The Netherlands: A Bog for Investors

Remember Nina Brink? Shareholders in the Netherlands certainly do. She's the CEO who cost them $1.7 billion in early 2000 by quietly selling a large chunk of her personal stake in World Online just weeks before it went public. When details of the dubious deal surfaced, investors rushed for the exits, sending the newly listed Internet service provider's stock into free fall. It lost 65% of its value virtually overnight.

There have been plenty of other corporate governance outrages in the Netherlands since then. In 2001, the management of construction company Hollandsche Beton Groep rejected a takeover bid from Royal Boskalis Westminster for its dredging operations without bothering to consult shareholders. Then in February, the board of retailing giant Royal Ahold, the country's most widely held stock, admitted overstating earnings by at least $500 million in 2001 and 2002, sending the company's shares plummeting. "Ahold really turned the spotlight on corporate governance," says Robbert van het Kaar, a governance specialist at the University of Amsterdam. "It raised Enron-type questions about transparency, disclosure, and accountancy rules in the Netherlands."

Indeed, the Netherlands is widely considered the corporate governance black spot of Europe. One frequently cited example is ING Groep, the sprawling financial-services firm. Like many other big Dutch companies, ING has traditionally given shareholders little information about its decision-making processes. It has a complex share structure with multiple voting rights that acts as a barrier to hostile takeovers and gives management enormous influence over how many shares are voted. ING places limits on voting rights of holders of depositary receipts -- as shares with limited voting rights are known in Dutch companies. Some shareholders don't get to vote at all. "[That] is a complete negation of the most basic shareholder right," says Marco Becht, executive director at the European Corporate Governance Institute in Brussels. There's more: The supervisory boards of large Dutch companies can appoint their own members as well as senior management. That means shareholders don't get a say in choosing the people who oversee the company they own.

In the days when the Dutch economy was booming and stock prices were soaring, shareholders weren't worried. Foreign investors poured money into Dutch equities. Now, those foreign investors, who still hold more than half of Dutch shares, are pressing for change. So is the government, which in the wake of the Ahold crisis set up a committee of financial and legal experts to overhaul the country's corporate governance system. High on its agenda: revamping corporate auditing practices, new rules for choosing members of supervisory boards, and improved corporate transparency.

Companies are beginning to mend their ways. Even before the Ahold storm broke, Fortis, the financial-services group, unveiled plans to abolish depositary receipts, putting all shareholders on an equal footing. Anglo-Dutch conglomerate Unilever, media and information company VNU, and banking behemoth ABN-Amro say they too will change their structures and voting procedures.

ING is also overhauling its system. Among the reforms: giving shareholders the right to elect supervisory board members and abolishing restrictions on shareholder voting rights and owners of depositary receipts. "We want to be a modern company with a balanced corporate governance structure," says CEO Ewald Kist. "Less than 30% of our employees work in the Netherlands, and some 70% of our share capital is in the hands of international investors. There are international demands to be heard and we are responding to them."

More needs to be done. The Hollandsche Beton case is emblematic. Boskalis went to court to challenge Hollandsche Beton's rejection of its takeover bid, saying the company should have submitted the matter to a shareholder vote. In February, the Netherlands Supreme Court ruled there was no such obligation under Dutch law. Until that law is changed, Dutch companies will continue to run rings around their shareholders.

By David Fairlamb in Frankfurt, with Kerry Capell in Brussels

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