Pauline van der Meer Mohr on the Actualization of the Dutch Corporate Governance Code

Your last report on the corporate governance code was published in December 2021. I thought I detected a little more elaboration and interpretation on your part from time to time. For example, the Monitoring Committee no longer talks about 'culture' as such, but about 'creating a culture focused on long-term value creation'. Why did you choose to do that?
‘That has been well considered, of course. As a committee, you can choose to give a purely factual account of how companies are complying with the code – neutral and analytical. That results in interesting, somewhat academic discussions about the question of what culture is exactly and how boards of directors and supervisory boards should communicate about it. The committee proposes to use long-term value creation as the central organizing principle, and to see the provisions on culture and behavior linked with vision, mission and strategy aimed at long-term value creation. In doing so, the company naturally moves towards integrated reporting, rather than ticking off each provision in isolation.
By pointing this out, the Monitoring Committee can, as it were, give a nudge, a push in the direction of a holistic approach to the code. As it happens, the Dutch model does not go as far as in some surrounding countries, where there are financial reporting councils that can issue fines if companies do not comply with the code. We simply do not have those powers, but we did want to take our responsibility within the mandate that the committee was given by the supporting parties. That involves encouraging and inviting companies to comply both with the letter and the spirit of the code and to contribute to the development of corporate governance in the future.’

Is there a big difference between letter and spirit?
‘Yes, there is. A lot of companies comply perfectly with the code on paper. We have been scoring North Korean rates for years: 95% to 96% of companies are complying with the code. That is wonderful, but if you go into more depth, you will see that despite these great compliance rates there is still much more to be gained. We are still facing many ambiguities or questions about the implementation and questions about definitions. Even the term ‘long-term value creation’ appears to be open to different interpretations. Some companies are struggling with that.
The same applies to the question of what the social role of a company or organization is. Nowadays, society is expecting more and more from directors. How does a company relate to that society? And what does that mean in terms of good governance? These are pretty big, complex questions without easy answers. Some companies are crystal clear about their purpose, but that is far from the case for all the companies covered by the code. That was also reason enough for us to take a closer look at a number of these aspects in our most recent report.’

So you have good reason to elaborate on a concept like 'culture'?
‘In previous reports, we already observed that companies were struggling with some behavioral provisions, which – in addition to the reporting provisions – now comprise the majority of the code. Our findings show that it is difficult to report properly on the behavioral provisions and that a number of companies therefore choose not to report at all. This is allowed, as the code applies a ‘comply or explain’ principle. But if it is unclear whether and how the company applies the code, not providing an appropriate explanation is insufficient. Presumed compliance is a good principle to maintain, as long as companies actually comply. The code needs to be further clarified.’

So you are going to clarify the code. Will you also call to account those companies that are not adequately complying with the code?
‘This year, for the first time, the biggest outliers will receive a letter from the committee highlighting the focus areas. We will point out where we have found inadequate compliance or where the quality of their explanation is lacking. We will point out appealing examples of how they could do things differently, in the expectation that the company will take these tips seriously.’

According to the French model.
‘Yes, according to the French model, although the French are a bit stricter. I want to give companies a concrete tool that they can use to move towards existing good practices.’

Which companies can expect a letter from you? And how many letters do you think you will send?
‘I am not going to share that with you. The committee has opted for a strategy that does not involve naming and shaming. We have identified a few companies where we think things can clearly be improved. Once again, the main thing I want to do is help these companies improve their compliance with the code. It is definitely not my ambition to send a letter to everyone whose performance is not ideal. Initially, it will just be a small number.’

Fewer than ten letters?
‘Definitely fewer than ten.’

Do you sense reluctance among these companies?
‘No, I do not assume reluctance. I have no reason to believe that companies do not take the code seriously or do not consider it important. It will often be a case of limited capacity, or a lack of a good example to follow.’

In your report, you invite companies to share their dilemmas more regularly. Why? What do you see as the added value of that?
'I think it can be very useful to share dilemmas – and relevant, too. For shareholders, employees, other companies and society as a whole. As a stakeholder, I would like to gain an idea of the considerations involved in certain investment decisions. Companies make considerations on a daily basis. Are you going to invest, or not? Do you want to create value in the short term, or are you going for longer term? What are the trade-offs and risks?
There is always discussion leading up to these decisions. Everything is weighed up. Sometimes you cannot share your dilemmas for competitive reasons, of course. However, in other cases, it can be very relevant. Is an oil company investing in an upgrade of a highly pollutant factory for the short term, or are they thinking about their greener long-term profile? Probably both, but how does that investment decision fall into the context of a net zero strategy? By sharing those considerations, you offer stakeholders a glimpse into the boardroom. The decision-making process becomes more transparent, meaning that the company also works to build trust among stakeholders. It is also interesting for future employees, who read the annual reports and use them as a source when considering whether or not to work for a company.’

