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Regional co-operative development : the Mondragon example Tompkins, Catherine Jane 1992

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REGIONAL CO-OPERATIVE DEVELOPMENT:THE MONDRAGON EXAMPLEbyCATHERINE JANE TOMPKINSB.A., Simon Fraser University, 1988A THESIS SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF ARTSinTHE FACULTY OF GRADUATE STUDIES(School of Community and Regional Planning)We accept this thesis as conformingto the requir- tandardTHE UNIVERSITY OF BRITISH COLUMBIAApril 1992© Catherine Jane Tompkins, 1992In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)Department of Comma 174 4- Qe_5 tut a.)  82.An inThe University of British ColumbiaVancouver, CanadaDate^. P r—t)^29 s 19 92 DE-6 (2/88)iiABSTRACTThe Thesis examines the dynamics of the Mondragon Co-operative system in theBasque Region of Spain, and assesses the implications which the system has for co-operative movements in other regions. The polarities of co-operative independence andinterdependence at Mondragon are examined in the context of an increasingly competitiveEuropean marketplace.Shortcomings are identified in conventional Canadian regional developmentinitiatives, which may be minimized through co-operative efforts in the marketplace. It isargued that historically Canadian co-operative members have lacked adequate legislative,commercial and financial resources as well as systematic organizational links with eachother to become a significant third sector of the economy. A 'proactive' approach issuggested for co-operative system development, as a means to enhance and expand the co-operative movement in Canada.The Mondragon experiment indicates that technical and financial support through interco-operative linkages can provide a near guarantee against later failure. The Caja LaboralPopular, Ikerlan, the L.K.S. and other support co-operatives, which are governed by theproducer co-operatives, assist the producer co-operatives through losses due to changes inmarket conditions or other variables. At the same time, interco-operative collaborationpermits co-operatives to achieve economies of scale which are lacking in Canada's co-operative tradition. The development process in the Basque region is facilitated byformulas designed to provide essential social and educational services, mitigateiiiunemployment and provide lifestyle opportunities through economically democratic means.The thesis contends that while an abrogation of autonomy is a necessarycomponent of co-operative growth and development, sufficient decision making optionsmust be left in the hands of co-operative workers. Balancing the need for autonomy andthe need for economic vitality at Mondragon has been a difficult and seeminglyunresolved dilemma, particularly since the mid-1980s. While the recent reorganization ofthe Mondragon system raises serious questions about the future of worker participation inmany spheres of the system, Mondragon is offered as a crucial component in the ongoingdebate on the need for an economically as well as politically democratic community.ivI am gratefully indebted to Professor Peter Boothroyd. Without his support this thesiswould not have been written. I would also like to express my gratitude to Professor CraigDavis, for his help with the editing and the defence of the thesis, and to my other U.B.C.planning professors who helped in the process. I am also indebted to the hospitality ofmany people in Valencia and Mondragon, and to the Canadian tour group, who increasedmy understanding of the dynamics and complexity of co-operative development.TABLE OF CONTENTSAbstractTable of ContentsList of FiguresChapter 1. Nature of the Study1.1. Purpose ^  11.2. Rationale  21.3. Scope  51.4. Approach ^  61.5. Thesis Organization ^  6Chapter 2. The Case for Co-operation2.1. The Co-operative Option ^  92.2. Political Democracy  92.3. Economic Democracy  112.4. Employer-Employee Divisions ^  112.5. Community Building ^  12Chapter 3. A Systems Approach to Co-operative Development3.1. Proactive versus Reactive Approaches ^  143.2. Canadian Co-operation ^  153.3. A Co-operative System  18Chapter 4. The Mondragon Approach4.1. The Mondragon Approach ^  194.2. The Beginning of the Mondragon System ^  194.3. Mondragon Today ^  22Chapter 5. The Individual Co-operatives5.1 The Model^  255.2 The Production Companies ^  265.2.1 The General Assembly  285.2.2 The Board of Directors  295.2.3 The Management ^  295.2.4 The Management Council     315.2.5 The Social Council  335.2.6 The Audit Committee ^  345.3 Worker-Member Association  345.3.1 Becoming a Member at Mondragon ^  355.3.2 Advanced Earnings ^  375.3.3 Capital Accounts and Pensions  385.3.4 Non-Member Workers  385.4 Co-operative-Community Association ^  38iiviiChapter 6. The Second Level6.1. The Support Co-operatives ^  41vi6.2. The Community Bank ^  426.2.1 The Caja's Financial Division  436.3. Lan Kide Surtaketa (L.K.S.)  456.4. Hezibide Elkartea  476.4.1 Saiolan ^  486.4.2 Alecoop  496.4.3 The Ikastolas  496.5 Ikerlan  506.6 Ikasbide ^  516.7 Lankide Export  526.8. Lagun-Aro  546.9. Eroski: The Consumer Link ^  556.10. Summary. ^  56Chapter 7. New Levels of Co-operatives7.1. The Different Levels ^  617.2 The Second Level  617.2.1. Zone Group Assemblies and General Councils ^ 647.2.2. Zone Group Authority  657.3. The Congress ^  677.3.1. The General Assembly of the Congress ^ 677.3.2. The General Council of the Congress  687.3.3. Congress Authority  69Chapter 8. The Mondragon System8.1. An Experimental Approach ^  728.2. Emergence into the EEC  738.3. The Mondragon Response  748.4. Internal Changes ^  768.5 The Strategic Triangle  768.5. A Continued Commitment ^  778,6 The Status of the Experiment  81Chapter 9. Findings9.1 Co-operative Links ^  839.2 State Co-operative Relations ^  849.3 Support Co-operatives  859.4 Credit Union  859.5 Capital Accumulation  869.6 Economies of Scale ^  869.7 Social Services and Education ^  88Bibliography ^  90LIST OF FIGURESFigure 1 ^  89viiCHAPTER 1NATURE OF THE STUDY1.1. PurposeThe purpose of this study is to examine the dynamics of co-operative systemdevelopment at the Mondragon Co-operative Complex in the Basque region of Spain andto assess the implications of this system for other co-operative movements. The study hasseveral components. First is a general investigation of patterns of worker co-operativedevelopment in Canada, in order to provide a basis of comparison for the Mondragonsystem. The second component is an exploration of the benefits of a systems approach toco-operative development, as opposed to an incremental, or non-integrated form of co-operative planning. This section provides an understanding of the general polarities ofindependence and interdependence in worker co-operatives. It is argued that a 'proactive'approach to co-operative system development is needed in Canada if worker co-operativesare to survive and expand, and that therefore co-operatives must abrogate some autonomyin the process of building co-operative systems. At the same time, it is argued that caremust be taken to ensure that important decision making options are left in the hands ofworkers. The third component investigates the Mondragon approach to co-operativedevelopment, focusing on the manner in which it has dealt with the issue ofinterdependence and integration. The final component outlines the lessons of Mondragon'sapproach to interdependence and integration for co-operative development in Canada.21.2. RationaleWorker co-operatives tend to be small and isolated. They have much to learnfrom co-operative successes, and Mondragon is one of the largest in the world. In a thirtyyear period, the Mondragon group has grown from a handful of pioneers led by a Catholicpriest to a conglomerate of about 187 co-operatives (94 industrial) with nearly 22,000worker-members and a sales record of more than 2.5 billion dollars. (Phillips,1991:38)From a small town base, the Mondragon complex has developed into the largest industrialgroup in the Basque region, and the seventh largest in Spain. It is the largest manufacturerof domestic appliances in Spain, is doing the most advanced laser welding in Europe, andhas grown into a network of producer, consumer, educational, social welfare, housing andfinancial co-operatives. As possibly the most economically successful co-operative of itskind, Mondragon challenges the view that worker co-operatives cannot survive andprosper in the long term. As Ana Gutierrez-Johnson (1984) argues:Since the Beginning of modem Western industrialization, the belief in thepossibility of creating dynamic production enterprises, ruled by principles ofequity and distributive justice for the workers, has remained an imperfectlyfulfilled hope. Attempts have been made to create such enterprises, but most weresmall and short-lived. This is why the thriving network of co-operativeorganizations centred in the Basque town of Mondragon in Northern Spain hasbeen attracting world-wide attention. This network is the first historic example ofseveral kinds of cooperative organizations that have achieved a long-term, large-scale record of success. (p.35)Phillips (1991) notes that Mondragon's importance is in its "almost unqualified economicsuccess which belies the conventional wisdom" which presupposes that producer co-operatives are destined to a "short, no-growth existence."(p.38)3Much recent interest for developing worker co-operatives world-wide comes from thenotable success of the Mondragon experience. In terms of its extraordinary employmentrecord, for example, Greg MacLeod (1989) contends:From 1975 to 1985, the whole Basque region, like most of the western world,suffered through a severe economic crisis. During this period the region lost150,000 jobs. In striking contrast, the Mondragon complex gained over 4000 jobs.(P•3)The Mondragon Group's ability to survive severe recessions, even whileincreasing employment opportunities and experiencing economic growth, is unquestionablya source of great interest to economists as well as to other theorists concerned with socialchange. An essential aim of any co-operative movement is the provision of employment,and Mondragon's success in this pursuit is overwhelming. While paying wages equal to orbetter than private employers in the region, not one Mondragon worker has ever been laidoff, and only one co-operative (a small fishing co-operative, established in the 1950's) hasfailed to survive.(Phillips, 1991:38-39; Fleckenstein, 1992:61; Quarter,1989:38)The experiment is even more relevant to the Canadian experience because, likemany areas of traditionally high unemployment in Canada, Mondragon is peripherallylocated. John Jordon (1982) notes that:One can make a good case that the type of environmental conditions best suited toinitiating a Mondragon-type effort are ones in which Canada abounds. These arethe more peripheral areas of the country; areas such as Cape Breton, much ofQuebec, parts of Ontario and the Prairies. These are also areas where other typesof co-operatives tend to be numerous and strong, and areas where the tradition ofthe social gospel has backed co-operative and community development. These arealso the areas where the macro development strategies of DREE have revealedtheir impotence. On this basis alone, Mondragon merits careful consideration inthe Canadian context.(p.29)The early members of the Mondragon co-operatives perceived that in small communities4people would have to be more innovative and self supporting, than if they had beenlocated in larger centres.(MacLeod,1990; Kaswan and Kaswan,1989:9) The MondragonCo-operative Complex is centred in the village of Mondragon, in a geographically isolatedvalley deep in the Pyrenees Mountains in the Basque province of Guipuzera, in NorthernSpain. With a population of less than 30,000 people and no airport or railroad in thevillage, the only access to the outside world is on a narrow two lane road which windsthrough the mountains to the larger centres to the north and south. With few exceptions (ahandful of co-operatives situated in the province of Navarra) the co-operatives are locatedprimarily within a fifty mile radius of the village of Mondragon.(Phillips, 1991:38)The Mondragon experiment offers "practical solutions to problems that otherworker co-operatives have faced over the years."(Quarter,1989:13) According to Ruth andJaques Kaswan (1989):Though their achievements are closely related to local conditions, the performanceof these co-operatives is instructive for others because the challenges they face,like balancing democratic decision-making with productive efficiency, or moremundane problems like financing, planning, or relating principles to practice, aresimilar to the challenges faced by co-operatives everywhere. What works for themmay not work for us, but just as they borrow ideas from others, so we might tryto learn from them.(p.9)While the Mondragon experiment is relevant to a discussion of community economicdevelopment in peripheral areas in Canada, care must be taken in considering theimplications of its experiences. Co-operatives in Canada and elsewhere cannot simplyadopt foreign models of co-operation. Local circumstances must be considered in theplanning and implementation of local community development initiatives, including co-operative initiatives.5As George Melnyk (1989) contends, worker co-operation is not a "monolithicinternational ideology," but an "outgrowth of and an adaptation to certain conditions."Since no two regions will have the same industrial culture and tradition, it is important torecognize and assess various approaches to co-operative development when looking fornew ideas. Caution in applying the lessons of Mondragon to Canada is required alsobecause Mondragon is truly an experiment, and as such is in a constant state of change.Certain theoretical and organizational principles inherent in the Mondragon systemappear to be broad in potential application. By examining such systems as Mondragon,features might be identified and successfully adapted to other regions. As what may beour best example to date of a successful, large scale system of co-operatives, in thecontext of a diverse market economy, Mondragon offers a unique opportunity to learnfrom practice and to form broad theoretical guidelines which may prove useful in avariety of contexts.1.3. ScopeThe choice to analyze the Mondragon experiment from the perspective of theCanadian experience in co-operative development precludes detailed investigation of themany important institutions that make up the Mondragon model. The discussion providedin this thesis is confined to a description of the Mondragon co-operative model, anassessment of the interaction between the various Mondragon co-operatives, an analysis ofhow this interaction continues to evolve, and a consideration of the implications whichMondragon's inter-institutional relationships hold for co-operative development in Canada.6Emphasis will be placed on the Mondragon complex as an organic system, rather than onthe operation of its individual components.1.4. ApproachThe thesis began purely as a case study of co-operative expansion at theMondragon Associated Co-operatives. As research progressed, it became necessary tobroaden the potential application of the study by focusing upon the Canadian co-operativetradition. The co-operative experiences of some other countries as well as literature on theideology of co-operative movements were studied in order to develop an analyticalframework for evaluating co-operative development planning.Data for Mondragon were collected through a variety of means, includingliterature reviews and research of official Mondragon publications, along with telephoneand in-person interviews. Information was also obtained through on-site field research inSpain. During April, 1990, I had the opportunity to participate in a study tour of theMondragon Co-operative complex. The tour, the fourth of its kind, was organized and ledby Greg MacLeod of the University College of Cape Breton. The tour included visits to anumber of Mondragon co-operatives and first hand siting of the workplaces, the CajaLaboral Popular (Credit Union) and several educational and research institutions. A fieldresearch visit to Valencia was included, to examine a co-operative system more recentlyset up on the Mondragon example. In addition, the tour included personal interviews anddiscussions with influential members of the Mondragon system. Group discussions wereconducted with Jose Maria Larranaga Bolinanga, Director of Education at Ikasbide (the7Management Training Centre at Mondragon), Javier Erdocia, Secretary General of theMondragon Co-operative System, Jesus Larranaga, one of the five founders of theMondragon co-operatives and currently a Board of Directors member of the MondragonCo-operatives, and Jose Miguel, Director of Ikasbide.1.7. Thesis OrganizationThe remainder of this thesis will be organized as follows: Chapter 2 will examineconventional approaches to community and regional development, which have in manyinstances failed to address issues of local control over decision making and resourcemanagement, regional equality and employment security, and will argue in favour of a co-operative approach to community development. It will be argued that the co-operativemethod can assist in promoting greater forms of democracy, ensuring a more evendistribution of wealth, eradicating lines of friction between employee and employers, andbuilding more stable communities. Chapter 3 explores the benefits of creating systems ofco-operatives rather than independent co-operative firms, focusing on the competing goalsof organization versus autonomy. Chapter 4 will introduce the community economicdevelopment approach of the Mondragon co-operatives. Chapter 5 assesses the Mondragonapproach to building co-operatives. By examining the decision-making structures at theprimary level of the Mondragon co-operatives, it becomes possible to gain a perspectiveof the ideological priorities of the member-workers. Chapter 6 concentrates upon the co-operative support organizations which bind the Mondragon community together. Chapter 7provides a discussion of the different levels of participation in the co-operatives. Chapter88 discusses the development strategies utilized by the leaders of the group, noting theirpotential advantages and disadvantages in light of the Canadian experience and the desireof co-operators to manage their own affairs from the bottom up. Implications foralternative institutional arrangements for Canadian co-operatives are then proposed in thefinal chapter, along with a summary of the major conclusions of this study.9CHAPTER 2THE CASE FOR CO-OPERATION2.1. The Co-operative OptionA major argument in this thesis is that co-operative community development hasthe potential to reduce or eliminate many of the problems created by conventionalbusiness practice. On both ethical and practical grounds, co-operators have argued theirposition ever since the establishment of the Rochdale co-operative in the early 1800's.Although worker co-operatives have failed to impact the economy as many had hoped,there has since remained a small but devoted membership world-wide.2.2. Political DemocracyIn many western countries, including Canada, there has been much progress inbringing democratic forms to political systems. Governments frequently consider the'public will' in decision making processes, because governments can be removed frompolitical power. Yet, as George Melnyk and Jack Quarter (1989) maintain, there are "stillother facets of our society where the popular will is inconsequential to decisions that aretaken":The vast majority of workers in the Western democracies lack even the mostelementary voice in the decisions that affect the business that employs them. Inpart, this is because they are not owners but employees who are hired bymanagement representing owners.