Linda Hovius Sees Professionalization In Supervision

Linda Hovius Sees Professionalization In Supervision
As an independent boardroom consultant, Linda Hovius combines her own practice with supervisory positions, including those at Flow Traders and Royal FloraHolland. She observes that the role has undergone a huge process of professionalization: ‘In the past, it was very easy to identify areas for serious improvement, whereas now many Supervisory Boards are demonstrating best practices.’

When independent boardroom consultant Linda Hovius was appointed as Supervisory Board member at Flow Traders in mid-2021, the trading house had just had a fantastic year. Operating profit in 2020 was over 572 million Euros, which is almost nine times more than in 2019. That was “thanks to” considerable stock exchange trading during the coronavirus pandemic. Flow Traders makes money by always being present in the market as a buyer and seller and thus providing liquidity to all investors who want to trade. Nowadays, this happens through computers and electronic trading programs. Flow Traders ensures that there is always supply on the stock exchange. This warehousing function benefits from stress on the financial markets – of which there has been plenty due to the coronavirus pandemic, as it caused significantly higher levels of volatility and a larger difference between purchase and selling prices.

The pandemic situation initially seemed to be much more worrisome at Royal FloraHolland, where Hovius has been a Supervisory Board member since late 2018. The largest international marketplace for floriculture came to an abrupt standstill. “The situation looked very threatening. Everyone remembers the images of growers handing out flowers in hospitals or destroying entire batches that they could not sell. Fortunately, trade eventually picked up and the sector emerged well from the crisis.”

In addition to Flow Traders and Royal FloraHolland, you are also a Supervisory Board member of investment firm Triple Jump. A first glance, those are very different companies. When do you say “yes” to an offer?
‘I started out as a Strategy Consultant and I still enjoy thinking about long-term strategy and I find it interesting on a substantive level. That is why I like to associate myself with sector-shaping companies, which create disruption through innovation and thus change the existing way of doing business in a particular sector. When I joined Triple Jump five years ago, hardly anyone had even heard of impact investment. They helped raise awareness of it by funding and supporting micro-financing institutions and start-ups in developing countries. Royal FloraHolland and Flow Traders are also guiding the way for their sectors, as they both act as marketplaces in uniting supply and demand as transparently and inexpensively as possible. Flow Traders has completely automated traditional market making with the help of technology, creating a whole new playing field. There is more transparency, the costs are much lower and entering and exiting the market is a much more flexible process. Whereas investing used to be a black box and only happened through banks, now you can participate as a private individual and take control of your own financial future. This has made investing more democratic. In that sense, Flow Traders clearly has a social function, although it is often not perceived as such by the outside world. The added value of these companies for the Dutch economy also appeals to me. Royal FloraHolland, the largest digital marketplace for the international floriculture industry, employs 150,000 people across the sector. The fact that a company such as Flow Traders is a global market leader in market making and guaranteeing liquidity is really extraordinary for a small country like the Netherlands. We should be proud of that.’

Flow Traders is a stock exchange-quoted company, while Royal FloraHolland is a cooperative. Does that affect your regulatory role?
‘One difference is that a stock exchange-quoted company is under a kind of constant surveillance by the outside world, so you have to be even more aware of how things come across. At the same time, it is not very different in a cooperative such as Royal FloraHolland because the 4,000 members are also the shareholders and they closely monitor everything you do – you still need to take them into account.
The dynamics between people are no different anyway. Ultimately, as a Supervisory Board, you want to be able to have the right conversation with the Board of Directors under all circumstances. Who I get to work with is therefore another important element for me when it comes to deciding whether or not to accept a supervisory position. Are the people honest and smart and can they act quickly in order to allow a dialogue where you really challenge each other, respond effectively and thus continuously progress together?’

In its report published in December last year, the Corporate Governance Code Monitoring Committee states that annual reports still too often contain standard texts on dealing with the code. The Committee calls on companies to provide more information about the dilemmas discussed in the boardroom, the considerations made and their impact on the company. Do you agree?
‘I can certainly relate. I believe in transparency and I think that it results in better understanding in the outside world if you explain how you arrived at certain decisions and what the considerations were. The problem is that you can only report on that if that open, transparent discussion has actually taken place internally and I know from my practice as a Management Consultant that this is definitely not always the case. The Monitoring Committee is currently putting more pressure on it, in a manner of speaking. It is interesting.’

What are the preconditions for achieving effective inter-board dynamics?
‘From my role as a boardroom advisor, I call them “The Five Rs”, which stands for respect, role purity, relationship, reflection and room for dialogue. Role purity simply means that the regulator should not play the role of an executive, and vice versa. Further, the more mutual respect, better relationships and higher reflective capacity, the better the dialogue in the boardroom. The reflective capacity implies that you are able to look at issues more holistically and with some distance, and that you bring the outside world inside. Only when all that is guaranteed you will have room for real dialogue. Only then is it safe for the executive team to share dilemmas and for Supervisory Board members to spar about those dilemmas and provide support where necessary. As a regulator, you serve to both challenge and support the Board. These two tasks need to be balanced, and the five Rs are a good framework for checking that.’

