Corporate Governance in Co-operatives - The European Experience

Cadbury was an attempt to restore confidence in the City after its reputation had been badly tarnished by the likes of Polly Peck, BCCI and Maxwell, yet its influence reached beyond the public companies it was targeted at. A climate of self examination was created and soon all institutions, not just business, were reviewing the state of their own corporate governance.

In Europe, governance was also a topical issue, with many countries experiencing well publicised business embarrassments. The response was similar to that in the UK. In France, for example, the Vienot Report performed a similar function to that of Cadbury's.

It was against this background that the ICA European Advisory Council reviewed corporate governance and management control in co-operatives in Europe The review, the findings of which were submitted in 1995 to the European Union which had funded the project, examined the governance issues in consumer, agricultural, housing and banking co-operatives.

Legislation

Despite the differences in law from country to country, the structure of co-operatives falls into two categories; the monist system and the dualist system.

A society using the monist system is governed by one Board of Directors which is responsible to the shareholders. A society using the dualist system has two boards; an Executive Board which manages the business of the co-operative and a Supervisory Board which represents the interests of members. In Austria and Germany the dualist system is compulsory. In Belgium, France, Finland, Holland, co-operatives have the option of using either system.

The form of governing system and national law influence the type of weaknesses and strengths found in individual co-operatives, as can the commercial sector in which a society trades. Problems in one sector or country may not be problems in another. Yet even taking these factors into account there are many similarities.

Size

Members

Recruitment of members has frequently been neglected, perhaps because some managers view members as an obstacle to commercial effectiveness. Although there are exceptions, the recruitment of new members and the need to stimulate the interest and participation of existing members has been given a low priority, with little or no financial and management resources allocated to the task.

There are many reasons given for lack of participation including the non-payment of dividend, insignificant shareholdings in societies by members and inadequate, unimaginative communication channels. Understandably, many members are only interested in matters of a direct interest to them, e.g. in the housing co-operatives members believe their contact with the housing administrator (caretaker) is more important than through the formal democratic systems.

Encouragingly there is some recognition of the problems but the extent to which action is being taken differs from society to society. In the French bank, Credit Mutuel, new members have been recruited through an active membership policy centred around banking points with the assistance of lay persons and staff.

Governing Bodies - Annual General Meetings

The function of the annual general meetings is broadly the same in all co-operatives, namely to approve the accounts, elect Directors and auditors. Only a few members use it to debate trading policy and one of the reasons given for this is that members may possess insufficient knowledge of the business and are unable to ask searching and relevant questions.

Directors And Chief Executives

Where co-operatives operate the dualist system it is usual to have full-time, paid Directors serving on the Executive Board. However, the Supervisory Board, and in the monist system, the Administrative Board are dominated by lay Directors. The principle does not present a problem but there is a risk of Directors being ill-equipped to direct the business of a larger and more complex co-operative. A lack of knowledge and confidence on the part of Directors can result in over reliance on the Chief Executive who is in a position to choose how closely the Board is kept informed of the state of the business.

A skills deficit on Boards has led some societies, such as agricultural cooperatives in the UK, to appoint outside professional as Directors, although many, e.g. the agricultural societies in Denmark, resist this idea as being undemocratic.

In some countries the Chief Executive may also be a Director as in Sweden. The desirability of this depends largely on national laws and the division of responsibilities between Chief Executive and the Board of Directors. Clearly where the Chief Executive is also the President, as in many French and Italian societies, that person occupies a very powerful position.

Employee representation in the Boardroom i.e. Directors elected by employees, not members, is bound to workers' participation laws or voluntary agreements. Representation ranges from 10 per cent in Co-op Basle to 50 per cent in Co-op Society Dortmund-Kassell. Major problems are not reported but it is accepted that some conflicts of interests must exist. In the UK those employees who are Directors are elected by members and this can cause confusion as to whose interests they are representing.

Auditing And External Supervision

In addition to auditors, there may be some outside supervision of co-operatives. In the UK, the Registrar of Friendly Societies has a duty to ensure that only bone fide co-operatives are registered. In Austria, the housing co-operatives receive significant public subsidies and as such are subject to some State control. The banking co-operatives in all countries are subject to the same national banking supervision as companies.

The Solution?

Matters to be addressed by a Code include membership and, in particular, its revitalisation. This is a subject on which many articles have been written and there are various experiments and programmes in progress globally from which others may learn. Improved and imaginative forms of communication with members must be introduced and, most critically, financial and management resources need to be allocated to this area. Membership needs to be a responsibility of the Board of Directors who should report to general meetings on the progress they are making.

It should follow automatically that a more interested membership will result in there being more candidates in elections for delegates and Directors. However, in the meantime, societies should actively promote contested elections by examining different forms of voting, including postal voting, and providing better information on candidates. Introducing age limits should be considered in this context. One option that could be investigated is the payment to Directors of realistic fees in order to encourage and recognise commitment.

To resolve the problem of insufficiently skilled Directors, societies should provide training on commercial and co-operative matters. In return, Directors should be obliged to undertake training where necessary. Handbooks for Directors and induction programmes have a valuable role to play also.

The importance of regular Board meetings, supplied with full and accurate information, in clear and easy to understand formats must be recognised. Those societies who are not using sub- committees to examine priority areas in depth, e.g. audit and remuneration, should give urgent consideration to establishing them.

Whilst Codes of Best Practice have an important part to play in tackling governance they are only part of the answer. In the UK neither Cadbury's Code or the supervision of the Bank of England prevented the collapse of Barings Bank. Codes have not stopped the steady march in the demutualisation of Building Societies. For co-operatives the key to good governance will be recognising the uniqueness of the co-operative form of trading, not merely emulating public companies. This message has to be given from the very top, creating a culture where democracy is not just bolted on to a business but is an integral part. Directors must take decisions which will benefit the Movement at large and not just narrow interest groups. But members must fulfill their role too. If they truly wish to see their societies enter the 21st century as healthy, efficient organisations, a wider section of the membership must become involved both democratically and economically. If this commitment can be be given by all parties, then a firm foundation for good governance will have been laid.