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Sustainable Control Allocation and Dutch Corporate Law
Name: Jelle N. van Dijk
Email: jnvd@live.nl
Student number: 11344717
Track: Master Law and Finance, UvA
Supervisor: Prof. Dr. A. M. Pacces
Date: 13 07 2020
Abstract
Sustainability is a major topic in recent debate, and it influences the discussion on control allocation within large public companies. I evaluate the control allocation in large public corporations under Dutch law, looking at it through a sustainability lense. I ask if Dutch law on large public corporations allocates control to actors with the greatest incentives to internalize externalities. Institutional investors have more incentives to process and analyze generic information, than they have to process and analyze firm-specific information. Whether shareholders are well placed to ensure social welfare is maximized, depends on the nature of the policies that should internalize externalities. The incentives of directors to act to maximize social welfare in a stakeholderist-regime depend on the low-powered incentives of directors, and their ideas of social welfare. The success of stakeholderism depends on low-powered incentives of directors of companies, and may be dependent on political control over boards. Through a detailed legal analysis, I show how Dutch law allocates very little power to shareholders. Dutch law shields directors from shareholders. I propose improvements to Dutch corporate law on how directors may be further incentivized to take social welfare into account in their decisions. I conclude that, given the right corporate culture, Dutch law allocates control to the actor with the greatest incentive to internalize externalities: The board.
Key words: Sustainability, Corporate Control, Stakeholderism, Shareholder Primacy, Corporate Law
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Table of Contents
1. Introduction... 3
2. Shareholder Primacy ... 6
2.1 Incentives of Shareholders to Maximize Firm Value: ... 8
2.2 Heterogeneous Incentives? ... 9
2.3 The Structure of Ownership and the Incentives of Institutional Investors ... 10
3. Stakeholderism ... 15
3.1 What is Stakeholderism; in whose Interest? ... 16
3.2 Incentives of Directors: ... 17
4. Control Allocation of Large Business Corporations under Dutch law. ... 20
4.1 The General System of Corporate Law Codification in the Netherlands: ... 20
4.2 Board Composition under the Structure Regime: ... 22
4.3 Competences of the Board and Shareholders: ... 23
4.4 In Whose Interest? (Fiduciary Duties) ... 26
5. Application of the Theoretical Framework to Dutch law and Conclusion. ... 27
Bibliography ... 30
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-Sia (Academia)
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-Adorno and Horkheimer (Dialectic of Enlightment)
1. Introduction
Sustainability is a major topic in recent debate. It is understood to encompass both an ecological dimension and a socio-economic one.1 Libraries are (being) written on climate change
and its effects.2 In both the EU and the U.S. ambitious plans have been proposed to turn the
economy into a low-carbon one.3 Concerns have been voiced about growing inequality in
modern-day capitalist societies.4 As the large public business corporation is the dominant form of economic
organization in contemporary capitalist societies, reforms and changes have been proposed to it; partly because of sustainability concerns. The Business Roundtable has moved away from shareholder primacy,5 and the World Economic Forum has published a pro-stakeholder manifesto.6
In the Netherlands voices have been raised to further cement the social responsibility of business in law.7 Such propositions take as point of departure that it matters for social welfare which
1 In EU communications and legislation, reference is often made to both the Paris Agreement (see: United Nations
Treaty Collection, Paris Agreement. Available at: https://bit.ly/2zo4Cfa) and the Social Development Goals (see: Resolution adopted by the General Assembly on 25 September 2015, Transforming our World: the 2030 Agenda for Sustainable Development, A/Res/70/1). For example, see: Final Report of the High-Level Expert Group on
Sustainable Finance (2018) (Available at: https://bit.ly/3cWxnNT). For a visual respresentation of sustainability, see: Raworth, Oxfam Discussion Papers 2012/February. The author visualizes a sustainable economy between an ecological ceiling and on a social foundation. Her ecological categories are taken from Rockström a.o., Nature 2009/461.
2 For an example in the field of finance, see: Schoenmaker and Schramade, 2019.
3 In the U.S. a ‘Green New Deal’ has been proposed by Alexandria Ocasio-Cortez and Edward J. Marckey, see:
Friedman, The New York Times 2019/February 21st. In the EU, ‘The European Green Deal’ is supposed to mobilize
€100 billion, see: https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en.
4 For example: Piketty 2014. See also: Pistor 2019, who discusses how law favors certain assets over others,
providing its owners (the wealthy) with greater returns.
5 The Business Roundtable is an organization whose members are the CEOs of major U.S. companies. It had
previously endorsed shareholder primacy, see: Business Roundtable, Statement on Corporate Governance (September, 1997). For the new statement, see: Business Roundtable, Statement on the Purpose of a Corporation (August 19, 2019). See, for a critical discussion: Enriques, Promarket 2019.
6 Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution, 2019, December
2: “The purpose of a company is to engage all its stakeholders in shared and sustained value creation.” Available at:
https://www.weforum.org/agenda/2019/12/davos-manifesto-2020-the-universal-purpose-of-a-company-in-the-fourth-industrial-revolution/.
7 25 Of 31 professors of corporate law have argued that there should be a duty for the board to ensure a corporation
behaves as a ‘responsible corporate citizens’ should be, following the South African King-IV code, Winter a.o., Ondernemingsrecht 2020/86. See also: The Institute of Directors in Southern Africa, King IV Report on Corporate
4 corporate constituency has (ultimate) control over large public corporations, and in whose interest such control should be exercised.
Control allocation matters, so it is interesting to revisit the discussion on control allocation and consider it from a sustainability perspective. Control allocation depends critically on which corporate constituency is able to decide who takes decisions on the corporate level, and to monitor these agents.8
There are two main candidates for the allocation of control in corporations. (Ultimate) control can be allocated either to the shareholder or to the board.9 Another possibility of allocation
of control could be to labor,10 or other external constituencies.11 The business corporation seems
ill-suited for such allocation.12
I want to evaluate the control allocation in public corporations under Dutch law, looking at it through a sustainability lense. I do so by considering, as research question: Does Dutch law on large public corporations allocate control to actors with the greatest incentives to internalize externalities?13 I answer this question in reference to Dutch ‘operating level’ large public
corporations. So: large corporations operating in the real economy. The dynamics of financial
Governance for South Africa (2016), p. 40, principle 3. Available at:
www.iodsa.co.za/resource/resmgr/king_iv/King_IV_Report/IoDSA_King_IV_Report_-_WebVe.pdf.
8 Thus, governance is one way to deal with agency conflicts. It is not the only way, see Kraakman a.o. 2017, p. 31,
who distinguishes between regulatory and governance strategies. This point is made also by Pargendler, The Journal of Corporation Law 2016/41(2), p. 370. As to agency conflicts and costs, see: Jensen and Meckling, Journal of Financial Economics 1976/3(4). These authors argue that the relation between managers and shareholders is that the latter depends as regards their (invested) wealth on decisions taken by the former. Costs arising out of the
divergence in incentives between the two, and consequent monitoring, are termed ‘agency costs’. Their argument has been advanced by some scholars, to the point that corporate law can best be understood as responding to various agency conflicts around the corporation, see Kraakman a.o. 2017. Expanding on the benefits of the separation of ownership and control, see: Fama and Jensen, Journal of Law and Economics 1983/26(2).
