Works Councils, Acquisitions and Corporate Governance in the Netherlands– Some challenges!

by James Kirkbride and Steve Letza The European Centre for Corporate Governance

Abstract

Through legislation, the Dutch system of corporate governance has sought to provide a role for employees, as a stakeholder group, through the statutory rights given to works councils. This paper seeks to examine how that role and the rights of employees can be distorted in a merger and acquisition event. The Dutch system of Works Councils appears to have been developed within the context of a single firm, single jurisdiction environment where the complications of a parent-subsidiary group relationship involving crossing of boundaries of both culture and jurisdiction are not considered. The events at Delta Lloyd Group are provided as a case-study to illustrate the difficulties of Works Councils in a corporate group structure.

Introduction

Much has been written about the difference between the Continental European (Rhineland), dual-board, and the Anglo-American, single board, approaches to corporate governance/structures. The dominant focus within Anglo-American governance structures has been one of seeking to recognise the relationship between shareholders and the directors and the development of structures and mechanisms to control and regulate that relationship (Moerland 1997). Under the Anglo-American system the primary objective of the corporation, and therefore the corporate governance framework is to enhance corporate profit and shareholder gains (page 14 of Salacuse). Recent debate over wider stakeholder interest seems to have had little influence on the development of corporate governance structures even within the context of employee rights and remuneration. This can be seen in the way in which the recent Company Law Review in the United Kingdom came down firmly in favour of confirming the shareholder focus of current and future corporate governance structures. In one sense the Anglo-American approach does permit wider interests to be accommodated but through non-governance structures. These can be found in employee protection legislation, environmental protection legislation, and general corporate social

1 responsibility developments. These have an external regulatory function and role in relation to corporate leadership and governance albeit one might argue that the Turnbull report requires an internal risk assessment approach to balancing wider stakeholder interests and the exposure of corporate activity to a wider legislative controls. Nevertheless if the focus is one of corporate governance structures then structures rather than process and structures rather than the wider regulatory environment provides the distinction between European broader stakeholder approach and the Anglo-American narrower shareholder approach. Although this paper focuses on the organisational and cultural difficulties at the Delta Lloyd Group, by implication it serves to highlight the conflicts which may arise when an Anglo-American company acquires a Continental European company. One school of thought suggests that a European approach will increasingly come under threat through the internationalisation of capital markets (Shleifer and Vishmy, 1997; La Porta, Lopez-de-Salanes, Shleifer and Vishmy 1998). Price Waterhouse, 1997 report that corporate governance structures play a crucial role in determining where, in what form, and at what cost capital is provided by outside investors. This contrasts with the Dejorg, DeJorg, Mertens and Wasley (2000) study that suggests that the absence of strong investor rights in the Dutch system of corporate governance, which seeks to promote a wider recognition and range of stakeholder rights and influences, has had a negative impact on companies’ values.

Conversely, other studies suggest that the dominance of investor rights in the Anglo-American governance approach carries the risk of a too one-sided focus on mainly short-term results and shareholder value. Such a one-sided focus on profitability may adversely affect the attention for the longer-term policy and the company’s fortune. A management model, such as that found in the Netherlands, which allows for all stakeholders who are seriously involved in a company – not incidentally but for a longer period – is actually needed to support a proper functioning of the company (Goodyk, 2000). Within that model, the position of employees becomes prominent.

The focus of this study is the development of the Delta Lloyd Works Council under the Netherlands two-tier board structure model. That development raises conflicts in providing a local two-tier board structure (including employee representation) of subsidising companies with the single group structure and focus of the holding company. It also highlights the potential conflicts and difficulties of national governance controls and corporate globalisation ambitions. As we shall see within the context of the legislative controls the emerging group structure creates governance conflicts in respect of achieving the stakeholder model and stakeholder contributions in the context of the role, information acquisition, and cultural contributions of the designated works councils. The situation is compounded further if one considers any industrial restructuring that recognises mergers and acquisitions across Europe and Anglo-American organisations that have conflicting and contradictory stakeholder and shareholder perspectives;

2 particularly in the context of employee representation and works councils. The case study presented below assists in illustrating potential conflicts.

