2.3 Advantages of EFP for businesses & employees

The advantages of EFP for busses in Europe, with a view to the EU 2020 Strategy, is to improve their competitiveness and the quality of corporate management by increasing employees’ loyalty and identification with the company.

One of the main positive effects of EFP schemes is with respect to business succession. The EC single market is characterised by an enormous increase in transfers of company ownership, which will affect annually up to 690,000 unquoted companies and 2.8 million jobs annually as a result of an ageing European population. The ESOP model is tailored to the needs of unquoted companies, operating as a vehicle to facilitate transitions in ownership and management of family enterprises and SMEs in order to secure their continuity. It encourages business owners to sell their enterprise to their employees and not to a third party and foresees the gradual acquisition of up to 100% employee ownership.

In this respect it is rather innovative the focus of the EESC on the public sector where they press to encourage development of “model which offers the opportunity of EFP to all vocational groups and forms of enterprises taking into account the specific situation of the public sector.”

Forms of share ownership, where other acquisition of shares via a trusteed fund is financed by a profit share scheme paid in addition to wages, already exist. This is normally a separate intermediary entity, which manages the shareholding held in trust for employees[1]. The governance of these trusts should be direct expression of all employee shareholders, with no influence from the management, in a democratic elective way.

Best practice examples of intermediary entities holding employee shares are: AUCHAN[2] (France); HOMAG AG[3] (Germany); Pfalz Flugzeugwerke (PFW Aerospace AG)[4] (Germany); Voestalpine AG[5] (Austria); Oktogonen Foundation[6] (Sweden); Herend-ESOP[7]ll-ESOP[8] (UK); Eircom-ESOP[9] and Aerlingus-ESOP[10] (Ireland).

[1]              In continental Europe usually a limited company, foundation or association, in the UK and North America a trust.

[2]              Purpose: enhancing loyalty and employee motivation; http://www.groupe-auchan.com/emploi.html.

[3]              Purpose: financing of growth; http://www.homag.com/de-de/career/Seiten/mitarbeiterkapitalbeteiligung.aspx.

[4]              Purpose: EADS spin-off; http://www.netz-bund.de/pages/mitarbges.pdf, p. 32 et seq.

[5]              Purpose: privatisation and strategic shareholding; http://www.voestalpine.com/annualreport0809/en/management_report/employees.html.

[6]              Purpose: enhancing loyalty and employee motivation; see Handelsbanken, Annual Report 2009, http://www.handelsbanken.se/shb/inet/icentsv.nsf/vlookuppics/investor_relations_en_hb_09_eng_ar_rev/$file/hb09eng_medfoto.pdf, pp. 53, 56.

[7]              Purpose: privatisation as well as enhancing loyalty and employee motivation; http://www.herend.com/en/manufactory/story/, lacking details on ESOP, see year 1992.

[8]              Purpose: business succession; http://www.tullis-russell.co.uk/group/about/.

[9]              Purpose: privatisation and strategic shareholding; http://www.esop.eircom.ie/.

[10]           Purpose: privatisation and strategic shareholding; http://www.aerlingus.com/aboutus/investorrelations/shareregister/.

3. Case study – Basque country

Spain—together with Greece—is currently the European country with the highest unemployment rate. However, while salaried employment in the private sector as a whole fell by 19% between 2008 and 2012, the employment in cooperatives fell only by 9%, less than half.

How is this possible? Answers can be searched in the Basque region of Spain, which has the base of one of the largest production cooperatives in the Western world, the Mondragon Cooperative Corporation (MCC), a group of Guipúzcoa based cooperative enterprises.

And there is a reason, why Basque Country makes an excellent case since there are some interesting parallels between the Czech Republic and this region in the north of Spain. It experienced some forty 40 years ago a transition from an authoritarian regime to democracy in some ways comparable to that experienced by Czech society 25 years ago. Second, the Basque Country is today a comparatively wealthy European region, with an important concentration of metallurgic industry and mechanical SMEs.

