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