Welcome to VIPsight Europe - Netherlands

 

Author

Dr. Paul Frentrop

 

25 September 2013

The Imtech Governance Scandal

On 20 November 2012 ABNAmro analist Teun Teeuwisse changed his recommendation for Imtech from ‘buy’ to ‘sell’. Immediately the stock price dropped ten percent tot 15,68 euro. Also new was that since November last year short positions of investors are published by the Dutch Market Authority (AFM). Investors have to report short positions bigger than 0,2 percent of a company’s capital. The AFM pubklishes positions larger than 0,5 percent. In November hedgefund The Childrens Investment Fund had a short position of 1,24 percent. Obviously the market had doubts about Imtech.

The company’s board did not. Ceo René van der Bruggen, who was going to retire at the agm in april reiterated the company’s strategic targets: to almost double turnover to 8 billion in 2015. This growth should be for 50 percent internally driven and for 50 percent driven by take overs, as Imtech had been doing for the last ten years. “The financial situation of the company is stable,” said an Imtech press release on November 21.

That didn’t last long. In February 4 Imtech had to tell shareholders that 200 million was missing. A prepayment for an amusement park in Poland was fraudulently booked, but in fact was not made. The company’s net debt was much bigger than thought. Imtech investigated what happened and postponed the publication of its 2012 financial statements. The following day the ceo and cfo of Imtech Deutschland stepped down as a result of the situation in Poland. On February 8 Imtech’s cfo Boudewijn Gerner steppend down and was replaced,. On February 27 the company announced that ceo René van der Brugge retired early and was replaced by Gerard van de Aast. Also a 500 million rights issues was announced as demanded by the banks as a condition for their continued financing. Imtech wrote down 150 million on Polish projects and 150 million on German projects.

The chairman of the supervisory board, Rudy van der Meer, told the Dutch newspapers on March 8 that he would be available for re-election, unless shareholders would tell him that he had made a mess, but “such signals didn’t reach me yet.”  The obviously did shortly afterwards as he annoucned to step down. On June 18 Imtech presented a report to shareholders, who claim damages from the company and its accountant KPMG after the annual reports of 2010 and 2011 had to be restated.

The company claims to be defrauded by management in Germany and has asked the public prosecutor in Hamburg and other places to investigate what happened. In the meantime Imtech is reorganizing itself. At least 1500 jobs will be lost, and the governance structure will be changed. One of these changes is that the management board will consist of 5 persons, instead of just the ceo and cfo.

In the Netherlands the Imtech drama, made people remember the Ahold case ten years before. Like Ahold Imtech was a fast growing company with a ceo admired by investors, who turned out not to be in control of his expended empire.

More details about Imtech’s demise are expected to follow.

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VIPsight Archives Europe - Netherlands

 

11 October 2012

EADS/BAE merger plans called off.

The opposite of an hostile take over

When Jacques Chirac became president of France in 1995 one of his first actions was to explode an atomic bomb on an innocent South Pacific atoll. Yes, machismo is a Spanish word but the attitude is prevalent at least as much in France. After six ‘tests’ Chirac stopped, having sufficiently announced his entrance on the world political stage by showing to all concerned his ‘force de frappe’.

The French buy their atomic missiles at EADS, so obviously this company, that for its nuclear ballistic missile division has the French government as its only client always has the attention of French civil servants. When the board of EADS announced its intention to merge with British BAE Systems it could therefore be assumed this plan had been blessed by France.

But the French government isn’t the only shareholder in Franco-German EADS. On October 10 the merger talks were terminated.

Shareholders probably are not sorry that the deal pre-cooked with French civil servants faltered, because when French civil servants are involved the rules of corporate governance sometimes change in unexpected ways. This general wisdom may explain the market’s reaction last month when the merger between Europe’s two biggest defence contractors was announced. The share price of EADS, whose shareholders will own 60 per cent of the combined company, lost 15 per cent in two days. Private shareholders obviously didn’t think the plan would create value.

