Administration of the Cooperative

1. The General Meeting of the Cooperative

The cooperative members exercise their decisional powers applicable to the cooperative matters in the cooperative’s general meeting (COA, Chapter 5). Each member may use their rights either in person or through a representative. One representative can exercise the rights of not more than three members. The use of representatives can be forbidden in the rules. Each member has one vote in all matters to be considered by the general meeting if there is no special stipulation in the rules.

The statutory general meeting must be held within six months of the end of the financial year unless there is a stipulation of a shorter delay.

For large cooperatives, the rules can stipulate that its members’ discretionary power is exercised in all or some matters, instead of the general meeting, by the member council elected by its members.

2. Board of directors

The cooperative is required to have a board of directors (COA, Chapter 6) composed of at least one and at most five members. With a specific stipulation of the rules, derogations of the foregoing are possible. If there are less than three members of the board, there must be at least one alternate member.

Cannot be elected as members of the board

• legal persons
• persons with an assigned interest representative
• persons with limited legal capacity
• persons in bankruptcy

At least one of the members and alternates of the board must have their place of residence in the European Economic Area (EEA). The Finnish Patent and Register Office can grant an exception from this stipulation for the cooperative.

In principle, the members of the board are elected by the general meeting of the cooperative. However, it can be stipulated in the rules that the supervisory board elects the board of directors or that less than half of the board members are elected in another procedure.

The term of every member of the board elected will continue until further notice unless stipulations are taken into the rules on a fixed term in office.

If a board of directors is composed of more than one member, one of them has to be the chairperson, designated by the board, unless other stipulations are taken into the rules, or another decision be made at the board of directors’ election. In the case of an equality of votes, the chairperson is chosen by lot.

The board of directors shall have a quorum with more than half the directors present unless a higher figure is stipulated in the rules. Unless a qualified majority is required in the rules, the board’s decision shall be the opinion receiving the support of over half the directors present or, if there is a tie, the opinion receiving the support of the chairperson.

3. Financial auditor and performance auditor

(COA, Chapter 7) The choice of the financial auditor is regulated under the Finnish Audit Act (tilintarkastuslaki).

According to that law, small enterprises are exempted from the obligation of having their accounts audited. It is permitted not to elect the auditor if only one of the minimum criteria is met during the ended accounting period and the immediately preceding accounting one. These minimum criteria are:

1. the annual balance sheet exceeds € 100,000;
2. the turnover or the corresponding revenue exceeds € 200,000;
3. more than three persons are employed on average.

Even if the Audit Act does not require any auditor, the cooperative’s rules can stipulate that one must be chosen. In this case, the internal rule is mandatory, and the cooperative is required to have one.

The Finnish Cooperatives Act contains provisions relating to performance audits and performance auditor. According to the Audit Act, the new act requires small cooperatives incorporated after the beginning of year 2014 to elect a performance auditor for the cooperatives not required to elect a financial auditor. However, the rules of the cooperative can stipulate that it will not select any performance auditor.

A blocking minority of members can, in any case, demand that a financial auditor or a performance auditor be chosen. This applies even to those cases exempted from electing any auditor under the cooperative rules.

Concerning the performance auditor, there is no professional qualification required, unlike for the financial auditors. This does not mean that any layman could be designated as the performance auditor. The Finnish Cooperatives Act assumes the performance auditor has the necessary knowledge and experience of financial and legal affairs proportionally to the nature and the extensiveness of the cooperative’s operations in question.

The performance auditor has to be independent of the cooperative and its administration. According to the Cooperatives Act, the performance auditor is not allowed to be, amongst others, a member of the board of directors, the managing director, a near relative of these, or a person employed by the cooperative. A cooperative member can work as its performance auditor if the person satisfies the independence requirements and has adequate knowledge.

If a financial auditor is chosen, the cooperative must have a certified auditor, i.e., a qualified auditor (authorized by Finland Chamber of Commerce, “KHT-tilintarkastaja,” or by a local Chamber of Commerce, “HTM-tilintarkastaja”) or a qualified audit firm. The auditor can be chosen until further notice or for the term indicated in the rules.

In cooperatives listed on stock exchanges, at least one of the auditors must be a qualified auditor or a qualified auditor firm authorized by the Finland Chamber of Commerce.

For more details on cooperatives’ bodies, see chapter Guidance for drawing up of rules.

