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Part III Ownership Structures, 15 Cooperative Banking—A Dutch Experience

Martin van Olffen, Gerard van Solinge

From: Governance of Financial Institutions

Edited By: Danny Busch, Guido Ferrarini, Gerard van Solinge

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Regulation of banks — Investment business

(p. 358) 15  Cooperative Banking—A Dutch Experience

(p. 359) I.  Introduction

15.01  Most banks in the world are organized in the form of public or private limited companies. A smaller number are organized as cooperative banks. Although smaller in number, cooperative banks are significant players in the financial market. For instance, the European Association of Co-operative Banks has 3,135 associated cooperative banks, 80.5 million members, and 209 million customers.1 In other parts of the world, such as the United States, Japan, and India, cooperative banks are also in a strong position.

15.02  All cooperative banks have in common the fact that they are key players in local communities and provide access to finance at a local level. The purpose of cooperative banks is value creation for their members as opposed to the profit maximization that defines other types of banks. Each member of a cooperative bank has a vote in the strategy and the governance of their cooperative bank.

15.03  The cooperative movement has traditionally been ethically driven. The governance structures and strategies that guide cooperative banks today have their roots in ethical principles that were developed in the nineteenth century. An interesting question is, however, whether these moral and ethical standards still influence the day-to-day practice of banking.2

15.04  Based on the history and recent developments taking place at Rabobank, one of the major Dutch banks, this chapter will examine whether cooperative banking makes a difference in terms of governance, financial stability, conduct, and social responsibility.

II.  A Short History of Cooperative Banking

A.  The emergence of cooperatives in Europe

15.05  The first cooperatives arose in pre-industrial Europe. Allegedly, the Fenwick Weavers’ Society, established in 1761, was the first cooperative.3 This society united sixteen (apprentice) weavers, when they signed a charter in which they agreed to work together to set purchasing prices for yarns, selling prices for the cloth produced by them, and to deal fairly and honestly in their work. The weavers also set (p. 360) up a store for victuals and a credit union, which may be seen as the precursor of cooperative banks.4

15.06  In 1844, the Rochdale Society of Equitable Pioneers was founded as a consumer cooperative aiming to break the capitalistic powers of the Industrial Revolution. The Rochdale Society is considered to be the first structured business organization with the characteristics of a modern cooperative.5 It became famous as a result of its principles on cooperative entrepreneurship (See Section II.B).

15.07  During the nineteenth century the cooperative movement developed rapidly throughout Europe.6 Agricultural cooperatives, credit unions, and mutual insurance societies appeared in countries like Germany, France, the United Kingdom, Italy, Austria-Hungary, and the Netherlands.7 Unlike, for instance, in Germany and the Netherlands, the British cooperative movement was of a socialist nature. Although emancipatory in its goals, most cooperatives in continental Europe were of a more ethical-conservative nature. The credit unions were the first step in a development towards cooperative banking.

15.08  Traditionally, cooperatives combine social benefit interests with capitalistic property rights interests. This hybrid nature is still one of the main characteristics of modern cooperative entrepreneurship. Cooperatives were then, and still are nowadays, seen as an expression of economic democracy. Every cooperative operates with the following key elements: (i) one member one vote; (ii) the distribution of benefits to its members; and (iii) ownership of the bank by its members. Those key elements are derived from two sets of principles which endure to this day: the Rochdale Principles of Co-operation and the Raiffeisen Principles.

B.  The Rochdale Principles of Co-operation

15.09  The founders of the Rochdale Society drew up rules of conduct for their economic activities, which started with a store for the sale of provisions. These original rules included, inter alia, that capital should be of their own providing and bear a fixed rate of interest; that market prices should be charged and no credit given nor asked; that profits should be divided pro rata upon the amount of purchases made by each member; that the principle of ‘one member one vote’ should obtain in government (p. 361) and in the equality of the sexes in membership; that the management should be in the hands of officers and the periodically elected committee; that a definite percentage of profits should be allotted to education; and that frequent statements and balance sheets should be presented to members.8

15.10  These original rules of conduct have been summarized into what now are known as the Rochdale Principles of Co-operation, by which cooperatives can put their ethical values into practice:

  • •  voluntary and open membership;

  • •  democratic member control;

  • •  economic participation by members;

  • •  autonomy and independence;

  • •  education, training, and information;

  • •  cooperation among cooperatives; and

  • •  concern for community.

In 1995, the International Co-operative Alliance (ICA) adopted the Rochdale Principles in their revised Statement on the Cooperative Identity.9 Without exaggeration, one can say that the Rochdale Principles are the contemporary standard for cooperative entrepreneurship, and highly relevant for today’s cooperative banking, as will be seen in the example of Rabobank Nederland (see Section VII). International organizations like the United Nations, the International Labour Organization, and the European Commission often refer to these principles, although the latter does not actively promote their implementation in EU legislation.10

C.  The Raiffeissen Principles

15.11  A leading role in the history of cooperative banking was played by Friedrich Wilhelm Raiffeissen (1818–1888). As a small town mayor in the rural German province of Rhineland-Palatinate, he was inspired by the troublesome circumstances in which farmers and craftsmen had to live and work. In 1862, Raiffeissen founded the first credit union in Germany.11 In his book ‘Die Darlehnskasse-Vereine als Mittel zur Abhilfe der Noth der ländlichen Bevölkerung sowie auch der städtischen Handwerker und Arbeiter’, published in 1866,12 Raiffeisen unfolded his ideas on how farmers could unite in their own credit unions in order to get access to credit (p. 362) facilities and become independent from the traditional urban-orientated banking system. This book made Raiffeissen the German pioneer in the development of cooperative theory and practice. Raiffeissen is also considered to be one of the founding fathers of modern cooperative banking. In several countries cooperative banks still operate under his name or a name derived from his name. One of them is Rabobank Nederland (see further Section III).