9 Control allocation, understood here, is control allocation in ultimo. For example, if control (in my sense) is given to
shareholder, they would choose to delegate control to a board, see Fama and Jensen, Journal of Law and Economics 1983/26(2). That is, boards will have a wide range of discretionary ‘control’ powers over a corporation. Shareholder will have control nonetheless, if, given that they are not contend with a certain decision, they have the power to reverse such a decision through change-mechanisms.
10 The German “codetermination” model provides for the “involvement of employees in the company’s strategic
decision-making process”, see: Ringe, The American Journal of Comparative Law 2015/63(2), p. 495. Nevertheless, Ringe suggests that German firms used to be controlled by blockholders, but that recent changes in the structure of ownership has shifted power to managers.
11 How such a scheme would work, is hard to imagine. Kraakman a.o. 2017, p. 95, note that “none of our core
jurisdictions confers general appointment rights on non-shareholder constituencies other than employees”.
12 Hansmann, Journal of Law, Economics and Organization 1988/267(4), argues that in many cases other
constituencies have heterogeneous interests, and are able to protect their interests by contract. The investors of risk-bearing capital have homogeneous and are less able to protect their interest by contract. Allocating control to shareholders is thus more efficient. This explains why the business corporation is the dominant organizational form. Exceptions include law firms, in which partners have similar skills and interests.
5 institutions may diverge from those discussed below. Whereas a similar inquiry into such
corporations may be illuminating, it is outside of the scope of this thesis.14 Externalities are
indirect effects on consumption and production opportunities, which prices of products causing the externalities do not take into account.15 Externalities cause a divergence between private and
societal returns.16 Determining what the divergence is, and thus how large externalities are,
requires the valuation of hard to value ‘things’. Examples in case of sustainability are: Clean air, or human health and happiness. The valuation of such ‘things’ is notoriously difficult and depends on a vision of ‘the good life’, and social welfare.17 Internalizing externalities means to
take them into acount, so to ‘do away’ with the divergence between private and social returns.18 I
use ‘internalizing’ externalities interchangeably with ‘taking social costs into account’. Current political discourse considers the ‘sustainability externalities’ as the largest contemporary
challenges faced by society. This is why I take the generic concept of externalities as a proxy for sustainability.
Dutch law is chosen as it is a stakeholder jurisdiction, which has been considered as the “least shareholder-friendly jurisdiction in Europe”, yet has one of the highest stock market capitilizations in the world.19 The study of Dutch law may open new perspectives into
understanding corporate governance from a sustainability perspective.
The research in this thesis is theoretical. I discuss main concepts conceptually, and try to butress empirically testable claims in empirical evidence. Whereas an empirical analysis into the same topic would be interesting, it is ouside the scope of this thesis. Such a research should give insights into the culture of Dutch boardrooms, which is critical to the outcome of this research, as I will discuss below.20
14 Financial institutions have their ‘own’ specific externalities, see: Armour and Gordon, The Journal of Legal Analysis 2014/6(1).
15 Helbing, Finance & Development 2010/December, p. 48. I discuss why these externalities can exist, and are not
dealt with by the State, in the beginning of chapter 2.
16 One way to deal with externalities is by the allocation of property rights, followed by bargaining. Such an account
is given by Coase, Journal of Law and Economics 1960/3. The argument loses its force in relation to public goods. Sustainability concerns exactly those goods for which property rights are close to impossible to allocate, cf. Helbing, Finance & Development 2010/December.
17 A thorough account of valuation, and a compelling critique of how ‘things’ are valued in modern society is given
by the Italian born economist (Maria) Mazzucato, 2019.
18 An example may clarify this. Consider a polluting factory. Absent regulation the returns to the factory and society
diverge. If the factory would take externalities into account it would pollute less, or clean the polluted ‘things’.
19 Pacces 2007, p. 448. 20 infra sections 3.2, and 5.
6 I continue as follows. First, I discuss the two possible modes of control allocation:
shareholder primacy, and stakeholderism; and develop the framework which I will apply to Dutch law. I then discuss the legal rules on control allocation in Dutch large public companies. Afterward, I apply the theoretical framework to Dutch law and conclude.
In chapter 2 I discuss shareholder primacy, which allocates control to shareholders. I show that the success of its defence depends on the incentives of shareholders to internalize externalities. I discuss the structure of ownership; and the incentives of institutional investors to internalize externalities. In chapter 3 I discuss stakeholderism, which allocates control to the board so they can act as agents for a plurality of interests. I discuss stakeholderism conceptually, and turn to the incentives of directors to internalize externalities. In chapter 4 I discuss the Dutch legal framework which applies to large public corporations: the composition of the board, its competences and those of shareholders, and in whose interests such competences should be exercised. In chapter 5 I conclude by applying the framework developed in this thesis; and I answer the research question. Dutch corporate law allocates control to the actor (board) with the greatest incentive to internalize externalities. At the same time, there is room for improvement. I propose two possible improvements.
2. Shareholder Primacy
Shareholder primacy allocates control to shareholders. It means: A corporation should be run in the interest of the shareholders as a class, measured by share value.21 Shareholder primacy has
been defended on the grounds that it is the most efficient allocation of control. There are two main reasons to why shareholder primacy is the most efficient allocation. (1) Non-shareholder constituencies can be protected through regulation and contract,22 while shareholders cannot.23 The
21 Hansmann and Kraakman, The Georgetown Law Journal 2001/89(2), p. 440-441. See also: Hansmann and
Kraakman, Yale Law & Economics Research Paper 2011/449, p. 1-2. See also: Armour and Gordon, The Journal of Legal Analysis 2014/6(1), p. 35-36: “The generally accepted framework for analyzing corporate law and governance implies that those running a corporation should seek to maximize the value of shareholders’ claims, as measured by the stock price”.
22 I consider this claim in section 1.2.1 below. See also: Hansmann, Journal of Law, Economics and Organization
1988/267(4).
23 Hansmann and Kraakman, The Georgetown Law Journal 2001/89(2). See also: Kraakman a.o. 2017, p. 12,
explaining that the board is chosen by shareholders, as their interest are, “unlike those of other corporate constituencies, not strongly protected by contract”. See also: Pargendler, The Journal of Corporation Law
7 second part of this first claim seems not particularly convincing in light of the rise of institutional ownership,24 as sufficiently large institutional investors will contract with managers if incentivized
to do so. More convincing is the claim that (2) shareholders “will have powerful incentives to maximize the value of the firm”.25 If governments “deal with externalities”, 26 through legislation
and regulation this maximizes societal welfare.
