Co-op Study 7

Mondragon Co-operatives

by Manfred Davidmann

CONTENTS

Introduction

Overview

Rules of Co-operation

Allocating the Surplus

Supporting Co-ops

Management and Accountability

Board of Directors
Social Council

Structural Change

Performance

Conclusions

Ground Rules
Ownership and Control
Members' Pay, Profits and Capital
Allocating Profits and Accumulating Reserves
Structural Change

Notes <..> and References {..}

Relevant Current and Associated Works

Relevant Subject Index Pages and Site Overview

INTRODUCTION

Mondragon co-operatives created for their members a good way of life and a high degree of job and social security. The study looks at the extent to which these co-ops serve their members and the extent to which they co-operate with each other.

This study is one of a series of eight studies of co-operatives and mutual societies which were undertaken to determine causes of failure and reasons for success, to see how these enterprises were controlled and managed, to learn from the mistakes of others. What is taking place is fascinating and often unexpected (See 'Relevant Current and Associated Works').

The main report 'Co-operatives: Causes of Failure, Guidelines for Success' is based on these studies. Its conclusions and recommendations are entirely relevant and cover fundamental and practical problems of co-ops and mutual societies, of members, of direction, management and control (See 'Relevant Current and Associated Works').

OVERVIEW

Producer co-ops are owned by their members. Each member contributes to the co-op's capital when he becomes a member and individually owns a share of his co-op. His share is realised when he leaves or retires. Each member is an owner of the co-op.

The initial capital contributions from individual members and the co-op's profits which are retained by the co-op, are a cheap source of capital for the co-op.

The Spanish government provided a good deal of support, providing from 12.5 to 20 per cent of the capital required by a new co-operative, at a fixed low rate of interest. And there were tax concessions. Co-operatives paid no corporation tax for the first ten years, and half the standard rate after that. Further, the Mondragon co-operatives were protected from foreign competition by import controls.

Protected and subsidised by the state they were able to form and successfully develop the Mondragon group of co-operatives, and in the process 'gain a large share of the Spanish electrical appliance and machine tools market'.

By 1982, twenty-five years after starting the first co-operative, the Mondragon group of co-operatives consisted of 85 industrial, 6 agricultural and 14 housing co-operatives. The group was successful and had been making rapid progress.

Successful formation, successful operation and rapid expansion of co-operative enterprises was the result of

Rules of co-operation and association which they adopted right from the beginning.

Forming a bank for providing needed capital. Capital was provided in a way which prevented the bank or those who control capital from taking over co-ops to whom funds were lent.

Economic support and financial help from government.

The key mover at that time was the savings bank (Caja Laboral Popular). The consumer co-op (Eroski) is equally outstanding.

Key supporting co-ops at that time were an insurance co-op (Lagun-Aro) which provided social security and pensions, a medical and hospital services co-op, and a research and development co-op (Ikerlan).

And 43 schools and colleges were part of the group. Almost all seem to have joined the group during the previous five years. Presumably each school or college would be financially supported by industrial co-ops or the Caja (bank) and would have co-op members on its board of governors or control.

RULES OF CO-OPERATION

PRINCIPLES

Management is responsible and accountable to members, that is in producer co-ops to directors elected by and from worker-owners.

When social services are being provided, then 'each man should use what he needs' - all that he needs, but not more, and only what he really needs. Mondragon considered that fees would help to ensure that services provided by the community would be used responsibly.

MEMBERSHIP

Each co-op is owned by its members and all who work in it must be members.

STARTING A NEW CO-OP

One of the key problems of new co-ops is lack of capital. Here largely provided by co-operative savings bank Caja Laboral Popular {MON 04}:

75 per cent of required capital provided by bank, repayable over ten years at below-market rates.

12.5 per cent provided by state as a low-interest loan aimed at job creation.

12.5 per cent provided by members (worker-owners) on joining.

JOINING

On joining, each member contributes something like GBP 4,500 <2> to the co-op's capital.

75 per cent of this contributed capital is used to open a capital account for the member.

25 per cent is usually retained by the co-op and transferred to its reserves.

If needed, the capital contribution can be borrowed from the co-op at a favourable rate of interest and repaid from earnings within two years.

Each member receives interest at up to 6 per cent on the balance of his capital account. The interest is credited each year to his capital account.

Capital accounts are also regularly increased in value in line with inflation to maintain their purchasing power.

Members may not withdraw money from their capital accounts but when members leave the co-op then they must take their capital holding with them.

If the co-op fails then a member may lose the capital which he has accumulated in his capital account.

PAY

The member is paid the local going rate for the work he does. But the before-tax differential between the lowest paid and the highest paid is limited to three. The rate for the lowest paid is expected to be slightly higher than that paid locally for such work.