The Delta Lloyd Group Delta Lloyd is a service-oriented financial service provider, which employs around 6,500 employees, in corporate divisions and organisations located in the Netherlands, Germany, Belgium and Luxemburg1. Most (4.400) of these are located in the Netherlands where their stakeholder position is protected under the two-tier model board structure. In 1992, Delta Lloyd acquired a small bank, which was kept legally independent because of the requirements of legal authorities such as the Dutch Central Bank. Delta Lloyd merged in 2000 with OHRA Insurance, which was a competitor. To reflect this merger in the works council (OR) and to create a single voice at head-office level, a central works council (COR) was created. In 2003 a strategic alliance was formed with the insurance division of ABN AMRO another competitor. Because of this last event the representation of the works councils of the ‘acquired’ companies in the central works council had the majority vote (figure 5).

The Stakeholders in the Dutch Form In the Netherlands, the law (The Structure of Limited Liability Companies and Private Companies Act of 1971, hereinafter Structure Act) provides for the governance of large corporations. The Dutch system promotes a so-called ‘pentagon’ of important stakeholders at corporate level. (see figure 1)

Works Council

Share- Trade holders Unions Stakeholder Pentagon

Board of Supervisory Directors Board Figure 1

The most important stakeholders are often referred to as the stakeholder pentagon (figure 1). It consists of the board of directors, the supervisory board, the shareholders, the trade unions and the works councils (Goodijk, 2000, p.304).

1 The Group Structure

3 Although the focus of this paper is on the works council, it is important to briefly examine the position of the other bodies that constitute this stakeholder pentegon. a) The Board of Directors In recent years, the operation of the Board of Directors has come under scrutiny; external bodies, including shareholders, have become more active in the monitoring of Board and director behaviour. Included within this is the trend toward evaluative statements and financial and operating openness. Within the Dutch context, the Peters Committee (Peters 1997) had sought to increase the opportunity for accountability through recommendations to improve the openness and supply of information from the Board. b) The Supervisory Board – Similarly the Supervisory Board has been the subject of critisism, most notably from shareholders who express concern over the lack of shareholder financial interest representation on the Board and have demanded more influence on appointments to the board and on important decisions (Goodijk 2000). Employees also have expressed concerns that, in some instances, the Supervisory Board is too much of a continuation of the Board of Directors, too passive towards policy and too much an “old boys’ network”. Despite those criticisms, some research findings suggest that Supervisory Boards are becoming more pro-active in reviewing their own performance and in communicating with and responding to stakeholder interests (GITP 1977). Similarly, in Dutch law, employees have a voice (a representative) in the composition and functioning of the Supervisory Board including a right of recommendation and objection to appointments to the Board c) The shareholders – the shareholders also enjoy a right of recommendation and objection to appointments to the Supervisory Board, but have recently sought a higher degree of control over appointments to the Supervisory Board. Shareholders collectively campaign through the Association of Shareholders (Vereniging Effectenbezitters). The inevitable position and influence of this group threatens to undermine the influence of the employees and promotes an Anglo-Saxon approach to management. d) The trade Unions – although workers and their unions have generally enjoyed a more important role in corporate affairs and governance in the Continental European Rhineland model, in the Netherlands the position of the trade unions at corporate level has never been very strong. Trade unions generally enjoy negotiation rights only; whereas works councils enjoy participation rights.

The Statutory Framework The structure of limited liability companies and private companies Act of 1971 (here in after structure act) determines the government structure of large Dutch firms with limited liability (Boot, 1999 pp533-543). Enterprises above a certain size (with respect to the value of the shares put out and number of

4 employees) are obliged to have a board of supervisors, which takes over the most important controlling rights from the shareholders. Its main power is the appointment and dismissal of the board of directors, which is the actual management of the firm. Important decisions of the management have to be approved by the supervisory board. The resulting governance structure is a two tier board model. Unlike German workers, Dutch workers have no representation on the supervisory board, however, all members of the supervisory board, commissioners, are expected to operate in the interests of all stakeholders. The commissioners are appointed through a system of controlled co-optation. This implies that they can choose new members themselves; however, the shareholders as well as the works council exercise some degree of influence because they have the right to nominate and refuse candidates. This expresses the original intention of the structure Act, namely to provide a balance between the position of capital and labour in large companies.

