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The Mondragón Cooperative Corporation (MCC): An Introduction

by Fred Freundlich
Ownership Associates, Inc., Bilbao, Spain
Paper presented at Shared Capitalism: Mapping the Research Agenda
A conference sponsored by the National Bureau of Economic Research
Madison Hotel, Washington D.C., May 22 - 23, 1998


Contents

1. Current Statistics
2. Historical Development
3. The Current Structure of the MCC
4. The Internal Structure of an MCC firm
5. The Evolving Role of the Bank
Appendix

The Mondragón Cooperative Corporation, or MCC, is often considered the most successful example of worker-owned enterprise in the world. Taking its name from the small town in the Basque Country of Spain where it was founded, the MCC’s reach now extends across Spain, Europe and the globe. Its highly integrated network of cooperative businesses competes successfully with conventional corporate rivals both locally and worldwide.

This paper provides a brief introduction to the MCC and is divided into five sections:

1. Current Statistics
2. Historical Development
3. The Current Structure of the MCC
4. The Internal Structure of an MCC firm
5. The Evolving Role of the Bank-the Caja Laboral-and its Entrepreneurial Division
Appendix A. The Dimensions of the Mondragón Cooperative Group

1. Current Statistics

What started as one firm and roughly 25 people in 1956 is now a major international business with a work force of over 34,000, employed in some 100 worker-owned enterprises and affiliated organizations, all of which are integrated into the Mondragón Cooperative Corporation (MCC). In 1997, MCC had total sales of approximately $5 billion, exported nearly half its industrial sales, and its Financial Group (bank and social security/pension fund) had nearly $7.5 billion of various financial assets under management. MCC firms are the leading producer of domestic appliances and machine tools in Spain, the largest domestically-based supermarket chain in the country, and the third largest supplier of automotive components in Europe. Among its other products and services, one finds automated manufacturing cells, satellite dishes, luxury buses, industrial presses, large metal structures, engineering consulting, and software development, to name a few.

Solid comparative performance data on measures profitability and productivity are hard to come by. Further, the MCC accepts a number of costs, such as support for a variety of educational institutions, that ordinary corporations do not, which makes comparing margins deceptive. The comparative research that is available generally shows that the MCC outperforms its conventionally-owned counterparts. Preliminary data on the machine tool sector, for example, indicate that companies in MCC’s machine tool division are approximately 5.6% more efficient (value of output for a given value of inputs) than competitors in the region for the period 1990-1993. See Appendix A for a summary of 1997 statistics and growth since 1972.

The Mondragón group also has an exceptional record of employment growth, though a curious mix of factors explains this record. These factors cannot be examined here, but they include a strict no-layoff policy for members, an extraordinarily high enterprise survival rate, and the use of a certain number of temporary workers in companies operating in volatile markets.

2. Historical Development

The historical roots of Mondragón, not surprisingly, make a complicated story in themselves which I will just touch on here. To begin, the Basque Country, with substantial deposits of iron ore and coal within its borders and nearby, developed an industrial tradition over the centuries. Iron and steel industries, metalworking of various kinds, and shipbuilding all prospered in the late nineteenth and twentieth centuries.

In 1941, into an environment in the Basque Country of poverty and repression following the Spanish Civil War, the Archbishop of the region sent a young priest, Jose Maria Arizmendiarrieta. His quiet but forceful and charismatic leadership played a critical role in the development of the cooperatives, another complex story. In short, it should be said that it was he who inspired and did much of the legwork in support of several of the group’s early institutional innovations; indeed he is perhaps most responsible for making institutional adaptation an integral part of the culture of the Mondragón network.

Arizmendiarrieta began with education. In 1943, he established a small technical school for young people. As the years passed, he organized local associations of all kinds, usually under the protective auspices of the Church, and, based on his reading in social science and Catholic Social Doctrine, he gradually and unwittingly introduced the participants to a humanist kind of philosophy as well to new ideas about economic and social relations. Over the years, a nucleus of committed youth formed around Arizmendiarrieta, and, eventually, five of that group, graduates of his technical school, earned degrees in engineering and, in 1955-56, formed a business making simple paraffin stoves called Ulgor.

