Technical/Democratic Supervision in European Co-operative Banks (1996)

    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
                         December, 1996

          (Source: Review of International Co-operation
                    Vol.89, No.4/1996, pp.27-33)

          Technical/Democratic Supervision in European
                       Co-operative Banks

                      by Etienne Pflimlin*

Within the framework of the work conducted on the European
Committee of the International Co-operative Banking Association
(ICBA), a process of reflection has been initiated on relations
between professionals and elected directors who represent the

This reflection is far from being completed, since the work has
to be continued at our next meeting in Brussels this December.
It was introduced in a presentation by Professor Munkner, which
I can make available to those who are interested. I will
reproduce in this report its conclusions by way of an
introduction to my own line of thinking and, without wishing to
commit my colleagues on the Committee beyond our work that is in
progress, I will illustrate my presentation by referring to the
practice of Credit Mutuel in France.

Professor Munkner summarizes the current trends as follows:

"The progressive abolition of the initially clear separation
between the director's function, as a power of the board of
directors consisting of elected representatives of the members,
and the management function as a duty of professional managers
performing their job in a full-time capacity, is causing new
problems with regard to supervision of managers and disruption
of the balance of power to the advantage of professional

This tendency is accentuating the gap between the community of
members and the enterprise and at the same time encouraging the
disintegration of the members' commitment that results from the
principle of identity between their capacities as providers of
funds, co-decision-makers and customer.

This disintegration occurs, for example, when investor members
are introduced, when the capital that does not belong to the
members is increased, when salaried professional managers
supplant the members' elected representatives who perform their
office voluntarily and when transactions with non-members are
stepped up, with members and customers being placed on an equal

Due to this tendency the member's triple role - as a provider of
funds, participant in decision-making and customer - is gradually
being eroded. This role is being divided between the funds
provider and the customer of the co-operative enterprise, with
a loss of opportunities for participating in the definition of
the objective, decision-making and supervision."

The diagnosis is precise: the changes in the way in which
co-operative enterprises function today are bringing about a
hiatus in the relations maintained between the three key players
of co-operation, the three apexes of the triangle: the members,
the elected representatives and the professionals.


*    the members are losing sight of the ownership link that
     binds them to the co-operative enterprise and the directors
     are running into difficulties in performing their duties as
     representatives, the defenders of the members' interests;

*    as for the professionals, who are subject to the pressure
     of competition and to the sacrosanct rule of profit
     optimization, they are forgetting that their objective is
     to manage well in terms of the member's best interests and
     not that of profit maximization.

This harsh observation concerns all of us: none of us, as
directors of co-operative enterprises that are completely
integrated into the market economy, can in good faith fail to
feel affected:

In the banking sector the temptation to drift is even greater for
several reasons:

1.   Our organizations' territoriality no longer has borders:
     electronic exchanges through the INTERNET networks and
     others enable the member to be followed everywhere, to make
     each customer a potential member but also each member an
     ordinary customer!

2.   The means to be implemented to satisfy an increasingly
     demanding consumer and an increasingly disloyal member
     imply a capitalistic concentration of resources that is no
     longer affordable for the local banks.

3.   The prices of the raw material processed by the banks are
     now global, as they are fixed on the capital market.

4.   The measurement of these banks' performance, which is
     intrinsically linked to this management of capital, is
     becoming internationalized and more technocratic: the
     ratios that measure the soundness of a financial enterprise
     are the same whether it is a savings and loan co-operative
     in Budapest or the number one Japanese world bank; the
     professional competence is also the same.

In order to cope with these changes, our enterprises are
expanding their areas of operation beyond their original
membership, developing complex diversification strategies, the
implementation of which escapes the shareholders, and seeking by
every means to make profits, a prerequisite for their development
and security.

Now only the co-operative enterprise regards profit optimization
as a means of achieving a common objective - "economic and social
promotion" - and not as the ultimate objective of

Only the elected director, representing the members' interests,
may, through the supervision he exercises, ensure that this
objective is not lost sight of and that profit continues to serve
the co-operative member and not vice versa.

It is not just any form of supervision but democratic supervision
that concerns the matching of the means to the objective set.

In order to be exercised, this supervision therefore implies that
the objective of co-operative activity be precisely fixed: this
is strategic supervision.

