With the introduction of the Shareholder Rights Directive (“SRD II”) across the European Union, shareholders of Dutch companies will be asked to provide more regular feedback on the executive remuneration of their investee companies. Currently, approval is generally only sought on material amendments to the remuneration policy, but it appears likely that Dutch-listed companies will be required to seek AGM approval of the management board remuneration policy on a binding and ex ante basis at least every four years, or whenever changes are proposed.
According to the current draft legislation, companies will need to gain the support of at least 75% of votes cast on their remuneration policy (if the vote fails, the current policy will stay in place). An annual, advisory ex post shareholder vote on the remuneration report is set to complement the policy vote. If legislation passes the Dutch Senate before the year-end as expected, the new remuneration framework will be in place for the 2020 AGM season.
This will set tangible challenges for many Dutch companies. Given the short transitional period and higher approval threshold, the draft legislation’s new structural and disclosure requirements will compel companies to revisit their management board remuneration plans as a matter of urgency. As part of Glass Lewis’ annual engagement programme, we’ve spoken about the upcoming changes with a variety of Dutch issuers, including twenty of the biggest companies listed on the Euronext Amsterdam. The feedback that we received suggests that issuers will have to find the sweet spot between domestic pressure on quantum payouts, and wider investor expectations of a robust incentive structure.
Raising the Stakes: A Higher Threshold
Investors are already on alert when it comes to remuneration proposals, and some of the most contentious Dutch pay votes in recent years could have played out very differently under the new regime. For example, take Van Lanschot Kempen. At its 2018 AGM, the boutique financial services provider proposed substantial fixed pay increases for its management board members. While the company explained that the raises were based on peer comparisons, a number of shareholders raised their eyebrows at the benchmarking study used as justification. The amended policy felt the wrath of shareholders, gaining the support of less than a majority of free-float shareholders and just 62% of votes overall–enough to pass at the time, but well below the new 75% threshold.
It’s not the only case of institutional investors putting their foot down. At their 2019 AGM, Wessanen sought shareholder approval to alter the vesting schedule under the long-term incentive plan to allow for partial vesting below median, based on the fact that “peer group companies incentify their directors also under median level.” However, a review of Wessanen’s TSR peer group quickly poked holes in this short rationale and raised the question of whether the proposed change may have instead been driven by the company’s recent slide down its peer ranking. Presumably following feedback from concerned shareholders, Wessanen decided to pull the proposal off the agenda entirely.
Social Acceptance in the Dutch Stakeholder Model
Institutional investors aren’t the only stakeholders that companies need to be aware of when forming their pay proposals. One novel proposed change to the law through SRD II is a requirement that companies take ‘social acceptance’ into account when creating a new remuneration policy. While it is currently unclear exactly how the legislator foresees compliance with this provision, it is likely intended to further strengthen and formalise the Dutch ‘stakeholder model’, with companies already being legally required to consider the interests of stakeholders beyond the organisation and its shareholders.
Dutch companies are likely to encounter a plethora of different views on say on pay from their various stakeholders. That’s particularly true for financial institutions, which are already subject to more stringent legislation on management board remuneration. In mid-2016, the Act on the Remuneration Policy for Financial Undertakings (“WBFO”) entered into force, dictating that financial institutions with operations predominantly based in the Netherlands must limit variable pay to a maximum of 20% of fixed remuneration. Financial institutions that received state aid have already faced an outright ban on granting any variable remuneration to executives since 2012 and the industry is continuing to struggle to regain the public and political trust that was lost during the 2008 financial crisis.
Not only is there domestic pressure to closely control variable remuneration and quantum in general, financial institutions may need to clearly communicate to their international investors – who may be used to substantially higher upside opportunity in executive contracts in their home markets – how the remuneration policy will nevertheless serve to align the interests of executives with shareholders, how it will ensure that the company will be able to attract top talent, and in what way management board performance will be evaluated – even if targets are not explicitly linked to pay packages. Discussions with domestic stakeholders – such as the Works Council and the Dutch state – may need to be more focused on quantum and the link between management board and employee pay, clearly explaining the rationale and business case for any proposed pay increases.
Recent Public Responses to Dutch Say on Pay
Public discussions and AGM votes on remuneration policy changes in recent years have highlighted that there appears to be room for improvement in some companies’ stakeholder outreach on this matter.
At the beginning of 2018, ING Group NV (“ING”) proposed an increase of up to 50% of base salary for the CEO in the form of “fixed shares” that, while not dependent on any performance conditions, would be subject to a five-year holding period and a shareholding requirement of at least one year of base salary. However, following public backlash, which included the Dutch Minister of Finance threatening to block the increase, the company withdrew its proposal stating that it had “underestimated the public response in the Netherlands on this clearly sensitive matter”. Given that ING was blindsided by the outcry, it’s possible that a more concerted engagement push might have led to more shareholder support. Nonetheless, it’s clear that large and immediate quantum increases by financial institutions will be closely scrutinised by Dutch society, particularly when a compelling rationale isn’t provided.
ASR Nederland NV (“ASR”), another Dutch Company subject to WBFO regulation, ceased to award variable remuneration to members of the management board in 2011. In the past fiscal year, the company adjusted the constitution of its benchmark group to be composed of companies “with purely Dutch financial and similar listed companies of a socially responsible character.” Over the period from 2018 to 2020, it is intended that the base salary for management board members be gradually, but significantly, increased, with the CEO receiving a 40% pay hike.
The increases have been the subject of a strong reaction in the Netherlands. The Dutch Minister of Finance labelled them “striking and very heavy” and stated that it is important for the company to take into account its broader social support when determining the remuneration of top management. Further, trade union FNV Finance stated that the increases sent “the wrong signal to employees”, who would only receive a 2% increase following intense negotiations. Even when spread over multiple years and based on benchmarking, large quantum increases may receive widespread criticism—particularly where there is a misalignment of quantum increases between executives and the rest of the workforce.
Social Acceptance Through Stakeholder Engagement
The cases outlined above highlight that remuneration policy amendments–even if considered obvious or justified by the supervisory board–may prompt public outrage or shareholder pushback unless discussed with relevant stakeholder groups in advance. A board member at one of the companies we spoke to expressed their belief that ‘there will definitely be a number of companies that will encounter an unpleasant surprise. There are simply too many variables to consider. We are just trying to make sure we aren’t the ones who get surprised.’
Indeed, based on our experience engaging with the aforementioned companies, stakeholder discussions about pay may not be occurring quite as frequently in the Netherlands as in other markets due to the current system’s sporadic shareholder voting on remuneration-related items. In many cases, the absence of any pay proposals at the AGM has caused the topic to fell relatively low on the stakeholder outreach agenda. As a result, some companies may be out of touch with the differing views and concerns of their relevant stakeholders–leaving them particularly susceptible to an unpleasant surprise.
As such, companies may want to consult with investors and other relevant stakeholders on their remuneration program—not just as a means of building support, but as a way of meeting the proposed requirement that social acceptance be taken into account. With substantial domestic scrutiny and 75% of votes cast likely to be required to pass a remuneration policy vote, Dutch companies that simply guess the expectations of their stakeholders may end up facing criticism from politicians and the media, or even failing to gain shareholder support at the AGM.
Max is an analyst covering the Dutch market.