Corporate Governance at Wolters Kluwer
Thesis, July 2004
University of Groningen, the Netherlands Faculty of Management and Organization Author: Roderick Wijsmuller
Student ID: 1065513
Corporate Governance at Wolters Kluwer
A benchmark on the
Dutch Corporate Governance Code
Amsterdam, July 2004
University of Groningen, the Netherlands Master Accountancy
Author: Roderick Wijsmuller Student ID: 1065513
First reader: Drs. H.A. Snapper RA Second reader: Dr. R.B.H. Hooghiemstra By order of: Wolters Kluwer NV
Company supervisor: M.A.J. de Haas RA
“The books are cooked to meet or exceed analysts’ forecasts; workers are underpaid and executives are overpaid; board members are hand picked by management to help plunder the firm at the expense of the shareholders and creditors; etc., etc.”1
1 Takeovers, Restructuring & Corporate Governance, p.595
Executive Summary
Corporate governance is becoming more and more important to listed companies. Several corporate governance codes have been established throughout the past few years, for example: the Sarbanes-Oxley Act, the Combined Code on corporate governance and the Dutch Corporate Governance Code. The latter covers all companies that are listed in the Netherlands.
As Wolters Kluwer is a Dutch listed company, it has to comply with the regulations of the Dutch Corporate Governance Code. Taking this Code and the accompanying legislation and regulations into account, Wolters Kluwer was interested in its compliance with the Dutch Code compared to other Dutch listed companies.
The research objective is to develop an insight on where Wolters Kluwer stands relatively to other companies on implementing the Dutch Corporate Governance Code, and to make recommendations on aspects where Wolters Kluwer is lagging behind organizations in the peer group. Furthermore the research objective is to provide an outlook on the compulsory internal control statement.
To provide Wolters Kluwer with this insight I have based the research on benchmarking. This is the main theoretical framework of the thesis. I have introduced the reader to benchmarking and explained the purpose of it. Benchmarking includes more than one entity in the research.
Therefore I have compiled a peer group of companies. This peer group has been compiled on four selection criteria. The peer group consisted of two sub-groups. The first group included Dutch companies. These companies were used to provide Wolters Kluwer with an insight to its compliance. The latter group was used to provide the outlook on the internal control statement and consisted of British companies.
During the first phase of the project I came to the conclusion that I needed a strong measuring framework to gather information for the research in an effective manner. This measuring framework was another fundamental step in the research. It allowed me to gather the information I really required and later on, to analyze the information in an effective and efficient way. I have established another measuring framework for the outlook on the internal control statement for the same reason.
While executing the research it occurred to me that the subjective judgement of the
researcher played a large role. Therefore I tried to concretize the measuring framework to ban a little of the subjectivity. Therefore I have established a codebook with limited scoring possibilities. This made the research more concrete and it increased the objectivity.
The outcomes of the research were promising for Wolters Kluwer, although I have to say that a lot of improvement could be achieved. The following figure provides the reader with an
overall view of compliance with the Dutch Corporate Governance Code of the companies in the peer group.
44% 49% 51%
57%
64% 66%
74% 75% 75%
88%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Compliance (%)
Wessanen CS
M KL
M Heineken
Wo lters Kluwer
VNU Nu
mico TPG
Bu hrma
nn Philips
Figure 8.1: General overview of the outcomes
The outcomes of the research place Wolters Kluwer in the middle of the peer group with a compliance of 64%. As Wolters Kluwer beholds Philips as the leading company and
compares its financial reporting with that of Philips, this level of compliance leaves much room for improvement. This figure provides Wolters Kluwer with the insight in where it stands among the companies in the peer group as well.
To enable Wolters Kluwer to increase its compliance and to improve its position in the peer group, I have made some recommendations.
The main recommendation is that Wolters Kluwer has to completely abolish the regime of depositary receipts for shares. On its own this will prove impossible. Therefore all other recommendations will be geared to this main recommendation, and are aimed to increasing shareholder commitment and participation that in the end will enable Wolters Kluwer to abolish the regime for depositary receipts for shares.
It proved very hard to provide a reliable outlook on internal control statements. The reason for that is that the Dutch Code only takes effect from 1 January 2004. In spite of that, I managed to make some recommendations, albeit general ones.
The first recommendation is that Wolters Kluwer has to scrutinize the requirements on an internal control statement as laid down in the Dutch Corporate Governance Code. The statements will eventually evolve to a ‘standard format’. In that process Wolters Kluwer has to play an active role. Furthermore it might prove useful to include some company specific information. And last but not least, Wolters Kluwer must communicate its findings on key controls with its shareholders, which will improve shareholder commitment.
Preface
For most corporates the period for the annual report has passed again. Time to evaluate but also a time to look ahead. In the area of corporate reporting the presentation of the Dutch Corporate Governance Code by the Tabaksblat Committee was probably one of the more important events.
The Code provides detailed guidelines on the influence of shareholders, the responsibilities of the Management Board and Supervisory Board and the role of the external auditor. The Committee Tabaksblat has recommended to the government that companies include a separate chapter on corporate governance in their annual reports. To make sure the code is taken seriously, the committee recommended the government to issue legislation on this issue. But most corporates already have paid significant attention to corporate governance in 2003: at their websites, in their annual reports and during their annual general meetings.
