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Supervising management board culture.

Culture is the driver of sustainable performance, not the other way round.

Drs . Th.J .M. Kroese

Paper for the NCD-Nyenrode Commissar issencyc lus 17 2008-2009

Heemstede, February 11, 2009

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Inhoud

1 Introduct ion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.1 Purpose of th is paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.2 The cul ture paradox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.3 Management board cul ture – a def in i t ion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1.4 Why management board cul ture is a hard problem . . . . . . . . . . . . . . . . . . . . 5

2 What const i tutes a good management board cul ture? . . . . . . . . . . . . . . . . . . . . . . 6

3 Evaluat ion of management board cul ture – and act ing upon i t . . . . . . . . . . 8

4 Conclusions: management board cul ture is not e lus ive. . . . . . . . . . . . . . . . . . 11

4.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

4.2 Supervis ion of management board cul ture in pract ice . . . . . . . . . . . . . . 12

Appendix Case analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Footnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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1 Introduction

1.1 Purpose of this paper This paper examines whether management board cul ture can be regarded as a concrete subject, based upon which a supervisory board can perform i ts supervisory tasks and found the decis ions i t takes. Therefore, the fo l lowing quest ions have been taken as subject of research for th is paper: 1. What are the key character is t ics of a good management board cul ture? Chapter two wi l l provide a def ini t ion of a good management board cul ture and elaborate s ix key cul tural character ist ics, which can be used by a supervisory board to moni tor and evaluate the qual i ty of a management board. 2 Can a management board cul ture be evaluated and monitored based on key cul tural character is t ics – and can a superv isory board consequent ly act upon those character is t ics? To invest igate th is quest ion, three publ ic ly known cases have been analysed f rom a management board cul ture perspect ive: Fort is , Ahold and ABN AMRO. They are descr ibed in Appendix I to th is paper. In each case a s i tuat ion is descr ibed which const i tuted a di lemma for their supervisory boards at some point in t ime. The decis ion the supervisory board took at that t ime is also descr ibed. Each case is then discussed as fo l lows: what i f the supervisory board expl ic i t ly had used the s ix key character ist ics of good management board cul ture and used them as decision cr i ter ia for the s i tuat ion at hand? To which key character ist ic d id the case apply then? And what would the ‘cul tural informat ion’ have been to the supervisory board – how could i t have been interpreted? I f being made expl ic i t and used as cr i ter ia, how could they have acted upon the information al ternat ively?

1.2 The culture paradox Recent studies suggest that cul ture is the decis ive dr iver for the

sustainabi l i ty and di f ferent iat ion of any enterpr ise. The main f indings of

J im Col l ins’ ‘Good to Great ’ s tudy i are that sustainable corporate success

is not about the qual i ty of a strategy but has al l to do wi th the cul ture of

leadership and the qual i ty of the people in the management teams. A study

of General Electr ic , has shown that a large part of i ts success can be

at tr ibuted to a management cul ture which focuses on the qual i ty of

employees, not only in terms of abi l i ty , but also in terms of behaviour ii.

The cul ture of a management board is not only l inked to high performance.

I t of ten surfaces whenever there is corporate fai lure. In recent corporate

scandals i t has become clear that , somewhere in the course of events that

determined the fate of the companies in quest ion, something had gone

wrong wi th corporate governance and this was strongly l inked to a “poor”

management board cul ture. Take a look at the hid ing of comfort let ters by

the CEO and CFO of Ahold from their supervisory board and external

accountants. Their considerat ion was that th is was legi t imate and in the

interest of the company iii. Or consider the introduct ion of a ‘div ide and rule’

pol icy by the CEO in the management board of ABN AMRO iv, which caused

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the management board to become div ided, indecis ive and inef fect ive. In

these cases i t was people, their convict ions, their behaviour and their

( in)competence to act, e i ther col lect ively or indiv idual ly, that caused the

respect ive companies to enter into turmoi l and (near ly) col lapse. In these

cases there was also a supervisory board, or ‘Raad van Commissar issen’ ,

that somehow fai led to diagnose the issues and act effect ively.

So one could argue from the above that corporate governance could become ineffectual i f the cul ture is not support ive. I f cul ture is such an important factor for the long-term success of a company, how come that relat ively l i t t le at tent ion is being paid to i t in corporate governance? The amended Dutch Corporate Governance Code v does put more emphasis on (proper) behaviour of boards and shareholders, but i t s t ipulates pr inciples and best pract ices in a rather structural and formal way. I t does not provide insight into the pr incip les of a “proper” board cul ture, nor does i t s t ipulate how such a cul ture can be st imulated by ei ther board vi. Former ABN AMRO board member Dol f van den Br ink shed some l ight on th is paradox in h is inaugural lecture as Professor of Financial Inst i tut ions at the Universi ty of Amsterdam vii, whi le speaking about corporate cul ture in banks: ‘The subject (of corporate cul ture - TK) is general ly not placed high on the agenda of top management. Often, i t is regarded as a ‘sof t ’ problem . . . ’ (page 19). On page 20 Van den Br ink explains that the deeper cause of this might be the fact that cul ture is a much more elusive and complex subject than f igures viii.