Supervisory Board

Trade Share holders Works Unions Council

Board of Directors Figure 2

As depicted in figure 2, each of the three parties has a separate dialogue with the board of directors, which is well regulated. The shareholders have the shareholders meeting. The trade unions negotiate, on behalf of the employees, the financial and non-financial rewards. The works council has a dual task, taking care of the interests of all personnel and taking care of the firm at large. It is suggested that this is what sets them apart from most other workers’ representations. Not only are the works councils supposed to represent the interests of all personnel in a firm, but also they are expected to contribute to the optimal purchasing of that firm (Van den Berg). Recent developments, for example the ‘Tabaksblad’ code (2003), tend to strengthen the position of the shareholders by giving them the right to appoint and dismiss members of the supervisory board. (Van hot kaar: 2002)

The Works Council’s position

The position of the works council is legally protected in the Dutch Works Councils Act. Compared to the situation in most other European countries, the influence of labour on individual company’s policies is still quite large in the Netherlands. This only applies to Works Councils not to trade unions which are active exerting influence at the national and the industry levels. Following

5 the end of the second-world-war, the latter official reframed from active participation in the management of firms in return for representation on official economic advisory bodies to the government. In the 1960’s and 70’s unions tried to gain more power with limited success (Wind Muller et al 1987). Trade unions have always had the first right to negotiate on the terms of employment by concluding collective labour agreements at the sector level. At the company level, these agreements often need to be elaborated and the detail agreed. This is where the works councils come in (Bakels, 2000).

The Dutch Works Councils Act dates from 1950 but has been altered and extended several times since (Bakels, 2000). Originally the Act excluded the spirit of cooperation between employers and employees which was felt very strongly in the post war years. Management was included in the Works Council and even occupied the chair, while workers representatives possessed only rights to information and a limitation of discussion rights to business affairs only with the sole aim of improving the functioning of the company. The 1971 Amendment Act granted workers participation rights with respect to social issues as well as marking the start of the dual task of the works council: On the one hand the works council must stand up for the interests of all personnel, on the other the works council is legally obliged to operate in the interests of the firm at large. The most far-reaching revision of the Act took place in 1979 when it was declared that management could no longer be a member of the council and that the employees would receive major advisory rights. The latest revisions of the Act took place in 1998. To perform its task the works council meets at least twice a year with representatives of the board of directors and the board of supervisors to discuss general business developments. Further, the council has the right to be sufficiently informed on all relevant matters. Among others, the Works Council has the right to oversee the management’s compliance with the law, with the collective labour agreement and with other regulations concerning safety, heath and well being, as laid down in Section 28 of the Act. In addition the Works Council is empowered to submit proposals on its own initiative, to which the management is obliged to respond. The works council is entitled to be consulted on all-important well-defined economic decisions by the management. The council also enjoys the right of consent with respect to all social arrangements within the firm, insofar as the substance of the matter in question has not already been regulated in a collective agreement between employers and trade unions. In order to use all these rights effectively, the members of the works council, are allowed to meet during working hours and follow training courses. It also can consult outside experts and have the right to go to court if their rights have been violated. (Bakels, 2000) Since 1971 large companies in the Netherlands have been subject to a law on company structures. The original intention of this was to provide a balance between the position on capital and labour in large companies. In these companies the members of the management board are not appointed by the general meeting of shareholders but by the supervisory board. The annual accounts are also adopted by the supervisory board. These changes have

6 resulted in making the supervisory board the most powerful body in the company, replacing the general meeting.

It is clear that in the Netherlands employees are regarded as important stakeholders in the company. Evidence of their importance is manifest in the role played by the works council in a proposed merger or acquisition. Before any merger or acquisition can formally be approved the Works Council has to be presented with an enterprise report. The rights of Works Council to be heard by the enterprise section of the court is in addition to their current right to advise during a merger or takeover. The fact that this can tip the scales became apparent in the reported decision by an enterprise section to stop a takeover because the interest of the employees and the works council had not been taken into account (enterprise section of the Amsterdam Court of Appeal, 23rd October 1997, No 21).

