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A number of legislative proposals issued in 2001 and 2002 aim to strengthen the position of the general meeting of shareholders in Dutch companies in relation to company management and, in some cases, even the supervisory board. At the same time, the powers of employee representatives will remain largely unchanged. These changes may bring about a shift in the balance of power within large companies in favour of shareholders.
In the current debate on the Dutch system of corporate governance (NL9801154F) shareholders of companies are seen as the 'principal', while management is seen as the 'agent'. Corporate governance centres on how the principal maintains control over the agent. The different types of control by shareholders are generally referred to as disciplinary mechanisms, of which the most prominent in the Netherlands are:
- exit - shareholders sell their shares (ie they 'vote with their feet');
- direct supervision of management by specially appointed supervisors;
- 'voice'- shareholders can make themselves heard;
- the takeover market - poorly operating companies change ownership, after which the new owner replaces the incumbent management; and
- the 'market' for managers, insofar as this is determined by the system of remuneration.
In the Netherlands, employees and their representatives – particularly works council s – play a variety of roles in terms of the above mechanisms or the use thereof. First, they possess powers in relation to the use of several of these mechanisms, such as the right to recommend or object to the appointment of supervisory board members within large companies. Second, the use of such mechanisms by shareholders can have consequences for the powers enjoyed by employee representatives. Finally, altering the mechanisms could lead to significantly undermining (or strengthening) the position of employee representatives.
Direct supervision: rules applicable to statutory two-tier entities
Dutch legislation on company structure obliges larger companies to appoint a supervisory board, which maintains supervisory control over the firm, including appointing and dismissing management. In January 2001, the Social and Economic Council (Sociaal Economische Raad, SER) issued a unanimous recommendation on amending the allocation of powers within large companies contained in these so-called statutory two-tier rules (NL0011112F).
At the beginning of 2002, a legislative proposal largely along the lines of the SER recommendation was published (Parliamentary documents II 2001-2002, 28179, no. 2). Instead of the current system under which the supervisory board appoints its own members, the general meeting of shareholders would act as the appointing body. Works council powers would be expanded to the almost binding nomination of a maximum of one-third of the supervisory board's members - currently they can nominate members for appointment/reappointment and object to proposed appointments. Supervisory board members would nonetheless continue to carry out the same package of tasks: they may not focus on 'sub-interests' (such as those of shareholders or employees), but must adopt the interests of the company and any associated companies as the point of departure in formulating their position. This represents a fundamental difference between the Dutch and German systems of supervisory boards (NL9910166F).
The works council's existing right to object to the (re)appointment of supervisory directors would be scrapped. In a departure from the current system, the general meeting of shareholders would be awarded the right to dismiss the supervisory board in its entirety. If it should resort to such measures, the works council would have the right to be heard. The general meeting of shareholders would be awarded the right to adopt the annual accounts (the supervisory board currently enjoys this power). Finally, the general meeting of shareholders would have to grant its approval for far-reaching mergers and takeovers.
Management remuneration
Following an earlier proposal to increase transparency regarding management salaries at listed companies (NL0007196N), the government put forward a proposal in mid-August 2001 specifically to grant shareholders more influence in determining management salaries. Unless otherwise stipulated in the company's articles of association, the general meeting of shareholders would in future be authorised to determine remuneration levels for managers and supervisory directors. It is proposed that the power of the general meeting of shareholders must not be limited with respect to amending the articles of association in the interests of determining remuneration levels. In this manner, the general meeting of shareholders would be able to maintain its authority.
In cases where the articles of association do indeed award a different body the power to determine remuneration levels, the legislative proposal stipulates that (all changes to) remuneration policy in respect of managers and supervisory directors must be brought before the general meeting of shareholders for approval.
It is noteworthy that the government's proposals pass over the works council. Nonetheless, the government does note that while with respect to publication of remuneration policy, the proposed remuneration policy report would provide those involved, such as the works council, with an opportunity to stay informed, though the proposals do not include any (extension of) the works council's powers. In this regard, the Prime Minister, Wim Kok, notes that it stands to reason that if transparency is seen as a priority, the works council will have some say about salary developments.
