HomeChapter 9: Comparing Changing Board Attributes9.3 The Transformation of Corporate Boards in the Netherlands

9.3 The Transformation of Corporate Boards in the Netherlands

Signs of board model transformation can also be observed in the organization of Dutch two-tier boards. The next sections of this paragraph summarize developments in the attributes and the formal independence of Dutch two-tier boards.

 

Supervisory Board Committees in the Netherlands

Although one-tier boards appear to use committee structures far more often than two-tier boards (Demb and Neubauer, 1992b), this study found an increasing number of board committees in Dutch two-tier boards. The Peters Committee recommends the formation of board committees such as the nomination committee, the remuneration committee and the audit committee. At least 45 supervisory boards out of a total of one hundred listed corporations have one or more board committees in 1997 compared to 38 in 1996. A total of at least 42 supervisory boards work with a remuneration committee in 1997 compared to thirty supervisory boards in 1996. The number of audit committees has increased from 26 in 1996 to at least 32 in 1997. The voluntary introduction of committees to Dutch boards - even before the publication of the Peters Committee’s recommendations - resembles the common practice of non-executive directors to operate in committees in the US and the UK.

Yet, the function of supervisoy board committees seems to differ from the oversight function of committees in one-tier boards. Survey results indicate that supervisory board committees are composed of both managing directors and supervisory directors with the exception of remuneration committees (Maassen, 1998a). So, while one-tier board committee structures serve purposes which are, to some degree, similar to the legal separation of management and supervisory boards in two-tier boards (Demb and Neubauer, 1992b), supervisory board committees may serve as integrative devices by means of a mixed composition (Maassen and van den Bosch, 1999a).

 

The Combined Meetings of Management and Supervisory Boards in the Netherlands

It appears to be a common practice of Dutch supervisory directors to meet with managing directors. The latest figures indicate that supervisory boards formally met on average six times in 1997. Of these meetings, a large majority of formal supervisory board meetings were held together with the management board (Maassen, 1998a, 1999a). These observations directly challenge the assumption that two-tier boards divide board responsibilities of management and supervisory boards (assumptions A.2d and A.4d). Although a division of board roles is carried out between the two boards, in reality the organization of two-tier boards suggests that supervisory directors operate in a board structure similar to one-tier boards in which both executive and non-executive directors have a seat in a unitary board and where they meet together on a regular basis.

 

The Roles of the Supervisory Board in Strategic Decision Making

Sheridan and Kendall (1992) suggest that two-tier boards transparently define board responsibilities of executive managing directors and non-executive supervisory directors by separate management and supervisory boards. Dutch company law prescribes several supervisory board responsibilities related to the management board’s decision-management role. Under certain circumstances, the supervisory board may “ . . . be entrusted with the management tasks or a part thereof. This relates to the replacement of the management in the event of absence or hindrance . . . and the representation of the company in the event of a conflicting interest of managing directors” (Blanco Fernández, 1993:213-214).

Dutch law also specifies an advisory task of the supervisory board. Consequently, in practice a clear division between decision management and decision control may be diminished. This is reflected by the role of supervisory boards as perceived by Dutch supervisory chairmen. Two thirds of the chairmen interviewed in the Maassen (1998a) study indicate an increasing emphasis on the role of supervisory directors in the formulation and ratification of strategy. The chairmen observe that supervisory directors are more involved in the development and analysis of strategic corporate opportunities, as well as in the supervision of the implementation and the evaluation of strategies.

 

The appointment of Formerly Affiliated Managing Directors to Dutch Supervisory Boards

Chapter eight indicates that the common and structure regimes do not prohibit the appointment of formerly affiliated managing directors to supervisory boards in the Netherlands. Directly related to assumptions A.2a and A.4a in this study, this observation may challenge the conventional wisdom that the composition of supervisory boards is positively associated with the separation of decision management from decision control in two-tier boards. In addition, the appointment of formerly affiliated managing directors and CEOs to the chair position of supervisory boards could theoretically challenge assumptions A.2b and A.4b.

