The sanction gap

Blog

18 September 2018

Supervising the operational management is a precarious undertaking. It’s difficult to prevent supervision from culminating into outright co-management. On the other hand, you wouldn’t and shouldn’t want to be a “rubber stamp” as a supervisory board member.

A supervisory board must be taken seriously. Powerless supervision is not much use. Nevertheless, the legislative framework of most legal entities, such as public and private limited companies and foundations, offers few effective ways of giving force to the wishes of a supervisory board. On one side of the spectrum there’s the soft persuasive power of the consultant and on the other side the blunt axe of suspension and dismissal. In between there’s a wide gap in the law. As a supervisory board, you simply don’t have a decent arsenal of truly effective legal tools at your disposal to give shape to your influence in between these two extremes. You’re a bit like a referee who, in case of a foul, only has the choice between an admonishing look and a red card for life. The first is not necessarily effective and the second will quickly lead to the downfall of the game and its players.

“As a supervisory board, you simply don’t have a decent arsenal of truly effective legal tools at your disposal to give shape to your influence in between these two extremes”

To bridge this sanction gap, it’s important that supervisory board members have a clear idea of their playing field. A supervisory board shouldn’t want to try to have its way or force management decisions too easily. By definition, that’s not part of a supervisory role. This has been confirmed by the Court on several occasions, also in the Dutch Caribbean. The management board manages. Any pressure can therefore only be exerted within the field where the supervisory board does have the statutory and legal authority to exert such pressure, if necessary. First of all, this regards adequate (financial) accountability to the supervisory board and to the shareholder. Second, this applies to management decisions that, on the basis of the articles of association, require prior approval from the supervisory board before they are executed. Third, this is the case if commitments with regard to agreed policy intentions aren’t fulfilled.

In order to be able to operate properly in this playing field, a supervisory board member must have clear insight into the scope and boundaries of his legal responsibilities. A supervisory board member has an employer role towards the management board, but (contrary to what some supervisory board members think) the supervisory board is not the management board’s employer. A characteristic of employership is the relationship of authority. The employer has power over the employee, which is granted unilaterally by law. He can give the employee tasks that the employee must carry out. A relationship of authority such as this doesn’t exist between the supervisory board and the management board. The supervisory board only holds its employer role because no one else is able to fulfill that role in a more or less impartial manner. Other than an employer, it can’t give orders to the management board. It can and must conduct performance and assessment interviews, though. The good thing about this is that these interviews – if you do it right – can be very effective in bridging the sanction gap. It’s amazing that in most companies in the Dutch Caribbean, the supervisory board only seems to focus to a limited extent on the latter point: conducting performance and assessment interviews. The more time the supervisory board spends on discussing and determining the policy plan, including the targets and risk management, the better. Even better would be to define measurable results based on these policy intentions. Then they can be linked to (a part of) the directors’ remuneration. As a supervisory board, you can thus build a bridge across the sanction gap.

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