1 Introduction

The establishment of an effective system of corporate governance is based on the collaboration, monitoring and trust of three actors: shareholders, board of directors and management. Since, according to the agency theory, the latter two tend to behave opportunistically, appropriate incentives need to be installed to align the interests of shareholders with those of executive directors and management. In this view, performance-linked director compensation is an effective corporate governance tool that can be used to create these appropriate incentives. Yet, there has been a lot of criticism of these performance-linked remuneration systems. Executive pay is often considered to be ‘excessive’ and regarded as an agency cost in itself.Footnote 1 The board of directors, representing the shareholders when contracting with the CEO, relies too much on the latter or on conflicted remuneration consultants,Footnote 2 which is an important argument of the ‘managerial power theory’.Footnote 3 The discussion on (how to structure) executive pay is fiery and not only involves shareholders, politicians and academics; media, too, have drawn considerable attention to high levels of executive pay to so-labelled ‘fat cats’,Footnote 4 thereby turning this discussion into a social one.Footnote 5

In order to strengthen executive compensation as a corporate governance mechanism, and as a result of shareholder lobbying,Footnote 6 different governments and legislators have introduced reforms in the past decade,Footnote 7 including shareholders’ say on pay. Say on pay systems vary widely across European countries.Footnote 8 The Netherlands was a frontrunner, introducing its say on pay empowerment of shareholders in 2004. In this system, shareholders have a mandatory say on the company’s remuneration policy. The law provides that the general meeting adopts the remuneration policy, which made the Dutch approach unique for a long period of time.

The introduction of say on pay legislation adds another component to the executive pay discussion. Whereas proponents suggest that say on pay would create pressure on boards of directors to reduce executive compensation levels and stimulate the dialogue during and outside general meetings, opponents are more sceptical.Footnote 9 The central question in this discussion is: how effective is shareholders’ say on pay in practice?

Although many articles have been written on executive pay and the body of say on pay literature is growing, a long-term analysis of the evolution and effects of say on pay is lacking. The Dutch say on pay has already existed for over a decade and thus provides an opportunity for an extensive evaluation of its effectiveness and effects. This contribution analyses shareholder behaviour regarding pay issues and provides clear insights into the impact of say on pay. The article proceeds as follows. Before conducting an empirical analysis of the merits of the Dutch say on pay in practice in Sect. 3, we introduce the Dutch corporate governance system and its legal framework for say on pay in Sect. 2. Section 4 provides our main conclusions.

2 The Dutch Corporate Governance System and Say on Pay

2.1 The Dutch Corporate Governance Framework

Until 2013, Dutch company law only provided for a two-tier board structure.Footnote 10 The management board is responsible for the management of the company, i.e., its day-to-day business and affairs.Footnote 11 The supervisory board’s role is to supervise and advise the management board, as well as to monitor the general course of the company’s affairs, developed and executed by the management board.Footnote 12 In addition, the supervisory board – ‘with labour co-determination’ according to some authorsFootnote 13 – is charged with hiring and firing the members of the management board.Footnote 14 In addition, the supervisory board’s chairman conducts the general meeting of shareholders.

The general meeting of shareholders appoints the members of the supervisory board. The supervisory board must develop a profile of its composition, size and the required expertise of its members that it must discuss with the general meeting of shareholders and the works council.Footnote 15 The candidates are selected by the supervisory board itself. Furthermore, in companies with labour co-determination the works councilFootnote 16 has the binding right to nominate one third of the members of the supervisory board. A supervisory board member is elected for a term of 4 years.

Since 2013, a Dutch company can opt for a one-tier board structure. In that case, the board must be composed of both non-executive and executive members. Whether a particular candidate will be elected as a non-executive or executive board member is decided by the general meeting of shareholders.Footnote 17 In case a company with a one-tier board is subject to co-determination, the rights and duties of the supervisory board are, mutatis mutandis, passed to the non-executive directors.Footnote 18 The Dutch Civil Code (hereinafter: DCC) states that the non-executive members of the one-tier board must monitor the performance of the executive members. Further, the chairman must be a non-executive member of the board of directors. In matters related to executive compensation, all executive members of the board are prohibited from being involved in the decision-making process and the setting of their remuneration.Footnote 19

The Dutch corporate governance framework of listed companies is also governed by the Dutch Corporate Governance Code (hereinafter: the Dutch Code).Footnote 20 The company must disclose, in its annual report, whether it complies with the Code’s governance principles or explain why it deviates from these principles. The Code also includes principles and best practices related to the level, composition, determination and disclosure of the remuneration of the management board,Footnote 21 but does not address say on pay.Footnote 22 Every year, the Monitoring Committee assesses the compliance of Dutch companies with the Code. The Committee found that compliance with the recommendations relating to the remuneration of the board of directors was relatively low compared to that with the other recommendations, and urged companies to increase the compliance levels.Footnote 23

2.2 The Dutch Say on Pay System

Article 2:135 DCC and Article 2:145 DCC jointly state which corporate constituents set the remuneration of the different types of directors and stipulate that the company must provide for a remuneration policy. Article 2:145 DCC empowers the general meeting to determine the remuneration of the supervisory board in a two-tier board structure.Footnote 24

Article 2:135 DCC is more complex.Footnote 25 Previously, it contained the rule that the general meeting of shareholders should determine the executive remuneration,Footnote 26 but the law allowed the delegation of this power to another corporate body. Many (listed) companies delegated this authority, in their articles of association, to the supervisory board, capping shareholders’ power on remuneration issues. Due to the growing concerns about large bonuses for directors, the Dutch government decided to strengthen the role of shareholders in order to restore the balance of power.Footnote 27 In the 2004 revised Article 2:135(1) DCC the Dutch legislator introduced the distinction between remuneration policy and remuneration packages. While the determination of the compensation packages can still be delegated, the remuneration policy must always be adopted by the general meeting of shareholders.