These assumptions indicate that the leadership structure of two-tier boards is positively associated with separation of decision management from decision control and negatively associated with the integration of these roles. Based on an analysis of annual reports published between 1987 and 1998, Maassen (1999a) indicates that a majority of seventy percent of one hundred listed corporations have no formerly affiliated managing directors in their boards in 1998. Only 37 positions out of a total of 592 supervisory board positions are held by formerly affiliated managing directors in 1998 (about six percent). When formerly affiliated directors are appointed, corporations also generally adhere to the recommendations of the Peters Committee to appoint a maximum of one formerly affiliated managing director to their supervisory boards.

The latest figures indicate that only four supervisory boards out of a total of one hundred listed corporations are chaired by a formerly affiliated managing director in 1998 (Maassen, 1999a). These appointments took place between 1987 and 1998. These findings indicate that a strong majority of the one hundred corporations investigated (96 percent) adhere to the recommendations of the Peters Committee to avoid the appointment of a formerly affiliated managing director to the chairman seat of supervisory boards. The findings also indicate that these appointment rarely take place in the top one hundred of Dutch listed corporations.

 

Implications for the Independence of Two-Tier Boards in the Netherlands

Pressures from the Peters Committee have certainly resulted in more openness from supervisory directors on their working methods and their board structures. The research findings of this research also indicate that some developments take place in the organization and the composition of two-tier boards in the Netherlands. What do these observations mean for the formal independence of two-tier boards in the Netherlands? According to Maassen and van den Bosch (1999a), the combination of the appointment of formerly affiliated managing directors to the supervisory board, the mixed composition of board committees, the combined board meetings and the diffusion of supervisory board responsibilities may challenge the widespread agency theoretical belief that supervisory directors operate per definition independently of managing directors in two-tier boards. It is, for example, a common practice for the supervisory board to organize joint meetings with the entire management board.

This study also found that supervisory boards increasingly work with audit and nomination committees composed of both managing directors and supervisory directors, when the size of the corporation and the supervisory board justifies the formation of these committees. Through these arrangements, it is likely to be the case that directors apply design strategies that aim to facilitate the integration of decision management with decision control in their two-tier boards. This might especially be the case when formerly affiliated managing directors are appointed to supervisory boards and when these directors would act in the same way as executive directors in one-tier boards. Yet, the convergence hypothesis would not be supported if formerly affiliated directors act truly independent of management.

More research is needed to understand the roles of these directors due to the fact that figures on formerly affiliated managing directors in this research do no explicate the role these directors perform in the decision control activities of the supervisory board. The relevant assumptions and research findings are summarized in table 9.2.

 

Table 9.2

Assumptions on Two-Tier Board Attributes and Research Findings

Assumptions:

Relates to:

Findings are based on an analysis in the Netherlands between 1987 and 1998.

 

A.2a, A.4a.

Board composition.

  • the legal requirement to separate managing directors from supervisory directors has not been changed. Formerly affiliated managing directors are sometimes appointed to supervisory boards (about six percent of supervisory board positions in 1998 in one hundred listed corporations).

A.2b, A.4b.

Board leadership structure.

  • no changes have occurred in the formal organization of the leadership structure of Dutch supervisory boards. In a few cases, formerly affiliated managing directors are chairing supervisory boards after their retirement (four percent of one hundred listed corporations in 1998).

A.2c, A.4c.

A.2d, A.4d.

Oversight board committees and board organization.

  • managing and supervisory directors meet together during most formal board meetings of supervisory boards and meet together in board committees when these are formed.

 

Proposition P.2

Proposition P.2: to facilitate the integration of the executive directors’ decision management role with the non-executive directors’ decision control role, appropriate attributes of one-tier boards are incorporated into two-tier boards.

 

  • Supervisory directors apply design strategies that integrate decision management with decision control:
  • more board committees are formed with both managing and supervisory directors;
  • combined meetings are held with managing directors;
  • a minority of supervisory boards has appointed formerly affiliated managing directors.
 

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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.