(preface)Important decisions in private corporations are made by those individuals, whetherlocally or foreign based, who control the investment capital of the firm. Individuals, aloneor collectively, who provide the capital, regardless of their social interests in the workers'10community, may own the business and choose the decision makers who will influence thelocal economy.By contrast, worker co-operatives, with worker-owners who elect a board ofdirectors and thus have a more direct influence in major policy decisions, bringdemocracy to the workplace. A primary social principle of producer co-operatives is thatthe workers who are involved and affected by a business make the important decisions.Democracy is thus brought to the workplace and, theoretically at least, there are spinoffsof democracy in the wider community.A basic co-operative economic principle is that ownership and rights to profit areearned by work or other active participation in an enterprise. Capital is necessary for anyenterprise, but while capitalists hire labour and gain profits, co-operatives rent capital andthe members earn profits through their participation. Members in a worker co-operativehave rights similar to those of citizens in a political democracy, via the right to participatein the decision making process.Furthermore, worker co-operatives promote greater forms of localized controlover local decisions. The right to vote is accorded only to those who work in theenterprise and who therefore live in the community. Thus, decision makers generally sharea greater stake in their community's welfare than they likely would if they were outsidestock holders or even hired managers from outside of the community. Regardless of theindividuals' property holdings in the co-operative, each member has one vote to exerciseat general meetings, elections to the board of directors, and other fundamental decisions ofthe co-operative.112.3. Economic DemocracyCo-operatives promote greater economic democracy as well because of theworkers' right to own their full individual and collective labour value. The right to profitis the right to share in any year-end surplus (profit) and the responsibility for any year-endloss of the enterprise. This right to profit is accorded to workers because they work there,not because they have purchased the rights.(Fleckenstein, 1992:62)Member rights sets the co-operative apart from conventional capitalist firms.Membership rights are transferable property rights attached to the shares of stock. Theshares may be sold to whomever can afford to buy them, and the shareholder is generallyotherwise not connected with the company. Since the votes and profits are distributed on aper-share basis, shareholders in an ordinary corporation will often have the number ofvotes and portions of the profits equal to the number of shares owned.(Ellerman,1989:15)2.4. Worker-Employer DivisionsGeorge Melnyk (1989)contends that:In the economies of the world, whether they be capitalist or socialist, there existsa basic division between the employee and the employer, no matter who theemployer is -- individual conglomerate, or the state.(p.192)Indeed, Jack Quarter and Jo-Ann Hannah (1989) point out that in a conventionalenterprise "the relationship between workers and owners is not overly harmonious and isoften very impersonal.":With the exception of small businesses where the owner participates actively inthe enterprise, workers and owners deal with each other through intermediaries,that is, managers appointed by the owners and labour representatives of theworkers, each of whom tries to uphold the interests of their respective group.This12arrangement often results in a lack of commitment from workers to the plant thatemploys them.(p.79)Corporations attempt frequently to address the problem of worker alienation through theuse of techniques such as profit-sharing, bonus plans, and token involvement of employeesin decision making. Particularly Japanese corporations appear successful in buildingworker loyalty. And, as Quarter and Hannah maintain, it would be "cavalier to dismiss ascosmetic" all of these techniques. In essence, worker alienation is a potential problemregardless of the type of ownership. Still, evidence suggests that worker alienation ismuch less of a problem in cases where people are the owners of the enterprise where theyare employed. Workers, as owners, elect from their own ranks their Boards of Directors,hence eliminating the inherent conflict between the interests of the shareholders and thoseof the workers. In turn, fewer supervisory positions are needed in the co-operativemodel.(Quarter and Hannah,1989:79)2.5. Community BuildingTraditional forms of regional development have, to varying degrees, centred uponthe classical economic belief in market equilibrium. Based upon supply-demandrelationships with little regard for the social, political, and in some cases even economicneeds of many communities, these strategies have been particularly detrimental toperipheral regions. Owners of conventional corporations often lack adequate commitmentto employees and their communities. As Quarter and Hannah (1989) maintain:Owners, particularly the shareholders of mature corporations, generally lack acommitment to their employees or to their employees' community. Decisionsabout maintaining and developing existing plants are made on the basis of13corporate interest (ie: investment decisions) not from the viewpoint of acommunity or its employees. (p.'79)And while welfare state initiatives have been designed to alleviate some of the morenegative consequences of market allocations, they have for the most part tended to provideonly short-term, piecemeal solutions. Hence, increasingly planners are seeking new,community-based methods for fostering community development.14CHAPTER 3A SYSTEMS APPROACH TO CO-OPERATIVE DEVELOPMENT3.1. Proactive versus Reactive ApproachesA major difference between the Canadian co-operative tradition and theMondragon approach is that in Mondragon development is, in ideological terms, both'top down' and 'bottom up.' From the initial market analysis to the establishment andmaintenance of a co-operative business, the planning process is coordinated by thebusiness consultants of the Associated Co-operatives at Mondragon, in conjunction withthe leadership of the new enterprise. At the same time, the leadership at Mondragon areheld accountable to the workers in the individual co-operatives. The Canadian experience,by contrast, has been almost entirely 'bottom up', or populist. The initiative for planningnew enterprises has come from workers who seek the assistance of consultants only ifthey can afford to do so. The Canadian consultant's role, meanwhile, is reactive, inresponse to the proposals of worker-owners. Primary financing also comes from workers,with small loans from banks, credit unions and private investors.This is not to say that the Canadian co-operative movement is devoid of lobbyingefforts or inter-co-operative integration. Collectively, many Canadian co-operatives haveattempted to promote the interests of Canadian co-operatives as a "third sector" of theeconomy. The National Task Force on Co-operative Development (1984) was formed toreflect upon issues of co-operative development and expansion across the country and, asnoted by Laycock (1987):As the Task Force Report made abundantly clear, the point of the reconsideration(of co-operative relations with Canadian governments) was to ensure that15Canadians could benefit more fully from co-operative enterprises and values at atime when the central challenge before Canadians is how to make our economicand social institutions more participatory and responsive to human needs.(p.4)In 1984 the Task Force predicted that co-operative growth was "an idea whose time hadcome."(cited in Laycock,1987:5)3.2. Canadian Co-operatismNevertheless, the predominance in Canada of workers as planners and thedominance of workers shares in financing has meant that most worker-owned businessesare small, underfinanced and poorly planned operations, often with little chance ofsuccess. Canadian worker co-operatives have been developed primarily by people lessinterested in starting just another business than in demonstrating alternative forms fororganizing and maintaining the workplace. As Quarter (1989) contends, the independenceof these co-operatives may "satisfy the social needs of members, insofar as they alone canshape their own house," (pp.53-54) but economic success does not automatically follow.Small independent co-operatives, financed and developed by groups of workers, create atype of business which may have meaning to the individuals involved, but lacks anysignificant, enduring impact on the overall economy. Many Canadian co-operatives are"marginal businesses with the members either working part time because of low revenuesor working irregularly because their service is seasonal." (Quarter, 1989:54) Frequentlythey lack resources and, therefore, must draw small starter salaries. Lack of capital, weakmarketing, minimal planning, and the isolation of each enterprise result frequently in highfailure rates and low earnings.(Quarter,1989:54)16With few exceptions, Canadian co-operatives have been directed by individuals"suspicious of developing close relationships between their organizations andgovernments."(Laycock,1987:19) Hence, for many co-operators, any involvement,including policy development for the state or co-operative involvement in political activityis only feasible to resolve short term crises. Political neutrality is a principle traced backto the Rochdale pioneers. In striking comparison, capitalist firms perceive their relationswith political bodies as crucial to their ability to function in the Canadianenvironment.(Laycock,1987:20)Capital is a fundamental problem in setting up new Canadian co-operatives. Co-operators initially lack money to pay consulting firms. Consultants in capitalist countries,meanwhile, do not generally encourage worker ownership. Hence, Quarter (1989) arguesthat resource groups specializing in co-operative development are required:Unlike conventional consultants, who are detached from the enterprises theyassist, the members of resource groups enter into a symbiotic relationship withworker-owned enterprises, taking a leading role in their development, a role thatin turn becomes the raison d'etre for the resource groups. In other words, resourcegroups are an integral part of what they are creating. Initially, at least, theyprovide a new enterprise with such key components of entrepreneurship asbusiness planning and market and financial analysis.(p.34)Indeed, as Quarter (1989) maintains:Start-ups of worker co-operatives have gone hand in hand with specialized'resource groups' committed to their development. Resource groups provide aninfrastructure consisting of advocates and technical experts, and they assist inassembling the financial package -- the lifeblood of any new business.(p.33)Even when co-operative members seek the services of resource groups, however, theresource groups themselves often lack capital to provide ongoing support to the co-operatives. In most cases, external funding from private and government sources is needed17for consultants or resource groups and co-operators to earn acceptable salaries. Still, theconsultants and resource personnel often draw insufficient salaries, a situation which canbe sustained only temporarily.In addition, despite the volume of worker co-operatives throughout Canada, "theinterconnectedness that signifies a movement is lacking." (Quarter, 1989:36) And co-operative federations in Canada tend to be unifunctional institutions, with interests only inparticular sectors such as housing or banking. Hence, although Canadian co-operativesappear to perform at least to the standard of small privately-owned enterprises in similarcircumstances, at the same time:The independence of worker co-operatives has denied them economies of scale inmarketing, purchasing, and support services -- economies that reduce the risks offailure in a competitive market."(Quarter,1989:36)According to Quarter, "the impact of this structural weakness should not beunderestimated for either existing enterprises or the development of new ones."(p.37) Onechallenge, therefore, is to create an approach to development which will "assist the workerco-operative movement to overcome its marginal status."(p.53)To significantly affect the economy, co-operative movements require qualifiedresource personnel, capital and ongoing support, in much the same way as do largeconventional firms and their subsidiaries. Co-operative movements thus need:...a proactive approach to development whereby professional planners indevelopment groups identify markets for prospective enterprises and, inpartnership with co-operative entrepreneurs, carefully plan the start of a newbusiness...(Quarter,1989:53)Quarter (1989) maintains that without resource groups worker co-operatives would beestablished at a much slower rate, that "evidence from virtually every country withsignificant development in worker co-operatives suggests that resource groups acceleratethe pace of development."(p.33)3.3. A Co-operative SystemIn order for co-operative development to be wide-spread in any country and fornew co-operatives to survive, a system must be in place to provide sources forentrepreneurship, capital and ongoing support. Quarter (1989) therefore contends that thestability of worker co-operatives would be greatly secured by establishing "systems ofcompanies rather than concentrating on isolated enterprises:The argument in favour of a systems approach is based upon the success of theapproach in areas such as Mondragon, and on the relative failure of independent,isolated co-operative enterprises.(pp.35-36)1819CHAPTER 4THE MONDRAGON APPROACH4.1 The Mondragon ApproachThe Mondragon approach to co-operative development, an organic, holisticapproach, signifies the placing of integrated parts to make up an organic whole, uponwhich the parts are dependant. As Greg MacLeod (1989) contends:No part of the Mondragon experimental complex exists on its own. It is anorganic network of parts and pieces with roots deep in the local community,which nourish and support each other. That philosophy is exportable, though themechanical bits and pieces of the system may not be.(p.187)4.2 The Beginning of the Mondragon SystemThroughout their history, the Basque people have developed various co-operativeeconomic activities, including local communal work, industrial co-operatives, consumerco-operatives, agricultural labour leagues and fishermen's guilds. In the years leading upto the Civil War of 1936, both the social-anarchist positions and the Basque socialchristianity movement promoted and backed co-operative activities.(Caja LaboralPopular,1986:13)The foundation of the Mondragon co-operatives owes much to the work of aCatholic Priest, Don Jose Maria Arizmendiarrieta (usually shortened to Arizmendi), anexpert on the Church's social doctrine with a profound yet pragmatic vision for improvingthe social order of the Basque community. When Arizmendi was sent to Mondragon in1941, the town was a community of 8000 people, economically depressed and sufferingpolitical and economic oppression following the Republican defeat in the Spanish Civil20War. Arizmendi concluded that Basque workers required technical training if they were toimprove their economic, political and social condition. In 1943, he and his group ofstudents persuaded one-quarter of the town's residents to contribute to the foundation ofthe Mondragon Technical College, which combined professional-technical training withsocial doctrine.(Jose Maria Larranaga,1990; Caja Laboral Popular,1986:13)Arizmendi taught that the problems associated with labour and capital could bealleviated if workers owned and operated their own workplaces democratically, insolidarity with the local community. According to John Cort (1982):What he (Arizmendi) himself taught the students, besides an emphasis oncompetence and an impatience with theory divorced from practice, was the socialteaching of the church, including that passage from 'Quadragesimo Anno' thatencourages partnership arrangements whereby 'wage earners are made sharers ofsome sort in the ownership, or the management, or the profits.'(p.370)Arizmendi's students generally agreed with him that employees should have a share in theprofits they generated. In 1956, when five of his students completed engineering school atthe technical college, and had gained experience in conventional firms, they establishedthe first of the Mondragon co-operatives, an electric stove manufacturing cooperativenamed Ulgor, an acronym for the names of the five founders. With a workforce of 23,Ulgor was founded loosely along democratic lines, and in 1959 adopted a formal co-operative constitution, largely written by Arizmendi.