Only months before the introduction of this new version of Article 2:135(1) DCC, the 2003 version of the Dutch Code (also called ‘Code Tabaksblat’) was enacted and gained regulatory status via amendment of Article 2:391(5) DCC. Listed companies must comply – in accordance with a ‘comply or explain’ approach − with the provisions of the Code. Principle II.2 stated that

‘the remuneration policy proposed for the next financial year and subsequent years as specified in the remuneration report shall be submitted to the general meeting of shareholders for adoption. Every material change in the remuneration policy shall also be submitted to the general meeting of shareholders for adoption. Schemes whereby management board members are remunerated in the form of shares or rights to subscribe for shares, and major changes to such schemes, shall be submitted to the general meeting of shareholders for approval.’Footnote 28

The introduction of the new Article 2:135 DCC made this (part of the) principle redundant and the 2008 version of the Dutch Code revised it. The revised Code 2008 only maintained the best practice provision that the supervisory board must explain how the remuneration policy was implemented in the past financial year as well as how it plans to apply the policy in the next and subsequent years.Footnote 29 This provision should be read in combination with the Dutch law on this matter, i.e., the supervisory board cannot change the future policy without the general meeting’s approval. Consequently, the planned policy must be in line with the policy approved by the general meeting.

2.2.1 Remuneration Policy

Since 1 October 2004, the general meeting is the only corporate body that can adopt the remuneration policy, and delegation of this right is no longer possible. Although the Dutch law remains silent on this issue, it is assumed that the general meeting must also adopt amendments to the remuneration policy.Footnote 30 According to the Dutch legislature, the remuneration policy generally covers a medium or long-term period, which may indicate that the general meeting does not have to decide on minor alterations.Footnote 31 Dutch law and the Dutch CodeFootnote 32 lack further guidance on what may be considered as an amendment to the remuneration policy, requiring the shareholders’ vote.

The remuneration policy includes at least the elements as described in Articles 2:383c DCC up to and including 2:383e DCC to the extent that these concern the board of directors. These Articles address the information requirements of companies regarding the compensation packages of directors. As a result, the policy should include ‘all aspects of remuneration’.Footnote 33 Article 2:383c–e DCC requires the disclosure of the base salary, the bonus, the long-term incentives, severance pay, profit sharing, share grants, stock options, and other benefits, as well as loans, advances and guarantees provided to the directors.Footnote 34 In an early parliamentary document about the introduction of say on pay legislation, the Dutch legislator proposed that the general meeting should adopt ‘the general lines of the remuneration policy’; later, in the parliamentary discussion, this was changed into ‘the remuneration policy’.Footnote 35 Hence, under current Article 2:135(1) DCC, the general meeting adopts not just the general outline of the remuneration policy but the full remuneration policy.

Additionally, the works councilFootnote 36 has the right to inform the shareholders of its vision of the remuneration policy, and the council’s chairman can further explain its position.Footnote 37 In 2010, the council was given this right to provide its opinion to the general meeting. In 2015, the Minister of Social Affairs launched an initiative to further strengthen the works council’s role: within the council, an annual debate should take place about to the evolution of the relationship between the remuneration of the board and that of the employees of the company.Footnote 38

2.2.2 Individual Remuneration Packages

In contrast to the adoption of the remuneration policy, the determination of the compensation package of the individual members of the management board and/or of the executive board members can be delegated to another corporate body via the articles of association.Footnote 39 Usually, the supervisory board in a two-tier board structure is empowered to determine this individual remuneration package.Footnote 40 The Dutch parliament has been debating whether this ability to delegate this power must be abolished to further strengthen the position of the shareholders. However, the arguments regarding information asymmetry among shareholders and widely dispersed international ownership convinced the members of parliament to maintain this delegation facility in the articles of association.Footnote 41 Thus, in case the power is delegated, the shareholders can only indirectly structure the remuneration of individual board members through the adoption of (another) remuneration policy.

Article 2:135 DCC does not address the consequences if the individual remuneration package is in breach of the remuneration policy. According to some Dutch legal scholars, a decision that is not accordance with that policy should be void, pursuant to Article 2:14(1) DCC.Footnote 42 Conversely, others argue that it is possible to deviate from the policy if the decision is based on convincing arguments.Footnote 43 However, in practice, the remuneration policy is broadly formulated, which makes it unlikely that individual remuneration will not be in line with it.

