Could Co-Ops Solve Income Inequality?

When bike riders test the work done at the Orbea factory, they get to ride through roads like these, which are etched into the cloud-capped limestone mountains of Spain’s Leniz valley. photo courtesy of Orbea

In the Basque country of Northern Spain, the Mondragon Corporation — the world’s largest co-operative business enterprise — has found ways to weather economic crises, avoid severe income inequality, and build long-term worker loyalty. Why don’t more businesses follow “the Mondragon model”?

By ROBERTO LOVATO

I’m driving on a circuitous, narrow country road that leads to Aretxabaleta, one of many medieval Basque towns in the storied Leniz valley. Up above, mist-sodden forests and dreamy trails thread through cloud-capped limestone mountains, the rocky backdrop to towns teeming with legends — and a sequence of economic crises, ancient and modern. The Basque landscape is so breathtaking that several Game of Thrones episodes were filmed here. My reason for visiting is a little different, however. I’ve come to see whether the region’s most modern economic legend, the Mondragon Corporation, is all it’s cracked up to be.

Mondragon’s 80,818 workers spread across 98 businesses operating 143 businesses operating 77 production plants in 22 countries, which makes it the most successful experiment in worker ownership in history. Just the idea that I will soon visit this enterprise has the twenty-something former co-op coordinator in me pressing the gas pedal to get there sooner.

Several studies have concluded that workers belonging to co-operatives identify more strongly with the business than those in more traditional workplaces, and work harder.

Though renowned in the growing world of alternative economies, the Mondragon experiment is still little-known outside of Spain. Yet its accomplishments are undeniable: eight educational institutions, an insurance company, several high-tech firms, electronic car-part manufacturers, consulting firms and major retailers, including Eroski, the is supermarket chain whose 33,000-plus workers and 1,651 outlets make it one of the “global powers of retailing.” Laboral Kutxa, the Mondragon Corporation’s financial arm, is one of the largest savings banks in Spain; it, too, gets high ratings, consistently ranking as one of Spain’s safest, best-run financial institutions.

While these achievements are impressive, I’m here to see much more. Having gone on, after two years as a co-op manager, to earn an MBA and then work as a business consultant, I want to understand how the famed “Mondragon model” dealt with the inevitable economic crises that all economies and businesses face. Beyond that, I want to figure out if and how a business model of this kind can solve some of the longstanding economic problems that plague the U.S., especially the ever-expanding crisis of income inequality.

The Escuela de Armería (Armory school) in Eibar, once the world famous “City of Guns.” The Escuela was the main school in Basque country to formally combine theory and practice with weapons manufacturing, the major industry in the area for centuries. photo courtesy of Mondragon Corporation

Several minutes later, I’ve reached my destination: a 14th-Century, formerly fortified castle called Otálora, which has become a crucial part of the Mondragon complex. Now owned by Laboral Kutxa, the castle has been transformed into a training center for Mondragon’s worker-owners, and their guests.

The medieval streets of Arrasate (named Mondragón by the Spanish) bear the marks of many cultures, including the Romans, Visigoths, Vandals, Franks, and the Basques. photo by Roberto Lovato

Greeting me as I approach the castle is Ander Etxeberria, Mondragon’s gregarious, mustachioed Director of Dissemination, the person charged with promoting co-operativism worldwide. Etxeberria’s job has been made easier by articles like the recent story in Harvard Business Review titled “Why the U.S. Needs More Worker-Owned Companies.” Several studies, including an unprecedented 2005 National Bureau of Economic Research survey of 40,000 workers, have concluded that workers belonging to co-operatives, employee-stock-ownership plans (ESOPs) and group-based pay schemes identify more strongly with the business than those in more traditional workplaces, and, as a result, work harder.

“Co-ops tend to be better at helping people get through economic crisis,” says Roy Messing, Director of Kent State Co-operative Development Center (a department started with a Rural Co-operative Development grant from the U.S. Department of Agriculture). “Banding together, using collective capabilities makes it a lot easier than slugging it out on your own.”