As the economy recovered from the war, new businesses found relatively easy local and regional markets for their goods. There was domestic competition, but the Spanish market was highly protected from outside pressure in the 1950s and 1960s-a key factor in Mondragón’s companies’ ability to get themselves up and running. Ulgor experienced substantial success in those years, as did several other cooperative businesses that had been formed in its wake. Arizmendiarrieta soon convinced the group that they should have a direct source of capital-their own bank-and in 1959 helped them establish the Caja Laboral Popular. More on the bank later. By the mid-1960s then, Mondragón firms had become established; several had grown to reasonable size, and the number of firms in the group increased to over 30. They all became legally affiliated with the Caja Laboral by signing a "Contract of Association", adopted the same set of cooperative corporate by-laws, and sent representatives to the Caja’s General Assembly for making overall group policy. Business continued to be good and several other important Mondragón institutions took shape: an engineering college in 1968; the precursor to the supermarket/retail chain, Eroski, in 1969; Lagun Aro, the network’s independent social security and pension service became independent from the Caja in 1973, and, in 1974, Ikerlan, the group’s main R&D center opened its doors.

Business growth continued apace through this period and by 1975 Mondragón firms employed nearly 14,000. The group has continued to expand since then, but not explosively, as in the early years. The same crises that affected the rest of the industrialized world since the mid-1970s, first in energy prices and then economic restructuring, also hit hard in Mondragón. The group has remained quite successful from that time to the present, but it has had to face its share of economic challenges, and its focus has shifted from rapid growth to consolidation and meeting the increasing challenges of international competition.

A defining feature of the Mondragón cooperatives throughout their history has been the ability to adapt their overall institutional structures to changing circumstances. In the early years, most of the cooperatives operated more or less independently from day to day, while they were joined through the Caja. But, as markets became larger and competitive, the firms began to see advantages in joining forces. Starting as early as the mid-1960s, and then to a much greater extent in the late 1970s and 1980s, the companies formed regional sub-groups to provide themselves more comprehensive strategic management and related services. By the late 1980s, the group as a whole felt that this arrangement was no longer adequate. Markets were global and Spain had become integrated into the competitive environment of the European Union.

3. Current Structure

The Mondragón group responded to these competitive pressures in several ways, but the most significant response was a special brand of legal-structural unification. The new structure, created in 1991, gathered all the enterprises and support organizations under one corporate roof, the MCC. The regional subgroups were mostly dissolved and the individual co-operative enterprises were grouped instead by industrial sector within the MCC’s new structure: three main business groups (Financial, Industrial, and Retail) and, within the Industrial Group, seven different divisions. The MCC as a whole is now managed by a President and his General Council, which is comprised of nine vice-presidents (one per group or division) and the directors of the six MCC Central Departments. MCC officials emphasize that the purpose of the reorganization was most definitely not centralized operational control, but rather, closer coordination of activities within common business sectors, improved economies of scale, and greatly strengthened strategic planning. The Caja Laboral remains a central institution, but now devotes itself to the banking business more strictly defined. Its venture capital, consulting and group policy-making functions have largely been moved elsewhere (see below and Section 5).

The new MCC management bodies are accountable to two representative governance structures, a Cooperative Congress and a Standing Committee. The Cooperative Congress is made up of representatives elected from all the cooperatives in the Corporation (in indirect proportion to their size) and is the basic policy-making body for the MCC as a whole, replacing the Caja’s General Assembly. The Standing Committee consists of 17 people elected from among the previously elected Governing Councils of the sectoral groups and divisions. The Standing Committee appoints the President of the MCC (the CEO), must approve the President’s choices for the General Council, and generally serves as an internal board of directors.

While the MCC now appears at first glance to be much more like a conventional conglomerate, key Mondragón principles are still in place. Each individual cooperative firm remains, legally and, to a large degree, functionally, an autonomous unit controlled ultimately by its General Assembly of worker-members. Each firm joined (or, in a few cases, rejected joining) the MCC by a vote of its General Assembly, and can vote to leave at any time. Still, the new arrangements have generated controversy within the group over issues such as the centralization of authority, the bureaucratic distancing of senior management from the membership, and others.

This is where the MCC stands today. It has become a multi-billion dollar international enterprise with an inventive internal structure that aims to strengthen both competitiveness and worker ownership.

4. Internal Structure of an MCC Company

Virtually all the co-operative companies in the MCC have the same by-laws and internal structure. The General Assembly of worker-members is the highest authority in the firm and makes decisions based on the principle of one member-one vote. It must meet at least once a year (and usually meets twice), sets or revises basic company policy (within the general framework of MCC policies), reviews and approves annual business plans, and elects a Governing Council (an internal Board of Directors) and a President of the Governing Council. The Council members and President serve four-year terms and may be re-elected. The Governing Council appoints-and can remove-the CEO, must approve his or her choices for senior executives. It meets bi-weekly or monthly to make or revise policy proposals for the General Assembly to consider and to monitor the management team’s and the company’s performance and its implementation of company policy.

