The discussion on Corporate Government in The Netherlands was (officially) kicked off in 1996. Over the course of the last 18 years, it has evolved into the country’s current Corporate Governance Code (“CGC” or “Code”) by taking into account feedback by its “users,” lessons learned from various corporate scandals in The Netherlands and elsewhere, and other relevant developments in global markets.

The current Code is aimed at companies with registered offices in The Netherlands whose shares are quoted on a Dutch stock exchange. It takes the shape of a comply or explain model, which requires companies either to comply with their respective governance codes or explicitly explain why they do not. As is the case in many similar codes and regulations, the Dutch CGC seeks to stimulate responsible and transparent governance on the basis of the accepted principle that a company is a long-term form of collaboration among all stakeholders involved. As such it provides principles on the roles and responsibilities of the management and supervisory boards, determination and disclosure of remuneration, independence, corporate structure, shareholder responsibility, and communication, among others. These principles, some more explicitly than others, are a means towards creating longer-term enterprise value.

A feature which is specific but not necessarily unique to the Dutch CGC is that management and supervisory boards, in discharging their respective roles, “shall take into account the relevant interests of the company’s stakeholders” as well “have due regard for relevant corporate social responsibility issues.” This underpins the notion that if non-shareholder stakeholders are to cooperate within and with the company, it is essential for them to be confident that their interests are properly represented and secured over a longer period of time. Principles of reasonableness and fairness determine the extent to which shareholders can exercise their interests at the expense of those of other stakeholders.

Whether this feature adds anything substantial or is of a more symbolic nature remains a matter of opinion. For all intents and purposes, however, it is somewhat impractical in its application. It fails to lend itself to clear communication and transparency, which is one of the more important objectives of the CGC. In the absence of a clearer yardstick, boards will become embroiled in conflicting loyalties and needless debates and thus will not be able to perform their chief functions as well as they should.

This does not imply, however, that one should disavow the importance of a firm and longer-term alignment of the various interests of shareholders and other stakeholders. Rather, those guided by self-interest and short-term gains at the expense of stakeholders are the root cause of loss of jobs, customers, investments, savings, self-esteem, and a pollution-free environment.

To this day, we continue to pay a high price for those who unjustly benefited or attempted to benefit from the deficiencies of a system that was coined in a different age with different circumstances, pace and technology.  This system can only remain functioning now with countless costly bureaucratic and confining rules and regulations to control and mitigate the excesses that have manifested over time. In the absence of any alternative that would qualitatively and/or quantitatively benefit a larger number of people than the current system does, we should be prepared and have the courage to seek intrinsic self-enhancing solutions within the system, rather than taking refuge in snap treatment of issues if and when they arise, as is now often the case.

Despite everything that respective Corporate Governance Committees have implemented and regulators have imposed in order to advance a longer-term perspective, success, as yet, is not evident. Consider the following:

  • According to a recent McKinsey survey [1], 63% of a group of 1,000 board members and C-suite executives around the world said the pressure to generate strong short-term results had increased over the previous five years, with 79% of them feeling especially pressured to demonstrate strong financial performance over a period of just two years or less. There is no reason to assume that the numbers for the Netherlands are much different.
  • 86% of those interviewed declared that using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation.
  •  The performance of fund managers at institutional investors such as pension funds, insurance firms, sovereign wealth funds and mutual funds is assessed relative to benchmark indices and the amount of assets they manage [2]. Not surprisingly, those managers focus on short-term performance – and pass this emphasis along to the companies they manage.
  • In the Netherlands, 2/3 of the traditional Dutch listed companies on the major AEX index have poison pill-like structures in place to fend off undesired influences that may threaten the company’s continuity, independence and/or identity. This does not encourage active shareholder participation, particularly if one is aware that a large number of companies also have mechanics in place which turn the shares of those shareholders who have not registered to exercise their voting rights for a particular shareholder meeting, into votes in favor of any decision the board has tabled for that meeting.
  • In a recent interview [3], the chairman responsible for drafting the latest version of the Dutch CGC, Jean Frijns, expressed serious doubts as to whether the Code has brought about the desired and anticipated alignment between shareholders and stakeholders. Its intention to influence behavior has only resulted in a mechanical check-the-box mentality. Now that many principles in the Code have been incorporated in regulation, Frijns even goes so far as to say that it might be better to abolish the Code entirely and start all over with a blank sheet of paper to address those issues that really matter.
  • On the one hand, we see pressures on boards to advance short-term interests against better judgment. On the other, we see a lack of real shareholder engagement by those who could, and in my view, should have a longer-term perspective on the affairs of the company. This implies that an important prerogative and means for establishing a balance of power is wasted as shareholders vote by buying and selling shares, rather than actively exercising their voting rights. In a system where the proper countermeasures are lacking, e.g. if the various players do not exercise their rights and obligations in accordance with the purpose for which they where granted, sub-optimization is a real threat and decline may well wait around the corner.

The subjective nature of assessments makes it difficult to provide solid evidence that those companies that strive for longer-term value creation outperform the market in the long run. There are studies, however, which do point in that direction, such as Goldman Sachs’s SUSTAIN research [4]. And, as we can surmise from the McKinsey survey quoted above, executives know it intuitively as well. At the same time, we all know from the most recent economic crisis, which was largely brought about by a misguided focus on short-term gains, that short-termism is not a viable option. 