(Goyder,1979:24; Larranaga,1990:370;Cort,1982:370; Gutierrez-Johnson, 1984:36; Jordon, 1982:29; Kaswan and Kaswan,1989:9;Caja Laboral Popular,1986:13-14)Ulgor began with borrowed resources and a modest product (paraffin stoves). Likeother producer co-operatives, it was established with democratic principles and a high21value placed on the dignity of labour:Its (Ulgor's) creation was aimed at establishing a modern democratically runcompany, bearing in mind the 'aim of the members of the company that manuallabour should enjoy the prerogatives inherent in its dignity, by means of thestructural subordination of the other necessary elements in all productiveprocesses.' To do this it would become a Co-operative company, since amongstall the legal company structures envisaged by Spanish legislation this mostadequately met with the aim of the founders.(Caja Laboral Popular,1986:14)The founders of Ulgor made the decision to begin small, with a technology theycould manage, yet seeking an expansive process. For example, Ulgor paid an unusuallyhigh price for the permit to start operations, because under Spanish law that particularpermit contained a clause enabling Ulgor to produce a large range of durable andintermediate goods. Ulgor could thus expand its production range without state approvalfor new permits each time a new product was developed, and Ulgor members could thussearch continually for ways to expand production and employment. Ulgor sent scoutsthrough Spain and Europe to find potential products and processes, purchased advancedEuropean technologies, and introduced them into the Basque region. Administrative andmanagerial rationalization were also introduced, to co-exist with the co-operativestructures in place.(Gutierrez-Johnson,1984:39)Ulgor's success led to the formation of additional co-operatives for themanufacturing of machine tools and food handling equipment, and a consumer co-operative store. Essentially, Ulgor would choose a new product and then launch a new co-operative firm to carry out the operation. The new firm would encompass the sameorganizational principles as those of Ulgor, and organizational affinity made linkageformation natural and allowed the sharing of resources to achieve economies of scale.22In addition, by 1959 the producer co-operatives of Funcor and Arrasate, and theSan Jose Consumer Co-operative had emerged. Their common problems includedinsufficient financing for further development, lack of social security (due to Spanish Lawwhich held that co-operative members were self-employed and therefore ineligible forstate assistance in social security), and a lack of co-ordination and technical assistance.Hence, together with Ulgor they decided to create their own environment in order tosurvive and expand in what they deemed as a "capitalist system hostile towards them inprinciple."(Caja Laboral Popular, 1986:14-15)The four co-operatives responded by creating their own financial institution, theCaja Laboral Popular, in 1959. This Community Co-operative bank, discussed in moredetail in Chapter 6, was established to provide loans, accounting services, and eventuallyresearch and technical assistance. The technical college, meanwhile, infused with Christiansocial teaching, was providing competent managerial personnel with social principles.(Larranaga,1990; MacLeod,1990; Cort,1982:370)4.3 Mondragon TodayThe Mondragon co-operative complex includes a wide range of industrial co-operatives, including Spain's largest producer of refrigerators and stoves, one of Spain'smajor machine tool producers, and a wide variety of electronic and technologicallyadvanced enterprises. Member enterprises include virtually every field, includingagriculture, construction, housing, educational, consumer and service co-operatives, one ofthe largest chains of consumer stores in Spain, a social insurance and health service co-23operative, a technological research centre, and their own bank, the fastest growingfinancial institution in Spain.(Kaswan and Kaswan,1989:10)The Development of the Mondragon Co-operatives has been remarkable, not onlyduring periods of industrial expansion, but also during recessionary times. Following the1973-1982 recession, for example, which caused the demise of a large number ofindustrial firms in the Basque region, approximately 178,000 workers were unemployed inthe region, representing an unemployment rate which averaged approximately 18 percent.During the same period, the Mondragon co-operatives protected its 11,000 existing jobsand created 7,000 new ones, along with 37 new co-operative enterprises. Its salesincreased at an average annual rate of 25 percent, and its industrial investments grew at anaverage annual rate of 15 percent. Similarly, in 1985, with a regional unemploymentproblem of more than 20 percent in the Basque region, the Mondragon complex added366 new jobs.(Kaswan and Kaswan,1989:10; Fleckenstein,1992:62)One of the most extraordinary of Mondragon's achievements is its proven abilityto create and sustain employment. Of the over 187 diverse enterprises, scatteredthroughout the Basque provinces, not one worker has ever been laid off, and there hasbeen only one corporate failure, a small fishing co-operative which was dissolved in the1950's.(Cort,1982:370)A social commitment that Mondragon firmly retains is that of job creation andsecurity. New co-operatives and jobs are being created continually. The Mondragoncomplex offers continual employment up to retirement age, and has never laid a workeroff, but has moved workers to different areas of the complex when required. In 1989, the24Mondragon co-operatives employed 22,000 worker -owners.(Fleckenstein,1992:63; Whyteand Whyte,1989:x) Mondragon factories function at a level equal or superior in efficiencyto that of capitalist enterprises in the same area. Efficiency in terms of the use made ofscarce resources has been higher, as well as the co-operatives' growth record of sales,exports, and employment, both under favourable and adverse economic conditions.(Henkand Logan,1982:126; Gutierrez-Johnson, 1984:36)In addition, the social performance of the industrial complex of Mondragon isoutstanding, according to many observers. Direct and indirect participation of workers isachieved through the co-operative structures of worker-ownership and one-member, one-vote decision-making. The co-operatives have filled the vacuum in health care, socialsecurity, education, and job creation left by the repressive Francisco Francogovernment. (Gutierrez-Johnson, 1984:36)The consultant groups which do the planning for the Mondragon co-operatives, aswill be discussed in Chapters 7 and 8, are the so-called second and third level co-operatives. Direct costs of development and consulting services are initially covered bythe Caja Laboral and are later assigned to a new co-operative as an operating expense.Developing new co-operatives, which is costly, involves planning time for projects thatprove to be non-feasible, hence, the full costs of development are not borne by a new co-operative.CHAPTER 5THE INDIVIDUAL CO-OPERATIVES5.1. The ModelIn order to understand the dynamics of the Mondragon experiment, it will benecessary in this chapter to acquaint the reader with the structures of the individual co-operatives. At the same time, the dangers of doing so should be emphasized. Structures inan experiment such as Mondragon are continually changing to conform to a dynamicenvironment as well as to the perceived needs of the local population, and will thereforebe extremely flexible. Weiner and Oakshott (1987) explain that Mondragon is:...feeling its way and has no preconceived notions about the organizationalstructures, rules and legal forms it should adopt. Giving the most detained attentionto these, keeping them under review, and not allowing them to ossify is part of theMondragon tradition.(p.5))Another danger in concentrating upon individual co-operative structures is apotential loss of focus on the organic nature of relationships in the co-operative systemand the community. Examiners must avoid the perception that the individual componentsof the system equal the whole; the sum total of the parts are, as is the case in anycommunity, greater than the whole. MacLeod (1989) maintains that:No part of the Mondragon experimental complex exists on its own. It is an organicnetwork of parts and pieces with roots deep in the local community, which nourishand support each other. That philosophy is exportable, though the mechanical bitsand pieces of the system may not be.(p.87)252 6Mondragon is not merely an assortment of separate, independent enterprises, but a closelyknit community of co-operatives.(Goyder,1979:26; MacLeod,1989:187) As will be seen inthe following chapters, the Mondragon co-operatives are intricately connected to eachother and to the community around them.Yet, by providing a discussion of the decision-making structures of the individualco-operatives, we are able to examine the extent to which participation strategies and,hence, the co-operative values have been maintained at the individual co-operative level. Itis then possible in subsequent chapters to determine the extent to which these sameprovisions have endured with the immense growth of the complex, and to thus gain moreinsight into the practical and even the ideological priorities of decision makers at theMondragon complex.Details will be primarily drawn from the Ulgor experience. As the first of theMondragon co-operatives, Ulgor has been the focus of a wide array of literature, as it hasbeen utilized as a standard co-operative model by the other co-operatives and is thereforestrikingly similar in structure to most of the Mondragon co-operatives.5.2. The Production CompaniesThe approximately 186 co-operatives that make up the production component ofthe Mondragon system can be divided into three broad categories: industrial co-operatives,agricultural co-operatives and service co-operatives. The industrial co-operative firmsmanufacture a wide range of durable goods, intermediate goods, capital equipment, andhigh technology electrical products. Items produced include items as diverse as kitchen2 7appliances, hydraulic equipment, surgical equipment, forklifts, furniture, and toolcomponents. In addition, there are eight enterprises engaged in such agricultural activitiesas milk product processing, animal feed production, house plant operations, lumberproduct processing, fruit and vegetable processing, and cattle and pig breeding. Third, theservices component of the production co-operatives includes four co-operatives whichprovide restaurant meals to factory workers, automated factory systems, maintenanceservices for computer systems, and sewage and water treatment facilities in and aroundthe town of Mondragon. Together, the industrial, agricultural and service co-operativesmake up about five percent of employment in the Basque region.(Fleckenstein,1992:61-63;Phillips, 1991:38-39; Gutierrez-Johnson, 1984:36; MacLeod, 1989:6; Weiner andOakshott,1987:6)There are three broad ways in which co-operative firms have become members ofthe Mondragon complex. First, there are the original co-operatives: Ulgor, Arrasate, andFuncor being industrial co-operatives and San Jose (now incorporated into Eroski, asexplained in Chapter 6), a consumer co-operative. Second are those co-operatives whichwere originally established as capitalist firms and later joined the Mondragon complex andadopted co-operative structures. Third, the majority of associated members are thosewhich were created by breaking away from existing member co-operatives, or werefounded by the leaders of the Mondragon group in conjunction with new members whoapproached the leaders with a viable proposal for a new co-operative.The individual production co-operatives range in size from a handful of people toover two thousand in a single co-operative. While most co-operatives bear striking28structural similarities to Ulgor, each varies in accordance with size, preferences andcircumstances.(Weiner and Oakshott,1987:6; MacLeod,1989:5; Kaswan andKaswan,1989:9)5.2.1. The General AssemblyEvery worker-member of a Mondragon enterprise is a shareholder and is entitled toone vote at the General Assembly of that enterprise, regardless of the amount ofindividual capital contributions, seniority or wage level. Hence, all workers are membersof a General Assembly, and it is impossible for non-workers to be members by virtue ofcapital contributions. This differs from traditional capitalist firms, whereby the person withthe most capital is generally the one with the most voting power.Each Assembly meets once per year, although special meetings may be held undercertain circumstances (described below). The General Assembly has two main functions:to approve (or reject) the co-operative's annual operational plan, and to elect replacementsto the co-operative's Board of Directors. (Jose Maria Larranaga,1990; Cort,1982:370;Kaswan and Kaswan,1989:11)In order to encourage worker participation in General Assemblies, many co-operatives ensure that meetings are held at convenient times, such as at the end of schoolyears. In addition, if a worker misses a General Assembly meeting, he is sanctionedagainst voting at the next meeting of the Assembly. According to Jose Maria Larranaga,Director of Co-operative Education at Ikasbide (Mondragon's Management TrainingCentre which will be discussed in Chapter 6), participation rates vary widely from29company to company. The large Fagor plants (discussed in Chapter 7), for example,average approximately sixty percent participation by workers.(Jose Maria Larranaga,1990)5.2.2. The Board of DirectorsThe Board of Directors, composed of between three and nine workers (dependingupon the size of the co-operative), meets at least monthly to review and co-ordinateoperations, and is in charge of appointing and judging the performance of themanagement. The Board also presents the co-operative's annual operational plans to theGeneral Assembly for approval.(Kaswan and Kaswan,1989:11; Cort,1982:370; CajaLaboral Popular,1986:20) Board members hold positions for a period of four years, withapproximately 50 percent replacement each two years. The Mondragon regulations requiremore than one candidate for each seat, hence, there are never elections byacclamation.(Jose Maria Larranaga, 1990)5.2.3. The ManagementGenerally comprised of one manager, the management is the executive body of theco-operative. The manager is responsible for all operating decisions of the individual co-operative. The Board and Assembly produce broad guidelines which must be followed,and offer advice to management, but the daily operation of the co-operative is the fullresponsibility of the management. The manager is appointed to a four year term by theBoard of Directors. The Board is required to have at least three candidates for the position3 0of manager, although a manager is permitted to serve successive terms.(Jose MariaLarranaga,1990; Gutierrez-Johnson, 1984:39; Kaswan and Kaswan,1989:12; Cort,1982:170)As will be discussed in Chapter 7, for example, Mondragon's largest co-operativegroup, Fagor, consists of twelve legally independent member co-operatives. If anindividual co-operative in the Fagor group requires a new manager, that co-operative willrequest the management of the other eleven Fagor co-operatives to suggest potentialcandidates for the position. If a viable candidate is not found in this way, the co-operativemay request suggestions from other Mondragon co-operatives. When the minimumrequirement of three candidates are named, one may be elected by the co-operative'sBoard of Directors.(Jose Maria Larranaga,1990)The chief preoccupation of the manager is the financial success of the co-operative.The manager makes decisions in all areas of the business, including buying, selling,appointments to department heads, and work assignments, subject only to the broadguidelines determined by the Assembly (discussed in Chapters 7 and 8) and the Board. Inessence, the manager has similar freedoms and responsibilities as those which wouldcharacterize management in a conventional capitalist firm. The major difference is thatmanagement at Mondragon, although given full authority to carry out responsibilitieswithout interference, is accountable at the end of the fiscal year to the General Assemblyof Workers and the Board of Directors, rather than to outside stockholders who may beless concerned with the human elements inherent in running the business. In addition, ifthe co-operative worker-members are dissatisfied with the Manager's performance, theycan initiate a special meeting of the General Assembly, with twenty percent of the31workers signing a petition. With the consent of the Board of Directors, the GeneralAssembly then can dismiss the manager or demand a new operational plan. A fundamentalproblem at Mondragon, however, has been finding competent managers with a loyalty toco-operative organization. Replacements are not always easy to find, should a manager befired.(Jose Maria Larranaga,1990; Greg MacLeod,1990; Caja Laboral Popular,1986:20;Kaswan and Kaswan,1989:11-12; Cort,1982:370; Gutierrez-Johnson,1984:39)5.2.4. The Management CouncilThe Management Council is not an elected body, but consists of the heads of keydepartments within the individual co-operative firm. These departmental heads areappointed by the manager of the co-operative, not only to key positions within theirdepartments but also to the Management Council. It serves^as an advisorybody to the Manager as well as a communications channel. As a consultive body, itadvises the Manager on matters which affect the various departments and the co-operativeas a whole.(Jose Maria Larranaga,1990; Caja Laboral Popular,1986:20-21)5.2.5. The Social CouncilOne of the most innovative elements of the Mondragon co-operatives is the'Consejo Social' or Social Council. Mondragon pioneers ascertained that the GeneralAssemblies (the most conventional democratic form of worker participation in co-operatives) were insufficient to ensure conflict-resolution, particularly with Mondragon'sdivision of labour between management and labour. The Social Council was thus created32as an elected, permanent advisory body for the expression of the collective preferences ofworkers as members, performing the functions normally performed by a labour union in aconventional corporation. It allows all workers to express their opinions on all majorpolicy decisions of the firm. The Social Council concentrates upon a wide range of issues,including wage levels, working conditions, safety, community contributions, and otherpolicy issues of concern to the co-operative. There are no economic incentives for servingon the Social Council.