1.3 Management board culture – a definit ion There are numerous def ini t ions of work cul ture and count less books have

been wri t ten to both def ine and change i t . Fons Trompenaars and Char les

Hampden Turner state, der ived from E. Schein ix, that ‘ i t is not unusual to

regard cul ture as the way a group of people solves problems’ x. This wi l l be

used as a basis for the def in i t ion of management board cul ture for th is

paper. First of al l because i t is the core task of a management board to

deal with problems the company faces. They may be ei ther strategic or

operat ional – i t is the responsibi l i ty of the management board to solve

them in such a way that the interest of company is served. Secondly, ‘ the

way a group of people solves problems’ says something about the

behaviour of that group. Other def in i t ions of cul ture may pertain to values,

convict ions of people or groups, but those values and convict ions become

manifest in the way they behave. The th ird reason for us ing the

Trompenaars-Hampden Turner def in i t ion, is that i t is pract ical for a

supervisory board: they cannot go around al l the t ime wonder ing what

(complex) value systems are incorporated into the execut ives’ minds. They

have to base their supervis ion on what actual ly happens. Therefore, for

the purpose of th is paper a management board cul ture is def ined as the

way a management board solves corporate problems and di lemmas.

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1.4 Why management board culture is a hard problem What most managers might cal l a ‘soft ’ problem is the dr iver of ‘hard’ long-term results : companies general ly don’ t fa i l because of infer ior products. They most ly fa i l because of the way their management boards behave in competi t ion: the choices they make, the way they solve problems and inevi tably the way in which they do or do not cooperate. In short : management board cul ture. The way they are judged and remunerated also plays a part in the management board cul ture that comes into existence. Unfortunately, the problem with a wrong board cul ture is that i ts ef fects are never immediate, especial ly i f the management board or cer ta in of i ts members cover up their behaviour. Or dur ing prolonged per iods of success. Whereas prof i ts, turnover and market share may st i l l be r is ing, underneath these ‘hard’ symptoms, scenar ios may unfold s lowly – fo l lowing from such phenomenons as complacency, management boards free r id ing off the success of pr ior managers, disagreement on strategy or pr ior i t ies, inabi l i ty to cooperate etcetera - that at some point in t ime resul t in sudden decl ine: ‘Even the most dramat ic [ fa i lures] tend to be years in the making’ . xi So cul ture should, in fact, be treated as a ‘hard’ issue on the agendas of supervisory boards i f one is ser ious about sustainable performance of the company. Van den Brink makes a concrete suggest ion for banks to this regard xii: the remunerat ion and appointment committee of the supervisory board should be extended to a ‘people and cul ture’ commit tee, wi th a broader responsibi l i ty as to involve the supervisors of the bank in the issue of corporate cul ture. Whether or not supervis ion on corporate culture should be inst i tut ional ized in a separate commit tee is the ‘how’ and something separate to the core issue of th is paper. The not ion here is that corporate cul ture is part of the responsibi l i ty of the supervisory board and not something that just comes bundled with the appointment of the management board. A corporate cul ture is def ined by the ‘ tone at the top’ : the cul ture that is propagated by the management board. In contrast to the way many supervisory boards might th ink, management board cul ture must have the strong at tent ion of the supervisory board. They must independent ly ask: how does the management board behave? Are they an effect ive team? Do they act in the interest of the company? Do they inspire the other management layers. Or do the supervisors not ice that the execut ives are just busy managing their d iscord and personal interests? Very of ten these are just a few quest ions the supervisory board can ask in order to assess whether the management board cul ture is for the best of the company they are responsible for .

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2 What constitutes a good management board

culture?

A good management board cul ture is def ined as the way the management

board solves problems and di lemmas in the interest of the company xiii.

Numerous books, art ic les and studies about leadership and management

have at tempted to def ine the character ist ics of good leadership and

management. For the purpose of th is paper, ins ights wi l l be used from

several acknowledged scient is ts and authors xiv xv xvi xvii as wel l as my own

exper ience as a management consultant. Six character is t ics are being used

which, together, const i tute a good management board cul ture:

1. Modest leaders, subservient to the company interest. As Jim Col l ins puts i t in ‘Good to Great ’ , excel lent leaders xviii ‘channel their ego needs away from themselves and into the larger goals of bui ld ing a great company’…….’ their ambit ion is f i rst and foremost for the inst i tut ion, not themselves. ’ (page 21). Key character ist ics of excel lent leaders are humil i ty and modesty. 2. Focus on the r ight people on the team. ‘F i rs t ‘who’, then ‘what ’ according to Jim Col l ins. ‘Get the r ight people on the bus, the wrong people of f the bus and then decide where to dr ive. ’ Good boards have a genuine interest in ‘ the r ight ’ people and wi l l draw up expl ic i t prof i les of each board member. 3. Acceptance of real ity and acting upon it . There’s no ‘beat ing around the bush’ in case of good funct ioning management teams. No window dressing. Facts and s i tuat ions are accepted just as they are, they are the star t ing point for resolve and act ion. 4. Sound management board dialogue, dominated by a search for

consensus. In people focused board cul ture, d irectors wi l l genuinely try to understand each other ’s points of v iew. They wi l l search for the other persons’ perspect ives in the team and regard di f ferent points of v iew as an enr ichment, f rom which the best solut ions wi l l be der ived. Sound management board dia logue also means that the management board wi l l , del iberately, engage in construct ive dia logue with i ts supervisory board, just as i t wi l l do wi th their subordinates. They view the layers above and below them as support ive to their funct ioning. 5. Balance of ( informal) power, no room for dominant egos. When there is sound management board dia logue, there is l i t t le or no room for dominant egos. The focus is on the interest of the company as a whole. To that regard, each member of the management board wi l l be subservient to the board as a whole and put h is/her ego or personal interests aside. 6. Remuneration and (re)appointment The supervisory board needs to ensure that generat ing the r ight cul ture is

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put on an equal foot ing to generat ing the required short term f inancial resul ts. Al though remunerat ion is not a behavioural cr i ter ia, i t is acknowledged that the way a management board is remunerated and (re)appointments are being done wi l ref lect on the actual management board cul ture.

