Mondragon

0verlooking a stone mountain in the Southern Pyrenees sits the headquarters of Spain's most profitable financial institution. An elegant structure laced with abstract sculpture and high speed computers, it lies at the heart of an industrial and service conglomerate of 19,000 workers and 150 companies with combined annual sales of nearly a billion dollars.

Its product range from children's' books and hothouse asparagus to ships' hulls, hydraulic presses, and digital control machine tools. It runs housing developments, banks, supermarkets, elementary schools and an accredited university. The in-house research institute is currently exploring new applications of robotics and solar energy. Although this sprawling network directly services or employs more than one in five residents of Spain's Basque region, 30 percent of its industrial output is exported- most of it to the tough, competitive markets of Europe, North America, and the Far East. From 1974 to 1983 total income multiplied six times as the companies expanded and created thousands of new jobs in the teeth of a recession that pushed regional unemployment over 20 percent.

Founded on a shoestring 28 years ago by five factory foremen and a visionary priest, the group of companies around the Caja Laboral Popular (Working People's Savings Bank) of Mondragon, Spain, are an entrepreneurial success story to rival those of Japan or Silicon Valley.

But the achievement of Mondragon goes beyond an impressive balance sheet. It raises the possibility of nothing less than a realistic alternative to capitalist organization within the modern marketplace. For the companies of Mondragon are owned and controlled by their workers (and, in the case of service firms, consumers as well). Relying on capital generated by their own efforts, serving as their own directors, choosing their own managers and maintaining a tight 3 to 1 salary ratio between the highest and lowest paid jobs, the worker entrepreneurs of Mondragon have created a world-class financial-industrial complex that regularly surpasses its capitalist competitors in growth, profitability, job creation, and industrial efficiency.

Long renowned among an international circle of economists, co-op organizers, and progressive trade unionists, the Mondragon group remains little known to the public at large. In an age when capital uses jobs as ransom for givebacks in the industrialized nations and extravagant political concessions in the Third World, and communist and socialist regimes slowly recoil from the infeasibilities of centralized, state controlled industry, the success of Mondragon poses an increasingly relevant challenge to economic and political imagination.

Variants of the idea of worker control have been hailed across the spectrum, from Marx's final stage of communism to the corporatist industrial policy of Felix Rohatyn to the "opportunity society" of Newt Gingrich and the New Right. in practice, however, worker control has had a difficult and checkered history.

Neoclassical economic theory contends that a worker owned firm will reach lower levels of output and employment than its capitalist counterpart and fail to take advantage of economies of scale. Beatrice and Sidney Webb, the Fabian Socialists who pioneered the development of British consumer cooperatives, argued that worker owned producer cooperatives were a bad idea because they would either degenerate into capitalist controlled firms or collapse under the weight of inferior efficiency.

Indeed, for numerous worker control projects, the Webb's gloomy prophecy has rung true. Corporate experiments with shopfloor participation, board membership or employee stock ownership may dampen worker discontent or increase productivity, but they fail to alter the balance of income, wealth and power between those who really own the plant and those who merely work there. Such arrangements also leave intact the logic of capitalist decisionmaking, which tries to maximize owner's return (and, some theorists contend, manager's power as well) before serving other, often conflicting values such as worker income, health and safety or the preservation and creation of jobs.

At the other end of the scale, many grassroots efforts to organize equitable co-ops have foundered on the rocks of scarce capital, weak management and the rigors of competition. Some start life with one foot in the grave, as workers seeking to save their jobs take over an antiquated plant being abandoned by its owners. Although some producer co-ops have avoided these pitfalls, Mondragon is widely regarded as a breakthrough example of dynamic expansion while preserving principles of equity and genuine worker control.

Seen in perspective, the slow development of the producer co-op model is hardly surprising. New economic forms have never evolved quickly. When they do emerge, it is usually the culmination of a long and painful journey marked by generations of failures that have fallen on the road behind. The ultimate viability of a co-op economy remains an open question, but the success of Mondragon should make the possibility of sustainable worker-controlled industry a matter beyond dispute.

The real questions about Mondragon concern how much of its experience and technique is transferable to other nations and economies. It has, to be sure, benefited mightily from a rich Basque cultural heritage that values group cohesion and nationalistic pride. Though rooted firmly in the idea of individual enterprise and private property, Basque tradition includes customs such as the Lorra and Hauzo-Lan, seasonal gatherings for communal harvesting and building repair. When asked if they run cultural programs-as many American co-ops do in an attempt to foster a sense of community among the membershipMondragon workers seem baffled by the question. In a society where lifelong friends still gather religiously in drinking clubs and gastronomical societies, social bonds are the bedrock of everyday life, rather than fragile links that one must work at to preserve.

