Co-op Study 7

Mondragon Co-operatives

by Manfred Davidmann

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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:

% of profits    
     
25   must go to obligatory reserve funds
20   must go to obligatory funds against the possibility of bankruptcy
10   to community projects.

'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:

    P t a s  m i l l i o n s
    Share Capital   Reserves   Total
            (of these two)
             
31/12/1995   62,948   110,739    
31/12/1994   58,338   94,587    
             
Increase   4,610   16,152   20,762
             
             
Increase (% of Total)   22.2   77.8   100.0


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
http://www.solhaam.org/

ASSOCIATED CO-OP STUDIES
Manfred Davidmann
http://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:

Title   Description
     
Directing and Managing Change     How to plan ahead, find best strategies, decide and implement, agree targets and objectives, monitor and control progress, evaluate performance, carry out appraisal and target-setting interviews. Describes proved, practical and effective techniques.
     
Style of Management and Leadership     Major review and analysis of the style of management and its effect on management effectiveness, decision taking and standard of living. Measures of style of management and government. Overcoming problems of size. Management effectiveness can be increased by 20-30 percent.
     
Role of Managers Under Different Styles of Management     Short summary of the role of managers under authoritarian and participative styles of management. Also covers decision making and the basic characteristics of each style.
     
Organising   Comprehensive review. Outstanding is the section on functional relationships. Shows how to improve co-ordination, teamwork and co-operation. Discusses the role and responsibilities of managers in different circumstances.
     
Work and Pay   Major review and analysis of work and pay in relation to employer, employee and community. Provides the underlying knowledge and understanding for scientific determination and prediction of rates of pay, remuneration and differentials, of National Remuneration Scales and of the National Remuneration Pattern of pay and differentials.
     
Work and Pay: Summary   Concise summary review of whole subject of work and pay, in clear language. Covers pay, incomes and differentials and the interests and requirements of owners and employers, of the individual and his family, and of the community.
     
Social Responsibility, Profits and Social Accountability   Incidents, disasters and catastrophes are here put together as individual case studies and reviewed as a whole. We are facing a sequence of events which are increasing in frequency, severity and extent. There are sections about what can be done about this, on community aims and community leadership, on the world-wide struggle for social accountability.
     
Social Responsibility and Accountability: Summary   Outlines basic causes of socially irresponsible behaviour and ways of solving the problem. Statement of aims. Public demonstrations and protests as essential survival mechanisms. Whistle-blowing. Worldwide struggle to achieve social accountability.
     
Motivation Summary   Reviews and summarises past work in Motivation. Provides a clear definition of 'motivation', of the factors which motivate and of what people are striving to achieve.
     
The Will to Work: What People Struggle to Achieve   Major review, analysis and report about motivation and motivating. Covers remuneration and job satisfaction as well as the factors which motivate. Develops a clear definition of 'motivation'. Lists what people are striving and struggling to achieve, and progress made, in corporations, communities, countries.
     
What People are Struggling Against: How Society is Organised for Controlling and Exploiting People   Report of study undertaken to find out why people have to struggle throughout their adult lives, in all countries, organisations and levels, to maintain and improve their standard of living and quality of life. Reviews what people are struggling against.
     
Community and Public Ownership   This report objectively evaluates community ownership and reviews the reasons both for nationalising and for privatising. Performance, control and accountability of community-owned enterprises and industries are discussed. Points made are illustrated by a number of striking case-studies.
     
Ownership and Limited Liability   Discusses different types of enterprises and the extent to which owners are responsible for repaying the debts of their enterprise. Also discussed are disadvantages, difficulties and abuses associated with the system of Limited Liability, and their implications for customers, suppliers and employees.
     
Ownership and Deciding Policy: Companies, Shareholders, Directors and Community   A short statement which describes the system by which a company's majority shareholders decide policy and control the company.
     
Ownership: Summary   Ownership means control, means decision-taking. This short review covers where the right to ownership comes from and how it is exercised. Ownership of land, means of production, and wealth. Ownership in relation to incomes, need, and human rights.
     
The Right to Strike   Discusses and defines the right to strike, the extent to which people can strike and what this implies. Also discussed are aspects of current problems such as part-time work and home working, Works Councils, uses and misuses of linking pay to a cost-of-living index, participation in decision-taking, upward redistribution of income and wealth.
     
Using Words to Communicate Effectively   Shows how to communicate more effectively, covering aspects of thinking, writing, speaking and listening as well as formal and informal communications. Consists of guidelines found useful by university students and practising middle and senior managers.
     
Exporting and Importing of Employment and Unemployment   Discusses exporting and importing of employment and unemployment, underlying principles, effect of trade, how to reduce unemployment, social costs of unemployment, community objectives, support for enterprises, socially irresponsible enterprise behaviour.
     
Transfer Pricing and Taxation   One of the most controversial operations of multinationals, transfer pricing, is clearly described and defined. An easily-followed illustration shows how transfer pricing can be used by multinationals to maximise their profits by tax avoidance and by obtaining tax rebates. Also discussed is the effect of transfer pricing on the tax burden carried by other tax payers.
     
Inflation, Balance of Payments and Currency Exchange Rates     Reviews the relationships, how inflation affects currency exchange rates and trade, the effect of changing interest rates on share prices and pensions. Discusses multinational operations such as transfer pricing, inflation's burdens and worldwide inequality.

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Relevant Subject Index Pages and Site Overview


The Site Overview page has links to all individual Subject Index Pages which between them list the works by Manfred Davidmann which are available on the Internet, with short descriptions and links for downloading.

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Copyright    ©    1996    Manfred Davidmann
All rights reserved worldwide.

History
14/11/96 Completed
17/03/97 To Website
02/06/02 Added 'Relevant Current and Associated Works'