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3 Evaluation of management board culture – and

acting upon it.

Can a supervisory board use the key cul tural character is t ics, as def ined in the previous chapter, as a benchmark for evaluat ing and monitor ing the management board i t supervises? And can a supervisory board, subsequent ly, act upon the cul tural information i t gets f rom i ts management board? In order to answer th is quest ion, three cases have been studied for th is paper. Given the subject of analysis in th is paper, publ ic companies have been chosen as subjects for the case studies, because the case mater ia l wi th regard to corporate governance is publ ic ly avai lable. In this case i t concerns two Dutch companies, ABN AMRO and Ahold, wi th statutory two-t ier boards ( the so-cal led: Structuurvennootschappen) and one Belgian company, wi th a statutory one-t ier board xix, Fort is . These case studies have been set up as fol lows: Each case deals wi th an important , i f not decis ive, d i f f icul t per iod for the respect ive company and answers three key quest ions:

• how did the management board perform, when measured against the key character is t ics of a good management board cul ture: to which key cul tural character ist ic d id the management board cul ture fa i l to apply with regard to the si tuat ion descr ibed xx?

• which behavioural aspects of the management board, or certa in of i ts members, can be viewed as relevant ‘cul tural ’ in format ion or s ignal to the supervisory board on the basis of which they could have judged that the management board did not comply to these key cul tural character is t ics?

• could the supervisory boards in these cases have acted or decided di f ferent ly than they actual ly had done, based on the cul tural informat ion, the behavioural s ignals they had gotten from their management boards xxi? What could the supervisory boards have done al ternat ively, once they had interpreted the informat ion avai lable to them as a s ignal that something was wrong wi th regard to management board cul ture?

Table 1 presents a summary of the case studies, which are presented completely in the Appendix to th is paper ( fol lowing page):

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Table 1: case summaries

Company Key cultural characteristic the board fai led to apply to

Cultural or behavioural information to the supervisory board

How could the supervisory board have acted alternatively, i f based on the behavioural information?

Fortis Lack of modest leadership (cr i ter ia 1)

In a per iod in which i t had become clear that Fort is had entered into turmoi l , CEO Votron had demanded an extra bonus over 2007, and chairman Maur ice Lippens had agreed to i t , against company procedures xxii and wi thout consul tat ion of the remunerat ion and appointment committee in the board. By doing so, CEO Votron had put his personal interest above the company interest. This deed later turns out to be a breaking point for shareholder and employee trust .

In the case of Fort is , having a statutory one-t ier status, the whole board needed to decide on the agreement between Lippens and Votron xxiii. So they could ei ther decide in favour of th is agreement or vote i t down. I f the board had recognized the cul tural s ignal f rom Votron and Lippens, they could have voted the agreement down. By doing so, they would have recognized the company’s interest at that moment: g iven the amount of problems facing Fort is i t was not in the interest of Fort is to focus on rais ing a CEO’s bonus.

Ahold Denial of real i ty and not act ing on i t (cr i ter ia 2)

In 1999 the management board ignored strong warnings from both the Internal Audi t Department and the external audi tor concerning the company’s internal controls and continued Aholds aggressive acquisi t ion strategy. On top of that , i t ignored the supervisory board’s direct ive that no more takeovers could be done unt i l the internal controls had been put in order suff ic ient ly xxiv.

Under Dutch law in a company wi th a statutory two-t ier s tatus ( ‘s tructuurvennootschap’) , the supervisory board needs to approve of important decis ions of the management board. In case of acquis i t ions or investments: they need approval i f the value of these investments exceeds 25% of the company’s equi ty. This was the case wi th both investments in ICA (value: € 1.8 bi l l ion) and US Foodservice (€ 3.6 bi l l ion) , as the group equity of Ahold at the end of 1998 was € 1.8 bi l lon (1999: 2.4 bi l l ion). So in the Ahold case discussed in th is paper, the supervisory board could s imply have st icked to their statement in 1999 that no more takeovers could take place and disapprove of the proposed acquis i t ions. Fol lowing the disapproval f i r ing Van der Hoeven would have been a ser ious opt ion: af ter a l l th is CEO had ignored the supervisory boards instruct ion. I t is

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understood that th is would have been di f f icul t , because of the shower praises of press and publ ic on Van der Hoeven. But a supervisory board must, on al l accounts, perform i ts dut ies ‘wi thout orders and consul tat ion’ ( ‘zonder last of ruggespraak’) , meaning: completely independent and in the interest of the company.

ABN AMRO

Bad boardroom dynamics (cr i ter ia 4)

In 2004, Groenink made i t c lear to the chairman of the supervisory board, Aarnout Loudon, that i t is h is intent ion to f i re Wilco J iskoot. This is a f inal s ignal in a range of s ignals and occurrences that have shown the supervisory board, over the f ive previous years, that the management board does not get along wel l , is indecis ive and inef fect ive as a team. Aarnout Loudon forbids Groenink to fol low up on his intent ion and leaves i t at that .

At the t ime CEO Groenink made i t c lear to Loudon that he wanted to f i re his board col league J iskoot, Loudon could have s ignaled that the personal incompatibi l i ty of J iskoot and Groenink had gone too far and had led to a cr ippled management board, not capable of jo int ly act ing in the company’s interest. Once Loudon had acknowledged that, th is would have been the moment to intervene and make personal changes in the board. Loudon, for th is purpose, could have taken the fo l lowing steps: • cal l for a supervisory

board meeting to discuss the issue at hand and conclude that the s i tuat ion in the management board was untenable;

• decide upon a people change in the management board. This change would at least have meant that e i ther Groenink or J iskoot would have to resign.

