Learning from the Mondrag6n Cooperative Experience

lliam Foote Whyte

The Mondrag6n cooperative complex in the Basque country of Spain is recognized as the world's most impressive case of industrial cooperative development. The complex links together industrial, service, and agricultural cooperatives with a bank and a series of educational cooperatives. The continued expansion of the complex defies the con- ventional wisdom that worker cooperatives can only survive briefly in special niches not of interest to multi-national businesses.

Mondrag6n's dynamic growth and development cannot be due to some special fea- tures of the Basque culture. Success is due in part to the extraordinary vision and leadership of the founder, father Jos6 Maria Arizmendiarrieta, to the social inventions he created, and to the organizational culture that he and his followers built to guide the complex.

T he Mondrag6n cooperat ive complex in the Basque region of Spain is recog- nized as the wor ld ' s most impressive case of industrial cooperative develop-

ment. The complex began with the founding of the first industrial firm by 23 workers in 1956. By 1992, the complex had grown to 99 industrial or agro-indus-

trial and service cooperat ives closely linked with a cooperat ive bank, a research and development cooperative, and educational cooperatives. At that date, total employ- ment in the Mondrag6n complex was over 20,000.

Mondrag6n is the leading manufacturer of stoves, refrigerators, and washing ma-

chines in the Spanish market. The cooperat ives are involved in a wide range of

other businesses, f rom the manufacture of machine tools to construction, f rom furni-

ture making to financial and computer services.

William Foote Whyte is professor emeritus (1979) in Cornell University's New York State School of Industrial and Labor Relations. He continues to be active in the extension division of the School as research director of Programs for Employment and Workplace Systems. His best known book is Street Corner Society. With Kathleen King Whyte, he published Making Mondrag6n: The Growth and Dy- namics of the Mondrag6n Cooperative Complex. His latest book is an autobiography, Participant Observer.

Studies in Comparative International Development, Summer 1995, Vol. 30, No.2, 58-67.

Whyte 59

Since I first heard of Mondrag6n, I have been fascinated with this case because it seemed to challenge the conventional wisdom that worker cooperatives have little prospect of long-run survival and growth. With Kathleen King Whyte, I made my first visit to Mondrag6n in 1975 and later study visits in 1983, 1985, 1986, and 1990 (Whyte and Whyte 1988, 1991). Since then I have kept in touch with the coopera- tives through their monthly publication, T.U. (Trabajo y Union) and through consul- tation with Cornell 's Davydd J. Greenwood, a leading authority on the Basque culture, who has been involved in participatory action research with members of the FAGOR cooperative group (Greenwood et al. 1993).

Here, I begin by confronting Mondrag6n with the reservations that have been raised against the viability of worker cooperatives in general and against the poten- tial relevance of this case for cooperative developments elsewhere. I then show how Mondrag6n has overcome the supposed weaknesses of workers' cooperatives. On this basis, I conclude with ideas as to how other cooperative movements can learn from the Mondrag6n experience.

On the Supposed Weaknesses of Worker Cooperatives

Critics have argued that worker cooperatives tend to have the following built-in weaknesses that prevent them from becoming important factors in modern industrial competition.

1. They do not have the human, financial, and technical resources to compete effectively with the large multi-national private firms. They can be expected to thrive only in special niches, where the multi-nationals are not a threat.

2. Since worker-owners favor immediate income over reinvestment of profits, worker cooperatives tend to be poorly financed for research and development and for survival in recessionary periods.

3. Worker cooperatives can go out of existence if they fail financially, just like a privately owned firm, but also if they become highly successful over a period of years. In the latter case, as the firm expands and as some of the older members retire, the controlling members decide to protect their equity by taking on new people as hired labor. When the old timers finally retire, they want to sell their ownership shares, but, by this time, their value has multiplied so that employees can't buy them. The firm finds a market among outsiders and is converted to a private company.

In their nearly forty years of experience, the Mondrag6n cooperatives have shown that these supposed deficiencies of worker cooperatives can be overcome.

Mondrag6n has been able to compete effectively with multinationals in Spain, and some of the cooperatives export more than 50 percent of their production. Mondrag6n policies place a heavy emphasis on reinvestment of profits and on investments in research and development. Year after year, they reinvest a much higher percentage of their profits in reserve funds, to be drawn upon when business is slow, and to support research and development than do the average private industrial companies in the Basque region.

According to current practice and their own constitutions, the cooperative cannot have more than 10 percent of its work force as non-owning labor. Since the

60 Studies in Comparative International Development / Summer 1995

Mondrag6n cooperative does not issue stock, control is based on labor and not on capital.

