Archive for November, 2013

Financial Crisis at Fagor Electrodomésticos Vs. “Building development capacities” Cooperative Model

One, if not the most important, concern of the Club of Rome is to pay attention to fractal issues that may anticipate a change in our social and economic future. From this perspective, we have closely followed the evolution of the Mondragon (MCC) cooperative experience as a benchmark for another way of doing business and we view the current financial crisis at Fagor Electrodomésticos (FE) as an opportunity for this experience to change.

As with the collapse of Lehman Brothers due to its respective financial crisis, which did not represent the end of the liberal-capitalist system, but rather the cleansing of a globalisation process that needs to be fairer, we believe that the crisis at FE has a similar significance for the cooperative model.

Given the unique nature of the subject matter, it is important to highlight the hallmarks of the MCC cooperative model, which is characterised by transparency in management, sharing financial results and capital, cooperation between companies and a coherent pay scale. It is based on the values of respect for people and work as a method for social integration, training, and staff working on shared projects, leadership as responsible duty and commitment, and an inclusive business project that aims to create employment, with a long-term vision that responds to the social and cultural environment.

With these principles, it has overcome various crises since the first cooperative was founded in 1955 to the current incarnation of 100 cooperatives involving 80,000 people. Over this 58-year period, an “inclusive system” has been designed and implemented that is capable of “building development capacities”, in which all the composing parts collaborate with one another.

This includes both the Industrial Area, which includes the machine tool, construction, automotive parts, and services cooperatives, etc. with production plants in 24 countries, sales of €5.812 Bn (65% overseas), of which FE represents 8.4%, and Eroski, the Distribution Area, with sales of €7.092 Bn, the Financial Area, composed of Laboral Kutxa with €18.636 Bn in deposits and Lagun Aro with €4.876 Bn in funds, and the Knowledge Area, comprising the Vocational Training Colleges, the University, Technology Centres, etc.

Each has a system that means each part preserves its corporate identity and its own balance sheet and generation-of-income account, with internal solidarity agreements, investment funds, relocation of staff, R&D platforms and joint exports, etc., under a governance model that is unique to the cooperative experience. MCC is the leading industrial group in the Basque Country and the 10th largest in Spain for a good reason.

However, some aspects of this model are under scrutiny following the current crisis. One of the most critical of these is the transparency of information and the complex management of the dissemination of information in large cooperatives in a changing market, with diverse options, where decisions must be made continuously, along with the permanence of key historic leaders that frame these decisions within the values, history and aims of the cooperative.

The dynamics of organisations move between two extremes: change (promoted by staff members with the greatest awareness and a long-term vision), and resistance to change (where short-term, individual interests dominate). In a representative organisation, where all employees are members, the majority of the group (70%) will either be for or against change depending on how those in positions of responsibility know how to transmit the importance and opportunity represented by these changes, and whether the information is handled with transparency and intelligence and not left entirely in the hands of bodies with no direct responsibility such as the Social Council in the cooperative or the Works Council in the Sociedad Anónimas (public limited companies).

The transparency of information, its breakdown into indicators that reflect the contribution of each person to shared projects and their effect on company strategy is key to any organisation, whether it is a cooperative or not. Along these lines, cooperatives offer an important experience, given that today competitiveness is based on the innovation generated by people in a shared business project. This is one of the key features in the knowledge society we currently live in. The second aspect is related to the competitiveness and internationalisation model, based on technological development (R&D) which is normally reserved for parent companies and applied to low cost production processes. This has led to production being relocated overseas, depending on labour costs and/or emerging markets with a heavy demand for these products. In short, it has followed the model of large multinational companies, against which it is competing, but without the flexibility and lack of roots of these companies in their aim for maximum short-term profit. At present this model is being questioned, firstly due to exhaustion: which countries are currently the cheapest and for how long? And secondly by the emerging countries themselves, who are determined to “build development capacities”, solutions that comprise training, the development of competitive businesses, R&D, financing, governance, etc., integrated into the local culture and which strengthen responsibility, creativity, solidarity and equality among people.

