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The debate in the Netherlands on supervisory control within large companies resulted in a provisional compromise in October 2000 within the tripartite Social and Economic Council (SER). The Council has recommended changes to the current system whereby shareholders and works councils nominate members of the supervisory board. Although supported by trade unions and employer organisations, as well as a majority of the Lower House of parliament, the compromise triggered much opposition elsewhere.
In its current form, the Dutch law on company structure - the so-called structure law (structuurregeling) - obliges large companies to appoint a supervisory body or supervisory board (Raad van Commissarissen, RvC), which maintains supervisory control over the firm. It appoints and dismisses management, adopts the annual accounts and has the right to veto important board decisions.
In most countries with such structures, the members of a company's supervisory body (or supervisory members in a combined board of directors) are appointed by the general meeting of shareholders. In some countries, however, employees have a right to appoint some members of the board - either directly or through trade unions and works councils - alongside those appointed by shareholders (TN9809201S). In Germany, for example, a maximum of half the members of the supervisory board (with the level depending on the type and size of company) are appointed by works councils and unions, and the remainder by the general meeting of shareholders. In this respect, the Netherlands is unique: the supervisory board appoints its own members by means of a system of "controlled co-option". Labour (employees) and capital (shareholders) exert indirect influence over the composition of the supervisory body: the general meeting of shareholders and the works council (ondernemingsraad,OR) possess the right to nominate supervisory board members for appointment or reappointment and can also object to proposed appointments. The structure law has been under fire for some time, especially from shareholders (NL9801154F).
Provisional compromise within the SER
In mid-October 2000, an agreement was reached within the tripartite advisory Social and Economic Council (Sociaal Economische Raad, SER) on adjusting the law on company structure. In brief, the SER's provisional compromise involves the following:
- similar to the existing system, shareholders and the works council would have the right to nominate supervisory board members. The management board, however, would lose its right to appoint supervisory board members.
- the works council's right to nominate candidate supervisory directors would apply to only one-third of the supervisory board members;
- the supervisory board would makes a proposal on the appointment of members, based on the nominations of the shareholders and the works council, to the general meeting of shareholders. If, in so doing, the proposals of the works council are not honoured, the conflict must be placed before an independent court for resolution within four weeks;
- appointment would take place at the general meeting of shareholders, which could reject the proposals of the supervisory board through a three-quarters majority vote;
- the tasks for which supervisory board members are responsible would remain unchanged. In carrying out their tasks, they would be obliged to act in the interests of the company and all its subsidiaries and not on the basis of partial interests; and
- if a supervisory director fails to fulfil his or her function properly, both the general meeting of shareholders and the works council are authorised to disband the entire supervisory board.
Mixed response
So far, the responses to the SER proposal vary from the highly positive to outright rejection. Understandably, the trade union movement and the employers' organisations are largely positive: after all, their representatives achieved the compromise within the SER. On the other hand, several large individual companies have expressed some criticism.
The Association of Securities Holders (Vereniging van Effectenbezitters, VEB), which represents the interests of shareholders, is not in the least bit positive. Although its chair, Peter Paul De Vries, is happy that the existing system is on its way out, he feels that shareholders would be given far too little power in relation to that awarded to employees by the proposed new rules. He emphasised that shareholders are not represented on the SER.
Professor Piet Moerland of Tilburg University is also highly critical. He states that the proposed system of indirect appointment - whereby the works council and the general meeting of shareholders nominate candidates for supervisory board membership for the approval of the supervisory board, which then compiles a proposal for the general meeting of shareholders - is not particularly transparent. The same applies to the proposed rule stating that the entire supervisory board can be disbanded, as opposed to an individual supervisory board member being removed. Another academic, Arnoud Boot of the University of Amsterdam, finds it undesirable that the proposal awards works councils greater powers in relation to the composition of the supervisory board. In his opinion, employees already have sufficient rights in comparison with shareholders. Moreover, he is fearful that the works council will become too much of a selection committee for supervisory board members, thus jeopardising its independence and effectiveness.