In a recent case, the Dutch Hoge Raad (Dutch Supreme Court, Imeko Holding v. B&D Beheer)Footnote 44 stressed that it is important to have a clear division of powers between the different corporate bodies and to avoid conflict of interests in decision making related to remuneration matters.Footnote 45 Whereas the division of powers to determine the remuneration of the management board members and supervisory board members in a two-tier board structure is clear, there is discussion regarding the authority to determine the remuneration package of non-executive directors in a one-tier board structure.Footnote 46 The majority of Dutch scholars tend to agree that the remuneration package of non-executive directors is decided by the general meeting.Footnote 47

2.2.3 Shares and Options on Shares

Where the articles of association empower a body other than the general meeting to determine the individual remuneration package (Article 2:135(4) DCC), Article 2:135(5) DCC nevertheless stipulates that the general meeting must approve pay schemes in the form of shares or options. The rationale behind this rule is, according to the Dutch legislator, that shareholders may have special interests in decisions regarding share capital changes. Granting shares and options on shares may cause a dilution of the stake of incumbent shareholders and may change the composition of the share capital.Footnote 48 The last phrase of Article 2:135(5) DCC states that the absence of approval by the general meeting does not affect the power of representation regarding the granting of such shares or options. In other words, the lack of approval does not hinder the legal consequences of any such granting.Footnote 49

2.2.4 Claw-Back RegimeFootnote 50

In 2013, the Dutch remuneration regime was complemented with a claw-back regime.Footnote 51 The Dutch Code already provided the supervisory board with the power to modify bonuses that were considered unfairFootnote 52 and to claim back variable pay that appeared to be granted on the basis of false information.Footnote 53 These rules were added in Article 2:135 DCC, under paragraphs (6), (7) and (8). The new legislation also capped directors’ gains arising from the share price increase following the announcement of a take-over. It should be noted that a ninth paragraph in Article 2:135 DCC on shareholders’ say on severance pay exceeding the fixed part of the annual pay was not adopted.Footnote 54

3 Dutch Say on Pay in Practice

In this section we investigate shareholder behaviour during the entire period of the Dutch say on pay era (2004–2014) in Dutch large and mid-cap companies. We collected the voting results, the meeting minutes and data on the shareholder structure of those companies.

3.1 Methodology and Sample

In this research, we used an unbalanced hand-collected panel dataset with say on pay information of 44 companies over a period of 11 years (2004–2014).Footnote 55 The information was collected from meeting minutes, voting results and other documents disclosed on the websites of these companies.

The current Dutch Code (as well as the 2003 and the 2008 versions) requires companies to provide shareholders, upon request, with the ‘report’Footnote 56 of the general meeting. However, there is no specific duty for companies to disclose this information to the public. Nevertheless, many companies upload the minutes of the general meeting on their websites, making them publicly available. These minutes not only contain information about the voting results pertaining to the remuneration policy but also provide insights into shareholder concerns expressed during the meeting as well as remarks and questions about the remuneration of directors. Since 2007, European Directive 2007/36/EC requires companies to publicly divulge the voting results regarding all agenda items of the general meeting on their websites.Footnote 57 The Netherlands implemented this Directive through the Wet Implementatie van de Richtlijn Aandeelhoudersrechten (Act Implementing the Shareholder Rights Directive),Footnote 58 which only came into effect on 1 July 2010.Footnote 59 While this Act only requires the disclosure of the ‘bare’ voting results, most companies continued to comply with 2008 Dutch Code Principle IV.3.10, disclosing the detailed minutes of the meeting. Other companies that previously did not disclose this information started publishing either the voting results or the detailed minutes.

Besides the disclosed minutes of the general meetings and/or documents on voting results, we also made use of the ownership structure data provided in the companies’ annual reports and included in the registers of the Dutch Autoriteit Financiële Markten (Authority for the Financial Markets − AFM).Footnote 60

Our sample consists of those companies that cumulatively complied with the following requirements: (1) the company had its registered office in the Netherlands; (2) it was a member of the Amsterdam Exchange Index (AEX-25) or Amsterdam Midcap Index (AMX-25) at the end of December 2014 or at least for a period of five consecutive years during the period 2004–2014; and (3) it disclosed the voting results or minutes of the general meeting for at least five consecutive years during the period 2004–2014. During this 11-year period, 49 companies were member of the AEX and 60 of the AMX. These two samples together contain a total of 88 different companies, since a number of companies were removed from one index and included in the other. Of these 88 companies, 48 met the first two sample requirements. Regarding 4 of these 48 companies, no information about general meetings had been available for five or more years. The list of 44 Dutch companies can be found in the “Appendix”.Footnote 61

Of the 44 companies in our sample, only 4 have a one-tier board structure. These companies are Gemalto, Reed Elsevier, Unit4 and Unilever.Footnote 62

Many of these 44 companies do not keep the minutes of all former meetings on their websites, nor regularly update their websites. After contacting investor relations officers, we were able to collect information related to the general meetings of 14 companies in 2004, which swiftly increased to more than 40 companies in 2008–2014. An overview of the information available on these companies’ websites in December 2015 is shown in the “Appendix”. Table 1 provides an overview of sample sizes per year.

Table 1 Sample of AEX and AMX companies (2004–2014)

3.2 Sample Statistics

The companies in our sample organised 413 general meetings. Of these meetings, 19 were extraordinary general meetings.Footnote 63 At 151 general meetings, a resolution about the remuneration policy was an agenda item. Shareholders could vote for a proposal concerning the bonuses at 36 general meetings, and proposals relating to the remuneration of the supervisory board were put on the agenda of 120 general meetings. Table 2 shows the percentage of companies with the said categories of resolutions per year.

