2.2 Initiative of EC on EFP – The PEPPER Reports

2.2.1 Results on the EU level. Positive dynamic of EFP

The PEPPER Reports underline the continuing importance of this subject for European policy. PEPPER-IV notes the significant rise in EFP in the EU-27 over the last decade.[1] In the period 1999-2005 the proportion of firms which offered employee share ownership schemes open to all employees grew by five points, from an average of 13% to 18%. In the case of profit-sharing schemes it grew by six points, from an average of 29% to 35%. In the same period the number of employees actually participating in these schemes also grew, although less rapidly.

The PEPPER IV Report calls for a European Council Recommendation on a European platform for EFP. The basis for a common framework is the Building Block Approach, a perspective promoted with a study sustained by the EC to link the many and varied EFP models which exist across member states, including profit-sharing (cash, either deferred or in shares), individual share ownership (employee shares or stock options), and ESOP (Employee Stock Ownership Plan) concept (collective employee share ownership model financed from a profit share additional to remuneration).

While tax incentives are not a precondition for EFP, they have proved in the past to be a positive and important leverage in those countries which offer them. Without prejudice to Member States’ competence on taxation, coordination, streamlining and mutual recognition may help to stimulate EFP in cross-border operating companies. The calculation of “effective tax rates” for standardised scenarios could permit direct comparison between the EU-27 and thus ensure further harmonisation. As long as European measures remain optional, conflicts with national law should not arise.

[1] The PEPPER IV Report: Benchmarking of Employee Participation in Profits and Enterprise Results in the Member and Candidate Countries of the European Union, Jens Lowitzsch, 2009

The Czech Republic is the country whose privatisation policy has granted by far the fewest concessions to insiders. Despite some tradition of both financial participation of employees and employee participation in decision-making, the Czech privatisation framework did not include any special price reductions, credit arrangements, or pre-emptive rights for employees. Czech policy opted for the voucher concept, with no specific and enterprise structures. It was—and in general it remains—unfavourable to employee participation. Under voucher privatisation, only about 1.5% of the total shares privatised were allocated to employees. Currently, profit–sharing plans are rare, and those which exist are mostly found in foreign-owned companies. Of the existing, rather restrictive, regulation on employee share ownership and (share-based) profit–sharing, only the former have been implemented, but just to a very limited extent.

The Mondragon Group of cooperative enterprises began with a single company and two dozen people in 1955-56. Today, some 60 years later, Mondragon has become a major internationalised network of businesses with a combined work force of over 80 000 employed in 110 cooperatives, 147 subsidiary companies, 8 foundations, 1 benefit society, 10 umbrella organisations and 13 international services all of which are integrated into the Mondragon Group. In 2012, the Mondragon Group network of industrial and retail sales totalled approximately $13billion (total revenue $14billion); its Financial Group (comprised mainly of a cooperative bank, Caja Laboral Popular, and a cooperative social security/insurance organisation, Lagun Aro) had over $23 billion of various financial assets under management. Mondragon Group is the leading producer of domestic appliances and machine tools in Spain, the largest Spanish-owned retail food distribution company in the country (through the Eroski group) and one of the largest suppliers of automotive components in Europe. Among its other products and services, one can also find automated manufacturing cells, electronic components, satellite dishes, medical equipment, large metal structures, industrial presses, bicycles, management and engineering consulting, software development, and on-line training systems just to name the important ones.

Aside from substantial growth and diversification, Mondragon Group has also maintained an impressive record of business longevity and employment stability. This record can be explained by several factors, some of which reflect favourably on Mondragon, and other of which have been sources of criticism. First, the survival rate of new ventures in the group has always been very high, over 90% overall, and nearly 100% in the first 3-4 years. This compares to an approximately 44% four-year survival rate for start-ups of conventional businesses in the United States, and approximately 71% three-year rate in the UK. Second, the group has a strict no-layoff policy for worker-members. Hence, almost all workers coming from the small number of firms that have closed over the years were relocated to other companies of the group. Third, the no-layoff policy further means that enterprises that may not be in serious trouble, but are facing declining demand, do not lay off worker-members but rather transfer them to other businesses in the group that are operating on sound economic bases.

Related to the no-layoff policy, Mondragon seeks to turn around firms that get into trouble in order to protect jobs and ensure community economic stability. A number of Mondragon companies probably would have been closed at one time or another if conventional business criteria had been applied. But because of Mondragon’s business philosophy and commitments, feasibility studies are carried out in problematic firms. Following these studies, many of these problem firms are restructured with the help of sister-companies and Caja Laboral preferential financing. Most of the group’s restructured companies have become again profitable. Anecdotally, the bus body manufacturing cooperative, Irizar—since 2008 not part any more of the Mondragon Group—is an example of that turnaround policy. It was near bankruptcy in the early 1990s, but was turned around with Mondragon institutions’ help and the distinct leadership of Koldo Sarachaga. It is now the second largest manufacturer of bus bodies in Europe and by many financial criteria one of the most successful Guipuzcoan cooperatives.

