Piero Novelli: ‘The Dutch Governance Model Is Highly Relevant’

Piero Novelli: ‘The Dutch Governance Model Is Highly Relevant’
If it were up to Piero Novelli, the world could learn much from the two-tier board system. The Italian top banker has been chairman of Euronext since 2021 and is a thorough expert on governance models in listed companies. A first interview in a series in which foreign leaders at Dutch companies share their views on our governance model.

Anyone who asks Piero Novelli about his view on corporate governance will receive a thorough explanation of the historical context of the theme. Novelli, who has been chairman of Euronext since 2021, studied the history of the Dutch stock exchange and the development of corporate governance in the Rhineland model in depth. Two years ago, he succeeded the Dutchman Dick Sluimers. Sluimers, after the takeover of Borsa Italiana by Euronext a year earlier, made way for the Italian Novelli, who prefers to see himself as a world citizen.
Novelli lived in Switzerland for the past decade, where he was in a top position at the investment bank UBS. He grew up in Italy, but moved to the United States for his education, where he found his partner. He has experience in the Swiss, German, French and British financial sectors. He is the first interviewee in this series of conversations with foreign decision makers in Dutch organizations.

Novelli still travels extensively. His children have both Italian and American nationalities and have now completed their education in the United States. In addition to a position as a lecturer at his alma mater MIT in Boston, America, Novelli also has a role as a lecturer at London’s Imperial College. ‘Contact with the next generation of leaders inspires me,’ he says. ‘I have one foot in the business world and the other foot in the academic world.’
He also moves within the global circuit of top bankers. This became apparent last spring when he was involved in the rescue of the Credit Suisse Group (CS) by competitor UBS. When it became clear to both banks that a takeover was inevitable, Novelli was recruited by CS directors Ullrich Körner and Axel Lehmann as deal advisor. Novelli shares his view on corporate governance with Management Scope.

In your view, what distinguishes the Dutch culture of corporate governance?
‘A distinctive part of Dutch corporate governance is the attention to stakeholders and the impact on society of the strategies, activities and products of the company. The two-tier management model reflects the desire to achieve the associated goals. Historically speaking, Dutch companies have done well. The Dutch model reflects the desire of Dutch society to take the interests of stakeholders into account. Whether this can also work in societies other than the Netherlands depends on the circumstances in those countries. I think there are many countries in which the Dutch model can be similarly successful. Think of Scandinavian countries and Germany. There you will find the circumstances where profit maximization and shareholder value creation are possible within the social context.’

In which countries do you see different corporate governance models which work equally well?
‘This is a potentially complicated issue. After all, corporate governance is not static. Not only do the models and rules differ across the planet but histories are also different. This applies even to the Anglo-Saxon profit maximization-driven model with one board of directors, where the Chairman and the CEO share responsibilities. In that model, directors are encouraged to work towards one specified aim in managing the company, and less account is taken of the interests of social stakeholders. But take a step back and look at the development of the model over the past century. The vision of the future of corporate governance has changed several times. These changes are the result of crises. The models are therefore not carved in marble. They evolve and overcome flaws and pitfalls. This sometimes creates new challenges. Take the US Sarbanes-Oxley legislation, which brought greater financial disclosure, but also rules which undermined the competitive position of young companies. Sarbanes-Oxley made it much less attractive to take a company public, which required new rules to mitigate those side effects. In this way, corporate governance develops gradually.’

What do you think of the Dutch governance model taking into consideration the current global economy?
‘I find the Dutch model relevant and seriously useful in other jurisdictions. There are major social challenges worldwide that did not exist before. Consider the sustainability of the economy and social instability. Think about LGBTQ issues. Consider the prevention of new, major corporate scandals. If you take all these issues together, it is not difficult to see that stakeholders and their interests are relevant for companies in their governance. In other words, it would be a logical inconsistency to ignore those interests.’

If there is an area in which the Dutch system could develop, what is it?
‘It would be a good idea to extract the better elements from other models and implement them in the Dutch model. I think of those elements that achieve better outcomes, such as an emphasis on sector expertise. After all, the more independence you seek in governance, the less room there is for expertise. With more targeted expertise in, for example, implementing transformations, you could improve the level of supervision. At a time when all companies are experiencing disruption, knowledge of the practical aspects of transformation innovation is desperately needed.’

