According to the International Monetary Fund's 2004 Financial System Stability Assessment, the Netherlands is reforming its corporate governance practices. This should increase confidence in Dutch companies and financial institutions, especially in light of prior high profile corporate scandals. In 2004, the Dutch Corporate Governance Code entered into force on a "comply-or-explain" basis. The Corporate Governance Code Monitoring Committee's 2006 report on compliance with the Dutch corporate governance code indicates that compliance has improved since 2005, reaching an average of 96 percent compliance with the provisions of the code, but there are still concerns regarding shareholder's participation and transparency of director's remuneration. Since, 2004, several other pieces of legislation have been introduced to further strengthen corporate governance in the Netherlands.

General Overview

According to the International Monetary Fund's (IMF) 2004 Financial System Stability Assessment (FSSA), the Netherlands is reforming its corporate governance practices. This should increase confidence in Dutch companies and financial institutions, especially in light of prior high profile corporate scandals. Previously, corporate governance was considered poor relative to other industrial countries, on account of anti-takeover devices and management-oriented organizational structure. In 2004, a new corporate governance code entered into force.

A report by Hopt et al., "European Corporate Governance in company law and codes," presented at the 2004 European Corporate Governance Conference, explains that the Dutch Corporate Governance Code applies to all listed companies in the Netherlands. The Code is enforced on a "comply-or-explain" basis, with explanations included in a company's annual report. According to the Corporate Governance Code Monitoring Committee's 2006 report on compliance with the Dutch Corporate Governance Code, the government established the Committee in 2004 to monitor compliance with the code and update it according to national and international best practice standards. Also in 2004, according to Hopt et al., the Dutch Civil Code was amended to grant codetermination rights to employees in larger companies and to improve corporate governance by increasing the role of the annual general meeting (AGM) and providing greater rights for shareholders. The Financial Markets Authority (AFM) website reports that, as of the implementation of the Act on the Disclosure of Major Holdings and Capital Interests in Securities-Issuing Institutions in January 2007, the AFM is responsible for ensuring the implementation of disclosure requirements, including the responsibility to supervise annual reporting, which is particularly important in enforcing the Code's "comply-or-explain" requirement. In addition, the European Union (EU) Market Abuse Directive was implemented in 2005 to better protect market integrity. It includes provisions covering disclosure duties and insider trading. Other laws that govern corporate governance are the 2006 Act on Financial Supervision, which includes insider trading rules; the Dutch Company Law; the Euronext Amsterdam Listing and Issuing Rules; and the Dutch Competition Act.

The Corporate Governance Code Monitoring Committee's 2006 report indicates that compliance with the Dutch corporate governance code has improved since 2005, reaching an average of 96 percent compliance with the provisions of the code. The compliance of local companies is not as good as the compliance of listed companies on the Euronext Amsterdam (AEX), Amsterdam Midkap Index (AMX) and the Amsterdam Internet Exchange (AMS). The committee, in its 2006 report, determined that 85 percent of explanations given for noncompliance were "understandable" (p. 5). It is concerned that the AGM average attendance rate was 56 percent and only an average of 30 percent of institutional investors comply with the code because shareholders play an important role in ensuring the code's effectiveness. However, it notes that most trust offices provide voting proxies. The Committee suggested that to improve the transparency of directors' remuneration, the companies' remuneration policy should be included in a uniform and transparent manner in the annual accounts, and that the supervisory board should report on the effectiveness of the policy. There has been a significant improvement in the reporting on the functioning of the internal risk management and control system.

