Dutch Corporate Governance Code Research Articles

The effect of audit committee characteristics on financial reporting quality: The moderating role of audit quality in the Netherlands

The purposes of this study are to shed light, on the one hand, on the effect of audit committee characteristics, namely independent members in audit committee, a financial expert in audit committee, frequency of meetings and audit committee size on financial reporting quality proxied by real earnings management. On the other hand, it aims to investigate the moderating role of audit quality in the relationship between audit committee characteristics and financial reporting quality. The objective is to contribute to the new evidence on the role of audit committee characteristics towards the financial reporting quality with audit quality as a moderator, particularly the appointment of Big 4 company. This study uses the ordinary least squares (OLS) regression to achieve the research purpose by evaluating the data collected from 90 public listed companies from 2010 to 2019 in the Dutch context. The results state that audit committee characteristics have a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on abnormal operating cash flow and discretionary expenses is not significant. There is also evidence that audit quality positively moderates the audit committee and real earnings management links. Lastly, the findings of this study will help professional accountancy bodies and governments to highlight the relevance of earnings management in safeguarding trustworthy financial information, owners’ wealth and to enhance audit committee characteristics in improving audit quality, especially after the enforcement of the Dutch Corporate Governance Code in 2016.

Long-Term Value Creation in Corporate Governance: The Crucial Role for Boards and Auditors

According to the Business Roundtable in the US and the Dutch Corporate governance code, companies should focus more on long-term value creation and be accountable to all their relevant stakeholders. This is only possible if long-term value creation is made explicit and measurable and the reporting is checked by an independent third party. The auditor is the designated party for this. • Steering for long-term value creation is becoming increasingly important for companies. • To make the relatively vague understanding of long-term value creation explicit and measurable, new standards are needed. • The auditor is the appropriate person to audit those new standards. Long-term value creation is given a prominent place in the revised Dutch Corporate Governance Code 2016 (the “Code”). Management and supervisory boards are accountable for both financial and non-financial aspects of long-term value creation. But the Dutch Code does not prescribe what long-term value creation is and how you determine it. In particular, the non-financial aspects of long-term value creation are difficult to measure and to make comparable, communicable and reliable, let alone controllable. How can we make these aspects more measurable? And who should be responsible for controlling long-term value creation goals?

Compliant in principle! and in practice? Internal audit at listed companies in the Netherlands: beyond compliance with the Dutch Corporate Governance Code

The revised Dutch Corporate Governance Code of 2016 (hereafter “the Code”) comprises provisions regarding the existence of an internal audit function. Following the comply or explain principle of the Code, Euronext Amsterdam listed companies with a registered office in the Netherlands either have established an internal audit function or have to explain why they did not. Our research shows that the number of listed companies with an internal audit function has since grown. In 2016 53% of Euronext Amsterdam listed companies with their registered office in the Netherlands have established an internal audit function; in 2018 this figure is 64%. More than half of these listed companies have an in-house independent internal audit function, whereas other companies have internal audit functions with different characteristics, such as a combined internal audit and risk management function or have outsourced the internal audit function. The majority of the companies without an internal audit function provide inadequate arguments for this absence. They thereby do not meet the standards as set forth in the Code. In most cases, the argument for not having an internal audit function is: “the organization is too small”. This is not a valid argument, as the Code specifically addresses this situation stating that in case the size of a company is not suited for an internal audit function, outsourcing may be an appropriate alternative. We conclude that management boards should give this topic better thought and give better insight in their judgement by explaining the arguments. We therefore advocate that the principle of “comply or explain” should be “comply and explain”. Such is the case in the South African corporate governance code (King IV). The effect will be that management boards mindfully have to elaborate on how they obtain independent assurance on the company’s governance, risk management and control systems.

