Mondragon: Maintaining Resilience through Cooperative Strategies

Introduction

When the Spanish priest Father José María Arizmendiarreta started a small workers’ cooperative in his local community, he can hardly have predicted that his humble venture would grow into a business of global scale. Founded in 1959, Mondragon today is a federation of industrial cooperative associations with over 260 companies and subsidiaries in thirty-five countries—although it remains close to its roots in Spain’s Basque Region. Overall, the federation brings in revenues of approximately $14 billion and employs over seventy-five thousand workers worldwide in the finance, manufacturing, retail, and consultancy sectors.

Mondragon is, in its own words, ‘created by and for people’ and aims to generate ‘wealth in society through business development and job creation’. It derives its strength both from the breadth of its activities and its emphasis on employees’ professional development and technological research. The federation funds training and innovation, supporting fifteen of its own research and development centres. This investment has yielded over 460 groups of patents.

Previous research into Mondragon’s structure has provided insights into the opportunities and challenges associated with operating member-owned businesses. This case, however, focuses on the relationship between mutuality and resilience in Mondragon’s performance.

Resilience, defined here as ‘the ability of firms to sustain employment and growth during difficult economic conditions,’ is an underappreciated aspect of company performance.1

Pain Points in the Ecosystem

From the start, Mondragon’s assessment of modern economic systems was that neither capitalism nor socialism offered the right conditions for people to thrive and for businesses to operate competitively. Mondragon concluded that social benefits ought to be inherent to competitiveness and structured its management practices accordingly. In other words, competitive financial performance would be found through purposeful investment in social and human capital. Mondragon, therefore, built its own values-driven system within a modern capitalist context on the core principles of cooperation, participation, social responsibility, and innovation. How these principles have been put into practice has evolved over decades, but Mondragon continues to offer a significant example of how business can deliver social transformation while at the same time remaining financially profitable. Above all, the Mondragon business case highlights the importance of purposeful investment in human and social capital as a safeguard against the challenges of economic crises.

From cooperatives to non-profits, social enterprises to mutual societies, social economy enterprises operate on the principle of serving their members, rather than aiming to maximize returns on investment. In other words, as the economists José Luis Monzón and Rafael Chaves describe, social economy ventures are ‘organizations of people who conduct an activity with the main purpose of meeting the needs of persons rather than remunerating capitalist investors’.2 Monzón and Chaves go on to say that the rise of the social economy ‘reflect[s] the need for an economy that reconciles social, economic, and financial dimensions, that is able to create wealth, and that is not measured solely in terms of its financial capital, but also—and above all—by its social capital’.3 This recognition of the need to take into consideration non-financial forms of capital—human, social, and natural—and the relationship between them and financial performance is at the heart of delivering mutuality.

The history of cooperatives suggests that member-owned business often thrive in times of crisis.4 From as early as the agricultural depression of 1860s Germany to the comparatively recent collapse of the Soviet Union, cooperatives have tended to weather the worst of the economic climate. This is not, however, to suggest that cooperatives only succeed during crises. Rather, ‘it is the strength built up by cooperatives during good times that helps tide them over a recession.’5 In other words, cooperatives may have structures and practices already in place that help protect them against periods of economic hardship.

According to the International Labour Organization, cooperatives have seven interrelated features: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training, and information; cooperation among cooperatives; and concern for community.6 Taken together, these features arguably help foster a sense of shared identity, ownership, and investment in both the business and local community. Workers, as stakeholders in the business, recognize that it is in their own best interests to advance the cooperative’s aims. Since most cooperative members are also members of the same community, they also have a strong incentive to work towards shared goals. Members have a direct stake in the outcome of business decisions, which often results in ‘loyalty, commitment, shared knowledge, member participation, underpinned by strong economic incentives’.7 Research suggests that these factors play a key role in helping protect member-owned businesses during economic downturns.

Integral to cooperatives’ resilience is their focus on job creation and retention through ‘employee buyouts and rescues’.8 Rather than letting employees go in response to challenging economic times, cooperatives have an incentive to retain their workers. Further, cooperatives’ longevity in the face of financial crises can be attributed in part to their use of ‘member capital rather than bank borrowing to expand the business’ and their appeal to ‘risk-adverse consumers’.9 Put differently, instead of turning to external lending and borrowing services, cooperatives rely on their own resources and social capital to sustain their businesses.

In banking, in particular, cooperatives have thrived during financial crises. In the wake of 2008, cooperative credit unions and financial services continued to operate under the same challenging economic conditions that had caused several commercial banks to fail. In 2009, for example, the growth of US credit unions’ productive loans reached 11 per cent, against a fall of 15 per cent for conventional banks.10 During the same period, although several European public and commercial banks failed, no cooperative bank failed.11

In the period between 2008 and 2013, Spain’s economy experienced an extended double-dip recession. The 2008 global financial crisis affected Mondragon’s business, and the industrial sectors within the federation were particularly hard hit. Rather than responding with heavy employee or benefit cuts when confronted with this challenge, Mondragon turned instead to a strategy that reflected its values of mutuality: it invested in human capital at a critical time.

Business Strategy

Mondragon’s business practices reflect the commitment to its core values of cooperation, participation, social responsibility, and innovation. Investment in human capital lies at the heart of Mondragon’s strategy for maintaining long-term financial performance and resilience. The federation’s structure is designed both to safeguard and engender mutual practices.

Membership of the cooperative provides employees with specific benefits: all employees have equal rights to vote and ownership; managing boards consist of a combination of employees from all levels of the organization; the highest managers earn no more than six times the lowest paid worker; the general assembly of worker-owners in each cooperative decides how to distribute 70 per cent of profits after taxes; no more than 20 per cent of workers can be temporary contractors; and re-allocating workers across cooperatives in the federation helps retain jobs and support the weakest performing businesses.12 Taken together, these mutual strategies may have helped Mondragon weather unfavourable economic conditions.