In these terms the Mondragon cooperative experience has the values and resources to reinvent itself and adapt to the demands of a fairer globalisation, where human beings continue to be the start and finish point.

José Luis Jiménez Brea. Basque Country Coordinator of the Spanish Chapter of the Club of Rome.

Public/Private Sector Ownership Proposal (P2SOP)

A new socio-political populist movement is sweeping America in reaction to the 2008 financial tsunami of deregulated, greed-based causes and massive wealth transfer effects or receipts to the financial one-percent. Based purely on the numbers seen to date, this movement is and will be composed of rising and current Millennials and the “Net Generation” or “Generation Edge”, immigrants and minorities, plus any white person with a progressive conscience. Converging as a new coalition of the socially and technologically willing, these voters (unless effectively wholesale disenfranchised) will provide a national elections cycle majority for decades as America becomes a majority minority country even though some geographical revisionist and recidivist pockets will persist (such as the Mason Dixon healthcare divide) based on political gerrymandering and subtext political culture.

Represented in numerous cross-pollinating private and nonprofit sector organizations across the country, this movement reacts to no-way-out diminishing expectations and desperation. Practitioners are studying and forming various hybrid, virtuous cycle, cooperative and collaborative capitalism models that honor individual initiative in the context of broad-based and transparent stakeholder ownership centered in “local living economies.” (more…)

When the Right Ones Get It Wrong

The Mondragon Cooperative Group (“Humanity At Work” through Cooperation, Participation, Social Responsibility and Innovation, headquartered in the Basque region between Spain and France) is ranked as the world’s largest worker-owned industrial cooperative group but also as the top Basque industrial group, tenth in Spain with 80,000 personnel, a presence in 70 countries, and winner of the 2013 Financial Times “Boldness in Business” award. Mondragon’s 60-year mission is to generate wealth for society through values-centric and market competitive business development and job creation under the “one worker, one vote” cooperative framework where labor is sovereign and capital, while essential, is subordinate to sustaining job creation.

Yesterday, Fagor Electrodomestics, which evolved from the original Mondragon household white goods manufacturing cooperative (ULGOR) to hold almost a third of its domestic sector market share for decades, was declared formally insolvent (859 million Euros in debt, 5,642 jobs at risk, 100,000 Euros left in the corporate account). Predictably, global media “punditcrats” have wasted no time in jumping on the “see, I told you so” bandwagon. Case in point, The Economist, “Trouble in workers’ paradise – The collapse of Spain’s Fagor tests the world’s largest group of cooperatives.” This publication and others speculate as to whether cooperatives and similar hybrid forms of worker ownership can survive the “real world” of boom or bust cycles that both predatory and virtuous capitalism practices mete out to passive adherents and active practitioners, beneficiaries and victims.

Also yesterday, Mondragon’s social mutual, Lagun Aro, announced it would propose a 1.5% raise in contributions from all members at Mondragon’s next General Assembly to support its role in providing additional unemployment benefits to displaced Fagor Electrodomestics worker-owners. This other news received only local media coverage and therein lies the conventional wisdom disconnect from the healing power of practicing metrics-based solidarity. (more…)

The future of Mondragon following its third financial crisis

ALTHOUGH the financial crisis at Fagor Electrodomésticos (FE) is more spectacular due to the renown of the brand involved, it is neither the first nor the largest suffered by what is today the leading business group in the Basque Country. Therefore, to glimpse how it will react in the face of this adversity, it is worth recalling how it did so in earlier critical moments.

It experienced its first significant crisis in 1970 due to the stratospheric growth of cooperatives in the heat of an internal market protected from overseas competition.

In that year the financial needs of industrial companies exceeded the capacity of Caja Laboral, which had established itself in the small towns where cooperatives were based (Aretxabaleta, Elorrio, Placencia, etc.) and where, with an ideological message, it requested savings from inhabitants to support the development of local business.

