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CMS Derks Star Busmann Day of the Board: one-tier board too tight?

One-tier board legistlative proposal is 'Codification, not modification'

29/10/2008

'Most company supervisory directors understand little of the company's real business. They often have no idea of what goes on on the shop floor,' said Ton Risseeuw, chairman of the supervisory board of KPN and former managing director of Getronics.

Yesterday, the 'Day of the Board' took place, organized by CMS Derks Star Busmann, during which prominent representatives of both academia, the business community, the legislator and the judicature gave their views on the traditional Dutch dual-board board system with a separate supervisory board versus the Anglo-Saxon one-tier board model, in which executive and non-executive directors are on one board. They entered into a direct and informal debate with the attendant clients and relations of CMS Derks Star Busmann, all of them representatives from Dutch businesses and highly experienced in the area of corporate governance.

This Friday 31 October, the cabinet will take a decision on the legislative proposal entitled 'Modification of management and supervision in public limited companies and private limited companies' (commonly referred to as: 'The one-tier board Bill') that is to create a legal basis for the one-tier board in Dutch companies and should provide a handle on their composition. In practice, the one-tier board has been a possibility for Dutch companies for some time, but the legal implications of it are still largely unclear. Major current examples are Unilever, Reed Elsevier and Shell.

According to born businessman Risseeuw, supervisory directors in the traditional Dutch dual-board board system are too far removed from the company's core management. In carefully prepared and orchestrated supervisory board meetings, they are informed by the management by means of flashy PowerPoint presentations and kept at a 'safe' distance of the shop floor. They do not oppose this situation sufficiently. In practice, the supervisory board therefore has insufficient information to be able to supervise the company's management adequately. Risseeuw showed himself to be a great proponent of the one-tier board, even though he does not have any personal experience of it. He argued that good governance proves itself in particular when a company is in heavy weather. In such circumstances it is crucial that supervisors are fully informed, and that they are as close to the company as possible.
Chairman of the day Morris Tabaksblat, former chief of Unilever, former chairman of the Tabaksblat Committee and the Dutch expert in the area of the one-tier board, agreed that on a one-tier board, the non-executive directors have much better access to the information required to supervise the company adequately.

An essential matter is who is responsible for providing the non-executive directors with information. Martin Mendelssohn, partner of CMS Cameron McKenna in London, who explained the one-tier board system as it operates in the UK, said that the chairman (roughly speaking the chairman of the non-executive directors) is to a large extent responsible for providing the non-executive directors with the right information based on his position and his close relationship with the CEO.

But are non-executive directors on a one-tier board not exposed to greater risk of liability than supervisory directors in a dual-board board model? After all, they are part of the management and therefore closer to the fire. Loes Lennarts, professor of Corporate Law at Utrecht University, felt that the increased risk of liability of non-executives should not be exaggerated. Her opinion was that it is important that the distribution of duties between the executive and non-executive directors is established properly in law. Ellen Kiersch, head of the Private Law Division of the Legislation Department at the Ministry of Justice, clarified that the legislator has not intended to increase the liability of supervisory directors. 'Codification, not modification, is the objective.' She did include the major qualification that as a (non-executive) director is given a more decisive role, he or she will also get the liability that is appropriate to that role.

The president of the Enterprise Division, Huub Willems, in contrast, could not escape the impression that in a monistic system the position of non-executive directors will change. He felt that they will be held liable more readily if the company's management falls short. He recalled that in our present dual-board system it is often difficult to take the supervisory directors to court and that they often escape being held liable. However, Mendelssohn also pointed out that within the board of British companies there is often an 'us-and-them' relationship between the executive and non-executive directors. There was consensus in the meeting that regardless of the management system, the quality of the directors is key to good management.

Risseeuw, Tabaksblat, Lennarts and Willems all felt that large companies (such as KPN and TNT) also ought to have a one-tier board. Kiersch recognized this need.
Will large companies opt for a one-tier board in droves when the Bill is enacted? Tabaksblat predicted that it will be some time before the one-tier board becomes the norm in the Netherlands. Companies will wait and see. There will have to be a few brave early adopters before it is generally accepted.

According to Tabaksblat, the one-tier board model that is customary in the Anglo-Saxon countries will not be a success until the very important role of the chairman - the wisest, most powerful and often the oldest person in the company - is recognized and institutionalized in the Netherlands. In addition, the crucial relationship between the chairman and the CEO must come to full fruition, which will require a radical mind switch in Dutch boardrooms.

For the time being, the eyes of the Day of the Board attendees and of the rest of Dutch businessmen are fixed on the legislator: this Friday we will know whether the law will provide for a one-tier board for the present dual-board companies.

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