Can the First Dutch Stewardship Code Encourage Investors to Act as Stewards

Hélène Vletter-van Dort is Professor of Financial Law & Governance at the Erasmus School of Law and Titiaan Keijzer is a Visiting Scholar at Columbia Law School and PhD Candidate at Erasmus School of Law. This post is based on their recent memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).


On July 3rd, 2018, Eumedion published the first Dutch Stewardship Code (the “Code”), following a public consultation launched in September 2017. The Code provides a set of principles for stewardship by asset owners and asset managers towards Dutch listed investee companies. Eumedion is a cooperative body of mainly Dutch institutional investors, although in recent years, it has been (formally) joined by well-known foreign parties such as BlackRock and Aberdeen. Thus, Eumedion represents a globally highly diversified asset base in excess of € 5 billion. We discuss the background and implications of this first Code and draw comparisons with the Dutch Corporate Governance Code and the UK Stewardship Code.

General framework

As per 1 January 2018, the 2016 Corporate Governance Code (“CGC”) has come into force in the Netherlands. The CGC is based on five themes, such as long-term value creation and corporate culture. The CGC has purposely not focused on the role of shareholders, as at the time of its drafting and consultation, the revised Shareholders Rights Directive was being finalized. In its closing statement, the Monitoring Committee Corporate Governance (“Monitoring Committee”) recommended its successors to focus on the role of shareholders in more detail. It also indirectly referred to the consultation of the Code by Eumedion.

The recitals of the revised Shareholders Rights Directive mention that effective and sustainable shareholder engagement is one of the cornerstones of the governance model of listed companies. Eumedion states that, since asset owners and asset managers hold the overwhelming majority of the shares in Dutch listed companies and manage other people’s and institutions’ money, society at large expects both Dutch and non-Dutch asset owners and asset managers to take their responsibility in playing an active role in promoting good corporate governance and sustainability practices.

The Code starts with a couple of important acknowledgements. First, it states that it incorporates the new stewardship obligations for asset owners and asset managers stemming from the revised Shareholder Rights Directive. The Code also includes the best practices of the CGC that apply to asset owners and asset managers. Second, the Code observes that the role of asset owners or managers is not to conduct the daily business operations of investee companies. They do have, however, a role to play in monitoring the boards of those companies and that is why they need to gain an understanding of how the boards fulfil their responsibilities. This stewardship role includes the casting of informed votes at general meetings and the monitoring of and engagement with listed companies on aspects related to strategy, the performance and risks and opportunities of the company, capital structure, social and environmental impact and corporate governance. Based on this premise, asset owners and managers should initiate a meaningful dialogue. Although the Code is the first of its kind in the Netherlands, the initiative is not entirely without precedent: in 2011, Eumedion already published a set of Best Practices. Whereas Eumedion carries significant weight in setting (Dutch) governance standards, the Code is as such not endorsed in legislation, as opposed to, notably, the CGC. Indeed, the Eumedion working group responsible for drafting the Code consisted solely of representatives of institutional parties (mostly related to or a member of Eumedion), whilst the—government appointed—Monitoring Committee consists of independent members as well as representatives of associations of listed companies, employers and employees.


The Code consists of a Preamble, Principles (11 in total) and Guidance. Principally, asset owners and managers are required to have a stewardship (Principle 1) and conflict of interest policy (Principle 6), both of which should be disclosed publicly. Additionally, asset owners and managers should report annually on the implementation of their stewardship policy, whereas asset owners shall also report publicly on their arrangements with asset managers. Indeed, the Code places much of the stewardship responsibilities on asset owners, with asset managers being granted more latitude. However, the increasing length of the chain of asset owners and managers has been a source of concern to many scholars, with each additional intermediary contributing to increased short-term focus. In this respect, the UK Stewardship Code appears somewhat more balanced. Additionally, the UK Stewardship Code also applies to service providers such as proxy advisors, which are largely disregarded by its Dutch counterpart.

Scope and application

Similarly to many other codes, the Code features a comply-or-explain approach, phrased as apply-or-explain. However, the CGC also stipulates that if the explanation for a deviation contains some sort of time frame, the company should indicate when it will fully implement the particular provision. None of this can be found in the Code. Instead, it encourages asset owners and managers to “commit”, whatever this might imply. As such, the Code also deviates from the earlier Consultation Document as well as from its UK counterpart, which requires signatories to issue a public statement on stewardship on their website.

In total, 25 parties participated in the public consultation procedure for the Code. (For a comparison between the initial and the final version of the Code, the 2011 Eumedion Best Practices, the CGC and the Shareholder Rights Directive, we refer to Eumedion’s feedback statement). The Code will apply to fiscal years starting on or after January 1st, 2019. Compliance will be monitored through an analysis of annual reports, although not by an independent committee, as is the case with the CGC and was proposed in the consultation leading up to the Code, but instead by the Eumedion Secretariat. A summary of the monitoring report will subsequently be made public.