Generally, law (legislation) is a way to deal with externalities. Private law will do an imperfect job to make sure all social costs are internalized.27 This provides a reason to use the
political process to impose specific legislation and regulation on business.28 A specific example
thereof is the imposition of a carbon-tax. Governments are unlikely to be able to legislate and regulate in a way that all externalities are internalized by corporations. Governments face information gaps,29 and are not always able to resist lobbying efforts.30 Governmental legislation
and regulation alone are thus unlikely to ensure that all societal costs are internalized.
This means that the rationale for shareholder primacy depends on the incentives of shareholders to both maximize firm value, and take into account externalities.31 So, because not
all externalities are internalized, the social welfare function in shareholder primacy depends on the incentives of shareholders to take social costs into acount.
2016/41(2), p. 397, who notes that this is the case because shareholders do not have a fixed claim, as opposed to other constituencies, and because shareholders’ wealth is ‘locked in’.
24 See infra section 2.3.
25 Hansmann and Kraakman, The Georgetown Law Journal 2001/89(2), p. 454. 26 Hart and Zingales, Journal of Law, Finance, and Accounting 2017/2, p. 249.
27 cf. Armour and Gordon, The Journal of Legal Analysis 2014/6(1), p. 46. The authors give the general restriction
of tort law to claim only direct damages as an example. Other examples of the unsuitability of tort law to deal with externalities in general may be procedural hurdles, or coordination costs if tort victims are dispersed. Furthermore, legal proceedings may be costly and time consuming.
28 One could of course also take the view that legislation and regulation should be the preferred channel, over private
law and/or private enforcement. Such a preference would only by justifiable in the presence of effective public enforcement. For a study finding that public enforcemen has negligible impact on stock market development, see: La porta, Lopez-de-Silanes, and Shleifer, The Journal of Finance 2006/61(1).
29 Such information gaps are one of the reasons that it is efficient to allocate (non-ultimate) control to boards.
Corporate decision require information that is diffused throughout a corporation; it is the board’s task to make sense of this corporation-specific information and base strategy and policy on it. cf. Fama and Jensen, Journal of Law and Economics 1983/26(2).
30 Business will have an easier time organizing itself than other actors in society, due to access to financial,
relationship and human capital, cf. Armour, a.o. 2016, p. 558. The authors make this point in relation to the financial services industry. It applies in general, especially the case in the U.S. after the Citizens United Supreme Court case. Strine, U of Penn, Inst. for Law & Econ Research Paper 2019/19-39, makes the point that institutional investors have so far done little to curb this behavior.
31 cf. Hart and Zingales, Journal of Law, Finance, and Accounting 2017/2, p. 249. Also see: Pargendler, The Journal of Corporation Law 2016/41(2), p. 365: “governance may partly substitute for government, at least in the level of discourse”.
8 2.1 Incentives of Shareholders to Maximize Firm Value:
Shareholders are given control over corporation, as they are said to have the best incentives to maximize firm value as residual claimants. There are cases in which shareholders do not have the best incentives to maximize firm value. Due to the capital structure of the corporation, shareholders may have incentives to either over-invest32 or under-invest.33 The severity of this problem is partly
dependent on the sophistication of creditors. Creditors with debt covenants in place, may force the firm to change strategy and implement changes, well before insolvency looms.34 Furthermore, as
regards non-contracting creditors35, because of limited liability, “shareholders bear only a fraction
of the costs of the companies’ activities cause for third parties”.36 These two examples are
intra-firm externalities. Governments may deal with these externalities through legislation, and regulation.37
Shareholders are said to have “relatively homogeneous interests among themselves”, namely: to maximize the value of their claim.38 Shareholders may also have other interest. They
may care in diverging levels for sustainablilty, and want to take such concerns into account. However, as was famously argued by Friedman: Shareholders can pursue such interests by using the gains from their equity investment.39 So, they should be indifferent as to whether the
corporation pursues their interests to the extent of their value of investment, or whether they do so
32 Also known as risk-shifting. That is, shareholders may want to start negative NPV projects, in a ‘gamble for
resurrection’. In a study documenting the responses of U.K. firms, experiencing financial distress, between 1992 and 1998, the authors found that 40% of firms expand their assets, see: McColgan and Hillier, 2005.
33 Also known as the debt-overhang problem. Shareholders may want to forgo positive NPV projects, because the
upside would be captured only by other claimants.
34 cf. Bolton, Journal of Law, Economics, and Organization 2014/30(1). On the flipside, this may give rise to
intra-creditor problems, especially in jurisdictions with an ‘accommodating’ preference law, such as in England, where “it has been a principle of English law since the eighteenth century that preferential transactions entered into because of pressure will not be set aside”, see: Keay and Walton, 2008, section 39.2.3.4.
35 Most obviously (non-adjusting) tort-creditors, and tax authorities. For a discussion of tax-authorities, their claims
in bankruptcy, and the cost thereof on long-term debt finance, see: Pistor, Columbia Journal of Transnational Law 2008/46(3).
36 Kraakman a.o. 2017, p. 93.
37 Ex-post, priority rights may provide redress for such parties. More effectively, shareholders may be held liable for
damages inflicted by the corporation. Notably, in Brazil courts may apply unlimited shareholder liability, when damage are inflicted on workers, consumers, or the environment, see Kraakman a.o. 2017, p. 116.
38 Kraakman a.o. 2017, p. 13.
9 themselves with this value. Managers should focus on maximizing the value of shareholders’ claims.40
2.2 Heterogeneous Incentives?
Friedman’s argument has come under attack. Recent scholarship has emphasized the defects of the assumption that money-making and ethical activities can be treated as separable.41 In general,
activities of a firm cannot just be ‘undone’. Oliver Hart and Luigi Zingales give the example of an oil digging project.42 If investors would rather not see oil being extracted at a certain place, there
is no feasible way to reverse this by using monetary proceeds from their shareholdings.
The authors show that if shareholders place some weight on the social surplus associated with firm decisions, and if their preference was pivotal to the decision adopted, then there are situations in which maximizing shareholder value would not be the same as maximizing shareholder welfare.43 Shareholder have “powerful incentives to maximize firm value”, but if they
are given the opportunity to internalize externalities, they will do so to the extent that they are ‘prosocial’. Shareholder welfare is in this framework the social surplus associated with a given decisions, minus the aggregate value of internalized costs by the shareholders. They conclude that, because of this divergence, managers and directors should maximize shareholder welfare. It would be wrong to maximize shareholder value.44 One way to facilitate the maximization of shareholder
welfare, is to “let shareholders vote on the broad outlines of corporate policy”.45 Voting makes
40 See also: Armour and Gordon, Armour and Gordon, The Journal of Legal Analysis 2014/6(1). The authors
discuss, inter alia, that undiversified investors may have different incentives from diversified investors. That is, in most situations undiversified investors will tend to want to take less risk than optimal. Contrary, for financial firms this may not be the case. Because projects of such firms influence the market risk, and because both private law and regulation are likely to not fully ensure that costs are internalized, undiversified investors may prefer to take more risk than optimal. As regards financial firms, shareholder value maximization, as measured by stock prices, is not efficient.