(Jose Maria Larranaga,1990; Caja Laboral Popular,1986:20;Fleckenstein, 1992:62; Kaswan and Kaswan,1989:12; Gutierrez-Johnson, 1984:38)Structurally, each department (electrical, marketing, personnel management, etc) ofthe firm elects a representative to the Social Council, which meets quarterly. Therepresentative reports back to the department workers, listens to their concerns, and relaystheir concerns at subsequent Social Council meetings. As the Social Council members arechosen by the various departments and not at the General Assembly, there is a diversity ofpeople elected. All workers, including members of the Board of Directors, are expected tomeet at least monthly with their Social Council delegate in their shops or offices. TheSocial Council may place items of concern on the agendas of General Assemblies orManagement Councils.(Jose Maria Larranaga,1990; Caja Laboral Popular, 1986:20;Kaswan and Kaswan,1989:12; Gutierrez-Johnson, 1984:38)There is no legal obligation for a co-operative to establish a social council, and itsimportance and strength depend primarily upon the particular circumstances of eachparticular co-operative. In some companies, especially the larger ones, the social council isextremely important, not only as an initiator of policy but also as a crucial information33channel. In Ulgor, for example, the social council is extremely important in this regard, asthe departments would be less influential with only the Board of Directors and GeneralAssembly.^Social Councils are also important instruments in making smooth transitionsin technological change within companies. In small, low technology co-operatives thesocial council undertakes fewer tasks.(Jose Maria Larranaga,1990)The size of the Social Council is important in terms of its effectiveness. Ulgor,with 3000 workers, had a Social Council which expanded to eighty members. The Councilbecame too cumbersome, and was later reduced in size to thirty members, now amaximum number commonly accepted in the large Mondragon co-operatives.(Jose MariaLarranaga,1990)5.2.6. The Audit CommitteeThe General Assembly also elects a supervisory-audit committee, sometimesreferred to as the Account Control Board. This body is a three member group whichreviews all financial activities of the co-operative to ensure that the firm is effectivelymanaged. According to the Caja Laboral Popular (1986):...its job basically consists of inspecting the accounts and any documents presentedfor the consideration of the General Assembly. They have a right to anyinformation deemed necessary by the members.(p.20)With the assistance of special support bodies (discussed in Chapter 6) or an accountingfirm, the Audit Committee identifies potential problems in the financial management ofthe co-operative and requests the Board and Management to ensure their resolution. Ifproblems remain unresolved by the appropriate bodies, the Audit Committee has the34authority to call a special meeting of the General Assembly. Moreover, as this isessentially an elected body, and may therefore lack the technical expertise to understandthe implications of the vast sums of financial data, it has the assistance of the L.K.S.(discussed in Chapter 6), and its members participate in special personnel developmentcourses at Ikasbide, Mondragon's management training centre. Essentially, the auditcommittee allows for co-operative records to be open to the membership of the co-operative.(Jose Maria Larranaga,1990; Kaswan and Kaswan,1989:11)5.3. Worker-Member AssociationThe link between the worker-members and the Mondragon Associated Co-operativesystem is formalized by means of a membership contract, in which the rights andobligations of workers are outlined. In essence, as will be seen in the following chapters,the worker-members are obliged to abide by the rules of association and in return areentitled to their part of collective ownership of the system, including a percentage ofprofits (in addition to wages) and the right to participate in the governance. The co-operatives are open to anyone with the requisite skills and training.5.3.1. Becoming a Member at MondragonTo become a worker-member requires two contributions: the first is personalability, which is tested during a probationary period. The second is a capital contribution,which at present is the equivalent of one year's wages for an unskilled worker, depositedinto each worker-member account. (Javier Erdocia,1990) This contribution is essentially a35statement of commitment to the co-operatives. The worker may borrow the money fromthe Caja Laboral Popular or arrange for a 'check-off, by which the contribution isdeducted from his wages for a two and a half year period, with no interest paid by themember-worker.(Phillips, 1991:38; Jose Maria Larranaga,1990; Kaswan andKaswan,1989:13; Caja Laboral Popular,1986:21)5.3.2. Advance EarningsAdvance payments or advance earnings are the sums which each co-operative paysto its workers for their work. Resembling the wages in a conventional firm, they consistof twelve monthly payments, paid at the end of each month, and two extra payments ofequivalent sums made on the 15th of July and the 15th of December.(Caja LaboralPopular, 1986:23)Payment received for work is not considered a wage, but an advance (anticipo) onthe members' share of returns. As mentioned in one Caja Laboral Popular (1986)document:They are called advance payments because they can increase or decrease accordingto the dividends (or negative dividends) that the co-operative pays out (or takesaway) at the end of the year, depending on whether profits have been made ornot.(p.23)Salaries are never fixed absolutely. At the beginning of each fiscal year a figure is setwhich seems reasonable in light of anticipated earnings. This so-called elastic wagesystem is a no-lose situation financially for the co-operative. If the company makes lessmoney, the workers acquire less money. Each year the company decides what the 'wages'will be, depending upon profits anticipated.(MacLeod,1990; Weiner and Oakshott,1987:5;3 6Goyder,1979:5; Caja Laboral Popular,1986:23; Gutierrez-Johnson,1984:39; Kaswan andKaswan,1989:13)To determine the amount of individual earnings at the co-operatives, each memberis allocated a job grade, in accordance with the general Mondragon formula whichassesses criteria such as the importance of the position, the manner in which the workerresponds to the demands of the position, and seniority. Throughout the history of theMondragon co-operatives, the wage grade disparity provision has been expanded. Theinitial practice was to have no more than a three-fold difference in wage, from the lowestpaid to the highest paid employee. At Present, the wage scale is set at five to one, soon tobe six to one as discussed in the last Co-operative Congress (discussed in Chapter 8). Thelowest wage (number one on the scale) is currently the equivalent of about 800 Canadiandollars per month.(Jose Maria Larranaga, 1990). For the most part the highest payment forwork is not more than four and a half times the lowest, with the exception of managers,who may have 'exceptional responsibilities,' and longer than average working days.Management turnovers at Mondragon were considered too high because, with a shortageparticularly of engineers and economists in Northern Spain, many competent managerswere turning to higher paying conventional firms. Certain co-operatives have hiredcontract employees at higher wages still, but only on a limited time basis. The averageentry level wage remains above the regional average for the Basque provinces, and theaverage wage for management is below the regional average.(Fleckenstein, 1992:63; JoseMaria Larranaga,1990; Phillips, 1991:38)375.3.3. Capital Accounts and PensionsTwenty percent of the capital stake which a worker contributes when entering theco-operative system (approximately 10,000 dollars) is placed into his "capital account"(with the remainder placed in the company reserve fund). In addition, fifty percent of thecompany's profits is divided equally into the capital accounts of each worker member, andthe total in each account earns about 6 percent interest annually. Should the co-operativelose money in a given year, the capital accounts make up the deficits. Funds are paid into(or withdrawn from) the account each June and December, although workers are exemptedfrom making up losses for their first six months of membership in the complex. Fundscannot be withdrawn from the capital account until the worker retires or leaves the co-operative system. There are provisions in place for co-operatives to share profits anddeficits with sister co-operatives, which will be discussed in Chapter 6. On average, aftertwenty years of service, a worker receives approximately 100,000 to 120,000 dollars.(JoseMaria Larranaga,1990; Kas wan and Kaswan,1989:13; Caja Laboral Popular,1985:21;Cort,1982:370)If a worker transfers from one co-operative to another in the system, the entry feeis not required and the worker retains the same passbook (capital account). An accordbetween the co-operatives ensures that the worker does not withdraw funds from thecapital account in this event. In addition, should a worker quit a job at a co-operative andleave the system, the Caja Laboral Popular may keep the funds from the worker's capitalaccount for up to five years.(Jose Maria Larranaga,1990)38In addition to the capital accounts, each worker, upon retirement, is entitled to apension which is equivalent to approximately 70 percent of his annual income.(JavierErdocia,1990; Kaswan and Kaswan,1989:13)5.3.4. Non-Member WorkersApproximately two percent of Mondragon workers are not members of theMondragon co-operative system. This figure includes short-term contract workers whomay enter the co-operative system for two to six months, to perform specific tasks, suchas short term consultant work not requiring a full time staff. (For example, Mondragonhas hired temporary employees to initiate a cable television system the Basque region)There are also non-member workers who are undergoing a probationary period beforeacquiring membership. In order to avoid conflict between members and non-members, thegoal is to allow full membership in the system wherever possible.(Jose MariaLarranaga,1990)5.4. Co-operative-Community AssociationThe allocation of profits at Mondragon is governed partly by Spanish law on co-operatives and partly by Mondragon's own provisions.(Caja Laboral Popular,1986:21;Cort,1982:370; Kaswan and Kaswan,1989:13) While it is beyond the scope of this thesisto provide detailed analyses of the extent of the laws governing co-operatives in Spain, itshould be mentioned that the so-called 'social businesses', which include co-operatives,are given certain financial benefits which other firms do not have, usually in the form of3 9tax incentives or grants. In return, social companies must meet certain responsibilities fortheir communities. There are two obligatory funds in particular which have been providedfor by legislation by the Basque Government: the Obligatory Reserve Fund and the SocialAdvancement Fund. A minimum of ten percent of a social company's profit must go to asocial advancement fund, and a minimum of twenty percent to a company reserve fund.The social advancement fund is a flexible fund designed for "social purposes to benefitthe community." (Jesus Larranaga:1990) This ranges from providing textbooks to schoolsto providing education to worker-members of the co-operative. The Reserve Fund,meanwhile, is a permanent part of the company's equity and can never be withdrawn bythe employees. A typical division of profit for a Mondragon co-operative is 10 percent tothe social advancement fund, forty-five percent to the company reserve fund, and forty-five percent to the capital accounts of the worker members. If a co-operative experienceslosses, fifty percent are made up from workers' accounts, and fifty percent from thereserve fund.(Jose Maria Larranaga,1990; Caja Laboral Popular,1986:21; Cort,1982:370;Kaswan and Kaswan,1989:13)These features of profit allocation guarantee strong public support as well as alarger pool of working capital than would otherwise prevail. In keeping with Mondragontraditions from the time of Arizmendi's teachings, most (ninety percent of) funds stay inthe co-operative system, in capital accounts and reserves, to be used in social services andthe creation of more co-operatives.(Javier Erdocia,1990)As will be noted in Chapter 6, combined with favourable state relations, a strongcommunity bank and educational institutions designed to assist the expansion and growth40of the co-operatives, the system is also capable of producing and maintaining aninfrastructure which intertwines with and serves the associated production co-operatives,offering financial and managerial expertise as well as social services to them.41CHAPTER 6THE SECOND LEVEL6.1. The Support Co-operativesSupport co-operatives are those whose function is to offer concrete financial, socialand managerial support to the base co-operatives. They were created because of a need forthe co-operatives to confront the unavoidable problems of financing, social security andmanagement. The primary function of most of the support co-operatives is to "promote,assist, and develop new and existing co-operatives."(MacLeod, 1989:185) They include theCaja Laboral Popular (Co-operative Community Bank), L.K.S. (Lan Kide Surtaketa,formerly the Entrepreneurial Division of the Caja Laboral), Ikasbide (a ManagementTraining Centre), Hezibide Elkartea (formerly the League of Education and Culture),Lagun-Aro (for social security), Ikerlan (a technical research centre), and Lankide Export(a promotional export company).(MacLeod,1989:185; Caja Laboral Popular,1986:37)Each worker in a service institution is an individual member of the Mondragoncomplex, with the same rights and responsibilities as those in production enterprises. Butthese co-operatives are referred to as 'second level' or 'second degree' co-operativesbecause the 'base' or 'first level' production control the service co-operatives by electingtheir own members to the General Assemblies and the Board of Directors of the serviceco-operatives. Because it is the individual production co-operatives which they serve, thesupport co-operatives will have a General Assembly and Board of Directors composed of42fifty percent their own employees and fifty percent representatives of production co-operatives.(Weiner,1987:4; Jordon, 1982:29)6.2. The Community BankThe Caja Laboral Popular is of crucial importance to Mondragon's success.Mondragon members admit openly that there would be no system of co-operatives atMondragon if they had failed to build a co-operative banking system. Weiner (1987)suggests that:The spirit of the whole movement is expressed in (the Caja Laboral Popular's)Basque name 'Lan Kide Aurrezkia': Lan Kide translates almost exactly into theGerman 'Gemeinwirtschaft', or, roughly, an 'economy managed in the publicinterest.'(p.4)Indeed, the Caja has historically financed, assisted, advised and regulated the behaviour ofthe base co-operatives. Today the Caja has more than 164 branches in Spain, primarily inthe Basque region but as far away as Madrid, and close to 3 billion dollars in assets. It isgrowing faster than any other bank or credit union in Spain.(Phillips, 1991:7;MacLeod,1989:187; Whyte and Whyte, 1989:5; Quarter and Melnyk,1989:12; Kaswan andKaswan,1989:13)The role of the Caja was clear since its conception in 1959: to entrap local capitaland invest in the creation of local enterprises for the development of the Basque region,which was suffering from high unemployment. Without resources of their own, thefounders of the co-operative system at Mondragon asked for the financial backing fromtheir community. The motto of the Caja was "savings or Suitcases", implying that eitherthe community must support itself through this community development venture or4 3continue to invest in foreign banks and thus have to move away due to lack ofemployment. The co-operators were successful, partially because they managed to developa concept of savings that was permitted by law to which no one had previously paidattention. It was called 'worker savings', and paid an interest rate of one-half percentabove the one paid by banks and regular loan associations.(MacLeod,1989:185;Jordon, 1982:28; Gutierrez-Johnson, 1984:37)The Caja is the institution which historically enabled the co-operatives to takeadvantage simultaneously of the benefits of worker participation in decision making andeconomies of scale. It has also historically been the forum in which inter-co-operativepolicy was decided. Rules of personnel practice (such as wage disparities), as well aseconomic strategies, were set by the individual co-operatives, within the guidelines setuntil recently by the Caja Laboral Popular.As mentioned above, the Caja began with the broad purpose of generating localcapital for the creation of new enterprises. Hence, from the beginning there were twoseparate Caja divisions, the fmancial and the entrepreneurial. These divisions are legallyseparate second-degree co-operatives today, each with their own General Assembly andBoard of Directors.(Quarter, 1989:35; MacLeod, 1989:185-186)6.2.1. The Caja's Financial DivisionThe internal structure of the Caja is similar to that of any base co-operative, with aGeneral Assembly, Board of Directors, Management Council, Social Committee, andAudit Committee. As the Caja is essentially a second-degree co-operative, however, its4 4General Assembly and Board of Directors are of mixed composition, comprising fiftypercent worker members of the Caja and fifty percent representatives of the base co-operatives. Caja Laboral documents (1986) point out accordance with the spirit that urged the creation of the Caja LaboralPopular...the co-operatives are members of the Caja Laboral Popular ...this fact hasmarked the Associated Group's organizational model as each Co-operative retainscomplete authority with respect to its own performance whilst sharing authoritywith the other Co-operatives and individual members with regard to the CajaLaboral Popular.