Exercise of voting rights

The Code deals with the exercise of voting rights in several provisions. When requested, institutional investors should disclose their full equity holding (Principle 3). Asset owners and managers should exercise their voting rights in an informed manner, which is (formally) understood as in accordance with policy. They should disclose voting at individual company level, per item, on a quarterly basis. General voting behaviour should be disclosed on an annual basis (Principle 7). In case services of proxy advisors are used, asset owners and managers should disclose to what extent the voting recommendations of those advisors are followed. They should also regularly evaluate that proxy advisors have robust processes, policies and capabilities in place to ensure the quality of the voting recommendations received. When convening an extraordinary general meeting or requesting an item to be put on the agenda, the asset owner or manager should first consult with the board (Principle 9) and should attend the meeting at which the particular agenda item is discussed (Principle 10). As such, the Code contains few hard obligations, but focuses mainly on voluntary measures and/or disclosure.

Dialogue and escalation

A remarkable provision is Principle 3. Its implications are unsurprising to the extent that the Dutch (company law) principle of reasonableness and fairness ensues that shareholders are expected to be prepared to enter into dialogue with Dutch listed investee companies. However, the Principle also gives a list of “escalation actions” asset owners and asset managers may take if circumstances so require. This list contains a number of remarkable steps, such as:

  • Intervening jointly with other institutional investors and shareholders on specific issues;
  • Issuing a public statement.

Thus, the Code appears to disregard the risk of market abuse and the rules on acting in concert. We are seriously questioning the wisdom of these proposed actions.

Also noteworthy is Principle 5, which states that asset owners and asset managers may aim to understand the aspirations and motivations of other relevant stakeholders of the company, including banks, creditors, customers, suppliers, the works council and non-governmental organizations, to advance the goals of a dialogue with a Dutch listed investee company and/or their voting behavior on material issues. The decision to respond to relevant stakeholders is determined by the asset owner or asset manager, based on the issue at hand.

Again, this provision seems to encourage activist behaviour and/or a dialogue behind the company’s back, which may lead to the formation of coalitions that may have other interests at heart than the company’s long-term growth. We feel that, although of course it should always be possible for the principal stakeholders to engage with each other, this should preferably not be done on a structural basis without the company’s knowledge or being informed (immediately) afterwards.

Securities lending

Another important phenomenon, analyzed intensively by Hu and Black and also by Schouten, is that of securities lending, which can result in economic interests exceeding (“hidden ownership”) or inferior to control power (“empty voting”). This is a contentious matter, as the incentives for investors to cast an informed vote (thus contributing to long-term value) could be distorted. Therefore, Principle 11 of the Code appears to be a step in the right direction. It stipulates that asset owners and managers should recall their lent shares if the agenda of a general meeting contains one or more significant matters. Significant matters are those of economic or strategic importance, where voting is anticipated to be close or controversial or where asset owner or asset manager disagree with the board’s recommendation. Additionally, asset owners and managers should refrain from voting if their short position exceeds their long position. However, this principle is not applicable at group level. In that case, the manager of the legal entity that is used for taking short positions has no influence on the group’s voting policy and behaviour. Nevertheless, the question remains whether securities lending is a topic that belongs in a stewardship code. The UK instrument, for instance, does not address this issue and so far does not seem intent on doing so.

The Review of the UK Stewardship Code

Similar to the Dutch Stewardship Code, its UK counterpart aims to improve the quality of the engagement between investors and corporations and, thus, to contribute to long-term value. The UK Stewardship Code was first adopted in 2012. A revised edition is scheduled to be presented later this year, as part of the broader overhaul of UK corporate governance. Indeed, the UK Stewardship Code has not remained free from criticism. Some have argued that in comparison with the UK Corporate Governance Code, it (i) emphasizes disclosure over substantively regulating the roles of different corporate actors, (ii) is less detail-oriented and (iii) lacks specific sanctioning mechanisms. As noted, the Code faces the same problems. Additionally, the fact that British institutional shareholders have drastically diversified their holdings beyond national borders has been cited as another complicating factor in ensuring the UK Stewardship Code’s effectiveness. Melis has called this the “institutional investor stewardship myth”.

Indeed, what has been presented in the 2017 proposal for reviewing the UK Stewardship Code as some initial “high level questions” actually concerns a rather fundamental inquiry on its future, both to its form as well as its substance. Issues to be discussed include whether expectations regarding investors’ behavior should be formulated more clearly, and whether different Stewardship Codes should apply for specific types of signatories or based on their position in the investment chain (direct or indirect). Another matter is whether certain aspects (including diversity) of the UK Corporate Governance Code should be applied by analogy, or whether institutional parties should specify how they contribute to long-term value creation (with a view to dividends and share buybacks, ESG policies and holding periods). Finally, in the UK (Stewardship Code) Consultation, a request is made to provide information on any element of foreign Stewardship Codes that could be of use. After this plethora of options, one is left with the impression that currently there is no clear-cut vision on the future function of the UK Stewardship Code, and that considerable changes are not unlikely.

Thus, one may wonder whether it would not have made more sense for Eumedion to postpone the adoption of the Code until a revised UK counterpart would have been presented. Additionally, the revised (and binding) Shareholder Rights Directive considers asset owners and asset managers as well, meaning that one can cast even more doubts over the usefulness of the Code. Nevertheless, the Code is there. Given the fact that it largely aims to follow the existing UK approach, it will be interesting to see whether the initiative will yield any significant results—to be continued.

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