DNB’s view is that the Supervisory Board (Raad van Commissarissen) or similar organ of a supervised entity is needed to ensure due care in promoting all relevant interests, in the interest of the undertaking. Independent functioning, in this context, regards the SB as an organ and of the individual SB members vis-à-vis one another, the Managing Board, the shareholder, the Company Council (Ondernemingsraad), the employees etc.
Independent functioning of the SB is not an objective in itself. It is just one element of good corporate governance and in ensuring controlled and ethical operations. By adopting this view, DNB implements an important governance lesson from the financial crisis, which is that the quality of internal supervision benefits from a certain degree of independence.
In assessing independent functioning, DNB recognises the importance of consistent policy within groups that are subject to consolidated supervision or supplementary group supervision by DNB. The existing practice of personal union at the level of the authorised institution will, for instance, be allowed to continue (see also below under Independence ‘in state’).
What is the legal basis?
Under the Wft, a requirement to have a Supervisory Board or similar organ consisting of at least three persons in place applies to (i) a clearing institution or bank having its registered office in the Netherlands which is a public or private limited liability company (NV or BV) (Section 3:19(1) Wft) and to (ii) a clearing institution or bank having its registered office in the Netherlands which is neither a public nor a private limited liability company (Section 3:19(2) Wft).
Section 3:17 of the Wft further requires that an authorised entity must ensure that its operations are controlled and ethical. This principle is worked out in more detail in Section 17 of the Policy Rule providing Prudential Rules under the Wft, commonly known as Bpr. The Policy Rule implementing the EBA Guidelines in the Wft 2012 (of 11 July 2011) (Beleidsregel toepassing richtsnoeren EBA Wft 2012) encased the EBA Guidelines on Internal Governance in the controlled and ethical operations supervision of banks and investment firms. The EBA guidelines include provisions on the independent functioning of the SB.
This is also in line with the objective relating to the mandate of the SB and the way its members act, as set out in Section 2:140(2) (2:250) of the Dutch Civil Code (Burgerlijk wetboek): ‘It is the duty of the SB to exercise supervision over the policy pursued by the Management Board and over the general course of developments in the company and its connected enterprise. The SB advises the Management Board. In performing their duties, the Supervisory Board members should serve the interest of the company and its connected enterprise.’
The Wft further stipulates that SB members must be ‘competent’ (geschikt) (Section 3:8 Wft as effective from 1 July 2012). The Policy Rule on Expertise 2011 of DNB and the AFM specifies the requirements these supervisors apply regarding the expertise (as of 1 July 2012: competence) of policymakers within their supervisory remit, and discusses which aspects they include in their assessment of competence. This policy rule does not distinguish between the several types of policymakers (managing directors, supervisory directors etc.). However, competence testing of policymakers does look at and weigh the various aspects of competence, including the policymaker’s position and the composition and functioning of the management body as a whole. Such competence testing with due observance of the subject’s position etc. does justice to the different mandates, responsibilities and powers that different types of policymaker may have. In the case of SB members, ‘independent functioning’ is among the aspects weighed in the competence test.
How does one measure independent functioning?
Independent functioning as viewed by DNB includes the following three basic elements:
- The SB member is able to act independently and to balance competing interests (independence in mind);
- The SB member avoid or control any semblance of conflicting interests (independence in appearance); and
- The SB as a body enjoys a sufficient degree of formal independence (independence in state). DNB translates this element into the requirement that at least half (50%) of the SB members must be formally independent.
DNB considers all of these elements in considering whether an SB functions independently. Also taken into account are the nature, size, complexity and inherent risks of the business of a supervised entity.
Authorised entities that do have an SB even though they hold a dispensation (under Section 3:19(3) Wft) from the requirement to have an SB, are subject to the same considerations. Having an SB creates certain obligations. It broadcasts a message to stakeholders regarding the quality of a firm's governance. More specifically, the SB, being an internal supervisor, fulfils an important and responsible role within an organisation.
In establishing an SB’s independence in appearance and in state (see below), DNB applies criteria set out in the Dutch Corporate Governance Code (‘CG Code’). This is because these criteria are already well-known and enjoy broad support in Dutch society. It does not mean that DNB is to supervise compliance with the CG Code generally; it merely adopts a set of well-established approaches and insights.
Further explanation of DNB’s viewpoints regarding the three elements Independence in mind
By this DNB means that every SB member should demonstrably take an independent stance regarding competing interests; and that they are able to balance such interests impartially. SB members take account of all possible interests affecting the company and its connected undertaking, and disregard any other interests.
Independence in mind can be apparent from, for instance, the SB minutes or the inclusion of ‘independence’ as a competence aspect in the job description for SB members. Also, SB members should come from different backgrounds, enabling them to observe and approach issues from different angles (diversity).
Independence in appearance
To be independent in appearance, an SB member should avoid or control any semblance of conflicting interests. As a minimum this should be reflected in the SB charter/regulations, supported by policy and specific measures.