15.12  Raiffeissen saw clearly the connection between poverty and dependency: who wants to fight poverty, should fight dependency first. As a result of this idea, he came up with the three S’s formula: Selbsthilfe, Selbstverwaltung, and Selbstverantwortung.13 Raiffeissen also developed a set of principles:

  • •  member liability based on solidarity;

  • •  management and administration free of charge;

  • •  adding profits to reserves (retained earnings) for further growth;

  • •  limited local operating area; and

  • •  membership of cooperative central bank.

These Raiffeissen Principles show some similarities with the Rochdale Principles of Co-operation, but they are more practical and realistic and less idealistic, and, of course, focused on cooperative banking. These principles are still visible in modern cooperative banks like Rabobank. However, one of these principles is not topical anymore. When Raiffeissen developed his principles, management and administration free of charge was a realistic principle, as the local banks used to be managed by their own members. Today, management and supervisory board members are paid professionals, but the local members’ councils14 still consist of unpaid members working on a voluntary basis (see Section VII.D).

III.  A Short History of Cooperative Banking in the Netherlands: Rabobank

15.13  At the end of the nineteenth century the first cooperative agricultural banks were founded in the Netherlands. They were small-sized credit unions located in local agricultural communities throughout the country. The emergence of these local cooperative banks in the Netherlands was rather late15 compared to Germany, France, and the United Kingdom.

(p. 363) 15.14  In 1898 two central cooperative banks were founded: the Coöperatieve Centrale Raiffeisen-Bank, located in Utrecht, and the Coöperatieve Centrale Boerenleenbank, located in Eindhoven. Soon after, sixty-seven local cooperatives were affiliated with one of these central banks. About fifty years later, more than 1,300 local banks were affiliated with them.

15.15  Unlike in other countries, in the Netherlands the cooperatives were often initiated and supported by the nobility and bourgeoisie, and both the Roman Catholic Church and the Protestant churches. The former Central Raiffeissenbank, located in Utrecht, had a Protestant signature and the former Central Boerenleenbank, located in Eindhoven, had a Catholic signature.

15.16  In the decades thereafter the local banks began to merge into larger local entities. In 1972, the two central cooperative banks merged into one central bank, today called Coöperatieve Rabobank UA (hereafter Rabobank).16 Recently, this central bank merged with the 106 local banks. Since 2016, Rabobank is one legal entity with one banking licence. See further Section VII.

15.17  Nowadays, Rabobank is one of the largest banks in the Netherlands, with branches and representative offices in many countries all over the world (see Section VII.B). It is a dominant player in the housing mortgage market and the food and agribusiness sector.17

15.18  Rabobank also conducts business through separate legal entities, not only in the Netherlands but also worldwide. Rabobank is the (ultimate) shareholder of about 700 subsidiaries and participations. These subsidiaries focus on retail banking and financial services, as well as insurance (Interpolis) and leasing (Lage Landen). They are not organized in the form of cooperatives, but in the form of public limited companies or private limited companies.

15.19  Rabobank currently has 6.5 million retail clients and 800,000 corporate clients worldwide; approximately two million of them are members of the cooperative.

15.20  For the vast majority of the members of the local Rabobanks the cooperative value orientation is a strong impact factor: being owner, client, supervisor, and stakeholder all in one. Most members of the local Rabobanks indicate that their drivers are the values created by the bank in the local community and society at large rather than the individual benefits of membership. Those driving values are related to the concept of ‘community banking’. This is the typical approach for cooperative (p. 364) banks, aiming at an enhanced commitment of the clients in their local community, for instance through members initiating, supporting, and monitoring donations in charitable projects, and supporting local entrepreneurship and community activities. The relatively new focus on supporting food and agricultural projects in developing countries attract growing support from the members.18

IV.  Main Characteristics of Dutch Cooperative Law

A.  General

15.21  This paragraph gives a short oversight of the legal structure of the cooperative under Dutch law. In the Dutch Civil Code (DCC), the cooperative is a legal person, defined as a special type of the association.19 This Dutch approach, in which the cooperative is an association, differs from other jurisdictions where the cooperative is organized more or less like a public company with an equity capital divided into shares. This approach also differs from the one defined in European legislation, with the creation of the European Cooperative (Societas Cooperativa Europaea or SCE). In legal terms the SCE is basically a hybrid; both an association and a public company.20

15.22  If organized as a holding entity of a group of companies, the distribution of benefits of such companies through the cooperative parent to its members were, under certain circumstances, not subject to Dutch withholding tax. That may explain the strong growth of the number of cooperatives in the Netherlands in recent years,21 especially in energy distribution, healthcare, finance, and even law firms. In 2018, new tax rules have put an end to this exemption for holding cooperatives, but it still applies to ‘classic’ cooperatives.

B.  Members

15.23  Typically, an association has a body of members. The members form the general meeting, often by way of delegation in a members’ council (‘ledenraad’). In a members’ council each member of the cooperative should be represented.22 In larger cooperatives, like Rabobank, local members can also be represented by the chairman of the local supervisory board in a central members’ council (‘algemene ledenraad’; see Section VII.D).