But important as it is, hospitable local culture is hardly sufficient explanation for the success of the Mondragon endeavor. The Basque country is far from an idyllic land of spontaneous grassroots cooperators. More than 90 percent of industry is capitalist and fiercely competitive. Labor unrest is common. Political factionalism is legendary. A local saying sums it up:-One Basque, two opinions; two Basques, four parties."

Hard-headed self interest

There is nothing mystical about the force that keeps the co-ops together. Unlike organizations that bloom with the commitment and wither with the burnout of their members, Mondragon is not subsidized by the zeal of members who sacrifice personal comfort for political ends. While such groups have historically been the cutting edge of social change, they are not well suited for making refrigerators.

Mondragon is built on a firm foundation of economic rationality and hard-headed self interest. But it is a rationality and selfinterest ingeniously redirected and seen from a broader perspective than that offered by the conventional business world.

The core principles of Mondragon were developed by Father Jose Maria Arizmendiarrieta, a Jesuit priest who narrowly escaped execution at the hands of Franco's army, and have been refined by the members through years of growth and diversification.

All co-op shares are owned by the workers and every worker must be a shareholder-there are no employees. The maximum salary differential is 3 to one, and salaries are apportioned according to a formula approved by the workers' assembly based on job responsibility and individual performance. All surplus profits are divided three ways: 10 percent for a social services fund, at least 20 percent for general company reserves, and the remainder for the workers' individual capital accounts. These interest-bearing accounts must be kept within the company and cannot be drawn on until the worker leaves (at that time they must be withdrawn, since nonworkers are not permitted to hold shares). The amount of profit distributed to each worker's capital account varies with his or her salary grade-again, within the 3:1 ratio. When money is needed to cover corporate losses, deductions are made from individual accounts in similar proportions.

A one person-one vote workers' assembly consisting of all members of the firm elects a board of directors from its own ranks. These unpaid part-time directors hire the firm's management, who in turn become members of the company. The worker assembly also elects a watchdog accounting board to continually audit the management and company operations. To represent the workers day to day in their capacity as entrepreneurs, the board of directors selects a management council which consults with management on questions of investment and business strategy; the social council represents them in their capacity as workers, handling matters of personnel, wages and occupational health and safety. Company books are open to all workers; each year's accounts and balance sheets, along with basic decisions on capital distribution, investment and company regulations, must be approved by the full worker's assembly.

"Each worker learns in the co-op what a balance sheet is and learns to follow the rate of profit and to think about return on investment," says Antonio Cancelo Alonso, a self-taught former hospital worker who helped to organize Mondragon's consumer distribution co-op and later became its manager, "We have people with little formal education making decisions to raise or lower their salaries, commit new capital, seek loans. When you're the owner and you pay for the consequences of your decisions, economic rationality finally imposes itself. But there can't be rationality where there isn't information. Here we share the information and we share the power and it's good for the cumpany . Here the worker is by definition an entrepreneur and the first function of an entrepreneur is to see that his enterprise survives,. How? Capitalize it keep investing and reinvesting and run it with the maximum etficiency. Here the worker knows that the salary he takes home and the wealth he saves up depends on his own productivity and his own decisions and that no one else is sitting out there getting rich off the fruits of his labor. In L capitalist company , a worker demands a 20 percent raise because he doesn't know the profits, the rate of exploitation and the rate of return. But if he owns the firm and know! the rates he doesn't ask for it."

Under the Mondragon structure, self interest and company interest converge The co-op's publishing house has issued at 862 page hard cover. small print book wit} Father Arizmendiarrieta's writings on politics, economics and cooperation. But a Mondragon worker need read nothing more than the balance of his personal capital account to be reminded of the virtues of serving the common good.

By channeling self-interest in such manner, the co-ops produce a preoccupation with discipline, public property and long-range thinking that would seem oddly out of place in an American capitalist firm. "Work discipline is very strong, and it's self-imposed," says Marcos de Castro, a Mondragon education specialist, "If I go to the doctor I make up the hours of work later because they are collective hours. There's a strong respect for all collective property, and severe punishment for theft. That's the one thing that's beyond discussion. Any other problem, we can work it out, but robbery-disrespect for everybody else's property-no, you're fired."