There is some suggestion that the historical and cultural development in Europe has caused European countries to place greater store in communities rather than individuals as a set of values. Europe’s emphasis on social solidarity, its scepticism about the merits of unfettered competition and its formal inclusion of labour in corporate management manifest in the greater importance that European culture attaches to the community, particularly as opposed to American culture. American doctrines of employment at will and freedom of contract, both reflections of individualist values, contrasts with, for example, German concepts of labour rights and good faith in contract, which reveal strong community values. Even greater community values can be found in the rights of works councils in the structures adopted in the law and company structure in the Netherlands (Salacuse).

Within the takeover context the structure in the Netherlands is assumed to be a structure of an insider system as opposed to an outsider system. Outsider systems are systems which characterise the relationship between management and shareholders as fluid and at arms length. Outsider systems are also characterised by the existence of an active market for corporate control/takeover, particularly hostile takeover. Outsider systems are dominant in Anglo-Saxon countries. Whereas insider systems exist were the owners of the firm tend to have an enduring interest in the company and hold positions on the board of directors or other senior managerial positions. These systems are characterised by a stable and close relationship between management and shareholders. This stability of ownership, often coupled with legal or institutional barriers to takeovers, means that there is little by way of a market for corporate control. Moreover insider systems are characterised by the existence of formal rights for employees to influence key managerial decisions, often through supervisory boards or works councils type bodies.

7 The insider system is clearly found in varying forms in continental Europe including the Netherlands (Edwards). It is clear through the legislative position of works councils in the Netherlands that the work councils have particular rights to give advice on all major decisions and in some incidences write to nominate and object to the appointment of members of the supervisory boards. A process of consultation is also commonly available that enables the works council to influence the nature of decisions particularly in relation to restructuring which may lead to significant changes in employment.

Governance Structure

Under the Dutch system it is assumed that there is a multiple principal-agent relationship between the supervisory board and the board of directors as well as between the board of directors and the employees (figure 3). Supervisory board 1 Board of directors 2 3 4

Employees / works council Figure 3

1. The supervisory board is installed according to the Structure Act and is expected to operate on behalf of all stakeholders. The supervisory board monitors the board of directors to run the company in such a way that it maximises the interests of all stakeholders. 2. The board of directors instructs employees to perform tasks, with the aim of profit maximisation (most often). 3. The employees / works council have the legal right to be informed, to advise and to consent on all relevant matters and can therefore monitor the board of directors to act on behalf of the employees.

4. The dotted arrow reflects the right to approve the appointment of members of the supervisory board. Twice a year the works council meets with the board of directors with a member of the supervisory board present. This meeting is recognised as a crucial element in monitoring the board of directors by the supervisory board. The reason for this is that in many respects workers are in a much better position than remote supervisory board or shareholders to monitor the management; in particular they possess knowledge of daily affairs.

Governance in a group structure Many larger organisations adopt a group structure. The group structure can accommodate the two-tier board structure. Where a group structure is in

8 place, the works council operates both at the subsidiary level and group levels. In a group structure the parent company effectively controls the supervisory board and therefore the board of directors of the subsidiary company. In practice therefore, the subsidiary company is effectively subsumed within the greater group structure. The legal position of the works council is not affected; however the effectiveness of the function in reality and, in particular, the route of the works council via the supervisory board of the subsidiary company becomes questionable. At the top of the group structure is the parent company, which decides on matters that the works council is entitled to influence. The works council needs to organise itself in such a way that it can effectively interact both at the subsidiary and group levels.

Effective Power and information flow

Supervisory board Parent Company Board of directors

Employees / works council

Supervisory board Supervisory board Subsidiary Companies Board of directors Board of directors

Employees / works council Employees / works council

Figure 4

Power is exercised at the Parent company level and therefore the works council should be organised to speak with one voice at group level. To ensure that the group structure is reflected in the structure of the works council, the members of the formal meetings should be well defined. The formal meeting is where a member of the supervisory board is present. This should be the ‘labour commissioner’, who is on the supervisory board of the group, as well. A member of the works council from the group level should also be present at this meeting. This is shown in figure 4.