Table 2 Companies per year (in %, number of companies between parentheses)

As we have seen in the previous Section, the Dutch Code of 2003 contained a best practice principle to submit the remuneration policy to the general meeting for adoption − Principle II.2: Determination and Disclosure of Remuneration. In 2004, shareholders of 9 of the 14 companies in our sample were given the opportunity to vote on the adoption of the remuneration policy (64% compliance rate). The introduction of the Dutch say on pay on 1 October 2004 made it mandatory to put the (existing) remuneration policy to a vote. In 2005, the other companies in our sample had their remuneration policy voted on, and two other companies postponed it to another date.

It does not come as a surprise that in the following years a relative decrease could be seen in the number of meetings that had to adopt (an amendment to) the remuneration report. During the period 2006–2008, companies were still improving and amending their policy, but from 2009 onwards, the number of changes requiring a shareholders’ vote dropped to less than 40%. Only in 2010 did the remuneration policy resurrect as an agenda item at almost half of the general meetings. According to Thomas and Van der Elst (2015), this was caused by the changes to the Dutch Code in 2008 that led many companies to reconsider their remuneration policy in 2009. These amended policies had to be adopted at the general meeting of 2010.Footnote 64

The study of the meeting minutes shows that there is some uncertainty about the practical consequences of Article 2:135(1) DCC relating to the approval of the remuneration policy and Article 2:135(5) DCC relating to the approval of schemes in the form of shares or options on shares. More specifically, it is unclear whether short-term and long-term incentive plans need separate approval by the general meeting as stipulated in Article 2:135(5) DCC or whether these plans can be adopted together with (the amendments to) the remuneration policy pursuant to Article 2:135(1) DCC.Footnote 65 From the parliamentary history it can be deduced that Article 2:135(5) DCC contains a specific requirement for schemes in the form of shares or options on shares, which further elaborates on the general provision in Articles 2:135(1) DCC and 2:135(4) DCC. Article 2:135(5) DCC requires the approval of the general meeting for the granting of (special) shares or options on shares to (individual) board members pursuant to Article 2:135(4) DCC in accordance with the current remuneration policy. In contrast, since the remuneration policy includes, according to parliamentary history,Footnote 66 ‘all aspects’ of the remuneration, including plans on shares and options on shares, we tend to conclude that separate approval of general long-term and short-term incentive plans as such will not be required if these plans are included in the (amendments to the) remuneration policy.

As a result of this legal uncertainty, some companies put separate voting items on the general meeting’s agenda that concern amendments to the remuneration policy relating to the long-term and short-term incentive plans, while others do not include them as separate agenda items.Footnote 67 It is recommended that the Dutch legislator or – now – the Dutch Corporate Governance Code Monitoring Committee provide further guidance on this matter.

We report descriptive statistics concerning;

  1. i)

    proposals to adopt (amendments to) the remuneration policy and/or (amendments to) short-term or long-term incentive plans (‘the remuneration policy’);

  2. ii)

    proposals to authorise the board to grant or to issue shares or options on shares under existing incentive plans, including special bonuses to (individual) directors (‘bonuses’); and

  3. iii)

    proposals concerning the remuneration of the supervisory board (‘supervisory board remuneration’Footnote 68).

Table 2 shows the number of companies per year that put at least one of these three proposals on the agenda of their meeting(s).

We also analyse the average number of times one or more resolutions regarding the remuneration policy were put on the agenda. We find that shareholders are invited to approve (amendments to) the remuneration policy on average 3.5 times during an average period of 9.1 years. Six companies in our sample amended their remuneration policy only once.Footnote 69 TKH Group is the only company that did not amend the remuneration policy during the sample period.Footnote 70 The shareholders of 9 other companies were able to vote twice during an average period of 7.9 years. Hence, around two-thirds of the companies in our sample amended their remuneration policy three or more times (4.6 times on average for this sub-sample) in an average period of 9.7 years. These numbers indicate that a large majority of companies in our sample put their (amendments to the) remuneration policy to a vote at least every 3 years.

3.3 Shareholder Voting Behaviour

We investigate the voting behaviour of shareholders as regards the three aforementioned categories of resolutions. Table 3 provides an overview of the voting results for these categories.Footnote 71

Table 3 Statistics on say on pay in the Netherlands (2004–2014)

The average shareholder dissent against the remuneration policy is 5.8%. The median opposition is only 1.9%, which indicates that regarding half of these proposals, shareholder dissent is less than 2%. The only rejection of a remuneration policy occurred in 2008.Footnote 72 In that year, over 60% of the shareholders dismissed Philips’ new long-term incentive plan.Footnote 73 Other high levels of shareholder dissent were found at the meeting of SBM Offshore in 2008, where over 43% of the shareholders voted against the amendments to the remuneration policy,Footnote 74 and at Aalberts Industries in 2010, where 40% of the shareholders voted against this policy.Footnote 75 At Binckbank, 37% of the attending shareholders rejected the remuneration policy in 2012.

