Supervisory Board members: independent in letter and spirit

Date 25 September 2012

The Dutch central bank is evaluating the independence of Supervisory Board members, based mainly on conduct.  

One important lesson we’ve all learned from the financial crisis is that high-quality Supervisory Board members must have a certain degree of independence. DNB is therefore evaluating whether Supervisory Boards are sufficiently independent and/or are upholding the interests of all the stakeholders. Internationally, the need for independence is set down in the EBA Guidelines on Internal Governance (GL44). Nationally, it is enshrined in the Banking Code. The supervisory authorities evaluate three criteria relating to independence: mind, appearance and state.

‘Independence in mind’ is the most important. It relates to the conduct of individual Supervisory Board members and of the Supervisory Board collectively in carrying out their duties (‘the proof of the pudding is in the eating’). Individual Supervisory Board members and their Boards must be able to show in practice that they take into consideration all relevant interests when making decisions. The evaluation is also closely linked to the requirement of suitability, which has applied to the Supervisory Board members of financial institutions since 1 July 2012. ‘Suitability’ covers knowledge, skills and professional conduct. For a Supervisory Board member, professional conduct specifies ‘independence in mind’ as a minimum requirement.

Appearance and state
‘Independence in appearance’ means that all Supervisory Board members must guard against or manage any appearance of a conflict of interests. For example, they must ensure that adequate controls are in place, such as excluding decisions about issues that appear to give rise to a conflict of interests.
‘Independence in state’ is established for each Supervisory Board member on the basis of formal independence. In other words, a Supervisory Board member should ideally not be supervising a company in which he holds a financial stake. Here, too, the exclusion criteria are based on the Corporate Governance code. As soon as a Supervisory Board member meets one of these criteria, he is no longer deemed to be formally independent.

DNB’s policy is that at least half (50%) of a Supervisory Board must consist of members who are formally independent. This creates a minimum degree of critical mass within the Supervisory Board, ensuring an environment that promotes ‘independence in mind’. At the same time, this percentage also gives organisations sufficient scope to appoint internal Supervisory Board members where necessary. Exceptions are possible in specific cases. DNB takes account of the need for groups that fall under its consolidated group supervision to pursue a consistent policy. The exemption for group companies in the CG code is applied to these groups. This allows for the preservation of dual board membership within a group under certain circumstances.

More information
Q&As on the independence of Supervisory Board members
Q&As on exemptions for Supervisory Boards