9 The multiple communication points between the works council and the company at various levels requires that all members of the works councils at any moment communicate the same point of view to the organisation. The organisational structure of the works council therefore must be facilitated by, for example, a knowledge management system that ensures the availability of the central viewpoint on all subjects at all times. At the same time, this knowledge system ensures continuity and stability in the works council representative functions.

Current Structure of Delta Lloyd’s works council Figure 5 depicts the current structure of Delta Lloyds works council is shown. Four divisions have works council representation. The central works council is formed out of delegates from the works councils at division level. Delta Lloyd has around 4.400 employees in the Netherlands, divided 55% original Delta Lloyd versus 45% in recently acquired companies. These employees are represented by 54 members in different works councils of which 17 are in the central works council. From figure 5 and organisational knowledge the following observations are made: 1. The central works council is organised to speak with one voice at head- office level. The members of the central works council however have a double workload which weakens their effectiveness. 2. The acquired companies represent almost half of personnel. 3. The election of the works councils’ members is organised at division level. Employees and works council’s members are involved / committed most to division level. The lack of involvement/commitment to the central works council has a negative influence on its effectiveness, and on its ‘single voice’! 4. The works council of division Delta Lloyd is huge in size, which makes it difficult to manage. The central works council is about the same size and suffers managerial difficulties as well. 5. OR is made compulsory by law for any company which has responsibilities as an entity and has more than 50 employees.

Analyses of current situation There is a mismatch between observations 1 and 3, which becomes stronger as the ‘Delta Lloyd feeling’ becomes weaker, especially in the acquired companies. The fact that almost half of personnel is employed at the acquired companies, currently highlights this problem. The effective size of a works council is probably not around 19 members. However, both Delta Lloyd’s works council as well as the central works council operate at this, not optimal, size. Reducing the number of delegates in the central works council will alter the sensitive balance between Delta Lloyd and the acquired companies.

10 RcC Labour Unions agreed with Delta Lloyd on ‘Delta Lloyd Collective RvB Labour Agreement’ (DL-CAO) COR RvC RvC RvC RvC

OR OR OR OR RvB RvB RvB RvB

Company Delta Lloyd OHRA Joint Venture DL Bank ABN AMRO

# employees 2400 900 800 300 # members in 19 13 13 9 the OR # delegates 8 5 2 2 in the COR Supervisory Board (RvC) Board of Directors (RvB) Central Works Council (COR) Works Council (OR)

Figure 5

Clearly there is a choice to make between: Organising power for maximum influence, or: Maximise reflection of culture and identity of acquired companies. The answer should be to organise power for maximum influence, but this might not succeed, if there is no understanding of the culture and identity issue.

Proposed new structure of Delta Lloyd’s works council Improvements for the current structure should deal with the choice: Organise power for maximum influence? Or, maximise reflection of culture and identity of acquired companies?

Organise power for maximum influence First, the participants in the formal meetings should be aligned with the two- tier board model at headquarters level. Further, the current structure has a COR in place. The members of the COR however have to deal with a double workload, commitment at division level and on top of this managerial difficulties in the size and the division of tasks of the COR.

A possible improvement is to create knowledge centres at the COR level. These centres could focus on the four tasks.

1. Monitoring of the Collective Labour Agreement and welfare of employees in general.

11 2. The rights of information and advisory and co-determination. 3. Monitoring business performance. 4. Own initiatives.

These knowledge centres are populated with members of the works councils and with expert personnel. The knowledge captured in these centres is useful for the organisation as well. Further, the team leader positions in the knowledge centres should become prioritised as a group of future management or board appointments. This effectively influences the board of directors of the future and includes an understanding of current and future stakeholder interests of employees. The works councils at division level have access to the knowledge centres as well. More specifically, the knowledge centres monitor management compliance throughout the organisation and consult the works councils where necessary. In the works councils meetings experts assist the works councils at divisional level. The knowledge centres improve the inter-divisional communication and ensures a common and consistent point of view at different communication points. The central works council can be reduced to a third, acting as management. The works councils at divisional level can be reduced to a third as well. This results in a total of around 20 members in the works councils, and 34 in the knowledge centres (figure 6). The 20 members exercise the power at the front line. The knowledge centres provide the ammunition.

