If the Erreka Group operated like most companies, the pandemic would have caused a traumatic blow to its workers.
Based in the Basque region of Spain, the company produces a variety of products, including sliding doors, plastic parts used in cars and medical devices sold around the world. As the coronavirus ravaged Europe in late March, the Spanish government ordered the company to close two of its three local factories, threatening the livelihood of 210 local workers.
But the Erreka Group avoided layoffs by temporarily reducing wages by 5%. He continued to pay workers trapped at home in exchange for the promise that they would recover part of their hours when better days returned.
This flexible approach was possible because the company is part of a wide range of cooperative companies, centered in the city of Mondragón. Most of its workers are partners, which means that they own the company. While Mondragón Corporation’s 96 cooperatives are expected to produce profits to stay in business – as any company does – these deals were designed not to give dividends to shareholders or to spill stock options on executives, but to preserve salaries.
The concept of a cooperative can evoke notions of hippie socialism, limiting its value as a model for the global economy, but Mondragón stands out as a genuinely large company. Its cooperatives employ over 70,000 people in Spain, making it one of the country’s largest sources of wages. They have annual revenues of more than 12 billion euros ($ 14.5 billion). The group includes one of the largest supermarket chains in the country, Eroski, along with a credit union and manufacturers that export their products to the planet.
“Mondragón is one of the milestones of the social economy movement due to its scale,” said Amal Chevreau, a policy analyst at the Center for Entrepreneurship at the Organization for Economic Cooperation and Development in Paris. “They show that it is possible to be profitable, but still act with social goals.”
In a world struggling with the consequences of increasing economic inequality, cooperatives are gaining attention as a potentially intriguing alternative to the established mode of global capitalism. They emphasize a defining purpose: to protect workers.
The pandemic highlighted and exacerbated the pitfalls faced by companies created to maximize return to shareholders. The closure of much of the world economy has increased unemployment, threatening the ability of workers to feed their families and keep up with rent and mortgage payments – especially in the United States. Government rescue packages have emphasized protecting assets such as stocks and bonds, supporting investors and leaving workers vulnerable.
Within the corporate world, high-level initiatives have declared the dawn of a more socially conscious mindset. Last year, 181 members of the Business Roundtable, an important group of chief executives, pledged allegiance to a new mission statement in which they promised to run their businesses not only for the enrichment of shareholders, but also for the support of other so-called stakeholders. – workers, suppliers, the environment and local communities.
The pandemic represented the first real test of the principles of stakeholder capitalism. The results were verified, with a study finding that the signatories of the pledge did not perform better than the average of the companies.
Many large companies distributed a large part of their profits to shareholders in the form of dividends and purchases of their own shares, which raised share prices. When the pandemic arrived, many lacked reserves to face a crisis, which prompted managers to lay off and fire employees to cut costs.
Cooperatives were created expressly to avoid such results. They typically require managers to apply most of their profits back to the company to avoid layoffs in times of duress.
“We have a philosophy of not firing people,” said Antton Tomasena, CEO of the Erreka Group. “We wanted people not to worry too much.”
However, even though cooperatives are increasingly part of the discussion on how to update capitalism, they remain confined to the margins of commercial life. They are found in Italy and Belgium. In the north of England, the city of Preston promoted cooperatives as an antidote to a decade of national austerity. A number of cooperatives in Cleveland were organized by a nonprofit organization, Democracy Collaborative.
In Mondragón, cooperatives date back to the wreckage of the Spanish Civil War in the early 1940s, when a priest, José M. Arizmendiarrieta, arrived in the area with unorthodox ideas about economic improvement.
Rich in ore, the Basque Country has long been the scene of industry, especially steel, but most workers were underpaid. People generally started working at 14 and made little progress.
When the priest approached the owner of a private vocational school to see if it was possible to open it for everyone, he was rejected. Then 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 convinced five of the first graduates of the local engineering program to buy a company that manufactured heaters and ran it as a cooperative. They elevated workers to owners – partners is the term of the art – with each one winning a single vote in a democratic process that determines wages, working conditions and profit sharing to be distributed each year.
