If the Erreka Group had operated like most companies, the pandemic would have dealt a traumatic blow to its workers.
Based in the rugged Basque region of Spain, the company produces a wide variety of goods including sliding doors, plastic parts for cars and medical devices sold worldwide. When the coronavirus ravaged Europe in late March, the Spanish government ordered the company to close two of its three local factories, threatening the livelihoods of 210 workers there.
However, the Erreka Group prevented layoffs by temporarily cutting wages by 5 percent. It continued to pay workers who were stuck at home in exchange for promising that they would make up some of their hours when better days returned.
This flexible approach was possible because the company is part of a large collection of cooperative companies based in the city of Mondragón. Most employees are partners, meaning they own the company. Though Mondragón Corporation’s 96 cooperatives need to make a profit to stay in business – like any business – these businesses are designed not to distribute dividends to shareholders or shower stock options to executives, but receive the paychecks.
The concept of the cooperative may evoke ideas of hippie socialism and limit its value as a model for the world economy, but Mondragón is a really big company. The cooperatives employ more than 70,000 people in Spain, making them one of the largest paychecks in the country. They have an annual turnover of more than 12 billion euros. The group includes one of the country’s largest grocery chains, Eroski, as well as a credit union and manufacturers that export their goods around the planet.
“Mondragón is one of the landmarks of the social economy movement because of its size,” said Amal Chevreau, policy analyst at the Center for Entrepreneurship of the Organization for Economic Cooperation and Development in Paris. “They show that it is possible to be profitable and still achieve social goals.”
In a world grappling with the consequences of expanding economic inequality, cooperatives are gaining attention as a fascinating potential alternative to the established form of global capitalism. They emphasize a specific purpose: protecting workers.
The pandemic has highlighted and exacerbated the pitfalls of companies built to maximize shareholder returns. The closure of much of the world economy has driven unemployment and threatened workers’ ability to support their families and keep rent and mortgage payments up to date – particularly in the US. Government bailouts have emphasized protecting assets like stocks and bonds, empowering investors and leaving workers vulnerable.
In the corporate world, high profile initiatives have marked the beginning of a more socially conscious mentality. Last year, 181 members of the Business Roundtable, a leading group of executives, pledged loyalty to a new mission statement in which they pledged to conduct their business not only to enrich the shareholders, but also to supply other so-called stakeholder workers , Suppliers, the environment and local communities.
The pandemic was the first real test of the principles of stakeholder capitalism. The results have been reviewed, with one study showing that the promise’s signers did no better than the average company.
Many large corporations have distributed much of their profits to shareholders in the form of dividends and purchases of their own stocks, causing stock prices to rise. When the pandemic hit, many lacked the resources to weather a downturn, prompting managers to take vacations and lay off workers to cut costs.
Cooperatives were specifically set up to prevent such outcomes. They usually require managers to put the majority of their profits back into the company to prevent layoffs in times of need.
“Our philosophy is not to lay off people,” said Antton Tomasena, Managing Director of the Erreka Group. “We wanted people not to worry too much.”
While co-operatives are increasingly part of the discussion about updating capitalism, they remain confined to the limits of business life. They can be found in Italy and Belgium. In the north of England, the city of Preston has sponsored cooperatives as an antidote to a decade of national austerity. A number of Cleveland cooperatives have been organized by a nonprofit organization, the Democracy Collaborative.
In Mondragón, cooperatives date back to the rubble of the Spanish Civil War in the early 1940s when a priest, José M. Arizmendiarrieta, came to the area with unorthodox ideas about economic improvements.
The Basque Country, rich in ore, has long been the scene of industry, particularly steel making, but most of the workers were poorly paid. People usually started working when they were 14 and had little progress.
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Dec. Dec. 29, 2020 at 5:11 pm ET
When the priest turned to the owner of a private vocational school to see if it was open to all, he was turned away. So he started his own now known as Mondragon University.
The priest saw cooperative principles as the key to raising the standard of living. In 1955, he persuaded five of the first few graduates of the local engineering program to buy a company that made heating systems and run it as a cooperative. They elevated workers to owners – partner is the term in art – with each one receiving a single vote in a democratic process that determines wages, working conditions and the proportion of profits to be distributed each year.