Knowledge Supervisory board centre 1 1 Board of directors 2 3 4 Knowledge Employees / works council centre 2

Supervisory board Supervisory board Knowledge 1 1 centre 3 Board of directors Board of directors 2 3 4 2 3 4 Employees / works council Knowledge Employees / works council centre 4 Figure 6

Maximise reflection of culture and identity of acquired companies

This choice highlights a cultural issue. The issue however is bigger than just the acquired companies. Within Delta Lloyd there are Life insurance, General insurance, Health care insurance and shared service centres. These broad

12 groups are not organised legal entities, as the acquired companies are separately managed as if they were separate entities. There is some inconsistency in this. Two responses might be possible: One, is to organise works councils around these sub divisions within Delta Lloyd and make sure that these works councils are accepted by the organisation and embedded in the central works council and knowledge centres. The other logical response is to organise an election for the central works council and the knowledge centres. This effectively increases the commitment at head-office level and diminishes the direct connection to the division level. Of course, the election areas for the central works council should be defined in accordance with all the relevant broad groups. Rules and institutions are clearly shaped by the culture of the societies in which they function. Moreover within corporations, corporate governance systems are constantly interacting with organisational culture, sometimes reinforcing one another and sometimes conflicting. For example, the prevailing corporate culture in the Enron Corporation seems to have conflicted with, and indeed overwhelmed, its formal governance systems. As a result any consideration of corporate governance must take into account culture, both national and organisational.

Definitions of culture are as numerous as definitions of governance. For some scholars culture is, “the way in which a group of people solves problems and recognisable dilemma” (Hampdon Turner) for others culture is, “an integrated pattern of basic assumptions, values and artefacts that sets the state for action, believe, and policy” (Fredrick). Perhaps a more acceptable definition is that of, “social transmitted behaviour patterns, attitudes, norms and values of a given community” (Salacuse). It has been suggested that one might conceive of four cultural elements, behaviour, attitudes, norms and values as forming a series of concentric circles like the layers of an onion. The process of understanding a specific culture is similar to peeling an onion. The outer most layer of the onion is behaviours, words and actions of persons working within the corporation, for example the way meetings are conducted among managers of how members of one corporate division communicate with another division. A second layer consists of the attitudes of persons within the corporation towards specific events and phenomena, for examples attitudes about cooperating with another division. Rest are norms, the rules to be followed by members of the corporation in specific situations. The inner most layer (the core that orients and shapes all the other layers) consists of values, fundamental beliefs, for example whether an organisation or community has a strong attachment to the value of individualism, a value preferences that can have profound impact on a wide range of systems from compensation to decision making. One of the essential characteristics of a value is the belief by an individual or group that specific conduct is personally or socially preferable to opposite conduct.

13 Culture has two basic crucial functions; to permit a community or organisation to survive and adapt to the external environment to integrate its internal processes and personnel to ensure its capacity to survive and adapt. One of the important tasks of corporate leadership is to shape corporate culture (primarily its values) in a way that will enable the corporation to achieve its perceived goals.

Whereas corporate governance is basically influenced by structure external to the corporation, such as state and federal law, corporate culture is essentially shaped by internal phenomena especially the values beliefs and attitudes of its personnel. As a result the potential for tension and conflict in a particular cooperation between its system of governance and its prevailing culture maybe great. The current events within Delta Lloyd and the process of seeking to find an internal structure to accommodate governance and accommodate the cultural impact of governance changes is evidence of that tension and conflicts.

Conclusion The organisational structure of the works council within Delta Lloyd could be improved to more effectively reflect the stakeholder position of the employees. A group structure complicates the effectiveness of a works council. The group identity, as well as the communication structure tends to reduce the effectiveness of stakeholder representation at the group level. An organisational structure based on central knowledge centres seems to improve both communication structure and the effectiveness of stakeholder representation at group level. Cultural identity is in the proposed new organisational structure, less prominently impersonated. The stakes however are probably defended better, because the knowledge centres support the works council at divisional too.

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