Could Co-Ops Solve Income Inequality?
In the Basque country of Northern Spain, the Mondragon Corporation—the world’s largest co-operative business enterprise—has found ways to weather economic crises, avoid severe income inequality, and build long-term worker loyalty. Why don’t more businesses follow “the Mondragon model”?
By ROBERTO LOVATO
Editor’s Note: This article includes a new sidebar, written in June 2020, showing how one of the co-ops featured in the story—the Evergreen Cooperatives in Cleveland, Ohio—has handled COVID’s economic damages better than most traditionally structured businesses. The story underscores one of the arguments in this article: that co-ops might be the most effective business model for coping with economic crises.
I’m driving on a circuitous, narrow country road that leads to Aretxabaleta, one of many medieval Basque towns in the storied Leniz valley. Up above, mist-sodden forests and dreamy trails thread through cloud-capped limestone mountains, the rocky backdrop to towns teeming with legends—and a sequence of economic crises, ancient and modern. The Basque landscape is so breathtaking that several “Game of Thrones” episodes were filmed here. My reason for visiting is a little different, however. I’ve come to see whether the region’s most modern economic legend, the Mondragon Corporation, is all it’s cracked up to be.
Mondragon’s 80,818 workers spread across 98 businesses operating 143 businesses operating 77 production plants in 22 countries, which makes it the most successful experiment in worker ownership in history. Just the idea that I will soon visit this enterprise has the twenty-something former co-op coordinator in me pressing the gas pedal to get there sooner.
Several studies have concluded that workers belonging to co-operatives identify more strongly with the business than those in more traditional workplaces, and work harder.
Though renowned in the growing world of alternative economies, the Mondragon experiment is still little-known outside of Spain. Yet its accomplishments are undeniable: eight educational institutions, an insurance company, several high-tech firms, electronic car-part manufacturers, consulting firms and major retailers, including Eroski, the supermarket chain whose 33,000-plus workers and 1,651 outlets make it one of the “global powers of retailing.” Laboral Kutxa, the Mondragon Corporation’s financial arm, is one of the largest savings banks in Spain; it, too, gets high ratings, consistently ranking as one of Spain’s safest, best-run financial institutions.
While these achievements are impressive, I’m here to see much more. Having gone on, after two years as a co-op manager, to earn an MBA and then work as a business consultant, I want to understand how the famed “Mondragon model” dealt with the inevitable economic crises that all economies and businesses face. Beyond that, I want to figure out if and how a business model of this kind can solve some of the longstanding economic problems that plague the U.S., especially the ever-expanding crisis of income inequality.
Several minutes later, I’ve reached my destination: a 14th-Century, formerly fortified castle called Otálora, which has become a crucial part of the Mondragon complex. Now owned by Laboral Kutxa, the castle has been transformed into a training center for Mondragon’s worker-owners, and their guests.
Greeting me as I approach the castle is Ander Etxeberria, Mondragon’s gregarious, mustachioed Director of Dissemination, the person charged with promoting co-operativism worldwide. Etxeberria’s job has been made easier by articles like the recent story in Harvard Business Review titled “Why the U.S. Needs More Worker-Owned Companies.” Several studies, including an unprecedented 2005 National Bureau of Economic Research survey of 40,000 workers, have concluded that workers belonging to co-operatives, employee-stock-ownership plans (ESOPs) and group-based pay schemes identify more strongly with the business than those in more traditional workplaces, and, as a result, work harder.
“Co-ops tend to be better at helping people get through economic crisis,” says Roy Messing, Director of Kent State Co-operative Development Center (a department started with a Rural Co-operative Development grant from the U.S. Department of Agriculture). “Banding together, using collective capabilities makes it a lot easier than slugging it out on your own.”
But that just scratches the surface of what co-ops deliver, in both opportunities and challenges. As an example, one of the biggest plusses to working in a co-op, which is by definition owned by the workers, is that every employee is entitled to his or her say. But having a say also leads to responsibilities; meetings therefore are constant, frequently stretching far past the work-day. Co-ops also tend to have an uphill battle as they seek to grow and attract financing, primarily because the economic system has long been structured to work with more traditional capitalist enterprises. But for the growing number of workers willing to put in the extra effort that the co-operative challenge demands, the rewards, I soon learned, can be remarkable.