By act ing as such, the supervisory board would have seized the opportuni ty and would have given a loud & clear message that a d iv ided, undecis ive, board is unacceptable for the supervisors and counterproduct ive to the interest of ABN AMRO.

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4 Conclusions: management board culture is not

elusive

4.1 General Management board cul ture is a key factor , both in achieving sustainably high performance relat ive to competi t ion, and in the avoidance of corporate governance fai lures. Culture belongs to the intangible assets of a company. Unl ike the other intangible assets, cul ture star ts at the top and is embedded in the character ist ics of the execut ives the supervisors appoint. Therefore, the supervisory board is where this process star ts . Supervisory boards should be aware of a possib le over-rel iance in the numbers and communicat ions, and the r isk of fa i l ing to reconci le the behaviour of the execut ives and messages their behaviour contains. Culture cannot be lef t to chance. Nor can i t be lef t to the management board to nurture, change or destroy cul ture as they please. I t is a long-term dr iver of , of ten short term, resul ts . Therefore, i t is the responsibi l i ty of a supervisory board to recognise the importance of a sound management board cul ture and decide independent ly what the key cul tural character ist ics of the management board should be and how the cul ture of the f i rm should be measured and reviewed. Furthermore, i t has to decide how such measurements should feature in the employment and remunerat ion packages of the management board. A management board cul ture manifests i tsel f through the behaviour of the indiv idual board members and their col lect ive behaviour. So the character ist ics of any management board cul ture become apparent through ‘behavioural informat ion’ that supervisors get in the course of act ion: through observat ion, a sound board dia logue, asking quest ions and checking informat ion through observat ions picked up from contact wi th other people than the management board. This information can be evaluated against key cul tural character is t ics, concrete cr i ter ia for good management board cul ture, which should be formulated by the supervisory board. Once interpreted, the supervisory board can act upon the informat ion, wi th in the boundar ies of their control , def ined by their statutory mandate and the ar t ic les of associat ion of the company i t supervises. In a statutory two-t ier board, a Dutch ‘Structuurvennootschap’, the supervisory board can perform i ts task through approval or d isapproval of management board decis ions. I t can f i re management board members or suspend them (unless i t concerns a ‘moderate’ s tatutory two-t ier board) xxv. In a statutory one-t ier board, the supervisors are part of the decis ion making process. This makes their involvement in decis ion making stronger and appeals stronger to their responsibi l i ty, making i t important to take a ‘d is tant look’ at what happens in the board. However, the pr incip les of a good management board cul ture apply regardless of the statutory structure of a supervisory board. Whether two-t ier supervisors or one-t ier non-execut ives: performing a supervisory task based, amongst others, on an evaluat ion of people and their behaviour serves the long-term interest of a company and provides for sustainabi l i ty in short- term resul ts. And therefore, the cul ture of the management board should be subject of constant attent ion and evaluat ion by the supervisory board. I t is the responsibi l i ty of the supervisory board to delve deeply into the character ist ics of cul ture and make a true effor t to understand them and act upon them. Can a supervisory board inf luence the management board cul ture and, consequent ly, the corporate cul ture? I t can be pleaded that the cases

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d iscussed in this paper support a posi t ive answer to this quest ion: i f a supervisory board consistent ly acts upon a ‘cul ture pol icy’ i t has adopted i t can inf luence the management board cul ture through i ts own supervisory board behaviour - i ts decis ions, appointments and dismissals of management board members and interact ions wi th the management board.

4.2 Supervision of management board culture in practice How can a supervisory board then put supervis ion of management board cul ture into pract ice? For th is purpose, the fo l lowing steps can be taken by a supervisory board: 1. Create awareness and common understanding

I t should be the responsibi l i ty of the supervisory board, or the non-execut ives in a one-t ier board, to commonly acknowledge the long-term relevance of appropr iate management board cul ture for the interest of the company. This awareness should lead to goal sett ing and fol low-up, as def ined in the fo l lowing steps. Management board cul ture could be placed under the responsibi l i ty of a separate commit tee, e.g. the Appointment and Remunerat ion Committee, which then wi l l have a broader responsibi l i ty. Whatever the structural solut ion, i t is p leaded that the Chairman of the Board should assume management board cul ture as one of h is main areas of responsibi l i ty , g iven the importance of cul ture for the long-term continui ty of the company.

2. Def ine key cul tural character ist ics. This is not a task to be taken l ight ly. First i t means recognizing what key cul tural character is t ics mean. On what values are they based? And, most important : how do they translate into behaviour? Secondly the supervisory board should ask: what k ind of behaviour does support the interest of th is company? What specif ic cul tural at tr ibutes are required of a management board to guide the organizat ion. xxvi A thorough discussion among the members of a supervisory board wi l l have the advantage that the supervisors wi l l share a deeper understanding of those cul tural character ist ics which ‘make the c lock t ick’ , i .e. are decis ive in the long-term success of the company. Key cul tural character ist ics are contingent upon each company and the market s i tuat ion i t f inds i tsel f in. However, as business dynamics change and compet i t ive playing f ie lds change, i t should be recognized by supervisors that key cul tural character ist ics may be suscept ib le to change over t ime.