(p. 365) 15.24  The cooperative purpose cannot be classified in the dichotomy between for-profit and not-for-profit. For-profit organizations aim at maximizing profits to distribute to the participants or owners. Although they are allowed to make profits, not-for-profit organizations may not distribute these profits to its members, founders, or officers, as they are not the owners. The cooperative has a mutual purpose; sharing elements of the purposes of both for-profit and not-for-profit enterprises.23

15.25  According to Dutch law, the cooperative purpose is to supply the specific material interests of its members, that is, to produce earned income for its members and to save expenses for them.24 The economic interaction between the cooperative and its members is through contracts.25 This interaction is not on an exclusive basis, as cooperatives may contract with third parties, provided that the agreements with the members are not of subordinate significance.26 Nevertheless, a cooperative remains a business for its members; the business activities of the cooperative must stem from the economic activities of its members. Members are not liable for the cooperative’s business.

15.26  Unlike limited companies, cooperatives typically do not issue shares. Technically, a cooperative can issue shares. Other than limited companies, however, such shares cannot provide the shareholder with voting rights, as voting rights are related to a membership.27 Therefore, cooperatives in practice typically do not have a capital divided by shares. The cooperative is financed by its members and they must supply sufficient funds. If they do not, the members can be held liable, at certain levels, for the deficit in case of dissolution. This liability can be excluded in the articles of association, which is the case at Rabobank.28

15.27  In practice, other more sophisticated instruments to finance the cooperative have been developed (see Section VI.A).

C.  Governance models

15.28  A regular cooperative has an executive board (or management board), but cooperatives often have a two-tier system consisting of a managing board and a supervisory board. This may be on a voluntary basis, but the two-tier system is mandatory for cooperatives that have qualified as ‘large’ cooperatives.29 Rabobank is one such ‘large’ cooperative. See further Section VI.B.

(p. 366) 15.29  In this mandatory system the supervisory board members are appointed by the members on nomination by the supervisory board, whereas the general meeting, the works council, and the executive board have a right of recommendation.30 The supervisory boards in such large cooperatives have broader powers than regular supervisory boards: many relevant decisions of the executive board require prior approval by the supervisory board.31 The mandatory two-tier system, which also applies to public and private limited companies, is the Dutch alternative to the more direct form of employee participation like the German model of Mitbestimmung.32

15.30  The one-tier system, which in 2013 was introduced in the DCC for public and private limited companies, will be an alternative governance model for cooperatives in the near future.33

V.  Specific Features of Cooperatives: Assets or Risks?

A.  Members, no shareholders

15.31  The self-image of Rabobank is reflected in a promotional video that aired from 2003 to 2007.34 A bank employee said the following:

15.32  ‘Rabobank is a cooperative bank, which was established in the late nineteenth century by farmers. We are a bank with principles. So, at Rabobank it’s not all about making profit, because Rabobank doesn’t have shareholders. Instead Rabobank has members, who have a voice in the bank’s decisions … ’

15.33  It is clear that the bank sees its cooperative structure as an asset, because of the involvement of its members in the decision-making process, the advantages of community banking, and particularly because it has no shareholders. But members may also entail risks. Being strong in both the retail and the wholesale market, Rabobank has approximately two million members, varying from households and small local firms to big corporates. This makes a large number of potential (p. 367) plaintiffs, which involves a significant litigation risk. Moreover, history shows that being a cooperative with members is no guarantee against risks normal banks may have. See further Section VII.

15.34  Rabobank’s cooperative structure with its more than 100 local membership councils and its numerous consultation structures on local, regional, and national level is quite time-consuming and expensive. This is one of the causes of the high cost/income ratio that Rabobank is struggling with to meet the European Central Bank’s (ECB) Common Equity Tier 1 Capital Ratio.

15.35  The members of a cooperative cannot be shareholders, because the cooperative may not issue shares. Therefore, cooperatives like Rabobank are not listed on a stock exchange. Not being listed means no easy access to the financial market. On the other hand, not being listed means that the cooperative is not subject to market discipline, shareholder activism, and takeover pressure. But there are alternative ways in which members can invest in their own cooperatives. See Section V.B.

B.  No shares, no listing

15.36  Although the cooperative typically does not issue shares, financing by alternative instruments is possible. Through that, cooperatives can have access to the capital market. Rabobank, for instance, issues bond-like financial instruments to its members and directors. See further Section VI.A. As those instruments are non-voting, the holders thereof do not have voting rights like shareholders would have. Of course, the bondholders have their voting rights as members of the cooperative.

15.37  No shares also means no share compensation for directors. The concept of the alignment of the interests of directors and shareholders does not play a role in cooperatives. However, by issuing alternative (non-voting) instruments to members of the executive board and supervisory board, a certain level of alignment can be achieved.

C.  Corporate governance

15.38  The principle of member dominance means that executive directors are nominated by the general meeting, even if the so-called large cooperative regime is applicable, according to which essential powers of the general meeting are transferred to the supervisory board. See Section IV.C.

15.39  This can be organized otherwise, provided that every member can participate, directly or indirectly, in the voting with respect to the nomination of the board members.35 The principle of member dominance leads to boards that are composed by (p. 368) and out of the members. Typically, a cooperative board consists of directors who are long-time members. It is not common for lateral hires to get a position in the executive board. The advantage is, of course, that the executives are thoroughbred followers of cooperative entrepreneurship. On the other hand, an inflow of fresh blood is sometimes missed.