3.1 Description of the Basque region

The Basque Country is an autonomous community of northern Spain. It includes provinces of Álava, Biscay and Gipuzkoa. In a comparative perspective Guipuzcoa remains one of the most industrial provinces of Spain. According to the provincial Chamber of Commerce, industrial activity and its associated services represent yet nearly 50% of Guipuzcoa’s gross domestic product, a figure would be well above that for Spain and most European countries.

The industry of Guipuzcoa was developed in the 19th century using the comparative advantages represented by the iron and steel available from neighbouring Biscay, a favourable geographic geography close to the French border, a skilled working class, and the availability of the San Sebastian – Pasajes harbour, which greatly facilitates exports of manufactured goods by sea. The industry structure is very similar to that of the Czech Republic as it is based on medium-sized metallurgic manufacturing enterprises with focus on sectors such as small arms and light weapons, home appliances, railroad and tramway locomotives and carriages, steel and machine tools, components for the important Spanish auto industry, autobus body manufacturing, and so on.

The decade 1995-2005 includes the years of the Spanish construction and real estate bubble. In the Basque Country this bubble also existed but by comparison to other Spanish regions (notably Madrid and the Mediterranean coast) was kept within reasonable boundaries. Among the reasons that explain this are: a) the already mentioned comparatively more diversified economy, in which the industrial sector and its related services still keep an important weight, b) the comparatively smaller pressures of the tourist residential sector, and c) last but not least, the much more responsible behaviour of both urban development authorities and managers of public regional financial institutions, the Cajas de Ahorros, which in the Basque country continue to control an important share of the banking and financial services sector.

Being thus comparatively less exposed to the real estate bubble, the Basque Country has been also less hit by the high unemployment rates that have haunted most Spanish regions during the Great Recession of 2009-2013. Actually, registered unemployment figures were high in the Basque Country from the time of the Transition (1976-1980) until about 1995. This was a consequence of the major transformation that the Basque industry had then to go through in the context of Spain’s accession to the European Union. The unemployment rates reached over 20% in 1986, a figure that was similar to that which then existed for Spain as a whole. According to the Eustat, the Basque statistical office, they were still at the level of 20.3% in 1997 (while the corresponding Spanish figure was then 20.7%). The employment figures for 2000 and 2005 showed, however, a major improvement. The unemployment rate for Basque Country fell from 20.3% in 1997 to 8.1% in 2001 (10.6% for Spain) and then to 4.9% in 2005 (9.2% in Spain). The latter figure already reflects the effects of the real estate boom of 2000 -2008 which had a temporary positive impact all over Spain. However, the figure for the whole Basque Country jumped from 4.1% in 2006 (Spain 8.5%) to 10.8% at the end of 2011 (Spain 21.4%) and to 15% in the first half of 2014 (Spain 24.5%). Thus, the unemployment rate in the region significantly increased during the period 2008-2013– five times the figure of 3.3% recorded in 2007.

According to Eurostat, the Statistical Office of the European Union, the average GDP per capita of the EU-27 countries in 2010 could be rounded up to Euro 24,500 (expressed in Purchasing Power Standards, PPS). If this value is used as the reference (100%) then the relative GDP per capita of the Basque country is 132%. It is the highest for any Spanish region, followed by Madrid, with 129%. The least economically developed Spanish regions of Extremadura and Andalusia have respective values of 67 and 73% of the EU average.

The relative GDP value for Spain as a whole is 99%. The per capita GDP of the Basque Country (expressed in PPS) has been since 2008 consistently higher than the Spanish average by about 30-35%. And the tendency during the current Great Recession (2009-2013) has been for this difference to increase.

The economic development and prosperity of the Basque Country, as measured in terms of GDP per capita is comparable or above that of many Western European countries.   Among the economically developed countries of Western and Northern Europe, Eurostat provides the following figures of relative GDP per capita for 2010: Netherlands (131%), Ireland (129%), Denmark (128%), Sweden (124%), Germany (119%), Belgium (119%), United Kingdom (111%), France (108%) and Italy (101%). Even European regions like Bavaria in Germany or Lombardy in Italy, which count among the most prosperous European regions, have per capita GDP values similar to the figure for the Basque Country. In the case of Bavaria, 135%, and in the case of Lombardy 132%, exactly the same as the value for the Basque Country.[1]

During the 1980’s Basque industry was in need of a major technological transformation to adapt to the single market of the European Union and to a global economy. In fact, unemployment rates in the Basque Country, especially in Biscay, soared in the late 1970’s and early 1980’s above Spanish averages, largely due to lack of competitiveness of many industrial firms and the labour redundancies created by that transformation.

