Mondragón Cooperative Corporation
In most for-profit businesses, labor is hired at the service of capital. For the Mondragón cooperatives, capital is something they rent to benefit the worker-owners. The Mondragón model is not only about distribution of the profits, it is also about control of the business. Capital is borrowed, stock is not sold for financing. All new employees become worker-owners.
Mondragón Cooperative Corporation (MCC) firms:
- leading producer of domestic appliances and machine tools in Spain
- largest domestically-based supermarket chain in Spain
- third-largest supplier of automotive components in Europe
- also automated manufacturing cells, satellite dishes, luxury buses, industrial presses, large metal structures, engineering consulting, software development
It’s hard to get good data on profitability and productivity of the MCC — it’s a pretty unique cooperative setup, so comparative analysis is not very possible. The MCC also has costs that ordinary corps. don’t — like funding for educational institutions. What research is available suggests that the MCC “outperforms its conventionally-owned counterparts.”
Exceptional record of employment growth is caused by a number of factors, including
- strict no-layoff policy for members
- high enterprise survival rate
- use of temporary workers in “companies operating in volatile markets.”
“The success it has enjoyed is, at least in part, the result of reversing one of the most important premises of capitalism. The old rule of business is: when you are faced with the choice of risking your capital to protect jobs or risking jobs to protect your capital, always protect your capital. The reversal is, always protect your jobs!”
History and Structure
Founder José María Arizmendiarrieta (a young Catholic priest) established a technical school in 1943, and moved from education to the organization of many kinds of associations, usually involved with the Church in some way. “He gradually and unwittingly introduced the participants to a humanist kind of philosophy as well as to new ideas about economic and social relations.”
The Spanish market was highly protected from outside pressure in the 1950s and 1960s – a key factor in Mondragón’s companies’ ability to get themselves up and running. Arizmendiarrieta soon convinced the group that they should have a direct source of capital – their own bank – and in 1959 helped them establish the Caja Laboral Popular
A defining feature of the Mondragón cooperatives throughout their history has been the ability to adapt their overall institutional structures to changing circumstances. In the early years, most of the cooperatives operated more or less independently from day to day, while they were joined through the Caja. But as markets became larger and more competitive, the firms began to see advantages in joining forces.
In 1991, a special kind of legal-structural unification joined all the various companies and organizations under one “corporate roof,” the MCC. New setup had three main business groups (Financial, Industrial, Retail) and seven different divisions within the Industrial Group. The Caja Laboral is still a central institution, but now is more strictly banking business – no more venture capital, consulting, or group-policy making functions (not dissolved, just moved elsewhere)
MCC officials emphasize that the purpose of the reorganization was most definitely not centralized operational control, but rather closer coordination of activities within common business sectors, improved economies of scale, and greatly strengthened strategic planning.
Each firm maintains its autonomy (legally and functionally), to a large degree, and is controlled by its General Assembly of worker-members. A firm can vote to leave the MCC at any time (and voted to enter). The new arrangements did have their fair share of controversy, with people upset about centralization of authority or the distancing of management from membership.
Companies share the same by-laws and internal structures. In each firm, the General Assembly of worker-members is the highest authority. Decision-making: one member-one vote.
- The Governing Council can appoint or remove the CEO, and must approve choices for senior execs.
- The Social Council “serves to facilitate communication between management and the front line and to represent frontline workers’ perspective in discussions with senior management.” It usually focuses on working conditions, health and safety, work calendar, staffing and work relations.
Day-to-day business management is very similar to that of conventional companies. “Cutting-edge, high-involvement systems-work teams at different levels, flattened hierarchies, various participatory Total Quality and Customer Satisfaction initiatives, etc.”
It is an explicit MCC policy priority for its companies to promote and develop participatory management practices, both for philosophical reasons and for business performance reasons.
Big reason for high rate of start-up success and survival: support institutions. It can be hard for employee-owned firms to get financing, but this is what the Caja Laboral was created for. It was “created specifically to offer patient capital, to cater generally to the financial needs of both new cooperative enterprises and other cooperatives experiencing difficulties.” As the companies have gotten larger and more established, the Caja has been focused more on traditional consumer and business banking.