It has to ensure that the means match the objective: this is
technical supervision.

Finally, it must express the quality of the supervision itself:
this is political supervision.

It is necessary to examine these three components and to see how
they are expressed in a European co-operative banking institution
- I shall take the example of the Credit Mutuel.

By way of a preliminary, here is a brief description of the
organization of Credit Mutuel:

the three degrees...
line of political & strategic supervision: LB = > Fed. = > CNCM

-    the elective principle of the "higher" level
     representatives, and the social mandate

-    the principle of subsidiarity as a mode of functioning

line of technical supervision: 
CNCM = > Fed. = > LB

-    the principle of hierarchical supervision and
     decentralization of supervisory power.

The essential concern is to organize at all levels the
convergence of both methods of supervision in order to ensure
that one does not predominate over the other but that, on the
contrary, they each enrich one another with their specific

Strategic Supervision
Ever since the origin of the Raiffeisen co-operative movements,
the supervision exercised by the director is a supervision of the
acts that commit the future of the community and not day-to-day
management acts.

Originally, the granting of bank loans was a strategic act that
committed the members' unlimited liability. Today this decision
has become a commonplace act that is delegated all the more
easily in that a number of prudential rules has specified the
conditions under which these grants may be made:

-    risk division ratio
-    equity capital ratio

-    rules for following up and processing payment incidents,

Technical inspections are carried out to see whether these rules
are being applied and failure to observe them leads to remarks
being made by the supervisors of the co-operative enterprise's
banking activity.

At Credit Mutuel, because these remarks concern elements that may
jeopardize the survival of the enterprise, they are the subject
of a balanced examination on supervision committees consisting
of elected representatives and technicians. They result in the
drafting of a document setting out the inadequacies ascertained
and the undertakings made by the technicians to remedy them under
the responsibility of the board of directors of the body
concerned, which fixes a framework for lending rates, debt
ratios, upper limits on authority, etc.

In the light of unfortunate experiences showing the limits of
this "strategic" supervision and as things evolve in an unstable
and increasingly complex financial environment, Credit Mutuel has
put in place a procedure which is not only more restrictive but
which at the same time involves the directors more by bringing
together the elected representatives and salaried employees of
a regional group. It is the procedure known as "shared

Shared diagnosis is a methodology that gives the directors:

-    information about the directions in which each region is

-    a diagnosis of the probable trends, based on objectivized
     data whose consequences must be examined in common and the
     conclusions shared by everybody;

-    an alternative choice of policy line proposals.

This methodology is used in particular when a Credit Mutuel group
calls on the Credit Mutuel community to make investments that
will be beneficial for everybody or to restore fundamental
balances that have been jeopardized by reversals of the level of
economic activity.

At the October 1996 General Meeting a think-tank was set up to
improve the strategic decision-making procedures.

Technical Supervision
This type of supervision is highly developed today in a banking
enterprise since the business of financial intermediary generates
risks that have to be controlled.

*    technical inspection on the spot and based on accounting

*    remote inspection of the main management balances;

*    internal inspection of decision-making processes,
     production procedures and marketing actions.

Faced with this multiplicity of increasingly technocratic
inspections, the elected representative tends to feel useless
because his responsibility has been removed: since other people
who are more technocratic than he is are doing the supervising,
what more can he do?

Two key points:
*    preserving the independence of technical supervisors from
     the "technocrat's" power;

*    publicizing the conclusions of the inspections among the
     principal persons concerned: the members.

The CM's reply on the first point:

*    the hierarchical positioning of the inspection and audit
     services reporting directly to the elected president and
     not to the general manager;

*    the functional positioning of the management supervision
     from the viewpoint of the operational managements whose
     performance it judges.

The CM's reply on the second point:

*    The information and training sessions: meetings that make
     for clarity;

*    the statutory GMs and their revival: the attendance at the
     GMs is increasing: in 1995 nearly one million members out
     of five million attended the GMs and asked questions;

*    Thematic GMs on a specific topic of banking or a specific
     trend in the banking world: the EURO in 1997.