What do you think is the downside of strict independence in governance?
‘A certain degree of economic alignment is needed between the interests of the company and the directors. That wish goes against the spirit of the Dutch model. But in practice it does not have to conflict. After all, there are also private equity-backed companies and companies with a major influence of a family or founder on the board. In those companies, those stakeholders focus on a long-term strategic vision for the company. I think it would be an improvement to achieve more alignment among Dutch companies in this way.’

How can that be realized in a two-tier board?
‘I am thinking of alignment of the supervisory board with the board of directors. This does not have to be enforced absolutely on all members of the supervisory board, as it still needs to be consistent with the existing model. But more open dialogue and debate in meetings on a diversity of themes, and more opportunities of contact between the supervisory directors and the board of directors are crucial.’

During your years at UBS, you were active in the themes of diversity, equity and inclusion (DEI). What is your view on this?
‘Companies that are incapable of utilizing their maximum talent potential in 2023 are doomed. Talent is scarce and it is detrimental to limit recruiting for talent to white young men. I see DEI as a strategic theme for European companies to win the war for talent and tap into sources of human capital. It is rare for directors to argue from this perspective, but Europe’s demographics are challenging. The Netherlands has made much progress in this area, but there undoubtedly still is a long way to go. I feel that across continental Europe awareness of the importance of ethnic diversity is too limited. I think as a society we lack the cultural understanding of the importance of this topic. If we do not take up this challenge, there is the threat of a division in our society, with population groups developing at different tempos. Organizations with only white people in positions of power are not honest and nor are they in balance. Young people in the United States immediately attack me when they see a board of directors without women or other role models of diversity.’

What impact does the position of corporate governance have on the choice of a location for an IPO?
‘That influence is limited. The choice for a stock exchange listing is driven more by the liquidity of stock exchange trading, the coverage of similar companies, the attractiveness of investors, the technological capabilities and the local regulations for listed companies. What is currently even more important is of course that the IPO model faces increasing competition from opportunities outside the stock exchange to raise capital.’

As far as governance is concerned, what is the biggest distinction between public and private companies?
‘The main distinction between listed and private companies is in the shareholder structure. But it is not black and white, I rather see a spectrum with listed companies with a very fragmented shareholder base at one extreme. At the other end you will find companies that are fully owned by private equity. Between both ends there are also listed companies with major shareholders and family-managed companies, which may or may not be listed on the stock exchange. I see five manifestations, each with its own place on this continuum. The differences between the two models are large. One relevant difference is the culture of alignment in the board – in two-tier boards there is less alignment while this is a balancing factor that protects the company against various forms of headwinds. It may even prevent major incidents and scandals.’

How international are Euronext’s teams?
‘Completely international. We have strong regional differences between stock markets, and I see that as a form of abundance of our organization. Remember that the Netherlands and the Scandinavian countries have produced successful companies with their models. We can learn from the pitfalls and challenges of the different models.’

You have a long career as an investment banker. You have advised boards of directors all over the world. Can you give examples of situations in companies where governance functions very well?
‘I am convinced boards work best when no single individual can dominate the discussion. If there is one director who dominates the discussion, I find that the discussions are less profound and thorough, and that the decisions are therefore made less considerate. It works best if the Chairman and CEO are distinct personalities, each with their own character and experiences, and that they have a good collaboration in which neither dominates. It is optimal if both have their own vision on business operation. Such a situation offers every company the best recipe for well-functioning governance and a very fruitful decision-making process.’

You are Chairman on the board of Euronext. What would your advice for the onboarding process be for Dutch listed companies that attract a director from abroad?
After a silence: ‘I think it is always wise for new directors to delve into the history of companies and corporate governance in the Netherlands. Only if, as a director or supervisory director, you know why things are going the way they are, and why some things are more important here than elsewhere, can you function well. Take, for example, a delicate subject such as executive compensation. Things are completely different here than in other countries. To understand that you have to be in contact with society, understand the values and principles and know the stakeholders. That is challenging, but very important. I would strongly advise those companies to explain the social priorities to their new directors from abroad.’

This interview was published in Management Scope 02 2024.

This article was last changed on 06-02-2024