THE PRICE OF RESPONSIBILITY
In the U.S., the CEO-to-worker pay ratio averages 339 to 1, with the upper end of the spectrum surpassing 5,000 to 1. According to a Stanford University survey, most U.S. workers think a fair executive-to-worker pay ratio would be 6 to 1.
A few minutes after we settle into one of the cozy cobblestone rooms of the castle, Etxeberria leads a geographically diverse delegation from the U.S. in a seminar on co-operative basics.
One delegate mentions that Mondragon, and co-operatives in general, are being seriously considered as an alternative business model in the U.S. One of the reasons, apparently, is that the co-op structure offers a way to save a number of family businesses, which are run by baby boomers and are on the brink of closure. In November, 2018, MarketWatch reported that a third of the nation’s baby boomers who run their own businesses are planning to retire in the next five years. And more than a third have no children interested or available to take the reins, or any other plan for keeping the business open. This looming crisis led, in August, 2018, to the creation, in a bi-partisan vote, of the Main Street Employee Ownership Act (MSEOA), which enables the Small Business Administration to provide technical assistance and loans for employee-ownership conversions.
For this to work, of course, the employees need to learn how to run their businesses, some of which are multi-billion-dollar global enterprises. That’s why Mondragon puts extraordinary amounts of time and resources into worker training, which it considers the sine qua non of co-op success. The company also wants workers to appreciate the struggle and sacrifice that created their opportunities. That painful history, which spawned the culture of selflessness that is Mondragon’s foundation, permeates the atmosphere throughout this castle.
THE CO-OP PRIEST
I leave the seminar to check out the museum upstairs. In a small, dark room packed with pictures, a library, and other documents, I notice a yellowed document that is the most banal of bureaucratic texts: a list.
I assume it’s an old factory order, but on closer inspection I discover that it’s one of many lists which, according to historical texts, contain 1,788 names. These were the Basque men and women arrested and jailed in the notorious Larrínaga prison by the Nationalist forces of General and Spain’s eventual dictator Francisco Franco. On this particular document, which was an executioner’s list, most of those listed were either shot or placed by the Nationalist army in a garrote vil, a medieval device used to torture and then strangle its victims with rope, chain, wire, or fishing line.
Whether by the hand of God or by the equally invisible hand of the market, one of the people on this list who was not executed was Father Jose Maria Arizmendiarrieta, Mondragon’s founder—and, in 2015, a man declared “venerable” by Pope Francis, a major step toward Arizmendiarrieta’s nomination to Catholic sainthood as the “Apostle of Co-operation.”
In several pictures, Arizmendiarrieta is wearing a Saturno felt clergy hat that, along with his chiseled, gaunt face and thin frame, make him look like a bespectacled, clean-cut Basque version of Picasso’s iconic black on white drawing of Don Quixote. I spot old black and white stills of Arizmendiarrieta’s fellow priests from the town of Vitoria, who taught him about the church’s mission: the “redemption of the worker’s world.” Next to these are pictures of rickety houses, skinny children, and lots of sad faces—signs of the dark times descending on Basque country and all of Spain in the 1920s and 1930s.
In the face of this struggle, Arizmendiarrieta joined the Republican army, in 1936, to fight the nationalist forces, who eventually captured and jailed the young priest. Even though he was accused of “rebellion,” and his comrades executed, Arizmendiarrieta was sentenced to a month of imprisonment but was ultimately absolved; he was then forced into the army and sent to Burgos. While it’s tempting to ascribe some moral reasoning to his liberation, it was probably the result of bad business practices: the fascistas lacked the documentation to prove that Arizmendiarrieta received payment from the “subversive” papers he wrote for. So he simply returned to his church, which had become one of the few institutions able to provide cover from the encroaching tyranny.
Once freed, Arizmendiarrieta focused his ministry on aiding workers organizations in Basque country, most of which were forced to go underground. Strikes and collective bargaining were outlawed. Workers and their communities were regularly harassed, surveilled and jailed. Those who labored in the region were forced to work 12-hour work days for below survival income while others suffered from the era’s high unemployment, overcrowded housing, and extraordinarily high rates of tuberculosis.