But that just scratches the surface of what co-ops deliver, in both opportunities and challenges. As an example, one of the biggest plusses to working in a co-op, which is by definition owned by the workers, is that every employee is entitled to his or her say. But having a say also leads to responsibilities; meetings therefore are constant, frequently stretching far past the work-day. Co-ops also tend to have an uphill battle as they seek to grow and attract financing, primarily because the economic system has long been structured to work with more traditional capitalist enterprises. But for the growing number of workers willing to put in the extra effort that the co-operative challenge demands, the rewards, I soon learned, can be remarkable.

The coat of arms of the Otálora family, who presided over a 14th Century blockhouse fortress that is one of Mondragon’s training facilities. The Otálora name is derived from a yellow flower that’s native to the region. photo by Roberto Lovato

THE PRICE OF RESPONSIBILITY

In the U.S., the CEO-to-worker pay ratio averages 339 to 1, with the upper end of the spectrum surpassing 5,000 to 1. According to a Stanford University survey, most U.S. workers think a fair executive-to-worker pay ratio would be 6 to 1.

A few minutes after we settle into one of the cozy cobblestone rooms of the castle, Etxeberria leads a geographically diverse delegation from the U.S. in a seminar on co-operative basics.

One delegate mentions that Mondragon, and co-operatives in general, are being seriously considered as an alternative business model in the U.S. One of the reasons, apparently, is that the co-op structure offers a way to save a number of family businesses, which are run by baby boomers and are on the brink of closure. In November, 2018, MarketWatchreported that a third of the nation’s baby boomers who run their own businesses are planning to retire in the next five years. And more than a third have no children interested or available to take the reins, or any other plan for keeping the business open. This looming crisis led, in August, 2018, to the creation, in a bi-partisan vote, of the Main Street Employee Ownership Act(MSEOA), which enables the Small Business Administration to provide technical assistance and loans for employee-ownership conversions.

Throughout his life, Jose MariaArizmendiarrieta, Mondragon’s founder, preferred traveling by bike. Called the “priest on the bike” by locals, Arizmendiarrieta rode from one community to another, visiting factories, schools, churches, and homes to spread his teachings on co-operativism. Only after age and ailments befell him did he trade in his bike for a scooter. photo courtesy of Mondragon Corporation

For this to work, of course, the employees need to learn how to run their businesses, some of which are multi-billion-dollar global enterprises. That’s why Mondragon puts extraordinary amounts of time and resources into worker training, which it considers the sine qua non of co-op success. The company also wants workers to appreciate the struggle and sacrifice that created their opportunities. That painful history, which spawned the culture of selflessness that is Mondragon’s foundation, permeates the atmosphere throughout this castle.

THE CO-OP PRIEST

Ileave the seminar to check out the museum upstairs. In a small, dark room packed with pictures, a library, and other documents, I notice a yellowed document that is the most banal of bureaucratic texts: a list.

I assume it’s an old factory order, but on closer inspection I discover that it’s one of many lists which, according to historical texts, contain 1,788 names. These were the Basque men and women arrested and jailed in the notorious Larrínaga prison by the Nationalist forces of General and Spain’s eventual dictator Francisco Franco. On this particular document, which was an executioner’s list, most of those listed were either shot or placed by the Nationalist army in a garrote vil, a medieval device used to torture and then strangle its victims with rope, chain, wire, or fishing line.

Whether by the hand of God or by the equally invisible hand of the market, one of the people on this list who was not executed was Father Jose Maria Arizmendiarrieta, Mondragon’s founder — and, in 2015, a man declared “venerable” by Pope Francis, a major step toward Arizmendiarrieta’s nomination to Catholic sainthood as the “Apostle of Co-operation.”

Members of the US-based Democracy Collaborative listen to a presentation by Ana Aguirre, the 27-year-old co-founder and business developer of Tazebaez. The business bills more than $2 million a year for business innovation, product, and service design. Tazebaez grew out of students’ first-year requirements at Mondragon University’s business school. photo by Roberto Lovato

In several pictures, Arizmendiarrieta is wearing a Saturno felt clergy hat that, along with his chiseled, gaunt face and thin frame, make him look like a bespectacled, clean-cut Basque version of Picasso’s iconic black on white drawing of Don Quixote. I spot old black and white stills of Arizmendiarrieta’s fellow priests from the town of Vitoria, who taught him about the church’s mission: the “redemption of the worker’s world.” Next to these are pictures of rickety houses, skinny children, and lots of sad faces — signs of the dark times descending on Basque country and all of Spain in the 1920s and 1930s.

