Response of the Netherlands AFM to the green paper corporate governance July 2011 General questions (1) Should EU corporate governance measures take into account the size of listed companies? How? Should a differentiated and proportionate regime for small and medium-sized listed companies be established? If so, are there any appropriate definitions or thresholds? If so, please suggest ways of adapting them for SMEs where appropriate when answering the questions below. In principle, there is no reason for such different regimes as there presently is no presumption of different principles of good governance for larger and smaller listed companies. SMEs can make appropriate use of comply or explain to create some flexibility. However, if a future corporate governance framework would make it practically impossible for SMEs to comply (e.g. because of high costs of compliance) and a vast majority of the SMEs within a certain sector would be forced to explain, we would see value in a differentiated and proportionate regime. (2) Should any corporate governance measures be taken at EU level for unlisted companies? Should the EU focus on promoting development and application of voluntary codes for non-listed companies? Non-listed companies having offered, to a large extent, securities to the public, or having other public exposure could face similar demands as listed companies in respect of governance. We do not think that measures should be taken at EU level, measures at the national level could be sufficient. Boards of directors (3) Should the EU seek to ensure that the functions and duties of the chairperson of the board of directors and the chief executive officer are clearly divided? Yes, given the principle of good corporate governance the AFM is of the opinion that the functions and duties of the chairperson of the board of directors and the chief executive officer are clearly divided and should not be combined in one person. A combination of both functions in one person might obscure the distinction between the executive task (the day to day running of the company) and the non-executive task (the general management of the company) of the board. It also could concentrate too much power in one person. In France and the UK both functions have to be performed by different persons for reasons of good corporate governance. Also the Dutch Corporate Governance Code supports the principle that the chairman of the management board may not also be or have been an executive director. This practice is in line with a law that has recently been approved by Dutch Parliament and is also in line with the European Commission s view as set out in the 1
European Commission s Recommendation of February 15, 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the supervisory board (PG EG L522/51 of February 25, 2005). (4) Should recruitment policies be more specific about the profile of directors, including the chairman, to ensure that they have the right skills and that the board is suitably diverse? If so, how could that be best achieved and at what level of governance, i.e. at national, EU or international level? Yes, we agree with this view as explained by the following. The AFM considers it important that the composition of a board, either one-tier or two-tier, is diverse, as this can enhance the quality of the decision making in terms of expertise and independence. Furthermore expertise, commitment and independence are essential to the proper functioning of a board. An adequate counterbalancing power between the board members is important to achieve the corrective power of the board. There are several ways to accomplish this. For example for firms in the financial sector through the fit and proper test, which can specify that directors should have appropriate knowledge, skills and professionalism to provide corrective power. A suitable composition of the board is an important variable to achieve this. An explicit specification of the required knowledge, skills and professionalism of the board can provide the framework for the recruitment of directors. A profile of the board and of the individual directors may also be a useful instrument, as well as a (periodic external) board review process. We have no definite views yet at what level of governance this could be achieved. If any arrangements are made at the EU-level, the AFM suggests to take into consideration the geographical positioning and complexity of the operations of the listed companies as in our response to question 7. (5) Should listed companies be required to disclose whether they have a diversity policy and, if so, describe its objectives and main content and regularly report on progress? Yes, we agree with this view and refer to the relevant part of the Dutch Corporate Governance Code. This Code prescribes that the (supervisory) board shall prepare a profile of its size and composition, taking account of the nature of the business, its activities and the desired expertise and background of the board members. The profile shall deal with the aspects of diversity in the composition of the (supervisory) board that are relevant to the company and shall state what specific objective is pursued by the board in relation to diversity. In so far as the existing situation differs from the intended situation, the supervisory board shall account for this in the report of the supervisory board and shall indicate how and within what period it expects to achieve this aim. The profile shall be made generally available and shall be posted on the company s website (Principe III and BP III.3.1). (6) Should listed companies be required to ensure a better gender balance on boards? If so, how? Yes, although in our opinion this should be addressed on a voluntary basis. The gender of a board member need not be regarded exclusively as an aspect of diversity, but the representation of women should also be viewed in the context of equal treatment. Listed 2