VI.  Rabobank Corporate Governance and Finance Structure—The Recent Past

A.  General

15.40  Before the 2016 reorganization, the Rabobank Group consisted of 107 cooperatives: 106 cooperatives as local banks, each of them a member of the central cooperative bank, Rabobank.36 Each local bank was active in a certain geographical part of the Netherlands and had a number of branches in its area. The local banks together had approximately 1.9 million members. Each local bank had its own banking licence and its own annual accounts. In the context of financing the operational activities of the Rabobank Group and providing assurance to the financial market, different schemes were available, amongst others:

  • •  a cross-guarantee scheme, linking the assets of the local banks, Rabobank, and several subsidiaries. This scheme ensured that if one participating entity had insufficient funds, its obligations would be covered by the other;37

  • •  issuance of Rabobank Participaties for an amount of approximately six billion euros;38 and

  • •  (consolidated) reserves of approximately twenty-five billion euros.

As discussed above (Section IV.B), under Dutch law there are distinct possibilities for liability of members of a cooperative. In the Rabobank structure there was no liability for customer members.

B.  Governance in and supervision over local Rabobanks

15.41  The governance model of all local banks was identical. Customers of a local bank could become a member of its local bank. There was, however, no obligation to (p. 369) become a member. Based on the membership model of a cooperative, the governance was build up of different layers.39 For logistical reasons, it was not practical to organize meetings for more than 100,000 members of one local bank.

15.42  As a first layer, each member was allocated to a certain geographical area depending on his or her place of residence, which was set up as a department (afdeling). A department can be set up as an independent corporate body.40 Each department had its own board, appointed by the department meeting. As a second layer there was a members’ council. This body consisted of all department board members and hence represented all members of a local bank. This members’ council was authorized to resolve on almost all resolutions otherwise attributed to a members’ meeting, including the appointment of the members of the supervisory board, amendment of the articles of association, and approval of the accounts. Certain special resolutions were reserved for an all members meeting, such as dissolution and termination of the membership with Rabobank. Each local bank was subject to the statutory regime for large companies with special rules for codetermination of employees in the appointment of members of the supervisory board.41 As a result, a works council had the opportunity to nominate a director for each vacancy on the supervisory board and could oppose candidates nominated by the supervisory board. Members of the executive board were appointed by the supervisory board. In this governance scheme, each member of a local bank had an influence over its own bank. The local banks had a discretionary authority to spend a certain percentage of its income on charity, underscoring the local presence and its contribution to the local community.

15.43  Under the Financial Supervision Act 2007 (Wet financieel toezicht (Wft)), Rabobank had been assigned with supervisory authority over its member banks. The Wft included specific provisions for banks that were related to a central credit institution.42 These provisions aimed to create a level playing field and a structure comparable with local branches of other national banks. Based on this scheme, Rabobank was supervisor of its members, the local banks. The articles of association of Rabobank included special provisions for this supervising authority, enabling Rabobank to provide instructions in its capacity as supervisor to local banks. The (p. 370) Dutch regulatory authorities (the Dutch Central Bank and Authority on Financial Market) reviewed Rabobank, including its supervision on local banks.

C.  Governance in Rabobank

15.44  Rabobank had all local banks as members. There were no other members. As a member, each local Rabobank had access to the members’ meeting. The members’ meeting appointed the members of the supervisory board, subject to the codetermination rights of the large company regime.43 The supervisory board appointed the members of the executive board. Further, each local bank was represented in the central district meeting (centrale kringvergadering), which among others things, was authorized to advise management of Rabobank on banking and other activities within the Rabobank Group. In this governance scheme, each member of a local bank had, through its own bank, influence over Rabobank.

D.  Events driven change

15.45  The Rabobank Group implemented changes on a structural basis in response to laws, regulations, and social developments. In earlier years, the local banks had to give up some of their independence, but always remained independent entities with their own management, supervisory directors, equity, and banking licence. Rabobank survived the financial crisis during 2007 to 2010, and as one of the few large banks without government support. In 2010, Rabobank recorded the highest profit in its history. Rabobank, however, did not manage to steer away from the fallout from the financial crisis and the related sovereign debt crisis. The turmoil in the financial industry led to stricter banking regulation and supervision. New and stricter supervisory authorities were created on a national and supranational level. Europe created the Banking Union and the supervision of systemically important banks, including Rabobank, was transferred from national supervisory authorities to the ECB. In the Netherlands new rules were introduced for executive directors and supervisory directors of financial institutions. These had a material impact on the supervisory directors of the local banks. To be eligible and remain eligible for their supervisory tasks at the local level, they had to comply with so-called ‘fit and proper’ tests. Consequently, the population of local supervisors became less diverse and more people with a feeling for compliance such as lawyers and accountants became local supervisory board members.

15.46  The financial crisis had many victims: the financial industry lost trust and reliability. ‘Banker-bashing’ became a popular attitude. Rabobank incurred extra reputational damage due to its role in the LIBOR affair44 and the Calexico (p. 371) affair45. The LIBOR affair resulted in financial settlements of 774 million euros (one billion US dollars) with various authorities in connection with their investigations into Rabobank’s historical LIBOR submission processes. The involvement of Rabobank in the LIBOR affair and the settlement caused great commotion, both in the Rabobank Group and in Dutch society. It also triggered far-reaching organizational changes. Although the local banks were in no way involved in this affair, their reputation was impaired. In the public domain, there was no difference between Rabobank as central organization and holding company of international activities and Rabobank as local bank. Many representatives of local banks expressed their concern and disappointment. The name Rabobank, once a phenomenon for triple A banking, was contaminated. A long-term continuation of the existing governance structure did not seem possible. There was a need for a fundamental review of Rabobank’s existing governance structure.