Since only one voting item concerning the remuneration policy was formally rejected (0.7%), we can conclude that the influence of shareholders on the executive remuneration (policy) is limited. However, as will be discussed below, shareholders also make use of other mechanisms to change the policy and, indirectly, the remuneration packages.Footnote 76

Dissent against proposals relating to bonus plans is remarkably higher with an − on average – 12% dissent, but it should be noted that the number of AGMs in the sample is low. Consequently, the standard deviation is relatively large (22.5%) and the median is only a modest 3.2%. Three bonus plan proposals (9%) were rejected by the shareholders. At the 2014 extraordinary general meeting of Corbion, 89.4% of the shareholders voted against a special share award for the executive board members. The board had successfully sold a division of the company, and the supervisory board intended to grant the executive board a bonus which it considered to be part of the long-term incentive plan. Some shareholders entered into private negotiations with the supervisory board, forcing the latter to call an extraordinary general meeting with the bonus plan as an agenda item. The supervisory board told the shareholders that their rejection would not result in an overall abolishment of the bonus.Footnote 77 Consequently, not only did the shareholders reject the bonus, but a significant number of them also voted against the discharge of the supervisory board and against re-election of the chairman of the supervisory board.Footnote 78 At the 2009 general meeting of Vastned Retail, 87.9% of the shareholders voted against a special bonus for the extraordinary work relating to a failed take-over. In the minutes of the meeting we found that approximately half of the meeting time was spent on debating this extra bonus.Footnote 79 The supervisory board’s support for payment of this bonus also resulted in a refusal to discharge this board. Later that year, the supervisory board called an extra meeting regarding its discharge. At this second meeting, the board announced that it would request prior shareholder approval before granting extra bonuses, thus reassuring the shareholders, who then approved the discharge of the supervisory board. Previously, in 2008, the general meeting of Vastned Retail had also rejected a bonus, but the amount of ‘no’ votes had not been reported in the minutes of the meeting.Footnote 80

On average, the remuneration of the supervisory board was approved by close to 99% of the votes (88.7% of the meetings) in the period 2004–2014, with a standard deviation of 4.7% and a median opposition rate of 0.0%. The average shareholder dissent regarding the remuneration of the supervisory board was substantially lower than the opposition related to the remuneration policy. A paired samples t testFootnote 81 for 47 observations indicates that the mean voting outcome for these two resolutions is significantly different.Footnote 82 The supervisory board’s remuneration was never rejected, which illustrates that the fixed compensation levels for these board members never offended the shareholders. Only exceptionally does the remuneration of supervisory board members raise significant opposition. At the 2011 general meeting of ASM International, shareholder dissent regarding the supervisory board’s remuneration was over 41%.Footnote 83 It is not clear why so many shareholders opposed the increase in the pay of the supervisory board. In 2011, the company restarted distributing a dividend, and between the end of 2010 and the general meeting in 2011 the stock price of ASM International increased significantly. Maybe many shareholders rejected the significant, relative increase of 80% for the supervisory board members to €45,000 and the 20% augmentation of the chairman’s pay to €60,000. The shareholder opposition of almost 19% to the remuneration of the supervisory board members of Pharming Group has a more obvious explanation. Pharming Group is the only company in the sample that uses variable remuneration packages for its supervisory board, which is not in accordance with the Dutch Code. Many shareholders reject any (kind of explanation for a) deviation from the fixed remuneration principle for supervisory board members.

Figure 1 below shows the mean opposition to the adoption of the remuneration policy and to the remuneration of the supervisory board per year.Footnote 84

Fig. 1
figure 1

Mean opposition to remuneration policy and supervisory board remuneration per year (in %)

Figure 1 shows that the opposition to the remuneration policy was the strongest in 2012, followed by 2011 and 2008. In 2012, a relatively low number of companies had an amendment to the remuneration policy voted on, and Binckbank experienced a 37% opposition, positively influencing this average. The relatively strong opposition to the remuneration policy in 2008–2012 may be explained by the credit crisis, the overall economic situation and the widespread public debate on executive pay at the time.Footnote 85 The same period experienced both the strongest and weakest opposition to the remuneration of the supervisory board: 2.3% in 2011 and only 0.1% in 2012. Remarkably, the average shareholder opposition to the two categories of resolutions – remuneration policy and remuneration of the supervisory board – is more symmetric in the last 2 years (2013–2014). The future will show whether this is just a coincidence or whether there are specific reasons for this convergence.

3.4 Outsider Shareholder Opposition

3.4.1 Assessing Outsider Shareholder Opposition

Many companies in the Netherlands have large blockholders. Often (representatives of) these shareholders act as (supervisory) board members, and it may be assumed that in such cases the management and supervisory boards are in regular and close contact with them. It is likely that the boards present and discuss with these shareholders the agenda items before they are brought to a vote. Where appropriate, boards will amend the proposals to avoid rejection by these shareholders and, consequently, of the general meeting. However, these agenda items may still be unacceptable to ‘outsider’ shareholders. This is particularly the case with the remuneration policy, which, in a number of cases and from an economic perspective, can be considered as a related party transaction. Indeed, research shows that in Belgium outsider shareholders rejected the remuneration report at almost 20% of the meetings.Footnote 86

In this section, we address the voting behaviour of these outsider shareholders regarding the remuneration policy so as to provide a more advanced analysis of Dutch say on pay. We exclude the proposals relating to the remuneration of supervisory board members since average shareholder opposition to such resolutions is relatively insignificant.Footnote 87 In our sample the total number of general meetings with resolutions concerning the remuneration policy and/or bonuses on the agenda is 176.