(p.19)The Caja tends to earn more profits than the other co-operatives, but Caja employees'shares of the profit are limited to the average earned by all the associated co-operatives.(Kaswan and Kaswan,1989:13)An objective of the Caja Laboral is to attract and channel capital into the co-operatives, by encouraging the establishment of new co-operatives. (Caja LaboralPopular,1986:39) The costs for developing new co-operatives at Mondragon is assigned tothe new co-operative as an operating expense, but initially the Caja Laboral provides thesecosts if necessary. (MacLeod,1989:186) The Caja provides substantial interest reductionsto co-operatives in difficulties and to new co-operatives. New co-operatives, for example,are initially charged eight percent interest annually on capital rather than the usual thirteenpercent.(Kaswan and Kaswan,1989:13)The Caja will provide loans of up to seventy percent of the capital funds requiredto set up a new co-operative business, with the balance coming from the members andperhaps a small state grant or loan. The new co-operative, in turn, must become a memberof the Associated Group, through a formal contract of association, and must abide by theassociation rules.(Jordon,1982:29)45The Caja is a crucial linkage in the Mondragon complex. Historically co-operativemovements in Canada and elsewhere have received the bulk of funding from outsidesources, including non-profit organizations, private loans and government grants or loans.Frequently they have trouble generating sufficient funds to operate over a long term.However committed their employees, most co-operative movements have been criticallyshort of capital. A historic example is the Rochdale co-operative, which received capitalfrom outside sources, but in doing so was forced to share votes with capital shareholders,and thus lost worker control over its own operation.6.3. Lan Kide Surtaketa (L.K.S.)L.K.S. is the reorganized Entrepreneurial Division of the Caja Laboral Popular,which now operates as an autonomous entity within the Mondragon complex. Its objectiveis to provide technical and entrepreneurial support to companies, particularly theMondragon Associated Co-operatives, and to attract new member businesses to the group.With over 115 member-workers, L.K.S. resembles a consulting-accounting firm, andprovides management, bookkeeping, marketing, and planning to member co-operatives aswell as outside firms. The close monitoring role played by this institution has allowed forquick, effective responses to problems, and is a major reason for the minimal failure ratesof member co-operatives.(Quarter,1989:35; Phillips,40-41; Fleckenstein, 1992:62; CajaLaboral Popular,1986:39) According to MacLeod (1989):Its (L.K.S.'s) functions are three-fold: 1) to develop new co-operative enterprises;2) to provide technical consulting assistance to members; and 3) to audit andmonitor the financial operations of all members.(p.186)4 6L.K.S. employs experts in the fields of industrial business planning, plant engineering,stock control, quality assurance, land purchasing, urban planning, accounting, economics,and personnel administration.(Goyder,1979)There are several areas in which L.K.S. meets its objectives. The EconomicAnalysis Department, for example, undertakes macroeconomic studies of the Basqueregion as well as national and international trends in the economy. For at least five yearsbefore Spain considered entry into the European Common Market, this department hadbeen analyzing the common market's potential impact on Mondragon businesses. It issuesregular reports on most aspects of the Basque economy, and is currently studying changesin the world economy to identify four or five favourable areas ofconcentration.(1V1acLeod,1989:186)In addition, the Auditing and Information Department collects, analyses and keepspermanent records of the commercial situations of all member co-operatives. TheIndustrial Promotion Department researches and locates new products and services, andcollaborates in the promotion of new member co-operatives. This department, primarilyresponsible for assisting with the establishment of new co-operatives, is always in searchof new ideas in such countries as Japan, Germany, France, Great Britain and the UnitedStates. About 30 proposals are analyzed per month, going through a filtering process toend up with about 10 percent of them. If an idea for a new co-operative is consideredfeasible and desirable, the process continues. A prospective manager and an advisor ischosen, and an intense feasibility study begins. The Caja must approve the plan forfinancial support, and the manager recruits a technical team from within the system.4 7The Intervention and Advice Departments concentrate upon those co-operatives(usually at the launch stage) which are in economic trouble or are not meeting their fullpotential. The Urban Planning and Building Department concerns itself with civil andindustrial construction projects, promotes housing, and provides architectural andmanagement services. The Agricultural-Food Promotion Department promotes newagricultural initiatives in the Basque region, studies the development prospects of existingones, and lends technical and entrepreneurial advice to these agricultural co-operatives. Arecent objective of this department has been to link forest production to the retail market,using planning and technology. In essence, these departments are all concerned withmonitoring the performance of all the member co-operatives, controlling the admission ofnew ones, and spotting opportunities for starting new ones.(Caja Laboral Popular,1986:39;Quarter,1989:35; MacLeod,1989:186)6.4. Hezibide ElkarteaPreviously the League of Education and Culture, Hezbide Elkartea has itsbeginnings in 1948 under the direct influence of Arizmendi, with the purpose ofcoordinating and stimulating educational activities among co-operatives. It became a co-operative in its own right in 1964.(Caja Laboral Popular,1986:39)Hezibide Elkartea incorporates teaching centres of various educational levels forco-operative firms, private economic organizations, and public state institutions. In theacademic year 1984-85, Hezibide was providing education from the day care to theuniversity levels, to 6,201 regular students and an additional 2000 students who took part4 8in unregulated classes (primarily Basque Language Training).(Phillips,1991:41;Fleckenstein, 1992:63)There are three co-operative centres at the university level: the Don Jose MariaArizmendiarrieta Eskola Politeknikoa (EPP), in the town of Mondragon, offers technicaltraining courses. The EPP concentrates primarily in engineering streams such as computerengineering, production engineering, industrial electronics, and microelectronics. TheEscuela de Tecnicas Empresariales (ETEO) covers university business courses. The IrkasleEskola provides training courses for Basque speaking teachers.(Caja LaboralPopular,1986:45)6.4.1. SaiolanThe EPP has recently, as part of its long-term plan, established 'Saiolan', in orderto create a technologically higher level of studies. Saiolan specializes in the creation ofnew enterprises by implementing completely new ideas for commercial pursuit. Theregular Saiolan staff begins by concentrating upon a variety of new ideas and concepts,from which a few potentially feasible ideas are selected and subsequently streamedthrough a testing and implementation program. Each program lasts approximately 18months, during which time a team of 'idea' promoters are chosen and a three phase planis initiated, taking the idea from theory to practice. Saiolan, in essence, has a dual role:the first is the gathering of information on new, applicable technologies, such as lasers,holography, and bio-technology, and turning theory into practice: the second is to formcadres of highly competent managers who understand the various technologies. Since4 91983, about a dozen new companies have been established in this way. Some become partof the Mondragon Co-operative System and some operate on their own, outside of the co-operative system. An example of a recent company set up is a laser company which hasrecently become part of the Fagor group (discussed in Chapter 7).(Caja LaboralPopular,1986:45)6.4.2. AlecoopAlecoop is another important institution related to Hezibide Elkartea. Incorporatedin 1970, Alecoop provides students from the EPP, the ETEO, and the Irkasle Eskola withdirect co-operative work experience in conjunction with their theoretical studies. By 1984Alecoop had 337 student members working part time and had annual sales figures of869 8 million pesetas, primarily through supplying teaching materials and components forthe domestic appliance sector. While the turnover is large, as only students may bemembers of Alecoop, the co-operative not only finances the studies of students but alsogives them experience in preparing them for work in the co-operative system.(CajaLaboral Popular, 1986:45 -46; Phillips ,1991 :41; Fleckenstein, 1992 :63)6.4.3. The IkastolasIkastolas, or Basque speaking schools, associated with the Mondragon complex hadby 1984 a total population of 35,000 students in the four Basque provinces. TheseIkastolas were triggered by the anti-Basque policies of the previous Franco regime inSpain, which made the Basque language illegal to speak outside of the home. Now that5 0the state has abandoned its anti-cultural approach, the extent of future co-operativeinvolvement in this type of education remains to be seen. The schools are currently in theprocess of becoming state run schools, as the government of the region now has morefavourable policies.(Jose Maria Larranaga,1990)6.5. IkerlanIkerlan, a technological research co-operative, was created in 1977 with thebacking of the associated first-level co-operatives, the Caja Laboral Popular and thePolytechnical School. This second degree co-operative responds primarily to the need ofthe already existing co-operatives for applied research. This co-operative specializes inrobotics, microelectronics, and computer assisted design, and has contracts with co-operatives as well as state and private companies, and by 1982 had begun to receivesupport from the Basque government.(Kaswan and Kaswan,1989:11; Caja LaboralPopular,1986:42; Fagor,1990:3) According to Caja Laboral Popular (1986) statements:Ikerlan's activities are centred on the field of research aimed at the acquisition anddevelopment of technology and its application to industrial products and processeswith the fundamental aim of being of service to the industrial sector and to anyother body or institution which may solicit its aid to resolve their current or futureproblems in the technological areas in which they are involved.(pp.42-43)There are four broad areas in which Ikerlan develops its research. The first iselectronics, which comprise Industrial Instrumentation, Microcomputing, IndustrialAutomation, and Tests and Services Departments. Second, there is the Mechanics field,with includes Computation and Design, Thermal Services, and the Technical Office andPrototype Workshops Departments. The third, Computer Science, comprises the Software51Development Department and the Computation Centre. Finally, the Productions Systemsfield includes Organization, CAD/CAM, and Robotics and Transport.(Caja LaboralPopular, 1986:42-43)In this way, Ikerlan has carried out over 100 concrete research projects forcompanies and is continually approached for services. For example, this co-operative hasalready developed its own industrial robot and is testing how it can be adopted to theparticular needs of Mondragon's co-operative manufacturing companies. Ikerlan providesindustrial services such as the development of industrial prototypes, advice, computations,seminars, and short training courses. The support co-operative also "takes part in nationalas well as international research projects, with companies such as Eureka and Esprit."(Fagor,1990:5) By the end of 1984, Ikerlan consisted of 94 staff members, including 54full-time worker members, 12 part-time Polytechnical College Scholarship students, 6part-time Polytechnical College teachers, and 22 part-time students from the Alecoop Co-operative. (Caja Laboral Popular, 1986:42-43)6 6 IkasbideIkasbide was created in 1984 as a business co-operative to fill a series of gapsdetected in managerial training in the areas of technical skills, co-operative managementpractices and Basque language training. Because of the decision-making involvement oflarge numbers of worker-members, and a knowledge of how the Associated Groupoperates is vital to success, Ikasbide is responsible for courses for Boards of Directors,Social Councils, Audit Committees and Management. To bring existing management up to52date with managerial methods, technical training for management is undertaken jointly byL.K.S. and Ikasbide. An attempt is being made throughout the Mondragon system topromote the use of Basque language, hence, Ikasbide offers Basque courses specifically toSocial Committees, Managerial personnel and Board of Directors members.(Caja LaboralPopular, 1986:44)In addition, in accordance with studies which determine the potential needs of theco-operatives in the long term, Ikasbide offers post-graduate training courses for post-graduates (graduates of outside universities) who lack professional experience but whodesire to become co-operative members, to give them technical and entrepreneurialexperience and in turn enable them to carry out management activities within one of theAssociated Group's co-operatives.6.7. Lankide ExportAnother important second-degree co-operative is Lankide Export, which wascreated in 1980 to help the associated co-operatives to successfully compete in the exportmarket. During the Franco era, Spain was heavily protected from outside competition, andSpanish companies such as the Mondragon system were able to dominate the local market.This has changed with new Spanish policies, the emerging European Common Market,and Spain's entry, scheduled for completion in 1992. According to the Caja LaboralPopular:For the co-operatives, exporting competitively, far from being a mere complementto sales in the domestic market, is an unavoidable requirement for their ownsurvival in a future which seems to be irremediably tense and demanding. For this53reason, Lanldde export was created in 1980 as a means to support financially theexports of the Associated Co-operative Group.(Caja Laboral Popular,1986:43)The Caja Laboral Popular's publication, The Mondragon Experiment,  outlines sevenspecific mandates of Lankide Export:1) To create and participate in the capital of commercial companies located abroad inorder to promote products manufactured by Mondragon co-operatives.2) to create its own commercial structures and branch offices abroad and to sell productsmanufactured by the co-operatives.3) to carry out trading and counter-trading deals on behalf of the co-operatives.4) to help the co-operatives by providing expertise in export management, and in gainingmarkets in 'difficult' or in 'geographically distant' areas.5) To participate in international fairs (for tenders and bidding) for deals in which allproducts requested come from the various Mondragon co-operatives.6) To carry out technology transfer deals in the form of manufacturing skills andknowledge, sales of industrial processes, or products.7) to participate as a co-investor in mixed manufacturing companies.546.8. Lagun-AroBecause Mondragon workers are considered by the Spanish state to be self-employed, and thus ineligible for Spanish social security, Mondragon co-operativesformed their own health and welfare institution. Lagun-Aro is the second-degree co-operative which manages pension funds for the associated co-operatives. It also has alarge industrial medical department that specializes in worker safety and health, and helpsco-operatives to adopt safety standards.(Jordon,1982:29; Kaswan and Kaswan,1989:11)Lagun Aro was in the original structure a branch of the Caja Laboral Popular,responsible for social standards in the co-operatives. The need for social security was oneof the factors which led to the creation of the co-operatives and to the Caja LaboralPopular. In its first phase, the social department covered short term social needs ofmembers, while the Autonomous Workers' Friendly Society was established to respond tosuch areas as pensions and financial death services. In 1969, the Autonomous WorkersFriendly Society and the social department of the Caja were merged into one co-operative,known as the 'Friendly Society for Social Provisions' and named Lagun-Aro.The funds necessary to ensure adequate services to worker-members comes fromthe co-operative members themselves. The amount paid monthly by each individualmember depends upon both fixed and variable quotas, based upon an individual's advancepayments. The fixed quota ensures that all member families receive medical assistanceand death expenses. The variable quotas cover benefits such as temporary work55incapacity, pensions, widow's pensions, and unemployment, which are proportional to amember's advance payments.(Caja Laboral Popular,1986:40)The company medical service includes a Clinical Laboratory Department,responsible for biological, bacteriological, and water analysis in the workplace. ThePsychology Department collaborates with other doctors to ensure appropriate medicaltreatment for workers. The Safety and Hygiene Department increases safety at work bylessening the number of accidents.(Caja Laboral Popular,1986:41)In April, 1982, Lagun-Aro Insurance, a separate member co-operative, was createdto manage all the various types of insurance. Caja Laboral Popular and Lagun-Aro have50 percent shares respectively in the capital of Lagun-Aro Insurance, which by 1986amounted to more than 160 million pesetas.