Especially important to the rise of Mondragon was the lack of social mobility in the early days of the Franco regime, a fact that became obvious to any worker who aspired to get an education. There was one custom in particular that the museum’s curators made sure the locals and other visitors could never to forget: during the early twentieth century and much of the following decades of the Franco era, businesses in Basque country excluded anyone but the children, specifically the sons, of business managers from getting an education.
Black and white photos from the early 1950s depict Arizmendiarrieta and some of the uniformed students of the Escuela Profesional, a technical school he founded, laboring at lathes, drills, gear shapers, and other industrial equipment housed at Unión Cerrajera, then a hotbed of organizing by socialists and a loose, rebellious crowd called anarcho-syndicalists. Inspired by their priestly mentor, in early 1954, student-workers at the Unión climbed the concrete stairs of the hulking, massive structure that housed one of the most important metal factories in all of Spain. The young workers wanted management to consider a radical idea: give employees the option of investing in and owning part of the company.
After their proposal was rejected out of hand, five of the students pictured in several large museum photos decided the time had come to take matters into their own hands. On November 12, 1956, they officially established Talleres Ulgor, the first industrial co-operative of what would become the Mondragon Corporation. Ulgor started off manufacturing heaters and gas stoves, but soon moved into other appliances and, eventually, a name change: Fagor Electrodomésticos. The company served as Mondragon’s flagship venture until the global recession of 2008, when it faced a major crisis (more on this in a moment).
In the intervening years, Mondragon launched additional co-operative ventures that emulated and expanded on the Fagor example, creating an industrial complex that, by the mid-1960s, included co-operatives in agricultural ventures, education, culture, real estate, and health services. In 1959, the corporation founded the Caja Laboral Popular (now Laboral Kutxa), a co-operative savings bank and credit union that arose out of Arizmendiarrieta’s fear that traditional financial institutions of the Franco era would not lend money to worker co-operatives. Sure enough, Francoist financial institutions refused to lend to Mondragon and its members for many years, a reality that eventually changed with the times, and the fall of Franco regime on November 20, 1975.
By this time, the co-operativistas had developed a powerful set of educational institutions to supplement the work of individual co-operatives, and to foster the interdependence between them. Today, these institutions include a Culinary Arts Center and University, 15 technology centers, and Europe’s largest research and development complex, according to the Praxis Peace Institute .
FIGHTING INCOME INEQUALITY
The university and all of Mondragon’s co-operatives also deal directly with one of today’s major sources of Spanish and global inequality: the pay gap between the executives and average workers.
According to the Financial Times Stock Exchange index (FTSE), the average CEO salary among European companies is $7 million a year. While the average is admittedly bloated by the continent’s big-revenue firms, it still yields a CEO-to-line-worker pay ratio of 129-to-1. (Among traditional companies in Spain, the average is roughly the same). In contrast, Mondragon’s co-operatives have decided on a ratio that runs from 6-to-1 to 9-to-1. And no CEO of a Mondragon co-operative makes more than $1 million a year.
By contrast, in the the U.S., the CEO-to-worker pay ratio averages 339 to 1, with the upper end of the spectrum surpassing a ratio of 5,000 to 1. (These figures turned up in a comprehensive May 2018 Congressional study conducted by the office of former Congressman Keith Ellison.) Curiously, according to a 2016 Stanford University survey, most U.S. workers think a fair executive-to-worker pay ratio would be considerably smaller—at a stunning 6 to 1. No wonder income inequality resonates so strongly among American voters whenever the issue is raised.
As most everyone knows, the standard explanation for high executive salaries is that companies cannot attract top talent without them. But this might be more myth than fact. Numerous studies show that, on average, the highest paid CEOs tend to be the worst performers. One joint study by the University of Utah and Cambridge University came to the following conclusion: “Overconfident CEOs receiving high excess pay undertake activities such as over-investment and value-destroying mergers and acquisitions that lead to shareholder wealth losses.”