41 Hart and Zingales, Journal of Law, Finance, and Accounting 2017/2, p. 249. 42 Id. p. 249.
43 Id. p. 254.
44 Id. p. 263: “Corporate directors have a duty to maximize shareholder welfare, not just shareholder value”. That
claim seems incorrect, at least as far as Delaware law is concerned. For instance, the former Chief Justice of the Delaware Supreme Court takes another position, see: Strine, Columbia Law Review 2014/114(2), p. 454, footnote 16: “[…] other constituencies may only be considered instrumentally in terms of their relationship to creating profits for shareholders”. He lists several court cases to support his view.
45 Hart and Zingales, Journal of Law, Finance, and Accounting 2017/2, p. 270. The authors discuss several other
ways; one other one is to have dual class shares. Contractual, or charter provisions are another one. The authors are skeptical to the effect of the latter option (as am I), notably due to the insulation of directors from judicial scrutiny due to business judgement rules.
10 shareholders feel responsible (pivotal) for the decision voted on, and ensures that they internalize societal costs, at least, as far as shareholders themselves value this.
This model is thus at odds with the claim that the interests of shareholders should be measured by firm value, as firm value and shareholder welfare may diverge. The outcome of allocating control to shareholders depends on the weight shareholders place on ‘doing the right thing’ in this model. It also depends on shareholders being able to correctly value the social surplus associated with given decisions.46 Boards generally have more information on the business
decisions and their expected effects.47 The outcome of allocating ultimate control in this model
thus depends on shareholders being able to process and value information communicated by the board, which depends on the latter’s ability and incentives to communicate this information. So, one friction in this process is the reintroduction of an agency conflict: To value the firm and managerial performance, shareholders cannot depend on share price anymore and thus depend on either their own ability to collect, process and analyze information, or on the willingness of managers and directors to do this for them. Departing from firm value measured by stock price as metric of managerial performance, asks more of shareholders. Shareholders must be able to correctly analyze specific performance and information. This latter is problematic, due to the business model of most shareholders. I develop this point in the coming section on the structure of ownership. The key take away from this section is that shareholder welfare depends on the ability of shareholders to process and analyze information. The extent to which social welfare and shareholder welfare align, depends on the incentives of shareholders to internalize externalities.
2.3 The Structure of Ownership and the Incentives of Institutional Investors
In determining the incentives of shareholders, I will first turn to the structure of ownership.48 In the U.S. the image of widely held dispersed ownership used to be prevalent, as a
consequence of the work of Adolph Berle and Gardiner Means.49 Whereas this image was still
roughly correct for the U.S. in 1999, it was not for many other countries around the world. In fact,
46 This is the ‘hard to value’-problem, discussed supra 17.
47 cf. Fama and Jensen, Journal of Law and Economics 1983/26(2).
48 As, in general, it is the structure of capital markets that drives the efficient structure of corporate governance. This
point is made in Gilson and Gordon, Columbia Law Review 2014/113(4), p. 869.
49 See: La Porta, Lopez-de-Silanes, and Shleifer, The Journal of Finance 1999/54(2), p. 471. The authors reference
11 La Porta and others found that, in that year, only 36% of all firms in the world were widely held. Comparatively, countries with common law legal origins had a “significantly higher fraction of widely held firms than civil law countries do”.50 Civil law countries had more family and state
owned firms.
Nowadays, institutional shareholder hold roughly between 60% and 80% of all U.S. equity.51 In the EU roughly 38% of ownership of listed companies is owned by institutional
investors, a development that has sparked recent EU legislation.52 On a global level, institutional
investords hold 41% of the global market capitilization.53 In the Netherlands the largest public
companies are owned almost entirely by these investors: 94% Of equity in the AEX-index is held by institutional investors,54 and half of all listed companies are owned by institutional investors.55
That is not to say that the beneficial owners of equity are not still dispersed, save for those countries dominated by family or state-owned firms, but rather that the equity is held by institutional “record owners”.56
Whereas this concentration may be thought to lower information and coordination costs, thereby incentivizing these shareholders to become involved in individual firms, the opposite may be true. Institutional investors have little incentive to engage in company-specific performance issues.57 Competitive pressure may force institutional investors to focus on relative performance.
As regards mutual funds, for example, the beneficial owners of the equity held by this fund may benefit from an intervention at the level of operating firms. However, so would the fund’s competitors. If insitutional investors were to develop expertise regarding company specific information that may affect performance, they would be expected to trade on it, rather than intervene on company level.58 In general, due to diversification, higher returns at the level of an
50 Id. p. 505.
51 See: Zingales, Chicago Booth School of Business Research Paper 2009/08-27, p.13. Finding that in 2005
institutional investors owned 60% of U.S. equity. See also: McGrath, Pensions & Investments 2017/April 25th. Who
finds that 80% of U.S. equity is owned by institutional investors.
52 For example, see: Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017
amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (Shareholder Rights Directive [SRD] II, amending SRD I). This directive uses the term ‘institutional investors’ 20 times in the preamble. Chapter Ib of the new directive specifically deals with institutional investors.
53 De la Cruz, Medina, and Tang, OECD Capital Markets Series 2019, p. 6.
54 Abma e.a. 2017, p. 8-9. The AEX-index is composed of (roughly) the 25 largest corporations listed on Euronext
Amsterdam.
55 De la Cruz, Medina, and Tang, OECD Capital Markets Series 2019, p. 12. 56 cf. Gilson and Gordon, Columbia Law Review 2014/113(4), p. 865.
57 Id. See also: Rock and Kahan, NYU Law and Economics Research Paper 2019/18-39, p. 4. 58 Id. p. 889-890.
12 individual company will generally be relatively small, whereas an institutional investor will bear the full and certain cost of governance intervention. Benefits arising from such intervention will accrue also to competitors.59
Conversely, some scholars have argued that the investment advisers who manage funds have strong incentives to increase firm value across the board, as these advisers (and also, fund managers), receive compensation based on assets under management. If the assets held increase in value, so does their compensation.60 There is thus an incentive to vote in an informed manner, and
identify value-increasing proposals. Importantly, in the U.S. institutional investors must also do this, under regulatory mandate, and “vote on every measure” in an informed manner.61 While there
is evidence from the U.S. that smaller institutional investors “economize” on voting, there is also significant heterogeneity in voting for larger institutional investors.62 In the EU, legislators have
focused on transparency and disclosure requirements, e.g. institutional investors and asset managers must disclose an engagement policy, and disclose how they have cast votes on the shares they hold, to urge them to do so.63 The rationale is that disclosure will lead to better interventions.