4. Managing Director

(COA, Chapter 6, Sections 17 to 20) A cooperative can have a managing director, it the rules so stipulate or the board of directors so decides. The managing director is designated by the board. The rules can stipulate that the managing director is chosen by the supervisory board or by the general meeting of the cooperative.

The managing director (and his/her potential deputy) must have their residence in the European Economic Area (EEA). The Finnish Patent and Register Office can grant an exception from this provision for the cooperative.

5. Liability of the management and the elected officials

The management and the elected officials’ responsibility has been under discussion, particularly after the bank crisis and legal reorganizations. It has been asked, among others, who is liable for the huge losses generated by some companies. The discussion is all the more vivid among cooperative circles as the research has taken an interest in the contents of the so-called corporate governance of the cooperative and its significance for the cooperative companies.

The responsibility of the management and the elected officials can be divided in two: the legal liability and the commercial responsibility, which also involves certain ethical issues we could call “soft aspects”.

Without differentiating the responsibility of the management and the elected officials in their way exposed above, we cannot define the consequences of this liability.

Legal liability

Legal liability means that the cooperative management must function in the context of law, rules and resolutions voted. The powers of the board of directors and even those of the general meeting are also defined by the paragraph concerning the cooperative line of activities.

The board of directors and the elected cooperative officials can render themselves liable if they cause prejudice to the cooperative by negligent behavior.

Any liability implies that the director in question has violated the law or the rules and that this has caused prejudice. Exceptions to standard and diligent procedures may imply liability. Any director who has trespassed the limits of the legal liability may be liable to third parties.

Commercial responsibility

Commercial responsibility has a much broader scope than legal liability. The board of directors and the managing director must manage the cooperative in the context required by the legal liability in such a way that it is able to operate with economic success. If the board of directors cannot do this, the general meeting of the cooperative can discharge the board members (and the managing director) from their duties. There is no way to claim damage if the board of directors has not violated the law or acted against the rules.

The consequence of the commercial responsibility does not necessarily lead to distrust. If the cooperative’s general meeting is satisfied with the conduct of the board of directors, it can thank the latter and re-elect its members. The consequence of the commercial responsibility can be either positive or negative. On the contrary, the consequence of legal liability is always negative.

Ethical and social responsibility

Commercial responsibility includes the responsibility for ethical provisions, like acting by honest practices in commercial matters. Individual members of the cooperative may have to make choices between their own interests and those of the cooperative.

There has been more and more discussion about the ethical or corporate social responsibility of undertakings in recent years. The European union has published a so-called green paper describing the modern European way of thinking and principles. Cooperative undertakings are driven by the internationally recognized principles of the cooperative enterprise, so they should, on their own initiative, take responsibility for their social obligations and the ones related to civil society.

Check the cooperative values and principles. Act accordingly!

Principles of the cooperative enterprise:

1. Voluntary and open membership
2. Democratic member control
3. Member economic participation
4. Autonomy and Independence
5. Education, training and information
6. Duty of cooperation among cooperatives
7. Concern for the community.

 Cooperative values:

1. Self-help
2. Self-responsibility
3. Democracy
4. Equality
5. Equity
6. Solidarity
7. Honesty
8. Openness
9. Social responsibility
10. Caring for others.

The importance of corporate values, ethical provisions, and social responsibility has increased recently because value judgments are significant in today’s society as competitive factors between companies. In the business in practice, the cooperative principles, which have existed and been tested for more than 150 years, and ethically high values resulting from the fair and genuine cooperative spirit are an unbeatable leading edge, as long as they are used correctly.

Don’t forget to supervise

The management of an enterprise cannot be penalized with compensation claims only because of the low profitability or vast losses of the enterprise unless the management has committed infringements. However, in these cases, the manager director can be discharged, which often happens in practice (distrust).

When it comes to the legal liability and violations against it, it is possible to claim compensation from the managing staff for damage if any prejudice has resulted. Often only slight negligence is enough.

Because the board of directors has the obligation to supervise, they are also responsible for their subordinates’ acts. For example, in embezzlement cases, the board members may become liable if they have neglected their supervision duty.

Some court cases demonstrate that board members, having neglected their duty of supervision, have been required to pay damages to the cooperative (the same principles are usually applied in other legal forms of companies). Also, in cases where the board of directors has exceeded the limits imposed by the stipulation of the cooperative line of activities, the board members have been sentenced to pay damages to the cooperative.

This is why the board and the managing director have all the more reasons to familiarize themselves properly with these matters, examine very carefully every decision to make, and supervise their subordinates.