In the face of this struggle, Arizmendiarrieta joined the Republican army, in 1936, to fight the nationalist forces, who eventually captured and jailed the young priest. Even though he was accused of “rebellion,” and his comrades executed, Arizmendiarrieta was sentenced to a month of imprisonment but was ultimately absolved; he was then forced into the army and sent to Burgos. While it’s tempting to ascribe some moral reasoning to his liberation, it was probably the result of bad business practices: the fascistas lacked the documentation to prove that Arizmendiarrieta received payment from the “subversive” papers he wrote for. So he simply returned to his church, which had become one of the few institutions able to provide cover from the encroaching tyranny.

Once freed, Arizmendiarrieta focused his ministry on aiding workers organizations in Basque country, most of which were forced to go underground. Strikes and collective bargaining were outlawed. Workers and their communities were regularly harassed, surveilled and jailed. Those who labored in the region were forced to work 12-hour work days for below survival income while others suffered from the era’s high unemployment, overcrowded housing, and extraordinarily high rates of tuberculosis.

EDUCATION!

This mural is one of hundreds coloring towns and cities in Basque country. Previously outlawed along with the Basque language during the Franco era, the murals became, and remain, important markers of Basque nationalism. And, like this mural in the city of Mondragón, they also celebrate the value of cooperative labor. photo by Roberto Lovato

Especially important to the rise of Mondragon was the lack of social mobility in the early days of the Franco regime, a fact that became obvious to any worker who aspired to get an education. There was one custom in particular that the museum’s curators made sure the locals and other visitors could never to forget: during the early twentieth century and much of the following decades of the Franco era, businesses in Basque country excluded anyone but the children, specifically the sons, of business managers from getting an education.

GRACE UNDER PRESSURE

In 2008, recession hit Spain as hard as anyplace else. At the time, Spain was in the midst of a housing bubble, which promptly exploded. That sent the country into an economic tailspin that led to unemployment levels of more than 25 %. Yet in Alto Deba, the county where Mondragon and many of its co-operatives are headquartered, unemployment dropped to 9.87%, almost a third of the national average, between 2009 and 2010. Meanwhile, in the U.S., 66% of ESOP companies either grew or remained stable during the crash of 2009, according to a comprehensive study by the National Center for Employee Stock Ownership .

Other research on co-ops seems to back this up. Several studies comparing performance between co-operatives and more traditionally-run businesses find that co-ops fare better in times of crisis. One 2017 study from Rutgers University’s School of Management and Labor Relations found that traditional businesses converted to worker and employee ownership models increased profits by up to 14%.

The Orca is Orbea’s flagship road bike. Designed for professional bikers, the Orca reflects Orbea’s decision to become one of the bike world’s early adopters of carbon frames–an indication that collective decision-making and innovation can go together. photo courtesy of Orbea

Unlike workers in traditional firms, Mondragon’s worker-owners have two critical rights that make for a different workplace: equity and the right to have a say in the hiring and firing of their CEOs. While the management team skews male, men and women at Mondragon are paid the same amount for the same work — which is not the case almost anywhere else, including the U.S. It also helps that all employees eat lunch in the same staff lunch area. This includes the CEOs, whose votes have the same power in Mondragon’s General Assembly as the janitor sitting across from them.

At the end of the year, Mondragon’s worker-owners collectively create a balance sheet for the coming year. That of course requires skill, which is why education matters so much in a co-op. Priority one is reinvesting in the company: 20% of any profits are to be reinvested in an obligatory reserve fund; another 30% goes into another, voluntary reserve; 10% is used for social, educational and other programs to benefit the co-operative’s local community; and the remaining 40% is placed in the co-op equivalent of a pension fund.

The self-sacrifice has clearly paid off. “When Father Arizmendiarrieta came to Mondragón, it was the poorest area of Spain. Today it is the wealthiest,” writes Jill Bamberg, co-founder of the Bainbridge Institute who visited the enterprise in 2017. And the majority of the community’s residents are worker-owners at Mondragon.