In all your supervisory positions, you are the Chair of the remuneration committee. Outsiders have been quite critical about the hefty bonuses that were paid out at Flow Traders in 2020, when the coronavirus pandemic was ever present. Can you relate to that?
‘I understand that it is a sensitive issue, and I also notice that the remuneration policy at Flow Traders is not well understood. The beauty of it is that the interests of employees and shareholders are completely aligned. The fixed salaries are relatively low. If profit is made, 65% of that profit goes to shareholders and 35% to employees – including the secretaries, the receptionist and the youngest employees within Compliance. 2020 was, of course, an extremely good year with high profit sharing, but nowhere do you find that the profit share was much lower in the previous two years. People focus on a single, high amount, paying little attention to the huge variety over the years. Moreover, much of the remuneration takes place long term, with payout periods of three or four years. So if this year is loss-making, part of last year's profit share is forfeited – a real claw back.
We are now wrestling with the Shareholders' Rights Directive, which was amended by the European Union, and which states that 75% of the shareholders must approve the remuneration policy. That is quite a majority that we need to get on board. We believe that our remuneration policy very much aligns the interests of all stakeholders, but of course it means that less goes to shareholders compared to many other stock exchange-quoted companies. So we will need to make our shareholders see that our model is sustainable and proven, partly because we can retain talent better this way as our non-stock exchange-quoted competitors are partnerships and also work with profit sharing.’

The Corporate Governance Code Monitoring Committee’s report also emphasizes that a focus on long-term value creation and sustainability should be reflected in the remuneration policy. Do you agree?
‘Totally. As a Supervisory Board, you generally have to guarantee long-term value creation and ensure that it is converted into concrete objectives. In turn, those objectives must be linked to KPIs or a balanced scorecard that largely includes non-financial targets, which is the case in all the companies that I am involved in. To determine whether or not the Board is doing well, we look at both the day-to-day operations and also quite deliberately at the ‘soft’ aspects such as client satisfaction, staff engagement scores and sustainability goals, insofar as they relate to the realization of the long-term strategy. In general, the trend is to distribute the variable remuneration over three, four or five years in order to ensure that it better aligns with long-term objectives. I think that is the right thing to do. The Board is – hopefully – in it for the long haul and ensures an effective role for the organization in society.’

From your own consultancy practice, you have conducted many self-evaluations of Supervisory Boards. Do you factor that experience into your role as Supervisory Board member?
‘I consciously combine my own practice with my supervisory positions, because they reinforce one another and are clearly intertwined. Sometimes, during an evaluation, I hear how a Supervisory Board handles something and I then put it to my own Supervisory Board. That also applies the other way round. Based on my experience as a Supervisory Board member, I sometimes ask other questions during meetings that I conduct as part of self-evaluation. Do you do preliminary consultations? How does that work?
Incidentally, what strikes me about self-evaluations is that there has been significant professionalization of supervision over the past decade. In the past, it was very easy to identify areas for serious improvement. I now see more Supervisory Boards getting it right and demonstrating best practices.’

The Monitoring Committee states that while the most important aspects that emerge from an evaluation are often indicated, it is less clear what people have resolved to do about those aspects.
‘The trend towards more accountability has started, but I think it will be some time before it happens everywhere. What I see in my practice is that the greatest potential for improvement lies in the evaluation process used by the Board of Directors – the Supervisory Board’s employer role. More care is being taken, but I still see large gaps here and there. It is not enough to just look at the KPIs.
In order to test the effectiveness of the leadership, it is best practice to gather 360° feedback by talking to many different people within the organization. Leadership very much determines the tone at the top and the culture within the organization. How do stakeholders experience that, and is there support for senior Board members? If you do not have that broad picture as a Supervisory Board, it is very difficult to know whether you have the right people on the Board for the objectives you want to achieve.’

In effect, what you are saying is that Remuneration and/or Nomination Committees do not always do their work thoroughly enough. How do you explain that?
‘In recent years, committees have been much more focused on matters relating to long-term value creation, such as performance management, culture and license to operate, but remuneration seems to have been left out. Nowadays, audit committees’ remuneration is sometimes even higher than that of the RemCo. That is not right. If you want to conduct 360° feedback properly, the process takes a lot of time. In my experience, the time commitment and importance of the RemCo is certainly not less than that of the audit committee. That is an interesting development in terms of governance.’

This interview was published in Management Scope 03 2022.

This article was last changed on 09-03-2022