3. Share character ist ics wi th the management board Once def ined, the key cul tural character ist ics should be shared wi th the management board: i t should be c lear to the lat ter what is expected from them and their behaviour, both as a team and individual board members. Next to the ‘hard’ resul ts the management board produces they are ent i t led to know what behavioural performance indicators have been assessed by their supervisors. I t is advised that the supervisory board and management board discuss the character is t ics thoroughly enough as to make sure that the management board has understood the supervisory board wel l xxvii. Preferably, the key cul tural character ist ics are consistent wi th the corporate values set by management. In fact, they are a way to make these values concrete in the dai ly management pract ice.

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Here, again, a thorough discussion and common understanding wi l l not only real ise a k ind of cul tural evaluat ion system. I t wi l l , more important ly, contr ibute to a strong cul ture as a deeper understanding of the core values of the company, of which key cul tural character is t ics and behavioural performance indicators are der ived, is encouraged.

4. Moni tor and evaluate management board behaviour I t wi l l take t ime for supervisors to get into the habit of evaluat ing and monitor ing actual behaviour of management boards. I t means that, f rom t ime to t ime, supervisors wi l l have to look back on important occurrences and events- be i t press coverage, customer complaints, shareholder act iv ism - and assess what actual ly the behaviour was of the management board or i ts board members in the speci f ic s i tuat ion. Then they should weigh the behavioural s ignals against the key cul tural character ist ics they have def ined. I t is the duty of a supervisory board not only to supervise, but a lso check the execut ion of a company’s strategy and pol icy. In doing so, the supervisory board has the r ight, even the duty, to be proper ly informed and, i f deemed necessary, seek the advice from experts. With in th is context supervisory boards can be helped by behavioural experts, such as management consul tants and psychologists, to help them acquire expert ise and ‘a habit ’ in analys ing and interpret ing actual management board behaviour.

5. Act upon the f indings and ins ights: boardroom dialogue f i rs t ! Once (cer ta in) management board behaviour has been evaluated, the supervisory board can act upon their conclusions. As stated in the previous paragraph, the formal supervisory board instruments have been def ined by their statutory mandate and the ar t ic les of associat ion of the company supervised. However, these formal instruments - such as (d is)approving of management board proposals, h ir ing and f i r ing managers or res igning – should not be regarded as the f i rs t ‘management tools’ for supervisory boards wi th regard to cul ture: when i t comes to management board cul ture the f i rst and most important instrument of a supervisory board is the boardroom dialogue. This is the pr imary instrument for st imulat ion of the r ight behaviour and correct ion of counterproduct ive behaviour: the interact ion between the supervisory board and the management board should be used to ‘get and stay on the same songsheet ’ wi th regard to behaviour that sui ts the long-term interest of the company.

Supervis ing management board cul ture in pract ice wi l l require qui te an

ef for t from al l those supervisors who, for long, have considered cul ture to

be an elusive subject . However, the returns of this investment wi l l be

substant ia l ly posi t ive in terms of continui ty and robustness of the

companies they supervise. And supervisors wi l l f ind out that their ef for ts

wi l l lead to sustainable resul ts , as successful cul tures have a habit in

maintain ing and even re inforc ing themselves.

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Appendix Case analyses

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Company Fort is Si tuat ion/case For the year 2007, CEO Jean-Paul Vot ron and chai rman of the board Maur ice L ippens have agreed that Vot ron,

based on Votrons own demand, wi l l get a bonus of € 2 .5 mi l l ion, double the amount to which Vot ron is ent i t led, accord ing to For t is ’ own gu ide l ines. Vot ron h imsel f had demanded the bonus, against company procedures xxviii. The agreement between h im and L ippens had been reached wi thout consul ta t ion of the remunerat ion and appointment commit tee in the board. The ext ra bonus was publ ic ized xxix on march 31s t , 2008, a t a t ime when i t had become c lear that the takeover of ABN AMRO by For t is was not as easy to d igest as suspected xxx: • Due to its exposure to subprime‐mortgages, Fortis is forced to amortize € 1.5 billion, causing the its profit to be € 1.3 billion lower than expected. • At that time, there is uncertainty whether Fortis will be able to finance the acquisition of ABN AMRO • At the same time, Fortis needs to acquire additional capital in order to satisfy the solvability requirements • In order to realize synergies and increase efficiency, a comprehensive savings program has been introduced • Fortis’ share price at that time had decreased with more than one third in 2007.  As later turns out , Vot rons bonus is a break ing po in t : as th is is regarded as Vot ron put t ing h is se l f - interest above the company in terest , shareholders lose the i r t rus t as do employees. On July 11, 2008, Jean-Paul Vot ron res igns as CEO of For t is .

Supervisory board di lemma

On what grounds to agree on the ext ra bonus, demanded by the CEO? Which dec is ion is responsib le and in the best in terest of the company?

What has been done or decided

The board of d i rectors , a l though d iv ided, approves of the ext ra bonus. Even the chai rman of the board is granted a var iab le bonus, qu i te uncommon for non-execut ives. Because of the mora l pressure wi th in the board, L ippens dec ides to forgo the bonus, in exchange of 75% increase in h is remunerat ion and extens ion of h is term as chai rman.

Board culture character ist ic the case appl ies to

Modest leadersh ip , subserv ient to the company in terest

Information or s ignal to supervisory board

‘Personal interest before company interest’ One can imagine a CEO or management board who want to renegot iate the terms of the i r remunerat ion. In th is case the d iscuss ion had been s tar ted by the CEO himsel f a t a t ime when there were c lear s ignals to the superv isory board that the company i tse l f was at r isk .