While recognizing the financial and organizational success of Mondrag6n, some critics question the validity of "the Mondrag6n model" as a guide to cooperative development, claiming that this case presents key features that cannot be duplicated elsewhere. They refer to the following features: a) The Basque culture especially favors and supports what the Basques themselves refer to as "our associative ten- dencies;" b) A key factor in the design and growth of the Mondrag6n complex was the extraordinary vision and leadership of one man: Jos6 Maria Arizmendiarrieta, a parish priest who settled in 1941 in the small town of Mondrag6n (population 8,000 then, 30,000 now) and was the leader and guiding spirit for all major cooperative developments until his death in 1976.

Let us examine these supposed limitations.

On the Cultural Basis of the Mondrag6n Cooperatives

The Basques may well be more inclined to cooperative group activities than people of other cultures. In the 1980s, they had far more worker cooperatives outside of the Mondrag6n complex than within it. There was, however a crucial difference between Mondrag6n and non-Mondrag6n cooperatives. Only Mondrag6n produced an integrated, mutually reinforcing system of organizations, whereas the outside cooperative firms were all small and had no such supporting linkages. There is no precedent in Basque culture for such linking of cooperative and development activities.

Like other cultures, the Basque culture can and does permit a variety of appar- ently contradictory activities. For example, the Basques are known world wide as the home for one of the most violent of terrorist organizations, ETA. It would seem paradoxical to say that the Basque culture supports both a terrorist organization and also the peaceful development of the Mondrag6n cooperative movement. In other words, the cultural explanation for the growth and dynamics of the Mondrag6n cooperatives explains little, if anything.

Another test for the relevance of the Mondrag6n experience is to note where it is being put into practice outside of the Basque country in Spain. There is a develop- ment closely modeled on Mondrag6n, El Grup Empresarial Cooperatiu Valencia (G.E.C.V.) (Martinez 1991). The leaders of the Valencia group began to organize in 1969 and had their first meeting with the leaders of Mondrag6n in 1970. There were frequent interchanges of information and ideas between the two groups from that day to this. In 1994, the Valencia group provided employment to 2,550 members in more then 65 cooperatives, organized in relation to a cooperative bank and an educational system. Even in the depressed economic conditions of Spain, El Grup continues to expand in employment and profits every year.

Job Ownership Ltd. in London supports the application of some of the Mondrag6n principles to the United Kingdom and elsewhere. It was founded by Robert Oakeshott, who discovered Mondrag6n for the English-speaking world in 1973 (Oakeshott 1973).

Whyte 61

In the United States and Canada, Mondrag6n has attracted wide interest. The Industrial Cooperative Association has been the leading non-profit organization studying and interpreting Mondrag6n, and I.C.A. led a political movement to sup- port new state legislation on worker cooperatives in Massachusetts, New York, and several other states that would facilitate the adoption of certain features of the Mondrag6n model. These initiatives have also led to federal legislation granting worker cooperatives some of the benefits provided for Employee Stock Ownership Plans (ESOPs) (Blasi 1989).

On the Role of the Founder

When we first interviewed the founder, Jos6 Maria Arizmendiarrieta, he told us, "I have no power." If we mean by power-holding an executive position entitling him to make decisions for his organization, that statement is true. He never held an official position beyond that of "advisor," yet, he wielded enormous influence on the design and growth of the cooperative complex.

Was he a charismatic leader? That term suggests a public speaker so eloquent as to arouse hundreds of people to follow him. Even his closest friends and associates tell us that he was a poor public speaker. His sermons were boring and hard to follow. He was a strategic thinker and leader of educational dialogues. In his semi- nary studies, he became interested in cooperatives, reading of the history of Robert Owen and the Rochdale principles of cooperative organization. While the Rochdale consumer cooperatives proved to be viable organizations, the Owen worker coop- erative textile firm eventually reverted to private ownership, as the worker owners retired and sold their stock to outsiders. To prevent this from happening, Don Jos6 Maria created a social invention, a worker cooperative that did not offer stock to its members (or anyone else). Capital was raised and enlarged through establishment of capital accounts for each member of the cooperative. On joining, the member paid the cooperative an entry fee in cash or in payroll deductions. That initial amount established the member's capital account. Out of the profits of each subsequent year, after deduction of 30 to 50 percent to go into the cooperative's reserve fund, according to the decision of the firm's Governing Council, the remainder is distrib- uted to member capital accounts, according to hours worked and pay grade.

