The Hungarian Perspective (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.16-19)

                    The Hungarian Perspective

                         by Pal Bartus*
                    *************************

Changing Times
--------------
A new era began in Hungary in 1990 following the democratic
general elections. This date marks the creation of the
constitutional state when a series  of substantial laws were
formed. In the co-operatives, these changes were the catalyst for
an internal renaissance and adjustment to a new economic and
social environment. Goals and tasks based on the new co-operative
principles are enabling  consumer co-operatives to cope with the
ever-increasing economic competition to serve the interest of
their members and remain substantial players within the Hungarian
economy.

Basic Values &  History
-----------------------
The co-operative movement first emerged in Hungary in the middle
of the 19th century and was regulated under the law on commercial
activities.

Consumer and retailing had the most rapidly growing areas of
expansion. Working in the given market situation, co-operatives
protected the interests of their members, and improved the living
conditions of the people.

Besides selling and purchasing, the co-ops extended their
activities to agricultural production, food processing, and
providing credit and other services.

After 1948, consumer co-operatives, the newly-founded farming
co-operatives and later, their legal successors, the consumer and
marketing co-operatives were able to preserve the most important
co-operative principles, such as voluntary and open membership
and democratic self-governance, in spite of some of the
activities imposed on them by the State. However, the co-ops
endured strong political pressure  and the movement was used as
a tool in the process of consolidating the one-party political
system.

The change of regime in 1990 and the law on co-operatives in 1992
did not modify the co-operative system of corporate governance
and management control. The ICA statements concerning these
fields can still be found in Hungarian co-operative practice.

The Autonomous System of Hungarian Consumer Co-ops
The consumer co-operatives have developed in different forms
according to the needs of their vast membership. Their
operational rules are defined by the statutes and different
internal regulations, within the framework of the law on
co-operatives.

The basic institution of consumer co-operatives is the general
assembly which comprises regional assemblies from different parts
of the country and decides on fundamental issues, such as
mergers, splitting up, winding up of operations and
transformation. The regional assemblies elect a delegates'
meeting to determine the business and social activities of the
co-operative and ensure that resolutions are implemented. 

This body also elects the board of directors and the chairman,
who is, at the same time, the chairman of the co-operative. The
importance, role and social influence of the chairmen, both
locally and regionally, is based on their democratic election.

The Supervisory Committee, elected from members, and its
separately elected chairman, ensure that tasks are carried out
correctly.

Control and Supervision
-----------------------
During the six to seven years of the transitional economy, it has
become clear that it has been difficult for the management of the
former state-owned companies and socialist-type co-operatives to
adapt to the market economy. This is because membership of the
board of directors of a co-operative can stem from decades of
personal relations, rather than qualification or expertise.

During the transitional years, the restitution of property posed
a great challenge for the co-operative management. It was a
difficult task to operate the property of their co-operative
effectively in intensifying market competition and they could
observe the privitization process, which was controlled
centrally, but, in a lot of cases, happened spontaneously. The
possibility of following suit and making their own fortune
obviously occurred to them and, unfortunately this possibility
still exists today, therefore greater corporate supervision is
imperative. Management of property should be strictly separated
from corporate supervision in order to protect the property of
the members.

However, these two activities have often been combined and the
profit-orientated operation of property has not been clearly
separated from the social-type protection of co-operative
property.

As mentioned in the ICA study, the background paper on Corporate
Governance and Management Control Systems in European
Co-operatves, the rotation of officials within elected bodies is
low and this needs attention so that the co-operatives of the
next millennium can be led by highly  educated young people. I
am not suggesting that all experienced elderly officials should
be removed from elected bodies, however, I advocate a policy
whereby  more young people are given the opportunity to become
involved in decision-making and leadership.

The relationship between the board of directors and the
supervisory committee is controversial. In practice, the board
of directors, or, in the case of one-man leadership, the
chairman, does not have close contact with the supervisory
committee, nor keep members informed or involve them in the
decision-making process.

During the 1990s, co-operative management has increasingly come
into conflict with the body responsible for exercising social
supervision and protecting the interest of members.

As a result of the personification of assets and decreasing
membership, the influence of the management on the property grew,
members interests were pushed into the background as making
profit became the priority. This situation was acerbated because
competitors in the market attacked the co-operatives with all the
tools of market competition.

Supervisory committees should be made up of professionally
trained and morally blameless individuals and Co-op Hungary
supports efforts to organize training for members and chairmen
of supervisory committees. 

Co-operative Managers are not very responsive to the problems of
members or interested in finding rapid solutions to these and the
size of many co-operatives impedes effective member relations.

This means that the role of the regional executive committees is
pivotal since they are the ones who can inform the management
about their experience at members' meetings.

The ICA also mentions the compensation of officials. Hungarian
experiences showthe work of boards of directors and supervisory
committees improves if their members are adequately compensated,
depending on the size of the co-operative, the level of income,
the number of officials, etc.

Great Expectations
------------------
>From January 1997 a new law on co-operatives will regulate our
co-operative affairs and co-operative supporters have great
expectations about this new legislation.

