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Home , Corporate governance

Corporate Principles in Co-operative Banks

AN ASSOCIATION ON THE MOVE

The European Association of Co-operative Banks

The Association of co-operative banks was created in 1970. It represents, promotes, and defends the interests of its members and co-operative banks in general. As such, the Association is the official spokesman to the European institutions. To this end, the missions of the Association include:

To provide to members on all initiatives and measures taken by the European Union that affect the banking sector; To organize an exchange of views and experiences and to coordinate member organisations’ positions on issues of common interest; To carry out efficient and active lobbying to European institutions; To develop positions on issues of common interest.

The European Association of Co-operative banks fosters co-operation between co-operative banking groups. Furthermore, with the other representative co-operative organisations, the Association promotes the spirit of co-operation throughout the banking sector and beyond. In order to fulfil such goals, the Association is one of the founding members of the European Banking Industry Committee (EBIC), the European Payments Council (EPC), the European Committee for Banking Standards (ECBS) and the European Financial Reporting Advisory Group (EFRAG). The Association also maintains close contacts with UNICO and the International Confederation of Popular Banks (Confédération Internationale des Banques Populaires: CIBP). It is a founding member of the Co- ordinating Committee of European Union Co-operative Associations (CCACE). Moreover the Association chairs the European Regional Committee of the International Co-operative Banking Association (ICBA). The Association maintains close links with the International Raiffeisen Union (IRU), the Confédération Internationale du Crédit Agricole (CICA) and the World Council of Credit Unions (WOCCU).

Other publications: • Co-operative Banks in Europe: Values and Practices to Promote Development • Co-operative Structures, Principles and EU- Law • Corporate Social Responsibility (CSR): The Performance of Banks

For further information, please contact EACB: E-mail : [email protected] Telephone: (+ 32 )2 230 11 24 Web: www.eurocoopbanks.coop

© Copyright 2006: European Association of Co-operative Banks

Introduction I. Structural and operating “Corporate governance” in its broad sense characteristics of Co-operative is regarded as the system by which Banks are directed and controlled. The corporate governance structure 1. Membership involves a set of relationships between the boards, the and other Members of co-operative banks are not stakeholders. It specifies the distribution simply shareholders. Membership aims of rights and responsibilities among them at establishing a long term relationship and spells out the rules and procedures for with the co-operative bank and generates making decisions on corporate affairs. rights, particularly voting rights. The corporate governance of co-operative In co-operatives, “ownership” rights banks is strongly influenced by the fact (e.g. the right to vote and to speak in that co-operative banks are expressly the General Assembly, the election of focused on their members. Co-operative directors etc.) emanate only from the banks have as their principal objective the acquisition of membership. It means satisfaction of their members’ needs and/ that the rights are vested in the or the development of their economic and membership of the individual, not in social activities.1 With its credit the . institution’s activities, the co-operative Furthermore, the members of co- banks support the economic success of operatives do not only formulate the bank’s members. They promote their different objectives, but also have a members’ interest by conducting the strong involvement in their co- of banking in the widest sense. operative. The concrete targets of the of the Indeed, members are generally more co-operative bank are defined by its involved in the activities of their co- members. The motivation for operative and therefore, they are likely to membership principally comes from the have a higher degree of understanding of services produced by the co-operative the cooperative’s business than would be rather than a return on capital invested. the case for a of a public By consequence, the corporate limited . Membership is decided governance of co-operative banks is upon on a well-informed basis and focusing not only on the financial represents a commitment in the longer- claims of its members but rather on the run. fulfillment of their provision of Members of co-operative banks generally 2 adequate and price worthy services. look at the co-operative banks activities and exert influence from a double

1 Article 1 (3) of the SCE-. perspective. 2 These objectives may imply that co-operatives are not capital- orientated and profit maximisation with the aim of creating shareholder even without any profit margin since they have to value is not the core aim. But, of course, co- operate profitably to exist (Articles 48 (2) of the operative banks cannot operate below costs or EC Treaty is not opposed to such objective.) 3