E.  Preliminary discussion for a new governance

15.47  Although there were earlier discussions within the Rabobank Group, the appointment of an internal governance committee in early 2014 marked the start of the largest reorganization in Rabobank’s history. A major overhaul was necessary to find a solution for the issues discussed above. The governance committee was assigned to present proposals for governance changes establishing future-proof governance. A governance scheme was established that would recover and maintain trust and confidence among internal and external stakeholders in Rabobank. The committee consisted of four chairmen of supervisory boards of local banks, four executive directors of local banks, two executive board members of Rabobank, and some specialist staff members of Rabobank. Numerous road shows, round table discussions, webinars, and plenary meetings have been held to collect input and views as well as to involve and inform stakeholders. Crucial elements in this debate were trust and confidence among all stakeholders.

15.48  Along the way, the committee formulated different alternatives, with two more prominent structures. These structures consisted of:

  • •  a merger of all local banks with Rabobank, with Rabobank as the acquiring entity and only surviving cooperative; and

  • •  a hive down of all assets and liabilities of all local banks to Rabobank.

15.49  The first alternative was a giant leap forwards, resulting in one Rabobank, where all customers would become a member of one and the same bank. The second alternative obviously left part of the governance structure in existence with the local (p. 372) cooperatives as a service organization rather than a bank. In both alternatives, the local banks could continue to exist as branches of Rabobank.

15.50  In the early stages of discussion, there was some hesitation whether the first alternative could include sufficient countervailing powers between members and management. The architects behind the governance committee, however, were able to create a legal structure with a governance that could mirror most of the existing governance with certain new features to cater for appropriate countervailing powers.

15.51  After many meetings and discussions, the committee proposed a merger between the 106 local banks and Rabobank. The legal documentation for the merger, a merger proposal, amounted to 12,534 pages and approximately 1,000 signatures. The merger encompassed a transfer of equity of approximately twenty-one billion euros and twenty-seven thousand employees from the local banks to Rabobank. On 9 December 2015 all 106 local banks unanimously approved the merger. On 1 January 2016, the legal merger and the new governance structure of Rabobank became effective, starting a new era in the bank’s 120-year history. The merger resulted in one Rabobank with one balance sheet and all assets and liabilities in one legal entity in the legal form of a cooperative.

VII.  Rabobank Corporate Governance Structure—The Present

A.  Group structure

15.52  The Group is comprised of Rabobank as the top holding entity together with its subsidiaries in the Netherlands and abroad.46 The Group’s cooperative core business is carried out by the local banks, as discussed below.

B.  Rabobank—general

15.53  The central institution of the Group is Rabobank. Rabobank is a licensed bank, in the legal form of a cooperative with excluded liability. It was established under Dutch law. Rabobank operates not only from the Netherlands, but also from branches and representative offices all over the world. These branches and offices all form part of the legal entity Rabobank and focus on wholesale banking. Rabobank branches are located in Sydney, Antwerp, Toronto, Beijing, Shanghai, Dublin, Frankfurt, Madrid, Paris, Mumbai, Milan, Labuan, Wellington, New York, Singapore, Hong (p. 373) Kong, and London. Rabobank representative offices are located in Mexico City, Buenos Aires, Moscow, Istanbul, Kuala Lumpur, Tokyo, Atlanta, Chicago, Dallas, San Francisco, Nairobi, and St Louis. Through their mutual financial association, various legal entities within the Group, including Rabobank, make up a single organization.

C.  Rabobank—Executive board and mandates for local banks

15.54  As a result of the merger, Rabobank became the owner of all assets of all local banks and hence, the statutory management of and supervision over the business activities of the individual cooperatives disappeared as a result. From one day to another, the executive board of Rabobank was fully responsible for the overall banking business, including that of all local banks. Under the former governance structure, supervision over the local banks took place through the executive board of Rabobank and the supervisory board of the local bank. The supervisory board of the local bank acted as ‘internal supervisor’ based on corporate law and the executive board of Rabobank as ‘external supervisor’ based on regulatory law.47 The supervision of the supervisory board of Rabobank was extended to this new management role. To enable the local banks to continue their business and to create a governance structure for the future, next to the merger documents, the executive board of Rabobank granted mandates to the management of the local banks. In their future role as managers of the local banks, they were empowered to run the business of these local banks.48 The members of the supervisory boards of the local banks were also granted mandates. These mandates included certain supervisory tasks, including the power to appoint and to dismiss certain (future) directors. These mandates empower the individuals referred to above with the possibility for the Executive board of Rabobank to exercise these powers itself if necessary.49 For a further discussion on the powers of the management and supervisors of local banks, see Section VII.E.

D.  Member influence within Rabobank

15.55  As a cooperative, Rabobank has members, not shareholders. Customers of Rabobank in the Netherlands have the opportunity to become members of Rabobank. There is no obligation. Early in 2017, Rabobank had approximately two million members. Rabobank is a cooperative with excluded liability. Members do not make capital contributions to Rabobank and do not have claims on the equity of Rabobank. (p. 374) The members do not have any obligations and are not liable for the obligations of Rabobank.

15.56  Rabobank is a decentralized organization with decision-making powers at both a local and central level. The members of Rabobank are organized, based on, amongst other things, geographical criteria, into about 100 departments. Each local bank is linked to a department. Within each department, members are organized into delegates’ election assemblies. These assemblies elect the members of the local members’ councils.

15.57  The local members’ councils consist of thirty to fifty members and have a basis in the local bank rules. Local members’ councils report to, and act as sparring partner of, the management team of the local bank on the quality of services and the contribution on social and sustainable development of the local environment. These councils have a number of formal tasks and responsibilities. One of the powers of the local members’ council is appointment, suspension, and dismissal of the local supervisory body, including its chairman.