-    The new law has to reflect the raison d'etre of the
     co-operative which is built upwards from the grassroots,
     starting from the co-operative member who bears a double
     identity: on the one hand, he or she is an owner of the
     co-operative and, on the other, a customer. 

-    The law has to assist the process of personalising the
     assets, a political act which should soon finish. The goal
     is that the proportion of indivisible assets of the
     co-operatives should increase within the global
     co-operative assets to ensure the greater cohesion of the
     business in the market place and to clarify the interests
     of members.

-    In the course of the transformation process, the external
     business share has been institutionalised, a development
     which is completely alien to the co-operative system. It
     means that ownership of the co-operative passes from the
     hands of members, as the owner of the external business
     share has acquired his shares through direct purchase or by
     right of inheritance. We expect that the new law will
     eliminate external business shares and the government will
     assist co-operatives to repurchase these.

-    It is anticipated that the new law will clearly and
     consistently represent the co-operative as an economic
     entity. It can do this in two ways:

     1.   The law could give the definition of a co-operative
          (without differentiating between producer or consumer
          co-ops), allowing the co-operatives to specify their
          particular characteristics, or

     2.   The law could define the characteristics of different
          types of co-operatives, that is, deal in a separate
          chapter with consumer and producer co-ops.

     The consequent implementation of either method will enable
     the Hungarian co-operative system to effectively compete in
     a changed market economy following clear regulations and to
     some extent in a protected environment.

-    I mentioned earlier that co-operative regulations do not
     facilitate effective corporate supervision. So we expect
     the law to enable the national and regional federations to
     supervise the activities of the co-operatives and their
     management.

-    The need for integration is increasing due to the changing
     economic climate and the new law should facilitate
     integration process by creating simple and clear
     regulations.

Nowadays the Hungarian co-operatives and organizations
representing their interests expect the Government of the
Republic of Hungary to declare unambiguously and irrevocably that
it considers the co-operative movement to be an integral part of
the Hungarian economy and society. This can be achieved by
involving the co-operative federations in the drafting of the new
legislation and thereby taking advantage of their expertise and
considering their point of view.

The holding of the ICA Regional Assembly in Budapest and the
international co-operative solidarity extended to us are a great
support  in our efforts.

Our greatest goal is that the Hungarian Co-operative movement
should remain a strong and successful member of the European
Co-operative movement.

----------------
* Mr. Bartus is  President of Co-op Hungary,  member of the ICA
Audit and Control Committee and ICA European Council. He and his
team were  most welcoming hosts during the Regional Assembly for
ICA Europe in Budapest in October 1996. 
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New Delhi, 26 Feb 1997

Dear Anne,

This is file 5a of ICA Review, Vol.89,No.4,1996. In order to keep
the sequence of the Table of Contents, all articles under item
5 `Corporate Governance & Management Control Systems' have been
separated as 5a,5b,5c,5d,5e,5f,5g. However only this file (5a)
will contain the heading of the section Corporate Governance &
Management Control Systems

Please add this file to the following sub-directories:

1.   International Co-operative Alliance (ICA)/
          ICA Publications/
               Review of International Co-operation/
                    ICA Review Vol.89, No.4, 1996/
                              1. Table of Contents
                              2. Editorial
                              3. Minutes of Regional...=20
                              4. Statement of the Regional..
                         ...  5. Corporate Governance & ..
                              ... The Supervision, Audi..

2.   Publications and Education Material/
          Review of International Co-operation (ICA)/
               ICA Review Vol.89, No.4, 1996/
                              1. Table of Contents
                              2. Editorial
                              3. Minutes of Regional....
                              4. Statement of the ....
                         ...  5. Corporate Governance & ..
                              ... The Supervision, Audi...

3.   International Co-operative Alliance (ICA)/
          Structure of ICA/
               Governing Bodies/
                    Regional Assemblies/
                         Europe/
                              ICA : Regional Assembly, 1996/
                              1. Minutes of the Regional      =20
                                 Assembly..
                              2. Statement of the Regional..
                          ... 3.  Corporate Governance &....
                              ... The Supervision, Auditing...

4.   Co-operative Issues/
          Co-operative Governance/
               6. Seminar on Corporate Governance
          ...  7. The Supervision, Auditing &...



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          Cooperative Alliance (ICA)/Review of International
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          Co-operative Governance/
                  =20
TITLE:    Co-operative Governance & Management Control Systems
          -    The Supervision, Auditing & Control of Co-ops in
               Italy (1996)

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    ----------------------------------------------------------
    This document has been made available in electronic format
         by the International Co-operative Alliance ICA=20
    ----------------------------------------------------------
                         December, 1996
          (Source: Review of International Co-operation
                    Vol.89, No.4/1996, pp.13-15)

          Co-operative Governance & Management Control Systems

          The Supervision, Auditing & Control of Co-ops in Italy
                         by Ivano Barberini*
          ****************************************************


The control system of the co-operative movement in Italy is based
upon the control imposed by the law and self-regulation set out
by ANCC/Lega.

