Economic Democracy in the Startup Age

With the collapse of communism and the crumbling of the Soviet Bloc in 1991 the triumph of liberal capitalism seemed complete. The liberalization of countries of the former Soviet Bloc, and of economies worldwide saw an explosion of trade coinciding with a period of profound economic growth from the late 1980s to mid-2000s. Capitalism seemed to be the answer to all our economic woes. The Great Recession of 2007 turned this illusion on its head, and rising inequality and popular anger in response to job loss and wage-depressing effects of neoliberalism threatens to reverse it. Interest in alternatives to capitalism have picked up in recent years with worker cooperatives becoming an increasing topic of focus. The successes and challenges of Mondragon Corporation – one of the most successful worker co-operatives to date – is an excellent case to analyze the successes and failures of worker cooperatives.

Workers cooperatives are an old and oft tried corporate structure. The history of modern worker cooperatives kicked off in 1844 with the establishment of the Rochdale Society of Equitable Pioneers in England – the first successful worker cooperative of the modern period. The Rochdale Society started as a small supermarket – the Rochdale Store – between a few workers and rapidly expanded its product line and sales. The Rochdale Society eventually grew and became part of The Co-operative Group – an English worker cooperative with 70,000 employees and annual sales of over £9 billion pounds as of 2015. Interest in worker cooperatives was reinvigorated first during the Great Depression and then again in the 1950s and 1960s, with new cooperatives formed focused on ownership by workers, particularly in the form of share ownership.

Definitions of worker cooperatives can vary greatly across countries. The International Organization of Industrial and Service Cooperatives (CICOPA) identifies 6 basic characteristics in its worldwide declaration of worker cooperatives. These are, in brief, as follows:

  1. The creation and maintenance of sustainable jobs that improve the material standard and quality of life for its workers.
  2. Free and voluntary membership by the cooperatives members
  3. The majority of the workers in a cooperative enterprise must be members of the worker cooperative.
  4. The worker-members’ relation with their cooperative will be different from that of conventional wage-based labour.
  5. Internal regulation of the worker cooperative enterprise is defined and agreed upon through a democratic process involving all members.
  6. The workers cooperatives should be autonomous and independent before the State and third parties.

The key tenets from the definitions above that are generally sufficient to define a worker cooperative are democratic decision-making, collective ownership of the enterprise (through shares) and a focus on job creation and value maximization as opposed to profit maximization.

One of the most famous examples of a worker cooperative is the highly successful Mondragon Corporation based in Spain’s Basque region. The Mondragon Corporation was founded in 1956 by a collection of workers working in a disused factory producing oil-fired heating and cooking stoves from sheet metal. Since then it has ballooned into a gigantic conglomerate with over 280 institutions in areas ranging from manufacturing and retail to agriculture and civil engineering. The Corporation had over 74,000 employees and revenues of €11 Billion Euros in 2015. Similarly, the corporation invested over €316 million Euros in its business that year. Clearly, Mondragon is no minnow, but is a sizeable corporation with the unique feature of being a worker cooperative.

mondragon-2

Key to understanding Mondragon Corporation is context on the Basque experience. The Basque region in Spain is one of four regions (provinces) of Spain with its own unique recognized regional language (the others being Catalonia, Valencia and Galicia). Under General Francisco Franco Spain was turned into a totalitarian state (from 1939 onwards) with a penchant for persecuting the distinct linguistic, cultural and historical communities within its borders. All the aforementioned regions experienced brutal repression of their languages and targeting by Spanish security forces. The Basques in particular have several distinguishing features from other linguistic and cultural communities in Spain. First and foremost, Basque is radically different from any other language on the Iberian peninsula. This forms the foundation of Basque identity, where a Basque refers to himself exclusively through his language, and the Basque nation defines itself as Euskal Herria or ‘the Basquespeaking nation.’ Basques also have slightly different physical features from other Spaniards including larger foreheads, taller statures and fairer skin.

These linguistic, physical and identity differences contribute to a sense of nationhood which caused the Basque region to be the only region in Spain that offered significant armed resistance to Franco’s oppression. Echoing these sentiments of nationhood, Euskadi Ta Askatasuna (Basque Country and Freedom) was founded as an organization hellbent on securing Basque independence. From 1968 onwards ETA engaged in a campaign of violence and terrorism that escalated and continued to grip Spain even after Franco’s death in 1975 and Spain’s transition to a constitutional democracy. Repression and instability have thus been features of the Basque region’s modern history. It is in this context that Mondragon Corporation was created. Unity, a sense of camaraderie and a distinct sense of national identity created by the historical oppression of the Basque region were thus likely contributing factors to Mondragon’s growth.

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Map of Spain, Basque Region in red. 

So how can Mondragon Corporation be evaluated as a proxy for evaluating the success of worker cooperatives more generally? Mondragon can be evaluated according to three measures: longevity, revenue & profitability and resilience. By the first measure, Mondragon Corporation is clearly a successful example in modern capitalism. The average lifespan of Spanish companies is 11.69 years. Mondragon outperforms this by almost a factor of six, given its 60-year lifespan to date. By the second measure, Mondragon outperforms Consum, a worker cooperative in the supermarket industry, with revenues 5 times as large as Consum’s 2 Billion Euros. To use some well-known comparisons, Twitter – which has 313 monthly active users worldwide – is only able to generate $2.2 billion in revenue at a loss of $521 million annually. Salesforce, another tech behemoth generates roughly $6.6 billion in revenue a year with net income of a meager $47 million. Finally, on the measure of resilience Mondragon was able to weather Spain’s deep recession quite well. In fact, its headquartered in Alto Deba county which was one of the few counties to increase employment during Spain’s recession. For example, between 2009 and 2010 unemployment dropped to 9.87% in the county while soaring elsewhere.