Shareholders are considered ‘insider’ shareholders in this research if expectations are that they support management proposals. These insider shareholders include trust offices, board members and founders, companies in a group structure and other blockholders that are likely to support the board of the company. A particular type of large insider shareholder is the trust office (in Dutch: stichting administratiekantoor). Some Dutch companies have not listed (all) their shares but issued non-voting depository receipts. The shares are issued to a trust office, which will then be the legal owner of the voting rights, and holders of non-voting depository receipts receive the financial rights and dividends.Footnote 88 Hence, voting rights are separated from capital rights. Further to Article 2:118a DCC, holders of such non-voting depository receipts may submit a request to receive proxies, except in takeover situations.Footnote 89

One or more of these insider shareholders attended 70 general meetings of 18 different companies. Table 4 below shows an overview of the types of insider shareholders with their average voting stakes at the general meeting.

Table 4 Types of largest ‘insider’ shareholders

Trust offices are the most common class of insider shareholders and have a large average voting stake. The average voting block of board members and founders, though less frequently insider shareholders, is the largest, with 47.4% on average. This high average mainly results from the combined large stakes of the four founders of TomTom.Footnote 90 The other types of large insider shareholders have significantly smaller, and often non-controlling, voting blocks.Footnote 91

As we expected that these shareholders support the (amendments to the) remuneration policy, we recalculated overall attendance and opposition at the general meeting excluding the votes of these types of insider shareholders. Information about outsider shareholderFootnote 92 opposition is provided in Table 5 and is calculated as follows:

$$ ({\text{Relative shareholder opposition}})/({\text{total percentage represented by outsider shareholders}}) \times 100\% = ({\text{relative shareholder opposition}})/\left( { 100\% - {\text{relative amount of votes represented by the summed voting block of all insider shareholders}}} \right) \times 100\% , $$

where the ‘relative amount of votes represented by the summed voting block of all insider shareholders’ is calculated asFootnote 93:

$$ ({\text{Summed voting block of all insider shareholders}})/({\text{total relative voter turnout}}) \times 100\% $$
Table 5 Outsider shareholder opposition (in %)

Since holders of non-voting depository receipts may request voting proxies prior to general meetings, the percentage of proxies needs to be deducted from the total voting stake of trust offices in order to determine their voting power at the general meetings. Most companies disclose this percentage in the minutes of the meetings.Footnote 94

The average relative amount of votes represented by the summed voting block of all insider shareholders is 42.1% (calculated in accordance with formula 2). At 26 general meetings, these insider shareholders even controlled the majority of the attending votes. In Table 5, we also calculated the outsider shareholders’ approval rates regarding the remuneration policy and bonuses. The mean outsider shareholder opposition to the remuneration policy is around 3% higher than the total shareholder opposition. The same holds for outsider shareholder opposition to bonuses.

Table 6 provides an overview of the proposals to which outsider shareholder opposition was larger than 30%. It shows that outsider shareholder opposition to remuneration proposals can be significantly stronger than total shareholder opposition. Moreover, three proposals of Heineken would not have been passed without the participation of the large controlling insider shareholders. The largest opposition of outsider shareholders was found at the general meeting of Heineken in 2011. At this meeting, 98% of these shareholders voted against the amendments to the remuneration policy. At the general meetings of Heineken in 2013 and 2010, voting items regarding remuneration were rejected by outsider shareholders as well. Just like Heineken, TomTom is included three times in Table 6. Since TomTom’s founders together held stakes varying from 47 to 52% of total voting rights in the period 2009–2014, outsider shareholder opposition was relatively strong compared to total shareholder opposition.

Table 6 Largest opposition of outsider shareholders (in %)

3.5 Reasons for Outsider Shareholder Opposition

In this section, shareholders’ reasons to vote against the remuneration proposals at the 20 meetings listed in Table 6 are analysed. Regarding each of these meetings we studied the minutes and the questions and comments of the shareholders relating to the remuneration item. We classified their concerns into seven categories of arguments, ranging from insufficient disclosure and lack of clear performance criteria to the social acceptability of the compensation. Each remuneration item may have been rejected by the outsider shareholders for different reasons. Figure 2 summarises the main reasons for shareholder opposition.Footnote 95

Fig. 2
figure 2

Reasons for opposition (# general meetings)

Figure 2 shows that disclosure and transparency issues are the main reasons for voting against the remuneration policy. In almost half of the cases, shareholders criticised the insufficient transparency and disclosure of the performance criteria, giving this as a reason for voting against the remuneration report or the bonus arrangement. At the general meeting of Heineken in 2010, the supervisory board proposed to replace the total shareholder return (TSR) measure by ‘fundamental performance measures that are crucial to the success of Heineken in the long run’ in the long-term incentive plan. According to the outsider shareholders, these new performance measures were not transparent. The new remuneration policy of SNS Reaal in 2009 was perceived by shareholders as complex and not transparent. One shareholder explained that the new policy reminded her of the saying ‘if you can’t convince them, confuse them’.Footnote 96 And in 2010, over 40% of the shareholders voted against the new remuneration policy of Aalberts Industries. The Dutch Association of Stockholders (Vereniging van Effectenbezitters − VEB) pointed out that the proposed remuneration policy was vague and unclear. TomTom experienced strong ‘outsider’ shareholder opposition due to unclear performance criteria in 2009 and 2013, while in 2014 many ‘outsider’ shareholders did not agree with the removal of the performance criteria (included in Fig. 2 in the category ‘lack of performance criteria’).

