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Relations on edge: Management Board vs. Supervisory Board

Relations on edge: Management Board vs. Supervisory Board

ABN Amro’s supervisory board chairman Olga Zoutendijk has indicated that she will retire from her position on 1 July 2018. This decision is related to criticism of her leadership style, according to reports in the media including het Financieele Dagblad. Allegedly, she interfered actively in the decision-making process within the bank. She also attended and addressed meetings that are generally only attended by management board directors. Her actions may have contributed to internal tensions and have had an impact on the departure of former senior executives. The question is whether Zoutendijk had sufficient attention for the allocation of duties between the Management Board and the Supervisory Board that has been laid down in law. She may also have violated the relevant provisions of the Corporate Governance Code. In this article, I will discuss the allocation of duties between the management board and the supervisory board: what are the main characteristics and powers of both company bodies?

Statutory allocation of duties

Management Board
The main and most obvious task of the management board is to formulate the strategy and manage the company on the basis of that strategy. In doing so, the management board must act in the interest of the company and its business. The interests of all parties involved must be taken into account when making decisions. The management board and, if not provided for otherwise, every individual board director has the power to represent the company externally. In the Netherlands, the management board can consist of both natural persons and legal entities.

Supervisory Board
The task of the supervisory board is first and foremost to supervise the management board’s policy and the general course of affairs within the company and its business. It also issues advice to the management board and, similarly to the management board, the supervisory board must act in the interest of the company and its business. The supervisory board is to be provided with the information required for the performance of its tasks by the management board and the supervisory board must be informed comprehensively at least once per year regarding the policy of and risks to the company among other things. Contrary to the management board, only natural persons can have a seat on the supervisory board.

The range of duties of the supervisory board is more comprehensive if the company is required to have a two-tier board structure[1] in connection with its size. If this is the case, the supervisory board has the right to appoint and dismiss management board directors for example. In addition, certain resolutions of the management board are subject to the supervisory board’s approval. A two-tier board structure can also be a voluntary choice. This shifts certain powers of the general meeting of shareholders to the supervisory board.

One-tier Board
In case of a one-tier board, the management board and the supervisory board are merged as it were into a single company body. If this is the case, there are no longer management board directors and supervisory directors, but rather executive and non-executive directors. Non-executive directors can be considered to be supervisory directors and the executive directors can be considered to be management board directors. Strictly speaking, they are all members of the board and on the basis thereof responsible and consequently liable for policy. However, in practice a distinction may be made in the articles of association between the responsibilities of the executive and the non-executive directors. This distinction can be very important to internal and external liability.

The Corporate Governance Code

The Corporate Governance Code (hereinafter also referred to as ‘the Code’) includes principles and best practice provisions that regulate the relations between the management board, the supervisory board and the (general meeting of) shareholders. The Code embodies the widely-accepted general views of good corporate governance within listed companies. If a listed company fails to comply with the Code, the deviating conduct will have to be explained to the shareholders and in the directors’ report. These standards may also have an indirect impact on non-listed companies. They can provide nuance to the standards of reasonableness and fairness and proper performance in matters of liability for example.

As regards the allocation of duties between the management board and the supervisory board, the Corporate Governance Code includes rules that are almost the same as those of the Dutch Civil Code. There are some differences in nuances, however. According to the Code, the management board is responsible for the (culture of) continuity of the company and its business, for example. The management board focuses on long-term value creation by the company and its business and weighs the relevant interests of the stakeholders such as the employees for this purpose. The management board involves the supervisory board on time in the formulation of strategy intended to realise long-term value creation and reports on the strategy and the explanation thereof. The supervisory board in turn supervises the management board’s policy and the general course of affairs within the company and its business. All of the above with a view to the specific key objectives of the supervisory board, such as: long-term value creation, the interests of all stakeholders, risk management, internal control and the right governance culture.

Conclusion

In order to structure properly and maintain the governance culture within a company, both the (executive/non-executive) directors and the supervisory directors must be well aware of who has which tasks and responsibilities. If those boundaries threaten to become blurred, such may lead to irregularities as are presumably at play at the top of ABN Amro. Distorted governance relations usually do not benefit policy or the performance of the company. You should therefore ensure that the allocation of tasks is laid down properly and that everyone is aware of it. You should also obtain sound advice in advance if would like to introduce the one-tier board system, if you intend to introduce a two-tier board structure, if you are obliged to apply the Corporate Governance Code or in the event these standards have a direct or indirect impact on governance within your company.

[1] A two-tier board structure is mandatory in principle for public and private limited companies (NV’s and BV’s) whose own capital including reserves is at least €16 million and in the event this company or a dependent company is required by law to form a works council and the company and its dependent companies jointly employ 100 persons in the Netherlands generally speaking.

By Bart Jacobs

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