This social invention has two important advantages. First, a member who quits or retires cannot sell his individual stock to an outsider, thus starting a trend in which the remaining cooperative members eventually lose control of their organization. The conversion to private ownership can only be accomplished if a majority of the cooperative members vote to sell out. (This has happened in the case of two small cooperatives in the province of Navarre, which is not included among Basque provinces supporting the Basque regional government. It has not happened to any of the major cooperatives or cooperative groups in the Mondrag6n complex.)

Second, when the cooperative is suffering serious losses, the members do not immediately have to choose between closing the firm or selling it to outsiders. While calling for advice and financial assistance from Mondrag6n's cooperative

62 Studies in Comparative International Development / Summer 1995

bank, the Caja Labor Popular, the members can vote to turn over to the firm some fraction of their individual capital accounts. Working with the Caja also usually involves accepting a percentage reduction in their individual pay rates until the financial crisis is overcome. This arrangement does not guarantee the long run survival of the firm, but the postponement of bankruptcy and the reorganization of the firm has led to several spectacular recoveries of important firms in the coopera- tive complex.

Don Jos6 Maria's educational contribution to Mondrag6n began when he led a group of young men and their parents to found the Escuela Polit~cnica (named for him after his death). The first class met in 1943, thirteen years before the founding of the first Mondrag6n worker cooperative. Up to this time, no children of working class parents in Mondrag6n had gone to a university. While the first graduates of the new school were working with the town's leading private firm, Don Jos6 Maria arranged to have them study in absentia for engineering degrees at the University of Zaragosa.

Those students were the nucleus for organization of the first worker cooperative. Throughout the years up to the launching of Ulgor, Don Jos6 Maria met often with these young men for discussions of social and economic development. One of his closest associates reports that he conducted "study circles" about twice a week from his arrival in 1941 to the founding of Ulgor in 1956.

As if it were a private firm, Ulgor was initially registered in the name of one of the five founders. During the first two years, after the working day, Don Jos6 Maria met frequently with the prospective members to devise a constitution and by-laws to establish Ulgor as a worker cooperative. All subsequent worker cooperatives adopted this framework.

The final authority is the general assembly of all members, which meets at least once a year to discuss various reports and to vote on management's plans for the following year. There is a Governing Council (GC), elected by the members-at- large, that has the same powers as a board of directors in a private firm, but includes among its members no executives nor any outsiders. The GC chooses the manager and his top staff for four-year terms. The cooperative also has a Social Council (SC), whose members are elected by the work units or departments in the firm. Since the same members vote for both the GC and the SC, why have two represen- tative bodies? In effect, the GC has come to represent the members as owners and the SC has come to represent the members as workers. If there were only one representative body trying to balance owners' interests against workers' interests and needs, the representatives would find themselves in ambivalent situations, and ambivalence is not a good position from which to make decisions.

Although the social council has been criticized frequently by its members as not representing worker interests effectively, we saw it play an essential role in the 1970s in guiding the cooperatives through a difficult period of changing compensa- tion policies in response to changing economic conditions. Leaders of Mondrag6n had accepted the values of worker participation on the job, but they have been far more effective in building participation in the governance structure than in the work

Whyte 63

place itself. That is, problems that arise in the work place tend to be referred to the social council or the governing council rather than being dealt with by workers, supervisors, and managers.

In 1959, just three years after the founding of Ulgor, Don Jos6 Maria persuaded his associates to set up a cooperative bank, the Caja Laboral Popular, to support the development of future cooperatives as well as to provide an institution for indi- vidual members' savings. As the Caja expanded, it came to include an entrepreneur- ial division, to provide consultation and support for the development of new cooperatives. Since worker cooperatives were not included in the Spanish social security system, the Caja organized Lagun Aro as an independent cooperative to provide this coverage. In recessionary periods, Lagun Aro has played important roles in helping individual members and their cooperatives to make the necessary adjustments.

In 1965 Don Jos6 Maria advised members to establish cooperative groups, linking cooperatives in the same general area, so that they could share many services (such as accounting, advertising, personnel administration, and research). ULARCO was the first cooperative group, and others were later organized, on the stimulus and partial financial support from the Caja. (In the late 1980s, ULARCO was renamed FAGOR, which had been the trademark of Ulgor's best selling household appli- ances.)

While teachers in the Escuela Politecnica were studying the technical needs of the worker cooperatives, in 1974 Don Jos6 Maria persuaded members to create Ikerlan, a research and development cooperative to serve the worker cooperatives--and also to offer services to private firms.

All of these are the creative initiatives of a unique individual, but those interested in building worker cooperatives can learn from what he has done.

