Proposed Changes to Dutch Corporate Governance (Tabaksblat) Code Focus on Executive Compensation

Changes
have been proposed to the Dutch Corporate Governance Code, popularly
known as the Tabaksblat Code, that will produce significant changes in
management remuneration, including the introduction of a claw back
clause. The changes also deal with the sometimes controversial
relationship between board compensation committees and outside
compensation consultants; an issue the SEC wrestled with when it
adopted a new executive compensation disclosure regime.

The
changes were proposed by the eminent Corporate Governance Code
Monitoring Committee, which was created by the Dutch government in
2004. The committee expects to adopt the changes to the Code in
December, 2008.

The Code embodies the principle of apply or
explain, under which its provisions should be applied unconditionally
or an explanation should be given for any departure from them. The
management board and supervisory board of a company account to the
shareholders for the corporate governance structure that has been
adopted; and for compliance with the Code.

Broadly, the
Monitoring Committee believes that self-regulation is in principle a
better instrument than legislation for influencing the level and
structure of management remuneration. This is also consistent with the
purpose of the Code. However, the committee cautioned that
self-regulation can be a serious alternative to legislation only if
everyone makes an effort to comply with the Code. In other words,
self-regulation requires self-discipline.

The supervisory board,
working through a remuneration committee, is responsible for
formulating the remuneration policy and determining the individual
remuneration of management board members. To assist the board in this
difficult job, the committee proposes guidance. The guidance is based
on the independence of the committee and how it uses external
compensation consultants.

The remuneration committee, and not
the remuneration consultant, should adopt the principles for the
remuneration policy, including the use and composition of the peer
group, the ratio of fixed to variable and short-term to long-term
remuneration, and the ratio of the remuneration of the chair to that of
other members of the management board. Similarly, the committee, and
not the consultant, should take the initiative in determining the
performance criteria. Also, the remuneration consultant should not have
any contact with the management board members.

If the
remuneration committee uses the services of a consultant who provides a
benchmark for determining the level of management board remuneration,
the consultant should be independent of the management board. It
follows that the consultant may accept other assignments from the
company only in very exceptional circumstances and with the prior
consent of the supervisory board or the committee. When the occasion
arises, this does not prevent another consultant working for the same
organization from accepting an assignment from the company, provided
that there is sufficient assurance that the two consultants operate
independently of each other.

The committee proposes a claw back
provision for the Code under which, if the variable pay is granted on
the basis of incorrect financial or other data, the supervisory board
should have the possibility of adjusting it, and the company should be
entitled to reclaim from the management board member the variable pay
granted on the basis of the incorrect data. This claw back clause
should be disclosed. In a letter to the committee, the International
Corporate Governance Network welcomed the claw back provision as a way
of ensuring that performance-based rewards paid to executives have
actually been earned in light of subsequent developments.

In the
case of new awards of variable pay to management board members based on
quantified performance criteria, the monitoring group says that the
supervisory board should be able to alter this in relation to the level
of previous years if this would produce unreasonable results, taking
account of the remuneration policy adopted by the shareholders. The
supervisory board should also have the power to alter existing
conditional awards of variable pay based on quantified performance
criteria if unaltered application would produce an unreasonable and
unintended result. The committee cautioned that the supervisory board
should exercise these powers only as a last resort.

In order to
prevent unlimited and unintended rises in variable pay, the supervisory
board should ensure that when short-term and/or long-term variable
remuneration is granted, each variable component does not exceed a
given maximum percentage of the fixed gross salary. The policy pursued
by the supervisory board with regard to the maximum ratio between fixed
and variable remuneration should be disclosed by the company.

The
Monitoring Committee proposes that severance pay be added to the list
of elements that must be disclosed immediately, unless this would be
contrary to an overriding interest of the company. In addition, a best
practice provision regulating the maximum remuneration in the event of
dismissal should be extended to include all reasons for termination of
employment. The main elements of the agreement reached with the
management board member should be disclosed immediately.

The
Monitoring Committee also proposes that the conditions for
change-of-control clauses in contracts with management board members
and for other prospective payments to management board members (whether
in the form of securities or otherwise) should be immediately
disclosed. Such information should also be provided in the event of a
resolution of the management board in respect of a takeover or other
important change in the nature of the company which is presented to the
general meeting of shareholders and may result in the applicability of
the compensation clause.

One-off payments should be explained in
the remuneration report. The Monitoring Committee recommends that if
the company makes one-off (short-term) payments to management board
members (other than the annual bonus), this should be based on a scheme
included to this effect in the remuneration policy adopted.