First, all workers must put some of their own money into the cooperative they are part of. The money accumulates interest but can only be removed upon retirement. It guarantees that everyone has something to lose if the enterprise fails; it also carries with it a reward at retirement if the enterprise is successful.
Second, a bank was created within the cooperative structure that serves the cooperative and is itself a cooperative. It has a very clear mission, which is to fund new jobs so that all people who wish to work in the Mondragón area can do so. This mission is even more important than making the best return on investment, thus violating the prevailing paradigm of banking. Simply put, the Mondragón cooperative bank risks its capital to protect the job base of the community.
All workers and the Mondragón cooperatives must use this bank. It holds the savings and retirement funds of the workers and processes all the funds flowing through all the Mondragón enterprises. In exchange for this monopoly of money, it provides services no other bank in the world provides to its members.
Pay Scale and Equity
The Mondragón Cooperative Complex has three things going for it: fairness as a part of the culture, a distinctly Christian slant to its enterprise ethics, and the Basque hallmark of moderation. As a result, the cooperative could create an extraordinary set of payment relationships and make them work.
Specific pay ratios were set in 1955, held until the 1980s. The person at the top could earn no more than six times the salary of the person at the bottom of the cooperative. If the boss got a raise, everyone got a raise. In the US, in 1996, the ratio was about 115 to one. Recently the ratios at Mondragón have increased to 15 to 1, because the rest of Spain has recognized how good Mondragón’s managers are and lures them away with higher salaries.
Raises within various sectors of each cooperative are determined by many standard measures of productivity and absenteeism, but they also include unusual measures such as “relational skills,” or how well the worker gets along with other people.
Salaries are called anticipos, payments in advance of profits. In case of job loss, workers are paid 80% of their salary plus 100% of their social and health insurance for twelve months. The Mondragón Cooperative Complex is self-insured for job loss, so that is the very last thing it wants to happen.
A new cooperative begins with a group of friends. Experience in starting 120 businesses over a 40-year period has taught the Mondragón cooperators that the pre-existing bonds of friendship are a good basis for building a productive working relationship.
Mondragón provides business and marketing research, assistance; the bank provides capital. Workers have to invest some of their own money, but the bank won’t abandon the new coop if they get into trouble, even waiving interest or forgiving loans if it becomes necessary.
Ten percent of corporate profits are donated to charity, 40% retained by cooperative to be used to benefit the “common good” of the cooperative — research, development, job creation. The balance of the profits goes into capital accounts for the the worker-owners. These funds may be borrowed against at the Caja for very low interest rates, and are important parts of the social security arrangements.
Unlike American employee-owned companies, the Mondragón coops support each other in hard times. Each of the 11 industrial cooperative groups pools a portion of its profits to cover potential losses in member coops within the group. Typically this covers about half of losses. The MCC backs this up with a pool of 2% of total group profits that picks up 1/3 of an individual coop’s remaining losses. Only the remainder (about 1/3 of the original loss) is debited against the individual coop’s capital and member accounts.
Co-ops can deduct their contributions to their industrial group’s reserve funds and to the MCC funds for investment in new products, new coops, the MCC reserve fund and Mondragón University from what otherwise would be pre-tax profits. Coops’ statutory income tax rates on the remainder are 10% (vs 35% for conventional companies), provided the cooperative also contributes 10% of profits (after income tax) to a social welfare and education fund and earmarks a minimum of 20% of remaining profits for the indivisible reserve fund within the individual cooperative. The indivisible reserve would belong to the public sector, not to the members, if the coop liquidated. In practice, Mondragón coops go well beyond the statutory miniums to put more money into education and individual coop reserves.
The Spanish system gives a high level of tax relief but only in return for employee-owned firms putting significant sums back into the community and into cooperative development, and the Mondragón cooperatives do more than is required by law.
Barker, Joel A. “The Mondragón Model: A New Pathway for the Twenty-first Century.” Global Dialogue Center, book excerpt (1997).
“The Mondragon Cooperative Corporation, Inc.: An Introduction.” Ownership Associates, inc.
“Mondragón: A Better Way to go to Work?” JustPeace.org
“Mondragon Corporation,” Wikipedia