But for Wolters Kluwer it is rather impossible to keep track of all the achievements of our peers on the implementation of the principles and best practices provided in the Tabaksblat Code. During the first six months of 2004, Roderick Wijsmuller has gathered information in a structured way on the achievements of these peers. Even though the conclusions are encouraging for us, his recommendations will give further ‘food for thought’ within Wolters Kluwer. Tabaksblat remains on top of the agenda.
Mark de Haas, July 2004
Vice President Corporate Accounting Wolters Kluwer NV
Table of Contents
Executive Summary
Preface
1 Introduction 1
2 Organizational Description 4
2.1 Introduction 4
2.2 History 4
2.3 Corporate profile 5
2.4 Strategy 5
2.5 Online migration 6
3 Problem Definition 8
3.1 Introduction 8
3.2 Introduction to the problem definition 8
3.3 Problem definition 9
3.3.1 Research objective 9
3.3.2 Central question 10
3.3.3 Research model 10
3.3.4 Sub-questions 11
3.4 Methodological justification 11
3.5 Sources of information 11
3.6 Theoretical framework 12
4 The Corporate Governance Codes 14
4.1 Introduction 14
4.2 Corporate Governance: a brief overview 14
4.3 The Dutch Corporate Governance Code 15
4.4 The Combined Code on corporate governance 17
5 The Peer Group 19
5.1 Introduction 19
5.2 What is peer group analysis? 19
5.3 The purpose 20
5.4 The measuring framework 21
5.5 The peer group 21
5.5.1 The selection criteria 21
5.5.2 The compilation of the peer group 23 5.5.3 Justification of the selected companies 23
6 The Measuring Framework 26
6.1 Introduction 26
6.2 The reason to form a framework 26
6.3 The forming of the framework 27
6.3.1 Selected publications and in-depth-reading 27 6.3.2 Listing and categorizing of the measuring points 29
6.3.3 The final measuring framework 29
6.4 Internal Control framework 30
7 Introduction To The Information Analysis 32
7.1 Introduction 32
7.2 The information 32
7.2.1 Information sources during the project 32
7.2.2 Comments to the information sources 32
7.3 Introduction to the analysis 34
7.3.1 Concretizing the measuring framework 34
7.3.2 Data analysis 37
8 Data Analysis and Comparison of Results 39
8.1 Introduction 39
8.2 General overview of the outcomes 39
8.3 Analyses of the differences 40
9 Internal Control Statement 49
9.1 Introduction 49
9.2 Compulsory topics of the internal control statement 49
9.3 Measuring framework 52
9.4 Outcomes of the measuring framework 53
9.4.1 Outcomes of the British companies 53
9.4.2 Outcomes of Wolters Kluwer annual report 2003 54 9.4.3 Future internal control statements of Wolters Kluwer 55
10 Conclusions and Recommendations 57
10.1 Introduction 57
10.2 Conclusions and recommendations on compliance of Wolters Kluwer
with the Dutch Corporate Governance Code 58
10.2.1 Conclusions 58
10.2.2 Recommendations 61
10.3 Conclusions and recommendations on the internal control statement 64
10.3.1 Conclusions 64
10.3.2 Recommendations 66
Word of Thanks 67
Bibliography 68
Appendices
I Methodological Justification II A brief overview of the companies
III Measuring framework corporate governance IV Measuring framework internal control statement V Codebook and research data
VI In retrospect
Chapter 1 Introduction
“The books are cooked to meet or exceed analysts’ forecasts; workers are underpaid and executives are overpaid; board members are hand picked by management to help plunder the firm at the expense of the shareholders and creditors; etc., etc.”2
These are some of the remarks people often make when companies increase the salaries of their executive directors even when the results of the company are poor. The ordinary shareholder and private investors call for more transparency about the issues mentioned in the quote at the beginning of this chapter.
During the recent years several corporate governance codes have been drawn up to increase shareholders’ faith in the company and to improve transparency of the companies. The most recent corporate governance code is the code compiled by the Tabaksblat Committee: The Dutch Corporate Governance Code.
This research handles about the compliance of Wolters Kluwer with the Dutch Corporate Governance Code. Wolters Kluwer is a leading multinational publisher and information services company. The company’s core markets are in the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors3.
The research objective is to develop an insight on where Wolters Kluwer stands relatively to other companies on implementing the Dutch Corporate Governance Code. Furthermore the research objective is to make recommendations on those aspects in which Wolters Kluwer is lagging behind organizations in the peer group. Furthermore the research objective is to provide an outlook on the compulsory internal control statement.
The outcomes of this research provide Wolters Kluwer with a view on where it stands among the companies in the peer group. Is Wolters Kluwer on the right track with implementing the Dutch Corporate Governance Code? Is Wolters Kluwer trailing behind? Or is Wolters Kluwer one of the leading companies with implementing the Dutch Corporate Governance Code? In chapter ten I will provide the reader with my conclusions on where Wolters Kluwer stands among the peer group and with my recommendations how to improve its position in the peer group.
