The Road to an Updated Corporate Governance Code

The Road to an Updated Corporate Governance Code
Mid April 2022 the consultation period ended, allowing all supporting parties, stakeholders and other interested parties to provide feedback on the consultation document with the proposed updates to the Dutch Corporate Governance Code. Allen & Overy partner Charles Honée wrote about the proposed updates and shared his thoughts.

In February 2022 the Corporate Governance Code Monitoring Committee presented proposals for updates to the Dutch Corporate Governance Code in a consultation document (available on the committee’s website). For eight weeks, the supporting parties and other stakeholders and interested parties can submit their feedback on the committee’s proposals. The committee will consider the public debate and the submissions from the consultation phase in the final updates to the code. The update proposal focuses on three main areas: long-term value creation, the role of shareholders, and diversity and inclusion (D&I). In addition, it puts forward several amendments based on updated laws and regulations and to improve accountability in auditing and annual reporting. 

Proposals on ESG Stakeholder Dialog: Is Policy at the Discretion of the Board, or Not?
The updates in the area of long-term value creation pertain to ESG (Environmental, Social & Governance). This topic is a priority in business, as well as for the public and policymakers. Internationally we see a whole slew of ESG regulations in the works, such as the European Corporate Sustainability Reporting Directive (CSRD) and the OECD Due Diligence Guidance for companies to meet their supply chain responsibility in international business. The committee does not want to get too far ahead of these. Its proposal to update the code on this point is multi-layered. Firstly, it proposes that companies draft a clear ESG strategy, with specific targets, as part of their long-term value creation strategy. Their annual reporting must include reporting on this ESG strategy, for accountability. In setting the ESG strategy, the Board would be required to consider the interests of the relevant stakeholders, and to draft a stakeholder dialog policy for this.
The above proposals raise questions. They lend the impression that the ESG strategy is a separate strategy. ESG proponents are actually calling for incorporation of ESG aspects into the core activities of companies, so they are an integral part of their overall strategy. The provision for a dialog with all relevant stakeholders for the ESG component is also noteworthy. For the overall strategy, the basic principle is that the Board sets it, and the Supervisory Board is involved in its adoption and monitors its implementation. This provides a high degree of autonomy, without measures such as requiring the Board to involve shareholders as stakeholders. For the “ESG strategy”, the committee evidently sees this differently. For certain decisions that affect the public in the production and value chains of the company, it makes sense for Management to involve the affected parties, in order to arrive at the right decision. Yet in our stakeholder model, this decision falls to the Executive Board, under the supervision of the Supervisory Board. The proposed best practice provision to hold a relevant stakeholder dialog may require the Board to deal with an array of self-declared relevant stakeholders who want to claim a position. It is worth considering, in my view, to provide a clarification that decisions on whether to involve stakeholders are at the discretion of the Board.

Proposals on Shareholders: A Provision with Far-Reaching Consequences
In the area of shareholders, the committee proposes a greater role for effective and sustained shareholder involvement. In this process, the committee also considered elements of Eumedion’s Stewardship Code. Specifically, it proposes a new best practice provision that shareholders and the company be willing to enter into mutual consultation where appropriate and at their discretion. The company is expected to facilitate the dialog, unless the Board deems this not to be in the interests of the company and its affiliates. The explanatory notes to the newly proposed provision state that under the principles of corporate reasonableness and fairness, shareholders are also expected to be willing to enter into constructive dialog with companies.
The new provision appears to entail that companies must enter into dialog with (individual) shareholders any time a shareholder request this, including outside of the general meeting of shareholders. That is a far-reaching measure. Activist shareholders eagerly seized on the introduction of the right to add agenda items. A provision allowing shareholders to claim the right to dialog, and requiring the Board to give reasons why this dialog is not in the interest of the company, could lend fresh momentum to activist shareholders. Another possible consideration would be to place greater emphasis on what is in the explanatory notes, namely that shareholders may be expected to enter into constructive dialog with the company.

Proposals on Diversity and Inclusion: Provision Goes Beyond the Law
On the topic of diversity and inclusion (D&I), the committee wants to broaden the scope beyond just gender, and also improve compliance. This is expressed in the proposal to expand the composition of the Board of Directors, the Supervisory Board and the Executive Committee. Their composition must balance expertise, experience, competencies, personal qualities, age, gender identity and background (such as cultural background). Moreover, the committee proposes that companies have a D&I policy with suitable and ambitious targets for a proper balance in terms of gender diversity. This proposal also describes what D&I should look like in the composition of the top (Executive Board, Supervisory Board, Executive Committee), and how to pursue the D&I policy for other company staff. This provision goes beyond the legal requirement for companies to set targets for male/female ratios on the Executive Board and Supervisory Board because it expects companies to pursue a broader D&I policy throughout the organization. In the explanatory notes, the committee notes that it expects the top to consider the societal role of the company in the area of D&I and its relevance to its corporate culture and how this is expressed in leadership development.

Response Time and Pay
As for the other topics in the update proposal, I would also like to mention that the committee has retained the response time, but due to the recently introduced statutory waiting period, it now clarifies that overlapping or successive application of the two periods is undesirable. It is however evident that the two provisions differ enough to keep the response time. It often applies at an earlier stage and in more situations than the statutory waiting period.
The update also addresses reward as a separate topic. The committee reviews the relevant best practice provisions in the context of the adjusted statutory rules for listed companies in the area of remuneration policy and reporting. It does not make significant changes to the content of these provisions, but does provide a detailed explanation of how the pay provisions from the code supplement the provisions of the law. The committee also calls for attention to ESG aspects here, by incorporating the ESG targets into the remuneration policy, along with the criteria for meeting these targets. Moreover, the remuneration report must explain how implementation of the remuneration policy contributes to long-term value creation. Finally, the committee explains how it expects the remuneration report to use the concept of pay ratios (ratio of CEO pay to the average annual pay of employees in the company and its affiliates).

The Actual Update
The consultation on the proposed updates to the code runs until 17 April 2022. During this period, the committee is holding an intensive dialog with the relevant stakeholders for the code (including directors, Supervisory Board members and supporting parties). We expect all feedback on the update proposal to be published, allowing us to see the prevailing views and what this means for the definitive update slated for the end of this year.

This essay was published in Management Scope 04 2022.