Nonetheless the EADS board stressed the merger was driven by opportunity, not by necessity. What opportunity one wonders? Defence spending in the West is being reduced, so both companies face a declining market. As the Wall Street Journal memorized on the announcement Margaret Thatcher privatized British Aerospace in 1981 when defence spending came to 5.8 % of British GDP. Now that figure is below 3 per cent and falling. A defensive merger would aim for cost synergies, that would entail closures of production facilities, but the governance structure of EADS is set up to make this hard. Two shareholders, the French government and (indirectly) the German government, have the power to veto actions that would mean closures of factories. Not by accident EADS employs about the same number (48.000) in each country. As car manufacturers know, the French government doesn’t look kindly at companies that want bring back overcapacity. Privately owned Peugeot was only allowed to skip jobs in France after the presidential election. The German government is less directly involved in corporate decision making, but is very sensitive to the interests of the many Mittelstand suppliers of EADS. Germany cannot be happy with the idea that the new groups civil business (Airbus) would stay in Toulouse and its defence business would be based in Britain.

With such dominating shareholders who are also major clients, what opportunity does the board of EADS see if it is not cost synergy? Maybe the opportunity to dilute major shareholders? That seems more likely. The governance structure of EADS gives to major shareholders veto-powers and that is not the optimal way to run company. EADS in the past has been plagued by infighting among French and German managers, supported by their ‘own’ shareholder. But given the fact that both these shareholders are ‘political’ and politicians are not known to give up any control voluntarily, why would the board think they would give in if BAE comes on board?

Under the proposed merger both the French and the German government would retain a golden share that gives them the power to veto a take-over of the company, but that obviously was not enough. The French government sure wanted extra say, maybe through its holding of ordinary shares. In that case it would be unwise for Germany to accept less influence. Combined however, the Franco-German influence might stay such that the USA government, the most important client of BAE (50 % of sales), might wonder whether it should keep buying defence materials from a company controlled by two countries that set up Airbus to compete with Boeing in the civilian aerospace business.

On the other hand there are private EADS shareholders who wanted to get out. Daimler already transferred part of its stake to friendly banks, such as KfW, keeping however its 22.5 per cent of the voting rights. The French family controlled conglomerate Lagardère, holding 7,5 per cent in EADS, could finally get out of the defence business that papa Jean-Luc liked so much, and concentrate on its media business even though the Mr Arnaud Lagardère was in May this year elected chairman of EADS. (He did not bother to show up at the annual meeting where this took place). The stock of Lagardère was up 3 per cent when the merger plans were announced. That the company Lagardère issued a statement calling the terms of the merger ‘unsatisfactory’ and saying that the proposal needs “to better account for all of the interests of French[ sic!] controlling [sic!] shareholders” just gives an indication that in the EADS corporate governance should not be judged against normal standards and best practices. In the special situation of EADS it is not the board but the executives that care for corporate governance. EADS ceo Tom Enders and BAE ceo Ian King wrote in an opinion piece that the combined company would have a more typical corporate governance structure so that it could operate “in a normal commercial matter.”

This merger was a method to bring better governance to a company whose shareholders are not interested in good corporate governance. Burt managers cannot discipline shareholders. These shareholders have refuted a deal that according to the executives was based on sound industrial logic. But EADS itself is not based on sound industrial logic but on economic patriotism. Many trees have been felled to provide the paper for plans to create first national industrial champions and later on European champions. Especially in France there is the continuous ambition to create European/French controlled companies to counter the dominance of American companies and technology. Airbus, Galileo, STMicroelectronics, Alcatel are just some projects that come to mind.¹ The funniest example of course being the Asterix amusement park north of Paris that has has to demonstrate French cultural superiority over Disneyland.

This kind of economic patriotism has of course nothing to do with the ideals about free trade that form the basis of the European Union. That’s why the EU has to give permission on big mergers such as the defence giants, had in mind.