In times of crisis, workers in Mondragon’s coops have even slashed their wages instead of laying off workers. “The most difficult recent decision we had to take was the closure of Fagor,” says Maria Retegui, the 46-year-old customer service manager at Orbea, a bicycle manufacturing operation in Mallabia that is one of Mondragón’s most successful co-ops (see sidebar, “From Guns to Bicycles”). Retegui, who is the daughter of the former Rector of the University, who worked with Arizmendiarrieta, remembers the chaos of that period acutely.

Maria Retegui, who handles Orbea’s customer service operations, shows off one of the bikes that she and her family have ridden in and around her hometown of Aretxabaleta, where her father was a close, longtime friend of Father José María Arizmendiarrieta. Almost 50 percent of Mondragon worker-owners are women. photo courtesy of Orbea

THE RISE AND FALL OF A CO-OP

In 2013, the fall of Fagor Electrodomésticos co-operative, once Spain’s largest electrical appliances manufacturer and one of the first co-operatives in the Corporation, turned into a referendum on the “Mondragon model,” and global co-operativism in general. (It should noted that two other Fagor ventures have survived just fine; the Fagor story in this account therefore refers only to Fagor Electrodomésticos.) The media in Spain and elsewhere followed the Economist in declaring that “one of the (Mondragon) group’s key principles — of solidarity among its 110 constituent co-ops — has found its limit.” The reality, of course, was more complicated.

Fagor’s difficulties started with the 2008 crash, which combined with intense competition from Chinese appliances flooding the European market. That created a threat not just to Fagor but all of Mondragon.

“At first,” Retegui explains, “we tried to support them (Fagor) in managing their way out of the crisis.” This initial, internal line of defense led Fagor workers to vote to slash their wages by 20 percent. Unfortunately, Fagor’s internal firewall fell.

Acting swiftly, Retegui and the 649 other members of Mondragon’s Co-operative Congress (one of the Corporation’s primary decision making bodies) met in May 2013, where they approved the establishment of the Fondo de Restructuración y Empleo Societario (or the Fund for Restructuring and Company Employment). Together, the Corporation’s 103 co-operatives donated more than €70 million ($90 million) into a self-imposed bailout fund to help restructure Fagor. But that didn’t stop the bleeding. A few months later, after Fagor debt reached €850m ($1.2 billion). In total, Mondragon pumped €300 million into the failing company.

Jokin Diez is one of about 180 worker-owners at Orbea’s ultra-modern new facility, at the company’s headquarters in Malabia. photo by Roberto Lovato

Eventually, the organization’s co-operative spirit was forced to deploy another instrument in its toolbox — making a difficult decision in the interests of the whole. In November 2013, the General Assembly voted to reject the Fagor worker’s request for another €170m bailout.

“The market perception was that [Fagor] was going to drag all the other co-operatives down with it,” Txomin García, the CEO of Laboral Kutxa, Mondragon’s financial arm, told El Pais, Spain’s largest daily. “But what the market didn’t know was that we had designed firewalls to prevent contagion.”

In November, 2013, the General Council voted, with the support of Mondragon’s co-operatives and their members, to let its flagship sink into bankruptcy so the rest of the multi-billion dollar enterprise could be saved. To do this, Retegui and the other co-operativistas provided the Fagor workers a battery of social and other services. During the next few years, Mondragon found jobs for laid-off workers at its other co-operatives. Today, only about 100 of Fagor’s 1,800 employees still have no work.

To find out what we discovered when we asked the question, “Can a Co-op Work in Cleveland?” and explored “The Co-ops of Tomorrow” read the full article in the Craftsmanship Quarterly “Craft of Community, Part Two,” Winter 2019 issue, here.

Roberto Lovato is a writer and journalist based at the San Francisco Writers Grotto. His work focuses on immigration, the drug war, national security, and climate change. His previous article for Craftsmanship Quarterly was “The Hydraulic Genius of Shari’ah Law.” He is currently teaching at the University of California, Los Angeles.

Multi-media online magazine using long-form storytelling to give artisans & innovators a voice and bring new meaning to traditional & innovative craftsmanship.

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