The reader of this thesis has to bear the following note in mind. This research can only provide the reader with compliance figures at a given moment in time. This means that the outcomes of this research could be out-of-date at the time this thesis has been completed.
2 Takeovers, Restructuring & Corporate Governance, p.595
3 Wolters Kluwer Annual Report 2003
The Dutch Corporate Governance Code was issued 9 December 2003. Therefore there was little information available about to which extent the companies implemented the code and how much transparency they fostered. This research provides the reader with an overview of the compliance with the Tabaksblat Code of the companies in the peer group.
The research is based around the Dutch Corporate Governance Code. This code is also referred to as the Tabaksblat Code. During the research I used different terminologies for the Dutch Corporate Governance Code. Therefore, if one reads the ‘Code’, the ‘Tabaksblat Code’, the ‘Corporate Governance Code’ or any other reference to a code, please assume that I refer to the Dutch Corporate Governance Code. Furthermore I discussed the British Combined Code on corporate governance. During the research I have used several different references to the Combined Code. Therefore the same counts for the Combined Code as for the Tabaksblat Code, when I refer to the ‘Code’ or ‘British Code’, please assume that it is the British Combined Code on corporate governance. The context of the text should provide the reader with enough information to understand if I refer to the Dutch Code or the British Code.
The arrangement of the further chapters of this thesis is as follows:
First of all, in chapter two, I will provide the reader with an organizational description of Wolters Kluwer. In this chapter I discuss the history, the strategy and the core markets of Wolters Kluwer.
In chapter three I discuss the problem definition of this research. I will start that chapter with an introduction to the problem definition followed by the actual problem definition. I will provide the reader with the sources of information I will use during the research and the theoretical framework I chose to setup the research around.
As mentioned in this introduction I use two corporate governance codes. In chapter four I will discuss them both. First of all I will provide a brief overview on the recent history of corporate governance. Subsequently the Dutch Corporate Governance Code will be discussed followed by the British Combined Code on corporate governance.
Chapter five discusses peer group analysis. Benchmarking forms the basis of this analysis. In chapter five I will discuss the phases of which benchmarking consists. Furthermore I have established a peer group. I give an account to the compilation of the peer group and provide a justification on the selected organizations as well.
To perform the benchmark I have compiled two separate measuring frameworks; one for each part of the research. In chapter six I describe the process of forming those frameworks. I will focus on the measuring framework that measures the compliance of the companies in the peer group and Wolters Kluwer with the Dutch Corporate Governance Code. Further on in that chapter I will highlight the compilation of the measuring framework for the outlook on the internal control statement.
In chapter seven I will describe how I have processed the data I gathered during the research and which sources of information I used to gather information on each company in the peer
group. Furthermore I will discuss the codebook I compiled for the processing of the data in an Excel spreadsheet.
Chapter eight consists of the analyses of the data I have gathered during the research. This chapter forms the basis for the conclusions and recommendations that I will make in chapter ten. I will analyze the data in different ways. First of all I will analyze the data according to the categories I have established in the measuring framework and the codebook. Then I will also compare similar companies, such as companies with a trust office, AEX companies and AMX companies. The insights of these analyses will strengthen the conclusions and
recommendations to the research.
Chapter nine deals with the second part of the research; the outlook on the internal control statements. Before I provide the outlook I will state the requirements on internal control statements according to the Dutch Corporate Governance Code. Then I will discuss the measuring framework established for this part of the framework and provide the reader with the outcomes. Furthermore I will analyze what Wolters Kluwer intends to disclose in the annual report on 2004. I will end the chapter with the outlook.
In the final chapter, chapter ten, I will make conclusions and recommendations to improve the compliance with the Dutch Corporate Governance Code of Wolters Kluwer.
Chapter 2 Organizational description
2.1 Introduction
The purpose of this chapter is to provide the reader with some insight on Wolters Kluwer’s history and in which way the business is run. Therefore I will start with introducing the reader to the history of Wolters Kluwer. Furthermore I will highlight the corporate profile and the strategy of Wolters Kluwer. In the corporate profile the core markets and the customers that Wolters Kluwer serves will be stated. Paragraph four describes the strategy of Wolters Kluwer. In paragraph five the key priority within each division will be highlighted: online growth and migration.
2.2 History
Three family companies originally founded Wolters Kluwer in the late nineteenth century and the early twentieth century. Through a series of mergers and acquisitions Wolters Kluwer emerged in its current form in 1987.
The year 1987 is a key point in the history of Wolters Kluwer. In 1987 Elsevier tried to acquire the shares of Kluwer. Kluwer has a strong legal foothold in the Dutch market, which Elsevier lacked. So Kluwer fitted well in Elsevier’s portfolio. Kluwer was not prepared to co-operate with a friendly takeover, so Elsevier prepared a hostile takeover bid. As a contra measure Kluwer decided to merge with Wolters Samsom. Therefore Wolters Samsom had to acquire the majority of shares in Kluwer. What followed was a ‘battle’ between Elsevier and Wolters Samsom to acquire the much-needed majority of shares to establish the merger. Wolters Samsom succeeded in acquiring a small majority of the shares and the merger with Kluwer was established4.