When faced with the lack of trust from financial institutions in the new “business invention” and the inability of Caja Laboral (the sole financier) to resolve the liquidity problems, some cooperatives began to be unable to make their payments. This had a knock-on effect and in some towns a panic-driven withdrawal of funds which both aggravated and increased the problem.

Caja Laboral, with very few resources and with 100% investment of its third-party resources set aside for a small number of companies was a serious contender to join the list of failed credit cooperatives.

However, the hard work of many missionaries, whose spent countless hours explaining the project and achieving the backing of several social leaders, managed to contain the problem.

The subsequent decision to open branches in larger towns and cities, with an emphasis on service and customer relationships (unknown in banks and building societies at this time) confirmed the support of many sectors of Basque society for the original social business project. Savings deposited in Caja Laboral grew rapidly and in just a few years they outgrew the financial needs of the cooperatives.

The second crisis, in the latter half of the 1980s was more serious and complicated because it involved several negative factors at the same time:

  • The results of the general crisis in the Basque economy with its general problems, and over 10 cooperatives that had to be closed after successive failed attempts to keep them open that consumed a great deal of resources.
  • The Bank of Spain being granted responsibility for supervising credit cooperatives (previously the responsibility of the Ministry for Employment). It demanded external audits, that large loans borrowed by cooperatives be registered as losses and a drastic reduction in the bank’s investment in the group, which had previously represented 70% of its total investment.
  • The retirement of the founders, whose status as the founders whose leadership had been helped by their great professional thoroughness and their outstanding commitment and austerity.

The response was proportional to the problem: it was unanimously decided to establish solidarity systems that meant sacrifices for all, to help the over 2,000 people affected and, in addition, the MCC Corporation was established. This replaced the Caja Laboral as the leader of the cooperative based on the creation of the Cooperative Congress, with representation proportional to the number of members; the General Assembly, as executive body, and the Corporate Centre, for managing joint services and funds.

This led to a new successful period with great business development, visionary internationalisation and a firm commitment to research and growth, also accepting ideological flexibility, with a growing use of ‘sociedades anónimas (private limited companies) to keep control of the new initiatives led by cooperatives.

In both crises, what stood out was the solidarity of the affected parties can be emphasised, based on special efforts and personal sacrifices, as well as the pragmatism of adapting to new regulatory or market requirements while the basic values which should be the cornerstone for any situation (participation, cooperation, innovation and social responsibility).

So, what should we expect as the response to this new crisis regarding the liquidation of the largest part of Fagor Electrodomésticos? As we have seen, the pioneers faced problems with a level of effort, self-sacrifice, self-demand and solidarity that we may have forgotten. They understood that it was the way to effectively “fight for a job” for themselves and their children. This capacity for sacrifice was accompanied by the pragmatism to “be reborn and adapt” without dogma or ideological prejudices but instead thinking, first and foremost, about solving people’s problems and doing so without betraying the founding values.

Within this framework, it will be necessary to address the following practical matters, at least:

  • Promptly implement new and traditional mechanisms to provide solutions to the unemployed staff members of Fagor Electrodomésticos to relieve their understandable current anxiety.
  • Attempt to save jobs in the profitable business of this company, even while it is undergoing arrangements with creditors, and to do so as quickly as possible, the key to efficiently negotiating its future in new companies.
  • Optimise, where possible, the running of the profitable cooperatives so as to improve group results, generate greater solidarity funds and realistically start new businesses that can absorb, in the medium-term, the unemployed members and current temporary workers.
  • Restore trust from suppliers and financial institutions, who will have been disappointed by the inability to keep to their promise that “we have always paid every last penny”.
  • Review the brand policy in cooperatives with the Fagor name in their company name, due to the possible negative consequences.
  • Find new ways of financing new projects, perhaps giving financial contributors a say in future decisions (remember that in the cooperative world Marx’s famous statement that “capital is accumulated work” is especially true).