More generally, shareholders of banks and insurance companies are particularly keen on clear and transparent performance criteria. ING, Aegon, SNS Reaal, Binckbank and Delta Lloyd all experienced opposition of more than 30% of the outsider shareholders due to the experienced persistent obscurity of the performance measurements which they believed to be less and less based on total shareholder return but more and more on other criteria which increased the discretionary power of the supervisory board.Footnote 97 Unexpectedly, the new regulatory framework caused part of the shareholders’ concerns. A number of (financial) companies, confronted in particular with the transposition of the (repealed) European Capital Requirements Directive IIIFootnote 98 remuneration guidelines, divided the remuneration into a fixed and a variable part. The latter part is partially deferred and conditional but based on the integration of previously longer-term performance criteria into 1-year ones. Every year these 1-year performance criteria are used to address the conditionality of the deferred payment.Footnote 99 Shareholders criticised both the term of the performance criteria and the (supervisory) board’s large discretionary power to make the deferred payment unconditional.

At five general meetings shareholders argued that the proposed remuneration policies were not in accordance with the Dutch Code. For example, at the general meeting of Philips in 2008, where shareholders dismissed the new long-term incentive plan, shareholders indicated that the proposal did not comply with the Dutch Code. More specifically, the proposed option scheme to grant options unconditionally was not in line with best practice provision II.2.1 of the 2003 Dutch Code, which states: ‘[O]ptions to acquire shares are a conditional remuneration component, and become unconditional only when the management board members have fulfilled predetermined performance criteria after a period of at least 3 years from the grant date’. According to the shareholders, these performance criteria were not included in the new long-term incentive plan.

Shareholders also posed critical questions about peer groups that were used to determine the remuneration levels, as well as about changes to these peer groups. In a particular case, a shareholder asked whether the larger market capitalisation of reference companies in the peer group had been taken into account.Footnote 100

Three proposals concerning bonuses were rejected because shareholders did not agree with the company’s reasons for granting an additional bonus to the members of the management board. According to the shareholders, the ‘special’ or ‘extraordinary’ activities for which special bonuses would be granted either had not been performed excellentlyFootnote 101 or were considered by the shareholders to belong to the current tasks of the management board for which no special bonus should be granted.Footnote 102

The category ‘social perception’ contains all social arguments made by shareholders. The shareholder discussion at the general meeting of ING in 2011 largely concerned the public and political commotion about the proposed remuneration policy prior to the general meeting.Footnote 103 At the general meeting of Heineken in 2010, the large gap between executive pay and employee salaries was explicitly mentioned by the shareholders who voted against the remuneration policy.Footnote 104 Shareholders argued that, whereas executive pay levels continued to increase, the company cut costs and lowered employee salaries. At the general meeting of Heineken in 2013, one shareholder pointed to the stagnated employee salary levels while the board was granted an additional bonus.Footnote 105

At other general meetings, some shareholders proposed to put more emphasis on non-financial performance indicators.Footnote 106 This indicates that shareholders are all but a homogeneous group. Many shareholders are often reluctant to approve the use of non-financial indicators due to their vagueness, the discretionary power of the (supervisory) board and the weaker relationship of these criteria with shareholders’ interests. Finally, shareholders sometimes oppose bonuses regarding which no performance criteria were used.Footnote 107

3.6 Indirect Say on Pay

Contrary to some other European countries, in the Netherlands the shareholders do not have an advisory or mandatory vote on the remuneration report. Consequently, shareholders of Dutch companies have no direct means of showing their discontent with the implementation of the approved remuneration policy. However, the general meeting minutes show that shareholders may use other paths to signal their discontent ex post or ex ante. More specifically, shareholders use their say on pay regarding the remuneration policy to influence executive pay ex ante, but they can also enter into a dialogue with the company to have a remuneration policy that could lead to unacceptable individual remuneration packages withdrawn even before it comes to a vote. Shareholders may withhold their support for discharging or for re-electing the members of the supervisory board in order to signal their discontent with remuneration issues ex post. These different types of ‘indirect say on pay can be even more influential than showing discontent by voting against the remuneration policy. Although part of these dialogues take place behind the scenes, minutes of meetings and other documents illustrate the importance of both ex post and ex ante mechanisms.

First, say on pay also stimulates the dialogue between shareholders and directors prior to general meetings. In other words, the threat of a rejection of the remuneration policy or (too) painful shareholder discussions during general meetings may cause companies to formulate their remuneration policy proposals more carefully. The 2012 general meeting of Wereldhave clearly shows this additional effect of say on pay. Prior to the general meeting, the proposal regarding the variable remuneration component of the remuneration policy was modified and simplified ‘[i]n light of responses by a number of shareholders on the original proposal for variable remuneration’.Footnote 108 The minutes of the 2009 meeting of KPN state that the company modified its criteria for granting bonus shares after critical comments by shareholders.Footnote 109

Secondly, when shareholders signal their discontent with a proposed amendment to the remuneration policy, the (supervisory) board can decide to withdraw the agenda item. In 2009, Heineken did so with two agenda items regarding amendments to the remuneration policy and long-term incentive plan prior to the general meeting. In its press release, it clarified: ‘[G]iven the public debate regarding executive remuneration and the request to freeze the 2009 salaries of the Executive Board … the Supervisory Board has decided to withdraw the proposals’.Footnote 110 In 2009, Randstad, too, withdrew a proposal to amend the remuneration policy, indicating in a press release that ‘[i]n view of the current economic circumstances and the proposal not to pay dividend on the ordinary shares, the scheduled changes to the peer group and the variable remuneration will now also be cancelled’.Footnote 111