Jeffrey Gordon and Ronald Gilson also note that institutional shareholders “frequently oppose management on corporate governance issues”.64
Evidence that institutional investors vote in a way that they believe increases firm value can be inferred from recent changes in the corporate governance of large U.S. companies. Staggered boards are an example. In the U.S. board classification provides a powerful tool for managerial entrenchment. “Directors are grouped into classes, with each class elected at successive annual meetings”.65 In 2010 only 17% of companies had staggered boards in place, as opposed to
59 Id. p. 892. In short: good governance is a public good, so there exist free-rider problems. 60 NYU Law and Economics Research Paper 2019/18-39.
61 See: Strine, Columbia Law Review 2014/114(2), p. 484. Noting that there has been a regulatory mandate imposed
by regulators under ERISA. See also, Rock and Kahan, NYU Law and Economics Research Paper 2019/18-39, p. 6, noting that informed voting creates a market for proxy advisors.
62 See: Choi a.o., Harvard Business Law Review 2013/35(3). Analyzing how mutual funds vote in the context of
uncontested director elections. They find that funds voting in line with management, as way of economizing on voting, make up 27% of their sample. Funds “blindly following ISS”, only make up 3.04%, p. 55.
63 supra 52, article 3g. See more generally chapter Ib. See also: Regulation (EU) 2019/2088 (Disclosure Regulation),
requiring market participants to disclose certain sustainability-related matters in their pre-contractual disclosures, their periodic reports, and on their websites.
64 Gilson and Gordon, Columbia Law Review 2014/113(4), p. 887.
65 Bebchuck and Coates IV, The Harvard John M. Olin Discussion Paper Series 2002/353, p. 5. The authors discuss
that staggered boards are a potent tool against takeover in combination with a poison pill. This forces a bidder into at least two proxy contests. The maximum number of classes is three in Delaware, four in New York. See also: Bebchuck and Cohen, Journal of Financial Economics 2005/78(2). The authors find that “staggered boards are associated with an economically meaningful reduction in firm value”. However, their study is criticized for being
13 44% in 2003.66 Furthermore many companies adopted the majority voting rule, adding to
shareholder control.67
Activist investors are, in this framework, conceptualized as arbitraging the undervaluation of governance rights by institutional investors, and the actors which act on company specific information.68 As to operating performance (i.e. non-social metrics), there is evidence that
hedge-fund do indeed create long-term value by intervening in companies, and that they mostly target firms with weak performance relative to their peers, in order to turn these firms around.69
It is important to note that there may be a divergence between the incentives of beneficial owners and record holders. Oliver Hart and Luigi Zingales premise their model on the assumption that shareholders of operating companies would internalize societal costs. This fits in the narrative of a “society of shareholders”70, i.e. the belief that as more people become the owners of equity,
shareholder welfare becomes a proxy for societal welfare.71 However, these ultimate owners are
not the ones casting the votes. The actors that are to internalize externalities, are not the ones calling the shots. Thus, it has been argued that institutional investors are not cut out for the role of agents for society; intervening on operating level is the business model of activist investors, not of
subject to endogeneity problems by Cremers and Sepe, Stanford Law Review 2016/68(1). These authors find that “staggered boards are associated with an economically meaningful increase in firm value”. These authors narrow their conclusion in Cremers, Litov, and Sepe, Journal of Financial Economics 2017. In this article the authors find that staggered boards are value increasing for firms “engaged in long-term projects, and with important stakeholders relationships”, p. 33. The latter suggests that a one-size-fits-all approach may not be warranted in the rules
governing boards, and a firm-specific approach may be necessary. See the discussion infra section 2.1.
66 Kahan and Rock, Texas Law Review 2010/88(5). For the S&P500 these numbers are 57% and 36% respectively. 67 From 16% of the S&P 500 in 2006, to roughly 90% in 2014, see: Choi a.o., The University of Chicago Law Review 2016/83(3), p. 1127. Strine conceives the power to withhold a vote under the majority voting rule, as a more potent weapon than shareholder access, see Strine, The Journal of Corporation Law 2007/33(1), p. 11. At best, the Choi study does not per se support this position empirically.
68 Gilson and Gordon, Columbia Law Review 2014/113(4), p. 896.
69 See: Bebchuck, Brav, and Jiang, Columbia Law Review 2015/115(5). The authors find that hedge funds regularly
pick out firms low operating performance compared to their peers. This suggests that hedge fund do indeed play the specialist role of intervening on operating level, at firms where such intervention is beneficial. The authors find that hedge fund activism are followed by improvement of long term performance. See also: Brav, Jiang, and Kim, The Review of Financial Studies 2015/28(10). These authors find that hedge fund activism improves operating
performance, in their sample of manufacturing plants hedge fund activism. Again, hedge fund normally target firms with low relative operating performance. The authors also note that equity investors capture most of the upside of the turnaround, as opposed to workers also sharing in the surplus.
70 cf. Pargendler, The Journal of Corporation Law 2016/41(2), p. 398..
71 Strine makes the point that, as most of us are invested in the market because of pensions, we are “forced
capitalists”, The Journal of Corporation Law 2007/33(1), p. 4. I encountered this term first when my brother used it to describe himself.
14 institutional investors.72 However, it is important to note that this argument does not apply to
generic, i.e. not firm specific interventions.73 Where the internalization of social costs is efficient,
institutional investors will push for such measures themselves, if such expertise can be developed on a market-wide basis; as was the case for staggered boards. Similarly, it has been argued that the economy-wide exposure of institutional investors, most notably index-funds, has created “a natural alignment” between shareholders’ interest and that of society.74 This exposure might urge
institutional investors to internalize externalities.75 A recent study by has shown that corporations
show improved performance, after engagement by an activist on environmental and social issues.76
Thus, activists investors may force companies into prosocial goals, which seem value increasing over the board.
Furthermore, and in line with proposals by Leo Strine,77 it is efficient to further align the
incentives of the record holders with that of beneficial owners, without interfering with the specialization that separate business models bring (by ensuring that resulting changes can be implemented generically), as this brings down the agency costs between ultimate investors and institutional investors. One way to do this, is to require institutional investors to hold binding votes among their investors on generic sustainability and socio-economic policy, and requiring these institutional investors to exercise their voting rights accordingly. This would make for an expression of shareholder welfare. This proposal builds upon the framework of Oliver hart and Luigi Zingales, but takes into account the structure of ownership, that they seem to ignore.
One final caveat: The business model of institutional investors does not only bind them to favor generic policies and interventions; it binds them to earning returns. If the earning of returns by institutional investors would necessarily lead to growth, it might well be that this (fundamental)
72 Gilson and Gordon, Columbia Law Review 2014/113(4), p. 897: The authors note that “this specialization is more
efficient than having a single actor play both roles. Each requires a different business model, and combining them may degrade the performance of both.”
73 Governance issues are examples of such generic interventions. 74 See: Kraakman a.o. 2017, p. 97.
75 The analysis becomes more complicated if these externalities are located in areas to which such investors have
less exposure. The abhorrent circumstances in cobalt mines in Congo serve as an example. Institutional investors are not (directly) exposed to the social costs that such circumstances create. In fact: They seem to profit and extract the gains.