However, although these challenges are significant and critical, in-depth reflection on other aspects is also necessary, such as:

Should the sovereignty of the cooperatives be shared in the event that solidarity funds necessary for their development have been contributed? Should the Corporation have the capacity to intervene in companies (as Caja Laboral did in the first phase based on its financing monopoly) in order to avoid extreme situations such as those we are currently experiencing? Is it necessary/appropriate to provide institutional representation to possible providers of capital to meet the financing needed for development?

Can (should) mechanisms involving the participation of professionals also now be put into practice in the group’s sociedades anónimas? In short, is it necessary to review the corporate governance model and find variations on the traditional industrial cooperative model?

The challenge is to do this while simultaneously retaining the differentiating values mentioned above, forging new routes to solidarity and being sufficiently pragmatic to discover business formulas that combine competitiveness and human development in such a way that, despite requiring sweat and perhaps even tears, the original, humanist Basque business project is capable of offering, in a few years, new results for the people and society of this country.

Juan Manuel Sinde Board member of Arizmendiarrietaren Lagunak Elkartea – Saturday, 16 November 2013

We Need More Employee-Owned Businesses | U.S. News

By David Brodwin

Worker-owned businesses are on the rise. The number of worker-owned business in the U.S. is growing robustly, around 6 percent per year, and these businesses now account for about 12 percent of the private sector workforce. Yet, worker-owned business are frequently disparaged as “not quite capitalism.” Skeptics repeat the cliché that worker-owners bog down seeking consensus on the most minor points.

The skeptics should keep in mind that some the world’s most respected business organizations are in fact, owned entirely by their staff. It’s true for top tier law firms and accounting firms. It’s true for leading management consultants like McKinsey. And top investment banks like Goldman Sachs were partnerships until relatively recently in their history.

Members of worker-owned co-ops may not think of their businesses as having anything in common with top-tier professional services firms, but there are several important similarities between the two structures:

In both cases, the partners (or employee-owners) have a vote in electing the managing partner or president.
In both cases, the managing partner or president must exchange information extensively with other partners or owners, in order to maintain support and buy-in to the firm’s plans.
In both cases, compensation is shared among the partners or owners. This keeps incentives aligned.
In both cases, compensation is variable, based on a combination of individual and overall performance. This makes the firm more robust, since in tough times it has less of a payroll to meet.
In both cases, there are clear-cut rules for how a person newly entering the firm can become a partner or owners. This promotes a meritocratic culture that rewards performance and discourages cronyism.

Because of these characteristics, worker-owned businesses were, on average, better at maintaining their fiscal health during the last recession.

Read the whole article via usnews.com.

Union co-op group taking root in Cincinnati | Cincinnati.com

College Hill farm is first of several planned worker-owner initiatives to include pipe fitting, manufacturing

By Mark Curnutte

COLLEGE HILL — Zeke Coleman, laid off from his previous job in the food industry, has found a living wage and his passion in an emerging local jobs program that has attracted international attention.

Coleman, 33, of Hamilton, is one of 10 worker-owners of the Our Harvest Food Hub Co-Op, a food packaging and distribution center based on an incubator farm off North Bend Road in College Hill.

“I love vegetables, and I love this work,” said Coleman, who spent Wednesday packaging crops harvested this fall – turnips, cilantro, winter squash, kale – at the farm and delivering 51 bags or boxes to three distribution sites. There, some of the 200 consumer subscribers in the Community Supported Agriculture program will pick them up.

Our Harvest, which opened on the farm in April 2012, is the most advanced of the eight projects that are part of the Cincinnati Union Co-Op Initiative. Based on and developed with help of the Mondragon Worker-Owner Cooperatives in the Basque region of Spain, the Cincinnati Union Co-Op hopes to develop hundreds of family-sustaining union jobs in the next few years in multiple industries: railway manufacturing, energy jewelry, renter-equity housing, food service and home health care.

Read the article and watch the video from Cincinnati.com.

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