8.3 About Board Composition

The general meeting of shareholders of a corporation that operates under the rules of the structure regime and the mitigated structure regime has no formal powers to appoint supervisory board members. In the case of a vacancy, the supervisory board appoints directors through a system of formal “co-optation.”[39] This means that supervisory directors are nominated and elected by the supervisory board. Candidates are neither appointed by managing directors nor elected by shareholders.

Yet, the supervisory board must inform the shareholders’ meeting and the works council about pending supervisory board vacancies and nominations. Before the supervisory board appoints a new supervisory board member, the works council, the management board and the shareholders’ meeting have the right to propose other board candidates for nomination (“aanbevelingsrecht”). The shareholders’ meeting and works council also have equal rights to object to the appointment of candidates. This right is not granted to the management board. The right of the works council and the shareholders’ meeting to raise objections to the appointment of a supervisory director is based on three grounds:

  • the nomination and appointment procedures are not diligently adhered to by parties involved;
  • proposed board candidates are found to be unqualified by parties involved to fulfil a position in the supervisory board and/or;
  • parties involved object to the appointment of candidates because appointment of the new candidate would not result in a sound composition of the supervisory board.

Source: Civil Code, translated by Slagter (1994:332).


When an objection is made, the supervisory board needs to obtain a ruling from the Enterprise Chamber of the Court of Appeal in Amsterdam in order to have a candidate appointed. The shareholders’ meeting and works council have no further rights to nominate and dismiss managing directors in structure corporations (see also figure 8.2). As indicated above, the shareholders’ meeting has the right to appoint and to dismiss members of the management board and has the right to adopt the annual accounts in corporations that operate under the rules of the mitigated structure corporations.


Figure 8.2 The Appointment of Supervisory Directors in Structure Corporations


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


Board Composition and the Co-optation of Supervisory Directors


The appointment of non-executive supervisory directors by co-optation can shield the Dutch supervisory board from influences outside the corporation. Gelauff and den Broeder (1996:59) indicate: “The fact that members of the supervisory board are appointed by co-optation and are not selected by the general meeting of shareholders limits the powers of shareholders through the general meeting.” As such, it is suggested that the co-optation of supervisory directors in corporations that operate under the rules of the structure regime facilitates the independent position of the supervisory board. Investors that seek control over corporations through direct changes in the composition of boards of directors in structure corporations have virtually no formal powers to alter the composition of the supervisory board and the management board.

Seen from this point of view, in addition to other anti-takeover devices, co-optation can be seen as a means to protect the corporation from hostile takeovers and undesired shareholder activism[40]. Although it was a highly unusual proxy fight in the Netherlands, the hostile take-over bid from Thorn Hagen in 1992 for Nedlloyd (see box 8.3) clearly demonstrated the power of the co-optation system to protect structure corporations from unwanted take-overs (Slagter, 1994).


Box 8.3

The Proxy Fight at Nedlloyd


“Much commotion has been caused last fall (1993, eds.) by an attempt of Mr. Hagen, through his investment company Marine Investments, for 17.2 . . . percent shareholder and with the help of 22 percent of supporting shareholders of NV Nedlloyd, the largest Dutch shipping company, to gain a seat on the supervisory board. At first, the management and supervisory board were not in favour of this appointment, arguing that the interests of such a large shareholder could conflict with those of the company. After refusal of the shareholders’ meeting to approve the annual accounts over 1990 to express its dissatisfaction with the failure of the management and supervisory board to propose Mr. Hagen for an existing vacancy on the supervisory board, and after establishment of a committee proposing Mr. Hagen to the supervisory board, the management and supervisory board relinquished their opposition, but only after they made Mr. Hagen make a statement of “good conduct” . . . After this obstacle had been removed following numerous meetings, Mr. Hagen found a second obstacle on his way to the supervisory board: the central works council exercised its right of objection at this structure company, compelling the supervisory board . . . of NV Nedlloyd to bring this case before the Chamber of Enterprises of the Court of Appeal. This affair has caused observers in other countries to suppose that it is hardly possible to gain participation in decision making by investing in a Dutch structure company, and that the Dutch structure regime is, from a perspective of European law, objectionable. From a Dutch perspective, this is regrettable, since the structure regime, instituted at the time as an ingenious compromise between employers and employees and therefore received with scepsis by both sides, after 20 years of experience is generally appreciated as a workable institution to reconcile wishes with regard to efficient management and co-determination.”


