The Dutch may be happy to speak English to foreigners but among themselves they are proud of their own language and its sayings. They call an endless process in which no progress is being made a ‘gebed zonder end’, a ‘prayer without an end.’ Outsiders, puzzled by the lack of progress in the discussion on corporate governance in the Netherlands, should be forgiven for referring to these deliberations as a gebed zonder end.
After years of commissions, parliamentary letters and negotiations between government, political parties, employers and trade unions, the results are meager indeed. The government can partly defend itself for its inaction by referring to other areas in the Dutch economic and financial set-up that needed more urgent attention: competition law, insider trading, ownership and supervision of the Amsterdam Stock Exchange. But one formal change in corporate governance (a law enabling shareholders to vote by proxy on shareholders meetings) is a sorry harvest indeed. Two years after the government presented a proposal to reduce the use and power of anti-takeover defenses (beschermingsconstructies), nobody dares predict when this relatively modest issue will find its way onto the statute book.
The merits of the Dutch ‘structuurregime’ have been hotly debated for years. This set of rules allows members of the supervisory board of most major quoted Dutch companies to co-opt one another. As the supervisory board elects the board of directors, this virtually eliminates shareholder influence on the composition of both. The system has been vilified by many because of the lack of supervision of the supervisors and the smell of an old boy network hanging around it. Views of political parties, investors, business and trade unions regarding modification of the structuurregime are so incompatible, however, that no real change is expected in the short term.
For some of those involved, maintaining the status quo is the best of a range of bad alternatives. ‘We would rather the structuurregime stay as it is now’, says Rients Abma of the department of economic affairs at the Dutch employers’ association VNO-NCW. ‘Yes, we would like to see more influence of shareholders. But imagine if we were to propose that shareholders elect the supervisory board, ending the regime of co-option. That would be like opening Pandora’s Box. Trade unions and left wing parties would immediately demand some members of the supervisory board be elected by unions and possibly other stakeholders, not just the shareholders. The last thing we want are workers’ representatives on the supervisory board. We don’t think the German model is an example to be followed.’
Indeed, two small political parties (the Greens and the left-liberal D66) are preparing a proposal to have a third of the supervisory board elected by shareholders, a third by employees and a third to be co-opted.
This is supported by the trade unions. ‘Not because we want a polarization of the board like in Germany,’ says chairman Lodewijk de Waal of FNV, the leading trade union. ‘Once elected, board members should be independent. But we want to break the old boys network. Nowadays, you see the same people with the same old fashioned pin-striped suits on all Dutch boards. Where is the dialog with workers, minority groups, the environmental movement? The current set-up is outdated.’ Abma begs to differ: ‘If members of the supervisory board are representatives of special interests, indecision and polarization of the board are almost inevitable.’
Independent view
However, fear of workers’ representatives on the supervisory board is only half the story of VNO-NCW’s reluctance to contemplate changes. It is no secret that the management of most major quoted Dutch companies are happy with their freedom from shareholder interference. In recent years, few Dutch companies have taken steps to increase shareholder influence. Most have disregarded the bulk of the 40 recommendations made by the Peters-Commission on Corporate Governance in 1997, modest though these were.
Some observers, including Peters, blame shareholders themselves for the persistent lack of accountability of management to shareholders. According to Peters, a former chairman of insurance company Aegon, a more active attitude by institutional investors is required, not a change of law. Whereas big Dutch pension funds, like ABP and PGGM, periodically throw their weight around at shareholder meetings, other institutional investors tend to keep themselves fairly quiet. Apart from the pension funds, most institutional money in the Netherlands is controlled by banks and insurance companies. They dominate the mutual fund industry. And because financial giants like ING and ABN Amro have many relationships with major Dutch companies (credit, insurance, financial advice, brokerage), they are unwilling to ruffle too many feathers at meetings with management, particularly public shareholder meetings.