What could have been done

The board of d i rectors could have recognized that : 1. by reaching an agreement without consulting the remuneration and appointment committee, Lippens and Votron placed themselves apart from this 

committee. It should be labeled as bad boardroom dynamics; 2. this was an act of mere self‐interest. At that particular time, it should be regarded as an act which was not in the interest of the company and its 

stakeholders; 3. the bonus would have a bad impact on the trust in the board and the company. Especially among those who were suffering the most from the acquisition 

and credit crisis: shareholders and employees of Fortis.  Based on these arguments the (one t ier ) board of d i rectors could have voted down the increase in Vot rons bonus. The board could a lso have voted down the var iab le bonus of the chai rman (which they d id not , a l though L ippens h imsel f dec ided to change h is terms of remunerat ion) .

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Company Ahold Situat ion/case xxxi Since the appointment o f Cees van der Hoeven as CEO in 1993, Aholds main s t rateg ic act iv i ty had been (aggress ive)

non-organic growth through acquis i t ions and jo in t ventures. Meanwhi le , the focus on in terna l cont ro ls and r isk management had been loosened and consequent ly these cont ro ls had deter iorated, up to the po in t in 1999 were 30-40% of the Ahold enterpr ise d id not have adequate cont ro ls . Th is was repor ted by the In terna l Audi t Depar tment and conf i rmed by the externa l accountant Delo i t te & Touche to Aholds Audi t -Commit tee. The superv isory board then has i ts cha i rman, Henny de Rui ter , threat the management board that ‘ i f the f inanc ia l cont ro l does not improve, no new takeovers may be done, unt i l fur ther not ice ’ . The management board d isregarded the superv isory board dec is ion and cont inued i ts acquis i t ion act iv i t ies . In the same year , Ahold enters into jo in t ventures wi th Scandinav ian ICA and Guatemalan reta i l cha in La Fraga and takes over US Foodserv ice in the Uni ted States. The deals wi th ICA and US Foodserv ice are amongst Aholds largest . As appears later , they are a lso the r isk iest . The order / threat by the Superv isory Board was never fo l lowed up. Not on ly d id the Management Board cont inue go ing fu l l speed ahead on i ts aggress ive and expensive growth path, i t kept communicat ing to the outs ide wor ld i t was do ing so. E.g. on the ‘Dag van het Aandeel ’ ( ‘The Day of Stock ’ ) Van der Hoeven te l ls h is audience to be speaking wi th approx imate ly 10 takeover candidates. So not on ly d id the management board ignore the dec is ion of the superv isory board. I t ignored the (bruta l ) fac t that the company was s l id ing out o f cont ro l and, consequent ly, d id not act upon that . Nei ther by ( temporar i ly) s topping the i r acquis i t ion s t ra tegy nor by t ighten ing in terna l cont ro ls

Supervisory board di lemma

The d i lemma for the superv isory board was whether or not to fo l low up on i ts own dec is ion to the management board.

What has been done or decided

The superv isory board chose not to fo l low up on i ts threat . This d id not come as a surpr ise to the management board, as Jeroen Smi t descr ibes in Het Drama Ahold (page 220-221) : ‘ They ( the management board – TK) regard the meet ings wi th the superv isory board as a r i tua l dance. The atmosphere is a lways good……..The meet ings are character ized by a lo t of jokes and l i t t le concrete d iscuss ions. The chairman of the board of Royal Ahold seems to have accepted that Van der Hoeven is e lus ive ’ .

Board culture character ist ic the case appl ies to

Acceptance of rea l i ty and act ing on i t .

Information or s ignal to supervisory board

Ignorance of real ity. The superv isory board knew that Aholds aggress ive growth s t rategy was not susta inable . However , Van der Hoeven seemed untouchable and the Dutch (sharehold ing) publ ic and press seemed to love th is man, h is v is ion and h is deeds. He even seemed to fo l low the publ ic sent iment more and be l ieved in h is own growth-prophesy, o f which the superv isory board had expressed ear l ier i t would not be susta inable . By choos ing to ignore the d i rect ives of the superv isory board, as wel l as the c lear concerns f rom the In terna l Audi t Depar tment , the management board d id forgo hard s ignals about the s ta te of cont ro l the company was in a t that t ime. No fol low up on supervisory board directives. There can be two reasons for a management board not to fo l low up on superv isory board d i rect ives: one may be incompetence, which is not a cu l tura l s ignal as such, a l though i t should have a larm bel ls r ing ing in the superv isory board. The other may d isobedience or a de l iberate choice to ignore the d i rect ive. Any two reasons are suf f ic ient s ignals for the superv isory board to act swi f t l y and s t rongly , sending a s ignal that there is no to lerance for such counterproduct ive behav iour .

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What could have been done

The fact that the superv isory board knew of the r isks the management board took and d isapproved of them ( !) cou ld have urged them for act ion. They could have recognized that the management board was b l ind to bruta l fac ts that were severe enough to a larm Aholds In terna l Audi t Depar tment , the externa l audi tor Delo i t te & Touche and the audi t commit tee. Fur thermore, they could have recognized another bruta l fact , which at that t ime had become apparent : the superv isory board, be ing responsib le for adequate superv is ion, was not be ing taken ser ious ly by the board they were supposed to superv ise. I th ink there were 2 opt ions for the superv isory board: Opt ion I : ac t upon the facts . In sp i te o f the growth f igures and what the genera l publ ic or the press thought of Van der Hoeven, the superv isory board could have d isapproved of the jo in t ventures and takeovers that were announced af ter the i r dec is ion. They could have gone one s tep fur ther and f i re Van der Hoeven for not fo l lowing up a superv isory board inst ruct ion. This dec is ion would come as a b ig surpr ise but i t would have g iven the superv isory board oppor tun i ty to ins ta l l a CEO, or even a new board, which could work on the issue wi th the h ighest pr ior i ty: (1) ins ta l l ing and/or t ighten ing in terna l cont ro ls , (2) proper in tegrat ion of acquis i t ions and jo in t ventures, 3) rea l isat ion of synerg ies of sca le and operat ional synerg ies. Opt ion I I : res ign Given the formal respons ib i l i ty and l iab i l i ty a superv isory board has i t should be complete ly unacceptab le for them to be ignored by the management board. Therefore, i f the superv isory board of Ahold in 1999 d id dec ide not to act upon the fact that the i r ins t ruct ions were ignored by the management board they should have res igned, as the board cont inued a path they had expl ic i t ly d isapproved of .