Today the needs for unskilled and semi-skilled labour force in the Basque Country come primarily not from the steel industry but from the service sector. Contrary to what happened during the 20th century, they are being met not by internal immigration within Spain, but by foreign immigration, especially from Latin America and, to a lesser extent, from the Maghreb.

The population of foreign immigrants was quite small at the time of the Transition and it has been steadily increasing since then. In 2011, it did not reach yet 10% of the total population.

[1]              Nationalism, political violence, and the democratic polity: The case of San Sebastian in the Basque Country by Ramiro Cibrian, 2014

3.2 Mondragon Cooperative Corporation (MCC), 3.2.1 Historical Development of the cooperatives and Father José María Arizmendiarrieta

The Basque region is poor and mountainous agricultural land, but in the past it was rich in deposits of iron ore and coal both within its borders and nearby. Thus, an industrial tradition developed quite early. Iron, steel and related industries, metalworking of various kinds as well as shipbuilding, all prospered as early as the 16th and 17th centuries, and then expanded massively with western European industrialisation in the late 19th and first half of the 20th century. Basques benefited from a protected, in practice captive Spanish market and engaged besides in substantial trade with other parts of Europe, with England in particular. Industrial expansion continued through the 20th century until the 1970s when much of the West began to face both precipitous increases in fuel prices and heightened manufacturing competition from newly industrialising countries in Asia and elsewhere.

Mondragon itself was something of a microcosm of these economic trends.[1] The town of Mondragon (now also known by its ancient Euskera name of Arrasate) had been home to Union Cerrajera de Mondragon, a large lock and allied product manufacturing company launched by local elites early in the 20th century. This company was one of the most important industrial firms in Guipuzcoa for many years. As early as 1920 it had over 800 employees. The existence of this firm naturally gave rise to a large number of metalworking and other related businesses in and around the town of Mondragon. By the time the first cooperative of what what was to become the Mondragon Group was founded in the 1950s, the population of the area had a large stock of metal labor skills and knowledge, and was accustomed to the rhythms and requirements of industrial life. These circumstances help to explain why the first cooperatives of the Mondragon Group were industrial firms, as opposed to agricultural, retail or consumer credit organisations, as it has been the case of many cooperative movements in different parts of the world. The group was dominated by industrial firms for its first 35-40 years. Important is the Group’s bank, or credit union, called Caja Laboral Popular (Lankide Aurrezkia in Euskera, the autochthonous Basque language). It was one of the early cooperatives in the group. While it has been operating increasingly as a retail consumer bank, it was initially established to serve first and foremost the financial needs of the and Group firms. In summary, the Basque Country generally and the Mondragon area in particular had a long and sound industrial tradition and this tradition was a key asset in the creation and development of the Mondragon Group. The Spanish Civil War (1936-1939) also played an important role in the history of the cooperative complex. The Basque provinces of Biscay and Guipuzcoa remained loyal to the Spanish Republic—which, although belatedly, had promised greater Basque autonomy—and fought against the Francoist forces. The Spanish Civil War was also a civil war between Basques. Those who supported the Franco side—and there were many of them—enjoyed the spoils of victory and those Basques nationalists and republicans who lost suffered the consequences of defeat.

In 1941, against a background of economic scarcity and anti-republican repression that characterised the aftermath of the Civil War—with the rest of the world immersed in the Second World War and oblivious therefore to the situation in Spain— the Archbishop of Vitoria sent to Mondragon a reform-oriented young priest, Father Jose Maria Arizmendiarrieta. While carrying out his parish duties, Arizmendiarrieta also began to do extra-educational pastoral work while continuing his studies of social science, philosophy and theology. He organised all types of local associations and informal groups of all ages, enjoying the protective umbrella of the Church—which at the time was a rather unconditional allied, if not a part of the Franco regime— and initiated and guided countless local development projects. In fact, he engaged in what can best be described as community development, though he never encouraged people to challenge directly the local or national political and economic power structures. He rarely if ever spoke of resistance, but rather of self-help and development, responsibility, local initiative, and commitment to the community.

