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Corporate Alert: the most important differences between the current Corporate Governance Code and the amended Code

Corporate Alert: the most important differences between the current Corporate Governance Code and the amended Code

Corporate Alert: the most important differences between the current Corporate Governance Code and the amended Code

08.02.2017 NL law

On 8 December 2016, the Dutch Corporate Governance Code Monitoring Committee (the "Committee") presented the amended Dutch Corporate Governance Code (the "2016 Code") to the Dutch Minister of Economic Affairs, Mr. Kamp.

The 2016 Code includes certain important changes compared to the Corporate Governance Code from 2008 (the "2008 Code"). The most important changes to the 2016 Code are the focus on long-term value creation and the introduction of 'culture' as an element of good corporate governance.

In the upcoming months, listed companies will need to assess the provisions of the 2016 Code and consider the implementation thereof in their organization. Stibbe has prepared correlation tables of (i) the provisions of the 2008 Code compared to the 2016 Code (2008 Code-2016 Code), and (ii) the provisions of the 2016 Code compared to the 2008 Code (2016 Code-2008 Code) (both tables are only available in Dutch). These tables provide an overview of the provisions of the 2008 Code that were not included in the 2016 Code, and which provisions are new in the 2016 Code.

This Corporate Alert describes the most important differences between the 2008 Code and the 2016 Code. Please see our Corporate Alert of 14 December 2016 (click here for the English version of the Corporate Alert) for an overview of the ten most important differences between the proposal to amend the Code and the final version of the amended 2016 Code.  
   
Entry into force
Currently, the 2008 Code is the designated code of conduct under section 2:391(5) of the Dutch Civil Code. This means that the management report (bestuursverslag) in connection with the annual accounts over the financial year starting on or after 1 January 2016 must include an assessment of the company's compliance with the principles and best practice provisions of the 2008 Code, to the extent that these provisions are directed to the management board or supervisory board of the company. The management report must include an explanation if the company has deviated or intends to deviate from one or more provisions of the 2008 Code in the upcoming financial year.

The 2016 Code enters into force for the financial year starting on or after 1 January 2017. The Dutch legislator is expected to designate the 2016 Code as the code of conduct under section 2:391(5) of the Dutch Civil Code in 2017. Consequently, the management report in connection with the annual accounts over the financial year 2017 must include an explanation for deviations from the provisions of the 2016 Code.

The 2016 Code contains certain transitional provisions: 

1. Accountability
The Committee recommends that companies submit the statement in the management report outlining the corporate governance structure of the company and the company's compliance with the 2016 Code (the corporate governance statement) to the general meeting in 2018 as a separate item on the agenda. 
 
2. Changes to documentation
Where the provisions of the 2016 Code compared with the 2008 Code require changes to a listed company's rules, regulations, procedures or other written records, a company will be deemed to be compliant with the 2016 Code if such changes have been implemented by 31 December 2017.
 
3. Term of appointment supervisory board members
The 2016 Code includes two situations in which best practice provision 2.2.2 regarding the term of appointment for members of the supervisory board does not apply. For more information, see item 8 below. 

Listed companies must comply with all other provisions of the 2016 Code from 1 January 2017 onwards in accordance with the 'comply or explain' principle, meaning that a company must either comply with the provisions, or explain any deviation thereof in the management report. 
  
Most important differences between the 2008 Code and the 2016 Code
1. Long-term value creation
The 2016 Code provides that the management board should focus on long-term value creation for the company and its affiliated business. In connection therewith, the management board must take the interests of all stakeholders into account. The management board should – under the supervision of the supervisory board – develop a view on the company's long-term value creation. In addition, the management board should formulate a strategy in line with such view, in close consultation with the supervisory board. This strategy should not only focus on the company's business model, opportunities and risks, and operational and financial goals, but also on other aspects relevant to the company, such as the environment, social and employee-related matters, the supply chain, respect for human rights, and fighting corruption and bribery. The management board and the supervisory board are accountable for the view on long-term value creation and the corresponding strategy.

2. Addressing conduct and culture
Under the 2016 Code, the management board is responsible for the creation of a culture aimed at long-term value creation for the company. The supervisory board supervises the activities of the management board in this regard. The explanatory notes to the 2016 Code clarify that culture can be defined as the values that implicitly and explicitly influence actions and the resulting behavior. Culture is a frame of reference on the basis of which a person's own actions and those of others are reviewed.