Now that the plan is off the table no decision will be asked from the European Commissioner for competition, Mr Joaquin Almunia. That saddens me because this former Spanish trade union economist, who became the leader of the Socialist Party in Spain is a contributor to this author’s selection of memorable quotes with the statement he made on Wednesday 18 February 2009: “The Greek economy is in better condition compared with the average condition in the Eurozone, which is currently in recession.”² I hoped that his decision on the EADS/BAE merger plans would add a new item to my collection, but now I have to wait for other opportunities that sure will come.

1 For an overview see: Geoffrey Owen. Industrial Policy in Europe since the Second World War: What Has Been Learnt? ECIPE occasional paper no 1/2012 at www.ecipe.org.

2 Source: http://www.greekembassy.org/embassy/Content/en/Article.aspx?office=3&folder=1013%20&article=24631

 

 

10 July 2012

Proxy voting worries: nobody checks the whole chain

On May 5 2011, at the 2011 AGM of SBM Offshore in Rotterdam, one of the 86 shareholders present, noted that the number of votes exercised was higher than the total number of shares represented at the meeting. Confusion all over. Agenda item was already voted on.

The chairman conferred and thanked the shareholder for his alertness. A recount set the number of shares represented on 46.23 % of those outstanding. The chairman decided that the results of the votes for the five agenda-items, that were agreed with an overwhelming majority were not in dispute. So the meeting could go on.

This however is only one of the snags in the (proxy) voting process that starts to worry Dutch institutional investors. Another is the role of intermediaries.

In its 2011 Responsible Investment Report one of the largest shareholders of Europe, Dutch pension funds asset manager PGGM tells a remarkable story: PGGM uses custodian banks. A number of those custodian banks uses the services of a company called Broadridge for the execution of proxy voting instructions. PGGM was attended on the fact that Broadridge sells information on votes to companies. This without asking permission to shareholders. The names of shareholders were not disclosed but companies buying this information learned in an early stage the number of proxy votes for and against agenda items. Although the legal question of who owns this information is complicated, PGGM asked it’s custodians not to sell this kind of information anymore. All custodians complied. PGGM also raised the issue with other institutional investors and spoke with the Broadridge. In that talk it turned out that so many investors had raised objections that the service was to be stopped. PGGM is content with this result.

A different issue played at the AGM of Post.NL on 24 April of this year. Five days before the meeting the ceo stepped down because of serious disagreements with the supervisory board. One of the agenda items was the reappointment of the chairman of the supervisory board. Already over 60 percent of the votes was send in by proxy. A lot of those shareholders wanted to chance their vote, because they agreed with the ceo. This turned out to be impossible, at least that is what custodian banks told these shareholders. The company stated – afterwards - that if was possible to change the vote by having a representative visit the AGM in person. A notary was hired for that purpose, but no shareholder made use of this service, according to Post.NL.

All these issues hackle investors. Especially since the attendance of AGM’s is rising steadily. Corporate Netherlands for years pointed at investors who did not show up at AGMs as absentee shareholders, who should not have any rights. As around 80 percent of the shares in Dutch companies are held by foreign investors, the proxy voting system is crucial to raise attendance at AGMs. The fact that many banks demanded shares to be blocked for up to two weeks made that many shareholders did not vote. Even when a registration date system replaced the blocking system banks kept on blocking shares. It took a concentrated effort of Dutch institutional investors to convince companies and banks to stop blocking and to assure overseas investors and proxy advisory firms that it is ‘safe’ to vote in the Netherlands and no blocking will occur. This resulted in a growing participation of shareholders in AGMs. Voting doubled in the last seven hears from 33,3 percent in 2005 to 63,7 % percent in 2012, according to Eumedion, the Dutch corporate governance lobby group for institutional investors.