Company ABN AMRO Situat ion/case xxxii In 1999 the superv isory board cons idered the success ion of CEO Jan Kal f f . R i jkman Groenink was one of the

candidates. I t was recognized by severa l superv isors that a new CEO should, amongst o thers , be ab le to uni te the management board and bu i ld a team. There were doubts about Groeninks ab i l i ty to ach ieve th is , as he was ne i ther recognized as a team p layer , nor as a team bui lder . The chai rman of the board, Aarnout Loudon, had been warned about th is exp l ic i t ly . Based on other personal qual i t ies and – s i tuat ional – cons iderat ions, Groenink was appointed by the superv isory board. Af ter Groeninks appointment , the ABN AMRO management board was character ized by everyth ing but un i ty. Groeninks po l icy was ‘d iv ide & ru le ’ , he d id not consul t h is fe l low board members on al l dec is ions. He bui l t a s t rong one-on-one re la t ionship wi th h is chairman Aarnout Loudon, caus ing that a l l impor tant issues and dec is ions to be d iscussed and dec ided upon between the two men before board meet ings. This caused the informal power wi th in the management board to be shi f ted to Ri jkman Groenink main ly. Fur thermore, i t hampered a sound management board d ia logue, both wi th in the management board as between the management board and the superv isory board. In the course of the years af ter 1999, ABN AMRO did not succeed in formulat ing, let a lone execute, a c lear s t rategy. ABN AMRO is not ab le to de l iver upon i ts promises to shareholders . Th is can for a large par t be at t r ibuted to the management board which is d iv ided constant ly and act ing on the bas is of personal in terests and d iscord, ins tead of work ing as a team, focused on the in terest of ABN AMRO. The superv isory board wi tnesses these developments and, for severa l reasons, does not intervene, a l though t ime and again i t is c lear that Groenink does not comply wi th the agreement the superv isors made wi th h im in 1999: that he would bu i ld a team of the management board. Instead,

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Groenink appl ied ‘d iv ide & ru le ’ tac t ics , which he lped h im sh i f t the ba lance of power towards h imsel f . In the summer of 2004 i t has become c lear to the management board that a choice has to be made regard ing the wholesale d iv is ion of the bank, as the investments in th is d iv is ion so far have not y ie lded the expected returns. Jeroen Drost , D i rector Corporate Development wr i tes a memo in which two fundamenta l a l ternat ive choices are e laborated upon. Wi lco J iskoot , responsib le for th is d iv is ion chooses not to at tend the cruc ia l meet ing in autumn 2004, as he g ives pr ior i ty to a t tending the Olympic Games at that t ime. However , he had made i t c lear to Groenink that the employees of the wholesale d iv is ion would not cooperate to the a l ternat ive which wou ld mean the end of the wholesale d iv is ion in i ts current form. In fact he had made i t c lear that the employees would somehow obst ruct any such dec is ion. Separate f rom th is meet ing, Groenink makes i t c lear to Aarnout Loudon that , in case J iskoot does not cooperate to a good so lu t ion, he wi l l have to f i re h im. In response, Loudon forb ids Groenink to do so, as J iskoot earns suf f ic ient amounts of money for ABN AMRO. F ina l ly, the management board does not dec ide upon the wholesale d iv is ion, in fact leav ing i t as i t was. And leav ing the management board d iscord as i t is .

Supervisory board di lemma

Discord in the management board leads to indec is iveness on cruc ia l s t ra teg ic issues. How to act upon th is fact?

What has been done or decided

Aarnout Loudon makes i t c lear to Groenink that f i r ing J iskoot is unacceptab le , and leaves i t at that .

Board culture character ist ic the case appl ies to

Sound management board d ia logue Balance of power

Information or s ignal to supervisory board

No sound management board dialogue, ineffect ive management team. Result ing in indecisiveness on crucial strategic issues. This d i lemma p layed an impor tant ro le s ince Groeninks appointment in 1999: the superv isory board, through numerous s ignals , knew that the management board d id not funct ion as a team and that the bank had not l ived up to i ts promises made at the t ime Groenink took over as CEO. I t can be argued that over the years 1999 – 2004 there were reasons to cont inue the s ta tus quo as far as the const i tu t ion of the management board is concerned. However , in the autumn of 2004 Groeninks gives a loud & c lear s ignal to h is chai rman. There can be no mis interpretat ion to the fact that at least two – impor tant – men in the board do not get a long we l l . Th is t ime, the s i tuat ion has escala ted to the po int where the i r incompat ib i l i t y is , beyond doubt , counterproduct ive to the interest of ABN AMRO.

What could have been done

Loudon could have s ignaled that the personal incompat ib i l i ty o f J iskoot and Groenink has gone too far and that th is was the moment to in tervene and make personal changes in the board. Loudon, for th is purpose, cou ld have taken the fo l lowing s teps:

• call for a supervisory board meeting to discuss the issue at hand and conclude that the situation in the management board is untenable; • decide upon a people change in the management board. This change would at least mean that either Groenink or Jiskoot would have to resign.  

