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