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The external regulatory authorities

External regulatory authorities can influence the composition of a company’s board, decision-making in the company and the functioning of the company’s board in various ways. The extent to which external regulatory authorities have this influence depends on the laws and regulations applicable to the relevant company. Often, the influence of external regulatory authorities in specific sectors is detailed in sectoral governance codes. Companies applying these codes take into account the influence of their external regulatory authorities as a matter of course.

As part of the Corporate Governance blog series, in this blog we look at two examples of how an external regulatory authority can influence the functioning of a company.

Influence on information, decision-making and functioning of the board

For the board of a company to perform its duties properly, it is important that it receives the necessary information. External supervisors can play an important role in providing the management board with such information. Examples include information on the company’s financial condition.

A large company is obliged to have its financial statements audited by an external auditor every year (Article 2:393(1) of the Civil Code). The Corporate Governance Code requires the board of a listed company to have regular contact with the external auditor.

The auditor shall audit whether the company complies with the statutory requirements in respect of the financial statements, the management report and all related matters. After his audit, the auditor shall report to the Management Board and the Supervisory Board. The result of the auditor’s examination shall be reflected in a report which shall be included among the other information in the financial statements and shall thereafter be provided to the general meeting.

Vice versa, of course, it also applies: the board should ensure that an auditor has timely access to all the necessary information to perform his assignment.

Influence on the composition of the board

The composition of the board can also be influenced by external regulatory authorities. For instance, the Dutch Financial Markets Authority, The Dutch Central Bank and the Housing Corporation Authority assess the reliability and suitability of policymakers, such as directors, at a company. These audits of public-interest entities, enshrined in various laws (Wft, Wta and the Housing Act) and policy rules (e.g. the Policy on Suitability 2012, the Policy Wta and the Policy Housing Corporations Authority 2024), often stem from the idea that there is a strong public interest in guaranteeing the quality of statutory audits that these organisations are required to conduct.

By testing directors for suitability, the board will in practice only be composed of directors who the relevant external regulator deems suitable as directors. Within this framework, the supervisory authorities Authority for the Financial Markets and De Nederlandsche Bank also test whether the directors complement each other collectively and expressly take into account the importance of diversity, whereby persons who do not have a distinct background in the financial sector can also successfully pass the test, as long as they bring with them a specific expertise that is still lacking. So these supervisors also have a say in the matter when it comes to diversity.

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The external regulatory authorities