And directors receive no extra pay for the work they do as directors.

ALLOCATING THE SURPLUS

Each member's capital account is credited each year with his share of the co-op's profits, but may also be debited with his share of any losses.

The co-ops net profit, that is its surplus, is shared out thus:

A MINIMUM of 10 per cent of the surplus has to be allocated to the co-op's social fund which is to be used to benefit the community's social services.

A MINIMUM of 20 per cent has to be contributed to the co-op's collective reserve funds.

UP TO 70 per cent may be credited to the capital accounts of the members. The amount credited to each member is proportional to his wage (or salary).

The use of capitals to emphasise 'minimum' and 'up to' is mine.

Reserves accumulate year by year in successful enterprises, provide the means for weathering bad years and for financing the co-op and its expansion. But while the Spanish Government apparently laid down that not less than 15 per cent of net profit had to be transferred to collective reserve funds, the co-ops increased this figure by 33 per cent to 'not less than 20 per cent'.

Not less than 10 per cent of the total has to be contributed to finance social services in the community such as education. So if 10 per cent is allocated to the community and 20 per cent to co-op reserves then 70 per cent may be credited to members' capital accounts. Or, at the other end, 10 per cent can be allocated to the community and up to 90 per cent to the co-ops' reserves.

1995 results seem to indicate <4> that something like 75 per cent of net profits were added to reserves.

The bank (Caja) seems preoccupied with creating and safeguarding reserves which are owned collectively instead of belonging to co-op members as individuals. For example, it also stipulates that when an established co-op makes a loss in any one financial year, that NOT MORE THAN 30 per cent of the loss can be charged to collective reserves, that 70 per cent OR MORE of the loss has to be charged to members' capital accounts.

If a co-op is successful and capital payments allocated to members could amount to more than 50 per cent of its Basic Pay (including social security costs) bill, then the proportion of net profits allocated to members is determined by a specified formula. {MON 01, p61}

This formula states that the percentage of the net profit which is to be allocated to reserves has to be the same as the percentage of the Basic Wage cost which is to be allocated to members' individual capital accounts.

When wage cost remains the same, then the more profitable the co-op, the greater is the net profit available for allocating.

But the greater the co-op's success and profit, the smaller is the proportion of the profit allocated to members. Greater success is increasingly channelled into the co-ops collective reserves instead of members' own capital accounts.

SUPPORTING CO-OPS

What is said here applies largely to how things were in the initial period when the co-ops were expanding so successfully, up to Mondragon's restructuring.

CAJA LABORAL POPULAR (CAJA)

Initially a savings bank able to attract deposits by offering a better rate of interest than could be obtained elsewhere, Caja was able to provide (lend) funds required by associated co-ops. Caja provides financial and technical services to co-ops and monitors their operation.

It is a co-operative. Its membership consists of those who work in it as well as members from associated co-ops.

Caja's board of directors consisted of four directors elected from amongst themselves by its own workforce and of eight directors from associated co-ops. Its chief executive sat on the board as an adviser, having no vote.

Each staff member has a capital holding and receives a share of the bank's profits. But his profit share is a sum equal to the average distributed in the co-operative group as a whole.

In the early stages, as it was a co-operative savings bank, the distribution of the Caja's own profits was governed by Spanish Co-operative law {MON 01} such as:

'In practice, the Caja has chosen to plough back even larger percentages.'

And it is the Caja which laid down that the more profitable a co-op, the greater the proportion of its profits which would have to be allocated to collective reserves instead of benefiting individual members' capital accounts.

The bank backs the co-ops and the co-ops back the bank. Each needs the other for success and growth:

The co-operatives provide capital backing to the bank, contributing to meet the requirements of the Bank of Spain, and guarantee the bank's business operations. The co-ops also have to commit up to 25 per cents of their members capital (but not of their reserves) to cover the bank's liabilities towards its creditors, such as moneys lent to the bank or owed by the bank. {MON 01, p58-}

So over a considerable period of time the Caja has been preoccupied with amassing reserves.

LAGUN-ARO

Lagun-Aro provides social security for co-op members, including medical insurance, sickness and invalidity benefits, and pensions. Contributions from members are in part deducted from wages, the co-op paying the rest.

Here also the staff are individual members while co-operatives are institutional members and elect representatives to its board.

Lagun-Aro provides good benefits. Its pension is 100 per cent of final salary.

SCHOOLS AND COLLEGES

Schools and colleges have three classes of members: parents, co-operative enterprises and teachers. {MON 01}

EROSKI

Eroski is a successful retail co-operative. It is organised on principles which differ from those applied by the far less successful British consumer co-ops.