Over the decades numerous other cooperatives have established themselves and dominated the city’s economy. Each company is autonomous, but operates on a common set of principles, particularly the understanding that someone who loses a job in a cooperative has the right to take up a position with one of the others. If there is no work, the partners are entitled to vocational training plus unemployment benefits for up to two years.
In the United States, the executives of the 350 largest corporations receive roughly 320 times the typical worker, according to the Washington Economic Policy Institute. At Mondragón, executive salaries are capped at six times the lowest wage.
The lowest level is now € 16,000 per year (about $ 19,400), which is above the Spanish minimum wage. Most people earn at least double that and receive private health benefits, annual profit-sharing and pensions.
Each cooperative pays into a collective money pool that covers unemployment benefits and aid for struggling member cooperatives. When a crisis requires production to be limited, workers continue to be paid as usual, with residual amounts of working time that management can assign later.
The system proved robust during the global financial crisis of 2008, followed by the so-called sovereign debt crisis across Europe. Unemployment in Spain rose to over 26 percent. But in Mondragón, the cooperatives divided the pain into future hours through wage cuts and advance payments. Unemployment barely moved.
The crisis sparked the downfall of the original Fagor cooperative, which manufactured household appliances including refrigerators. This meant that almost 1,900 people were unemployed.
The Fagor collapse provoked talk that a weakness in the cooperative model had been exposed. Another type of business that has managed to maximize returns would have concluded much earlier that making refrigerators is a treacherous undertaking for a Spanish company given the stiff competition from low-wage countries in Asia. Endeavoring to keep jobs, Mondragón supported Fagor for years so as not to revive his fate.
Yet within six months of Fagor’s death, 600 of his former workers had found positions with other cooperatives, and the rest were receiving severance pay and early retirement packages, according to the group. As the leaders in Mondragón put it, the fact that Fagor collapsed while its employees were protected confirmed the value of the cooperative model.
“When a typical company goes bankrupt, we’re not saying that it is the end of the capitalist system,” said Ander Etxeberria, who oversees Mondragón’s communications.
In recent years the co-operatives have added contract and temporary workers who lack property rights, raising questions about whether the model can last as their business grows and competes with larger players. Many of Mondragón’s businesses have grown overseas, following their customers to Mexico, Brazil, China and numerous other countries. Most of the international subsidiaries are not cooperatives but traditional companies. They work under a loose guideline to improve local working conditions, but Mondragón leaders acknowledge that this is more aspiration than a reality.
Eventually, the Mondragón Cooperatives were created to improve livelihoods in Mondragón, not to reform labor markets worldwide.
“While the cooperative model protects people, it has to be competitive,” said Zigor Ezpeleta, who oversees social programs at Mondragón. “Otherwise it will go away.”
During the spring, when many Mondragón customers had to close their factories due to the pandemic, orders for parts fell. Production at the Mondragón factories dropped to 25 percent of capacity. The cooperatives responded with a 5 percent wage cut. Nobody was happy about it, but the opposition was limited.
Since then, almost all cooperatives have been working to capacity again, as the partners pay back the hours they were compensated for when the factories were closed. Overall, the cooperatives expect profitability for the year.
Mondragón cites its pandemic performance as evidence of its agility as well as the operational benefits of the trust that comes from a common goal.
“If you explain the situation very clearly and people know they own the company, you can make that kind of effort,” said Iñigo Ucín, president of Mondragón Corporation.
Most multinationals adapting to the pandemic tend to have divergent interests between shareholders and employees. Executives have continued to benefit from stock-based compensation promoted through public bailouts, even at companies that have resorted to layoffs.
At Mondragón, workers know that as owners they can benefit from sacrifices that strengthen their business.
“This is more than a job,” said Joana Ibarretxe Cano, production manager at the Erreka Group, whose plant was closed for the whole of April. “This is part of a team.”
The mother of two said she was concerned as the first wave of the pandemic unfolded – for her family, for the team she oversees, and for business. “Nobody likes not being able to go to work,” she said.
The way the company weathered the crisis has increased their confidence in the structure of their company. Their income was largely unaffected, even though the factory remained closed.
“The cooperative system has given us peace,” she said.
Rachel Chaundler contributed to the coverage.