companies have a direct interest in encouraging women to take top positions. An important determinant of success for companies is their ability to attract and to retain talent. At the current moment the issue of gender balance should be addressed on a voluntary basis within the listed companies and we see no justification to recommend or legalize a certain quote of female board members. (7) Do you believe there should be a measure at EU level limiting the number of mandates a non-executive director may hold? If so, how should it be formulated? With regard to listed companies the Dutch Corporate Governance Code determines that the number of mandates of a non-executive director shall be limited to such an extent that the proper performance of his duties is assured; the maximum number is five, for which purpose the chairmanship of a one tier board counts as two (BP III.3.3). Regarding a possible arrangement at EU-level for listed companies, we suggest to take this approach as a starting point. In addition to that, we suggest to take into consideration the geographical positioning and complexity of the operations of the listed companies, as we suggested in the joint Dutch reply to the consultation on corporate governance in financial institutions and remuneration policies. If any measures are taken at the EU-level, we would like to advise that this arrangement should not be too strict. (8) Should listed companies be encouraged to conduct an external evaluation regularly (e.g. every three years)? If so, how could this be done? We support the idea that the board should evaluate its performance annually. It can be a useful instrument to enhance the quality of the board's performance, as is the case in the Netherlands. Also we support the principle that the supervisory board shall discuss the functioning of the management board and the performance of individual members, and the conclusions that must be drawn on the basis thereof. We acknowledge that the involvement of an external advisor can have certain advantages and may improve the process of evaluation. Nevertheless, the non-executive directors are and should remain responsible for the way the evaluation is carried out and for the conclusions which are drawn from the evaluation. We support that an evaluation of the functioning of the board should be made available to the supervisory authorities. In our opinion a brief statement on the result of the evaluation, as is the case in the Netherlands, is preferable. Making the outcome of this evaluation publicly available and discussing it with shareholders on the general meeting of shareholders might contribute to a dialogue between the board of directors and shareholders and may ensure stakeholders confidence in management and supervision. (9) Should disclosure of remuneration policy, the annual remuneration report (a report on how the remuneration policy was implemented in the past year) and individual remuneration of executive and non-executive directors be mandatory? Yes, we support the view that disclosure should be mandatory. 3
We refer to best practice II.2.12 of the Dutch corporate governance code, where it is said that the remuneration report of the supervisory board shall contain an account of the manner in which the remuneration policy has been implemented in the past financial year, as well as an overview of the remuneration policy planned by the supervisory board for the next financial year and subsequent years. The report shall explain how the chosen remuneration policy contributes to the achievement of the long-term objectives of the company and its affiliated enterprise in keeping with the risk profile. The report shall be posted on the company s website. Further details of the content of the report with respect to individual remuneration is given in the subsequent best practices. (10) Should it be mandatory to put the remuneration policy and the remuneration report to a vote by shareholders? Yes, according to Dutch law (art. 2:135 BW) and the Dutch corporate governance code the remuneration policy should be put to a vote by shareholders. We support this principle. (11) Do you agree that the board should approve and take responsibility for the company s risk appetite and report it meaningfully to shareholders? Should these disclosure arrangements also include relevant key societal risks? Yes, however no additional rules are deemed necessary in this respect as far as we are concerned. The Code of the Netherlands stipulates that the executive board is responsible for establishing and realizing the targets and the strategy, including the risk profile. The executive board should report in this respect to the supervisory board and the shareholders. The supervisory board evaluates the performance of the executive board, including the strategy, the risks and the systems established for risk management and control. The supervisory board reports on the execution of these evaluations. Further, in the annual report, the executive board reports on the risks associated with the corporate strategy, including sensitivities for external factors, and the design and working of, including possible shortcomings and planned changes in, the systems for risk management and control. The relevant best practices in the Code of the Netherlands are well observed and the Code is deemed to be adequate in this respect. (12) Do you agree that the board should ensure that the company s risk management arrangements are effective and commensurate with the company s risk profile? Yes, we agree and we refer to the tasks and responsibilities of both executive board and supervisory board in this respect, stipulated in the Code of the Netherlands. See answer 11. Shareholders (13) Please point to any existing EU legal rules which, in your view, may contribute to inappropriate short-termism among investors and suggest how these rules could be changed to prevent such behaviour. 4
