From Process-Oriented to Meaningful Reporting

It is precisely this aspect that the committee's investigation for financial year 2020 focused on. The committee focused on five important aspects of the code: Long-term value creation, risk management, culture, diversity and remuneration. The committee's basic assumption in this regard is that the reporting provisions relating to these aspects are intended to encourage listed companies to provide information on how they implement the conduct-related provisions in relation to these aspects. The committee concludes that listed companies could report in a more meaningful way.
The committee's report also includes guidance on how to do this more effectively. Compliance reporting should not be considered a box-ticking exercise, which also means that standard texts should not be used as often. In concrete terms, the committee states that reports should not only describe more processes and actions. They should also provide information about the dilemmas that occurred, the considerations made, the resulting outcomes and the impact on the company. Action should also be taken towards implementing a more integrated reporting style, in which the various aspects of the code are considered in relation to each other.

Noteworthy Points
In relation to each aspect – long-term value creation, risk management, culture, diversity and remuneration – the report specifies the most important findings of the investigation. The committee also makes concrete recommendations. I have highlighted some of the noteworthy points below.

Long-Term Value Creation
The aspect of long-term value creation was made a key aspect of the 2016 Code. The committee points out that this core concept can be used more as an 'organizing principle' for corporate governance and reporting on it. The committee's recommendation is to make a clear link between strategy and long-term value creation in reports. As regards the involvement of the Supervisory Board in the development and supervision of the strategy, the committee recommends that more information be provided on the matters that had the special attention of the supervisory board.
A new aspect is that the committee indicates that information should be provided on how the stakeholders relevant to the company are involved in the strategy. Employee involvement is defined in the Works Councils Act, but the law does not provide a concrete basis for the involvement of other stakeholders in the strategy. It does, however, align with the trend towards a socially relevant way of doing business.
On this last point, the committee notes that companies are increasingly expected to take account of ESG factors and corporate social responsibility, which in its view highlights the importance of substantive reporting. It has since become clear that this also poses a dilemma for the committee itself: To what extent should rules about this form part of the code? The views of various involved parties, including the code's supporting parties, differ widely on this issue. The interest group of listed companies (VEUO) is not in favor of it. 29 large Dutch companies were recently called upon by Friends of the Earth Netherlands to present a 'concrete and feasible' climate plan within three months. The Shell judgement obtained by Friends of the Earth Netherlands and the hit list recently presented by the same organization feed the concern among companies that rules on corporate social responsibility will result in more legal proceedings. At the same time, there is a widely shared awareness, certainly in the business community, of the importance of taking account of and accounting for social impact and social expectations. Another issue is whether the code should be at the forefront of national and European legislation for embedding sustainability within the corporate governance framework, and for the method of reporting and financial reporting on sustainable activities.

Culture
In the committee's view, reporting on culture could be much more clearly linked to long-term value creation. From the committee's perspective, the various aspects clearly come together here. It is important to create a culture that is focused on long-term value creation, because this is where awareness of the effect on society comes into play. It is relevant to establish the applicable values within the company, show exemplary behavior (consider ‘tone at the top’), and explain an appropriate remuneration system.

Diversity
With regard to the aspect of diversity, the committee indicates that its research shows that diversity is still too often seen as a compulsory issue. In the reports, there is insufficient clarification about why diversity should be pursued. The committee calls for the matter to be prioritized on the agenda in broad terms.
It is worth mentioning that the committee found the provision on evaluations and the functioning of the Board of Directors and Supervisory Board to be the least compliant. The concern is not so much about the regular performance of evaluations as about the provision that explanation must be provided about what has been and is to be done with the conclusions of the evaluations. The committee calls for improved compliance with this explanation provision.

Updating the Code
The report indicates that the committee is working with the supporting parties on revisions to the code on the aspects of long-term value creation, stakeholder dialogue, the role of shareholders and diversity. It will also explore the recommendations made for enhancing corporate responsibility in terms of auditing and annual reporting. Finally, the response time regulation will also be considered in light of the new legal rules on the cooling-off period relating to public offers. The committee is expected to publish a consultation document in the first quarter of 2022 regarding the committee’s proposed revisions to the code.
The report already offers a preview of the upcoming consultation, as part of the report was already addressed in this analysis. The committee will consider the extent to which provisions on stakeholders can be updated – for example, reporting on the involvement of various stakeholder interests and how this translates into strategy. Perhaps in a more general sense, the committee seeks further clarification of the link between the various aspects of reporting, with long-term value creation as the 'organizing' principle for that link. The committee has indicated in no uncertain terms that it will propose a clarification that reporting on culture should address how a culture is actually created, focusing on long-term value creation, why which values are selected, and how they contribute to that culture. Furthermore, provisions will be updated that relate to diversity as a broader concept than just a more balanced male-female ratio.

Encouraging Companies
The committee has clearly selected substantive reporting as the key theme of its report. It wants to move away from more process-oriented style of reporting on the important aspects of the code. In addition, developments concerning sustainability and social relevance are moving incredibly fast. There are many legislative initiatives in the area of sustainability reporting, and the topic of ESG resonates widely. At the same time, the committee does not want to get ahead of the legislation. The trick for the committee is to encourage companies to prepare for what the developments in this area will entail. Considering a meaningful role in society translates into considering meaningful compliance reporting.

This essay was published in Management Scope 02 2022.