Of course, a company can always minimize salary simply by paying lower rung workers more generously. And it seems like Mondragon follows this policy, at least in some cases, but the data is far from consistent. For example, in a 2015 interview, Josu Ugarte, Mondragón’s chief executive, stated that the lowest level worker at Mondragón gets an annual salary of 28,000 Euros (or $32,000), which is three times Spain’s minimum wage. But according to the comparative job site indeed.com, a grocery stocker at Eroski, Mondragon’s giant supermarket, earns the equivalent of $12,860 a year, about the same as grocery stockers in Spain generally. In yet another calculation, a 2012 study by Hamilton University found that the Basque region’s co-operatives “tend to set a lower wage than conventional firms.”
GRACE UNDER PRESSURE
In 2008, recession hit Spain as hard as anyplace else. At the time, Spain was in the midst of a housing bubble, which promptly exploded. That sent the country into an economic tailspin that led to unemployment levels of more than 25 %. Yet in Alto Deba, the county where Mondragon and many of its co-operatives are headquartered, unemployment dropped to 9.87%, almost a third of the national average, between 2009 and 2010. Meanwhile, in the U.S., 66% of ESOP companies either grew or remained stable during the crash of 2009, according to a comprehensive study by the National Center for Employee Stock Ownership .
Other research on co-ops seems to back this up. Several studies comparing performance between co-operatives and more traditionally-run businesses find that co-ops fare better in times of crisis. One 2017 study from Rutgers University’s School of Management and Labor Relations found that traditional businesses converted to worker and employee ownership models increased profits by up to 14%.
Unlike workers in traditional firms, Mondragon’s worker-owners have two critical rights that make for a different workplace: equity and the right to have a say in the hiring and firing of their CEOs. While the management team skews male, men and women at Mondragon are paid the same amount for the same work—which is not the case almost anywhere else, including the U.S. It also helps that all employees eat lunch in the same staff lunch area. This includes the CEOs, whose votes have the same power in Mondragon’s General Assembly as the janitor sitting across from them.
At the end of the year, Mondragon’s worker-owners collectively create a balance sheet for the coming year. That of course requires skill, which is why education matters so much in a co-op. Priority one is reinvesting in the company: 20% of any profits are to be reinvested in an obligatory reserve fund; another 30% goes into another, voluntary reserve; 10% is used for social, educational and other programs to benefit the co-operative’s local community; and the remaining 40% is placed in the co-op equivalent of a pension fund.
The self-sacrifice has clearly paid off. “When Father Arizmendiarrieta came to Mondragón, it was the poorest area of Spain. Today it is the wealthiest,” writes Jill Bamberg, co-founder of the Bainbridge Institute who visited the enterprise in 2017. And the majority of the community’s residents are worker-owners at Mondragon.
In times of crisis, workers in Mondragon’s coops have even slashed their wages instead of laying off workers. “The most difficult recent decision we had to take was the closure of Fagor,” says Maria Retegui, the 46-year-old customer service manager at Orbea, a bicycle manufacturing operation in Mallabia that is one of Mondragón’s most successful co-ops (see sidebar, “From Guns to Bicycles”). Retegui, who is the daughter of the former Rector of the University, who worked with Arizmendiarrieta, remembers the chaos of that period acutely.
THE RISE AND FALL OF A CO-OP
In 2013, the fall of Fagor Electrodomésticos co-operative, once Spain’s largest electrical appliances manufacturer and one of the first co-operatives in the Corporation, turned into a referendum on the “Mondragon model,” and global co-operativism in general. (It should noted that two other Fagor ventures have survived just fine; the Fagor story in this account therefore refers only to Fagor Electrodomésticos.) The media in Spain and elsewhere followed the Economist in declaring that “one of the (Mondragon) group’s key principles—of solidarity among its 110 constituent co-ops—has found its limit.” The reality, of course, was more complicated.
Fagor’s difficulties started with the 2008 crash, which combined with intense competition from Chinese appliances flooding the European market. That created a threat not just to Fagor but all of Mondragon.
The August air in East Cleveland has a humidity that feels Latin American, as does the gloomy panorama around me: dozens of hulking, windowless, abandoned multi-story apartment buildings along concrete canyons.