15.58  The local supervisory body consists of three to seven members and is part of the department. It is a corporate body with a basis in the local bank rules and has various tasks and responsibilities, including a supervisory role on the level of the local bank. As part of that role as referred to above, the executive board of Rabobank has granted the local supervisory body a number of powers in respect of material decisions of the local management team chairman. The local supervisory body monitors the execution by the management team chairman of the local strategy. The local supervisory body also exercises the functional employer’s role in relation to the management team chairman of the local bank. The local supervisory body is accountable to the local members’ council. The members of the local supervisory body have to be members of Rabobank. See Section VII.E for more information on the interaction between the local management and the local supervision.

15.59  Every chairman of a local supervisory body represents the members of its department in the general members’ council of Rabobank.50 This council is the highest decision-making body in the Rabobank governance. Although the chairmen of the local supervisory bodies participate in the general members’ council of Rabobank without instruction and consultation, they will also take the local points of view into account. The general members’ council of Rabobank has a focus on strategy, identity, budget, and financial results and has powers on these matters. On behalf of the members, the general members’ council of Rabobank safeguards continuity as well as acts as the custodian of collective values. In that context it adopts the (p. 375) financial statements of Rabobank and has the right of approval for major decisions by the executive board, including:

  • •  determination of general principles of Rabobank’s identity and strategic frameworks;

  • •  general principles of the annual budget; and

  • •  mergers and aquisitions transactions, (dis)investments, and strategic partnerships with a value of more than two billion euros.

15.60  The general members’ council of Rabobank has three permanent committees: the urgency affairs committee, the coordination committee, and the committee on confidential matters. Preparation for discussion and decision making in the general members’ council takes place through regional assemblies. These are not formal corporate bodies in the Rabobank governance. The assemblies are consultative bodies where the chairmen of the supervisory bodies and the management chairmen of the local banks meet to discuss.

15.61  The members of the supervisory board of Rabobank are appointed by the general members’ council of Rabobank, subject to the employees codetermination rules under the statutory large company regime (see also Section IV.C). Two-thirds of the number of members of the supervisory board must be members of Rabobank.51 The supervisory board performs the supervisory role and is accountable to the general members’ council of Rabobank. In this respect, the supervisory board monitors compliance with laws and regulations and, inter alia, achievement of Rabobank’s objectives and strategy. The supervisory board has the power to approve material decisions of the executive board. The supervisory board also has an advisory role in respect to the executive board. The supervisory board has several committees, inter alia a risk committee and an audit committee, that perform preparatory and advisory work for the supervisory board.

15.62  The members of the executive board are appointed by the supervisory board. The default regime under Dutch law for a cooperative is that members of the executive board are appointed by the members’ meeting.52 Dutch law allows, however, for other schemes, as long as members of the cooperative indirectly can vote on appointments. Members of Rabobank have an indirect vote on the appointment of supervisory board members or Rabobank through the chain of member influence discussed above and hence have an indirect vote on the appointment of members of the executive board.53

(p. 376) 15.63  The executive board of Rabobank is responsible for the management of Rabobank including the local banks and, indirectly, its affiliated entities. The executive board has the ultimate responsibility for defining and achieving the targets, strategic policy and associated risk profile, financial results, and corporate social responsibility aspects. In addition, the executive board is in charge of the Groups’ compliance with relevant laws and regulations. Rabobank, represented by the executive board, is the hierarchical employer of the management team chairmen of the local banks. The executive board members are accountable to the supervisory board and the general members’ council of Rabobank.

E.  Business of local banks

15.64  The local business is organized through about 100 local banks. These local banks are not separate legal entities; as branches they are part of the legal entity Rabobank. To preserve local orientation and local entrepreneurship as distinguishing features of Rabobank, the executive board has granted the management team chairmen of the local banks a number of authorizations; see also Section VII.C. Consequently, these chairmen are able to perform their tasks locally and to take responsibility for their designated local bank. The management team chairmen have additional responsibilities for the department that is related with the local bank.

15.65  The local supervisory body and the local management team are expected to aim at alignment of locally formulated targets and the achievement of such targets. If this is not the case, the supervisory roles of the executive board of Rabobank and the local supervisory body may conflict. In such a situation, whether a common approach could be agreed upon to bridge diverging opinions and solve potential problems will be explored. At any time, the executive board of Rabobank may withdraw the authorizations granted to the local supervisory body and local management. The executive board will only exercise this power in exceptional circumstances and will inform the local supervisory body about a likely withdrawal of these mandates in advance. To ensure that the executive board does not abuse its authority, a right of appeal at the supervisory board of Rabobank is provided for within the governance framework.

15.66  The business of local banks is assisted by the directors’ conference. This body has a basis in the articles of association of Rabobank but is not a decision-making body. It is a preparatory, informative, and advisory meeting for proposals and policies concerning the business of the local banks. The executive board, management team chairmen of the local banks, and directors of local banks participate in this meeting. The director’s conference also constitutes a linking pin between the highest echelons of the bank and the task of safeguarding customers’ interests.

(p. 377) F.  Employee Influence within the Group

15.67  Issues concerning the Dutch business of Rabobank are handled by the works council (ondernemingsraad) of Rabobank. (Local) issues concerning the business of one, two, or three local banks are handled by the local work(s) council(s). Issues concerning a subsidiary are handled by the works council of that subsidiary. Rabobank has also installed a European works council for issues concerning the businesses that operate in more than one EU Member State.