The impact of audit committee on real earnings management: Evidence from Netherlands

This paper aims to examine the effect of the characteristics of an audit committee on real earnings management in the Dutch context. Our sample is composed of 80 non-financial companies listed on the Amsterdam Stock Exchange during the period between 2010 and 2017. Four proxies are used to measure audit committee characteristics, namely, audit committee independence, financial expertise, gender diversity, and audit committee meetings. To test our hypotheses, we use a regression model to identify the influence of a set of audit committee characteristics on real earnings management after controlling for firm audit committee size, leverage, size, loss, growth and board size. Our analyses provide evidence that audit committee independence and gender diversity constrain real earnings management. Our findings also suggest that audit committee financial expertise reduces to some extent the likelihood of engaging in real earnings management. To the best of our knowledge, the Dutch context is not yet explored especially following the issue of the long-awaited new Dutch Corporate Governance Code in 2016 which has been updated for a long period in 2008. Therefore, corporate governance is a relevant topic in the Netherlands. This study contributes geographically to the Audit Committee and earnings management literature that examines another possible method, specifically, real earnings management.

The Potential of the Dutch Corporate Governance Model for Sustainable Governance and Long Term Stakeholder Value

This article addresses the question of how the Dutch regulatory and institutional setting enables policy coherence, specifically with regard to safeguarding stakeholders’ interests and promoting sustainable governance. To address this question, we engage with idiosyncratic theoretical notions in the Dutch corporate governance model. We follow the evolution of these notions in statutory company law and case law, their development in the Dutch Corporate Governance Code and their relation to the Enterprise Chamber as a unique institution. We establish how these theoretical views and practical institutions present significant means by which stakeholder concerns may be represented in the operation of company law and corporate governance more broadly and provide a number of ways in which these institutions and their operation can be further developed.

A Study Into the Acceptance Level of Corporate Governance Code 2008 by Dutch Listed Companies

This paper was written with the twin objectives of providing insights into the Dutch Corporate Governance Code 2008 and analyzing the acceptance and compliance level of the Code by the listed Dutch companies. The Code was first formulated in the year 2003. It contains principles, best practice provisions pursuant to principles, and explanatory notes. It was amended in 2008 and recently again in 2016. The 2016 changes are effective beginning financial year 2017, the compliance outcome of which will be known only in 2019. The frequent reviews and modifications of the Code reflect, among other things, the willingness and the ability of various stakeholders in The Netherlands to keep their corporate governance principles and practices in line with the latest thinking and developments on the subject. Furthermore, the almost 100% compliance of the Code by the listed companies is really heartening and reflects its widest possible acceptance and ,therefore, the highest success rate of its key principles and provisions of best practices. The transitional preview of the amended 2016 Code re-enforces its widest acceptance and compliance in the coming years too. SEBI will also do well to prepare such annual compliance performance studies.

Het "in control statement"

In dit artikel bespreek ik de achtergrond en betekenis van het in control statement dat volgens een best practice-bepaling in de herziene corporate governance code 2016 door ondernemingen in het bestuursverslag moet worden opgenomen. Ik ga in op een aantal wijzigingen ten opzichte van eerdere versies van deze bepaling, op de relatie met de risico-informatie in het bestuursverslag en bespreek enkele bijzondere aandachtspunten voor de toepassing in de praktijk.

The Two-Pronged Approach of the (Semi-)Legal Norms on Gender Diversity: Exploratory Empirical Research on Corporate Boards of Dutch Listed Companies

In this article, two different perspectives on diversity and gender equality in boards of listed companies in The Netherlands are discussed: first, the diversity perspective which focuses on better decision-making capabilities of gender-diverse teams (i.e. the economic perspective), and second, the gender equality perspective which aims to realise gender equality in all levels of society pursuant to international human rights treaties and national law (i.e. the rights-based perspective). This two-pronged approach is presented as follows: on the basis of a literature study and desk research, the authors first set out the views discussed in the extant literature on the economic perspective and, next, the legal context applicable to the rights-based perspective. Subsequently, the application in practice of these two perspectives are tested by analysing unique empirical data collected by the authors from listed companies in The Netherlands. The empirical data are collected in two studies assigned by the Dutch Corporate Governance Code Monitoring Committee (the Committee) to the authors in 2014 and 2015. This Committee annually reports on the compliance by listed companies with the Dutch Corporate Governance Code (the Code). One of the areas of concern is diversity in corporate boards as, since 2008, the Code requires that companies have a policy to realise a diverse board composition, gender being one of the indicators. The Code applies on a comply or explain basis. The empirical study revealed that Dutch companies, in their annual reporting on their board diversity policies, often referred to the Dutch corporate law provision concerning the gender quota. This provision requires of large companies that their corporate boards (both the board of directors and the supervisory board) comprise at least 30 per cent women and at least 30 per cent men. Like the Code, this legal provision also applies on a comply or explain basis. This law had been enacted for a limited period of time, i.e. from 2013 until 2016, but a legislative proposal is pending to extend the application of this quota provision until 2020. The authors discovered that the two perspectives (i.e. the economic and the rights-based perspectives) are often mixed up by companies, government representatives and institutions, and other parties (together: stakeholders) who deal with the theme of (gender) diversity in corporate boards. In this article, the authors elaborate on these two perspectives, raise questions in regard to the application of the (semi-)legal norms in this area, and share innovative findings regarding the measures taken by progressive Dutch listed companies in order to realise a diverse board composition, and in particular to comply with the statutory quota on female board representation.