In assessing this element, DNB will look at (among other things) the aspects included in the CG Code under Principle III.6 on conflicting interests. There, a conflict of interests is said to exist in any case when the company intends to enter into a transaction with a legal entity:
i) in which an SB member personally holds a material financial interest;
ii) which has a management board member who is related under family law to a member of the company's Supervisory Board; or
iii) in which an SB member holds a managerial or supervisory position.
DNB’s implementation of the independence-in-appearance principle does not imply that an SB member may never have any conflicting interests. What it does mean is that where there is a conflicting interest, the SB must draw up a policy and take specific measures to make such a conflicting interest manageable.
An amended Section 2:140 of the Dutch Civil Code is effective from 1 July 2012. The amendment consists of the addition of a fifth subsection stating explicitly that an SB member must not participate in consultative and decision making processes on matters in which they have a direct or indirect personal interest which conflicts with the mandate of the SB (as formulated in subsection 2 of the said Section 2:140).
Independence in state (formal independence)
Under DNB policy, at least half (50%) of SB members must be formally independent. DNB has opted for the 50% rule because it is more closely aligned with the current practice within supervised entities than, for instance, the stricter ‘n-1’ criterion set out in the CG code.
Only conditionally will exceptions to this requirement be allowed. Such conditions are imposed by DNB on a case-by-case basis. If the conditions are met, DNB may accept a lower degree of formal independence of at least 25%.
Formal independence is determined according the independence criteria as set out in the CG Code (Principle III.2.2). Under the CG Code, an SB member is not independent if a single of seven dependence criteria applies.
Dependence criterion (f) concerns an impairment of independence through too close involvement of an SB member with a specific competing interest, viz. that of the shareholder. In this case an SB member is deemed to be insufficiently far removed from the shareholder’s interests to qualify as independent in their role as an SB member.
However, Criterion (f) makes an exception for group companies, to be understood as group companies as defined in Section 2:24b of the Dutch Civil Code). It is common practice for management or supervisory board members of the parent to act as SB members at the group company level. This practice offers an additional means to such management/supervisory board members to supervise the policies pursued by subsidiaries.
However, DNB is prepared to make this exception for group companies only at the level of authorised subsidiaries provided that DNB exercises consolidated or supplementary supervision over the group. The exercise of group supervision at the level of the Dutch-based parent (holding) company enables DNB to widen its supervisory view on the authorised subsidiary via the parent.
Under an exception as set out in Criterion (f), an SB member at a subsidiary who is a director or employee of the parent is deemed to be formally independent. However, such SB members at the authorised subsidiary level must still satisfy the other two elements of independence in mind and in appearance. And finally, every SB membership is, in principle, subject to a separate competence test, because such testing is linked to the position rather than to the person.
For the exception under (f) to be applicable DNB expects the SB of the parent where DNB exercises consolidated or supplementary group supervision, to meet, in principle, the specific requirements DNB makes regarding the ‘50% minimum formal independence’ element.
 Section 17 Bpr has undergone a recent change (Staatsblad Vol. 2011 no. 515). “This amendment purports to lay down explicitly that DNB’s supervises the existence of a clear, balanced and adequate system of management and supervision at financial institutions. The purpose of this amendment is to make explicit that the AFM and DNB have the – unchanged – authority to impose specific requirements on the corporate governance of financial institutions. These requirements will include an adequately implemented and positioned and independently functioning Supervisory Board.
 In the case of a three-strong SB, the statutory minimum, this implies that two members must be formally independent.
 Stb 2011, 275.
 Under the CG Code, an SB member is not independent if they satisfy one (or more) of the following dependence criteria. An SB member is dependent, according to the CG Code, BP III.2, if he or she: worked as an employee or member of the management board for the company (including associated companies as referred to in Section 5:48 of the Wft in the five years prior to the appointment; (b) receives personal financial compensation from the company, or a company associated with it, other than the compensation received for the work performed as a supervisory board member and in so far as this is not in keeping with normal business practice; (c) has had an important business relationship with the company, or a company associated with it, in the year prior to the appointment. This includes, without being limited to, the situation where the SB member, or a firm in which they are a shareholder, partner, employee or adviser, acted as an adviser to the company (consultant, external auditor, civil notary, lawyer) and the situation where the SB member is a management board member or employee of a bank with which the company has a lasting and significant relationship; (d) is a member of the management board of a company in which a member of the management board of the company which he supervises is a supervisory board member; (e) holds at least ten percent of the shares in the company (including the shares held by natural persons or legal entities which cooperate with him under an express or tacit, oral or written agreement); (f) is a member of the management board or supervisory board - or is a representative in some other way - of a legal entity which holds at least ten percent of the shares in the company, unless such entity is a member of the same group as the company; (g) managed the company on an interim basis during the preceding twelve months while management board members were absent or unable to discharge their duties.
Group companies exist where the parent is able to exercise overall control and both companies are linked to each other in a long-standing relationship.