These three contributing factors to business longevity and employment stability generally reflect favourably on the co-op network’s efforts to ensure social and economic success. However, other Mondragon Group policies—including those related to overseas operations and non-member workers—are more controversial.

The Mondragon Corporation represents a strikingly different and successful approach to our most basic economic institution, the business enterprise. The essence of this approach is expressed in its unusual ownership structure. Enterprises in the Mondragon Corporation are cooperative enterprises; that is, they are owned by the people who work in them.

Mondragon’s economic success and resilience as a group of worker-owned companies are remarkable. Mondragon firms have managed to prosper for over 50 years, the last 30 of which have been highly turbulent, including periods of severe industrial restructuring in the Basque Country as well as in the rest of the developed world.

Two of the defining features of the Mondragon cooperatives throughout their history are related to the idea of a network. The first feature concerns the idea of the network itself. Arizmendiarrieta and his followers early on saw the potential benefits of joining the cooperatives together in a group, or sets of interrelated groups, both to help each other in direct ways and to create “second-degree” network organisations to serve their common needs. The existence of this network of rims and support organisations – an embodiment of the principle of Inter-cooperation – has been fundamental to the Mondragon cooperative experience and central to its long-term success. The second defining feature has been their ability to adapt their network and organisational structures to changing needs and circumstances. Unlike other cooperative companies who operated more or less independently on a day to day basis, Mondragon’s cooperative representatives were together developing overall group policy and as the market grew larger and became more competitive starting in mid-1960s, they joined forces to collaborate in more direct ways, thus shared governance and management structures and services (mainly late 1970s-80s).

Later on, as the markets became more global and Spain was acceded to to the European Economic Community in 1986, it was realised by Mondragon’s management that the many of the old structures and policies were no longer adequate. The Mondragon Group responded to the new conditions in several ways. Two of the most important new organisation principles introduced then were: (a) partial structural unification, meaning by this the creation of central bodies with certain responsibilities and authority in both, governance and the provision of management services to the whole group; and (b) a reorganisation of member firms based on industrial sector as opposed to region (see Appendix, Figure 1). MCC was formally created in 1991, and refined in 2005-2006. It formally gathered all the Mondragon Group enterprises and support organisations under a single umbrella organisation, baptised as the Mondragon Cooperative Corporation (MCC).

The individual cooperative enterprises were distributed among the MCC’s three main business groups – financial, industrial and retail & allied – and, within the industrial group, into 12 divisions. The Mondragon Corporation as a whole and its three groups have governance and management bodies that approximately mirror those that exist at the level of the individual cooperative firm. At the level of Mondragon overall, management functions are carried out by a President and a General Council, which is comprised of the directors of the Financial Group, the Retail Group, the largest divisions of the industrial group, as well as the heads of several of the Corporation’s Central Departments (Finance, Strategic Planning and Technical Affairs, International operations, Legal and Institutional Affairs, Human Resources, innovation, New Business Development, etc). The purpose of this reorganisation was not to centralise control, but to achieve greater economies of scale, technological and business synergies, assistance and strategic planning.

The Caja remains an important institution, but now devotes itself to the banking business more strictly defined, and its development finance/venture capital functions have been transferred to several central funds in the headquarters organisation, primarily Mondragon Investments and the Mondragon Foundation, which are financed by annual investments and both pre- and post-tax contributions by member companies. The consulting and troubleshooting role of the Caja’s Business Services Division also shifted its institutional location, which is explained further below.

The central management bodies in Mondragon are accountable to two representative, democratic governance structures, the Cooperative Congress and its Standing Committee. The Congress is made up of 650 representatives and it debates and establishes basic policy which must be followed by member cooperatives. The Standing Committee (essentially an internal board of directors) consists of 21 people elected from among the previously elected boards of the sectoral groups and divisions. The Standing Committee appoints the senior management official, the President of the General Council, and must approve the president’s choices for the senior managers who sit on the General Council, that is, the group and division directors and the Directors of the Central Departments.

While the Mondragon Corporation structure may appear more similar to that of a conventional conglomerate than the former more decentralised structure did, essential cooperative principles are still in place. Each individual cooperative is, legally, an autonomous unit with democratic governance structures. Each one of them joined the MCC individually and agreed to abide by its policies through a vote of its General Assembly of worker-members (cooperativistas) and can vote to leave the MCC group at any time (as Irizar did in 2008 by a vote of 75% of its cooperativists).