(Caja Laboral Popular,1986:42)6.9. Eroski: The Consumer LinkEroski, an integral component of the Mondragon Co-operative system, is a retailchain with over 265 outlets (over 98 owned by the Mondragon group and the othersoperating under franchise with supplies from the Eroski warehouse which largelypromotes goods from the group's production co-operatives). With annual sales of over 600million dollars, and 75,000 regular customers, Eroski is the largest supplier of food in theBasque provinces and also sells clothes, shoes, appliances, and other items generallyrequired by consumers, with much of the merchandise supplied by the Mondragon co-operatives.(MacLeod,:1989:6; Jordon, 1982:29; Kaswan and Kaswan,1989:12)56The consumer co-operative was established in 1969, with the amalgamation of 9consumer co-operatives, including a founding co-operative, San Jose. At the time, the nineco-operatives decided to merge to form one co-operative in order to avoid "the dispersionand multiplication of the decision making bodies that make consumer co-operatives aninefficient and split project."^The individual stores in the Eroski chain are separateco-operatives in their own right, but function as a group, much like the zone groups whichwill be discussed in Chapter 7.(Caja Laboral Popular,1986:31)The Eroski chain is owned and governed jointly by consumers and employees.Consumers become members (There are now more than 130,000) by paying a membershipfee of approximately one dollar. Each year, the consumer members and the workermembers of individual Eroski stores meet separately in their own Assemblies to elect 250members to the General Assembly of the chain. The 500 representatives then elect aBoard of Directors which is composed of six consumers and six workers. The President,or Chairperson, is always a consumer, and the vice-President an Eroski worker.(Kaswanand Kaswan,1989)6.10. Support Co-operative SummaryThese second Degree Co-operatives have in common the fact that they aregoverned not only by their own worker-members, but also by the base, or first level co-operatives which they serve. The Caja Laboral Popular, for example, is a crucialfoundation, which has historically bound the co-operatives together and has increasedmany-fold its prospects for economic success.57Notably also, many of the second degree co-operatives are devoted to educationalactivities. As MacLeod (1989) contends, "Education was and is the foundation of theMondragon experiment."(p.6) Several are devoted to the creation of new co-operatives,while others work with existing co-operatives to achieve more competitiveness andefficiency.Technological innovation is ensured through an emphasis on technology in everypart of the system. Mondragon's aim is to use the latest and most appropriate technologyavailable in the world. The primary institutional instruments promoting the use oftechnology are the research and development centres such as Ikerlan and Saiolan. As anindication of commitment to technology, the Fagor group (to be discussed in Chapter 7)made a 1990 contribution of 18 million dollars, or 3.25 percent of sales, toward researchand development.(Jose Maria Larranaga, 1990)As will be seen in the following chapters, the co-operatives benefit tremendously,particularly in an economic and social sense, from their contracts and associations. But atthe same time they are subjected to more central control than is generally the case in co-operative movements. This control of the co-operatives, on the one hand, ensures theefficiency and productivity necessary to ensure economies of scale, and in many waysinvolves levels of authority which, although not absolute, can be compared with the linesof authority in many capitalist firms. The individual co-operatives at Mondragon haveabrogated much autonomy. There is a strong commitment to education and training in theco-operatives. Formation orients the total complex to pull together and face challenges,58and consists of education and information at all levels of service. It is ensured throughagencies such as Saiolan, Ikasbide, and the L.K.S.As mentioned above, the Caja began with the broad purpose of generating localcapital for the creation of new enterprises. Hence, from the beginning there were twoseparate Caja divisions, the financial and the entrepreneurial. These divisions are legallyseparate second degree co-operatives today, each with their own General Assembly andBoard of Directors.(Quarter,1989; MacLeod,1989)Since the early 1980s the whole Mondragon system has undergone, and continuesto pursue, a major strategy of reorganization. Before that time, the Caja Laboral Popularoperated "in many ways like the group headquarters of a decentralized privatecompany."(Goyder,1979) The member co-operatives retained some control over the Cajaby electing fifty percent of Caja's General Assembly and Board of Directors from themembership of the associated co-operatives. At the same time, through contracts ofassociation between the Caja and the members, and due to the Caja's firm control ofcapital, the bank held much financial and political power over the member co-operatives.Hence, in 1984, in order to give members more authority and responsibility over the co-ordination of the system, the Caja proposed the creation of a Congress of Co-operatives(discussed in Chapter 9), grouped along geographic and functional lines within which theCaja would be just another member. To further diffuse the power of the Caja, theentrepreneurial division was separated from the Caja, and turned into a separate co-operative called Lan Kide Surtaketa (L.K.S.), discussed below.(Quarter,1989;MacLeod,1989; Kaswan and Kaswan,1989)5 9Initiating Businesses at MondragonAs we have seen, the initiation of businesses at Mondragon is a highly structuredprocess, and new co-operatives rarely fail. Preparation for starting a new co-operative cantake up to five years. The first stage is to develop an idea for a potential product, and toprepare a development process. If a group of people in the region approach Mondragonofficials to start a new co-operative, the first basic screening criteria are that the startingmembers know and trust each other, commit themselves to co-operative principles, havesome skills to start a business, and want to participate in the often lengthy developmentprocess.(Kaswan and Kaswan:14) If these conditions are met, the prospective co-operativemembers must select one of their group as manager. The manager then works full timewith an experienced staff person from L.K.S. First, they embark on a detailed feasibilitystudy that includes consideration of available markets, the ecological impact of theenterprise and, most importantly, the likelihood that the enterprise would provide asignificant number of new jobs - at least forty jobs within five years. If the prospects lookpromising, they prepare a business plan and present it to the bank and to the prospectivemembers of the co-operative. If approved, the bank provides the necessary capital, themembers commit their share of the investment, and the group formally organizes itself asa co-operative. The actual development of the business then begins. Half of the groupsthat start this development process complete it.(Jose Maria Larranaga,1990)Once established, a representative of the L.K.S. resides on the Board of Directorsof the new Co-operative for two years, until it is deemed a fully developed co-operativeenterprise. After that the co-operative must supply the L.K.S. with regular information,60and the Division will only interfere if the co-op is in potential financial difficulty. Thenew co-operative continues to rely on the Caja for Research and Development, centralizedpurchasing, market analysis and administration, and will be a member of the Caja Laboraland the L.K.S., with a voice in determining their Boards of Directors.(Jose MariaLarranaga,1990)61CHAPTER 7NEW LEVELS OF CO-OPERATIVES7.1. The Different LevelsThis chapter will examine Mondragon's recent reorganization strategies, characterizedby a greater level of interdependence between the co-operatives through the use of functional"zone" groupings at the second level, and a third level, the Co-operative Congress. These newlevels of organization and power have essentially assumed many of the roles previouslyassigned to the Caja Laboral Popular. As will be seen, the second and third levels are elected,at the one level directly and at the higher levels indirectly by the elected members of thelower level co-operatives.Zone groups can be distinguished from second-degree support co-operatives by thenature of their mandate. Like the support co-operatives, the zone groups are governed by thefirst-level co-operatives. But unlike the EPP, Lagun-Aro, Ikerlan and the other serviceinstitutions, the zone groups are not services, but simply a higher decision-makingorganization of first degree co-operatives.(Jose Maria Larranaga,1990)7.2 The Second LevelThe second level of organization takes the form of a series of zone groups, which arenormally a grouping together along functional lines. For example, those enterprises makingrefrigerators, washers, stoves and such have been organized into the Fagor group, even thougheach individual co-operative remains legally independent. In another zone, most of the62member enterprises may be producing agricultural and food products. By 1990 there wereeighteen groups in the Mondragon system, each representing three to twelve member co-operatives.(Jose Maria Larranaga,1990; Phillips,1991:40) The zone groups allow the co-operatives to complement each other to a greater degree than was previously possible, dueto common co-operative guidelines imposed by the zone onto the individual members. Ratherthan compete in the same general area, the individual co-operatives can better collaborate inmanagement and services. A new line of products, for example, can complement thosealready in existence.(Whyte and Whyte,1989:259-261)FAGOR, the largest zone group, is comprised of 12 co-operatives, including Ulgor(the first of the co-operatives), which produces refrigerators, washing machines, stoves anddishwashers, Fagor electronica, whose products include television tuners, and rectifiers, FagorClima, which manufactures water heaters, heat pumps and boilers, and Arrasate, whose outputincludes electro-mechanical machinery and electric appliances. Fagor achieves sales whichapproximate 750 million dollars, 30 percent of which are from exports. It is the largestproducer of home appliances in Spain, and has an overall market share in Spain of over 30percent. Moreover, most of the Fagor products have been introduced into internationalmarkets. It exports to more than 70 countries, with most of its exports going to EECcountries, and participates in technological co-operation agreements in various branches ofindustry, with General Electric (U.S.A.), Hitachi (Japan), and many other companies.(JoseMaria Larranaga,1990; Fagor,1990:6; Kaswan and Kaswan,1989:10; Fleckenstein,1992:63)Another example of a zone grouping is the Erein Agricultural-food group. Mondragonleaders believe that, despite the general abandoned state of the Basque agricultural sector, due63in part to the greater development of the industrial sector, the survival of a relatively strongprimary sector is important in the search for an appropriate balance in the region. The nineagricultural co-operatives, involving areas as diverse as forestry, cattle raising andhorticulture, make up the Erein group.(Caja Laboral Popular,1986:30)The creation of functional groups is based on the commercial and technologicalaffinity of the individual co-operatives that operate in the same sector of the economy. In thisway they are able to optimize commercial brands, and improve technical planning byrealizing joint research projects, transfers of technologies, and policy agreements betweenmember co-operatives.(Caja Laboral Popular, 1986:51)According to Kaswan and Kaswan (1989):Most of the individual co-operatives belong to groupings of from four to twelvemember co-operatives. These often share personnel, marketing and other services andpool their surpluses so that the stronger co-operatives support the weaker ones.Because of this mutual support and the financial and technical assistance from theentrepreneurial group, failure is virtually impossible. When layoffs are necessaryindividuals are shifted to other co-operatives or supported at 80 percent of their salaryuntil they are reemployed.(p.13)The transferring of workers occurs mainly between co-operatives within the zone groups, asworkers are more knowledgeable about operations within their groups. (Jose MariaLarranaga,1990)In addition, zone group members share profits and losses. Hence, during difficultfinancial times, particularly when a co-operative is just in the launch stage, workers can stillmake a viable living. For example, if one co-operative shows a loss of 20, 000 dollars andthe others in the group gain by 30,000 dollars, they will all average the losses and profits anddivide the sum evenly among the individual co-operatives in the zone group.(Jose Maria64Larranaga,1990) The zone group strategy also helps member firms to increase their profits.All the co-operatives in the zone group, for example, may use the same brand names. As anillustration, Jose Maria Larranaga (1990) explains:A small co-operative, Radar, was doing poorly. They were producing pots and pans.They changed their name to Fagor when they joined the group, and sales went upenormously because people recognized the label. Trade mark is so important. Forexample, the bluejean trademark Levi will sell whereas the same jeans without thelabel will not. We try to unify so that we can have the same trademarks or names andsell more.(Jose Maria Larranaga,1990)Zone groups are also helpful because they enable the member co-operatives to make bulkpurchases and thus reduce expenditures, and to invest in the marketplace with greater sums.(Jose Maria Larranaga,1990)7.2.1. Zone Group Assemblies and General CouncilsThe General Assembly of each individual co-operative enterprise in the group electsdelegates to the General Assembly of the group. In all, there are 150 members in a zonegroup General Assembly. The role of the General Assembly here, however, is not to elect aboard of directors, but to approve the general operating guidelines of the zone group.(JoseMaria Larranaga,1990; Caja Laboral Popular,1986:50)The Board of Directors or 'General Council' for the zone group, which meetsmonthly, is composed of two members from each member co-operative. Each co-operativechooses from their co-operative the chairperson and another Board member to serve on theZone Group's Board of Directors. Hence, the Board of Directors is not chosen by the workersat the General Assembly but, rather, by the elected officials from the individual co-operatives.In Fagor, there are 24 members of the Group Board of Directors: twelve members at large65and twelve chairpersons from the individual co-operatives. The General Assembly is requiredto approve the group's general policy, economic budget, and organizational rules. (Jose MariaLarranaga,1990; Caja Laboral Popular,1986:50)The Group Board of Directors chooses a General Manager for the Group, based uponthe nomination of at least three candidates. As is the case at the first degree level, the GeneralManager for the Group is accountable to the Group Board of Directors and, ultimately, to theGroup General Assembly. In addition, the managers of each individual enterprise form aGroup Management Committee, which meets once per month and advises the GeneralManager for the Group.(Jose Maria Larranaga,1990; Caja Laboral Popular,1986:50)7.2.2. Zone Group AuthorityAlthough each individual co-operative is in many ways autonomous, each abrogatesa degree of authority in order to be a member of the group. The zone group assembly, thegroup board and the group manager make group policies and decisions on matters whichtranscend the levels of the individual co-operatives, such as common wage guidelines,common brand names, advertisement, group purchasing of material, group marketing, andcommon investment funds. The group structure plays a major role in such areas as wageparities and common reserve funds. (Jose Maria Larranaga,1990; Phillips,1991:40-41)Decisions made at the individual co-operative level which could impact the groupmust be approved at the group level. For example, if a co-operative proposes to allocatebonuses for members working overtime, the bonuses will affect the profits and losses of theircompany and, in turn, the shares of returns in the other co-operative members in the group.66Hence, the co-operative will refer the proposal to the group level, and the group must decideto either approve or reject the request for bonuses.(Jose Maria Larranaga,1990)The individual co-operatives of each group must adhere to the following principles:the establishment of special services, the transfer of staff from one co-operative to another,priority commitment to interco-operative supplying, should one co-operative need productsproduced by another, and the redistribution of net profits and losses.(Caja LaboralPopular,1986:51)The redistribution of net profits requires that all accounts and balance sheets bestructured in a similar manner, all reserves be established through similar criteria, the reserves(obligatory by Spanish and Basque law) be established via similar criteria, and be subtractedfrom net profits, and a communal fund be established and maintained for the capital accountsand net profits of co-operatives. The co-operatives in the group must have a common wagerate. (Jose Maria Larranaga,1990)Profits as well as losses are averaged out among the group. It may be the case, forexample, that one enterprise experiences an annual net loss. The other enterprises will makeup for its losses so that the individual workers will not suffer. Of course, all memberenterprises must submit to the advise of a central body which has the services of L.K.S. toanalyze and ascertain certain necessary reforms when an enterprise is in difficulty. Theeconomic role of this kind of structure is obvious. The group is a much stronger actor in thecommercial world than each individual enterprise could be.(Fleckenstein,1992:61; Jose MariaLarranaga,1990)A co-operative which chooses to violate a ruling at the group level, such as paying67its workers more than the agreed upon wage scheme, has only one recourse: to leave thegroup. Since this would also mean losing all of the many benefits associated with groupmembership, this is really not a viable option.