Furthermore, shareholders can refuse to discharge the (supervisory) board when they do not agree with how the remuneration policy is applied. In 2009, the shareholders of Vastned Retail rejected a special bonus for the board of directors by almost 88% of the votes. At this meeting, 65% of the shareholders also voted against the discharge of the supervisory board, due to a lack of response to the rejection of a similar bonus at the general meeting in 2008. Discharge is considered a key feature for the (supervisory) board in the Netherlands. Six weeks after this meeting, Vastned Retail called an extraordinary general meeting in order to hold a second vote on the discharge of the supervisory board. At this extraordinary general meeting, the supervisory board stressed that it would no longer grant any such bonuses in the future; accordingly, the majority of shareholders voted in favour of the discharge. The shareholders of KPN also used the discharge of the supervisory board at the general meeting in 2009 to put pressure on the former regarding, for instance, its monitoring duties, in particular in relation to compensation practices and levels: over 41% voted against the resolution to discharge the board members. The shareholders’ discontent concerned in particular the absence of consultation of the general meeting, which was considered superfluous by the board: the board argued that the previously approved remuneration policy provided sufficient ground for not consulting the meeting.Footnote 112 Although the supervisory board was discharged, it confirmed that, in future, it would consult the general meeting before implementing any such amendments. At the 2009 general meeting of ASML, shareholders expressed their dissatisfaction with the level of the bonuses. Although ASML reported a loss for the year 2009, directors’ bonuses actually increased. Seven percent of the shareholders voted against discharge of the supervisory board in order to show their dissatisfaction. In 2014, the supervisory board of Heineken NV lowered the performance goals for the management board in order to meet the requirements regarding long-term performance pay. Dissatisfied with this board decision, more than 75% of the attending outsider shareholders voted against discharge of the supervisory board, resulting in a 20.8% opposition to this resolution. The chairman of the board was displeased to find out that only with the support of the majority shareholders were he and his team discharged.

Finally, dissatisfied shareholders recently found a new mechanism to address perceived inadequate compensation practices. For example, at the 2014 Corbion AGM, in addition to opposing the supervisory board’s discharge – with more than 26% of the votes –, more than 31% of the shareholders voted against re-election of the supervisory board member who had joined the remuneration committee as a result of a special transaction pay in the form of a share grant.

4 Conclusion

In this research, we investigated the effects and effectiveness of Dutch shareholders’ say on pay. We conclude that say on pay indeed stimulates shareholders’ dialogue and increases pressure on boards regarding remuneration matters.

Our study finds that the Netherlands has developed a specific and unique approach to say on pay. Shareholders are invited to participate in the discussion, development and adoption of an appropriate remuneration policy. It is shown that it is not an easy task to provide for a clear and straightforward say on pay rule, as illustrated by the ambiguous application of the Dutch law regarding incentive plans. However, overall, the Dutch legislator went for a balanced approach by only opting for a mandatory vote when the remuneration policy is altered. Our results show that this approach is adequate, as it not only has spontaneously resulted in a vote at least every 3 years in many companies, but also allows other companies to apply a satisfying compensation policy for longer periods. These companies would face unnecessary extra costs if the remuneration policy required, for example, triennial approval. Furthermore, in those companies where shareholders would like to see the remuneration policy amended, they can use their right to put the item on the agenda.

The right to adopt (amendments to) the remuneration policy has significantly increased shareholders’ engagement. Over the years, many discussions about the adequacy of the proposed remuneration policy have taken place at general meetings of shareholders. In this respect, shareholders value communication and disclosure. The many questions shareholders raised during the meeting as well as the diligent use of the voting right when approving or rejecting proposed (amendments to) remuneration policy have shown that the argument that shareholders lack the appropriate tools for assessing the remuneration policy is at least exaggerated.

The remuneration policy was rejected only once, but our analysis has shown that the effects of shareholders’ adoption right reach much further. Debates taking place before the general meeting and criticising − but adopting − remuneration policies influence the behaviour of companies in developing future amendments to compensation policies and even indirectly remuneration practices. Although the presence of large insider shareholders protects companies from rejection of remuneration proposals, the social aspects of executive pay discussions attract major attention from the media, thereby creating incentives for such companies to avoid lower approval rates as well as major outsider shareholders’ rejection.

Shareholders tend to vote against proposals that are not transparent or not in line with the Dutch Code, thereby forcing board members to become more accountable. Shareholders may also signal their dissatisfaction ex post by voting against other agenda items, such as discharge of the (supervisory) board. We are of the opinion that such ‘figurative’ use of a board’s discharge or re-election of a board member because of discontent with compensation practices should be avoided. At the same time, such application of voting rights illustrates the importance of providing a platform for shareholders to discuss remuneration packages of directors after the remuneration policy has been adopted. It shows that there is room for further improvement. A separate say on pay right regarding the remuneration report can overcome the said figurative use.

The added value of the Dutch say on pay indicates that the introduction of say on pay can be advantageous to other countries as well, including those with a more concentrated corporate ownership structure. The European Commission’s proposal to adopt a European say on pay is definitely a step in the right direction.