The AFM is skeptical whether the stimulation of long-term shareholding offers a solution to the identified problem. We consider that the quality of the engagement between shareholder and company is more important to long-term value creation than the specific length of the holding period as such. The tendency towards shorter holding periods constitutes an economic reality. It is questionable whether specific rules and regulations should be changed in order to reverse this trend, especially given the fact that this may negatively affect the freedom of capital movements. Moreover, at least theoretically, both long-term and short-term investors take expectations as to the long term value prospects of a firm into account in their investment decisions. For this reason, long-term value creation can still be supported in an environment with shorter holding periods. It should also be kept in mind that institutional investors who have a long-term commitment to a given firm may still need to regularly recalibrate their share portfolio. As a result, the investor s economic position may remain stable, while the turnover rate of individual shares in the investee company can still be high. In extreme situations, the artificial prolongation of the holding period may lead to a reduction of liquidity in the shares of a given company. This can have a negative impact on the value of these shares, and may thus impact the financing ability of the firm. In this way, the artificial prolongation of the holding period can negatively impact long term value creation of the firm. Finally, some firms that are in need of (re)capitalization will be largely dependent on shortterm investors. This can be the case when long-term (institutional) investors are not willing or not allowed to invest in a company, e.g. due to doubts about the company s ability to survive or when a restructuring was preceded by a serious breach of confidence between the firm and long-term investors. (14) Are there measures to be taken, and if so, which ones, as regards the incentive structures for and performance evaluation of asset managers managing long-term institutional investors portfolios? (15) Should EU law promote more effective monitoring of asset managers by institutional investors with regard to strategies, costs, trading and the extent to which asset managers engage with the investee companies? If so, how? (16) Should EU rules require a certain independence of the asset managers governing body, for example from its parent company, or are other (legislative) measures needed to enhance disclosure and management of conflicts of interest? Combined response to 14, 15 and 16: No, we do not see a need for additional regulation here. In our opinion, the AIFM directive covers already the topics of (14) remuneration: incentive structures in line with interests of investors, remuneration serving an effective risk management; (15) transparency: extensive reporting and disclosure requirements regarding investment policy, asset valuation and risk and liquidity management and 5
(16) conflicts of interests: preventing of and dealing with conflicts of interest. The UCITS directive already covers these topics along the same lines for retail funds. So we do not really see a need for additional regulation here. (17) What would be the best way for the EU to facilitate shareholder cooperation? The AFM believes that consultation between shareholders can help increase the level of insight into the corporate governance of an issuer. This consultation can help shareholders convey their views to an issuer more effectively and clearly. This applies in particular with a view to preparations for a general meeting of shareholders, whereby consultation can lead to the granting of proxies and voting instructions. Such forms of consultation are generally not based on an agreement to pursue a sustained joint voting policy and therefore do not qualify as acting in concert. As long as each party concerned retains the freedom to exercise its voting right independently (or have its voting right exercised) at its own discretion a sustained joint voting policy will not exist. In order to facilitate shareholder cooperation, it would be very useful to have a harmonized EU-approach for what means acting in concert in terms of takeover bids. We suggest to clarify this in the takeover directive. (18) Should EU law require proxy advisors to be more transparent, e.g. about their analytical methods, conflicts of interest and their policy for managing them and/or whether they apply a code of conduct? If so, how can this best be achieved? (19) Do you believe that other (legislative) measures are necessary, e.g. restrictions on the ability of proxy advisors to provide consulting services to investee companies? Combined answer to 18 and 19: As a general comment the AFM believes that it is desirable that proxy advisors are transparent about their methods, material conflicts of interest, and their policies and processes to manage concerns effectively. At the same time, the AFM believes that shareholders who make use of the voting advice of a third party should form their own judgment on the voting policy of this adviser and the voting advice provided by him, and to ascertain that they do indeed vote as they see fit. The AFM will participate in an ESMA fact finding exercise with regard to the European proxy services industry. Pending the outcome of this ESMA-exercise we defer any comments as to potential policy options. We believe that the outcome of this exercise will also be highly useful for the Commission s purposes as to the potential way forward in this area. (20) Do you see a need for a technical and/or legal European mechanism to help issuers identify their shareholders in order to facilitate dialogue on corporate governance issues? If so, do you believe this would also benefit cooperation between investors?please provide details (e.g. objective(s) pursued, preferred instrument, frequency, level of detail and cost allocation). The AFM believes that shareholder engagement can be encouraged by facilitating a constructive dialogue between companies and their shareholders, and among shareholders themselves, at an early stage. The AFM recognizes that the anonymity of shareholders can be an obstacle to the establishment of that dialogue. Therefore, the AFM supports measures that may facilitate the identification of shareholders, along the lines of a legislative proposal currently underway in the Netherlands. In order to protect the anonymity of retail investors, the AFM believes such identification should only apply to professional investors, with 6
