The Mondragon Experiment

The concept of the corporation reaches back to Roman times. However, the modern business corporation evolved radically from its ancient roots into a form with little relation to the purpose as understood by historians of law. Today, the typical business corporation seems to be a disjointed entity whereby shareholders seek maximum income, labor unions seek maximum income, and managers vie for maximum salaries and bonuses. The needs of society in general seem to be ignored in this dynamic. Indeed, the formula appears to point in a direction that can only lead to trouble for those outside the three competing elements of the modern business corporation; the recent economic meltdown would appear to confirm the deep faults in the current concept of the business corporation.

Many qualified researchers from Berle and Means in California (1931) to LCB Gower in London (1954) to Naomi Klein in Toronto (2007) have warned us that large business corporations are beyond the control of any government and have become a threat to world society itself. Gower, for example, a highly respected historian of company law, argues that the law always lags behind reality and is in need of constant reform to address contemporary problems. In this article I begin from this claim and I propose what I call an older, more traditional notion of the corporation.

Conceptualizing a Corporation

According to Gower, a corporation is not simply a “thing” like a building that belongs to someone. It is a group of people associated in a common purpose to achieve an agreed upon goal. John Davis, another legal historian, notes that the precursor of the business corporation was the first monastery established in the sixth century, the purpose of which was to serve society. Most business corporations before 1900 developed in Britain, where they were established by royal charter, with the expectation of a contribution to society. Incorporation was a privilege granted in return for service to the crown or the nation.

I claim that business corporations have, by their very nature, a duty to society. Without an extensive school or university system supported by the state or a vast array of public infrastructure, the modern business corporation could not function. The modern corporation clearly depends upon society in many ways. It is time to recognize this dependence and return to earlier concepts whereby corporations have a clear public purpose. Today in the developed world, where most global corporations are headquartered, unemployment is becoming a major threat to social stability. Many corporate leaders say this unemployment is a problem for governments. I say that this is more fundamentally a problem for business corporations. The fact that Microsoft, for example, could make billions in profit and lay off thousands of workers in a time of recession is dereliction of public responsibility.

According to this concept of a business corporation, job creation is part of the corporate mission, an idea some oppose as leading automatically to losses and failure. The best answer to this is a real world case-study: the Mondragon Cooperative Corporation. This corporation began in Basque Spain in 1956, with its purpose clearly stated from the beginning: to create jobs for the five young founders and to help their rural community survive. Community survival and job creation are Mondragon’s explicit public purpose. Over the last sixty years this business corporation has grown exponentially from five workers to over 100,000. From its early years, this corporation adopted most of the methods of the most successful business corporations, modeling leaders such as Mitsubishi. Mondragon sought the best technology available and set up a series of its own research centers. They set up their own bank and thus avoided dependence on the blindness of the stock market. They did not retreat into the protection of their home country; rather, they expanded globally into 26 countries.

Modeling Mondragon

A corporation is considered by the law to exist as a legal person. In the Middle Ages it was called a “persona ficta”. This is a very useful way of looking at a business corporation, because it suggests correctly that the corporate person has a certain personality. It has duties and responsibilities vested unto it by the legitimate government or society that fostered it. The corporate person receives great benefits from society – and, in return, it must exercise great responsibilities. One of the most basic responsibilities is job creation, a fundamental need in any society.

The Mondragon Corporation is striking in that their annual strategic plan usually includes a job creation target. Most large global corporations, in contrast, develop strategies to increase earnings through job reduction. Conventional corporate managers argue that a “job creation” strategy necessarily leads to inefficiency and losses. But empirical testing suggests otherwise.

In 2006 and 2007 most large global corporations experienced a decline in revenue. Mondragon, on the other hand, increased revenues from $15 billion to $17 billion, an increase of over 13%. In 2007, Mondragon returned over US$50 million to workers as a share in profits. During this period, Mondragon’s total workforce expanded from 83,000 to 103,000, an increase of 20,000. One reason for Mondragon’s freedom of operation compared to conventional corporations is that it does not rely on stock markets for capital. Instead, it relies on its associated bank and worker shares as well as commercial loans.

Mondragon contrasts radically with the majority of large global business corporations. The complex includes over 100 enterprises producing a wide variety of products from buses to refrigerators to food products. An associated bank, a university, and a string of business research centers are all linked together in a corporate network that follows general guidelines agreed upon at the general congress held every four years and voted upon by representatives of the all the enterprises. In Spain, the vast majority of Mondragon workers are shareholders. Each business enterprise has its own board of directors chosen by the worker shareholders. Approximately 20 percent of the profit goes to the workers, with 70 percent of the remaining profit reinvested within the corporation. The remaining 10 percent goes to community projects which include the university. In addition to such profit sharing, Mondragon also includes “loss” sharing. With regard to the security of employment, there is no legal obligation to retain workers, but jobs are effectively guaranteed. If there is a redundancy in one enterprise, the redundant workers have the right to available work in the other associated enterprises.

About Author

Greg Macleod

Leave a Reply