Prof. Dr. Carl-Friedrich Leuschner,

Chief Executive Officer

German Cooperative and Raiffeisen Confederation

Second European Corporate Governance Conference

Luxembourg 28 June 2005

Cooperatives – between Corporate and Cooperative Governance

– 2 –

Content

1. The need for a corporate governance code

for cooperatives

2. Elements of the corporate governance code

for cooperatives

3. Further development and prospects

– 3 –

Content

1. The need for a corporate governance code

for cooperatives

2. Elements of the corporate governance code

for cooperatives

3. Further development and prospects

– 4 –

The need for a corporate governance code for cooperatives (1/2)

Despite similarities in the character of eG (reg. co-op) and AG

(stock company), there are significant differences which justify

a (separate) code.

facilitates the description of specific features ofthe legal and corporate form of a reg. co-op

3 major differences:

1. identity principle

2. mandate to provide benefits to members (Förder- auftrag) pursuant to §1 para 1 of the Co-op Act

3. compulsory audit

– 5 –

The need for a corporate governance code for cooperatives (2/2)

The cooperative code is a voluntary offer.

It sets out guidelines which focus on the specific corporate culture of cooperatives:

• focus on member values

• no application of the code in the form of „comply or explain“

• cooperative members are directly involved in corporate governance

– 6 –

Content

1. The need for a corporate governance code

for cooperatives

2. Elements of the corporate governance code for

cooperatives

3. Further development and prospects

– 7 –

I. Preamble

• scope

- cooperatives with a focus on capital markets(credit cooperatives)

- other forms of cooperatives, e.g. those with a full-time board of directors and/or annual audit

• member orientation of a reg. co-op

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II. Members and General Meeting

• members are shareholders and customers at the same

time

• voting rules according to the principle:

1 member, 1 vote

problem: multiple voting rights

• „power of the purse“ of members

– 9 –

III. Board of Directors and Supervisory Board (1/3)

• position on the boards is linked to membership

• attention paid to member interests

• participatory rights of the supervisory board

• no „hostile“ takeover of reg. co-op

• extensive lending requirements

– 10 –

III. Board of Directors and Supervisory Board (2/3)

• remuneration of board members

- fixed and variable amounts

- individualised records

current debate

• stock option incentives are balanced by member status

of the board of directors

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III. Board of Directors and Supervisory Board (3/3)

• remuneration of members of the supervisory board

- § 338 para 3 German Commercial Code

- no remuneration by results: § 36 para 2 Co-op Act

- setting-up of qualified committees

• age limit for members of the board of directors: 65 years

• supervisory board: no former members of the board of

directors

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IV. Accounting and Auditing

• annual financial statements and consolidated statement, if required; no obligation to submit semi-annual reports

• cooperative auditing association

• no transparency requirements as regards the choice of auditor

- reason: statutory auditing mandate for the cooperative auditing federation responsible

- rules for conflicts of interest contained in the Co-op Act if impartiality is challenged

– 13 –

Content

1. The need for a corporate governance code

for cooperatives

2. Elements for the corporate governance code

for cooperatives

3. Further development and prospects

– 14 –

Development

• democratic legal form

• older corporate governance structure than stock companies

• ideal for solving our society problems:

- privatisation of public tasks

- public health

- small trade

code for reg. co-op owing to specific differences in legal form

– 15 –

• no European code in the pipeline, but:

• draft EU-directive of 27-10-2004 to amend the 4th and 7th company law directives

• EU recommendations

- of 14-12-2004 as regards adequacy of remuneration of board of directors

- of 15-02-2005 as regards the functions of supervisory board members

Development at EU-Level

thank you!leuschner@dgrv.de