In the first instance, members are users of to a social economy fund in case of the services of their co-operative banks. . As users, it is in their first interest that their banks provide services of high 3. Democratic member participation: quality, which meet their needs. The “one man- one vote” principle Therefore, co-operative banks dispose of a customer led policy and give their The democratic idea is the basis of the members a say on their business policy. corporate governance of co-operatives. Accordingly, co-operative banks are The Regulation on the SCE specifies customer driven banks. As a result, the that principle of democratic structure interests of the using members “…where the ‘one man, one vote’ rule is converge to a large degree with the laid down and the right to vote is vested business policy of co-operative banks. in the individual….”4 On the other hand, they generally invest a There are only limited derogations from limited amount of capital in their co- this principle, which not undermine this operative banks. The members, as democratic idea.5 , do not expect high profits, but This “one man- one vote” principle they want that the co-operative business offers optimal protection for the conduct is sound and it works efficient democratic participation of all and profitable. members of a co-operative. It ensures a

fair representation of the interests of all 2. Character of investment individuals, who are members in a co- For a wide majority of co-operative operative. The “one man- one vote” banks, the shares of members can be principle provides equal rights to all redeemed by the co-operative only at members regardless of the amount of nominal value.3 shares they hold, and guarantees each member the same influence on decisions Members usually receive limited and thereby the supply of the members’ compensation on capital subscribed as a demands to the greatest extent. In condition of membership: Co-operatives contrast, as minority stakeholders, they may pay a to their members, would have no influence in public depending on the performance on the limited companies, where the principle entity. But the distribution as dividend is “one share- one vote” applies. constrained by the fact that at least a certain part of the profits is used to set up reserves to ensure the operations and the financial situation of the co-operative 4 The Regulation (EC) No 1435/2003 on the bank in order to pursue their objective Statute for a European Co-operative Society targets. In some countries, these reserves (SCE), Recital 8 of the SCE-Regulation. are indivisible and would be transferred 5 e.g. see Article 59 II Regulation (EC) No 1435/2003 on the Statute for a European Co- operative Society (SCE), which allows the 3 The remaining capital is either paid out in form attribution of a limited number of votes, which of or the common property of the co- shall not exceed five votes per member or 20 % operative and used to set up reserves. of total voting rights, whichever is lower. 4

4. Ownership structure and defend their interests. The members exercise their power through the General The “one man- one vote” principle is Assembly. The main tasks of the General complemented by special restrictions Assembly comprise the process of concerning the ownership structure of co- electing directors and controlling the operatives. decisions made by the . For members of a co-operative bank, As a general rule, the participation can there are limitations regarding the numbers of shares purchasable. They take place at different levels. The are not free to acquire an uncapped members can attend the General number of shares. Consequently, usually Assembly organized at local or regional members of co-operatives contribute level. All local members are also equitably to the capital of their co- represented by elected delegates in the operative bank. General Assembly of the bodies at national level. This set-up helps avoiding an “unbalanced” ownership structure where The General Assembly’s constitution a single shareholder could hold vast does not depend on other bodies’ numbers of shares. Such restrictions decisions. Generally, all power directly ensure the proper functioning of a co- originates from the members represented operative and prevent to undermine the in the General Assembly. notion of democratic participation of all members. 2. In general, in a one-tier system, the executive directors of the Administrative II. The institutional structure Board are engaged in the management of As a general rule, the structure of co- the cooperative. The power to represent operatives in Europe comprises a General the cooperative in dealing with third Assembly and either an administrative parties can be conferred on a single organ (one-tier system/ unitary board) person or on several persons acting depending on the form adopted in the jointly. Some members (non-executive statutes or a management and supervisory directors) of the Administrative Board organ (two-tier system/ dual board). may not be vested with management responsibilities but have a supervisory

function over the executive directors. 1. General Assembly In a two-tier system, the members of the The General Assembly is the principal Management Board (managing directors) institution which determines the are responsible for managing the democratic character of the institution. It cooperative6 and can represent the banks represents all individual members as an in dealing with third parties and in legal integrated entity. It is the body, where the proceedings. The members of the members or their delegates can be consulted and informed as well as 6 They are entrusted with the management of the participate in the life of the co-operatives bank. They are usually vested with management powers and engaged in the day to day business. 5

