What the World’s Largest Cooperative Corporation Has to Teach Capitalism about Solving Social Inequality

(originally published on Linked In on August 2, 2016)

After the First European B Corp Summit in Rome, I flew to Basque Country in Spain to visit the world’s largest cooperative corporation, Mondragon.

Silicon Valley has had some legendary founders -William Hewlett and David Packard of HP, Steve Jobs of Apple, Sergey Brin and Larry Page of Google – but Mondragon’s founder, Juan Maria Arizmendiarreta, eclipses them all. Arizmendiarretta, a Catholic priest, inspired a 60 year-old, corporate colossus without ever raising venture capital, owning any interest in the company, or even working directly for it.

To put his legend in the context of new paradigm leadership discussed in my last post, Arizmendiarreta had two crucial roles in founding Mondragon, “holding the space” and “role modeling behaviors”.  “Holding the space” meant that he inspired a corporation where workers are safe to show up fully as who they are and are becoming.  “Role modeling behaviors” meant that he lived by the core values of the business. New paradigm leadership is nothing new: there have always been extraordinary leaders who led from the heart.

 Juan Maria Arizmendiarreta: The Prototypical New Paradigm Leader

Juan Maria Arizmendiarreta was 25 when he arrived in Arraste-Mondragon as a curate in 1941. Spain was a disaster after the civil war of 1936-9 and there was massive social inequality. The world was in crisis and the young priest set about to fix it with no assets except his beliefs in the dignity of the human person, solidarity, work and education. As a man of the cloth, he naturally led from the heart. In addition, he had an abundance mindset, believing that there would more than enough for everyone if only the wealth could be distributed more fairly.

Presence: Holding the Space

Arizmendiarreta was everywhere.  A tireless worker, he had three principal roles: as a curate, as a teacher, and as an empowering community organizer First and foremost, he saw himself as a priest, giving confessions and presiding over church services. Second, he founded, ran and taught at the Escuela Profesional, which provided professional education for young people from the town. Finally, he organized and managed various community activities for his students. He produced Shakespeare plays and musicals, started an annual Santa Claus parade and football club, organized debates and even founded a radio station. He uplifted his entire community.

Values: Modeling the Behaviors

Arizmendiarretta was absolutely clear about his values, which remain Mondragon’s core values today.  He spoke to his students for 20 minutes every day about his philosophy and shared his values in his sermons:

Human Dignity

With respect to human dignity, Arizmendiarreta believed that God is sacred and, therefore, we are all sacred because we are all sons and daughters of God. No one would be sacrificed in his revolution.

Work

Arizmendiarreta believed that because God made the world but did not finish it, it is up to us to finish it and build a better one. No one worked harder to build a better world in Arraste-Mondragon than Arizmendiarreta. His belief that work is a positive thing was perfectly aligned with Basque culture which treats work as noble and beneath no one. Arizmendiarreta saw work as a way to develop oneself.  For him, the purpose of work is to build a better community

Solidarity

Arizmendiarretta sought to improve the harsh economic conditions for workers and their families and reduce the disparity of incomes and power between those in the town who owned the businesses and those who worked in them. Factory workers were paid low salaries while the owners made big profits and engaged in corporate paternalism. They had a company store which offered low priced food to workers, a community swimming pool and a school.  For Arizmendiaretta, these trickle-down gestures didn’t fix the underlying problem of social inequality.

Arizmendiaretta saw that workers had no power and tried to put more power in the hands of the workers. He saw two options:  work from top to bottom by taking power from those in power or work from the bottom up by changing people.  He was a fearless social activist. He spent ten years giving lectures and sermons urging business owners to be more inclusive of workers but none was willing to change. In 1953-1954 the owners of the largest company in town wanted to raise capital and Arizmendiarreta asked them if they would sell stock to the workers at a discount. After they refused, he concluded that it was not possible to change a big company.

Education

Happily, he had also been working from the bottom up to create a new man and woman using work and education as the tools. Arizmeniarfeta believed that universal access to professional education is essential for a healthy and prosperous society. After the town elites had rebuffed his attempts to open the existing school to everyone, in 1943 he founded the Escuela Profesional to teach technical engineering to young people.  Arizmendiarreta believed that It is human nature to identify problems, and he used education as a tool to empower people to propose solutions to problems and implement them.

From Humble Beginnings to A Self-Organizing Global Enterprise

In 1956, Arizmendiarreta encouraged and inspired five of his former engineering students to start the first cooperative, Ulgor, which didn’t formally organize as a cooperative corporation until 1958.  When bank financing was unavailable to the new cooperative, Arizmendiarreta was undeterred and inspired the creation of a bank and credit union, Caja Laboral, in 1959.  Many other cooperatives followed, including a health and welfare mutual for workers, Lagun Aro, in 1959, a consumer cooperative, Eroski, in 1969, and a research center, Ikerlan, in 1974. In 1987, the cooperatives collectively organized under the Mondragon Cooperative Group and in 1991 re-organized in their current collective form, the Mondragon Cooperative Corporation. In 1997, the Escuela Profesional became Mondragon University.

Today, Mondragon is a massive global enterprise comprised of 103 cooperatives with 157 subsidiary corporations spread across four principal groups: finance, industry, retail and knowledge. Mondragon had more than 12 Billion Euros of revenue in 2015, with Eroski Group, now a food retailer, being the largest individual cooperative with 6.27 billion Euros of revenue.  To put things in perspective, America’s largest consumer-owned cooperative, REI, had approximately $2.4 billion in revenue in 2015.

