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.