The 2016 Code does not define the term culture, and leaves it up to the management board to create the company's culture. This means that the management board should formulate and adopt values that align with the view and strategy of the company. Furthermore, the management board is responsible for the implementation and maintenance of these values within the company and its affiliated business, and must report hereon in the management report. The management board should encourage behavior that is in keeping with the company's values and propagate these values through leading by example. The company's culture should be promoted throughout the entire organization of the company.

3. Risk management
The Committee considers adequate internal risk management and control systems to be a crucial aspect for the realization of long-term value creation. The 2008 Code broadly described how a company should implement these systems. The 2016 Code is more focused on these topics and describes the phases of risk assessment, implementation and monitoring of these systems. In addition, the 2016 Code explicitly clarifies that such monitoring should cover all material control measures relating to strategic, operational, compliance and reporting risks.

Under the 2016 Code, the internal audit function plays an important role in the assessment of the internal risk management and control systems. In order to further strengthen the internal audit function, the supervisory board is more involved in the appointment, evaluation and dismissal of the senior internal auditor.

The scope of the in-control statement by the management board is broader in comparison to the 2008 Code, and the requirements for the content of such statement have been amended in certain respects. In addition to stating that (i) the internal risk management and control systems provide reasonable assurance that the financial reporting does not contain any material inaccuracies, and (ii) the management report provides sufficient insights into any failings in the effectiveness of such systems, the management board should, under the 2016 Code, also provide a statement that (iii) based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis, and (iv) the management report states those material risks and uncertainties that are relevant to the expectation of the company's continuity for the period of twelve months after the preparation of the report. The supervisory board should be permitted to examine the most important points of discussion arising between the external auditor and the management board based on the draft management letter or the draft audit report.

4. Executive Committee
If a company has an executive committee, the 2016 Code includes certain provisions which must be followed. The 2016 Code does not include specific provisions regarding the functioning of the executive committee, but lists general points to consider in connection with the role, duty and composition of the committee, and the position of the executive committee vis-à-vis the management board and supervisory board. The management report should include the reasons for installing an executive committee, and a description of its role, duty, composition and the contact arrangements between the supervisory board and the executive committee. The management board should inform the supervisory board about the remuneration of the members of the executive committee who are not management board members (statutair bestuurders), which should be discussed with the supervisory board on an annual basis.

5. Expertise
The 2008 Code provided that each member of the supervisory board should have the specific expertise required for the fulfillment of the duties assigned to his designated role within the framework of the supervisory board profile, but did not include any specific subjects. Under the 2016 Code, the requirement that each member should have the specific expertise required for the fulfillment of the duties assigned to his designated role applies to members of both the supervisory board and the management board. The explanatory notes to the 2016 Code clarify that sufficient expertise should be available within the management board and the supervisory board to identify opportunities and risks that may be associated with innovations in business models and technologies in a timely manner.

Under the 2008 Code, at least one member of the supervisory board should be a financial expert. This provision is no longer included in the 2016 Code. According to the Decree on Audit Committees (Besluit instelling auditcommissie) that was amended on 1 January 2017, at least one member should be an expert in financial reporting or in the auditing of annual accounts.

6. Diversity policy
The 2008 Code provided that the supervisory board should aim for a diverse composition in terms of such factors as gender and age, and did not include any provisions regarding the composition of the management board.

The Decree Adopting Further Regulations Regarding the Content of the Management Report (Vaststellingsbesluit nadere voorschriften inhoud bestuursverslag) was amended at the end of 2016 by the Decree on the Publication of the Diversity Policy (Besluit bekendmaking diversiteitsbeleid). As a result, the corporate governance statement included in the management report in connection with financial years starting on or after 1 January 2017 should now include a statement regarding the diversity policy for the composition of the management board and the supervisory board. The corporate governance statement should also describe the objectives of the policy, how the policy has been implemented and the results of the policy in the past financial year. If the company does not have a diversity policy in place, an explanation for this should be included in the corporate governance statement.

The 2016 Code provides that the supervisory board should draw up a diversity policy for the composition of the management board, the supervisory board and, if applicable, the executive committee. This policy should include concrete targets with respect to nationality, age, gender, and educational and professional background. The corporate governance statement in the management report should explain the diversity policy, addressing the objectives of the policy, how the policy has been implemented and the results of the policy in the past financial year.

