 

The corporation is a mere holding company belonging to an international group of corporations, provided that the majority of the employees of the entire group are employed outside the Netherlands, and/or the corporation acts exclusively as a service corporation for affiliated corporations, and/or is a dependent of a corporation that is already subject to the structure regime or the mitigated regime in the Netherlands.

 

General Meeting of Shareholders

(mandatory)

 

See Common Regime.

 

 

 

Supervisory Board

(not mandatory)

 

See Common Regime.

 

Source: Civil Code, translated by de Savornin Lohman (1996:24). See also Honée (1979).

 

In general, this is a normal practice of corporations in Anglo-Saxon countries. Especially the exempted regime may not hinder large Dutch multinational corporations to adapt to internationally accepted corporate governance standards due to the absence of the co-optation system (see also paragraph 8.3).


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.