Ever since, the new combination Wolters Kluwer has been very successful. Through several mergers with small and medium-sized companies Wolters Kluwer managed to become a multinational publisher with its corporate office in the Netherlands. Wolters Kluwer today has annual revenues of EUR 3.4 billion, employs approximately 19,500 people worldwide, and maintains operations across Europe, North America, and Asia Pacific5.
4 Van Gutenberg tot Gates, p. 90-91
5 Wolters Kluwer Annual Report 2003
2.3 Corporate profile6
Wolters Kluwer is a multinational publisher and information services company. The
company’s core markets are in the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has strong footholds in the majority of its markets.
Across all of its markets, Wolters Kluwer has strong and enduring brands. The world wide activities of Wolters Kluwer are aimed at a select customer group: professionals, such as:
• Accountants, lawyers, fiscal and tax experts
• Doctors, nurses and other medical specialists
• Banking, insurance and securities professionals
• Teachers, students and educational institutions
• Pharmaceutical companies, pharmacists, and hospitals
Wolters Kluwer provides its customers with products and services that assist them in making better decisions. The added value of Wolters Kluwer’s products contributes directly to the success of its customers. Relationships with customers are built on partnership and co- operation. Wolters Kluwer strives to deliver the right information, at the right time, and in the right medium.
Therefore Wolters Kluwer’s vision is to be The Professional’s first choice. Wolters Kluwer strives to provide information, tools and solutions to help professionals make their most critical decisions effectively and to improve their productivity. Within this vision, Wolters Kluwer builds on its brand and market positions to provide value to its customers through current, accurate, and expert information, leading edge technology and software solutions, and superior customer service.
2.4 Strategy
Wolters Kluwer is executing a three-year strategy to deliver improved value to shareholders, as outlined by its chairman, Nancy McKinstry, during the Strategy Update of October 30, 20037. The key components of the strategy are to:
• Invest in growth around leading market positions;
• Reduce costs through structural improvements;
• Reorganize the business to deliver growth.
6 Wolters Kluwer Annual Report 2003
7 Strategy Update 2003
Invest in growth around the leading market positions
Wolters Kluwer’s priority is to grow its revenues. Wolters Kluwer is the market leader in most of its markets. These positions are valuable and sustainable. Most importantly, they provide growth opportunities and a foundation for the future. Wolters Kluwer’s investments in growth are concentrated on strengthening its customer relationships, delivering end-to-end solutions, and driving online products and services to create integrated workflow tools8.
Reduce costs through structural improvements
Wolters Kluwer’s past approach of rapid acquisition and limited integration now gives Wolters Kluwer an opportunity to combine its business more effectively to gain scale benefits and improve operating performance. Wolters Kluwer is restructuring its operations to reduce costs and improve its flexibility. This operational efficiency and agility is particularly important as Wolters Kluwer continues to migrate from printed products to online and software solutions across its organization9.
Reorganize to deliver growth
A first step in Wolters Kluwer’s strategy was reorganizing its business into five divisions, which represent the leading market positions. This new organization structure became effective January 1, 2004, and provides Wolters Kluwer with a much stronger ability to focus on strengthening relationships with customers. Wolters Kluwer’s goal is not only to improve their market focus, but also take advantage of scale efficiencies in product development, technology, and sales and marketing10.
2.5 Online migration11
Investment in online growth and migration is central to the Wolters Kluwer strategy. Revenues from electronic products have grown from 22% of sales in 2001 to 31% in 2003. To focus more on online products Wolters Kluwer sold off their printing activities and newspaper business. Furthermore it gave the general book trade more autonomy through establishing the Booksellers Group Netherlands12.
While customers prefer to use certain reference and text books in print, new electronic products enable them to deliver superior performance in their professions, supporting
changes in medicine, law, compliance and education. In addition to delivering organic growth, solutions that become integrated within customer workflows deliver higher value and
improved renewal rates for the company. When customers migrate from print to online and software products, they have the ability to link to Wolters Kluwer products in new and meaningful ways. Information can be provided in detail for research purposes, or in summary
8 Wolters Kluwer Annual Report 2003
9 Wolters Kluwer Annual Report 2003
10 Wolters Kluwer Annual Report 2003
11 Wolters Kluwer Annual Report 2003
12 http://www.wolterskluwer.com/navigation/about_us/history.htm
form for quick answers. The delivery platform is flexible: desktop, point of care or personal digital assistant, and can be provided based on individual customer preference.
Investments in online migration also provide Wolters Kluwer with an opportunity to consolidate and streamline legacy editorial and production systems. This gives Wolters Kluwer the ability to effectively meet the needs of its customers, regardless of format.
Therefore, online growth and migration remains a key priority within each of the divisions.
Chapter 3 Problem Definition
3.1 Introduction
In this chapter the problem definition will be explained. I will start with the introduction to the problem definition from which automatically the actual problem definition follows. When the problem is defined a conceptual model will follow, succeeded by the sub-questions that define the steps I will take during the project. Furthermore, in the methodological justification the type of research, the level of aggregation, project definition, validity and dependability will be dealt with. The sources of information and the theoretical justification will be discussed in the subsequent paragraphs.