Supervisory Board (supervisory directors) equality of voting rights of each member, supervise the duties performed by the the decisions taken by the General Management Board. Assembly illustrate democracy as a feature of corporate governance. The powers of the General Assembly include III. Corporate governance the elections of the Boards members and mechanism the approval of annual accounts and balance sheet. Control occurs both externally (auditing, banking supervision) as well as internally. The legitimacy of the directors relies solely on the fact that they are elected by the members is by the members of a given territorial characterized by the democratic level (local, regional, national), whom principles of and pervades they represent. In consequence, the the whole cooperative network. Besides, directors are responsible to the members. there are compliance and auditing The members control the actions of mechanisms. elected officials. They can in the last resort sanction violations of the mandate 1. Democratic control emanates from the given by the removal of the elected basis official from their post. Furthermore, the In most European countries, co-operative General Assembly can refrain from banks are organized in banking networks adopting the and thereby that are usually composed of local banks, demonstrate their control over decisions regional banks and national institutions, taken by the directors. among which is a central cooperative or The democratic participation of the other entity acting as a for its members in the General Assembly members. efficiently maintains the balance of The power of all bodies originally power among the members as owners emanates from the members and and the directors of co-operative relates mostly to the allocation of banks. mandates and the control of the performance of the bodies. 2. Balance between the responsibilities of the executive and non-executive As it fits any democratic system in directors general, the members exert influence through the General Assembly. The The supervisory/ non-executive bodies members are either member of the are empowered to control the General Assembly or represented by management. delegates which they elect amongst Pursuant to the laws and statutes of the themselves. association, at national level, the The General Assembly, as the body supervisory/non-executive directors are representing all members, is the body that responsible for supervising the actions controls the orderly conduct of corporate and the of the management and governance as a whole. Due to the the course of business of the affiliated

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entities as well as the general course of decisions are guided by the interest of business of the co-operative banks sustained development of the cooperative concerning their legitimacy, expedience and not by the -termed personal and economical convenience. They financial interest of any member of the supervise the compliance with the managing staff. provisions of the law, the articles of associations and the by-laws. Therefore, the managing/ executive directors are Conclusion: Corporate governance of obliged to report at the request on the co-operative banks- an original model / non-executive for the European entrepreneurship directors of the Administrative Board, models and to allow inspection of the documents, scripts and assets of the co-operative From a corporate governance point of bank. The Supervisory Board/ non- view, why is the co-operative form of executive directors of the Administrative enterprise relevant for the EU? Board shall present their views on the The co-operative governance general policy and procedures and shall specificities underline the diversity of assist the managing/ executive directors European entrepreneurship. Co- with its advice. When important strategic operatives are a special form of decisions are taken, their approval is enterprise, whose shows required. substantial structural and operating characteristics, which are fundamentally 3. Less conflicts of interest different from other companies, whose Specific governance features of co- shares are publicly listed. “These include operatives structurally prevent potential the principles of democratic structure situations of . and control and the distribution of the net profit for the financial year on an The directors can not exert a stronger equitable basis.”8 Co-operatives’ voting influence than any other decision-making shows a democratic, member since they are also, as other equal participation of their members on members, subject to the principle ”one local and/or regional basis. man- one vote”.7 Therefore, there can not be any accumulation of a majority While there are some differences voting stake and a managing position. between governance systems of the co- operative banks in Europe, they all stick In addition, as for all members, the to the same core elements. The directors basically can not derive governance system of the co-operative substantial capital gains from holding a form of enterprise is well balanced, co-operative share. The general absence works efficiently and moreover of capital gains to be made from co- economically highly successful operative shares ensures that management throughout Europe. In particular, the

7 In some co-operative banks, managing directors 8 cf. Regulation (EC) No 1435/2003 on the are even excluded from membership and therefore Statute for a European Co-operative Society have not vote at all. (SCE), Recitals 7 7

corporate governance rules of co- operatives as a general rule grant an equal, democratic participation of its members and give them a say and control about all decisive decision respective their company. Therefore, no need for new EU initiative in the field of corporate governance can be identified as far as co-operatives are concerned. In case of developing any future legislative activities, it seems inevitable that the co-operative specificities have to be taken into consideration. Even when taking a functional approach, initiatives should not be adjusted only to the stock companies. The existence of co-operatives and their significance as independency of form of enterprise has to be present in the general perception.9 In conclusion, co-operative banks, which support the level playing field principle, have developed an original, innovative and highly successful corporate model and, in so doing, contribute to the success of national and European policies in the framework of the Lisbon strategy.

June 2006

9 As stated in the Action Plan concerning future regulatory initiatives, it is necessary to make a proper distinction between different categories of companies and to take full account of both the companies’ “form and size” to allow a more flexible framework. 8