76 Dimson, Karakas, and Li, Review of Financial Studies 2015/28(12).
77 Strine, U of Penn, Inst. for Law & Econ Research Paper 2019/19-39. Proposals include to change fiduciary duties
of institutional investors; to have proxy advisors to take (E)ESG concerns into account; to create certain disclosure obligations; and to require record holders to take into account the preferences of beneficial owners in voting.
15 business model is incompatible with sustainability. That would mean that the business model itself is the externality.78 More research into this question seems warranted.
In conclusion: Institutional investors have more incentives to process and analyze generic information, than they have to process and analyze firm-specific information. Where social costs can be taken into account by implementing generic policies, institutional investors are well placed to do so; as far as their incentives are aligned with those of their ultimate investors. Where social costs are better taken into account by firm-specific policy, institutional investors are less able to do so. Insitutional investors may be further incentivized to take externalities into account, by having their investors vote on broad policy outlines. Whether shareholders are well placed to ensure social welfare is maximized, thus depends on the nature of the policies that should internalize externalities.79 If the (fundamental) business model of institutional investors the cause
of externalities, allocating control to shareholders is necessarily problematic. In short: shareholders cannot be said to necessarily have the ‘right’ incentives to internalize externalities to a socially optimal level, without a number of contestable assumptions.
3. Stakeholderism
I now turn to discussing stakeholderism. Stakeholderism allocates ultimate control to the board. First I discuss the concept itself, and how it differs from shareholder primacy. Stakeholderism faces conceptual problems. These conceptual problems play a role in the discussion on directors’ incentives. Shareholder primacy allocates control to shareholder, and assumes these shareholders to act in their own interest, stakeholderism allocates control to the board, and assumes the board to act in some other stakeholder’s interest. It is thus necessary to ask first in whose interest the company should be run. This intersects with the literature on corporate purpose. What are the
78 Such is argued by Jackson 2017. The author argues that current growth rates are not sustainable. Notably, the rate
of decoupling is far below the what is necessary. He concludes that growth itself is the problem. This might be a problem inherent in capitalism. If the earning of returns on capital is rewarded with more capital; those with the greatest returns grow their relative share of capital the fastest; giving these actors more (relative) control over the capital stock.
79 I make this argument again, and develop it further, in relation to directors and firm-specific information, in section
16 incentives of directors in the current economic framework? How do the incentives of directors to maximize social welfare differ from those of shareholders?
3.1 What is Stakeholderism; in whose Interest?
As indicated in the introduction, recent debate U.S. debate has seen a move to stakeholderism as a response to social-economic and environmental concerns. If stakeholderism means: Engaging with several stakeholders is value-increasing, therefore corporations should engage with their stakeholders, then it is still shareholder primacy.80 In fact: if anything, this is precisely how one
should want shareholder primacy to work.81 Stakeholderism should thus be understood as giving
independent value to stakeholder concerns, regardless of the impact on firm value. The power to pursue such concerns is given to directors, by allocating control to them. It gives directors room to internalize externaites.
Stakeholderism faces methodological problems, as to who should be considered stakeholders, and how trade-offs should be resolved.82 For example, should a green start-up
consider the effects it may have in the fossil fuel industry? Should it consider the effect it may have on future generations? How should, if at all, such claims be converted to monetary values.83
Such questions, and the trade-offs that they pose, depend on a vision of society; i.e. a political vision. If directors are powered by concerns for their reputation and society, and have a vision of sociery that roughly aligns with that of the society in which they are situated, it seems that they are able to make such trade-offs. That is not to say these trade-offs will be made optimally every time, as ‘optimally’ itself is open to interpretation. Rather, it means that such questions are not impossibly and inendlessly open-textured, but answerable through a discursive political discussion within society. Stakeholderism maximizes social welfare if corporate ‘questions’ are resolved in a way that ‘fits’ society, and decisions are taken in a similar way. Stakeholderism thus turns directors into political agents. This conception of stakeholderism gives an underpinning to further political (i.e. governmental) control over board compositions. Without such control, stakeholderism stands at risk of being a way of privatising reform; or as granting control over political decisions to
80 cf. Bebchuck and Tallarita, Cornell Law Review 2020/December (forthcoming), p. 12.
81 For evidence that stakeholder relations may lead to higher returns, which used to be mispriced by the market, see:
Arian a.o., CalPERS Sustainability & Finance Symposium 2013.
82 Bebchuck and Tallarita, Cornell Law Review 2020/December (forthcoming), p. 21 83 Id. p. 17-21. This is the ‘hard-to-value problem’, mentioned supra 17.
17 directors.84 Through discursive political discussion a (contingent and shifting) vision of social
welfare may be adopted. Political control over directors ensures that corporate decisions conform to such vision.
3.2 Incentives of Directors:
First, as to the risk-appetite and incentive to internalize externalities for directors, the following. In the context of ‘regular’ operating companies, it is generally considered that directors are more risk-averse than diversified investors. Their human capital investment means that they are less diversified, and so are more sensitive to idiosyncratic risk.85 As regards the incentive to internalize
externalities, it stands to reason that they are less induced to take societal costs into account, unless they are disproportionality affected by such costs. That is, diversified investors in the end bear more of the societal costs than undiversified directors. An exception would be the societal costs to a plant relocating, if the directors of said plant live in the town from which it will depart.86
Much of corporate law can be understood as a response to agency costs.87 Agency costs
arise out of agency problems. The manager-shareholder agency problems arises out of the purported incentives of managers: if these are not tackled by legal strategies, to align these with other constituencies, managers will act only in their own interest.88 Whether this is truly the case,
and whether board insulation is not value-increasing, seems not settled. Recent scholarship has
84 Mariana Pargendler has argues that corporate governance is presented as an “off-the-rack solution to a variety of
problems”, The Journal of Corporation Law 2016/41(2), p. 367. Much reform can be understood as based on the assumption “that private sector checks and balances are the best cure for private sector ills”, p. 377. Similarly, Marcel Kahan and Edward Rock have argued that corporate governance fulfills a symbolic function that reconciles reality with our ideals, as they note that many corporate governance mechanisms have little real-life impact: Kahan and Rock, Boston University Law Review 2014/94(6). Matteo Gatti and Chrystin Ondersma have argued that corporate governance reform may provide both a shield and a sword to halt change. Such reforms use up political capital that may be more productively employed battling those problems. Stakeholderism may provide corporations with justifications for lobbying efforts, as corporations may argue to lobby for a prosocial, whereas in reality they do the opposite, in Journal of Corporation Law/forthcoming.
85 See: Armour and Gordon, The Journal of Legal Analysis 2014/6(1), p. 51. The authors posit that this problem is
solved by “carrots” and shields. The former being equity-linked compensation, the latter being the business judgement rule, which may shield directors from liability.