Participation is another defining element of his activities in Mondragon. He encouraged local groups to be self-managing, to take initiatives, to set up autonomous formal or informal associations, to establish schedules of meetings, choose their own leadership and hold the leaders accountable.

He came to see education as one of his most fundamental community development tasks. Since there was virtually no secondary education in Mondragon at the time, in 1943, two years after his arrival and with the help of a number of local residents, he established a small vocational-technical school for adolescents. The school grew and expanded its activities, and gradually became a fairly substantial organisation for a small town, coming to serve several hundred students by the 1950s. It later graduated many of the first generation of cooperative leaders during more than a decade.

The priest became an increasingly outspoken and forceful proponent of Catholic Social doctrine in the economic sphere. This doctrine was critical of conventional capitalist economy, business practice and workplace relations, calling for greater cooperation, economic justice, commitment to the community, and opportunities for human development both in the economy in general, as well as in the structure and functioning of the enterprise in particular.

A core group of people, mostly youth, became followers and even disciples of Father Arizmendiarrieta. Five members of that core group, graduates of his technical school, went on to earn degrees in engineering through correspondence courses. Several of them went eventually to work in the Union Cerrajera. They offered suggestions to company leaders about worker participation and profit-sharing, but management wanted then to hear no part of it. The five soon grew frustrated and left Union Cerrajera to pursue their own project. In 1955-56, they formed a business called Ulgor making simple paraffin stoves. Ulgor had no formal cooperative structures when it was founded in 1955, but with the help of Arizmendiarriteta’s research and negotiations with government officials, a cooperative corporate structure was developed and formalised in the next few years.

By the late 1950s and early 1960s, the Spanish economy had substantially recovered from the devastation of the Civil War and with hindsight ill-advised policies implemented by the Franco regime after World War II. The population had significant pent-up savings and growing disposable incomes. New businesses found relatively good local and regional markets for their goods and Ulgor was no exception. Moreover, the Spanish market was highly tariff-protected during the Franco regime. It was then de facto a captive market for Basque and Catalan industrialists. Prohibitively high tariffs kept most foreign goods out of reach of the mass of consumers, but the largely based market economy existing within Spain did impose a significant measure of competitive discipline. Thus, the new Mondragon co-ops were able to establish themselves and grow to a certain level of business maturity in a moderately competitive domestic economic environment, fully protected from foreign competition.

Ulgor experienced substantial success, as did several other businesses that had been formed by friends, associates or others who wanted to imitate the Ulgor experience. The group, in effect, fairly quickly diversified from domestic appliances to forge and foundry products, electrical and industrial components and machine tools. This diversification helped enormously in later years. During troughs in the business cycle or when other problems arouse, share-holding workers the so-called cooperativists, could easily shift from company to company as needed.

Another phenomenon related to the historical context also seems to have contributed to facilitate the start-up of new enterprises. The prevailing economic conditions of Spain and the tolerance enjoyed by the Catholic Church within Franco’s regime help significantly to explain the success of the first Mondragon cooperatives during the late 1950’s and the 1960’s. Thus, a number of different forces contributed to the successful launching of the first of cooperative companies in Mondragon: a charismatic leader working in an area with a strong industrial tradition; a growing, but highly tariff-protected market economy; and, last but not least, a social reaction who sought to develop areas of socio economic autonomy outside Franco’s authoritarian regime. These things together with sound and effective business operations gave Mondragon firms healthy profit margins during the first decade and more. The enterprises were able to establish themselves; the group was able to finance a good portion of its growth out of earnings, and new firms and initiatives institutions had enough support to get off the ground.