However, the integrity of the voting chain, cannot be assured, said Anatoli van der Krans, a lawyer for fund manager MN-Services and the writer of a thesis on the ‘virtual shareholder’s meeting’ told Dutch newspaper Het Financieele Dagblad recently. Votes get lost somewhere in the long chain between investors and the company. Whenever a vote is close, this might have devastating effects. A UK research in 2007 found that almost 5 percent of all proxy votes get lost. In the Netherlands the number is probably bigger as shares are still in bearer form, so no check is possible.

Cross border voting in other countries might have even higher rates of failure. There is anecdotal evidence from India, for example, that proxy votes are not counted at all at some companies. The discussion on corporate governance touches many worthy subjects. The nitty-gritty of the actual voting process however did not get much attention so far. The Dutch corporate governance code requires institutional investors to report how they voted. In practice however investors can seldom be sure whether they voted.

This starts to unnerve Dutch institutional investors and maybe some action will be taken.

 

21 January 2012

Zurich Financial settles with Converium shareholders

Pro´s and cons of international claims settlement in the Netherlands

On January 17 the Amsterdam Court of Appeals gave its final approval to the pan-European settlement in the Converium securities litigation setting a new milestone on the ambitious path of the Netherlands to become the canter for claims settlement in Europe.

The Dutch settlement system is based on a special law that aimed to deal with consumer protection and product liability claims. The direct cause was the said story of pregnant women who between 1947 and 1976 were prescribed a drug called diethylstilbesterol (DES) that did not only cause higher cancer rates among these women, but also caused cancer, infertility and deformities of the reproductive organs of their children, as was only discovered after many years. It took the daughters of these women (‘DES-dochters’) many years to get their problems recognized. Finally in 1986 six of these daughters brought ten pharmaceutical companies that had produced this product to trial. From a legal point of view it was almost impossible to establish a direct link for damage between producer and a victim, as the daughters couldn’t prove which company had sold the pills their mother had taken. As however both the pharmaceutical industry and most of the victims wanted to end this terrible story, a 38 million euro fund was set up by the industry and some health insurers, to compensate some of the damages.

Both industry and claimants have an interest in having such a settlement made legally binding for everybody – also for claimants who did not join the legal proceedings. Industry only wants to settle out of court when there is certainty that no new claims will be brought. Claimants who want a settlement realize that the other party will only agree when this settlement is legally binding.

In the financial sector this new legal opportunity was used first in 2005 in a 1 billion euro settlement between Belgium bank Dexia and about 400.000 Dutch clients who had been sold a deficient financial product (Legiolease) buy a subsidiary of Dutch insurance company Aegon that had been taken over by Dexia, obviously without enough due diligence.

The Converium case shows again that this procedure can also be used by shareholders, who have suffered damages.

Converium is insurance company that was 100 % owned by Zurich Financial Services Ltd. From 11 December 2001 some of Converium's common stock was listed on the SWX Swiss Exchange in Zürich, Switzerland. Soon after - in the period from October 2002 through September 2004, the market price of Converium's common stock declined substantially after Converium made various public announcements that it needed to increase its financial reserves for reinsurance coverage it had issued.

In the United States shareholders sued Converium and Zurich Financial Services. Before the judge could rule a settlement was reached. On July 28, 2008, Public Employees' Retirement System of Mississippi and Avalon Holdings, Inc. announced that they had reached agreements with SCOR Holding (Switzerland) AG, the successor to Converium, and Zurich Financial Services to partly compensate investors who had bought shares during the period from January 7, 2002 through September 2, 2004 (the "Class Period"). It was concluded that all investors together has suffered damages in this period of about $ 600 million.

However, such a US settlement, only applies to U.S. Residents or to foreign investors who purchased Converium ADSs on the NYSE. Foreign investors who didn’t purchase their shares through an American stock market can no longer participate in US federal securities actions.

As the company also wanted to settle with foreign investors (who held approximately two thirds of the stock), it agreed to ask the Amsterdam court to approve the settlement as legally binding for all investors.