86 It might be that they attach too much value to such an externality in such a case. Perhaps the off-setting benefits to
a new community would far outweigh the costs to the old community. This further illustrates the methodological issues mentioned above.
87 See the discussion supra 8. 88 cf. Kraakman a.o. 2017, chapter 2.
18 cast doubts on this received wisdom.89 In any case, the rise of institutional investor ownership has
coincided with the change in U.S. corporate governance of a managerialist model to shareholder primacy.90 The growing influence of shareholders in the U.S. has also had its impact on the
incentives of directors in their day to day decision making. As Leo Strine explains, many (independent) directors sit on multiple boards, and if these directors are seen and considered by institutional shareholders to be ‘difficult’, these directors may face withhold campaigns at other firms, or not get invited onto other boards. Thus, many boards are ready to listen to institutional investors, whenever these “rattle [their] toy sabers”.91 This is just, however, one equilibrium in the
labor market for directors where multiple may occur.92 That is, as directors signal their reputation
to other boards, this reputation may be either board-friendly or shareholder-friendly. 93 So, there
can be shareholder-friendly, or board-friendly equilibria. This latter category is lacking in the narrative put forward by Strine. Managerialist boards may search for managerialist directors. The labor market is a way to ‘deal with the agency conflict between shareholders and board. If there is a labor market for directors, as in the U.S., the incentives of directors are skewed towards those of shareholders. As I will discuss below, however, such a market does not exist in the Netherlands, in a similar fashion, as shareholder exercise little to no control over director-appointments. We may thus expect a more board-friendly equilibrium in the Netherlands.
Besides the labor market aligning directors’ incentives with those of shareholders, executive pay functions similarly. Executive pay for the S&P 500 consisted of 60% equity and
89 Whereas some studies have argued that board insulation destroys value, see: Bebchuck, Columbia Law Review
2013/113(6). Other studies have found that board insulation may increase value. Staggered boards are, in certain cases, value-increasing, see: Cremers, Litov, and Sepe, Journal of Financial Economics 2017, and the discussion supra 65. Takeover defenses may also be value-increasing, see: Johnson, Karpoff, and Yi, Journal of Financial Economics 2015/117(2). Takeover defenses bond a corporation’s explicit and implicit commitments to its customers. Takeover defenses (i.e. who decides in takeovers) substitue for contracts. This may “increase [firm] value because they economize on contracting costs”, p. 330.
90 cf. Hansmann and Kraakman, The Georgetown Law Journal 2001/89(2). See also: Rock, ‘Adapting to the New
Shareholder-Centric Reality’, University of Pennsylvania Law Review 2013/161(7). Rock provides, among other things, a historical overview of the reactions in U.S. corporate governance to agency costs. He notes that the core problem seems under control, p. 1926.
91 Strine, The Journal of Corporation Law 2007/33(1), p. 15. This point has been made before: Bebchuck and
Tallarita, Cornell Law Review 2020/December (forthcoming), give a short summary of the literature, p. 32. These authors note that labor and control markets ensure that directors have incentives to be viewed favorably by shareholders and the CEO.
92 Levit and Malenko, The Journal of Finance 2016/71(2). The authors derive a model for how reputational concerns
affect corporate governance.
93 The key insight in this framework is that ‘more’ governance, leads to more governance, due to signaling. The
19 40% cash in 2018.94 CEO pay also is on average also linked for over 60% to shareholder value.
Bonuses are often based on financial performance.95
I have argued in this section, so far, that directors are less likely to internalize externalities to the level that diversified investors would want, and that directors’ incentives are aligned with shareholders (possibly) through the labor market, and through compensation.96 These three
arguments would seem to imply that directors are poor guardians for the interests of other constituencies.97 These arguments, however, assume that directors of companies will act solely in
their own interest. As discussed above for shareholders 98, if directors place some weight on the
social surplus associated with their decisions, there will be a trade-off in their own gain associated with a given decision, and that of society. Where the interests of shareholders are sufficiently aligned with that of society at large, the trade-off largely disappears, as compensation packages and the incentives arising out of the labor market, will reward ‘prosocial’ behavior. It seems unlikely that such incentive structure would work optimally. As discussed above,99 directors have
firm-specific information that investors do not have; similarly they have sector-specific information that might not be processed and analyzed in relation to specific corporations. I have discussed how institutional investors have less incentive to obtain, process and analyze such information.100 In reality, compensation packages, and shareholder primacy may thus lead to
results that do not maximize social welfare. The incentives of directors to act to maximize social welfare, in a stakeholderist-regime, thus depends on the low-powered incentives of directors, and their ideas of social welfare.101 The success of shareholder primacy depends critically on the
alignment of the high-powered incentives to the interests of ultimate investors in its attainment of an optimal level of social welfare. The success of stakeholderism, on the other hand, would depend
94 Burton and Kim, Harvard Law School Forum on Corporate Governance 2019.
95 Bebchuck and Tallarita, Cornell Law Review 2020/December (forthcoming), pp. 35-36.
96 Which, in line with the discussion above increases firm value. The reverse is also true: Bebchuck shows that
empirical evidence suggests that “board insulation has long-term costs that are likely to be significant”, Columbia Law Review 2013/113(6), pp. 1679-1681.
97 Id. Bebchuck had made this point in 2002 already, see: Bebchuck, The University of Chicago Law Review
2002/69, p. 1023.
98 supra 2.2.
99 Fama and Jensen, Journal of Law and Economics 1983/26(2). See also the discussion supra 29. 100 supra 2.3.
101 That such ideas do not need depend on metrics such as GDP is argued by Jackson 2017. See also: Collier 2018.
20 on low-powered incentives of directors of companies, and may be dependent on political control over boards.102
4. Control Allocation of Large Business Corporations under Dutch law.
In this section, I will provide a high-level oversight of control allocation in large Dutch business corporations. I will do so by focussing on board composition and control. Which constituents can appoint and dismiss board members? What other general control rights are given to the board, and the shareholders? And in what way do rights have to be exercised? That is: Can they be exercised in any interest, or are constituents bound to act in a specific interest? I answer these three question by first (quickly) pointing out the structure of the rules which govern these questions. I go on to discuss the structure regime, which is the Dutch framework governing board control. I then provide an overview of how competences are allocated between board and shareholders. I end with a discussion of how these competences should be exercised, and show that not just the board, but also shareholders are bound in the exercise of their powers. I do not discuss the rules on takeovers under Dutch law, as they play only a minor role in Dutch corporate governance. Suffice it here to point out that boards can ‘just say no’ to takeovers.103
4.1 The General System of Corporate Law Codification in the Netherlands:
Much of Dutch private law is codified in a civil code, as is common in civil law countries.104 The
Dutch Civil Code is made up out of nine books.105 Books contain titles which contain sections.
Book 2 lays down rules governing legal persons.