(Jose Maria Larranaga,1990)7.3. The CongressThe third level of organization in the complex is that of the Congress, which first metin 1984. Before this time, the Caja Laboral Popular was the cement which held all the co-operative members together in a common structure. The Congress structure is the result ofa period of self-examination which was triggered by the desire to prepare for the economyof the 1990s. Leaders in the complex perceived the need to develop a structure which couldcreate new strategies to guide the entire complex. Even though all the companies andinstitutions in the complex were already interrelated and interlinked, it was considerednecessary to develop a structure which would permit rapid decision making in strategicmatters and which would at the same time be able to attain compliance and informeddecision-making among the various components of the system. Leaders argued thatparticularly with the entry into the European Common Market, the need to make decisionsmore rapidly was urgent. For example, in Spain, the Mondragon group holds 33% of themarket in refrigerators, yet in Europe the group holds only two percent of the market.(JoseMaria Larranaga,1990; Phillips, 1991:41)687.3.1. The General Assembly of the CongressThe General Assembly of the Congress is the most powerful component of theMondragon system. It is composed of 350 delegates who represent all member enterprises inthe system. The Congress Assembly meets once per year to approve the general operatingplans and strategies for the entire system.(Jose Maria Larranaga,1990)Approximately half of the 350 members which make up the General Assembly of theCongress come as delegates elected by the General Assemblies of the first level and theservice co-operatives. With the exception of some of the smaller grade schools, all co-operatives have at least one member at the Congress Assembly. The remainder of theCongress General Assembly is made up proportionally: the co-operatives with more workershave more delegates than those with fewer workers. (Jose Maria Larranaga,1990;MacLeod,1990)7.3.2. The General Council of the CongressThe plans and strategies determined by the Congress General Assembly are carriedout by the General Council, or third-level Board of Directors. The role of the Council isadministrative. It gives policy direction and carries out the orders of the Assembly. Unlikethe Boards of Directors at the first level, however, this body is not composed of electeddelegates; its 21 members are made up of the managers of the 18 zone groups, and delegatesfrom three special second-degree institutions (which each have a vote equal to a zone group):the Caja Laboral Popular, Eroski, and Ikerlan.(Jose Maria Larranaga,1990)697.3.3. Congress AuthorityIn essence, co-operatives at Mondragon are not merely subjected to the rules andobligations associated with the group or second-level of organization, but must also adhereto the authority of a third level, the Congress. Through the shift from the community bankto the Congress as a major unifying structure, there has been a natural shift of authority. TheCongress now sets down the operational guidelines and the overall strategy for all theindividual member co-operatives at Mondragon. Member co-operatives must abide byCongress decisions or leave the system. Undoubtedly, market pressures led to the creation ofthe third level. Jose Maria Larranaga (1990) comments that:The General Council has to make executive decisions with regard to small co-operatives that are not functional, to decide what to do with them, whether to putthem in with other co-operatives or let them disappear. There has to be a strong bodyin the General Council to legislate and co-ordinate activities.(Jose MariaLarranaga,1990)One rule binding all enterprises is that no enterprise is allowed to go beyond thesalary ratio scale of six to one, set out by the Congress. An enterprise could decide upon athree to one ratio and not break the rule, but if an enterprise went to ten to one, it would haveto leave. Another example of a key strategic decision taken at the Congress level is whetherand how to form alliances with traditional stock-owned companies in order to constitute theequivalent of joint ventures. If an individual enterprise or zone group does not abide by suchguidelines then that enterprise is excluded from the system. Jose Maria Larranaga (1990)stresses that:Here at Mondragon you have to play by the rules of the game. For example, a groupof people could take a vote to decide whether to go to San Sebastion or Vitoria. Youcan't go both ways, so you go with the majority or stay where you are. You play bythe rules of the game by not getting what you want but going with the majority. There70is an imposition of the will of the superstructure on the individual entity, or the group.We have to be aware of the power that is developing. We are probably seeing thegroup as being a boss group over the little groups, but its not these second and thirdlevel groups deciding for the little ones, but the little ones deciding for themselves.They are the same people.(Jose Maria Larranaga,1990)The guidelines which the Congress General Assembly has been meeting to establishsince 1984 are intended to benefit the interests of all the co-operatives with their diversehistories and interests. One issue was how to reorganize the whole complex, and the Congresscould not come to an agreement, hence, they delegated the task to the General Council, withits 21 members. Council is authorized to examine the organization of the complex and makenecessary changes, and continues to work toward that goal.(Jose Maria Larranaga,1990)The current reorganization of Mondragon aims to reduce the number of co-operativesfrom roughly 164 to 120, and to centralize decision making, in order to compete in capitalistmarkets. According to Jose Maria Larranaga (1990), "we are trying to unite the smaller co-operatives so that they won't be eaten up by big business." For the same reasons, the currenteighteen zone groups are being merged into seven. The groups will vary in size, but willaverage five to six thousand members each. At the same time, the zone groups and third levelCongress are assuming greater decision making powers over the co-operatives. According toLarranaga (1990), "the only reason for this reorganization is market pressure":At Congress the General Council was authorized to examine the organization andmake necessary changes. The plan is to reduce the 18 zone groups into seven groups.We have about 165 co-operatives and that is too many. We'll reduce the 165 co-operatives to about 120 or 125, so we'll amalgamate some, chop them up, bring themtogether and reorganize. The only reason we're doing this is market pressure. Wehave to do it. There is no choice.(Jose Maria Larranaga,1990)This strategy is a reversal of traditional Mondragon policies. As Phillips notes, Mondragonhas historically observed the co-operative value of "Small is Beautiful". Mondragon71experience to date has been that successful co-operatives should avoid evolving into largeoperations, hence, as its own co-operatives grew in size the members would separatedepartments, to form new co-operatives that would maintain links through the Caja and othersupport co-operatives within the same system. As Phillips (1991) notes:The original goal was to limit individual co-operatives to a maximum of 350 to 500members in order not to impair participation or alienate the individual worker owner.This was reinforced by a strike in 1974 in Ulgor which had grown to a totalmembership of well over three thousand.(p.39)The strike in Ulgor originated in the members' sense of powerlessness over conditions in theworkplace. Mondragon utilized a traditional management model without a social council atthe time, and workers lacked sufficient control over policy making. The immediate result ofthe strike was the establishment of the social council and a reduction in the size of Ulgor'smembership. Nevertheless, the current strategy of the Mondragon executive is to increasemembership in the individual co-operatives and, as will be seen in the following chapters, thestrategy is based upon the perceived need to survive market conditions.Undoubtedly, market pressures led to the creation of the third level. As Jose Maria Larranagacontends:We want to maintain the co-operative model, but the market has become socompetitive that at times decisions have to be made fast and the problem is to keepin mind the basic co-operative philosophy and take into account the small co-operativegroups. The market is so competitive and it is not always easy to consult theindividual co-operatives, so decisions have to be made at the general councillevel.(Jose Maria Larranaga,1990)72CHAPTER 8THE MONDRAGON SYSTEM8.1. An Experimental ApproachWhen discussing the Mondragon system, as mentioned in previous chapters, it isimportant to keep in mind that, even after more than 35 years of economic success, membersof the Mondragon co-operatives continue to perceive the system as an experiment. As Melnyk(1990) argues, "experiment implies incompleteness and openness to future possibilities."(p.29) Mondragon is a system, therefore, that is always in the process of change, withstructures that are always incomplete or in the process of beingdetermined. (Fleckenstein, 1992:61-63; Phillip s,1991:38-41; Melnyk,1990: 29) In the words ofArizmendi, who founded the system, "We have realized that theory is necessary, yes, but itis not sufficient; we build the road as we travel."(Quoted from Fleckenstein,1992:62)Very little has been written about the most recent changes in the Mondragon co-operatives, including the establishment of the third level Congress and its executive Council.According to Melnyk (1990), however, "there are trends which suggest that Mondragon isdeparting from its worker co-operative tradition toward a semi-capitalist model." (p.29)Inessence, Melnyk (1990) questions whether Mondragon is becoming "just like a reasonablyconscientious company". (p.29)Mondragon is indeed co-operative, to the extent that its owners are those whocontribute their labour and participate to a large degree in its goverance. But many73important decisions which affect not only the workplace but the region's futurecharacter, appear increasingly to be taken from the hands of the workers to theexecutive members at the third level.8.2. Emergence into the EECThe governance's have been a difficult time for Spanish businesses, particularly withthe 1992 emergence of Spain into the European Common Market. Capitalist competition isincreasing at a rapid rate and Spanish firms are attempting not only to retain their ownpositions in national markets but to expand internationally as well. Jesus Larranaga, afounder of the Mondragon co-operatives and current director for international relations atFagor, makes the point that, when the co-operatives were first established in the 1950s, theSpanish market was characterized by high tariffs and duties. It was therefore "very easy tohave a successful business, in any business." In 1965, the Spanish government liberalized themarket to a degree, but it wasn't until after Franco's death in 1975 that internationalcompetition became an important factor. Moreover, it wasn't until the early 1980s thatdiscussions took place with regards to Spain's participation in the European Common Market.In essence, by 1992, there will be a single market for all of Europe rather than a series ofnational markets for each country. According to Jesus Larranaga, given these new pressures,the Mondragon co-operatives "must be more competitive than ever as an economic group."(Jesus Larranaga,1990)Leaders at Mondragon stress increasingly that, in many ways, co-operative structuresare "inadequate " and cannot survive the global trend toward privatization, corporate mergers74and continental trading agreements. Jesus Larranaga (1990) is convinced that Mondragonmust "rise to the occasion with a forward looking and realistic policy of adaptation" to marketpressures. He calls this the most "difficult task in the whole history of the Mondragon coopmovement" Jose Maria Larranaga stresses:We want to maintain the co-operative model, but the market has become socompetitive that at times the decisions have to be made fast and the problem is tokeep in mind the basic co-operative philosophy and take into account the small co-operative groups. The market is so competitive and it is not always easy to consultthe individual co-operatives, so decisions have to be made at the general councillevel.(Jose Maria Larranaga,1990)8.3. The Mondragon ResponseThe capitalism of the 1990s is characterized by mergers and joint ventures throughoutSpain, Europe and the world. Hence, according to the Director of Co-operative Education atMondragon, Jose Maria Larranaga (1990):Volkswagen bought out Fiat (Seat) of Spain. All the big companies are doing that.They are buying out smaller companies, and they are keeping the same brand name(in this case Seat). The components are made in Germany but the local name Seat isused. Everyone is doing that and now we are going to do the same thing here atMondragon.(Jose Maria Larranaga,1990)In addition, Larranaga asserts:What we're intending to do is set up holding companies, so for example inrefrigerators Fagor will set up a holding company and maybe Fagor will hold a shareand Hoover dishwashing company in England will have a share. Through the holdingcompany we'll have a commercial agreement.(Jose Maria Larranaga,1990)Hence, Mondragon is establishing semi-capitalist strategies, such as mixed holdingcompanies, to compensate for the lack of share capital that can be sold to new partners. Theseinclude joint ventures with capitalist companies such as General Electric (U.S.A.), Hoover(Great Britain), and Hitachi (Japan). Through these agreements the workers at Mondragon75receive additional production work and their investment arms participate in outside businesspartnerships.(Jose Maria Larranaga,1990; Phillips, 1991:40-41; Melnyk,1990:30)Mondragon leaders perceive the current commitment, to preserve co-operativestructures internally while making capitalist deals externally, as a necessary evolution, anessential element for survival. Mondragon is growing rich and powerful through capitalistcontracts, yet knows its limits, and does not challenge capitalism. Melnyk (1990) states thatMondragon is similar to a:city-state with its territorial limit being the Basque region and in order to sustain itseconomic basis in the region it does whatever is expedient for survival.(p.30)Caja Laboral Popular documents (1986) indicate that the current thinking is that Mondragonhas no choice but to increase the capacity to compete:The profound changes envisaged in the socio-economic framework, with Spain's entryinto the EEC, tend to reinforce the need for association between co-operatives, urgingthe creation of Co-operative groups to carry out development in a more and moredynamic and competitive situation.(p.49)It could be argued that capitalist activities do not unduly affect the co-operative nature of theMondragon co-operatives themselves. But simultaneously with the emerging perception thatMondragon must compete internationally with large capitalist multinationals are the changesin the internal relationships and in the governance of the co-operatives. Melnyk (1990) assertsthat the ideological contradictions inherent in current Mondragon practices may have seriousconsequences:The schizophrenia of one set of internal rules and another set of rules for externalrelations could have serious side effects. Usually the more powerful partner in a unionwill modify the weaker and in this case the more powerful is capitalism."(p.31)768.4. Internal ChangesMondragon leaders created the Co-operative Congress (a third level) in late 1984,comparable to a "parliament," which meets annually to determine future policy direction. TheCongress has subsequently assumed increasing legislative responsibilities in the operationsof the individual co-operatives.(Melnyk,1990:31) Jose Maria Larranaga (1990) contends thatHaving arrived at a crucial moment in the co-operative movement, we look at themarket and what we lack, and see that what we need is a strong executive body.There has to be a strong body in the general council to legislate and coordinateactivities.(Jose Maria Larranaga,1990)The Congress has assumed the responsibility for the future development of MondragonCo-operatives. To enable the Congress to effectively plan future development, every co-operative is obliged to contribute to a central investment pool. Currently, the investment poolis used for the reorganization of existing enterprises. The Caja continues to provideinvestment capital for new enterprises.There is also a corresponding change in ideology at Mondragon, brought on largelyby external pressures and changing internal relations. Larranaga uses the term 'neo-cooperatism' to describe the system today. Gorrongoitia contends that Mondragon, as anexperiment, is not stuck in any ideology. Openendedness is the key work associated with neo-cooperatism, and Mondragon is described as a "self-determining process."(Melnyk,1990:28)Today, the leaders at Mondragon quote Arizmendi, who said "Do what you can given thecircumstances of the day, always move ahead, and never expect perfection." (Jose MariaLarranaga,1990)Melnyk (1985) perceives Mondragon as being in the third phase of co-operativism.77The first phase is 'utopian', whereby co-operative structures are democratically establishedand much emphasis is placed on process. Second is the 'movement phase', when the initialco-operative model expands through the structures formed in the utopian phase. The thirdphase, the 'system' phase, is when there is increased consolidation internally and capitalistpartnerships externally, marked by fewer co-operatives with larger numbers of people.According to Melnyk, Mondragon entered the third phase in the early 1980's.(pp.3-20)MacLeod states that the "Mondragon conglomerate operates in a manner similar to anylarge modern corporation, yet the whole spirit of the conglomerate is different because it isnot based on greed or profit." It indeed appears that the motive may be more community-oriented at Mondragon. Community roots are deep, and there is a corresponding commitmentto the elimination of unemployment in the region. But at the same time the currentcommitment toward economic growth and expansion is creating tension with the system's co-operative roots. Jesus Larranaga, one of the original founders of the system, contends that thenew strategy will "affect the original vision of the co-operatives," stating that "(I)t isnecessary to keep the autonomous nature of each co-operative, but at the same time we needto unite our forces to be competitive."