Legal discussion
As for legal changes, after years of studies and talks, there is more discussion yet to come. ‘We would like to engage in a more thorough discussion on corporate governance and representation of stakeholders in the supervisory regime,’ says Tineke Witteveen, of the lower house of the Dutch parliament. Witteveen is spokesperson on corporate governance issues for the PvdA (social-democrats), the major partner in prime minister Wim Kok’s coalition government. She favors the abolition of the regime of co-option and would like to introduce more diversity in the supervisory board, without institutionalizing opposing blocks.
‘I would like to maintain the current independence of supervision on management in any future structure,’ she adds. Witteveen says the Anglo-Saxon ‘shareholder value’ approach is no panacea and not always superior to the Dutch system. The PvdA has flirted with the idea of worker representation on the supervisory board, but Witteveen does not think that is the only option. ‘We are open for discussion.’
Her counterpart Hella Voute-Droste at the liberal-conservative VVD, the second biggest party in the coalition government, rejects the idea of worker representatives on the supervisory board outright. She agrees with Witteveen on the importance of an independent supervisory board, but also stresses the need for accountability. ‘I would like to increase the influence of shareholders. Manifestly incompetent members of a supervisory board should be removed. We would like to end co-option and we sympathize with the idea of a supervisory board elected by shareholders. However, we would like to establish safeguards to guarantee the independence of the board members.’
Although most members of the Dutch parliament might favor worker representation on the supervisory board, it is an unlikely outcome. Three key ministries (finance, justice, economic affairs) are headed by VVD-opponents of the idea; and the coalition partners would not want to risk a government crisis over the issue. Moreover, the fierce opposition of the employers federation is a formidable barrier. In the consensus-based Netherlands, government is unlikely to ride over the opposition of either trade unions or employers.
Hostility to hostile bids
Unfortunately, in the one area where a compromise has been reached – anti-takeover defenses – a new European guideline has thrown the situation into disarray. Two years ago, the Dutch minister of finance Gerrit Zalm brokered an agreement to facilitate hostile takeovers. Not satisfied with the independence the structuurregime grants management from shareholders, most Dutch companies have several defense mechanisms to avoid unwanted shareholders from acquiring a majority of voting rights at shareholder meetings. Certification of shares and limitation of voting rights to a low ceiling are two of them. In this situation, hostile takeovers are nigh on impossible, because the acquiring company could never impose its own business plan, let alone oust management.
Under the compromise, an investor with 70 percent or more of the shares in a company has the right to go to court if the board of directors and supervisory board have not taken the acquiror’s views into account after a year. It is then incumbent on the existing management to prove that the acquiror’s strategy would be harmful. If it fails to do so, the judge can hand control of the company to the acquiror, by temporarily breaking open the structuurregime. In extreme cases, the judge could even order removal of the supervisory board.
Moreover, in order to avoid undue change in shareholder influence in times of peace (when no hostile bid has been made), Zalm announced his determination to eliminate the introduction of new defense mechanisms when a company is not fighting off a bidder. On various issues, the proposals run foul of proposed EU regulations. A European takeover directive (still awaiting approval at the time of writing) aims to prohibit the introduction of anti-takeover defenses once a bid has been launched. That is exactly the opposite of Dutch plans, which would allow introduction of defenses in time of hostile bids but not under normal conditions.
‘The chances are that a range of Dutch companies will introduce additional ‘just-in-case’ takeover defenses if the EU-guidelines are approved,’ says Abma. Whereas the EU wants a shareholder who dominates the voting rights in a company to make a bid for all outstanding shares, no such requirement is contemplated in Dutch thinking, basically because even with 60-80 percent of the votes, a shareholder cannot automatically impose a strategy. In any event, some Dutch politicians had already asked for a rethink of the anti-takeover bill, since many deem a year as being too long a time in today’s fast-moving corporate world.
To deal with the problem of corporate governance and anti-takeover defenses, parliament decided to order government to ask for advice from the most important of Dutch neo-corporatist advisory bodies, the Sociaal Economische Raad (Social Economic Council, SER). The SER is a tripartite body with representatives of government, employers and trade-unions. There is no way employers and trade unions will agree on these issues. But politicians can at least wash their hands of them for a few months. The prayer is zonder end.