Source: Slagter (1994:343).


The position of shareholders is not only weakened by the statutory power of the supervisory board to appoint its members under the rules of the structure regime. The general meeting of shareholders also has to consider the equal rights of the works council to raise objections to a candidate proposed by the shareholders (Slagter, 1994). In this way, the Dutch system seeks to balance the interests of not only shareholders but those of employees and other stakeholders as well. This is regulated by the general rule that supervisory directors must act in accordance with the best interests of the corporation (de Savornin Lohman, 1996).


The Discussion on the Co-optation System

The discussion on the position of shareholders and employees in the nomination and the appointment of managing directors and supervisory directors goes back to the early proposals of the Stichting van de Arbeid in 1948, the Committee Verdam in 1960 and the Social Economic Council in 1984. More recently, Ophof (1994) introduced an alternative procedure to increase the rights of shareholders to appoint and dismiss supervisory directors in structure corporations. In this proposal, the shareholders’ meeting should have the right to appoint and to dismiss supervisory directors. The supervisory board and the works council would have equal rights to propose new supervisory board members. Boot (1994, 1995) also advocated an alternative procedure for the nomination of supervisory directors in structure corporations.

Through a nomination committee composed of representatives of employees, shareholders and independent experts, candidates should be appointed to the supervisory board. The Peters Committee also proposed the formation of selection and nomination board committees to prepare the selection criteria and nomination procedures for supervisory board members (Peters, 1997). At this moment, Groen Links - a left-wing political party in the Netherlands - and labor unions are flexing their muscles to increase workers’ participation in the appointment of supervisory directors.

The VEB (“Vereniging van Effectenbezitters”) - an active shareholder association in the Netherlands - strongly opposes the shareholders’ limited rights related to the appointment of managing directors in structure corporations. In a recent response to the Report of the Committee Peters, the VEB seeks support for more shareholder power to dismiss managing directors (VEB, 1997). In the case of dismissal, the VEB advocates that at least two-thirds of the shareholders with a total minimum of fifty percent of the shares must support the dismissal of the managing director before such a proposal could become effective.

Notwithstanding the attention given to these proposals in the business press, initiatives to increase shareholders' rights have not resulted to changes in the way supervisory directors are formally nominated, appointed and dismissed in structure corporations. Changes in legislation related to the co-optation system are also not expected in the near future. This is particularly articulated by the recent recommendations of the Peters Committee. Although the Peters Committee sought to increase the power of shareholders, it did not seek the alteration of the statutory powers of the supervisory board to appoint itself under the rules of the structure regime (see also box 8.4).


Box 8.4

The Peters Committee’s Statement on Co-optation


“The basic principle is that the board of directors and the supervisory board have the confidence of the shareholders’ meeting. The Committee therefore recommends that this (should, eds.) be borne in mind when appointing board members. Boards of directors and supervisory boards cannot perform satisfactorily in the long run without that confidence. If corporations comply with and implement these and other related recommendations by the Committee, then the co-optation system laid down in the ‘structure company’ regime should be able to continue functioning satisfactorily.”


Source: Peters Committee (1997:20).


Co-optation of Supervisory Directors and Foreign Investments in the Netherlands

According to Horringa (1994), the co-optation system may have a negative impact on the expansion of large Dutch structure corporations that seek co-operation through international strategic alliances. Due to its specific procedures, the appointment of supervisory directors by co-optation is not widely accepted and not well understood internationally. As a result, foreign partners may be reluctant to engage in strategic alliances when they discern that the appointment of directors lies in the hands of the supervisory board in the Netherlands. Although Horringa (1994) recognizes that this should not always be a problem, the prospect of complicated and time consuming nomination procedures may hinder foreign investors and corporations to form strategic alliances. Moreover, Horringa (1994) suggests that the globalization of corporations may be hindered by group thinking and old boys networking associated with the appointment of supervisory directors through the co-optation system.