Despite solid earnings in their first years, Father Arizmendiarrieta soon convinced the group that they should have a direct source of capital – their own cooperative bank – and in 1959 helped them establish the Caja Laboral Popular-Lankide Aurrezkia (Working People’s Bank). His followers were initially opposed, feeling enough overwhelmed with the work required to consolidate their new businesses, but the priest’s efforts to persuade them eventually won the day. Caja Laboral became crucially important to the development of the cooperatives over the next generation. Over the years, a considerable number of other support institutions were created with the encouragement, and frequently, at least in part, on the initiative of Arizmendiarrieta. He worked in the Polytechnic School and remained influential in the cooperative group until his death in 1976. His life and thoughts are regularly celebrated by the Mondragon network and many of its share-holding members, the so called “coperativistas”.

[1]              Generational Perspectives on Employee Ownership: The Relationship between Age and Satisfaction with Cooperative ownership in Mondragón by Frederick M. Freundlich, 2009

3.2 Mondragon Cooperative Corporation (MCC), 3.2.2 Mondragon Cooperatives: Current Size and Scope

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.

3.2 Mondragon Cooperative Corporation (MCC), 3.2.3 The Mondragon Network Structure

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).

Mondragon Network Structure

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).

3.2 Mondragon Cooperative Corporation (MCC), 3.2.4 Key features of the Mondragon Cooperative Experience

A network of enterprises and support institutions.

Mondragon is a complex, highly integrated network of diverse enterprises and support organisation across all major sectors of the economy—manufacturing, service, retail, financial. From the earliest years of Mondragon’s history, the cooperative enterprises joined together to establish a number of common institutions aimed to support their activity, to create what are called “second degree” cooperatives. Some of these are simply subgroups of firms, but most of them are enterprises on their own right, and were created in the first place to serve the needs of the rank and file cooperatives in the group and only secondarily to engage in independent business activity. This is a critical point: several service organisations were formed not so much to pursue independent business goals but rather specifically to help to consolidate the network of cooperatives and ensure the success of its member firms.

Today, as the group’s rank and file cooperatives have become mature and successful and have less need for support organisations by comparison to younger firms of the group, each of these support organisations has evolved sustainably and has objectives far beyond those of simply supporting the industrial firms of the group. They still provide critical support and coordination functions and will surely continue to do so in the foreseeable future, albeit perhaps in somewhat different configurations.

There are 5 categories of these support institutions:

Finance & Technical Assistance – the Caja Laboral: Worker-owned firms have traditionally encountered serious difficulty in obtaining adequate financing. Without a doubt, the Caja Laboral played fundamentally important role in supporting the development of the co-ops by offering patient capital, and by understanding and catering to the financial needs of both, new cooperative enterprises and other cooperatives experiencing difficulties. The Caja fulfilled another key supporting role over the years through a unique division mentioned above, the “Business Services Division”. This division provided extensive management consulting and technical assistance to new ventures and to troubled firms in the network. Formerly via Caja Laboral, later via the central funds, Mondragon Investments and Mondragon Foundation, provide patient seed or venture capital, and other kinds of funding; while the staff of Mondragon’s sectoral divisions and other Central Departments provide technical assistance together with a new cooperative enterprise, LKS Consulting.

Regional / Sectoral Subgroups: Mondragon firms can benefit from various synergies, economies of scale and mutual support from technological R&D through new business development to volume purchasing and the provision of joint services such as strategic planning, legal, training, etc.

Social Security & Insurance – Lagun Aro: Funded by monthly contributions from co-ops and workers’ pay-checks, also created another pool of patient capital, that is, a fund that needed to be available primarily to cover retirement and illness, but partly also for financing new and existing cooperative enterprises.

Research & Development: Technological R & D cooperative Ikerlan was established in 1974 and since then other 11 similar organisations have been set up.

Education: The vocational-technical secondary school, additional technical school, two post-secondary degree programs in engineering and business administration, and engineering college were set up. Eventually, Mondragon University, a private, non-profit, cooperatively-structured university was created in 1997.

3.2 Mondragon Cooperative Corporation (MCC), 3.2.5 Cooperative Structure

The legal-organisational structure of individual cooperative firms, that is, the definition of their internal authority relations, is a fundamental component of their identity, a basic influence on cooperative ownership satisfaction. It directly embodies the democratic and egalitarian principles on which Mondragon is based (see figure 2 in appendix).