Mondrag6n in Time Perspective

When Ulgor was created in 1956, and for many years thereafter, Spanish manu- facturers were protected by high tariffs. As the economy recovered after the end of the Civil War, any firm that produced something useful could find a ready demand for its products. Ulgor began with relatively simple technologies and products. In the 1960s, reinvestment of high profits and development of Mondrag6n's research and development capacity made possible continuous improvement in production methods and quality of products so that Mondrag6n could compete more effectively in the growing Spanish market.

Economic and political conditions changed markedly for Mondrag6n after the 1960s. By the 1970s, the cooperatives were facing stronger competition from Span- ish private firms, and then the national and international economies were shaken by the oil shocks when the OPEC nations imposed drastic price increases. The rate of profits of the cooperatives dropped substantially. The number of members and the number of cooperatives continued to increase but now more slowly. The changing economic conditions required a change in compensation policies. The basic rates of

64 Studies in Comparative International Development / Summer 1995

pay had been set in relation to customary rates paid by private firms in the Basque region and in relation to the cost of living. In the late 1970s, the cooperatives had to go through a difficult readjustment in establishing the firm's ability to pay as the primary determinant of pay rates.

By the early 1980s, Spain was undergoing a severe recession. In the Basque region, in 1983, 25 percent of the workforce was unemployed. By shifting workers from one cooperative to another and providing temporary assistance to those be- tween jobs, through reorganization and refinancing of failing firms, the Mondrag6n cooperatives remained close to full employment. In this period, the emphasis was upon protecting and strengthening existing resources, so the creation of new coop- eratives was practically eliminated.

Expansion did come in a new way: through buying out two failing private firms, one in the household appliances line, the other in the foundry business. These were expected to strengthen FAGOR's competitive position in two of its main lines of operation. These purchases brought Mondrag6n new social problems. The workers in these two firms belonged to unions. FAGOR offered them the opportunity to become members of the cooperatives by paying the membership fees in payroll deductions, but they voted instead to be hired labor.

In the early 1980s, while Mondrag6n was struggling to preserve its cooperatives and maintain its personnel, the Caja Laboral Popular launched a process of studies and discussion meetings to prepare for Spain's entry into the European common market, beginning gradually in 1990 and culminating in 1993, when all tariff barri- ers protecting Spanish manufacturers would be eliminated.

The major structural reorganization was carried out peacefully and democratically in a series of stages. Until 1987, the Caja provided the only link among all the members of the cooperative complex. Each cooperative signed a contractual agree- ment with the Caja, specifying terms of individual membership and group policies, and providing the Caja with monthly reports on its financial condition. In return, the Caja offered credit to any of its cooperatives at concessionary rates and access to technical assistance through its Entrepreneurial Division, including intervention to reorganize a cooperative that was failing.

The first major change to affect the entire complex occurred in 1987 when the first Congress of Mondrag6n Cooperatives took place. Each cooperative elected representatives, with the number roughly related to the total number of members in that cooperative, yielding a total of about 400 congress members. The body elected an executive committee empowered to take certain actions within the two years when the Congress was not in session. The members also elected a president and secretary.

The cooperative congresses of 1989 and 1991 carried through the structural trans- formation of a loosely linked cooperative complex into what is today the Mondrag6n Cooperative Corporation. Their preliminary studies referred to this as shifting from a sociological base to an economic base. That is, the cooperatives had first been grouped together according to their geographic location. This facilitated interper- sonal and interorganizational communication, but it was now thought to be eco-

Whyte 65

nomically inefficient. This led to the establishment of a divisional organization, grouping cooperatives that shared markets or technologies. The general manager of FAGOR became president of the Mondrag6n Cooperative Corporation, and vice presidents were chosen for each of the 10 divisions.

This was not designed to change the autonomy of the individual cooperative, but it built up a longer bureaucratic structure, which necessarily weakened the power and influence of the individual members and their cooperatives. This change neces- sarily involved a major readjustment in the pattern of interpersonal relations within a cooperative group. A new interpersonal and interorganizational network would have to be built up among individuals who, in many cases, were far more geo- graphically separated than were the members of the former locality based groups. Furthermore, while individual cooperatives retained their social councils, the new central structure had no place for that organ, which was supposed to continue representing the interests of members as workers.

When we visited Mondrag6n in 1990 and discussed these changes with some of the leading members of the FAGOR cooperative group, we found people persuaded that the drastic reorganization of the structure was necessary to secure the survival of the cooperatives as Spain entered the European Common Market, and yet they worried that this change could undermine the essential participative characteristics of workers' cooperatives. Would the Mondrag6n Cooperative Corporation come to resemble a large private corporation? Since the cooperative members considered themselves workers, our informants were not worried over how FAGOR manage- ment would deal with union leaders of the two formerly private firms in collective bargaining. It seemed to us, however, that a future impasse in bargaining and the threat of a strike would command wide national and international media attention. And would many of the cooperative members now want to unionize?