These measures – although good for Mondragon – fail to capture the entire experience and that qualitative impact of Mondragon on its employees and communities. Traditional analysis of capitalist firms focuses on accounting fundamentals, market share, growth patterns and the like. Human capital is given short shrift in this analysis, and if analyzed is often reduced to numerical quantities. But workers sentiment and quality of life are almost never included in the analysis of a firm’s health. Worker cooperatives however sacrifice profit maximization in the pursuit of value maximization for their members. What then is some of the value that Mondragon members derive from membership of the company? First and foremost membership of Mondragon entails membership of a community with immediate non-commodified benefits. The Mondragon conglomerate includes a Caja Laboral (a savings bank), two research centers (Ikerlan and Ideko) and several educational institutions which workers have access to. Mondragon is also the dominant economic force in the Basque region and actively defends the job security of its members. Finally, Mondragon is a fully-fledged “economic democracy” where workers collectively own the firm and collectively decide the delegations each cooperative will send to the Mondragon Corporación Cooperativa Congress. These are clearly intangible but very real benefits to workers. It amounts to nothing less than the empowerment of workers in the capitalist production process. In fact, Mondragon holds “community” as a central guiding principle and value for the cooperative. In terms of the qualitative impact that Mondragon has on a worker’s experience, it easily outstrips traditional corporate capitalism. Collectivism replaces individualism, cohesion replaces internal competition and democracy replaces command-style corporate capitalism.

The single largest challenge Mondragon and other workers cooperatives face today is the maintenance of cooperative values in the age of internationalization. In brief, the benefits of internationalization include increased efficiency, access to new markets and maintain competitiveness and thereby ensuring survival for a firm. Mondragon’s international expansion since the 1990s has come in the form of offshoring and increased the percentage of non-cooperative workers in Mondragon. Mondragon is composed of 289 institutions comprising 110 cooperatives and 147 subsidiary companies. Mondragon today has 40 corporate offices abroad and exports to 150 countries . Employment in international cooperatives increased by 170% in the periods 1990 – 1995 and 2000 – 2005 while shrinking by 11% for local cooperatives. Clearly, internationalization is a crucial strategy for continuing one of Mondragon’s main goals – job creation. Worker cooperatives face four main challenges in international expansion: starting a business internationally as a cooperative limits initial flexibility, cooperative legislation is underdeveloped in most of the world, cooperative culture is also lacking worldwide and finally the fear of international cooperatives challenging control of investments in the original “core” cooperatives.

Global expansion also raises significant management challenges for cooperatives and threatens the cooperative principle. Worker cooperatives can respond by adopting a mixed cooperative model and instituting a corporate management model. In the case of Mondragon, international expansion requires capital that workers in new locations often cannot provide. Basque Cooperative Law allows a cooperative to supersede this challenge by defining mixed cooperatives as cooperatives where members have rights in the General Assembly, dependent on the amount of capital they provide.

What does the next iteration of workers cooperatives look like? We have already seen two distinct categories of worker cooperatives. The first are localized, self-sufficient cooperatives (often agricultural) such as the agricultural communes seen in post-WWII China. These communes involved collaboration by local economic agents (mostly peasants) to pool resources to take advantage of economies of scale. The second category of workers cooperatives were often higher up in the value chain and had significantly greater growth paths. The Rochdale Society or Mondragon are two such examples. Rochdale was able to scale in the supermarket business and eventually became (along with other cooperatives) the hugely valuable Co-operative Group. Likewise, Mondragon started off with low-intensity manufacturing and rapidly progressed up the value chain from there, opening a cooperative bank as early as 1959. Both these categories focused on improving the lot of their workers and collective ownership. The key differentiators were the location on the value chain and the capital intensity of expansion efforts (land being expensive to purchase and improve).

With the dawn of the tech revolution an emerging third category of cooperatives is becoming possible. This third category involves small startup companies where ownership is equally divided. For example, many small venture capital firms are equally owned by all general partners, who contribute a given amount of capital in exchange for equal ownership rights. Similarly, many early-stage startups agree to equal-equity splits between the founding team (often 2 – 6 members). But an equal split of equity is not a necessary condition for a cooperative. Basque Cooperative Law for example defines “mixed cooperatives” as cooperatives where members have rights in the General Assembly, dependent on the amount of capital they provide.  Early-stage tech firms are then by all accounts mixed cooperatives that do not include significant non-equity holding staff. In the words of Steven Johnson of the Peer Society, it is a “virtually universal practice among tech companies of distributing meaningful equity to ordinary emplyoees.” Mixed cooperatives are thus a first step to the cooperativazation of a company. As for decision-making, prior to a company growing substantially all decisions are made democratically. Consensus and collaboration are at the core of this new breed of “startup” company.

Conceivably, the Gig-economy could empower workers to form sophisticated worker cooperatives in a variety of industries. Uber for example could easily have formed as a worker cooperative instead of a traditional cooperative business. Taxis in many ways are workers cooperatives, even if each car is owned by the individual driver. The emergence of software platforms upon which many businesses can now be built (Airbnb, Medium, AWS) lower the capital-intensity of production and encourage collective ownership.

Overall, Mondragon presents a unique model of collective ownership and democratic capitalism in an age awash with the opposite. The success of Mondragon and other worker cooperatives such as The Co-operative group, Amul Dairy and Suma makes a strong case for worker cooperatives as successful capitalism in a liberal democratic age. With the emergence of the new tech economy the barriers to entry for production and the lowering of capital intensity combine with a growing culture and drive to collaboration to create the conditions for another great wave of worker cooperatives. Perhaps we will see the emergence of entrepreneurial worker cooperatives across the world, companies of 5 – 20 members who make decisions collectively and own the company that they are building together.

This article was originally published here

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