By selecting Amsterdam for a European settlement Zurich Financial follows the example of oil company Royal Dutch Shell. Something that does not surprise based on the close personal relations between both companies. Former Shell ceo Lo van Wachem was for 12 years on the board of Zurich Financial (1993- 2005) partly as chairman and both companies at present share Joseph Ackerman as non-executive director.

Shell had reported it´ oil and gas reserves incorrectly and although this wasn´t literally an accounting matter, the board wanted to settle with the company´s disgruntled shareholders, who in 2004 had seen the stock price drop 12 per cent in one day. As 90 per cent of its shareholders is not an American resident. Shell voluntarily offered to pay $ 353 million in damages to non-US shareholders who accepted.

So the approval of a settlement that is declared legally binding by the Amsterdam court is a way for non-US investors to collect some damages. Investors should keep in mind that the route to Amsterdam is not an alternative to a US class action. The Dutch courts only start to work after both parties have reached an agreement. Nonetheless this procedure may be useful.

Investors should take note however that in the US their rights are better safeguarded. In the Converium casus for example total damages were set at 600 million. Two thirds of the investors were non-US. They got awarded 58 million which gives them a 14.5 % recovery rate. US investors received 85 million and therefore had a recovery rate of 42,5 %.

One might think that it is a fiduciary duty for institutional investors to buy shares on the US stock market when possible. When not, shareholders in European might file shareholder proposals asking for a second listing in the USA.

 

12 November 2011

10 years of regulation of the Dutch market for corporate control

The most spectacular part of corporate governance is the public tender bid. In the Netherlands there have been 114 public offers announced between 2001 and 2011. On average 11 per year and when the offer was for cash the average bid amount was around 1 billion euro.

But the take-over market is not about averages. There a years with a lot of bids and years with almost no activity. The top year was 2007, when just before the financial crisis hit, 20 public bids were announced, among which the biggest ever: Fortis, Royal Bank of Scotland and Santander offered shareholders of ABN Amro 70 billion to take the bank of their hands.

Sometimes more bidders bid for one company. Therefore only 88 bids were effective of which 81 resulted in a take-over. In those cases most shareholders left. Only in 5 cases less the 90 per cent of the shares were tendered. The highest acceptance scored DSV in 2005 with its friendly offer for logistics company Frans Maas: 99.96 %. The lowest score was for Canon from Japan when it bid for copier maker Océ in 2009. Only 71 per cent was tendered.

The average bid premium was 32 per cent, but again averages do not say much in the market for corporate control. The highest premium paid was 94 % when Rocket Software took over the small IT company Seagull. Spectacular was the 81 per cent premium TomTom paid for cart maker Tele Atlas. But that was a second bid, after US competitor Garmin put in a bid too. The first bid of TomTom offered Tele Atlas investors a below average premium of 28 per cent. Tele Atlas shareholders are no doubt grateful to both TomTom and Garmin. TomTom shareholders suffered the amortization of billions of goodwill.

These facts and figures have been made available the Dutch Financial Markets Authority (AFM) that celebrated the fact that for ten years it has been the supervisor of take-overs on the Amsterdam stock exchange. On September 5, 2001 the AFM started this job and the regulators had to go through a very steep learning curve. Immediately they had to regulate the very hostile international ‘handbag war’ between LVMH from France and Gucci from Italy. Gucci was listed in Amsterdam and LVMH turned out to own 34.4 of it’s competitor in January 1999. It found a white knight in Pinault-Printemps-Redoute and issued new shares so that PPR held 40 %. Parties saw each other in court and in the end PPR won. In 2004 it had 99.23 % of Gucci. With a duration of almost 3 year, this bid was the longest one ever in Dutch history.

Next in the learning curve was the ‘ghost bidder’ the market authority had to deal with. In march 2002 Brack Capital announced an agreed take-over bid for Haslemere real estate. A few days later to companies, named Evia and Allbubles, announced a 5 per cent higher bid. They valued Haslemere at 1,5 billion euro. However, nobody knew these new bidders. Haslemere management said they never spoke to them; nobody else had ever heard of them either. Did they exist or were they ghosts? After a week investigators from AFM located the ghost-bidders in an apartment above a pizza courier in Amsterdam and concluded that it was highly unlikely that these entities could finance a bid. The ghost bid was withdrawn and a penalty was imposed on the persons responsible.