The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investment Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. The Netherlands scores 4 in the Disclosure Index, against an OECD average of 6.3. It scores 4 in the Director Liability Index, against an Organization for Economic Cooperation and Development (OECD) average of 5.0 and 6 in the Shareholder Suits Index against an OECD average of 6.6.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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A 2004 report by Hopt, K. et al. explains that the Dutch Corporate Governance Code applies to all listed companies in the Netherlands. The Code is enforced on a "comply or explain" basis, requiring that explanations of noncompliance be reported in a company's annual report. According to the Corporate Governance Code Monitoring Committee's 2006 report, the government established the Corporate Governance Code Committee in 2004 to monitor compliance and update the code according to national and international best practice standards. Also in 2004, the Dutch Civil Code was amended, granting codetermination rights to employees in larger companies and improving corporate governance by increasing the role of the AGM and providing greater rights for shareholders. The AFM website reports that, as of January 2007, the AFM is responsible for ensuring the implementation of disclosure requirements, including the responsibility to supervise annual reporting, which is particularly important in enforcing the Code's "comply or explain" requirement. In addition, the EU Market Abuse Directive was implemented in 2005 to better protect market integrity. It includes provisions covering disclosure duties and insider trading. Other laws that govern corporate governance are the Civil Code, the 2006 Act on Financial Supervision, and Dutch Company Law. The Corporate Governance Code Monitoring Committee's 2006 report indicates that compliance has improved since 2005, reaching an average of 96 percent compliance with the provisions of the code. However, there is insufficient publicly available information directly addressing the Netherlands's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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According to the 2004 IMF FSAP, shareholders rights are covered in Dutch Company Law. Depending on the structure of a company, the shareholders' right to elect directors varies, but in all cases there is a balance in the shareholders rights and the need for independent directors. Major changes in corporate structure require shareholder approval; but the articles of incorporation may assign some of that power to the supervisory board. By law, shareholders in the Netherlands have significant power, but companies may limit their powers through the articles of incorporation. Oftentimes the trustees of a trust office will vote on the issues, and the only control mechanism that the shareholders have is requesting a court inquiry into potential mismanagement. However, the FSAP indicates that the there was proposed legislation to provide proxies to holders of depository receipts. The Company Law also covers the registration and transfer of shares and dividends and permits bearer shares. There are also protections for shareholders in the case of a takeover or change of control; and there are sanctions for a lack of compliance with notification requirements. In addition, AEX regulations include disclosure requirements protecting shareholders. However, there is insufficient publicly available information directly addressing the Netherlands's compliance with this principle.

Also in 2004, according to Hopt et al. the Dutch Civil Code was amended, in part to improve corporate governance by increasing the role of the AGM and providing greater rights for shareholders. AGMs have been allotted the additional responsibilities of authorizing major transactions, establishing remuneration policy, and approving shares based on that policy. The new powers of shareholders include greater rights to submit proposals to AGMs and the provision of proxies to holders of depository receipts for voting. The AFM website reports that, as of January 2007, the AFM is responsible for ensuring the implementation of disclosure requirements, including the responsibility to supervise annual reporting, which is particularly important in enforcing the Code's "comply or explain" requirement. In addition, the EU Market Abuse Directive was implemented in 2005 and better protects market integrity. It includes provisions covering disclosure duties and insider trading.

Principle III: The Equitable Treatment of Shareholders

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The 2004 IMF FSAP reports that, by law, shareholders in the Netherlands have significant power, but companies may limit their powers through the articles of incorporation. The FSAP also finds that in 30 percent of listed companies, not all shares of the same class have the same voting power. The shares are put into a trust office and while the economic benefits are equally distributed, the voting power is granted to the trust office. The trustees of the trust office, who often closely associate with management, exercise the voting power; and the only check that the shareholders have is requesting a court inquiry into potential mismanagement. However, the FSAP indicates that the there was proposed legislation to provide proxies to holders of depository receipts. The Dutch Civil Code was amended in 2004 to provide proxies to holders of depository receipts for voting. However, there is insufficient publicly available information directly addressing the Netherlands's compliance with this principle.

A 2005 study of the one-share/one-vote principle in Europe by the Association of British Insurers (ABI) indicates that in 86 percent of companies there are exceptions to offering proportional voting rights to shares held. There are multiple voting shares and companies may increase the number of shares without shareholder consent, often for the purpose of issuing preferential shares. Owners of priority shares may amend or veto AGM decisions and approve or veto capital structure decisions. Sometimes, owners entitle the holder to make "binding proposals for nominating candidates to the supervisory board" (p. 24) as noted by the ABI study. On average, 63 percent of share capital is comprised of depository receipts, but they make up only 52 percent of the voting rights. However, new legislation allowing depository receipt holders to request unlimited proxies has reduced this discrepancy. Also, there are two companies in the Netherlands that issue golden shares. The Corporate Governance Code Monitoring Committee commends that most trust offices provide voting proxies, in its 2006 report.

There has been progress in the equal treatment of shareholders since the introduction of the Dutch Corporate Governance Code, according to the 2005 ABI study. Companies have reduced the voting power of multiple voting shares. All the companies studied were in the process of eliminating restrictions on depositary receipts. Also, companies that issued golden shares agreed to limit their issuance, but not to eliminate them.