“At first,” Retegui explains, “we tried to support them (Fagor) in managing their way out of the crisis.” This initial, internal line of defense led Fagor workers to vote to slash their wages by 20 percent. Unfortunately, Fagor’s internal firewall fell.
Acting swiftly, Retegui and the 649 other members of Mondragon’s Co-operative Congress (one of the Corporation’s primary decision making bodies) met in May 2013, where they approved the establishment of the Fondo de Restructuración y Empleo Societario (or the Fund for Restructuring and Company Employment). Together, the Corporation’s 103 co-operatives donated more than €70 million ($90 million) into a self-imposed bailout fund to help restructure Fagor. But that didn’t stop the bleeding. A few months later, after Fagor debt reached €850m ($1.2 billion). In total, Mondragon pumped €300 million into the failing company.
Eventually, the organization’s co-operative spirit was forced to deploy another instrument in its toolbox—making a difficult decision in the interests of the whole. In November 2013, the General Assembly voted to reject the Fagor worker’s request for another €170m bailout.
“The market perception was that [Fagor] was going to drag all the other co-operatives down with it,” Txomin García, the CEO of Laboral Kutxa, Mondragon’s financial arm, told El Pais, Spain’s largest daily. “But what the market didn’t know was that we had designed firewalls to prevent contagion.”
In November, 2013, the General Council voted, with the support of Mondragon’s co-operatives and their members, to let its flagship sink into bankruptcy so the rest of the multi-billion dollar enterprise could be saved. To do this, Retegui and the other co-operativistas provided the Fagor workers a battery of social and other services. During the next few years, Mondragon found jobs for laid-off workers at its other co-operatives. Today, only about 100 of Fagor’s 1,800 employees still have no work.
CAN A CO-OP WORK IN CLEVELAND?
Back at the Otálora castle seminar, a U.S. delegate raises his hand.
“This model works well in the context of Basque country,” asks Ronnie Galvin, who works with the delegation’s sponsor, the Democracy Collaborative, “but aren’t there other pressures when the model works with people from other parts of the world?” Other delegates echo Galvin’s worry, wondering how co-ops can work in cities like Detroit or rural towns in Ohio.
“No,” Etxeberria responds, “the model cannot be applied automatically as it is. It has to be adjusted to the local conditions. There is no other way.” So what adjustments are needed in a place like East Cleveland, which has been struggling with social unrest and economic decline for decades? To answer that question, I traveled to Ohio.
The August air in East Cleveland has a humidity that feels Latin American, as does the gloomy panorama around me: dozens of hulking, windowless, abandoned multi-story apartment buildings along concrete canyons that look like the civil war-era pictures of Guernica I saw during a visit to that city’s museum. In contrast to Spain, however, only one bomb dropped in East Cleveland, the bomb of foreclosures that forced 10,000 Clevelanders to abandon their homes and apartments—in just one year, 2011.
East Cleveland and other predominantly working-class black neighborhoods, like Hough and Glenville, that saw major riots in the late 60s, were hit especially hard. Despite the current low unemployment rate on a national scale, communities like these have not recovered from those upheavals, or from the more recent recession of 2008.
A short drive northwest of here is the brightly lit offices of Glenville’s Evergreen Laundry, on 105th Street.
Established in 2007 and partially based on the Mondragon model, the laundry forms, along with Green City Growers and Evergreen Energy Solutions, part of Evergreen Co-operatives. At the invitation of the Democracy Collaborative, the Cleveland Foundation and other foundational institutions, members of the Mondragon Corporation visited Cleveland to provide advice and technical assistance during the foundation of the laundry co-op. Evergreen Vice President Brett Jones and others from his team have also traveled to Basque country; in fact, they were part of the recent U.S. delegation.
To help launch Evergreen, a collection of anchor institutions—big hospitals, universities, and other major facilities agreed to let the co-op bid for contracts. The role of these anchor institutions has caused some to criticize the “Cleveland model” for being less organic than other co-ops that begin and end with worker-owners.
LOCAL INVESTMENT TIPS THE BALANCE
More than half of the members of the Cleveland laundry co-op are what Coates calls “re-entry”—formerly incarcerated people who need a second chance, “good people who made bad decisions.”