It has worker-owner members. Consumers are members to the extent to which they are represented on Eroski's board of directors.

Its surplus is allocated in the same way as it is in the producer co-ops but while the co-op retains a share of the profits, the rest is passed on to consumers in lower prices.

MANAGEMENT AND ACCOUNTABILITY

BOARD OF DIRECTORS

The board of directors is elected by the members of the co-op. Each member of the co-op has one vote regardless of the size of his capital account.

The board of directors meets once each month. It can appoint and dismiss the top executives who, in turn, can appoint and dismiss middle managers.

The chief executive attends board meetings to give expert advice when required. He does not have a vote.

SOCIAL COUNCIL

Each member of the Social Council is elected by his department or workgroup and he represents those who elected him.

Any problems or concerns about people as people and as co-op members can be dealt with by the Social Council.

The Social Council has direct access to both the board of directors and the chief executive to state its findings, recommendations or requirements.

It would be usual for a member of the Social Council to arrange meetings of those who elected him to discuss any matter of concern to them or to the Social Council.

STRUCTURAL CHANGE

The Mondragon co-operatives were restructured about 1992 into three divisions, namely industrial, finance and retail. Such management structures concentrate power in the hands of managers, and it seems that policy setting and control of management activities have moved away from owners (producers, workers) towards an upper level of senior executives. To that extent the accountability of managers to local members has been reduced.

Salary differentials had apparently been increasing for some time and 'many co-op producers are wondering whether in the new Mondragon Cooperative Corporation some members are more equal than others' {MON 02}:

"Unless we can make management more accountable to the co-operatives' social councils (bodies in which co-op members' are represented in their capacity as producers) decision-making will get further and further from rank and file co-op members" says ... a member of the Fagor manufacturing co-operatives which form the backbone of the industrial division.

One top level manager was reported as saying {MON 02}

"There is a convergence between capitalist firms and co-operatives in terms of business strategy. But there are two enormous differences. First, in a private company, it's the shareholders who own the capital. In a co-op it's the producers. Second, in a co-operative, profit is distributed among the producers and not the shareholders."

This sounds well as the term 'business strategy' is so vague as to be almost meaningless. I would have thought that a co-operative 'business strategy' would need to be based on considerations such as

1. That for a successful and established co-operative, service to members (producers, workers, employees) and community was more important than mere profit-maximisation.

2. That in a co-operative the role of top-level managers is to implement policy and decisions made by a board of directors drawn from and elected by the members.

   Very different from doing almost whatever one thinks best.

3. And that in a co-operative top-level managers are accountable for what they do and omit to do, to directors who work in the organisation. That is, to directors who have first-hand knowledge about what is taking place within, of actual results and management performance.

   Again, very different from being accountable to distant shareholders who are unlikely to question performance as long as they get a reasonable dividend and the value of their shares keeps on increasing.

4. Much more difficult for top executives in a co-operative to use the owners' capital for engaging in politics of power and empire building by corporate alliances, mergers, takeovers.

This top manager may have said much else which was not reported but to me it seems that senior executives are thinking more in terms of profit-maximising ideology instead of thinking in terms of the people-orientated co-operative ideology which gave Mondragon co-ops their strength and success.

PERFORMANCE

The 1995 combined turnover of Mondragon's Industrial and Distribution divisions is Ptas 558,778 million (GBP 2.96 billion).

Mondragon corporation's published summary accounts <3> {MON 06} show how share capital and reserves changed during 1995:

Mondragon rules state that up to 70 per cent of profits should be added to owners' capital accounts, at least 20 per cent to reserves, at least 10 per cent to the community.

It would appear from Mondragon's Annual Report that, overall, something like 20 per cent has been added to owners' capital accounts and something like 75 per cent to reserves. <5> {MON 06}

While this falls within Mondragon rules, it is so far from the percentages given in the rules that I would have expected the annual report to explain what is taking place to the owners (members).

There are 27,950 worker-owners {MON 06}. This means that the share capital per owner is Ptas 2.25 mill (GBP 11,900) and reserves per owner are Ptas 3.96 mill (GBP 21,000). This would seem to indicate that Mondragon corporation has accumulated big reserves at the expense of its owners, of its members.

CONCLUSIONS

What stands out is that Mondragon co-operatives succeeded in creating for their members a good way of life, a good standard of living and a high degree of job and social security.

My own impression is that much of their undoubted initial success is coming under threat from within so that it is worth while to look at ingredients of success as well as at underlying weaknesses.

Ground Rules

At first this group of co-ops did well. Successful formation, successful operation and rapid expansion of co-operative enterprises resulted from rules of co-operation and association they adopted at the beginning. And by capital being provided by a banking co-operative in a way which prevented the bank or those who control capital from taking over co-ops to whom funds were lent.