7. Independence of the supervisory board
The provisions of the 2016 Code regarding the independence of members of the supervisory board differ from the 2008 Code where it concerns the composition of the supervisory board. An important change is that supervisory board members who themselves or as representatives of a shareholder with a direct or indirect shareholding in the company hold more than 10%[1] have a special position under the 2016 Code. They are not considered to be independent, but may in total make up less than half of the total number of supervisory board members. The chairman of the supervisory board should be independent.  

8. Appointment
Under the 2008 Code, a member of the supervisory board could be appointed for a maximum of three four-year terms. The 2016 Code has reduced this to a maximum of two four-year terms. A reappointment after this eight-year period is only permitted for a period of two years with a possible extension of another two-year term. Any reappointment after the initial eight-year term must be explained in the report of the supervisory board in the company's financial statements. These amended terms of appointment do not apply to members of the supervisory board who, from the date the 2016 Code entered into force, already held office for more than eight years or who are nominated for reappointment for a third four-year term at the general meeting in 2017.

In the event of the early retirement of a member of the management board or the supervisory board, the company should issue a press release mentioning the reasons for the departure.

9. Succession
The 2016 Code emphasizes the role of the supervisory board in connection with the appointment and succession of members of the management board and supervisory board. The 2016 Code introduces the responsibility of the supervisory board to ensure (i) a formal and transparent procedure for the appointment and reappointment of members of the management board and supervisory board, and (ii) a succession plan for the members of the management board and supervisory board. The succession plan should be aimed at retaining the balance in the required expertise, experience and diversity, with due observance of the supervisory board profile. This is also a point of attention for the selection and appointment committee of the supervisory board.

10. Other positions (nevenfuncties)
Similar to the 2008 Code, the 2016 Code requires members of the management board to request prior approval from the supervisory board for the acceptance of a membership of the supervisory board of another listed company. Under the 2008 Code, a member of the management board also had to notify the supervisory board of any other important other positions. The 2016 Code provides that members of both the management board and the supervisory board should report any other positions to the supervisory board in advance, and these other positions should be discussed at the supervisory board meeting at least annually.

11. Evaluation
The annual self-evaluation by the supervisory board should not only address the desired profile, composition and competencies of the supervisory board, but also the desired expertise, substantive aspects, mutual interaction and the interaction with the management board, and events that occurred in practice from which lessons may be learned. Similar to the 2008 Code, the supervisory board evaluates the functioning of both the management board as a whole and its individual members. The 2016 Code introduces that the management board itself should also annually evaluate its own functioning as a whole and the functioning of its individual members.

12. Misconduct and irregularities
The 2016 Code includes new provisions with respect to the reporting of misconduct and irregularities. The Committee considers the inclusion of these provisions relevant and appropriate because misconduct and irregularities could undermine the long-term value creation. The management board and supervisory board should be alert to indications of actual or suspected misconduct or irregularities. The management board should establish a procedure for the reporting of misconduct or irregularities and take appropriate follow-up action on the basis of these reports, each monitored by the supervisory board. The explanatory notes to the 2016 Code clarify that the provisions in respect of misconduct and irregularities are broader than those under the House for Whistleblowers Act (Wet huis voor klokkenluiders). This Act is only applicable to suspected misconduct that jeopardizes a social interest, whereas the 2016 Code also deals with the reporting of irregularities.

13. Remuneration
The chapter on remuneration in the 2016 Code is less detailed than the 2008 Code. The 2016 Code includes new provisions regarding (i) the obligation to be more transparent about the pay ratios between members of the management board and employees, and (ii) the obligation for the remuneration committee to take note of the individual management board members' view with regard to the amount and structure of their own remuneration when drafting the proposal for the remuneration of such members.

14. Compliance with the Code
The 2016 Code further clarifies the 'comply or explain' principle by listing certain elements that should be discussed when explaining a deviation from the Code in the corporate governance statement: (i) how the company deviated from the relevant principle, (ii) the reasons for such deviation, (iii) if the deviation is of a temporary nature and continues for more than one financial year, an indication of when the company intends to comply with the relevant principle again, and (iv) where applicable, a description of the alternative measure that was taken and either an explanation of how that measure attains the purpose of the principle, or a clarification of how the measure contributes to good corporate governance of the company.

Please contact one of the Stibbe contact persons for more information. 
  
[1] With respect to the criterion to be considered a non-independent supervisory board member, the 2016 Code still applies the > 10% requirement.

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