The Institutional Investor Stewardship Myth: A Theoretical, Legal and Empirical Analysis of Prescribed Institutional Investor Stewardship in a Dutch Context

The Enron scandal marked the beginning of an era in which corporate governance of listed companies became a central theme in the public debate. Regulators responded en masse in an attempt to restore confidence in the capitalistic system. Rules were established that placed greater demands on the way businesses were conducted. Corporate governance codes encouraged both companies and institutional investors to consider a shared responsibility for corporate governance at listed companies. Despite the rapid development of new guidelines, institutional investors as shareholders in investee companies do not always behave as desired. This led to the question: is institutional investor stewardship as prescribed by corporate governance codes a ‘myth’ created by regulators and policymakers: a widely held, but false belief or idea? This working paper provides a summary of the conclusions from research into the question if institutional investor stewardship in respect of Dutch listed companies as prescribed by the Dutch Corporate Governance Code is realistic?

30% Women on Boards: New Law in the Netherlands

The lack of upward mobility for women is an issue in many European countries. Gender segregation in the labor market, including the failure to promote women to senior posts, is one of the subjects addressed in a new act that will become effective mid 2012 in the Netherlands. The Act will amend Dutch corporate law. It requires large companies to have 'gender balanced' boards, comprising at least 30 percent women and 30 percent men. This article elaborates on the Act's legislative history, content, application and enforcement possibilities. It puts it in the perspective of Corporate Social Responsibility (CSR) and of gender equality as a human right as promoted in the Convention on the Elimination of All Forms of Discrimination against Women. Finally, the article compares the Act's provisions with the Dutch Corporate Governance Code because the latter also contains provisions on gender in board composition.

What determines the informativeness of firms' explanations for deviations from the Dutch corporate governance code?

The comply-or-explain principle is a common feature of corporate governance codes. While prior studies investigated compliance with corporate governance codes as well as the effects of compliance on firm behaviour and performance, explanations for deviations from a corporate governance code remain largely unexamined. This paper intends to fill that gap. The paper draws on the voluntary disclosure literature and agency theory to examine the association between firm characteristics and the informativeness of explanations for deviations from the Dutch corporate governance code. Applying content analysis to corporate governance statements for a sample of Dutch listed firms for the period 2005–2009, the study finds that ownership concentration and number of analysts following the firm are positively associated with informativeness. Furthermore, there is indicative evidence that board strength and informativeness are positively associated. The study also finds a negative association between leverage and informativeness. Institutional investors, however, do not seem to affect this type of disclosure. Taken together, the findings suggest that certain firm characteristics are associated with a firm's choice to provide either generic and uninformative explanations or more firm-specific and informative explanations. On the basis of the study's findings, I argue that firms having weaker boards, firms followed by fewer analysts, firms having more dispersed ownership and firms relying more on debt finance tend to approach comply-or-explain more symbolically than substantively.

'Enforceability of Institutional Investors’ Responsibilities in Corporate Governance Through the Dutch Corporate Governance Code: Are Regulators and Practitioners on the Same Page (and to Who are Institutional Investors Accountable)?

