Sustainability is key in new Dutch Corporate Governance Code

In our November 2022 newsletter, we already looked ahead briefly to the proposed update of the Dutch Corporate Governance Code (the “Code”). The Code, which sets out the rules of conduct for good corporate governance, was recently amended again. The Corporate Governance Monitoring Committee (the “Committee”) has now published the new version of the Code, from which the spirit of the times is clearly apparent. Sustainability is key, and the Code also pays more attention on themes such as diversity and inclusion. A number of important changes follow from the new Code. It would go too far to list all the amendments, but we would like to draw your attention to three significant changes. The Code now provides, for instance, that directors are responsible for sustainable long-term value creation. Diversity and inclusion policies will also have to be put in place at the company. In addition to a wide range of instructions to the board, a standard of conduct for shareholders also follows from the Code.

Sustainable long-term value creation

The concept of ‘long-term value creation’ has been a central theme in the Code for some time. The term ‘sustainable’ has now also been added to it. The Commission has opted to replace the term ‘ESG’ with ‘sustainability’, so that the economic aspects of doing business are now also included, in addition to environmental, social and governance factors. By introducing this guideline for directors and supervisory directors, the Commission is responding to the desire from the practice to focus on sustainability. Directors and supervisory directors already had to consider the long-term consequences of decisions and their impact on stakeholders. This addition to principle 1.1 of the Code makes the board responsible for sustainable long-term value creation and also requires it to act in a sustainable manner from an ecological, social and economic perspective. This does require some qualification: this responsibility does not create an obligation of result for the board. And, according to the Commission, it cannot be equated with liability. Although things are never as black as they seem, companies will therefore nevertheless have to account for the manner in which they create long-term value in a sustainable manner.

Although it is to be applauded that the Commission is following the developments in the field of sustainability by adding this term to the Code, it would, in our opinion, have been more useful if the Commission had provided a somewhat more precise definition of the concept of long-term value creation, since it remains a subjective and therefore problematic concept. On the other hand, this does give directors and supervisory directors freedom of policy by giving them room to define the way in which they create sustainable long-term value.

Diversity and inclusion

In addition to diversity, the new Code now also addresses inclusion. The scope of the diversity policy has thereby been expanded. Companies must draw up what is known as a diversity and inclusion (“D&I”) policy that creates a socially safe atmosphere within the company and ensures a level playing field in which no distinction is made between employees based on their identity or background. The policy must aim to give everyone an equal opportunity to become successful within the company. Companies should also pay attention to addressing inappropriate behaviour.

In addition to drawing up a D&I policy, companies must also report on the results of their D&I policy. They must account for, among other things, the concrete targets they have set regarding the composition of the supervisory board, the management board and (if any) the executive committee.

Role of shareholders

Besides the addition of ‘sustainability’ and ‘inclusion’, the Code also includes a new principle, focused on the role of shareholders. In addition to the principles related to good corporate governance, it also provides for a behavioural standard for shareholders regarding strategy. Principle 4.4 requires shareholders to recognise the importance of a strategy aimed at long-term value creation. Shareholders may of course still pursue their own interests, subject to the rules of reasonableness and fairness, but must take this new principle into account when deciding how to exercise their rights.

The Code furthermore contains a number of new best-practice provisions for institutional investors. It would be beyond the scope of this article to address these changes, but we we would like to note that they provide relevant new best practices for practitioners.

Entry into force of the Code

In principle, the updated Code takes effect for every listed company from 1 January 2023. That means that, from that date onward, listed companies will be deemed to comply with and report on the practice provisions. Practice will have to show what impact this update of the Code will have. The reactions to the new Code have been diverse. We therefore expect further updates of the Code in the near future.

Please feel free to contact Helger Kamerman (+31-6-510 801 97) or Lusine Shahbazyan (+31-6-128 715 76) for more information on this subject.

This article was published in the Newsletter Vestius of June 2023