MCC enterprises also have a Social Council which meets monthly and is composed of representatives elected by department who serve two-year terms and may be re-elected. The Social Council serves to facilitate communication between management and the frontline and to represent frontline workers’ perspective in discussions with senior management. It will take up any matter of importance to the work force, but usually focuses its communications with management and its constituents on concerns related to the working conditions, health and safety, work calendar and staffing and work relations.

That is a brief summary of company governance in Mondragón-how basic policy and long-term issues are decided. The structures for day-to-day business management, on the other hand, are very similar to those in conventional companies. Many MCC firms, just as other leading conventional companies, have implemented cutting-edge, high-involvement systems-work teams at different levels, flattened hierarchies, various participatory Total Quality and Customer Satisfaction initiatives, etc. Other MCC firms are more traditional or still making their way in this realm. It is, however, an explicit MCC policy priority for its companies to promote and develop participatory management practices, both for philosophical reasons and for business performance reasons.

5. The Evolving Role of the Bank-The Caja Laboral-and its Entrepreneurial Division

Earlier I mentioned the Mondragón group’s high rate of start-up success and enterprise survival. A key reason for this success is the group’s development of "support institutions" from the very beginning One of these that I mentioned earlier is the business groups, at first based on region, and later based on sector. But perhaps the most important of these support institutions, especially in the first two decades, was the group’s bank, the Caja Laboral. Employee-owned firms have traditionally had great difficulty getting adequate financing. Father Arizmendiarrieta, in part because of this problem, inspired the early leaders in Mondragón to create a finance organization. Starting in a small room with a handful of people and funds, the Caja Laboral now has $5.6 billion in deposits and serves MCC companies, the conventional business community and the general public through some 250 branches around the Basque Country. Without a doubt, the Caja Laboral played a fundamentally important role in supporting the development of the cooperatives, particularly in the early going. It did so by design-it was created specifically to offer patient capital, to cater generally 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 internal organization called the "Entrepreneurial Division". This division’s job was to provide extensive management and technical consulting to new and expanding ventures, and to troubled firms in the network. The assistance of the Entrepreneurial Divisions was crucial to the long-term success of many enterprises in the group.

The Caja’s role has changed markedly in the last decade, however. As the cooperative companies got larger and more established, and as their financial needs and the market and regulatory environment evolved, the MCC and the Caja made the strategic decision for the Caja to focus more on traditional consumer and business banking. In 1991 the Entrepreneurial Division was dissolved. However, the centrally important functions of the former Caja and Entrepreneurial Division have by no means been abandoned. They simply have been transferred to other institutional locations within the MCC. An institution called the Central Intercooperative Fund, to which each co-operative company contributes 10% of profits every year, and other similar institutions, provide the patient venture capital, while the management and technical assistance is provided by MCC’s Central Departments or its sectoral division staff. In addition, a portion of the former staff of the Entrepreneurial Division created a new MCC cooperative, LKS Consulting (and later another, LKS Engineering), which sells consulting services to the cooperatives and other organizations.

* * * * *

In conclusion, the Mondragón Cooperative Corporation is an outstanding success. While not without its own challenges, the MCC offers important lessons for any enterprise considering employee involvement in business ownership.


APPENDIX A:
The Dimensions of the Mondragón Cooperative Group.


Current Statistics


(in US$, assuming 146 pesetas/$ for 1997; figures approximate)

SALES & EXPORTS, 1997:

Industrial Division
Retail Division
------------------
Total

$2,295 billion
$2,626 billion
------------------
$5.021 billion
(an 11.6% increase over 1996)


Exports, Industrial Div. $1.06 billion (46% of sales)


FINANCIAL DIVISION, 1997

Net Credit Investment
Funds under management

$3.0 billion
$7.4 billion (bank + social security & pension fund)

WORK FORCE*

Industrial Division
Retail Division
Financial Division
Corporate & related*
------------------
Total

18,797 (55%)
13,291 (39%)
1,814 (6%)
495 (1%)
------------------
34,397 (100%)

*includes staff at the Mondragón University and other, related institutions.

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