Arizmendiarreta’s Values in Action

From the first, Mondragon’s cooperatives have embraced and embodied Arizmendiarreta’s values. Unlike HP whose HP Way gradually disappeared after the founders retired, Mondragon has successfully perpetuated its founder’s values.  The cooperative corporate form and related law provide legal architecture that is aligned with these values and support their continuation. Mondragon derives its four guiding principles from Arizmendiarreta’s core values: cooperation, which means that workers are the owners and protagonists; participation, which expresses a commitment to democratic management; social responsibility, which is the distribution of wealth based on solidarity and involvement in the community; and innovation, which means constant renewal.  These principles are distilled into Mondragon’s maxim: Humanity at Work.

The cooperative’s mission is to improve the community, to increase competitiveness, to satisfy customers, and to create wealth within society through entrepreneurial development and job creation, preferably through membership/jobs in cooperatives. Today, Mondragon strives to create a better society by creating high quality jobs for now and the future.

Corporate Democracy in Action

Mondragon’s corporate governance structure is more democratic than the traditional chain-of-command architecture because its employees run the company. Unlike the typical limited liability corporation controlled by its stockholders, who often have only a disassociated financial relationship with the business, Mondragon is owned and controlled by its worker members.

Mondragon’s governance structure is based on two basic democratic rights – the right to vote and the right to be elected.  Each of Mondragon’s 74,335 worker members gets one vote.  The basic concept is: worker = member = owner. Unlike in limited liability corporations, the workers own the cooperative and non-members can’t invest in it.

Every worker member is a voting member of The General Assembly, which meets once or twice per year to elect the Governing Council. The Governing Council, which is comprised of 6 or 7 full-time workers, then selects the General Manager, who works full-time on management. The General Manager appoints the members of the Management Council, which appoints the Managers of the individual cooperatives.  The Governing Council in turn approves the Managers who have been selected by the Management Council.  The General Manager and the Management Council determine the pay scale and individual salaries.  A Social Council assures the diversity of the Governing Council.  Mondragon has a training center to train workers elected to management and a management consulting company, LKS, which can provide specialized expertise to the individual cooperatives.

The net result of Mondragon’s democratic governing structure is that everyone participates in management and feels like part of the company. Workers feel empowered because they work for themselves and their co-workers, not for distant stockholders and super millionaire executives. Workers make good money, have an employer that encourages them to self-actualize, and have job security because workers are not fired. My host Ander Entxebarria expressed this spirit well, “I am lucky to work in a cooperative and want to let others have the same opportunity when I leave.  I work in a group until I retire.  If there isn’t work for me in my group, there will be work for me in another.”

Solidarity in Action

Mondragon’s equalitarian approach to employee ownership and compensation delivers a fairer and more even distribution of wealth than in most conventional corporations and suggests one way capitalism can evolve to deliver a better distribution of wealth and prosperity. In contrast to US corporations where average CEO pay is an estimated 204 times the pay of the median paid worker or Spain where average CEO pay is an estimated 140 times the pay of the lowest paid worker, Mondragon pays its highest paid person six times its lowest paid worker.  Some forward thinking US companies such as Whole Foods, which has capped executive pay at 19 times the average worker’s pay, have adopted similar compensation systems.

To assure the continuity of its culture and the perpetuation of its values, Mondragon requires potential worker members to work for a cooperative for a year or two as a contractor before he or she can become a member. There is no exam or formal assessment. By working on a temporary basis, a potential member becomes known and it becomes clear whether or not he embodies the cooperative’s values, has the competency to do the job and is innovative. Currently, 85% of workers are members, 15 % are temporary contractors.

When hired, each Mondragon worker is assigned an index number from 1-6, which establishes where he or she fits on the pay scale. Regular workers have index numbers ranging from 1 to 2.5 and managers have index numbers ranging from 2.5 to 6.  Approximately 90% are regular workers and 10% are managers. Managers earn lower salaries than in conventional limited liability corporations, but Mondragon has no problem retaining them.  It can be a challenge to hire outside managers.  The bylaws provide an exception: a cooperative can pay above the index range in order to hire a manager with specialized knowledge, but the rule of thumb is to develop expertise internally.

Similar to law firms with capital buy-ins for partners, Mondragon requires a capital buy-in from each worker of 13,500 Euros with a 1,500 Euro fee. Workers can pay the buy-in over time and their capital is returned when they leave. 60% of profits go into a reserve and working capital.  30% of annual profits are allocated to workers’ capital accounts and if there is a loss, capital accounts are correspondingly decreased.  To express the principal of solidarity – 10% of profits are allocated to collective social purposes with 2% of profits allocated to educational programs, 2% allocated to a solidarity fund for cooperatives in crisis and 6% allocated to community programs. Mondragon also compensates its worker members for their capital with interest, which is paid annually in cash.

Social Equality in Action

Thanks in part to its 2,000 cooperatives, Basque country has largely solved the problem of social and economic inequity and enjoys the lowest unemployment rate in Spain, the highest per capita R&D expenditures and the most even distribution of wealth.  Mondragon demonstrates that one of the keys to reducing social and economic iniquity is to have a narrow remuneration system. Basque country provides a prime example of how innovative corporate governance architecture can not only support successful businesses but also solve large scale social and economic problems.

 

 

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