Ownership and Control

Each producer co-op is owned by its members and all who work in it must be members. Management is responsible and accountable through directors to members. Directors are elected by and from members. Each member of the co-op has one vote regardless of the size of his capital account. The board of directors can appoint and dismiss the top executives. The chief executive attends board meetings to give expert advice when required. He does not have a vote.

Each co-op has a Social Council whose members are elected on a constituency basis. Concerns about people as people and as co-op members can be dealt with by the Social Council. The Social Council has direct access to both the board of directors and the chief executive to state its findings, recommendations or requirements.

Members' Pay, Profits and Capital

Each member is paid the local going rate for the work he does. But the before-tax differential between the lowest paid and the highest paid is limited to three. And directors receive no extra pay for the work they do as directors.

Each member's capital account is credited each year with his share of the co-op's profits. Each member also receives interest at up to 6 per cent each year on the balance of his capital account. The interest is credited each year to his capital account. Capital accounts are regularly increased in value in line with inflation to maintain their purchasing power. When members leave they must take their capital holding with them.

Allocating Profits and Accumulating Reserves

Reserves accumulate year by year in successful enterprises, provide the means for weathering bad years and for financing the co-op and its expansion.

But the bank (Caja) seems preoccupied with creating and safeguarding reserves which are owned collectively. And the greater a co-op's success and profit, the smaller is the proportion of the profit allocated to members. Greater success is increasingly channelled into the co-ops collective reserves instead of members' own capital accounts.

Mondragon rules state that up to 70 per cent of profits should be added to owners' capital accounts, at least 20 per cent to reserves, at least 10 per cent to the community.

1995 results indicate that, overall, only about 20 per cent of net profits were added to owners' capital accounts while about 75 per cent were added to reserves.

While this falls within Mondragon rules, it is so far from the percentage figures given in the rules that I would have expected the annual report to explain to members (owners) what is taking place.

Structural Change

It seems that salary differentials had been increasing for some time when Mondragon co-operatives were restructured about 1992 into three divisions, namely industrial, finance and retail. Such management structures usually concentrate power in the hands of managers, and it seems that policy setting and control of management activities have moved away from owners (producers, workers) towards an upper level of senior executives. To that extent the accountability of managers to local members (co-op owners) has been reduced.

To me it seems also that senior executives are thinking more in terms of profit-maximising ideology instead of thinking in terms of the people-orientated co-operative ideology which gave Mondragon co-ops their strength and success. And that the Social Councils do not have enough counterbalancing powers.

NOTES AND REFERENCES

NOTES

<1> Much of the earlier information on Mondragon co-operatives in this review

study is based on reference {MON 01}. Much of the later information is
based on reference {MON 02}.

<2> This amount may well be different now.

<3> It seems Mondragon's Annual Report {MON 06} leaves much to be desired

when it comes to looking at performance. Mondragon have apparently
always been reticent about disclosing information about performance of
co-operatives.

<4> See section 'Performance'

<5> See section 'Allocating the Surplus'

REFERENCES

{MON 01} Worker-owners: The Mondragon Achievement

A. Campbell, C. Keen, G. Norman, R. Oakshott
Anglo-German Foundation for the Study of Industrial Society, 1977
ISBN 0 905492 03 X

{MON 02} Co-ops Face an Unequal Fight

Andy Robinson, Guardian, 02/01/93

{MON 03} Basques Await VW Plant

Andy Robinson, Guardian, 03/07/93

{MON 04} The Mondragon Method of Fighting Spain's Recession

John Hands, Financial Times, 14/12/82

{MON 05} The Unorthodox Survivor

David White, Financial Times, 22/05/84

{MON 06} Annual Report 1995 (In English)

Mondragon Corporacion Cooperativa

Relevant Current and Associated Works

MAIN REPORT

CO-OPERATIVES: CAUSES OF FAILURE, GUIDELINES FOR SUCCESS

Manfred Davidmann
https://www.solhaam.org/

ASSOCIATED CO-OP STUDIES
Manfred Davidmann
https://www.solhaam.org/

1. The Trustee Savings Bank Give-Away
2. Credit Unions
3. Building Societies
4. Co-operative Retail Services Ltd
5. 5a. Co-operative Wholesale Society Ltd
5b. Co-operative Bank PLC
5c. Co-operative Insurance Society Limited
6. John Lewis Partnership PLC
7. Mondragon Co-operatives (Mondragon Corporacion Cooperativa)
8. Kibbutzim

Other relevant current and associated reports by Manfred Davidmann on leadership and management:

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