These and other stories can be found in the ‘little history’ the market supervisor assembled in the lean year 2011, where only 5 bids were announced. For aficionado’s of corporate governance this little history is a must read. It can be downloaded (in Dutch) from the website of the AFM: http://www.afm.nl/nl/professionals/afm-actueel/rapporten/2011/10-jaar-afm-toezicht-openbare-biedingen.aspx

 

2 September 2011

Breukelen, September 1^st 2011- Effective 1 September, Dr. Paul Frentrop has been appointed as Professor of Corporate Governance and Capital Markets at Nyenrode Business Universiteit.

The chair comes under the auspices of the Nyenrode Corporate Governance Institute, with which Prof mr. Steven Schuijt, Prof. mr. Bas Steins Bisschop, Prof. Dr. Mijntje Lückerath, Prof. Dr. Ruud Pruijm, Prof. Dr. Barbara Bier and Prof. Dr. Leen Paape (among others) are already associated. Corporate Governance is one of the leading areas for research and education at Nyenrode Business Universiteit.

Paul Frentrop will concentrate primarily on research exploring how institutional investors are able to exert influence on the boards of companies. He will also research the effects of investment policies of institutional investors on their role as shareholders, questions relating to long-term shareholdings (stewardship) and the problems associated with trans-border voting by shareholders. In addition, Frentrop will be actively involved in Nyenrode Business Universiteit’s educational programs for supervisory directors.

Paul Frentrop (57) earned his doctorate at the University of Tilburg on the subject of ‘Companies and their shareholders since the Dutch East Indies Company. Corporate Governance 1602-2002’. He has been involved in the developments relating to corporate governance for over twenty years. Among other things, he is the author of the reports ‘Corporate Governance in the Netherlands: the state of affairs’ (2002) and ‘The Debate on Corporate Governance in the Netherlands’ (2005), both of which were published under the auspices of the Netherlands Corporate Governance Foundation.

Until 2007 Frentrop was the director of the governance consultancy Deminor Nederland BV, and until 2010 the Head of Corporate Governance at APG. In addition, he was the administrator of Eumedion, the governance platform for institutional investors. He currently assists the supervisory boards of listed companies in their self-evaluations.

Prof Dr. Leen Paape, Dean of the Nyenrode School of Accountancy & Controlling and the Business School says: “We are particularly pleased to have Paul join us. His years of practical experience fit in superbly with the practically oriented approach of the Nyenrode Corporate Governance Institute.”

Paul Frentrop adds: “Nyenrode has made an outstanding name for itself in the Netherlands in the field of corporate governance. I look forward to making a contribution to the continued expansion and internationalization of the Nyenrode Corporate Governance Institute.

17 July 2011

Air France/KLM: a non-qualified non-executive?

Frits Bolkestein, non-executive (supervisory) director of Air France/KLM said his successor misses the capacities needed for the job. The outspoken former head of the Dutch liberal party and former EU commissioner, so qualified another Dutchman, Jaap de Hoop Scheffer, former secretary general of NATO. When French carrier Air France took over Dutch carrier KLM in 2003, the Dutch government got the right to nominate one non-executive director. Mr Bolkestein was appointed in 2005 and will retire this year and be succeeded by Mr de Hoop Scheffer.

It is (too?) seldom that non-executive directors publicly discuss the qualities of their peers. The exception made by Mr Bolkestein is not just another expression of the infamous Dutch bluntness. When Mr Bolkestein was active Dutch politics in the 1990’s he didn’t hesitate to attack the old boy network that provided in those days all non-executive directors at major listed companies. Even though he was the leader of the political party closest to the corporate sector, he publicly criticized the directors of shipping company Nedlloyd for their incompetence.