"After a while, we develop a different way of looking at property and value," says Cancelo, "we look at it as more than just individuals. Let's say we've got a little surplus on hand. We can distribute it right now so everybody can take his family out for a nice dinner this weekend. Or we can pool it and fix up the company lounge that we're all going to be using for the next few years-maybe put a new color TV in there. Or we can invest it and buy a new machine and maybe create another job that'll be helping the community and paying us all dividends from now to who knows when. If you're in a community of capital and labor you don't think about it that way because you don't have the choice. But we do, because we're not in a community of capital, we're a community of people."

This structure of internal incentives produces firms that, as Henk Thomas and Chris Logan discovered in an extensive economic analysis for the Institute of Social Studies at the Hague, have rates of absenteeism and efficiency and a "growth record of sales, exports and employment, (that) under both favorable and adverse economic conditions, has been superior to that of capitalist enterprises."

Despite their rapid growth, the Mondragon firms are continually faced with a surplus of job applicants for positions at all levels. In addition to a financial stake in the company and influence over policy, they offer potential workers long-term job security (layoffs virtually never occur and turnover is low), the possibility of advancement through the ranks to management or a directorship, extensive educational and on the job training programs, an in-house social security system, and the prospect of cashing in a capital account usually equal to years worth of earnings on retirement. Above and beyond this are the day to day wages. For lower and middle level jobs they are slightly higher than those on the capitalist market. For professional and managerial jobs-reined in by the salary ratio-they range from moderately to considerably lower.

Inaki Gorrono, Technical General Secretary of the Caja Laboral, explains the attraction for managerial applicants in terms of job security, greater professional responsibility, opportunities for advancement, and the attraction of participating in a prestigious and innovative enterprise. In fact, in Spain's business job market, a professional stint at Mondragon is seen as an attractive addition to the resume. Some people join the co-ops hoping to accelerate their careers with a few years' stay, but, Gorrono says, never get around to returning to the capitalist sector.

Investment over consumption

Aside from the constructive incentives they create for their workforce, two keys to the co-ops' success have been their emphasis on reinvestment and the innovative bank that ties them together. Company bylaws are written to favor investment over current consumption. Though the way the money is finally distributed differs radically from that of a capitalist firm, each co-op is required to limit its total wage bill to an amount equal to that of its capitalist competitors. If in a particular industry capitalist firms spend 30 percent of their costs on wages, the Mondragon co-ops must do the same. The surplus profits will eventually come back to the workers via their individual capital accounts, but in the meantime that money is available to the co-op for reinvestment. Since only 10 percent of profits are removed immediately for expenditure on health, welfare and recreation projects, fully 90 percent (20 percent in the general account; 70 percent in the individuals') is retained and invested.

Investment is seen as increasing long range profits on the one hand and creating new jobs on the other. The co-ops' commitment to job creation, however, goes beyond the point of narrow economic calculation. Arizmendiarrieta's teachings and the co-ops' own internal education programs hold that when the goals of profitability and job creation come into conflict, as they sometimes do, especially in times of softening demand, jobs come first.

The co-op bylaws have a built-in incentive for company members to create new jobs: each time a new worker comes on board, he must make a fixed contribution to the company's capital stock, either out of his own pocket or via wage deductions during his first few years on the job. But there are times when even such infusions of capital do not compensate for the costs of retaining or opening up new workspaces. It is then that the Mondragon cooperators bite the bullet. From 1978 to 1983, co-op workers elected to limit their wages in such a way that their buying power fell 15 percent compared to 12 percent for Spanish workers overall. But, unlike millions of their peers in capitalist firms, no Mondragon workers were laid off; indeed, 1700 new jobs were created.

It can be argued that this short term sacrifice will bring long term profits, as increased output yields fresh capital for future, more lucrative, investment. But this is far from clear. What is clear is that the workers knew they were paying a price (that might or might not be refunded to them in the future), and chose to do so to safeguard their own jobs and create new ones for their neighbors.

Economic theorists have argued that the tendency to preserve existing jobs is inherent in worker -controlled firms and is potentially detrimental to the economy as a whole since it can lead to the survival of fundamentally inefficient companies whose workers are reluctant to disband or shrink but whose resources could be better used elsewhere. Conversely, theorists also contend that the desire of worker-owners to maximize their individual incomes will keep healthy companies from expanding to their most efficient possible size because of reluctance to share the wealth with newcomers. A flexible, decentralized and diversified structure has enabled the Mondragon group to mitigate such tendencies.