3.2 Introduction to the problem definition
In 1997 the ‘Committee Peters’ published the report ‘Corporate Governance in the
Netherlands; the forty recommendations’. The report contains recommendations on corporate governance policies that organizations should stick to during their course of business.
A High Level Group of Company Law Experts, the committee Winter, recommended in its report ‘A Modern Regulatory Framework for Company Law in Europe’ to the European Commission, that every Member-State has to formulate a national corporate governance code. Listed organizations have to adopt these regulations or be transparent about their arguments not to stick to the regulations13.
Significant attention has been drawn to corporate governance due to the recent accounting scandals with major organizations all over the world. On request of several authoritative Dutch institutions and on the Dutch Ministers’ of Finance and Economic Affairs invitation, the
‘Committee Tabaksblat’ has been established. The formulated code covers ‘all firms with statutory residence in the Netherlands and of which the shares or certificates of shares do have an official listing at a by the authorities acknowledged stock exchange’14.
The new code has to contain principles, governing rules and recommendations, which have to be applied by self-regulating in the private sector.15 Mrs. Van Gennip, Assistant Secretary of Economic Affairs, supports this statement in her speech during a corporate governance meeting organized by KPMG in August 2003. She states that this is the big chance for shareholders and companies to prevent government regulation. Therefore she stimulates shareholders and companies to seize the chance of self-regulation.16
13 http://www.commissiecorporategovernance.nl/Taakopdracht
14 The Dutch Corporate Governance Code, p.3
15 http://www.commissiecorporategovernance.nl/Taakopdracht
16 Speech mrs. Van Gennip, august 2003
During recent years Wolters Kluwer has made significant improvements in their corporate governance. This opinion is based on a statement Rob Pieterse17 made in the Annual Report 2002: ‘Major steps forward have been made in the field of Corporate Governance over the past years. Once a well-protected organization that was not always transparent to the outside world, we have transformed into a company that listens carefully to, but does not necessarily follow, the financial markets. Depositary receipt holders attending the shareholders’ meeting now have unlimited voting rights and the voluntary structure regime (‘structuurregeling’) has been abolished. The only takeover deterrent still in place is the Preference Shares
Foundation, which has a call option on preference shares of the company.’18
In consultation with Mark de Haas (vice-president corporate accounting) and Matthijs Lusse (vice-president Accounting and Control), I will conduct a research about the way in which, in a peer group selected, organizations include the best practices of the Dutch Corporate
Governance Code in their financial reporting. The outcomes of this research will be
categorized and analyzed. With that analysis I will perform a similar research within Wolters Kluwer. The outcomes of the second research will be compared with the analysis. The outcomes of the comparison will provide, to some extent, insight in whether Wolters Kluwer is on the right track with implementing the Dutch Corporate Governance Code.
3.3 Problem definition
3.3.1 Research objective
The research objective is to develop an insight on where Wolters Kluwer stands relatively to other companies on implementing the Dutch Corporate Governance Code, and to make recommendations on aspects where Wolters Kluwer is lagging behind organizations in the peer group. Furthermore the research objective is to provide an outlook on the compulsory internal control statement.
To perform this research in a well-founded manner, a number of companies have been selected in a peer group. Furthermore a measuring framework has been selected to be able to effectively gather information during the research. To effectively analyze that information, the data have been entered in a spreadsheet to be able to visualize the outcomes of the research. Based on the analysis of the information the conclusions and recommendations have been made.
17 Rob Pieterse was a member of the Committee Tabaksblat and is former chairman of Wolters Kluwer
18 Wolters Kluwer Annual Report 2002, p5
3.3.2 Central question
In what way do organizations in a peer group report about the Dutch Corporate Governance Code, in what way do British organizations report on their internal control statement, in what way does Wolters Kluwer report about the Dutch Corporate Governance Code and where does Wolters Kluwer stand relatively compared to the organizations in the peer group?
3.3.3 Research model
This research consists of various phases. To provide the reader with an overview of the entire trajectory of the research, I compiled the following research model. The model visualizes every phase of the research and furthermore it is a welcome guidance for the researcher in, what very often is, the chaotic and unstructured world of research.
Figure 3.1: Research Model
Dutch Corporate Governance Code British Combined Code
Select Peer Group
What does the peer group report about?
What does Wolters Kluwer report about?
Compile a model with outcomes.
Compare outcomes of Wolters Kluwer with outcomes of the peer group.
Report on findings.
How do British organizations report on the internal control statement?
3.3.4 Sub-questions
From the research model the following sub-questions can be defined:
1. What is the Dutch Corporate Governance Code and what is the British Combined Code on Corporate Governance?
2. What is peer group analysis and which companies will be included in the peer group relating to Wolters Kluwer?
3. What aspects are significant to the research and should be included in the measuring framework?
4. In what way do the companies in the peer group report on the Dutch Corporate Governance Code?
5. In what way do the British companies in the peer group make their statement on risk management and internal control?
6. In what way does Wolters Kluwer report on the Dutch Corporate Governance Code and in what way will Wolters Kluwer compile its internal control statement?
7. How do the results of sub-questions four, five and six compare and where does that place Wolters Kluwer relatively to the companies in the peer-group?