(Jesus Larranaga,1990)8.5 The Strategic TriangleThe key to Mondragon's attempt to resolve contradictions between top-down andbottom-up decision making strategies can be found in what Mondragon leaders refer to as the"Strategic Triangle." It is illustrated as having three sides: technology, finance, and"formacion."78Their own source of technology (primarily Ikerlan) and finance (Caja Laboral Popular)is considered indispensable if the system is to survive in a capitalist market. According toPhillips (1991):Without these two agencies (Ikerlan and the Caja) it is estimated that two thirds ofthe co-operatives in the Mondragon complex would not have survived or would notremain competitive.(p.41)The third side of the triangle, formacion, refers to top down information to inform membersof decisions, and the reasoning behind decisions, and to ensure that members understand theinformation and have the knowledge, expertise, and will to participate in areas which areappropriate, along with the ability to adjust to changes in the system.(Jose MariaLarranaga,1990; Phillips ,1991:41)The Mondragon system allocates 600 dollars per worker annually to formacion. JoseMaria Larranaga, the director at Ikasbide in charge of co-operative education, contends that:The reason we have difficulty with these changes is that we have difficulty thinkingas a group. We have rules and regulations that we think aren't good for us, that theyimpinge on our liberty. But just as a crosswalk on a busy street, the rules are goodfor us. The group is good for us. There are still individuals here that think asindividuals, and when we begin to think as a group it will be better. ...(Jose MariaLarranaga,1990)According to Larranaga:Traditionally we thought that co-operatives had to be small to function well and thedanger is that when they get big they lose their democratic aspect. Now we see thatthere are whole levels of decision making going on at the different levels. When a co-operative system gets big you have to look to participate where you can participate.For example, it is a waste of time for me to talk about the national budget, becauseI cannot decide it, but there is a different area that I can look at and change...A lotof the time groups at Mondragon talk about things that they cannot change, and wastetheir time on things that shouldn't be on their agenda. They talk about the politicalclimate in Spain and should concentrate on such areas as their shop conditions andparking lots.(Jose Maria Larranaga,1990)79In essence, Larranaga maintains that Mondragon should have participation at the local levelthat deals with relevant local decisions.(Jose Maria Larranaga,1990)Jose Maria Larranaga uses the analogy of air flight to explain the Mondragon changes:Everybody's function has to be very clear. A pilot cannot consult the passengers abouthow to land the plane, but does have to ask the passengers where they want to go.He'll get them there because he knows how to land the plane. The pilot is thetechnician who will get them where they want to go. But if there is a storm in theplane, and the pilot has to make many decisions, he will have technical things to dothat he hasn't got time to explain to the passengers. The plane may even have to landin a different place. Mondragon has rapid decisions to make and does not have timeto explain them. The General Assemblies only meet once per year. There are rapidfiscal, technical and economic changes taking place, and we don't have time toconsult everyone.(Jose Maria Larranaga,1990)MacLeod contends that Mondragon is similar in many ways to a large corporationwhich has many features such as human resources, marketing, and finance. There are certainobjective factors that are present in any firm, capitalist or co-operative. According toMacLeod, "the individual first level co-operatives have decided for themselves that they aregoing to sacrifice a little bit of their individualism for the good of the group. Co-operativeshave to co-operate with other co-operatives, and each little co-operative has to give up a littleindividualism for the good of the group."(MacLeod, 1990) Jose Maria Larranaga states:A co-operative can go off on its own, but chooses to become associated with a groupof co-operatives because it thinks it is better for it. But when you become associatedwith a group you play by the rules of the game, and there will be some impositionsplaced upon you. The market is a sort of imposition placed upon you. You have nosay, and cannot change the market. You have to accept the market the way it is. Thereare also rules of administration that you can't change. Competition is another factor,and you can say that it takes away from your liberty a little bit but really it doesn't.Society as a whole accepts competition as a rule of the game. Trade unions, banksand even the church are impositions accepted by society as a whole as rules of thegame.(Jose Maria Larranaga,1990)As part of the information process at Ikasbide, individual members are informed that, while80market pressures are undoubtedly the major reason for Mondragon's recent reorganizationstrategy, changes may also be explained upon ideological grounds:The cooperative objective of creating economically efficient and democraticallymanaged companies cannot nor must not be undermined by the creation of economic'islands'; problems must be solved and new communal development options must beopened up. In other words, the creation of an economic 'island' radically detractsfrom the cooperative phenomenon, making a mockery of claims to solidarity andcommunal promotion.(Caja Laboral Popular,1986)Mondragon leaders continue to asssert that large, integrated co-operatives "do businessfor the whole of the community," that a co-operative relationship must be "more thanideology." They make the distinction between Spanish "conservative" co-operatives andsystems such as Mondragon, called "progressive." An example of conservative Spanish co-operatives is the Spanish agricultural co-operatives which have formed little more than acollective marketing group. In the Mondragon view, such co-operatives have an excessiveconcern with ideology and inadequate concern for actual results.8.6. A Continued CommitmentMondragon retains its commitment to the creation of employment. As Greg MacLeodcontends, "Mondragon belongs to the community outside, and feels the social responsibilityto start up other businesses."(MacLeod,1990)Jose Maria Larranaga contends that:Co-operatives have an obligation not only to themselves, but to create more jobs. Thisis a real difference between co-operative and capitalist enterprises.(Jose MariaLarranaga,1990)Ikasbide is not committed to teaching co-operative theory, or the ideas that led to co-operativism, but concentrates upon the co-operative process at Mondragon, as illustrated by81the strategic triangle. It is contended that to effectively carry out their jobs, managers atMondragon need to know the rules of association, conditions of employment, and Spanishlaws governing co-operatives. They also need to be responsive to the spirit of the various co-operatives.8.7 The Status of the Mondragon ExperimentThe impact of Spain's emergence into the EEC on co-operative development atMondragon is far from clear. Mondragon officials' concerns about the ability of the systemto survive to inevitable increase in competition are unlikely to be entirely unfounded ones,as multinational firms enter the Spanish market in most sectors of the economy. Hence,innovative measures are required if Mondragon is to maintain its market advantages. At thesame time, much sensitivity will be required to ensure the continuance of Mondragon's co-operative tradition. Workers at Mondragon have become more removed from major policymaking than ever before.Nevertheless, when a co-operative is established at Mondragon, it develops its owninternal structures, and legal framework, provided that it falls within the guidelinesestablished and enforced by the Congress. Similarly, when an already established co-operativejoins the Mondragon system it retains its legal, institutional and social structures, within theframework laid out by the Congress. Through the use of such bodies as social councils,general assemblies, audit committees, and support co-operatives, these workers have a fargreater degree of influence over the destiny of their community than can be found in areasdominated by conventional corporations. One can only speculate as to whether size can bereconciled with industrial democracy.8283CHAPTER 9IMPLICATIONS FOR CANADA9.1 Co-operative LinksCanadian co-operatives have long attempted to promote a recognition and support ofco-operatives as a legitimate economic third sector of the economy. The former CanadianUnion of Co-operatives, established in 1909, operated as a promoter of co-operative interests,and there are in many areas of the country (notably Quebec and the Atlantic Provinces) inter-co-operative links which attempt to promote the expansion of producer co-operatives. Co-operatives in Canada, however, have failed to impact the overall economy in a significantway. One factor related to the failure of Canadian co-operatives to attain third sector statushas been the ability of powerful conventional businesses to lobby provincial and federalgovernments to secure deals for locating their industries in Canada.(Laycock,1987:10) Privatesector competitors, well organized and financed, have indeed added to the dominantperception in Canada that co-operatives are not a legitimate form of business, and havelobbied governments with this in mind. At the same time, Canadian co-operatives havelargely been directed by people suspicious of close relationships between their co-operativesand governments, and co-operatives have therefore failed to set their own agenda withgovernments.(Laycock 1987:19)In addition, the absence of systematic, influential, organizational links with sister co-operatives, the state and the public has meant that co-operativism has not had the impactexpected by proponents of the movement. Canadian economics is characterized by divided84provincial and federal jurisdictions, and separated departmental jurisdictions at both levels.Hence, local initiatives are required for co-operatives to begin challenging the notion that theyare merely isolated islands as compared with the private corporations that dominate theeconomy. Like Canadian co-operatives, Mondragon began with a small group of sociallyconcerned and motivated people with commitment to their community and a vision for thefuture. Unlike the Canadian example, however, along with a commitment to co-operativephilosophy Mondragon has exhibited a great degree of flexibility and willingness to use allthe legislative, commercial and governmental resources they could find available.9.2 State - Co-operative RelationsMondragon has close ties with Spain's provincial and federal levels of government,and does not share in the Canadian co-operatives' reluctance to lobby for and acceptgovernmental assistance for developing and expanding upon worker co-operative enterprisesand systems. Proponents of Canadian co-operative development may need to improve upontheir attempts to make concrete progress upon their attempts to promote producer co-operatives in Canada. As Laycock (1987) argues:So long as co-operatives and their promoters have a clear sense of the democraticobjectives of co-operative development prospects, there can be a minimization of thedangers associated with corporatist relations between co-operatives and stateagencies. (p.20)A major obstacle in Canada is that the existing informal network of worker co-operative resource groups and activists in Canada lack sufficient human and financialresources for exposing the concepts, rationales and current examples of worker co-operativesto co-operative members, government officials and the general public. Examples of successful85producer co-operatives such as Mondragon illustrate that it is possible for co-operativemovements to develop and expand upon the co-operative sharing of education, finance andsocial services.9.3 Support Co-operativesThe Mondragon experiment indicates that technical and financial supportarrangements, available to co-operatives via inter-co-operative links, can provide a nearguarantee against later failure. At Mondragon, so long as a co-operative is a member of theassociation, the Caja, Ikerlan, the L.K.S. and other support co-operatives, governed by theproducer co-operatives and their own employees, will help the co-operative through lossesdue to changes in market conditions or other variables. As mentioned in previous chapters,Mondragon members understand that the support co-operatives are largely responsible for thesuccess of the system.9.2 Credit UnionFinancial sharing is necessary in large scale co-operative development. CanadianCredit Unions are not actively related to new community enterprise creation in Canada.(Laycock,1987) Canadian co-operatives generally lack the types and degrees of support whichMondragon's Caja Laboral Popular has supplied to its member co-operatives during the pastthirty years. The role of the Caja and its relationship to the service institutions is vital to theexperiment and relevant to the Canadian situation. The Caja Laboral Popular is a86service co-operative for the system, and an institution designed to assist in the growth of themovement.9.4 Capital AccumulationInter-co-operative sharing also permits co-operatives to keep profits within the co-operative development movement. A carefully developed plan to keep money within the co-operative system is essential. While there are many examples of successful co-operatives inCanada, the provisions for reinvesting to expand the co-operative movement are lacking. Thisis fundamental to the success of Mondragon. Member workers at Mondragon receive a fairand adequate income and, at the same time, the remainder of profit is available to the system,to constantly recapitalize and develop new worker co-operatives. The system of splittingprofits into 10 percent for a social fund, 45 percent to the company reserves, and 45 percentto the member accounts, which must remain in the Caja as long as the worker continues towork, facilitates the entire development process. This formula is encouraged through legalprovisions by the Spanish state, to increase employment rates. Companies receive financialbonuses and tax concessions in accordance with the numbers of employment opportunitiesthey create.9.5 Economies of ScaleAt the same time, inter-co-operative collaboration allows the co-operatives to achieveeconomies of scale, due to their ability to complement rather than compete with each otheras they operate in the same general community. Through collaboration in management and87services, according the Caja Laboral documents, association also allows co-operatives thepossibility of "homogenizing the internal rules and the structures of the co-operatives,"allowing them to "learn from the experiences of each other."(Caja Laboral Popular, 1986:49)While this is indeed true to a degree, it must be emphasized at the same time that by"homogenizing the internal rules and structures" the individual co-operatives lose a degreeof freedom and autonomy, and therefore variety. Whether Mondragon has overstepped theboundaries of industrial democracy remains to be seen.9.6 Social Services and EducationThe co-operative system at Mondragon allows co-operatives to collaborate and adoptcommon and effective responses to the need for community services, such as the socialservices provided by Lagun-Aro and education provided by Hezibide Elkartea.(Caja LaboralPopular,1986:49)Hezibide Elkartea is the tool by which Mondragon is able to train people in thecommunity to be productive within their own community. Hence, conventional regionaldevelopment techniques such as the "growth centre" attempt at regional development areunnecessary in the Basque region. The result is also a high level of competence and skill inthe co-operatives, a basic requirement stressed throughout the Mondragon experiment. Aprofessional, knowledgeable, and highly skilled approach to all the strategies makes thelikelihood of success much more certain and has undoubtedly contributed to the success ofthe Mondragon approach.Mondragon also makes use of professionals outside of the system, in a manner similar88to conventional companies. To utilize better technical resources, the Canadian movement mustestablish liaison with university departments and recruit graduates of universities, as othercorporations do as a matter of policy.Social commitment at Mondragon implies the creation of employment. "Doingbusiness for the good of the community" is constantly referred to in Mondragon circles. Theessential goal of the system is to be economically successful in a capitalist environment, tocreate new co-operative businesses, and to thus better the living standards of the entirecommunity. The spinoffs then are numerous for the region as a whole. Jesus Larranagacontends that "as long as unemployment exists, every co-operative has the duty to expand."(Jesus Larranaga:1990)Balancing the need for autonomy and the need for economic viability at Mondragonhas been a difficult and seemingly unresolved dilemma, particularly since the mid-1980's.The recent reorganization raises serious questions about the future of worker participation inmany spheres of the system. In any case, Mondragon is a crucial component in the ongoingdebate on the need for a truly democratic community.8990BIBLIOGRAPHYAhlstrom, Richard. "The European Community Faces 1992" Current History.November, 1992. pp.374-380.Ash, Maurice. "Reflections on Mondragon." Town and Country Planning.(Vol.47,1979), pp.11-14.Arizmendiarrieta, Jose Maria. La Empresa Para El Hombre. (Bilbao:CajaLaboral Popular/Lan Kide Aurrezkia).Axworthy, Christopher S. Worker Co-operatives in Mondragon, The U.K., and France: Some Reflections. 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