Caja Laboral

The co-ops are a constellation of firms in dozens of different businesses ranging in size from 30 to 2.000 workers (with an average of about 200).

They share common bylaws, an interco-op assembly, and a relationship with the Caja Laboral-which, aside from their internally generated capital, is their sole source of financing. The Caja, the joint research institute and the co-op assembly are constantly exploring new products, markets, and needs and possibilities for retooling existing co-ops or creating new ones. When one co-op is not working out, as was recently the case with a slumping chocolate factory, it can be disbanded (with member approval) and its workers transferred elsewhere- in the network. When a market shows potential, an existing co-op can expand or a new one can be created by a consortium of co-ops or by the Caja itself. When co-ops receiving loans from the Caja show profits above the 8 to 15 percent range, they are directed to expand and offer new jobs; when profits slump below this range the firm is pressured to contract and shift the layoffs to more vigorous concerns.

The bank, founded in 1960 (four years after the original industrial co-op, ULGOR, which began as a manufacturer of space heaters and parafin cooking stoves), has been the centerpiece of the Mondragon growth strategy. It is a savings bank, drawing deposits from throughout the Basque region and, aside from personal loans, investing it all in the co-ops. Each co-op loan, usually given at slightly below market rates, is rigorously monitored and comes accompanied with a team of marketing and development experts who help get each venture off the ground. Unlike capitalist banks, and even public co-op banks that have been tried in the U.S. and other countries, the Caja does not sit back and wait for third parties to approach it with ideas. It either goes out and creates the enterprises it will fund or does business with incumbent Mondragon group members or new co-ops that, as a condition for joining and receiving their loan, must enter a contract agreeing to structure themselves according to the groups' tried and true principles. In its first decade, the Caja paid its savers passbook interest above the going rate, compensating for this outflow with operating efficiency and reliable returns from its co-op borrowers. Since the early 1970s, however, relying on customer loyalty and superior consumer service (l5 day response to personal loan applications, versus up to three months in conventional banks), the bank has successfully dropped its rates below the market level, creating what was, in 1983, a $100 million dollar windfall for investment in the coops.

Although each member co-op must adhere to the Mondragon legal and capital structure, the style of shopfloor organization and the degree of hierarchy and supervision varies widely from firm to firm. Some use production techniques indistinguishable from the capitalist mode. Others eliminate entire levels of oversight and office bureaucracy, and still others use work groups and task sharing. According to Inaki Gorroflo, several experiments with increased day to day responsibility have not gone over well. "We sent teams to Sweden and tried the work groups but the men in some of the companies and the older workers didn't want to be bothered. The women and young people have responded much better; the others say they prefer less responsibility and want to stick with the assembly line."

In its daily operations and pricing, the 123,000 member Eroski consumer co-op often resembles a capitalist supermarket chain, a difficult fate to avoid in such an inherently low-margin business. But in quality control and food safety research Eroski has broken new ground. It offers a line of generic products-some provided by co-ops, others contracted with capitalist firms-whose preparation is monitored by Eroski inspectors and which sell at slightly lower prices. When Eroski testers noticed a decline in the quality of its generic yogurt line, for instance, the co-op pressured the contracting company into buying new equipment. Four years ago, Eroski labs made national headlines when they discovered that seafood was being treated with boric acid, a practice subsequently banned by the Ministry of Health. When the ministry two years later published data showing that certain local wines were being adulterated with toxic additives-but declined to announce the brand namesEroski did its own analysis, exposed the companies, and withdrew their products from its shelves. The government has responded with a proposed regulation that would ban such private testing without Ministry permission, an effort to forestall what a Spanish chamber of commerce representative described to Eroski as campaigns of `informational terrorism.'

In 1974 the Mondragon group was shaken by its first and only internal strike (workers regularly stage solidarity strikes on regional or national issues or in support of striking unions at capitalist firms). A dispute at ULGOR over a proposed change in job ratings led 414 of the company's 3250 workers to walk out for eight days; after bitter debate in the workers assembly, some 40 of the strike leaders were fired-all but 17 were later allowed back in. The strike touched off a reassessment of failures of internal democracy and communication. One of the outcomes was a new consensus that self-management could not work if the firms were allowed to get too large. Efforts have since been made to take this into account along with economic efficiency factors when discussing plant expansions. Employing a similar principle, Eroski has decided not to expand beyond the Basque country or to establish stores that are separated by more than a four hour drive.

Allan Nairn is a freelance writer based in New York.