Principle IV: The Role of Stakeholders in Corporate Governance

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In 2004, according to the Hopt et al. report, the Dutch Civil Code was amended granting codetermination rights to employees in larger companies. Supervisory directors must nominate a supervisory director, and they are then appointed by the AGM. The work council may nominate up to one-third of the supervisory board members. "Supervisory directors can be dismissed collectively by the general meeting" (p. 39). In addition, the 2003 Dutch Corporate Governance Code includes a provision for the management's assurance that employees can report irregularities, and that the company's policy toward whistleblowers be posted on its website. Also, in general, the code values the importance of stakeholders' confidence in the board and emphasizes the importance of the integrity, transparency, supervision, and accountability of board decisions. However, there is insufficient publicly available information directly addressing the Netherlands's compliance with this principle.

Principle V: Disclosure and Transparency

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The 2004 Hopt et al. report indicates that the Dutch Civil Code was amended in 2002 to introduce director disclosure requirements for all companies without restrictions on transfer of shares. It also set forth that remuneration policy of executive directors is decided by the AGM, while the supervisory board determines the individual remuneration within the parameters of the policy. The 2004 amendments to the Civil Code determine that the executive and supervisory boards are both responsible for financial reporting. While the executive board must ensure the quality and completeness of financial statements, the supervisory board is responsible for supervising the executive board's completion of their responsibilities. Members of the boards are personally responsible for misleading financial statements and are subject to civil and criminal penalties. While there is limited case law on this topic, there are cases under consideration in the courts. However, there is insufficient publicly available information directly addressing the Netherlands's compliance with this principle.

The 2004 Hopt et al. report notes that a draft law had been submitted to Parliament that will charge the AFM with supervision of the annual accounts and reports of listed companies. This is particularly important for enforcing the "comply-or-explain" requirement of the Dutch Corporate Governance Code in the annual account. The report judged that the new act would have a positive impact on the financial reporting of listed companies. The Act will grant the AFM with the authority to investigate and require revisions to financial statements if deemed necessary.

According to the 2004 IMF FSAP, the "full, accurate and timely disclosure of financial results and other information that is material to investors' decisions," which is an International Organization of Securities Regulators (IOSCO) Principle, was "fully implemented" (p. 103). All public offers require a prospectus. Companies must disclose their audited annual report, semi-annual report, and all other information that could affect the price of securities. Shareholders' voting rights should be included in the articles of association. All information necessary to properly judge an offer must be released. Also, the AEX listing requirements include ongoing disclosure requirements. The Corporate Governance Code Monitoring Committee suggested, in its 2006 report, that to improve the transparency of directors' remuneration, the companies' remuneration policy should be included in a uniform and transparent manner in the annual accounts, and that the supervisory board should report on the effectiveness of the policy. There has been a significant improvement in reporting on the functioning of the internal risk management and control system.

The AFM website reports that the Act on the Disclosure of Major Holdings and Capital Interests in Securities-Issuing Institutions was implemented in January 2007, when it was integrated into the Financial Markets Supervision Act. The AFM is responsible for ensuring the implementation of disclosure requirements, including the responsibility to supervise annual reporting, which is particularly important in enforcing the Code's "comply or explain" requirement. In addition, the EU Market Abuse Directive was implemented in 2005 to better protect market integrity. It includes provisions covering disclosure duties and insider trading.

Principle VI: The Responsibilities of the Board

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The 2004 Hopt et al. report states that most listed companies have a two-tier board structure and a supervisory board; however, there are also many companies with a one-tier board. The Dutch Civil Code assigns the supervisory board two general responsibilities, advising and supervising the management boards, but does not clarify what the responsibilities include. The Dutch Corporate Governance Code includes provisions that support the Draft Commission Recommendation on Strengthening the Role of Non-Executive or Supervisory Directors. The Civil Code sets forth that remuneration policy of executive directors is decided by the AGM, while the supervisory board determines the individual remuneration within the parameters of the policy. The 2004 amendments to the Civil Code determine that the executive and supervisory boards are both responsible for financial reporting. While the executive board must ensure the quality and completeness of the financial statements, and the supervisory board is responsible for overseeing the executive board's completion of their responsibilities. Members of the boards are held personally responsible for misleading financial statements and are subject to civil and criminal penalties. While there is limited case law on this topic, there are cases under consideration in the courts. In addition, according to the 2004 IMF FSAP, articles of incorporation may assign some of the shareholders' powers to the supervisory board. However, there is insufficient publicly available information directly addressing the Netherlands's compliance with this principle.