Task of the Supervisory Board
The principal corporate governance players in medium and large Dutch undertakings are the shareholder(s), the Management Board and the Supervisory Board. A Supervisory Board supervises the policy of the management and the general course of affairs in the undertaking. In addition, a Supervisory Board supports management by giving advice, both on request and of its own accord. The interest of the undertaking should always be paramount. As this interest does not automatically correspond to that of, say, the shareholder(s) or the members of the Management Board, DNB finds that financial institutions require independently functioning Supervisory Board members who will conscientiously look after the interests of all stakeholders, such as clients, employees, shareholders, public authorities and management.
An independently functioning Supervisory Board is not an end in itself. It is an essential element of good corporate governance. Under the Financial Supervision Act, banks and insurers are obliged to have a Supervisory Board consisting of at least three members. The Act also provides that financial undertakings ensure that their business operations are sound and controlled and that the members of the Supervisory Board are suitable. These provisions underlie DNB's supervision of the functioning of Supervisory Boards, specifically of their independent functioning.
What is independent functioning?
DNB looks at three elements of independence:
- All members of the Supervisory Board are able to act independently and to form balanced judgements (independent ‘in mind’);
- All members of the Supervisory Board prevent or manage the semblance of a conflicts of interests (independent ‘in appearance’); and
- At least half (50%) of the Supervisory Board consists of formally independent members (independent ‘in state’).
Independent attitude and balanced decision-making
Independence ‘in mind’ is the primary element. This covers the conduct of individual Supervisory Board members and of the Supervisory Board as a group when carrying out tasks. Examples of the questions to be answered in this regard are: Does a Supervisory Board member take an independent attitude or is he clearly acting on behalf of a stakeholder? Does he demonstrably take account of the interests of all stakeholders, including the clients' interest? What is the composition of Supervisory Board? Do the various members of the Supervisory Board have different backgrounds, allowing for a range of perspectives?
The proof of the pudding is in the eating! Supervisory Boards and their individual members must show in practice that they take all relevant interests into account in their decision-making. This clearly links in with the statutory requirement of suitability that has been in place for Supervisory Board members of financial undertakings since 1 July 2012. Suitability encompasses knowledge, skills and professional conduct. For a Supervisory Board member, professional conduct at any rate includes independence ‘in mind’.
Prevention of conflicting interests or the semblance of conflicting interests
Independence ‘in appearance’ and ‘in state’ are the prerequisites for independence 'in mind'. In determining these two elements DNB uses a number of criteria that are set out in the Dutch Corporate Governance Code (CG code). These criteria have broad-based public support.
For independence ‘in appearance’, all Supervisory Board members should avoid or control the semblance of conflicting interests. Is this issue given due attention in the rules applying to the Supervisory Board (such as regulations or statutes, possibly supplemented by policies and concrete procedures)? Are there any conflicts of interests? If so, have adequate control measures been taken ? For example, that one or more Supervisory Board members refrain from participating in decision-making on issues involving a conflict of interests. There is always a conflict of interests if the undertaking wishes to do business with another undertaking (i) in which the Supervisory Board member has a personal or sizeable financial interest, (ii) an executive of which is a family relative of a Supervisory Board member, or (iii) if the Supervisory Board member is also on the Supervisory Board or Management Board of the other undertaking.
Independence ‘in state’ is assessed by establishing whether each individual member of the Supervisory Board is formally independent. It may otherwise be like asking butchers to give a stamp of approval to their own meat. This assessment is also based on criteria from the CG code. A Supervisory Board member who fails to comply with one of these criteria is not formally independent. DNB’s policy is that at least half (50%) of the Supervisory Board should consist of independent members (though exceptions may be made in some cases). This generates a degree of critical mass within the Supervisory Board, creating a climate that promotes independence ‘in mind’. At the same time, this percentage gives undertakings scope to appoint internal Supervisory Board members if the need arises. Cases in point might be that an internal member of the Supervisory Board is well acquainted with the daily affairs of the undertaking, or that the undertaking belongs to a group.
One of DNB’s considerations in forming its assessment is that a uniform policy is important for groups which are subject to its consolidated or supplementary group supervision. The exception that the CG code makes for group companies is adopted in this case, thereby allowing for group companies to have some of the same persons on their Supervisory Boards. The exception in the CG code means that Management or Supervisory Board members of the parent who act as Supervisory Board members at the group company are regarded as formally independent. The rationale is that it is common practice in groups that Management or Supervisory Board members of the parent act as Supervisory Board members of one or more subsidiaries. For the members concerned, this is an extra means of supervising the policy of the subsidiaries.
Wearing two hats – ‘in mind’, ‘in appearance’ or ‘in state’ – still regularly occurs in the practice of internal supervision. By dealing with this issue in its external supervision, DNB helps to strengthen the quality of internal supervision within financial undertakings.