VIII.  Regulatory Framework

15.68  As most banks in the world are organized in the form of public or private limited companies, legislators and regulators sometimes oversee that the design of new rules does not cater for cooperatives. Other than cooperatives, public and private companies always have a share capital, and voting rights in the shareholders’ meeting are solely based on a shareholding. One example is the formulation of instruments of ownership in the Bank Recovery and Resolution Directive that does not take into account membership rights or (depositary receipts for) securities issued by a cooperative. In the Dutch implementation of this Directive, the scope of instrument of ownership has been widened.54 Another example is the alignment of the concept of supervision by a central credit institution as discussed in Section VI.B with the CRD IV/CRR Regulations.

15.69  At the end of the day, the EU legislation or its implementation has so far always seemed to meet the specific demands for a cooperative. It is, however, sometimes after fierce lobbying activities by or on behalf of cooperatives. The cooperatives always need to pay attention to ensure that their specific characteristics are recognized and included in legislation.

IX.  Summary

15.70  The Dutch experience shows that cooperative banking makes it possible to operate in a highly competitive market with a system of stakeholder democracy with (proportional) voting rights for shareholders, customers, employees, and other stakeholders. From that point of view, Rabobank is a special bank amidst the other banks.

(p. 378) 15.71  Given their higher moral and ethical standard—see the Rochdale Principles and the Raiffeissen Principles—cooperative banks supposedly have different business and investment policies. One might expect that cooperative banks have, as a matter of nature, for instance a ban on ‘bad’ investments in weapons, fossil fuels, or products made by child labour. Maybe they have, but in practice, standard banks (like ABN AMRO) have those bans too. Corporate social responsibility and commitment to sustainability are now widespread in the financial world and are no longer the exclusive issues of cooperative banks.

15.72  During the financial crisis that started in 2008, Rabobank survived whereas many listed banks went bankrupt or needed state aid. One could argue that not being a listed company at that time was a great advantage. However, several studies show that there is no evidence that banks with higher-quality governance performed better during the 2008 crisis.55

15.73  Rabobank came out of the crisis without a scratch or state interference. Elsewhere, in the aftermath of the financial crisis the large ‘banche popolari’ in Italy were forced to become standard public companies. The Italian government decided to do so, obviously from the thought that the cooperative form exposes banks to higher risks in times of crisis, eventually resulting in the bank’s collapse.56

15.74  Nevertheless, after the financial crisis, Rabobank has had its portion of crises with the LIBOR scandal and other issues (interest rate derivatives and money laundering e.g. in the Calexico branch). From that point of view, Rabobank is a normal bank amidst the other banks.

15.75  Is the cooperative form maybe a regulatory risk? That raises the question of whether regulatory supervision may prevent crises and collapses at all. Or, regardless of its form, is any bank with a weak risk-management function a risk? Indeed, several studies show that banks with strong and independent risk-management functions identify risks, and prevent excessive risk-taking which cannot be controlled entirely by regulatory supervision or external market discipline.57 If regulatory supervision and market discipline (i.e. shareholder control) are not that relevant, this holds true for any bank regardless of its form. In other words, the lack of market discipline which is typical for cooperatives has no significant influence on their performance. Early risk identification seems to be more relevant in avoiding financial distress. However, this is not only true for financial companies, but for all companies.


*  For the sake of transparency, it is noted that Martin van Olffen is legal counsel to Rabobank and was involved in the reorganization described in this chapter and Gerard van Solinge is a member of the supervisory board of one the local banks (i.e. Rabobank Rijk van Nijmegen).

2  For a study on cooperative banking during the crisis of the 1920s see, Cristopher L Colvin, ‘Banking on a Religious Divide: Accounting for the success of the Netherlands’ Raiffeissen Cooperatives in the Crisis of the 1920s’, The Journal of Economic History (2017), 77, 866–919.

3  However, earlier archetypes were found in the form of dairy cooperatives in the valleys of the Pyrenees. See Stefan Naubauer, ‘Predecessors and Perpetrators of Cooperative Systems in Europe’, Lex ET Scientia International Journal (2013), 20, 40.

5  Antonio Fici, ‘The Essential Role of Cooperative Law’, The Dovenschmidt Quarterly (2014), 147, 150.

6  In other parts of the world, for instance the United States, the cooperative enterprise by agricultural and industrial workers also goes back for many centuries. See John C Scatterfield, ‘The Cooperative in our Free Enterprise System’, Mississippi Law Journal (1961), 33 14. The immigrants who came to the United States, brought the Rochdale Principles with them, see Elaine Waterhouse, ‘Cooperatives: The First Social Enterprise’, DePaul Law Review (2017), 66, 1013, 1020.

7  For an overview, see Naubauer, n 3, 40.

8  The Rochdale Principles of Co-operation, available at www.rochdalepioneersmuseum/about-us/the-rochdale-principles, accessed 1 July 2018.

10  Ger J H van der Sangen, ‘How to Regulate Cooperatives in the EU’, The Dovenschmidt Quarterly (2014) 131, 139.

11  Heribert Hirte, ‘Das neue Genossenschaftsrecht (Teil I)’, Deutsches Steuerrecht (2007), 2167.

12  Translated: The Credit Unions as a remedy for the distress of the rural population and also for the urban manufacturers and workers.

13  Translated: self-help, self-governance, and self-responsibility.

14  See Section IV.B, and Section VI.B.

15  See Heinrich Heine’s famous words: ‘If the world would perish, I will move to Holland, where everything happens fifty years later.’

16  ‘Ra-’ stands for Raiffeissen, and ‘-bo’ stands for Boerenleenbank. The abbreviation ‘UA’ stands for: uitgesloten aansprakelijkheid (excluded liability). This implies that members cannot be held liable for the deficit of Rabobank in case of dissolution (see Section IV.B).