Lessons from the Mondrag6n Experience

Since there is no other group of cooperatives as large and complex as Mondrag6n, we can leave aside for now discussion of what can be learned about the problems and possibilities of Mondrag6n's struggles to prepare for entry into the European common market in the 1990s. Let us look for answers for those seeking to organize new cooperative movements today or to further develop their early cooperative initiatives.

Learning from the Mondrag6n experience should be viewed in a time perspective because the stages of growth and change must be understood in relation to changes in national and international political and economic conditions. In reviewing that history, the manager of Ulgor commented, "If it weren't for the economic situation of Spain when we started and for Don Jos6 Marfa, the Mondrag6n cooperatives would not be here today."

If those who founded the complex had had to face the national and international economic conditions facing Spain today, they might well have been confined to seeking out small niches where cooperatives might be able to escape from the

66 Studies in Comparative International Development / Summer 1995

competi t ion of private firms. As they gained financial and technological strength

over the years, many of the cooperat ives reached the point of being able to compete

with any national or international firm.

The personal characteristics of the founder, Don Jos6 Maria Arizmendiarrieta, can

not be duplicated elsewhere, but, if we concentrate on the key features of his social

inventions (and those of his followers), we will indeed find elements that are gener-

ally applicable for today and tomorrow. Let us focus on them.

�9 Capital accounts for financing and control: Don Jos6 Maria devised a system for financing that prevented a financially profitable worker cooperative from degenerating into a private firm.

�9 A cooperative development bank for financing and technical assistance in creating and preserving cooperative firms: Savings banks and credit unions are generally used to provide credit for purchases of individual borrowers. The Caja Laboral Popular was specifically created to finance and guide the development of cooperative firms.

�9 Educational foundations of cooperative development: The Escuela Politecnica not only pro- vided technical education needed for the creation and growth of cooperative firms; it also played a key role in the creation of research and development units. Ikerlan, the technical research and development cooperative, arose directly out of Escuela Politecnica, and other initiatives in management and entrepreneurial training originated in the Escuela. Training and research in management were transferred later to a new institution, Otalora (formerly known as lkasbide). Equally important as these concrete initiatives has been the establishment of a tradition to link education with development through establishing a social process of studying and discussing before taking actions.

�9 Creating the social councils to represent the members as workers: Providing separate insti- tutions for representing members as owners and as workers fostered a process of discussion over the problems of reconciling these sometimes incompatible interests. In our discussions with people active in these discussion processes, and in reading reports of meetings, we were im- pressed with frequent references to the need to find an equilibrio or balancing of interests. This usually took the form of seeking to balance social interests against technical and economic requirements. The social councils, however, are not represented in the top structure of the Mondrag6n Cooperative Corporation, which may mean that this balancing feature has been seriously weakened.

�9 Devising new cooperative structures for consumers cooperatives and agricultural coopera- tives: In the conventional consumers cooperative, only consumers vote for the board of direc- tors, and those working in the store are employees. In the Mondrag6n structure, both consumers and store workers vote, each electing one half of the governing council (with the presidency limited to a consumer member). With the agricultural cooperatives, a similar arrangement is established, assuring that both farmers and commercial workers participate in the governance.

Students of worker cooperat ives now generally agree that a single worker coop-

erative, surrounded by a sea of private firms and institutions to serve them, has a

poor chance to survive and grow. Planners have to think in terms of access of the

cooperat ive to the financial, social, and technical assistance necessary for financial

growth. The Valencia group has developed its model closely after Mondrag6n.

Elsewhere, it may not be practical or necessary to follow this model so closely, but

planners will in any case need to think of establishing some sort o f institutional

arrangements to secure the support necessary for cooperat ive growth and survival.

Whyte 67

References

BLASI, JOSEPH 1989 Employee ownership: Revolution or ripoff? New York: Ballinger.

GREENWOOD, DAVYDD J. and JOSI~ LUIS GONZALES SANTOS 1993 Industrial Democracy as process: Participatory action research in the Fagor cooperative

group of Mondrag6n. Stockholm: Van Gorcum, Assen/Mastricht. MARTINEZ, A.

1991 El.grup cooperatiu de Valencia. Valencia: Caixa Popular. OAKESHOTI', ROBERT

1973 Mondrag6n: Spain's oasis of democracy. London: London Observer January 21. WHYTE, WILLIAM F. and KATHLEEN KING WHYTE

1989, 1991 Making Mondrag6n: The growth and dynamics of the worker cooperative complex. Ithaca:

ILR Press.