8. What recommendations can be made to make sure that Wolters Kluwer will comply with the Dutch Corporate Governance Code?
3.4 Methodological justification
The purpose of the methodological justification is to explain what type of research will be conducted, what the level of aggregation is, what the project definition is, in what way the validity and dependability is guaranteed and what pre-conditions are in place for the project.
Because this information has much significance to the researcher and less significance to the readers of this thesis, the methodological justification is enclosed in appendix one.
3.5 Sources of information
This paragraph states for every sub-question the source(s) of information, which I will use to answer each sub-question. Before the sources of information will be provided, the sub questions will be stated.
1. What is the Dutch Corporate Governance Code and what is the British Combined Code on Corporate Governance?
To answer the first sub-question I will use the Dutch Corporate Governance Code and the British Combined Code on Corporate Governance. These two codes provide the framework for the project. Furthermore two books will be utilized to provide a brief overview of the history of corporate governance. The first book is ‘Corporate Governance: Economic and Financial Issues’ by Keasey, Thompson and Wright. The second one is ‘Takeovers, Restructuring and Corporate Governance’ by Weston, Siu and Johnson.
2. What is peer group analysis and which companies will be included in the peer group?
The second sub-question, and especially the compilation of the measuring framework for the research, requires much information. The question about what peer group analysis exactly is, will be answered by using an article about Peer Group Analysis in Computerworld and the book Improving through Benchmarking.
3. What aspects are significant to the research and should be included in the measuring framework?
The compilation of the measuring framework requires an extensive base of information. For reasons of clarity these sources will be mentioned and discussed in the specific paragraph.
Furthermore the Dutch Corporate Governance Code and the British Combined Code on corporate governance will be used.
4. In what way do the companies in the peer group report on the Dutch Corporate Governance Code?
5. In what way do the British companies in the peer group make their statement on risk management and internal control?
6. In what way does Wolters Kluwer report on the Dutch Corporate Governance Code and in what way will Wolters Kluwer compile its internal control statement?
7. How do the results of sub-questions four, five and six compare and where does that place Wolters Kluwer relatively to the companies in the peer-group?
The sub-questions four, five, six and seven will be answered by gathering information. This information has to be gathered by visiting annual general meetings, scrutinizing annual reports and by interviewing experts on the subject. The measuring frameworks that have been established before will structure the gathering of information.
8. What recommendations can be done to make sure that Wolters Kluwer will comply with the Dutch Corporate Governance Code?
The last sub-question will be answered by integrating all information gathered and by integrating all the answers of sub-questions. When all that information is compiled and analyzed, the conclusions can be drawn and the recommendations can be done.
3.6 Theoretical framework
In this paragraph I will explain in what way I utilized the selected theory to structure and answer the sub-questions.
The main focus of this research is benchmarking. Through performing a benchmark I want to provide Wolters Kluwer with some insight in to what extent the company complies with the Dutch Corporate Governance Code compared to other companies. Therefore it is necessary to have a firm theoretical framework around which the research is structured.
Richard Y. Chang provides a clear framework on benchmarking in his book ‘Improving Through Benchmarking, A Practical Guide To Achieving Peak Process Performance’.
According to Chang benchmarking consists of seven phases. In this research I will perform the first six phases. The seventh phase is beyond the scope of this research. A detailed description of every phase in the benchmark will be provided in chapter 5. The following figure represents the phases Chang acknowledges in benchmarking and the actions that
correspond with this research. These are the phases I will use during my research. The Actions are based on his book but are geared to my research. As I will not perform the seventh phase of the benchmark-cycle, I quoted the action Chang defined in his book.
Phase Action 1. Decide what you wish to benchmark. What to analyze and to what purpose
2. Decide what you wish to measure. Establish a measuring framework 3. With whom do you wish to compare? Compile a peer group
4. Gathering of data. Visiting AGM’s, scrutinizing annual reports, interviews with experts
5. Analyze the data and identify the gaps.
Analysis of quantitative and qualitative information
6. Recommendations Make recommendations to move closer to the desired situation
7. Continuous Monitoring Perform the benchmark regularly
Table 3.1: Benchmark phases and actions during the research (based on Richard Y. Chang)
The second part of this thesis, to provide an outlook on the internal control statement, will be based on benchmarking as well. Therefore I will use the same benchmark-cycle in the research on the internal control statement.
Chapter 4 The Corporate Governance Codes
4.1 Introduction
This chapter starts with a brief overview on corporate governance. It describes, on a high level, the history of corporate governance. A variety of national and international institutions have developed their own visions on corporate governance. But in the end it is a national matter how to organize corporate governance. The foundation of this research will be formed by two national corporate governance codes. The Dutch and the British corporate governance codes will subsequently be introduced in paragraphs three and four.
4.2 Corporate Governance: a brief overview
“The books are cooked to meet or exceed analysts’ forecasts; workers are underpaid and executives are overpaid; board members are hand picked by management to help plunder the firm at the expense of the shareholders and creditors; etc., etc.”19 These are some of the complaints made about corporate governance systems in the past few years.