On 12 December 2001, two members of parliament - Paul Rosenmöller and Ab Harrewijn - submitted an initiative legislative proposal – partly as a result of dissatisfaction with the above proposal – that would award powers in this area to the works council (Parliamentary documents II 2001-2002, 28 163, no. 2). Based on this proposal, a new article would need to be incorporated in the Works Councils Act stipulating that the works council enjoys the right to be informed regarding the level and content of employment conditions regulations pertaining to the different (job) categories used to classify employees within the company, as well as employment conditions regulations and agreements with managers and the level of remuneration awarded to the members of the supervisory body. The works council would need to be informed directly of any changes to such regulations.
The VNO-NCW employers' confederation opposes this proposal. It is of the opinion that the remuneration of managers and members of the supervisory body does not fall within the tasks of works councils.
The takeover market
A new Merger Code agreed in 2000 (NL0004188F) came into force on 5 September 2001 . The new code awards trade unions the right to information and consultation in the case of an intended merger. With one significant exception, the substance of the new merger code hardly differs from the previous code adopted in 1975. Whereas the previous regulations prohibited all unannounced hostile public takeover bids, the current regulations no longer appear explicitly to prohibit this in all cases. An important exception is made with respect to prohibiting previously unannounced bids in Article 3, Paragraph 2: 'If a generally applicable provision governing securities transactions rules out advanced notification, employee associations will – in departure from Paragraph 1 – be notified no later than when the public announcement is made.' This boils down to subordinating employee participation rights to those applicable under securities law.
Voice
Annual accounts
One of the main points in the rules applicable to statutory two-tier entities introduced in 1971 was that within large companies the authority to adopt the annual accounts was transferred from the general meeting of shareholders to the supervisory board. According to the legislative proposal for amendment of the two-tier rules, this power should be given back to the general meeting of shareholders. In addition, the general meeting of shareholders would be awarded the right to amend the annual accounts. Additionally, advisory powers would be awarded to the works council. Although these advisory powers require further elaboration, they appear to be limited to an obligation for the works council to be heard.
Shareholders' right of approval
The legislative proposal for amendment of the two-tier rules is not limited to the appointment of supervisory directors alone. It also covers other powers for shareholders. The right of approval is awarded to the general meeting of shareholders regarding far-reaching decisions insofar as such decisions might affect, or be conducive to significantly altering, the identity or character of the company. Examples here include decisions pertaining to the transfer of (close to) all the establishments comprising the company, entering into or ending long-term cooperative agreements with or participating interests in other companies, and investments or disinvestments. Under the current situation, the works council holds advisory powers over such decisions. The general meeting of shareholders does not enjoy such powers. The proposed new 'power ratio' between the works council and the general meeting of shareholders is still unclear.
Commentary
The above initiatives taken by the Dutch legislator share a common characteristic in that they strengthen the position of shareholders in relation to management and, in some cases the supervisory board. It can be noted that the initiatives are ambiguous concerning the works council and, in a few cases, the trade unions. In some cases, the powers of employee representatives are restricted (ie loss of the right to object to the appointment of supervisory board members, and the lifting of the ban on takeover bids without previous notice to unions). In a number of instances where employee representatives are awarded new powers, their significance is open to question (for example, the increased advisory powers regarding the appointment of supervisory board members). Other initiatives contain no provisions with respect to employee participation in general. On balance, the basic outcome is that the position of employee representatives remains largely the same in relation to management, while shareholders gain significant ground.
Given the above, it would seem that the era of 'equal representation' has ended. This concept meant that capital and labour had to occupy an equal footing, particularly within large companies. The above legislative proposals are all geared to strengthening the position of the shareholders (meeting) in relation to management and, in some cases the supervisory directors. Strictly speaking, what would tie in well with the concept of equal representation would be to strengthen the position of employee representatives to the same extent that the position of the general meeting of shareholders is strengthened. Nonetheless, this choice has not not made. Insofar as employee representatives are awarded powers, they are of a different order to the powers awarded to the general meeting of shareholders. (Robbert van het Kaar, HSI)