By acting as such, the supervisory board would have seized the opportunity and give a loud & clear message that a divided, undecisive, board is unacceptable for the supervisors and counterproductive to the interest of ABN AMRO. 

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Footnotes

Chapter 1 i Jim Collins, ‘Good to Great, Why some companies make the leap, and others don’t’, 2001 ii Fred van Eenennaam, Strategies of Successful Companies. iii Jeroen Smit, ‘Het drama Ahold’, 2004 iv Jeroen Smit, ‘De Prooi’, 2008, page 223 v The (amended) Dutch corporate governance code. vi In the preamble of the amended Dutch corporate governance code it is stated that ‘The principles (of this code – TK) may be regarded as reflecting the general views on good corporate governance, which enjoy wide support. They have been elaborated in the form of specific best practice provisions. These provisions create a set of standards governing the conduct of management board members, supervisory board members and shareholders.’ The Dutch corporate governance code does not provide concrete principles of culture, or behaviour , that boards should comply to. It deals with the matter in a structural and procedural  way, like the maximum period for which a director can be appointed, or the way boards should deal with (potential) conflicts of interests et cetera. Although the amended code, as presented by the Frijns‐committee on December 10, 2008, does put more emphasis on proper behaviour of directors and shareholders, instead of the way in which they account for their activities, it still deals with behaviour in a formal way. Examples can be found in the articles II.1.10 and II.1.11, which stipulate the role of the supervisory board in case of a takeover bid. Or in article IV.4.4. which stipulates shareholder behaviour while exercising the right to put an item on the agenda of the General Meeting of Shareholders. 

vii Bankstrategie en bankcultuur, Rede uitgesproken bij de aanvaarding van het ambt van Bijzonder hoogleraar Financiële Instellingen aan de Universiteit van Amsterdam op dinsdag 20 mei 2003 door R.G.C. van den Brink. 

viii According to Van den Brink, it also requires a certain susceptibility to spirituality ‘ in order to oversee and understand certain elements (of culture)’. Based on the findings in this paper, I do not agree with that notion, as far as management board culture is concerned. ix E. Schein, Organisation culture and Leadership, 1985 x Fons Trompenaars and Charles Hampden‐Turner, Over de grenzen van cultuur en management. xi Fortune Magazine, Why Companies Fail, CEOs offer every excuse but the right one: their own errors. Ram Charan and Jerry Useem, May 27, 2002 

xii Bankstrategie en bankcultuur, Rede uitgesproken bij de aanvaarding van het ambt van Bijzonder hoogleraar Financiële Instellingen aan de Universiteit van Amsterdam op dinsdag 20 mei 2003 door R.G.C. van den Brink, page 22. 

 Chapter 2 xiii It is not the intention of this paper to present these characteristics as final or ‘definite’, valid on all accounts. One can imagine that key cultural characteristics may differ among industries, countries or continents. xiv Jim Collins, Good to Great, 2001 xv Paul Fentener van Vlissingen, Ondernemers zijn Ezels xvi Fons Trompenaars en Charles Hampden Turner, Over de Grenzen van Cultuur en Management xvii Manfred F.R. Kets de Vries xviii ‘Level 5 Leaders’ according to the definition of ‘Good to Great’ xix Moreover, for private companies and limited liability companies a supervisory board is not compulsory by (Dutch) law and therefore it is suspected that whenever such companies have a supervisory board, rights and obligations may differ, depending on the articles of association, which makes the discussion on options to act more difficult.  

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Chapter 3 xx A comprehensive analysis of all cultural characteristics in all of these cases is out of the scope of this paper. xxi Please note that it is not the intention of this paper to assess all that was culturally right or wrong with the management boards in question, nor to provide a comprehensive set of conclusions as to what the supervisory board should have done. xxii NRC Handelsblad, 20 en 21 december 2008, ‘Topman Fortis vroeg en kreeg dubbele bonus van 2,5 miljoen’ xxiii It can be argued that the unilateral agreement between chairman Lippens and Votron can also be seen as a cultural signal that the power within the board of Fortis was out of balance. xxiv Not following up a supervisory board directive is in itself a sign that there something severely wrong in the dialogue/dynamics between a supervisory board and a management board. In such a case, in my opinion, the supervisory board should always act with a clear signal, which should be (1) correcting the management board, (2) firing the management board or the ones responsible for the disobedience or (3) resign as a supervisory board.  Chapter 4 xxv In case of a regular company under Dutch law, either a private company (bv) or a limited liability company (nv), these controls are basically the power of the shareholders but can be delegated, in the articles of association, to a supervisory board.  xxvi Here the link with the Appointment and Remuneration Committee becomes apparent, as they can translate the cultural characteristics into requirements for individual board members. However, culture is not to be regarded as a sum of different characters: it translates into a set of unwritten rules that define the behaviour of the team, as well as the individuals within. 

xxvii Preferably, the management board and supervisory board agree on the key cultural characteristics and their meaning, as strong corporate cultures are often characterized by a genuine search for consensus among its leaders. 

 Appendix  xxviii NRC Handelsblad, 20 en 21 december 2008, ‘Topman Fortis vroeg en kreeg dubbele bonus van 2,5 miljoen’ xxix Jaarverslag 2007 Fortis, pagina 132 xxx NRC Handelsblad, 20 en 21 december 2008, ‘Het feestje dat geen feestje mocht worden’. xxxi Jeroen Smit, Het Drama Ahold, 2004 xxxii Jeroen Smit, De Prooi, 2008