The term ‘corporate governance’, although now commonplace, was rarely encountered before the 1990s. Unfortunately, its subsequent rapid adoption has not been accompanied by consistent usage. Different writers vary widely in where they draw the boundaries of the subject. The absence of any real consensus on the definition of ‘corporate governance’ in the rapidly growing literature on the subject is symptomatic of the whole debate on governance reform. The underlying problem of corporate governance […] lies with the separation of beneficial ownership and executive decision-making in the joint-stock company.20
This is where we come to the point what corporate governance nowadays is all about. It is about the faith shareholders have in the decision-making by executive directors. In the past few years that faith has been damaged at a large scale. Several huge financial scandals at leading multinational companies have made shareholders weary of the plundering of the firms by board members and management.
For this reason several reports have been made up about corporate governance in the past few years. Especially in the Anglo-Saxon countries corporate governance has been put on top of the agenda. The report of the Cadbury Committee and the much more recent Combined Code on corporate governance, and the Sarbanes-Oxley Act are some examples.
Because every country has its own specific ‘business behaviour’ there is not one best way to conduct corporate governance. Even though the Organization for Economic Co-operation and Development (OECD) made up her OECD Principles of Corporate Governance, this has lead
19 Takeovers, Restructuring & Corporate Governance, p.595
20 Corporate Governance: Economic & Financial Issues, p.2
to a patchwork of different national codes on corporate governance. The purpose of this chapter is not to discuss every existing national code. Therefore I will focus on the Dutch Corporate Governance Code and make a little sidestep to the British Combined Code.
4.3 The Dutch Corporate Governance Code
Corporate Governance is about managing and controlling organizations, about responsibilities and authority, and about accountability and supervision. Integrity and transparency have a great influence on all these aspects.21 In this report, published on 25 June 1997, the Peters Committee tried to persuade Dutch companies to adhere to these 40 recommendations. In 2002, the Dutch Corporate Governance Foundation published the report ‘Corporate Governance in the Netherlands in 2002’. This report evaluated corporate governance in the Netherlands during the five years succeeding the first report. The outcomes were
unsatisfactory.22
For this reason the Corporate Governance Committee was re-established in March 2003 under the chairmanship of Morris Tabaksblat. The committee set off where the Peters Committee ended. In July 2003 they published a concept code and in December 2003 the final Code was drawn up.
The Dutch Corporate Governance Code provides the reader with principles and best practice provisions, which the persons involved in a company (including board members and
supervisory board members) and stakeholders (including institutional investors) should observe in relation to one another.23
The principles have been elaborated in the form of specific best practice provisions. These provisions create a set of standards governing the conduct of management board and supervisory board members (also in relation to the external auditor) and shareholders. They reflect the national and international best practices and may be regarded as an elaboration of the general principles of good corporate governance. Whether all the provisions can be applied is in fact dependant on the specific circumstances of the company and its
shareholders. Both shareholders and the management and supervisory boards should be prepared to enter into a dialogue on the reasons for non-application.24
21 Corporate Governance in Nederland, De veertig aanbevelingen (1997), p.9
22 Handbook Corporate Governance 2004, p.11
23 The Dutch Corporate Governance Code, p.4
24 The Dutch Corporate Governance Code, p.4
The code contains a preamble, the principles, the best practice provisions, as well as an explanation of and notes to certain terms used in the code. The code is divided into five chapters:
I Compliance with and enforcement of the code;
II Management Board;
III Supervisory Board;
IV The shareholders and General Meeting of Shareholders;
V The audit of the financial reporting and the position of the internal auditor function and of the external auditor.
All these chapters contain principles and provisions for listed companies. Chapter IV contains a number of provisions for the trust office that administers shares of the company for which depositary receipts of ordinary shares have been issued and provisions for institutional investors. Chapter V contains some provisions for the external auditor.25
In the ‘Explanation of and notes to certain terms used in the code’ the Dutch Corporate Governance Committee completes the Code by providing extra information on the principles and best practice provisions. This extra information includes suggestions on which theory to use under certain circumstances and clarifies terms used in the Code. Furthermore it puts in perspective the measures that a small or medium-sized organization should take compared to large listed companies.
In the ‘Account to the committee’s work’ the chairman of the committee provides the reader with the committee’s vision on how things developed during the process of establishing the code. In this ‘account’ several issues are described, such as: Foreign developments, Scope of the corporate governance code and ‘Comply or Explain?’26.
The committee received many comments on the draft code. These comments were taken into consideration. The useful comments were incorporated in the final version of the code. Some of the comments were refuted. Why these comments were refuted is explained in the
‘Account to the committee’s work’ as well.
The next part of the code contains recommendations for the legislator and the accounting standards setters. The report of the Peters Committee was quite permissive. To make sure that the Tabaksblat Committee’s code will be enforced, the committee provided the legislator and accounting standards setters with some recommendations.
‘Terms of reference of the corporate governance committee’ is the final chapter of the code.
This chapter handles about the aim of the Corporate Governance Committee and the
‘Parameters for a renewed code of best practice for corporate governance’. Furthermore the
25 The Dutch Corporate Governance Code, p.6
26 The Dutch Corporate Governance Code, p.39
subjects covered by the new committee’s ‘terms of reference’ and the ‘timing’ of the committee are discussed.27
It is outside the scope of this chapter to extensively deal with every principle and best practice provision given in the Code. If the reader wants to develop further knowledge of the Dutch Corporate Governance Code I refer to the document itself.