During times of economic stability, Lagun Aro, a welfare insurance cooperative, plays an important role in the Mondragon federation. During times of crisis, it takes on an additional share of responsibility for the welfare of workers within the federation. Lagun Aro offers insurance to members of the workers’ cooperative. It provides workers with benefits such as access to health insurance and a complementary pension system. And when a widespread response to the economic crisis was laying off employees, Lagun Aro helped Mondragon to redeploy workers at risk of redundancy in other parts of the federation.13 This practice not only helped to maintain high worker morale through providing job security, but also helped strengthen businesses within the cooperative that needed extra help. Managing this redeployment of hundreds of workers, Lagun Aro ensured that workers arrived at their new places of employment with the necessary skills to do their new jobs.14 It covered both training and transportation costs for workers who were deployed to new sectors or locations.15 If a worker moved to a cooperative with a lower pay scale, either Lagun Aro or the worker’s previous cooperative paid the difference in wage.16 Finally, if a cooperative was unable to place a worker within one of its many subsidiaries, Lagun Aro had the resources in place to provide workers with redundancy pay for two years.17

The efficacy of this strategy comes into sharper focus in the example of Fagor Electrodomésticos. In the aftermath of the economic crisis, Fagor, one of Mondragon’s largest cooperatives and Europe’s fifth largest white-goods manufacturer, shuttered its doors.18 Despite efforts to restructure Fagor, the Mondragon federation ultimately arrived at the difficult decision that proposed business plans would not ensure the cooperative’s future viability. Fagor subsequently filed for bankruptcy. Research suggests that Fagor’s insolvency resulted from a variety of interrelated causes, ‘including business cycles, poor conditions in the overall economy, and in the specific market in which Fagor operated’ as well as governance issues and ‘excessive debt due to risky growth strategies’.19 Taken together, these factors arguably contributed to Fagor’s closing.

Although the federation was unable to save Fagor’s business, it called upon its ethos of investing in human capital with the goal of increasing overall social capital at a critical time. With around 1,800 jobs now on the line, Mondragon sprang into action to minimize the loss of employment for its workers, taking a two-pronged approach. It invested in cross-training employees to take on different jobs at other cooperatives across the federation, and adopted a strategy of capital transfers to move cash from financially stable cooperatives to those that were facing potential insolvency. Although the latter strategy was not deemed viable in the case of Fagor, capital transfers helped other cooperatives withstand the worst of the economic crisis.20 Further, as a result of the cross-training, 1,500 people had been placed into jobs elsewhere in the group within six months of Fagor’s closing.21 This practice of pooling resources, in sum, enabled Mondragon to succeed where others had failed: in retaining workers and maintaining stable profits in the aftermath of the economic crisis.

Performance

The response to Fagor’s collapse highlights the strength of Mondragon’s group insurance mechanism. This mutual business practice, designed to mitigate challenges, helps ensure that the damage resulting from economic crises is absorbed internally and does not spread to the wider community. For the most part, Fagor’s workers faced relocation, but not redundancy. The practice of cross-training and supporting the weakest cooperatives through capital transfers arguably helped minimize the potential negative impact on both the business and the local economy.

Although there have been challenges, in particular those associated with expansion and internal reforms, comparative studies assessing growth and overall performance show the advantages of Mondragon’s model. The resilience of Mondragon cooperatives during the 2008 crisis in comparison to other companies is one of the most significant and valuable.22 Research, moreover, suggests that Mondragon’s business activities have helped bolster the local economy by causing a spill-over effect in its native region.23 Comparatively low levels of income inequality in Mondragon’s area of operation within the Basque region may be attributed to the business’s positive impact.24

Prognosis

As the case highlights, even under challenging circumstances, Mondragon continues to operate by the principle that solidarity leads to innovation and stable profitability. Although the company rarely self-promotes, its model undoubtedly makes it a leader among social economy enterprises.25 Looking to the future, the business is likely to seek ways of retaining its values of reciprocity and mutual practices as it scales. Mondragon aims to continue expanding and applying its model where circumstances allow, facing internally and externally the challenges of globalization that the business believes are eroding social solidarity and the importance of placing people above profit.26

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Notes

1. Bhalla, Jha, and Lampell (2010).

2. Monzón and Chaves (2017: 11).

3. Monzón and Chaves (2017: 4).

4. Birchall and Hammond Ketilson (2009: 5).

5. Birchall and Hammond Ketilson (2009: 8).

6. Birchall and Hammond Ketilson (2009: 11).

7. Birchall and Hammond Ketilson (2009: 12).

8. Birchall and Hammond Ketilson (2009: 14).

9. Birchall and Hammond Ketilson (2009: 14).

10. Bajo and Roelants (2011: 111).

11. Bajo and Roelants (2011: 111).

12. Mondragon Internal Documents.

13. Roelents et al. (2012: 48).

14. Roelents et al. (2012: 48).

15. Roelents et al. (2012: 48).

16. Roelents et al. (2012: 48).

17. Roelents et al. (2012: 48).

18. Henderson and Norris (2015).

19. Errasti et al. (2017: 188).

20. Ibon Zugasti (International Projects Manager, Mondragon), personal correspondence with the authors, 24 April 2018.

21. Henderson and Norris (2015).

22. Henderson and Norris (2015).

23. Henderson and Norris (2015).

24. Henderson and Norris (2015).

25. MacLeod (1997).

26. Flecha and Ngai (2014).

Case Study Contributors

• Justine Esta Ellis, University of Oxford

• Alastair Colin-Jones, Mars Catalyst

• Ibon Zugasti, Mondragon

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