Pension funds have a big interest in exercising their governance. By the end of the 1990s, they became increasingly aware of the importance of doing so. Pension funds strive to protect the benefits of their members as effectively as possible from the consequences of inflation. They therefore invest part of their assets in shares.
But the accounting scandals over the past few years have severely damaged investors’ confidence in shares. Rebuilding this trust is now a high priority everywhere. Pension funds and other institutional investors are expected to contribute to this rebuilding process. In what ways do Dutch pension funds influence the policy of the companies they are investing in?
A key player in the Dutch corporate governance field is the Foundation for Corporate Governance Research for Pension Funds, called in Dutch, Stichting Corporate Governance Onderzoek Pensioenfondsen (SCGOP). It describes itself as “an organisation established in the light of ‘the Peters Committee’, the corporate governance committee that has played an important role in intensifying and widening the corporate governance debate in the Netherlands”.
SCGOP was founded in 1998 by the industry-wide pension funds ABP, PGGM, Spoorwegpensioenfonds and the company pension funds KLM, KPN, Philips, Shell and Unilever. The Association of Industry-wide Pension Funds, Association of Insurance Companies, Dutch Fund Association and the Association of Company Pension Funds have an observer status within SCGOP.
SCGOP’s purpose is to facilitate its participants. In this respect, it is stressed that the foundation was not established to develop corporate governance independently from its participants. Each participant decides in what way it wants to contribute to the development of the corporate governance system. The participants do this from the perspective of long-term investors.
By the end of 2003 the Tabaksblat commission presented the Dutch Corporate Governance Code. In an explanation to the code, Morris Tabaksblat, chairman of the committee, said at that time that the
in-depth, wide-ranging and
sometimes strong debate has led to a fully-fledged code that can count on a broad base of support within society. He said: “The corporate
culture in the Netherlands is changing. In some cases action has been taken ahead of the code’s entry into force. So even prior to its adoption, the code is already
having an influence.”
Tabaksblat noted that there is some belief in self-regulation, which appeared to have arisen where initially sceptical voices had claimed that the entire code needed to be made law because it ‘lacked teeth’. According to Tabaksblat it was up to the companies themselves to apply the code. “The code must be taken up seriously. For only then will a meaningful effort be made to restore the loss of confidence,” he argued.

Corporate governance issues
In facilitating pension funds to exercise corporate governance on companies SCGOP produced a manual in 2004 in line with the principles and best practice provisions of the Dutch Corporate Governance Code.
The manual describes the specific Dutch situation as it stresses the importance of the ‘two-tier’ system. “Two-tier means that a separate body (the supervisory board) supervises the management. In a one-tier system there is only one board. The Netherlands has a two-tier system. With regard to the supervision of a company’s management, investors in the Netherlands must therefore place their confidence first and foremost in the supervisory directors. In countries with a one-tier system investors must place their trust in the stock market regulator, although in these countries too independent non-executive directors are playing an increasing role.”
Differences such as one-tier or two-tier models make it difficult to draw up international rules of conduct for good corporate governance. Most countries therefore have their own corporate governance codes. But, according to SCGOP, most corporate governance codes and also the Dutch code contain four key issues:
q Shareholders must have prompt access to all relevant financial information in order to assess whether the company’s policy has met its objective. Important matters must be presented to shareholders for approval. Shareholders must be in a position to cast their votes in a straightforward manner at the general meeting.
q Anti-takeover measures can be of use in guaranteeing the continuity of the company in particular situations. However, they should not be used to enable the management to disregard the opinion of a majority of shareholders over a long period.
q In the Dutch system supervisory directors must exercise independent supervision. That means they must not be allied to a specific shareholder, the executive board or other stakeholders. The management structure must also be
q The company must clearly disclose: the policy being pursued; the strategy; the decision-making process within the company; and the remuneration of executive and supervisory directors.
With these basc issues in mind, institutional investors like pension funds are aware of their own responsibility in the corporate governance area. The Dutch Corporate Governance Code contains three best practice provisions relating to the use of voting rights by institutional investors. Pension funds can therefore be required to account for their compliance with these provisions, which require institutional investors to:
q publish annually, in any event on their website, their policy on the exercise of the voting rights
for shares they hold in listed
q report annually, on their website and/or in their annual report, on how they have implemented their policy on the exercise of the voting rights in the year under review.
q report at least once a quarter, on their website, on whether and, if so, how they have voted as shareholders in the general meetings of shareholders.
On a more concrete level the SCGOP manual contains recommendations on how to exercise voting rights and to report on the implementation of the voting policy and voting behaviour.
It also pays attention to the discussion about governance within pension funds themselves. “Just as pension funds call for transparent corporate governance structures and accountability in companies in which they invest, they in turn can be questioned on their own corporate governance arrangements.”
And finally the manual states the difference between corporate governance and socially responsible investing by defining pension funds’ corporate governance policy as aimed at improving the risk-reward ratio of share investments. Investment can be said to be socially responsible if an investment portfolio is composed not merely on the basis of financial return, but if other factors also play a role.

On December 6, 2004, the Minister of Finance installed the Monitoring Committee Corporate Governance Code. The committee’s terms of reference are: to monitor the operation of the Dutch Corporate Governance Code and its implementation by listed companies and shareholders; to keep under review national and international developments in corporate governance generally, reflecting the monitoring committee’s objective of promoting the use and topicality of the code; and to indicate whether there is any gap or indistinctness in the Code.
As an elaboration of the Dutch Corporate Governance Code ABP last month made a plea for letting companies’ determine whether the salaries of their top management are reasonable. According to ABP companies by checking can prevent the rewards of top managers from automatically rising. Companies themselves should think about what should be a reasonable reward. ABP will ask the companies in which it has a financial interest how they determine the salaries of their top management.
Kees Verhagen is a freelance manager, media relations