4.4 The Combined Code on corporate governance
As stated in the problem definition of this research, it will provide an outlook on how the statement on risk management and internal control should be made. It is impossible to make such an outlook on the Dutch Corporate Governance Code solely as it only takes effect from the first of January 2004. This means that there is no internal control statement in the annual reports of Dutch companies as yet. To provide a sound outlook on such a statement I will use the British Combined Code and the annual reports of several leading British companies. This is possible because the Dutch Corporate Governance Code is heavily based upon the British Corporate Governance Code. In the account of the committee’s work, the committee pays attention to foreign developments. In paragraph ten of the account the British Combined Code is mentioned. The following quote from that paragraph proves that the Dutch Combined Code is based on the Combined Code: “However, the committee has accommodated several best practice provisions in the principles. Furthermore, following the UK’s example, the committee has opted to provide explanatory notes on certain principles and best practice provisions as well as an explanation of certain terms28.”
The contents of the Dutch Code are quite similar to the contents of the British Code.
Therefore I will not describe the main principles, the supporting principles and the code provisions. The focus will lay upon the ‘guidance on internal control’, also known as the
‘Turnbull Guidance’.
The Turnbull Guidance pays attention to the several aspects of internal control, which have to be fulfilled. After the introduction, in which the internal control requirements of the Combined Code and the importance of it are highlighted, the Turnbull Guidance pays attention to the maintenance of a sound system of internal control and the reviewing of the effectiveness of that system. Further on the Turnbull Guidance pays attention to ‘The Board’s statement on internal control’ and the internal audit. Particularly the Board’s statement will be of importance for the outlook I want to provide on the internal control statement.
27 The Dutch Corporate Governance Code, p. 67-69
28 The Dutch Corporate Governance Code, p.43-44
The following quotes provide the reader with a broad outline on the internal control statement:
‘In its narrative statement of how the company has applied Code principle D.229, the board should, as a minimum, disclose that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the company, that it has been in place for the year under review and up to the date of approval of the annual report and accounts, that it is regularly reviewed by the board and accords with the guidance in this document.’30
‘In relation to Code provision D.2.1, the board should summarize the process it (where applicable, through its committees) has applied in reviewing the effectiveness of the system of internal control. It should also disclose the process it has applied to deal with material internal control aspects of any significant problems disclosed in the annual report and account.’31
‘Where a board cannot make one or more of the disclosures in paragraphs 35 and 38, it should state this fact and provide an explanation. The Listing Rules require the board to disclose if it has failed to conduct a review of the effectiveness of the company’s system of internal control.’32
These three quotes form the basis of the internal control statement, as the Turnbull Guidance requires it. In the next chapter the selection of the peer group will be described. The peer group contains Dutch and British listed companies. The British companies provide the basis for the outlook on the internal control statement for Dutch companies in the future.
29 In the new Combined Code on Corporate Governance provision D has been replaced by provision C. The Turnbull Guidance has not been changed and therefore refers to the previous Combined Code.
30 The Combined Code on Corporate Governance, p.36
31 The Combined Code on Corporate Governance, p.36
32 The Combined Code on Corporate Governance, p.36
Chapter 5 The peer group
5.1 Introduction
In this chapter I will discuss peer group analysis and the process of selecting the peer group.
Paragraph 5.2 provides an overview of peer group analysis. This explanation is based upon literature on benchmarking. The third paragraph is about the purpose of the peer group analysis for this specific project. In the fourth paragraph the formation of the measuring framework will be discussed. In the fifth paragraph the selection criteria, the compilation of the peer group and the justification of the selected companies are stated.
5.2 What is peer group analysis?
Peer group analysis is the practice of identifying business peers using factors such as industry, size, revenue and geographical location. Furthermore it looks at who is in the group and what kind of performance they have.33
According to Chang peer group analysis consists of seven phases.34 The first phase is to establish a clear insight of what the company wishes to analyze and what purpose this analysis serves.
The second phase deals with what the researcher wants to measure. In this phase it is essential that a limited number of effective measuring points will be identified and put into a measuring framework to simplify and structure the information gathering in the fourth phase.
During the identification of these measuring points the researcher has to bear in mind that time can also be spent on other useful aspects of the peer group analysis such as gathering information. Above that, the right aspects have to be measured. This means that the researcher has to focus on the essential measuring points, otherwise the analysis will be invalid. Because of the importance of the measuring framework for the research, it will be discussed in chapter six.
During the third phase, when the purpose of the analysis and the measuring points of the analysis have been established, the researcher will have to select the companies that will form the peer group. Before the companies can be selected, selection criteria have to be defined. This will be discussed in paragraph 5.5.
The fourth phase consists of information gathering. This phase is based upon the previous two phases. The information gathering will be based upon the framework of measuring points as established during the second phase. The information will be gathered of the companies, which are selected in the peer group.
33 Peer Group Analysis, Computerworld, p55
34 Improving Through Benchmarking