holdings above a certain quantitative and/or relative threshold. Moreover, due guarantees are needed in order to assure that this information is not used for any other purposes than the facilitation of a dialogue between investor and issuer: The possibility to more easily identify shareholders should not lead to the exchange of price sensitive information or to the establishment of a non-disclosed sustained joint voting policy (see also our answer to question 17). A more general remark is that given the cross-border nature of shareholdership, the AFM would welcome additional measures on the European level that take the international nature of the identified problems into account. The AFM believes it is necessary to improve the integrity of the voting chain and to facilitate cross-border voting. (21) Do you think that minority shareholders need additional rights to represent their interests effectively in companies with controlling or dominant shareholders? The AFM considers it important that minority shareholders are able to represent their interests effectively. In this context, the AFM would like to point the Commission Services attention to the inquiry procedure laid down in Dutch company law. This procedure allows minority shareholders (with holdings over a certain threshold) to petition the court, in order to have one or more independent investigators perform a court sanctioned investigation into the affairs of the company. This investigation can be wide ranging, extending beyond the management board and its policy decisions, to every corporate body (and persons within such corporate bodies) involved in the policymaking of the company. Such an inquiry can be initiated when the specialised Enterprise Chamber of the Netherlands deems - in its sole discretion - that there are justified grounds to question the policy pursued by or within the company. Facts and circumstances must exist which justify the expectation of mismanagement within the company. We would also like to point to Recommendation III.8 of the High Level Group of Company Law Experts, which argues in favor of the adaptation of a European framework rule, whereby this special investigation right should be guaranteed in all companies and as far as possible on a group-wide basis. However, details of the procedure and determination of proper sanctions should be left to Member States. (22) Do you think that minority shareholders need more protection against related party transactions? If so, what measures could be taken? The AFM would welcome measures that would offer better protection of investors against related party transactions (tunneling), recognizing that this should be done by other means than through securities law. The AFM believes that merely enhancing the transparency about the execution by management of related party transactions ex-post would be insufficient. A flanking measure that the AFM would support is to require ex-ante shareholder approval for related party transactions above a certain quantitative threshold. The AFM has also observed that the legal interpretations with regard to related party transactions vary among Member States, both with regard to materiality and acceptability. This suggests that a Commission initiative in this area would be welcome in order to facilitate the alignment of the legal protections offered in Members States against related party transactions. (23) Are there measures to be taken, and is so, which ones, to promote at EU level employee share ownership? We do not see a role for EU-regulation to promote employee share ownership. 7
Monitoring and implementation of Corporate Governance Codes 24. Do you agree that companies departing from the recommendations of corporate governance codes should be required to provide detailed explanations for such departures and describe the alternative solutions adopted? Yes. The AFM underwrites the view of the European Commission that the main advantage of the comply or explain approach is its flexibility, allowing companies to adapt their corporate governance practices to their specific situation. The AFM is of the view that this flexibility also creates the obligation for companies departing from the recommendations to provide detailed information for departures and adopted alternative solutions. Otherwise, stakeholders of a company would lack important information to assess the quality of governance of that company. 25. Do you agree that monitoring bodies should be authorised to check the informative quality of the explanations in the corporate governance statements and require companies to complete the explanations where necessary? If yes, what exactly should be their role? In order to be effective, compliance with corporate governance codes on the basis of comply or explain needs to be complemented by a system of effective monitoring. The AFM is of the view that the system of monitoring in the Netherlands, which is characterized by a mixed regime of regulation by law and self regulation, leads to a flexible instrument with sufficient pressure to comply. Therefore, the AFM suggests that Member States adopt a similar system of monitoring. Below the AFM will elaborate on this. It is suggested that Member States make sure that the companies that are within the scope of the national corporate governance code are legally obliged to report on compliance with the code in their annual report and to explain why any of the principles and best practice provisions intended for the management and supervisory boards are not applied. Furthermore, it is suggested that Member States make sure that the corporate governance code itself is based on self-regulation because keeping the code up to date and practicable is less of a problem than in the case of legislation as it can be amended more easily and quickly. The monitoring should take place at a national level on grounds of subsidiarity and the direct involvement of all participants on a national level. Next to that, it is suggested that Member States nominate an independent monitoring body, with the official terms of reference to help ensure that the national corporate governance code is practicable and up to date and to monitor compliance with the code. As part of this terms of reference, the monitoring body should make the monitoring results publicly available in order to highlight best practices and to push companies towards more complete transparency. Against this background, the AFM believes that there is no need for monitoring bodies to require companies to complete the explanations where necessary. Finally, the AFM shares the view of the European Commission that the monitoring body should not interfere with the content of the information disclosed but wants to emphasize that the use of boilerplate disclosures should be discouraged. 8