Over the decades, several other cooperatives took root, dominating the city’s economy. Each company is autonomous, but operates under shared principles, mainly by understanding that if someone loses his job in one cooperative, he has the right to occupy a position in another. If there is no job, partners are entitled to vocational training and unemployment benefit for up to two years.
In the United States, the chief executives of the 350 largest companies receive about 320 times more than the normal worker, according to the Washington Institute of Economic Policy. At Mondragón, executive salaries are limited to six times the lowest salary.
The lowest level is now € 16,000 a year (about $ 19,400), which is higher than Spain’s minimum wage. Most people earn at least twice that, plus receive private health benefits, annual profit sharing and pensions.
Each cooperative contributes to a collective money fund that covers unemployment insurance and helps member cooperatives that are experiencing difficulties. When a crisis requires production limitation, workers continue to receive normally, while accumulating balances of working time due to which management can later allocate.
The system proved to be robust during the 2008 global financial crisis, followed by the so-called sovereign debt crisis across Europe. Unemployment exceeded 26% in Spain. But in Mondragón, the cooperatives distributed the pain through cut wages and advances in future hours. Unemployment has hardly changed.
The crisis triggered the fall of the original cooperative, Fagor, which manufactured home appliances, including refrigerators. This left almost 1,900 people without a job.
Fagor’s collapse sparked rumors that a weakness in the cooperative model had been exposed. A different type of business, which managed to maximize returns, would have concluded long before manufacturing refrigerators was a tricky undertaking for a Spanish company, given the strong competition from low-wage countries in Asia. With the intention of preserving jobs, Mondragón sustained Fagor for years in a failed effort to revive his fortune.
Still, six months after Fagor’s death, 600 of its former workers took jobs at other cooperatives, and the rest won layoff and early retirement packages, according to the group. As Mondragón officials portray, the fact that Fagor collapsed while its employees were protected affirmed the value of the cooperative model.
“When a typical company goes bankrupt, we don’t say it’s the end of the capitalist system,” said Ander Etxeberria, who oversees Mondragón’s communications.
In recent years, cooperatives have added contract workers and temporary workers without property rights, raising questions about whether the model can last as their operations grow and compete with larger competitors. Many of Mondragón’s businesses have expanded abroad, following their customers to Mexico, Brazil, China and several other countries. Most international subsidiaries are not cooperatives, but traditional companies. They operate under a flexible guideline to improve local working conditions, but Mondragón’s leaders recognize that this is more an aspiration than a reality.
After all, Mondragón cooperatives were created to improve livelihoods in Mondragón, not to reform labor markets around the world.
“The cooperative model protects its people, but it has to be competitive,” said Zigor Ezpeleta, who oversees social programs in Mondragón. “Otherwise, it disappears.”
During the spring, as many of Mondragón’s customers had to close their factories because of the pandemic, parts orders plummeted. Production at Mondragón’s factories has dropped to 25% of capacity. The cooperatives responded by cutting the 5% payment. Nobody was happy with that, but the opposition was limited.
Since then, almost all of the cooperatives are almost at full capacity, as members return the hours for which they were compensated for closing the factories. In general, the cooperatives expect to be profitable in the year.
Mondragón cites his pandemic performance as evidence of his agility, as well as the operational advantages of trust that flow from a sense of shared purpose.
“When you explain the situation very clearly and people know that they are the owners of the business, you can make that kind of effort,” said Iñigo Ucín, president of the Mondragón Corporation.
For most multinational companies that are adapting to the pandemic, the interests of shareholders and employees differ. Executives continued to profit from stock-based compensation driven by public bailouts, even in companies that resorted to layoffs.
At Mondragón, workers know that, as owners, they can benefit from the sacrifices that strengthen their businesses.
“It is more than a job,” said Joana Ibarretxe Cano, production manager at Grupo Erreka, whose factory was closed for the entire month of April. “This is part of a team.”
The mother of two said she was anxious when the first wave of the pandemic broke out – for her family, the team she supervises and the business. “Nobody likes not being able to go to work,” she said.
But the way the company overcame the crisis reinforced its faith in the structure of its company. His income was not affected, even with the factory closed.
“The cooperative system has given us peace of mind,” she said.
Rachel Chaundler contributed reporting.