The company doesn’t exist anymore, so Mr Bolkestein’s opinions should be taken seriously. His present distrust in the capacities of the former head of the biggest military alliance in human history has not just corporate but also political roots. In an interview with the weekly Elsevier he disclosed that he himself had suggested a better candidate for his replacement to the Dutch government in a letter dated January 4. Although the liberal party is the leading political party in the Dutch governing coalition of liberals and Christian democrats, he received no answer from the (Christian democrat) minister in charge, Mr Joop Atsma, until the government proposed Mr De Hoop Scheffer, who himself was the leader of the Christian democrat party from 1997 to 2001, when mr Atma was a backbencher in Parliament.

Who was the candidate Mr Bolkestein proposed? He doesn’t tell but says: She is a woman with ample board experience at multinational companies. And adds: The French law says that - when of equal stature - female candidates should be appointed.

Why does he think the former secretary general of NATOP does not qualify as non-executive director of one of Europe’s big carriers? Mr Bolkestein gives as an example: The man is convinced that Ukraine and Georgia should be members of NATO. Who says something like that is not right in the head. With Georgia a member of NATO we should have send the Dutch airborne brigade to fight Russian troops a few years ago.

‘Airborne’ is a nice rhetoric touch in this governance discussion that may provide food for thought for shareholders of Air France/KLM. The Dutch government by the way denied that political considerations had anything to do with the choice for Mr de Hoop Scheffer: “There were several candidates. Mr de Hoop Scheffer was picked on the basis of quality and experience.”

 

30 April 2011

From shareholder rights to shareholder duties:

Ten commandments for Dutch investors

Over the last decade improving corporate governance implied that listed companies all over Europe had to pay homage to shareholder rights. Now welcome the flip side of the governance coin: shareholder duties. The new challenge is to make institutional shareholders accountable for how they use their shareholder rights. Shouldn’t investors dealings with companies – code named engagement – be up to certain standards?

In the UK negligence by shareholders who did not prevent the boards of RBS and Lloyd’s bank from doing takeovers, was deemed to be the cause of the financial crisis. Therefore the UK lead the way with a Stewardship Code, published in July 2010. This Code aims to stimulate investors to pay attention to the companies they invest in and to foster “the efficient exercise of governance responsibilities by setting out good practice on engagement with investee companies.” Mmm, rules for investors. Never waste a good crisis. Brussels’s bureaucrats looked with interest at this new area of regulation and UK institutional investors told their colleagues on the continent: You should a) subscribe the UK Steward Ship Code and/or b) formulate stewardship codes for your own country: ‘Better do it yourself before Brussels forces new regulation on you.’

The Netherlands were first to act. Maybe because the Dutch were well fitted out to do so. Institutional investors in the Netherlands – bot Dutch based and foreign - already have an organisation, called Eumedion, that represents their interests in the field of corporate governance. Eumedion’s objective is “to develop good corporate governance on the basis of the responsibility of institutional investors” so this organisation seemed up and ready to write a Dutch Stewardship Code. But after some deliberation Eumedion refrained from following the UK all the way. The Dutch limited themselves to formulating ten ‘best practices’ which members of Eumedion “will follow to demonstrate that they are conscious of the greater responsibility that society expects of both Dutch and non-Dutch institutional investors.” Investors in the Netherlands undertake to:

• Monitor their Dutch investee companies

• Have a clear policy on how to exercise shareholder rights and engage with companies

• Have clear policies about what to do in case of a difference of opinion between themselves and the boards if these companies

• Be willing to work together with other investors

• Mitigate conflicts of interest when they have other relations with the company apart from a shareholder relation

• Have and disclose a voting policy

• Cast informed votes on all the shares they hold in Dutch companies

• Disclose once a quarter how they voted at Dutch companies

• Take account of environmental and social issues when exercising their shareholder rights