Corporate governance codes have been drafted to guide listed companies to improve corporate governance. Shareholders, in particular institutional investors, are being asked to play a critical role in safeguarding good corporate governance. However, addressing shareholders of Dutch listed companies through the Dutch Corporate Governance Code and describing their responsibilities as active owners has not so far resulted in a broad range of engagement of institutional investors with investee companies. This is possibly because there is a misalignment of key assumptions underlying the Dutch Code with actual capital market practices. Driven by those practices, institutional investors are first and foremost concerned with maximizing the returns on their investments. Enforcing institutional investors to take responsibility in improving corporate governance cannot be done through laws and codes alone. Passing laws and codes is one thing and enforcing them – and even inspiring buy in on the part of those they are aimed at – is something entirely different. Ultimately, enforceability is about the value that ultimate beneficiaries of institutional investors place on ‘stewardship’, and hold their (fiduciary) asset manager accountable for. This paper is a call to reconsider the ultimate function of corporate governance codes in a context of international capital market practice in which codes can never be a goal in itself, but more a means for improving corporate governance around the world.

Uniformity as response to soft law: Evidence from compliance and non‐compliance with the Dutch corporate governance code

AbstractThe objective of the paper is to examine how firms have dealt with the trade‐off between flexibility and uncertainty that is characteristic for the decision‐making of firms in coping with self‐regulatory initiatives in general and the comply‐or‐explain principle in corporate governance in particular. Using unique data for 126 listed Dutch firms, we find that firms respond to this self‐regulatory initiative by largely complying with the code recommendation, possibly out of fear that the firm's reputation may be damaged. Furthermore, we find evidence suggesting that firms confine themselves to adopting a specific set of code recommendations and use similar arguments to explain non‐compliance. Our findings indicate uniformity in adopting the standard of good governance which is not in line with the logic of corporate governance codes and casts doubt on the effectiveness of this form of soft law. Overall, the paper's findings indicate that more restrictive (regulatory) instruments may be necessary to make firms conform to the spirit of codes.

The Supervisory Board Report: Little Insight About Oversight

This article investigates to what extent the report by the Supervisory Board (hereafter: the SB-report) provides the reader with useful information. We investigate this for sixty companies testing all requirements regarding the SB-report. First of all, we investigate whether the SB-report fulfils the formal requirements. Furthermore, a judgment is being rendered regarding the degree of insight that the report provides to the user. Our investigation shows that little insight can be obtained about the way in which the SB monitors the Management Board (hereafter: MB), even though the Dutch Corporate Governance Code (hereafter: the Code) requires this. Thus, we plead for the Code to become more descriptive in this respect. At the same time, we give examples of SB-reports that, in our view, do provide adequate insight, albeit occasionally. This article contributes to the discussion about the openness that Bs are prepared to give regarding their work. The way in which SBs operate is often felt as being a “black box”. Even though shareholders may query the SBs about the execution of their Supervision of the MB at the Annual Meeting of Shareholders, they – like other stakeholders – have little information at hand to form themselves a reasonable impression thereof. This article not only contains a theoretical section regarding the use of transparency and legal requirements, but also takes a look at current practices. The article closes with some recommendations that may contribute to the quality of SB-reports.

Corporate Governance in the Netherlands: an overview of the application of the Tabaksblat Code in 2004

This article examines the overall acceptance of the best practice provisions contained in the Dutch corporate governance code and identifies those that receive comparably less agreement among 150 Dutch listed companies in 2004. The findings indicate a high level of compliance with the Code. Moreover, the extent of compliance is positively associated with company size. Provisions related to the remuneration of board members, independence of supervisory board members, and requirements with respect to internal control systems stand out when it comes to non‐compliance. In addition, the nature and content of the explanations provided for non‐compliance are remarkably similar across companies, which may indicate symbolic compliance with the Code's best practice provisions.

The Level and Composition of Executive Remuneration: a View from the Netherlands

In recent years the issue of executive directors? remuneration has attracted much attention. Against the background of the EU Commission Recommendations on non-executive directors and on directors? remuneration, this contribution focuses on a number of aspects of the regulation of executive remuneration in listed public limited companies in the Netherlands. It discusses the regulation laid down in the Dutch Civil Code and in the Dutch Corporate Governance Code.

Independent Non-Executive Directors: The Way Forward

In this article the author discusses the Dutch Corporate Governance code (Dutch code) criteria adopted to identify independent non-executive directors and compare these with the criteria used in the EU recommendation and in a some other countries.