We now face a multitude of questions regarding our next steps to advance the longer-term value creation as envisioned by CGC committees and regulators. How can we achieve longer-term value creation without falling into the trap of layering additional rules on the system and sponsoring the check-the-box mentality that seems commonplace in many current-day measures? How can we create an environment based on that longer-term strategy, all while remaining responsive to the sometimes-competing interests of shareholders and other stakeholders? And how can we align those interests while remaining responsive to the structural shifts that may affect that longer-term strategy?

Without implying or assuming that this is the sole cure for all problems, revitalizing the role of those shareholders who have a longer-term relationship with the company would, in my opinion, be a huge step forward because these shareholders in general hold an active and longer-term interest in the company. By emphasizing longer-term values and objectives, they can help overcome the power gap and become instrumental in aligning shareholder and other stakeholders’ interests. By strengthening these shareholders’ position, the positions of hit-and-run activist shareholders and of those who only have a passing interest in the company will be watered down.

Introducing shares that reward loyalty [5] and award meaningful additional voting rights commensurate to the length a given shareholder has held that particular share (say up to 3 times) could be instrumental in achieving this objective. These shares, which could go under the name Loyalty Aligned Voting Right Shares or “LAVRS”, are in all other respects equal to other shares. The shareholders of LAVRS would share in dividends exactly the same way ordinary shares would, regardless of the number of votes corresponding to that individual share.

Only beneficial shareholders would be entitled to additional voting rights, and only to the extent they registered their shareholdings prior to the meeting and would exercise these rights themselves. It follows logically that depository shares will each attract one vote only, if the beneficial owner himself does not exercise the voting rights associated to these shares.

Obviously there are practical issues to solve and objections to overcome, but thanks to technology and regulation, keeping track of who owns what shares and for what period of time is not one of them. Electronic trading has simplified the mechanics of tracking and identifying shareholders and their holding period.

Some may argue that this will adversely affect share prices, as inequality between shareholders usually does. Apart from the fact that the whole purpose of LAVRS is to increase shareholder participation rather than weaken it, it should also be understood that each share traded carries the same number of voting rights, i.e., one vote per share. As such, the value of individual shares will be equal on the trading floor. At the same time, the attractiveness of shares may be positively or negatively influenced depending on how one rates the value of LAVRS as an instrument to enhance longer-term alignment among all stakeholders. For some this may serve as a foundation and beacon for controlled growth and relative stability; for others, this may become a lost opportunity to hit-and-run. This initiative does not come at the expense of bureaucracy, nor can it be discharged through a check-the-box approach. It actually requires real dynamics and guides behavior in the direction most of the regulators and CG committees, both in the Netherlands and abroad, see as the right one.

By rewarding loyalty and longer-term interest in the company with additional influence, we would send an important message to all stakeholders in the company. This includes executives, employees, clients, suppliers, and society as a whole. Short-term results will be subordinated to the success of shareholders in the long run. In such a constellation, albeit indirectly and without ignoring the well-understood self-interests of longer-term shareholders, the interests of other stakeholders gain weight as reputation, sustainability and integrity become guiding factors in assessing the direction and strategy of the company. And provided they embrace and can handle meaningful shareholder influence, management and supervisory boards will also benefit from this clearer direction. Receiving input from shareholders would help management focus on longer-term objectives and avoid the pressures of short-termism.

We currently have the perfect opportunity here in The Netherlands to explore the virtues and pitfalls of this idea. Given that one of our largest banks is on the cusp of launching an I.P.O., we could test the concept of LAVRS and implement a longer-term strategy aligning engaged shareholders’ objectives with those of other stakeholders. The relisting of ABN AMRO shares with these goals in mind would serve as a course correction against the errors that led to its nationalization in the first place.



[1] HBR, January-February 2014, Dominic Barton and Make Wiseman - Focussing Capital on the long run

[2] HBR, March 2011, Dominic Barton - Capitalism for the long term

[3] De Commissaris, December 2013 (DLA Piper Nederland) - 10 Jaar Code-Tabaksblat

[4]  Goldman Sachs SUSTAIN research (February 2014) shows that since its launch in June 2007, the global GS SUSTAIN focus list has outperformed the MSCI ACWI benchmark with more than 40%. The GS SUSTAIN Focus list brings together companies well positioned to sustain industry-leading returns across global industries. It is aimed at long-term, long-only performance with a low turnover of ideas.

[5] In 2007, DSM announced it was going to float loyalty aligned dividend shares (i.e. rewarding longer-tem shareholders with extra dividend). This proposal never made it to the shareholders meeting as it was blocked by the Commercial division of the Court in Amsterdam as being in contravention of the Commercial Code principle to equally respect the rights of all shareholders. Later this decision of the Commercial division of the Amsterdam court was overruled by the High Court of The Netherlands providing that if the company’s articles of association are sufficiently specific on this arrangement and the arrangement is justified from e.g. a public interest perspective, this would be acceptable. DSM did not pursue this arrangement any further though.

About the author:

Mark J. Goudsmit is a former partner of EY. Before his retirement he was a member of the Global Quality & Risk Management Committee of the firm as well as the Global Tax Board. He is a certified INSEAD International Director (INSEAD IDP-C) and a tax lawyer by education. Currently he writes on economic, political and governance issues on his (mostly) Dutch language blog, Aantekeningen in de Marge (

This is an abbreviated version of a certification paper for the INSEAD Certificate in Corporate Governance (February 2014), with editorial support by Jocelyn Ho. 

AuthorMark Goudsmit