Cooperative Structure



3.2 Mondragon Cooperative Corporation (MCC), 3.2.6 Cooperative Policy – Compensation, (Re)Employment and Profit Distribution

Along with democratic governance, egalitarianism is important for cooperative philosophy and it is put into practice through a policy of remunerative solidarity, that is, a relatively compressed compensation scale from 6:1 (SMEs 4.5:1, financial institutions 9:1 or 70% of market). It limits the difference between executive positions and the lowest paid employees.

Also important cooperative policy concerns employment stability and lay-offs. A worker-member cannot be let go for motives related to the company’s economic performance and must be transferred to another coop. If not, they are paid 80% of their wages from Lagun Aro until such a transfer or return to work is possible.

Last but not least, distribution of profit begins with a worker-cooperativist`s internal cooperative account where the initial deposit made is not a year-end disbursed profit, but the cooperativist’s membership fee. In the MCC group this fee currently amounts to $16,000-$17,000 and can be deducted from the worker’s pay-check monthly and / or borrowed and repaid over several years if necessary. 25% of the membership fee is immediately transferred to the co-op’s collective reserve and cannot be recovered by the worker. There are in place schemes for solidarity in profit distribution as well as in loss distribution whenever losses happen. At the end of each fiscal year, after taxes, the co-op divides its surplus into three categories: 1) collective reserves, which amount to 45%; 2) distribution to worker-cooperativists, another 45%; and 3) donations to Non-Profit Organisations, the remaining 10%. Profits disbursed to cooperativists accumulate over the years in their personal internal accounts to which they do not have immediate access and for which they are paid by the co-operatives an annual interest of 7%. The accumulated savings are available to cooperativists only when they retire or leave MCC. These funds (a new concept of property as they are not individually nor collectively owned) can be used for venture capital purposes to finance new businesses of the group.

3.3 Problems and Challenges Facing Mondragon, 3.3.1 Overseas Operations and Conventional Subsidiaries

When operating outside the Basque country, the co-ops have purchased or created conventional companies as fully-owned subsidiaries or established joint ventures with conventional firms. A number of these are located in other parts of Spain, or other Western European countries, but most are in the transition economies of Central and Eastern Europe and in emerging countries on other continents. There was an internal policy to spread the co-op principles to those new entities, but failed to be implemented, mainly because of certain resistance from the member and managers, but also due to sheer difficulty of putting these ideas into practice, plain economic self-interest and fear of failure implications.

The group did create joint ventures with conventional companies overseas partly to have partners with whom to share the investment burden, partly because of the local partners’ knowledge of the sector and their familiarity with local business culture, governance practice and legal environments. Many in MCC believe the group should work more closely with cooperative movements in the countries where it wants to locate. But cooperative firms in some countries are only nominally cooperatives and in certain cases have been historically affiliated with repressive regimes, or with business and political efforts to undermine independent trade union and labor movements. According to Jesús Herrasti, former director of international operations, the most important asset for starting a cooperative firm is a group of committed cooperativists. In many countries people seem to have little knowledge of how Cooperatives work and no apparent interest in worker-ownership schemes. To launch cooperatives in those countries requires a long-term, large educational effort both both in communities and in enterprises.

Mondragon University’s Institute for Cooperative Studies – Lanki–, among other organisations, has begun to consider strategies for how these education and community development issues could be addressed overseas, but most recognise, again, that they constitute a major undertaking that will take many years to develop, adapt and implement in different cultures in different parts of the world.

There are also legal and financial complications of establishing worker-owned organisations successfully overseas that can vary from country to country and sector to sector. Many countries, for example, do not have legislation that recognises the worker-cooperative legal form or that facilitates worker participation in capital ownership. Starting firms also faces the barrier of start-up losses; that is, most new operations lose money for at least the first few years. To many in Mondragon it borders on outlandish to suggest that the co-ops try to persuade foreign workers, most with very modest incomes, to make investments in co-ops that would only lose value for some period of years. Different groups in Mondragon are analysing legal and financial arrangements that might overcome these barriers.