Once the general meeting of the cooperative has given discharge to the board members and the managing director, it is usually impossible to claim compensation for damage, provided that all matters pertaining to it have been known to the general meeting at the moment the discharge was given.

COMPENSATION FOR DAMAGES MAY BE CONSIDERED IF:

• the cooperative has suffered prejudice
• the prejudice is caused by a member of the board of directors intentionally or with negligence (a slight negligence is enough)
• the board of directors has neglected their duty of supervision
• the board of directors has exceeded the limits imposed by the stipulation concerning the cooperative lines of activities.

CHECKLIST

1. Do not forget to keep the membership register update, including each member’s name, address, number of shares, and the date of admission.
2. Keep a list of former members until the cooperative has repaid their contributions. The amount to be reimbursed must be paid one year after the end of the financial year during which the membership ended.
3. Submit the cooperative’s financial statements for registration at the Trade Register within two months after approving the profit/loss statement and the balance sheet. The Trade Register receives some of the financial information directly from the Tax Administration. Do not forget to complete the data, if needed.

6. Leading role and minimum equity participation

In a cooperative, the members’ discretionary power is exercised by the general meeting of the cooperative. Each member of the cooperative has equal rights according to the principle “one member, one vote”. This means that every member of a cooperative is in a leading position, as stipulated in the Unemployment Security Act.

The mere leading position in a cooperative does not mean that a member is a self-employed person. As was discussed above, the member must simultaneously own at least 15 % of the corporation.

Hence, if the cooperative has six members or fewer, each member’s share exceeds 15 %. In this case, the members are considered self-employed. If there are seven members or more, each one’s share is less than 15 %, and the self-employed status of the Unemployment Security Act is not created. Please note: the mere share of less than 15 % in the cooperative is not enough to entitle the salaried person or wage earner for the unemployment security status; when deciding whether to grant the adjusted daily allowance for unemployment or not, the so-called general characteristics of an employment relationship are often taken into consideration. Please read more on page “The Cooperative as an Employer”.

If an institutional member of a cooperative has personal members, these are not counted as members of the first cooperative. For example, the cooperative has four individual members (natural persons) and one institutional member. According to the Unemployment Security Act, Chapter 1, Section 6, the members are self-employed persons (each with a share exceeding 15 %). If one wishes to avoid self-employed persons’ status, it is important not to let the number of members drop under seven.

7. The Board of Directors of the Cooperative as a Resource

The board of directors of the cooperative is often seen only as a statutory, compulsory administrative organ. Since the incorporation stage, the board should be considered as a resource: the question is, how to compose a board able to generate profitable business and to build confidence among members.

Any cooperative has a double nature: it is a community of members and a business. The position of its board of directors can be described as follows:

The board of directors is in a position where it works simultaneously as a part of the community of members and as the director of the business. If the cooperative has a managing director, the board will delegate him or her some of its operative duties. The position of the board illustrates the importance of its dialogue with its members. The board must be aware of the members’ expectations towards the cooperative and, at the same time, demonstrate the benefits of the cooperative to its members. The position of the board characterizes equally its duty to have an uninterrupted insight in the customer market  and work for the cooperative in order to safeguard its future. The board of directors and its members can’t promote the interests of individual members or groups of members, but they will have to contribute to the overall benefit of the cooperative.

The work on the board of directors of the cooperative may be a source of conflict if its members are unable to establish a clear distinction between the overall benefit of the cooperative and the interests of individual members. Conflicts can also be due to the confusion of contemporary roles as a member of the cooperative and as an employee. It can also occur that the members of the cooperative interfere with the work the of board of directors in a way which prejudices its operation. Selection of persons can often generate problems for the board.

The board of directors can be a significant resource for the cooperative. For this, three prerequisites must be fulfilled:

1. The aim is to select the best possible members to form the board of directors, each with complementary expertise compared to another. Other important criteria for board members are the ability to work with others, active participation, constructive questioning and commitment and availability of sufficient time. If the member of the board has an extensive network of individuals and relationships, it can help the achievement of the overall benefits of the cooperative, but the networks should not be the exclusive criterium.
2. The board of directors works in an objective-oriented manner and is able to make decisions. This requires careful planning of the work in the board and a functional presidency. It is useful to renew the board for freshness at a suitable pace but not too rapidly.
3. The selection and the work of the board reflect a look forward. The emerging development of the operating environment must be observed closely. It is important to be aware of the specific strengths and weaknesses of one’s own cooperative. The time used in the board must have a clear forward-looking focus.