102 It may be put that this is a trusteeship strategy to attain maximum social welfare. See Kraakman a.o. 2017,
section 2.2.3. On the law school building of the University of Michigan it reads: “Upon the bar depends the
continuity of constitutional government and the perpetuity of the republic itself.” A similar point could be made in a stakeholderism-society for the directors of its companies. As to the quote, see:
https://repository.law.umich.edu/corbels/135/.
103 For the many ways in which Dutch takeover defenses may be structured: Keijzer and Vletter-van Dort, Ars Aequi
2016/Mei. Most notable is the ‘stichting’-defense, which has been likened to the poison pill, see: Pacces 2007, p. 457. See also: Raice and Patrick, Wall Street Journal, 2015/April 22nd.
104 For a history of European (including, Dutch) codifications, see: Lokin and Zwalve 2001.
105 Numbered 1 to 10, excluding 9. Orginally the ninth book was to deal with intellectual property rights. It never
came into force. See: Spath and Visser, Ars Aequi 2017/Mei. References to articles are made as book:article(subsection), so 1:2(3) refers to subsection 3 of article 2 of book 1.
21 Title 1 lists general provisions. Two of its provisions are of importance to corporate governance.106 First, it contains article 2:8. This article holds that a legal entity and those who are
involved in its organization pursuant to law or its charter, are to behave towards each other as required by reasonableness and fairness.107 This entails that shareholders and directors must
behave towards each other in an equitable manner. Article 2:9 establishes director liability in case of mismanagement.
Title 2 provides the framework on public companies. It contains eight sections108 and lays
down the organizational structure of the public company. It lays down the rules of important corporate governance issues, including the allocation of control between the board and the shareholders, between which corporate control is divided.109 Large public companies are subject
to the ‘structure regime’.110 This regime can be characterized as oligarchical and of a defensive
nature, as it allocates relatively much power to the board.111 In subsequent discussion I will assume
that this regime applies, as it does apply to the largest Dutch corporations.112 I do not discuss the
mitigated structure regime.113 Corporations which need to apply the rule of the structure regime
are the corporations that arguably have the biggest impact on sustainability. An analysis of the rules governing these corporations is therefore the most warranted.
106 This is also not to say that other provisions in title 1 are of no importance to corporate governance. These two
provisions, however, are of special importance.
107 Reasonableness and fairness pervade Dutch private law, and conceptions thereof drive many hallmark cases. On
the importance of this pair in Dutch corporate law, see: Van Schilfgaarde 2016.
108 1. General provisions, 2. The shares, 3. The capital of the public company, 4. The general meeting, 5. The
exectuive board of the public company and the supervision of the board, 6. The supervisory board for large public companies, 7. Equal distribution of seats between men and women, 8. Related party transactions.
109 cf. Van Ginneken 2010, section 2.2.1.
110 The rules of which are given in section 6. The elements of a large public company are given in article 2:153(2).
There must be a placed capital of at least €16 million, a workers council must be required by law and implemented, and the legal entity and dependent entities must have at least 100 employees. Placed capital is an important Dutch legal concept: it suffices here to state that it is roughly similar to balance sheet equity. See:Van Schilfgaarde 2017, chapter XV, and section 136. A history of the structure regime is provided in Van Solinge 2019, section 5.1. Until 2004 the structure regime also allocated several competences to labour, in line with the more German
codetermination-inspired approach adopted in 1971. Currently, the competences awarded to labour do not materially affect the main mechanisms of corporate governance, and I will not discuss them, save for the discussion infra 120. Interested readers are referred to Van Solinge 2019.
111 Van Ginneken 2010, section 2.3.1.
112 In 2015, it applied to approximately 400 corporations. This number has been relatively stable throughout the
years. See: Van Solinge, 2019, section 460. All Dutch corporations whose shares are traded on Euronext Amsterdam are subject to this regime.
113 Corporations of which at least half of placed capital is held by another corporation of which a majority of
employees works outside of the Netherlands, do not have to apply the rules on the appointment and dismissal of the management board. This is referred to as the ‘mitigated’ structure regime. See: Article 2:155.
22 4.2 Board Composition under the Structure Regime:
The structure regime does two things.114 First, it requires corporations to implement a supervisory
board, and governs its composition, and the appointment, and dismissal of its directors.115 Second,
it allocates certain competences to the supervisory board.
The supervisory board must have at least three members.116 The maximum term length is
four years.117 The Dutch Corporate Governance Code (Code) sets the term-length for listed
companies at four years, with the opportunity for one reappointment.118 The latter reappointment
may be extended by two years, twice. The maximum term is thus twelve years. The general meeting appoints directors to the supervisory board, which are nominated by the latter.119 The
general meeting may reject the nomination by absolute majoirty of votes cast, if the rejection votes represent one third of the capital of the entity.120 The supervisory board may appoint the nominee,
if the nominee is neither appointed nor rejected by the general meeting. If the one third-quorum is not reached, a new general meeting will have to be called, in which the quorum does not apply.121
The non-mandatory rules relating to appointment may be changed by amending the articles of incorporation; and with the consent of the supervisory board and worker’s council.122 Whereas
only the supervisory board can ask the enterprise chamber of the Court of Appeals in Amsterdam
114 cf. Van Solinge 2019, section 459.
115 Since 2013, a one-tier board is also possible. Rules applying to the management and supervisory board apply
analogously to executive and non-exectuvie directors; articles 2:129a and 164a. See also: Van Schilfgaarde 2017, section 43.
116 Article 2:1258(2). If there are less than three members, the supervisory board must take measures to fill the
vacancy as soon as possible. It may still exercise its powers if it has less than three members, see: KG 1988/250 (Van Mook/Mulder Boskoop).
117 Article 2:161(1).
118 The most recent version is from 2016 and can be found on: www.mccg.nl. It is binding in a ‘hard’ and in a ‘soft’
way. It is binding in a hard way, as listed companies must file a report on corporate governance with their annual account, in which they confirm to follow the code, or explain why they do not (‘comply or explain’). Article 2:391 lid 5 and Stb. 2017, 332. In a soft way, the Dutch Supreme Court has held that the Code influences what consitutes as reasonable and fair behaviour, as meant in article 2:8, and what consitutes mismanagement, as in 2:9. RO 2010/55 (ASMI).
119 Article 2:158(4)-(6). Both the general meeting and the worker’s council have a right to recommend nominees to
the supervisory board. The supervisory board is under no obligation to give effect to the recommendation, save for the fact that it must consider the nomination as required by article 2:8, i.e. in reasonable and fair terms. The worker’s council does have an additional ‘strong’ recommendation right, to one third of the supervisory board’s seats. To these seats, it may issue a binding recommendation to the supervisory board. 31% Of the worker’s councils in international groups (to which a slightly modified version of the structure regime applies) does not exercise this right. See: Meyer, Tijdschrift Recht & Arbeid 2016/45.
120 Article 2:158(9). By capital I mean ‘placed capital’, see supra 110. This is a mandatory rule: Article 2:158(12). 121 Article 2:158(9). This is a mandatory rule: 2:158(12).