You also write in your report that it needs to be clarified as to how stakeholders are involved in the business. What do you actually mean by ‘involvement’? Where does that involvement start and how far does it extend?
‘You raise an interesting point, because in practice it is a bit confusing. The Works Councils Act, for example, is very clear. It specifies exactly when employees need to be involved in which matters. But for the other stakeholders, involvement is less well defined and the code is also vague on that.
In the upcoming consultation document, the committee will make proposals to make the code clearer: A company needs to determine which stakeholders are relevant when establishing strategy. The question of whether you should switch to sustainable fries at the company restaurant would not be equally interesting to all stakeholders. But the question of whether to invest in a new factory would be interesting to many stakeholders. The company needs to identify which stakeholders need to be involved at that point. It seems logical to me that this should be at a stage when they can still participate in a meaningful way.’

I understand your point, but in your report, you seem to suggest that stakeholders should even be involved in formulating the strategy. That is going pretty far.
‘We see that as best practice.’

It is a novelty, though.
‘It is a novelty in the sense that the Works Councils Act states that you must at least involve your employees. And we say that you have to look beyond just those employees.’

But why?
‘Because we see that society's expectations of companies are evolving. In the past, you simply received a license to operate and at most you were asked to explain certain decisions later on. That is completely different now. Society demands and expects that a company relates to society. You can no longer get away with thinking up a strategy yourself and explaining it later. Stakeholders want to have their say – and they also demand it.’

You have said before that you are radicalized on this topic. You think that social duty of care belongs in the code. You also think it could all be a bit more ambitious. To be honest, that sounds like it could be quite difficult at times. Do you find yourself having to walk on eggshells quite a lot?
‘It is no different from other social developments: You will always have conservative forces pointing out the risks. That is a good thing, and understandable too. As a committee, we try to align the mentality about good governance with evolving societal expectations where possible, without getting too ahead of ourselves.’

The code is being updated this year. How will you approach that?
‘Initially, we will publish a consultation document, which will probably be published in early February. We expect to receive feedback on that from various parties. If people know that you are working on an update, you suddenly get many requests for chats over coffee. We already received a fairly long list of suggestions. The Minister of Finance, for example, has a few suggestions in response to the study carried out by the Commission on the Future of the Accountancy Sector (CTA). We are sifting through all the ideas based on several criteria, such as whether the code is the right place to incorporate them and whether there is support for them. We hope to be able to present an updated code by the time our term comes to an end, at the end of 2022.’

What do you see as your biggest challenge in this area?
‘The biggest dilemma is, of course: How far do you want to go with the code? For example, in codifying societal expectations and anticipating upcoming EU legislation from Brussels. Companies’ opinions differ widely in this area. Many parties are very hesitant to go too far in formulating the code. I really do understand that hesitation, by the way – it is inspired by a more litigious society. Before you know it, your company is being taken to court on the claim that you are not living up to your own ambitions.’

Take Shell, for example.
‘Take Shell, for example, indeed. Look at the hit list recently presented by Friends of the Earth Netherlands. Companies are concerned about this trend – and for understandable reasons. At the same time, I see an inevitability to better establish environmental ambitions and net zero plans, not only due to the imminent European Green Deal legislation. The European Union will require companies to provide extensive disclosures about their social and environmental impact. Companies will soon have to quantify the material negative effects throughout the value chain. Uniform reporting standards for sustainability criteria are currently being developed. Many large companies have taken little to no action yet. My view is that if you are going to wait until it is law, then you will be far too late. It is better to start thinking about what is coming your way – right now.’

You want to elaborate on matters such as long-term value creation, stakeholder dialogue, the role of shareholders and diversity. In your interim report, you are very outspoken about diversity. You say that it is seen too much as a compulsory issue... Can you explain that?
‘First of all, there is an enormous range to be seen here as well. For the trendsetters, diversity has not been an issue for a long time now. They have an ambition, a plan, they report on what has been achieved and diversity forms part of day-to-day talent management.
But there are also a number of companies in the rearguard – year in, year out. They are lagging behind when it comes to formulating and reporting on their diversity policy. Their annual report says: “We are very conscious of the fact that our Board of Directors only comprises men”. Great. Well? And? There is no follow-up at all. But that makes me think: How is that even possible? Has nothing changed at all? Well, those underachievers can expect to receive a letter from the committee highlighting the focus areas.’

What are you hoping for as Chair of the Monitoring Committee? Which direction does the code need to take?
‘Needless to say, we have a code for a reason. It sets out which aspects we all consider important in terms of the quality of governance in the Netherlands, to the extent this is not prescribed by law. That seems pretty essential to me. I hope that we are able to keep the code relevant by keeping up with society's evolving expectations, and that we act according to both the letter and spirit of the code. I also hope that the code remains principle-based and that companies use these principles to enhance and improve the quality of their management as part of a continuous learning process.’

This article was published in Management Scope 02 2022.