17  See Rabobank’s mission statement:‘Rabobank wants to make a substantial contribution to welfare and prosperity in the Netherlands and to feeding to world sustainably.’

18  See Ryan van Hout, ‘Cooperative Banks: The Strength of Impact Factors on the Cooperative Value Orientation and their Effects on the Behavior of Cooperative Members’ (PhD thesis, Open University) 2017.

19  See Article 2:53, para 1 of DCC.

20  See Van der Sangen, n 10, 135ff.

21  In 2017, there were more than 8,000 cooperatives registered with the trade register.

22  See Article 2:53a of DCC jo. Article 2:39 of DCC.

23  Henry B Hansmann, The Ownership of Enterprise, Harvard University Press, 1996, 17ff.

24  Article 2:53, para 1 DCC.

25  Ibid.

26  ibid, paras 3 and 4 of DCC.

27  The possibility to provide a maximum of 1/3 of voting rights in the members meeting to non-members as allowed under Article 2:38, para 3 of DCC is not discussed here.

28  See Article 2:56, para 1 of DCC.

29  A cooperative qualifies as ‘large’ if the cooperative has an equity of at least 16 million euros, the cooperative (or an independent entity) has established a works council as required by law, and the cooperative, together with its independent entities, normally employs 100 or more persons. The qualifying cooperative should have been registered with the trade register to that effect for three consecutive years, before it has to amend its articles of association. See Article 2:63b and 2:63c of DCC. To complicate things further, the mandatory two-tier system may also be adopted by non-qualifying cooperatives on a voluntary basis with immediate effect, see Article 2:63e of DCC.

30  Article 2:63f, para 2 and 4 of DCC.

31  Article 2:63j of DCC.

32  Maarten Muller (ed), Corporate Law in the Netherlands, Wolters Kluwer, 2013, 111–12. See further on the German codetermination and board composition, Paul Davies and Klaus Hopt, Chapter 6, this volume.

33  See the envisaged Article 2:63k of DCC, as proposed by legislative document (Kamerstukken) 34491.

34  The video is still available at: www.nrc.nl/nieuws/2015/12/11/zo-anders-is-de-rabobank-niet-meer-1566347-a25573, accessed 1 July 2018.

35  Article 2:53a jo. 2:37, para 2 of DCC.

36  On the restructuring of Rabobank in 2016, see also I P van den Heuvel, A van Breda, and B. Snijder-Kuipers, ‘Herziening governance Rabobank; succes voor de coöperatie’, Ondernemingsrecht 2017/5 and J M Groeneveld, ‘The road towards one cooperative Rabobank, publication of the Directorate Cooperative and Governance Affairs’, Rabobank (2016).

37  The obligations under the Rabobank Participatiesare not included in this programme.

38  The Rabobank Participaties are a so called Tier 1 instrument and are issued to a foundation against the issuance of depositary receipts for shares. These depositary receipts for shares were originally traded between members of the local banks and since 2014 listed on Euronext.

39  For a more detailed description of the possibilities under Dutch law to create various layers of membership influence in associations, cooperatives, and mutual, see G J C Rensen, Mr C Assers Handleiding tot de beoefening van het Nederlands Burgerlijk Recht. 2. Rechtspersonenrecht. Deel II. Overige rechtspersonen. Vereniging, coöperatie, onderlinge waarborgmaatschappij, stichting, kerkgenootschap en Europese rechtsvormen, Wolters Kluwer 2017 (Asser/Rensen 2-III), nr 186ff.

40  See A L G A Stille, ‘De afdeling in het verenigingsrecht’, (PhD thesis University of Amsterdam), 1986 and Asser/Rensen 2-III, n 40, nr 187.

41  See, for more information on this regime for cooperatives, Asser/Rensen 2-III, n 40, nr 261ff.

42  Article 2:105 and 3:111 Wft.

43  See n 40.

46  A part of the description is based on the language in a Rabobank’s prospectus for its Tier 2 Notes programme, see https://www.rabobank.com/en/images/a34354526-rabobank-2017-t2-prospectus-clean.pdf, accessed 1 July 2018.

47  See Section VI.B.

48  This process included the filing of approximately 1,200 proxies and 580 branches with the trade register.

49  See, on mandates under Dutch law, J G Groeneveld-Louwerse, ‘Publieke wenselijkheid of private beleidsvrijheid’ (PhD thesis Free University Amsterdam), 2004.

50  Rabobank makes use of the possibility of having a members meeting consisting of representatives as set forth in Article 2:39, para 1 of DCC.

51  This requirement can be included in the articles of association under the large company regime; Article 2:63h of DCC and underscores the influence of members on the organization.

52  Article 2:53a DCC jo. Article 2:37, para 2, first sentence of DCC.

53  There has been a discussion in Dutch legal literature on this scheme. See P J Dortmond, ‘Rabobank Nederland en het structuurregime’, Ondernemingsrecht 2002/11; M E Engelaar, ‘Reactie op: Rabobank Nederland en het structuurregime’, Ondernemingsrecht 2002/14; Gerard van Solinge, ‘Benoeming van bestuurders en commissarissen van een structuurcoöperatie’, Ondernemingsrecht 2012/78.

54  Chapter 3A, Article 1 Wft.

55  Guido Ferrarini, ‘Understanding the Role of Corporate Governance in Financial Institutions: A Research Agenda’, Ondernemingsrecht 2017/13 (72-83), 75. Also published as ECGI Law Working Paper 347/2017. See also Guido Ferrarini, Chapter 11, this volume.

56  See Paolo Giudici, Chapter 21, this volume.

57  See n 55.