The control envisaged by the Italian legislation derives directly
from our Constitution  which reflects both recognition of the
co-operative=D5s social function and the State's engagement to
promote co-operative development. Article 45 of the Constitution
states "The Italian Republic acknowledges the social function
of Co-operation with non-profit and mutual character. The law
promotes and enhances its growth with the most suitable means,
as well as it assures, by the relevant controls, its character
and goals".

Almost 90% of the co-operative surplus is allocated to
indivisible tax-free reserves allocated to  attaining the
above-mentioned goal.

The supervision and auditing on the Italian Co-operatives is
entrusted to the Ministry of Labour and Social Security, which,
in its turn, delegates this activity to the co-operative apex
organisations.

The supervision and controlling bodies established for this
purpose are the Ministry of Labour and Social Security, the
Central Commission for Co-operatives, the District Supervision
Commissions and the National Apex Co-operative Organisations.
This control activity is implemented through two types of
auditing:

Ordinary auditing is  carried out by the Ministry of Labour,
usually for the co-operatives which do not adhere to any apex
organisations, and the national apex organisation which the
co-operative is affiliated to. It verifies compliance both with
rules and procedures established by law and by the co-operative
standing orders, and oversees the administration and
book-keeping, technical set-up and activities of the co-operative
as well as well as the assets and liabilities of the Society.

Special auditing is carried out whenever the Ministry of Labour
has evidence of irregular or incorrect functioning of the
co-operatives.

A further control is established by the Law No. 59/1992, obliges
the larger co-operatives to submit a certified financial
statement:

In 1995                            No.
----------                         ----
Certified Co-operatives            358
Non-Cop Societies certified        248
Brokerage houses                   283

These data show the extent and rigour of the control activity on
the Italian co-operatives.

The special disciplinary measures which the Ministry of Labour
can take  after the ordinary and special auditing include issuing
warnings to the co-operative to regularise its situation, the
removal of managing directors and the dissolution or liquidation
of the co-operative.

ANCC & Lega Control Systems
---------------------------
I have already pointed out the provisions and procedures
established by the Italian legislation on this matter, but,
besides this, the Movement has developed a set of projects aiming
at promoting member participation, transparency, respect of
institutional goals and responsibility towards stake holders.

Member Participation
--------------------
There is a relevant engagement devoted to enhance and promote the
members' involvement and participation through ordinary meetings
which verify estimates and consolidate balance sheets, strategic
plans development programmes; evaluate membership activities and
campaigns such as environmental protection, assess restructuring
processes.

There are 1,000 meetings convened annually, with over 100,000
participating members and approximately 15,000 members taking the
floor.

Over 10,000  members are active at the regional level, in the
Board of Directors and "Membership Service Departments" located
in the outlets (meeting and listening points).

Apart from control procedures and the identification of policy
guidelines, their main focus is on activities involving school
children, young people and the elderly.

Member participation is significant but not satisfactory and the
movement is continually looking for new ways of increasing member
presence in order to increase the participation in democratic
control activities as well as in working out policy guidelines=20
for the co-operatives.

New technologies, such as the Internet, will allow an increased
level of interaction with the members.

The participation and control procedures established by the
Movement aim to increase confidence between members and their=20
co-operatives and strengthen Co-operative Identity.

A social audit is made of all the main information and control=20
( i.e. the Co-op financial statement including the initiatives
and resources allocated to social and public utility projects),
which  distinguishes the different levels of control: the
auditing, the corporate governance bodies, balance-sheet
certification.

The whole movement is auditing in this way, and not only the
individual co-operatives, ensuring adequate parameters for
measuring results as well as accurate participation figures.
This enables the Movement to increase the involvement of the
target groups, to listen to what members have to say and to
represent the movement efficiently at national and international
level, effectively communicate the distinctive features of
co-operatives through accurate and transparent information.

A further step towards effective control is taken by  the
definition of standards and through the evaluation of social
objectives, through the identification of index numbers, through
methods to evaluation social performance and the application of
economic theories to the co-operative framework (today it is
irrelevant).

This acts as a stimulus for discussion and the development of a
conceptual reference model and gives occasion for the
establishment of relationships and the exchange of opinions with
national and international universities.

Conclusion
----------
The controls established by the Italian legislation and the apex
organisations contribute to the achievement of institutional
goals and to management transparency before members and third
parties.

The following scheme shows the main components of the control
function.

Principles, sources and features of self-regulation
---------------------------------------------------
The guidelines should not be intended as a bond establishing a
rule of technical and procedural nature, rather as a reference
basis for co-operatives both at the strategic management level
and  the legal - institutional one; a reference based on the
awareness of the social and economic function of co-operation.
They draw inspiration from transparency principle as a value
intrinsic to Co-ops social behaviours.

They are founded on the coherence principle as a link among
mission, programme and results.

They are inspired through a sharing of common principles and
their practical application in daily activities. And finally,
they emerge from the resolve to set up a reference basis upon
which should be focused the managing and control procedures in
order to make them coherent and functional to the co-operative
mission.

---------------------
* Mr. Barberini is the President of the National League of
Co-operatives and Mutual Societies in Italy.