The response from Lower House of parliament was overwhelmingly positive, and the SER compromise can count on majority backing.
Works councils currently have little influence
In 1995, a study conducted into more than 100 large companies revealed that most works councils are not unduly active concerning the appointment of supervisory directors ("Ondernemingsraad en vertrouwenscommissaris", RH van het Kaar, Sinzheimer Cahiers 9, Sdu, The Hague (1995)). The situation now seems to have improved somewhat. The findings of a recent a study of compliance with the Works Councils Act reveal that fewer than half the organisations with a works council have not installed a supervisory body ("Naleving van de Wet op de ondernemingsraden", E Bruin and F Huijgen, Ministry of SZW/Elsevier Bedrijfsinformatie, The Hague (2000)). In no less than 45% of those organisations with a supervisory body is the works council authorised to nominate candidates. Of these organisations, in 45% of cases the views of works councils are heard with respect to the appointment of new members. In 63% of the organisations surveyed, works councils are kept informed of all supervisory board vacancies.
From this, however, it cannot simply be deduced that the works council possesses any great influence over the composition of the supervisory body. No less that 63% of the works councils surveyed are of the opinion that they do not have any real influence over the appointment of new members of the supervisory body, only 10% believe that they definitely have an influence and 20% believe that they possess a measure of influence.
The position of shareholders
Based on the compromise within the SER, it would ultimately be the general meeting of shareholders that decides on the composition of the supervisory board. Shareholders, however, will be confronted with various hurdles. These would partly be a consequence of the SER's proposals - such as the requirement that three-quarters of shareholders' votes would be required to reject the supervisory board's proposal for board appointments - and partly a consequence of the manner in which companies in the Netherlands protect themselves against hostile takeovers (NL0004188F). One such measure is the certification of shares, which awards capital providers the financial rights linked to the shares, but withholds voting rights from them.
As such, a very clear connection exists between the issue of appointing supervisory board members on the one hand, and other legislation governing companies on the other.
Expectations are that existing protective structures in the Netherlands, such as the certification of shares, will in time yield to pressure from the capital market. The outcome will also serve to strengthen the position of shareholders in the appointment of supervisory board members. However, it remains to be seen if shareholders will actually exercise these rights. To date, with the exception of groups which operate internationally, this has hardly been the case under the current structure law.
Commentary
A number of misunderstandings and implicit assumptions permeate current discussions on the company structure law. One such misunderstanding is that shareholders oppose the present system en masse, because it diminishes their right to participate. However, recent research conducted by Professors Timmerman and Honée into the application of the structure law reveals that eight listed companies that fail to meet the criteria for applying the structural rules (representing 39% of such companies), already apply the structure law on a voluntary basis ("De toepassing van de structuurregeling; zeggenschapsverhoudingen in Nederlandse beursvennootschappen", HJMN Honeé and L Timmerman, Nijmegen/Groningen (2000)). In addition, there is also a group of 22 companies that are exempt from the rules in their position as holding companies, but that have nonetheless voluntarily applied the law. This represents no fewer than 65% of the companies eligible for exemption.
An unvoiced assumption is that the structure law could be considered counterproductive to companies' performance. A report published by the Catholic University of Brabant reveals that statistics do not point to a relationship of any significance between the structural arrangement on one hand and the financial performance of companies on the other ("Zeggenschapsverhoudingen en financiële prestaties van beursvennootschappen", CentER, Tilburg, (2000)). In this regard, it is found to be of no consequence whether the structural arrangement is applied on a voluntary or compulsory basis. In fairness, it must be added that the researchers did conclude that there were a number of elements that did point in the direction of a less favourable performance.
Despite this, it is becoming clear that the discussion about the structure law, and especially the criticism of the current system of "co-option" of board members, has grown in scale to such an extent that maintenance of the existing arrangement, irrespective of its actual merits, is no longer a viable option. The system will change and most probably the existing balance between capital and labour will be shifted towards the shareholders. (Robbert van het Kaar, HSI)