• Not to borrow shares solely for the purpose of exercising voting rights

Eumedion now brings these ten best practices forward, like Moses brought down the ten commandments from the mountain. But in governance land there is always room for discussion. These best practices, like the ten commandments, apply only to the chosen, who in this case are Eumedion members. But these months all interested parties are invited to commend. This offer includes non-members and – especially - listed companies. After this consultation is concluded the best practices will be definitely set on June 30 and Eumedion members will be expected to follow them (or explain why not) as of January 1, 2012. What if they do not? What will happen to institutional investors that do not comply? Will they be ostracized? Will ‘bad’ shareholders be kicked out of the Eumedion club? That is not quite clear from the consultation document (www.eumedion.nl), that states: “The Eumedion secretariat will annually monitor the compliance of Eumedion participants with the best practises [..] The results will be reported to the General Board of Eumedion.”

8 April 2011

The Code that failed

On March 28 the a majority in the Dutch parliament adopted a proposal for a special tax to be levied on all employees in the banking sector, retro-active to 2008, equal to 100 per cent of the variable remuneration they received since then. The representatives of the Dutch voters wanted to claim back every bonus penny paid to bankers since the beginning of the banking crisis.

Of course the government will not introduce a law that retroactively taxes bankers, but how can the normally staid Dutch legislative body come to decide to take such a drastic measure?

Not because the Dutch consumer had been directly hit by the banking crisis. No savings have been lost. Those who had put their money in subsidiaries of Icelandic banks have been fully compensated by the Dutch government, that now tries to claim back that money from Iceland. The Dutch operations of once mighty ABNAmro are now 100 per cent government owned. Banking and insurance giant ING received 10 billion in capital support from the Dutch State who also guaranteed the US mortgage portfolio of ING, that is the number 4 savings bank in the US. Also Aegon, SNS, NIBC and Lease Plan received financial support from the Dutch government.

As things look now all this support will be paid back against a hefty premium. Only the money paid for Belgium ABNAmro looks unrecoverable. Voters are not hurt. Then what makes parliament so angry? Banker’s behaviour?

Originally the financial sector behaved as it should. When banks and insurance companies had to ask the government for financial support in the first months of 2009, the financial sector knew there would be political fallout. Past and present behaviour of bankers would be scrutinized.

In reaction to the dotcom crisis corporate Netherlands endorsed a corporate governance code, that deflected criticism of corporate managers and prevented stringent legislation. Now the banking sector followed the same recipe. A special banking code was written to restore confidence in bankers. The most eye catching feature of the code was that in banking from now on no executive would receive a variable remuneration bigger than his fixed salary. The Banking Code became operative in 2010 and the agreed limit on executive remuneration seemed to have appeased the public.

Then in march ING published its annual report over 2010 and that revealed that the ceo had received a bonus of 1,2 million euro. That is equal to 90 per cent of his salary, so the amount confirms to the Banking Code. That was not the only seal of approval. When supporting ING the Dutch government had demanded to seats in the supervisory board. These two non- executive directors have special veto power rights over remuneration. These two state appointed board members - one is the former head of the biggest labour union – had agreed on the remuneration over 2010, and, one may assume, checked in advance with the government. So what could go wrong?

But when the news came out members of parliament shouted out against such a high bonus paid at a bank that was still reported by the state. The government said it was unpleasantly surprised and journalists interviewed people on the street who claimed they were going to close their bank accounts at ING. In this tumultuous atmosphere the ING management declined their bonus and published an article in the newspapers with its apologies for not being sensitive to the public mood. That didn’t appease Dutch politicians. They still blame the bankers for their greed, that according to political wisdom was the cause of the credit crisis.

The financial sector is important for the Dutch economy. But bankers do not feel at home anymore in The Netherlands. Recently Greece, introduced its corporate governance code, being the last European country without one. But the governance lesson learned by Dutch bankers this month is that a code is a nice thing, but does not provide protection beyond what politics allow.