Finally, considering technical supervision should not only be
confined to the evaluation of banking operations, some of our
regional groups, basing themselves on a practice already existing
in the Desjardins banks, have put in place a technical inspection
tool for the bank's mutualist activity by publishing a "mutualist
balance sheet" for their members.

*    The co-operative and mutualist balance sheet evaluates the
     impact of solidarity actions on the socio-economic
     environment of the local bank or the regional group and
     makes these results public so that the member may evaluate
     the advisability of the solidarity actions that have been
     launched. This initiative is gradually spreading in our
     groups: introduced five years ago, this practice is in
     place in more than half our federations.

This participation by members in the life of the enterprise is
a major element which guarantees that supervision is not merely
formally democratic but really the expression of political
supervision, placing service to the member at the heart of the
business operation.

Political Supervision
If it is to be effective, it must be organized and its
organization supervised. If it is to be genuine and successful,
it must be done by directors and salaried employees working

*    its organization and its supervision: formal democracy

French co-operative law leaves co-operative organizations a great
deal of organizational leeway since it is confined to defining
the rules that establish the co-operative identity (freedom to
join and resign, principle of representation as per the rule one
man = one vote, principle of allocation of results and
constitution of indivisible reserves).

In the case of loan-granting and to the extent that this line of
business is strictly regulated at the European level, bank rules
have supplemented the co-operative rules (notably the "two pairs
of eyes" rule).

At Credit Mutuel it is the bye-laws and internal rules of
procedure - which have been enhanced for two years now by an
Institution Charter - that lay down most of the operating
rules of the statutory bodies, electoral procedures and the
conditions under which approval of directors is granted and
withdrawn (imposed by the banking law).

In the light of experience, one has to note the importance of
this institutional formalism in ensuring the decision-making
freedom of the elected directors in the face of omnipresent

The important decisions on our boards of directors are always
taken by a secret ballot. Our directors are also elected in the
same way - by secret ballot.

We have adapted the "two pairs of eyes" rule to the specific
features of our co-operative: while no legislation obliged us to
do so, our internal rules mean that one pair of eyes is that
of the elected representative and the other pair that of a
salaried director.

*    The supervision of this institutional formalism is now
     integrated into the terms of reference of inspections,
     which must ensure that the enterprise’s activities respect
     the written rules and that the deliberation procedures are

However, one fact is certain: these precautions will only produce
results if the women and men who chair the governing bodies feel
responsible for, and concerned by, the life of the enterprise,
its results and its prospects.

There are two key words here: training and activist dedication.

*    training: in our organizations this is acquired either in
     the context of specific sessions devoted to elected
     directors or, usually, in the context of dual training
     "elected representative and salaried employee" - "the
     winning tandem";

*    activist dedication cannot be learned, it has to be
     experienced. It is perhaps the most difficult point because
     our movements can quickly produce activism professionals
     who forget to listen to their superiors and who listen only
     to themselves.

The CM has not found any miracle solution on this point: it may
appear paradoxical or manipulative... but it seems that the least
pernicious way of avoiding this activism professionalism is to
manage the representativeness of the elected representatives in
the same way as one manages the employees' age pyramid: one has
to make sure there is a match between the sociological profile
of an area and its elected representatives:

*    in an industrial area one should avoid having only

*    or having only retired people in a university area;

*    or having a high proportion of rural people in an urban
     area, etc.

This management sometimes implies stimulating vocations, but why
should we deprive ourselves of it when we know there are
safeguards for supervising the excesses?

By way of a conclusion, I would like to reaffirm that the way our
enterprise is administered is certainly not free from
shortcomings, but it exists. It implies constant vigilance,
because it is easy to drift; it is based primarily on the will
of the women and men members who run the system to run it

It is centred on the elected representative, just as our business
is centred on the member. 
In all countries of the world joint-stock companies that publicly
collect savings are wondering today how to safeguard the
interests of small shareholders in the face of speculative
predators and how to ensure the durability of business and jobs
in an economy in which the search for maximum and immediate
profit takes precedence over any development project.

We can tell them: come and see how it works in our bank, come and
see our shared management methods and our operating rules. They
certainly have something to learn from our operating methods.

*    Mr. Pflimlin is the  President of Credit Mutuel, France,
     Chairman of the European Committee of the ICBA, member of
     the ICA European Council and member of the ICA Board.