Supervisory directors may have a preference to appoint candidates with similar backgrounds and the board may suffer the hazards of all small groups, including the tendency of certain individuals to dominate discussions, to avoid conflicts or to seek orderly resolution of issues (Demb and Neubauer, 1992b). So when globalization is a strategic issue for the management board, a conservative, risk-averse supervisory board may hinder the engagement in international strategic alliances (Maassen and van Montfort, 1994). Although the co-optation system may hinder the internalization of Dutch corporations, recent research shows an increasing emphasis on foreign director representation and international work experience in Dutch supervisory boards. Studies indicate that chairmen of supervisory boards increasingly emphasize the international management experience of common supervisory directors (Maassen, 1997; 1998a). The latest figures also indicate that more foreign non-executive directors are appointed to Dutch supervisory boards (Maassen, 1999a).


Board Composition and Interlocking Directorates (Board Memberships)

Although managing directors are not allowed to serve in the supervisory board of the corporation, corporation laws do not restrict the number of managing directors’ interlocking directorates. Also interlocking directorates of supervisory directors are not limited by corporation law in the Netherlands. It is often suggested that it is a common practice of top executives and supervisory directors to serve in other supervisory boards of listed corporations. In November 1993, the NCD – the Dutch Center for Boards of Directors – published voluntary guidelines that recommend directors to restrict the number directorships to a maximum of ten directorships in structure corporations. Directorships in corporations that operate under the rules of the common regime are not part of the NCD-guidelines. Supervisory directors are also recommended by the Peters Committee to limit the number of their supervisory board memberships.

The Peters Committee does not advocate a maximum number of directorships. It states: “The number of supervisory board memberships which a person can hold with a (listed) company should be limited in such a way as to guarantee the satisfactory performance of duties. Companies should allow employees in active service to hold memberships on supervisory boards of other companies” (Peters Committee, 1997:35).

Maassen (1998a) asked thirty chairmen of supervisory boards about the maximum number of boards memberships directors are allowed to have in supervisory boards of listed corporations. The chairmen indicated that the maximum should be on average between five and six supervisory board memberships. The chairmen indicated the following circumstances which would determine the maximum number of board memberships:

  • position of directors: directors who chair supervisory boards have a much higher workload than common board members;
  • workload of supervisory directors;
  • size of the corporation and the complexity of its operations;
  • possibility of conflicts of interest;
  • support from staff personnel;
  • location of head offices and the number of supervisory board meetings;
  • overall quality of the supervisory board;
  • age of supervisory directors;
  • time available.

Source: Maassen (1998a).


On average, the latest figures on interlocking directorates indicate that supervisory chairmen often serve on two supervisory boards in a sample of one hundred corporations listed at the Amsterdam Exchanges in 1998 (Maassen 1999a). The study indicates that a majority of the supervisory positions (54,7%) is held by directors who hold only one non-executive directorship. A total of nineteen supervisory directors have four or more directorships in supervisory boards of corporations in the corporations surveyed in 1998 (some 16,4% [97] of the total number of non-executive directorships [592]). Not included in the study are supervisory board positions in smaller (non-) listed corporations and not-for-profit institutions.


Board Composition and the Appointment of Formerly Affiliated Managing Directors

Dutch corporation laws do not prohibit the appointment of formerly affiliated managing directors to supervisory boards. Maassen (1998a) asked thirty supervisory board chairmen about the appointment of formerly affiliated managing directors. In general, chairmen indicate that through these appointments, the supervisory board can obtain more detailed information about the company and may benefit from the experience of former management. Chairmen also value the appointment of former management as a means to support the company culture and the continuity of long term strategic decisions. In summary, supervisory boards appoint formerly affiliated managing directors to their boards, in order to:

  • maintain company culture and family traditions;
  • bring in knowledge about the corporation;
  • secure the continuation of strategies and policies;
  • and if the nominee fits in the group considering his/her personality and background.

Source: Maassen (1998a).

The chairmen also indicate that the appointment of formerly affiliated managing directors may impede the independent position of the supervisory board. The “danger” of becoming actively involved in operational matters of the corporation may conflict with the distance supervisory directors should have from day-to-day operations. The chairmen suggest that appointments should only be made after careful consideration of the personality and experience of the nominee. The chairmen sometimes justify the appointment of formerly affiliated managing directors especially when highly specialized skills are unavailable outside the corporation.

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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.