13 July 2023
“Governance” is defined as “a system of rules, practices and processes by which a company is directed and controlled”. Or better: it concerns all companies, whether small or large.
As in many other countries, the Netherlands have introduced a Corporate Governance Code, with the first version being presented in 2003. This Code is formally only applicable to companies that are listed in the Netherlands, but in daily practice it also has a strong influence on all other types of companies. They use the Code or only the (for their company) relevant parts thereof as an indication of what “good governance” would entail. Case law also applies the Code in a similar manner. The practical reach of the Code is therefore considered very broad – or at least broader than just for listed companies.
In our daily practice, we have seen the Code being (entirely or partially) reflected in all kinds of companies, varying from investment funds to SME’s to family-owned companies. The Code is broadly applied in documents like shareholder agreements, articles of association and regulations for management boards and supervisory boards. Especially for non-Dutch investors, shareholders or acquirers of Dutch companies, the Code renders an objective tool in defining the basics for Dutch corporate governance.
Having said that, the Code is not considered to be law in the strict sense of the word. The Code contains certain key principles for good governance, and provides so-called “best practice” provisions to provide guidance to those principles. It is as such up to the (listed) companies if and how they wish to abide by those principles and best practices. However, in their annual reporting, listed companies have to disclose if they comply with the Code or, if not, to explain why. For the last monitored financial year of 2021, the Dutch Corporate Governance Code Monitoring Committee concluded on high compliance rates. However, the Monitoring Committee also concluded that companies could report in a more meaningful way and that too few companies - only 46% - are properly addressing ESG aspects.
Now that ESG has taken a seat at the C-levels, not in the last place because of a huge increase in regulations, the Monitoring Committee recently updated the Code especially on this topic. The updated Code applies as of the financial year 2023. As mentioned in the above, this amended Code is not only of (direct) importance to listed companies, but (indirectly) to the overall playing field of corporate governance in the Netherlands. In this outline, an overview will be provided of the key changes of the Code in relation to ESG. These changes may require considerations by all companies on if and how to implement these into their own governance. It is noted that the updated Code refers to more changes, but these will be left out of this outlook for being less direct ESG-relevant.
The cornerstone key principle of the newly amended Code is that the management board of a company is responsible for its sustainable long-term value creation. The word “sustainable” has been newly added, whereas the longer-term focus was implemented in 2016 due to the introduction of the UN’s SDG’s and the Paris Climate Agreement.
The word “sustainable” refers to the social, environmental and economic aspects of doing business – or the so-called “3 P’s” (People, Planet and Profit). It is noted that a wide variety of new in the field of sustainability is upcoming or already implemented. The CSRD (Corporate Sustainability Reporting Directive) and CSDDD (Corporate Sustainability Due Diligence Directive) are mere examples hereof. Companies are expected to interpret the concept of “sustainability” on the basis of this new regulatory framework. The Code does not provide concrete tools to that end.
Important to note is that the Code does not impose an obligation of result on the management board to comply. Therewith, non-compliance with this key principle does not automatically result in liabilities. Under Dutch law, liability of the management board requires a serious blame to be attributed to it. However, it may occur that non-compliance with the Code is an additional demonstration of mismanagement.
In order to execute the key principle of creating a sustainable long-term value, certain best practices are given:
1. the management board has to implement a strategy with specific objectives
The management board has to draw up a strategy that supports the sustainable long-term value creation of the company.
In this strategy, not only the impact of the company on people and the environment have to be taken into account, but also vice versa: the impact that sustainability issues have or may have on the company (double materiality). The strategy is to contain, among others:
As can be noted, also items like taxation and technology are to be considered in a sustainable strategy. This implies that companies are recommended to consider their tax policies and a responsible use of (new) technologies. Matters like tax evasion, cybersecurity, data protection and ethical use of new technologies such as AI are to be addressed.
2. the supervisory board has to be involved
The role of the supervisory board is increasing, and there with its responsibilities. One of the supervisory board’s key tasks is to supervise the management led by the management board. Now, the management board is recommended to engage with the supervisory board on formulating the sustainable long-term strategy and accounts to the supervisory board for the implementation thereof. This implies that the supervisory board has to take an active role, for instance by means of:
3. the management board has to report
In its annual reporting, the management board should provide a detailed explanation on its views on the sustainable long-term value creation and the strategy to realize this. In specific, this could include reporting on:
This reporting resonates the current reporting requirements under the NFRD (Non-Financial Reporting Directive) and the upcoming reporting standards under the CSRD. Companies that already report under those directives, will therefore have hardly any additional reporting work under the Code.
4. an effective dialogue with stakeholders has to be implemented
The company should draw up a policy for an effective dialogue with relevant stakeholders on sustainability of its strategy. This policy has to be published on the company’s website.
“Stakeholders” are both groups and individuals on whom the company’s actions have a direct or indirect and actual or potential effect. Such stakeholders are therefore not only shareholders or employee participations, but can also be lenders, suppliers, customers and others. It is up to the management board to determine on a case-by-case basis who the relevant stakeholders actually are and how relevant they would be. There is therefore no right of dialogue for the stakeholders. The management board is entitled to decline a dialogue in case it is of the opinion that such is not in the best interest of the company. However, the management board has to report on its balance of interests of stakeholders in its annual reporting.
A second amended key principle in the Code on ESG relates to diversity and the composition of the management board, the supervisory board and the executive committee (if any). These boards should be composed in such a way as to ensure “a degree of diversity with respect to expertise, experience, competencies, other personal qualities, sex or gender identity, age, nationality and cultural or other background”. The concept of “diversity” is therefore much broader then gender only. For instance, the Code emphasizes that, due to a changing world, expertise should be available in both the management board and the supervisory board in the fields of digitalization and sustainability.
Further, a company should have a D&I policy in place based on the following cornerstones:
The updated Code that takes effect as of the financial year 2023 for listed companies, may require considerations by all Dutch companies – especially in relation to ESG matters. Although not being hard law or obligatory for non-listed companies, the Code’s principles and best practices can provide helpful tools in defining sustainable governance policies. Also, being compliant with the Code can make companies more attractive to investors, buyers, employees or other stakeholders. Further, we would expect these tools to play a role in upcoming M&A transactions as well, such as in due diligence investigations, warranty schedules or W&I provisions.