It’s late afternoon, the time when workers at more traditional businesses are going home; the men and women of Evergreen, however, are just starting a business meeting in a cramped, windowless room. “We’re about to triple our growth” says Claudia Oates, a woman in her 50s who is leading the meeting of about 20 of the laundry co-op’s 200 members.
The excitement fueling the meeting stems from Evergreen’s recent winning bid for a contract to manage the Cleveland Clinic’s laundry facility , which was run until last February by the massive French company, Sodexo corporation. Judging from anecdotal reports, the price of the two companies’ bids were comparable. As a result, it was the social benefit—the multiplier effect—that made the difference. Profits in Evergreen will now stay in Cleveland, especially East Cleveland, where most of its worker-owners hail from, including its vice president, Brett Jones.
“Community wealth-building was the tie breaker,” says Jones. “The fundamental difference between the two bids is that the democratic workplace increases the quality of the jobs and creates wealth-building opportunities via profit sharing. Our workers are paid a living wage ($12/hour), which is not always the case in non-employee-owned companies and the upside is the profit sharing. We layer in additional benefits like a home ownership program and retirement account contributions.” Today, 100 former Sodexo workers are in the process of learning the skills and responsibilities involved in being a worker-owner.
THE CO-OPS OF TOMORROW
The training challenge in Cleveland, however, is very different from how it plays out in Mondragon. More than half of the laundry’s members are what Coates calls “re-entry”—formerly incarcerated people who need a second chance, “good people who made bad decisions.”
For these people, a chance to own a piece of the company you work for is a huge opportunity. And that can make the hassle of working for a co-op entirely worthwhile. “We go the extra mile,” says Coates, “not just because it’s our job, but because we benefit our families and communities—and because we are also the owners.”
From all indications, it seems that Evergreen’s tweak of the Mondragon model has worked. For the laundry business in particular, Roy Messing of Kent State’s Co-operative Development Center said, “Evergreen has turned the corner.”
In Cleveland, and at Mondragon, it’s clear that co-operative success hinges on the massive amounts of extra time and energy co-ops require from their worker—to attend extra meetings, education seminars, and other responsibilities that go far and beyond the day-to-day requirements of their specific jobs. Without this extra time and energy, research and my own experience suggest, co-operatives will not reach the ideals of equitable pay, workplace democracy, and other values associated with co-operativism. And even with all the time, education and effort, there’s no guarantee that a co-op will function effectively forever, as the Fagor case illustrates.
Despite the criticisms, contradictions, and challenges they face, co-operatives continue to grow vigorously and inspire millions around a world still reeling from the ups and downs of the global economy. As a result, many in the U.S. are discovering that co-ops are not so foreign as they might initially seem. Household brands like Ace Hardware, The Associated Press (AP), Ocean Spray, Sunkist, True Value, Welch’s function as co-operatives or adopt some aspect of co-operative work. Millions of people are members of credit unions, which operate co-operatively. For others, including the U.S. government, co-operative structures represent the future, an opportunity to face the coming “silver tsunami ” of baby boomer businesses that will close unless an alternative is found.
Estimates vary wildly on how many people work in co-ops (perhaps because people differ on how a co-op is defined). A 2014 report for the U.N., for example, puts the figure, worldwide, at 12.6 million. However, the Harvard Business Review, counts more than 17 million (or 12% of the U.S. workforce) who are employed in ESOPs, credit unions, consumer and purchasing co-operatives and other worker-owned enterprises.
Whatever the figure, nowhere is the co-operative advantage as obvious as in the struggle to close today’s gargantuan, ever-widening income gap, both in the U.S. and across the world. Defeating the dragon of income inequality, may, in fact, be one of the most appealing social benefits of the continued interest in co-operativism, a point made clear to me back in the misty mountain motherland of the Otálora castle, when I ask Etxeberria the origin of the name, Mondragon.
Apparently, the original Basque name for this part of Spain was Arrasate, for Mountain Pass, but the Spanish named it Mondragón, meaning “mountain of the dragon.” And why? “Legend has it” he says, “that the name comes from a time when the locals joined together to defeat a large dragon,” he tells me with a mischievous smile. “A clear sign that co-operation defeats individualism.”
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