As has been noted, the corporate system is based upon a well-defined, top-down hierarchy. Large, powerful corporations can (and do) exert influence on communities and countries. Corporations exist to make money for their stockholders and owners. If they don’t, they won’t be in business very long. None of that makes corporations inherently evil. They’re just playing the system to their greatest advantage, just as anyone would do, and must do, in order to compete in a fierce global marketplace.
Corporations are much better equipped to create money than are cities, states, and even nations. Companies are started because the people behind them believe that they can make money. Thus, companies are like hunters and profits are their prey. Municipalities, on the other hand, are passive by comparison. They can’t generate enormous revenues as easily as corporations, so instead they eek by on service fees and taxes. They are more like scavengers than hunters. There are cities in this country that can’t afford to fix potholes in streets or provide the most basic services because they are so strapped for cash. States, counties, and communities all across America are experiencing huge budget deficits with no way to compensate for the shortfalls.
By comparison, corporations don’t have this problem unless they are poorly managed and unable to get a government bailout. This gives them an advantage. Corporations, industries, and their lobbies are powerful, and their ability to affect communities both directly and indirectly is great. Unfortunately, too many of them deny that they have any other obligation except to make money for their stockholders. Yes, there are so-called “dual bottom line businesses.” These are companies that have dual goals or bottom lines. One goal is to make a profit, which all companies must do if they wish to remain in business. The other goal is to contribute to efforts they believe in, be it the environment, social issues or whatever. Ben & Jerry’s Ice Cream is probably the most widely cited example. Such companies contribute large sums to important causes and do it consistently. All companies do some charity work if for no other reason than the warm, fuzzy, public relations spin they’ll get in the press. But with dual bottom line businesses, it’s more than just good public relations, it’s part of their reason for being.
Sadly, large dual bottom line businesses are in the minority. Too many corporations turn a blind eye to the negative consequences of their actions in the pursuit of profit. They consistently demonstrate an alarming lack of concern for their impact on people, cultures, and the environment. Why? Because they seldom if ever suffer the negative consequences of their own actions. The executives need not worry about being outsourced to cheaper, third world labor. The board of directors won’t live anywhere near where the contaminated waste products are buried. The stockholders most likely won’t be downwind from toxins spewing from the factory run by the company in which they hold stock. In short, it ain’t their problem because it doesn’t affect them directly. Therefore, they have no reason to change their behavior. Thus, they continue their bad behaviors and practices year, after year, after year.
“The corporation has evolved to serve the interest of whoever controls it, at the expense of whoever does not.”
– William Dugger
Those paying the price for our global economy – those fighting for survival (meaning the majority of the middle and lower classes in every country), those whose natural resources have been pillaged and plundered, those without power and lacking any means of legal recourse – see things very differently. They’d rather not have their drinking water polluted by millions of gallons of untreated livestock urine, or toxic clouds billowing from unregulated factory chimneys, or jobs that pay less than a dollar an hour, or live with higher rates of cancer and disease without any access to healthcare or even legal recourse to address their grievances.
That’s the biggest failing of corporations. They’re not accountable to anyone but the stockholders who rarely live in the areas most impacted by the companies they own stock in. The whole system creates a culture of unaccountability. No one is responsible for anything. They hide behind a system that has made corporations faceless legal entities. The corporations can be held accountable for their actions, but the people that own and control them (and make the decisions) are protected, and they almost never suffer any negative consequences beyond forced retirement (with full benefits, of course).
Part of this problem stems from the fact that corporations – especially in America – have mutated into something that is both a person and a company. Our modern corporations trace their origins back several hundred years to charters, which are documents granting rights or authority of various types; such as the right or authority to operate a mine, found a colony, or trade spices. Charters acknowledge the prerogative of the recipient to exercise the rights or authority specified within the charter. Under such arrangements, it was understood that the granter of the charter retained sovereignty over the recipient of the charter. Thus, if the recipient of the charter failed to live up to the terms spelled out in the charter the charter could be revoked. This, in effect, gave the government or crown – the typical granter of such charters – a heavy hand in the operation of such endeavors. As you can imagine, this didn’t sit well with many entrepreneurs. Many, such as Carnegie, Rockefeller, and other giants of the industrial revolution avoided the corporate structure altogether and opted for limited partnerships or trusts. Recognizing the tremendous potential of corporations, governments around the globe began amending their laws starting in the mid 1800’s. Probably the greatest transformation occurred in the United States in 1886 with the Supreme Court case of Santa Clara County v. Southern Pacific Railroad that, in effect, acknowledged corporations’ status as persons.
What does this mean to you and me? During his 2000 presidential campaign, activist Ralph Nader summed up the Green Party’s stance on the issue stating, “Corporations are not human beings, they do not vote; they are artificial entities which should be subordinated to the rights of human beings. There can be no equal justice under the law if General Motors or Exxon has all the rights of humans plus all the privileges and immunities to concentrate enormous power and escape responsibility in ways unavailable to the wealthiest of real people.”
The courts have basically stated that corporations are both people and companies. They enjoy the rights and privileges of both with none of the consequences. If an individual were to dump poison in a lake that served as the drinking water for a community and caused the deaths of thousands of people, that person would most certainly be arrested and convicted of multiple homicide. Depending on the state in which he committed the crime, he might well receive the death penalty and be executed. However, if a corporation poisoned the drinking water of a community and caused illness or death it’s not likely that any of those who made the decision to do so would ever be prosecuted. The corporate structure would give them immunity to liability, and the corporation’s deep pockets and expansive legal team would allow it to easily out-spend and outlast any plaintiffs. In the end, the corporation might be forced to pay a settlement (depending on how good their team of lawyers are), and some people might get fired, but the corporation would not lose its life or have its charter revoked, and none of the stockholders would be held accountable. The corporation would continue to exist.
As part of his 2004 presidential bid, Ralph Nader’s platform included the following: “Among the reforms needed are resources to prosecute and convict the corporate executive crooks and to democratize corporate governance so shareholders have real power; pay back ill-gotten gains; rein in executive pay; and enact corporate sunshine laws, among others.”
As proof, just consider the reckless manner by which so many corporations (primarily banks and brokerage houses) opted to make fortunes that in turn brought the American economy to its knees in the fall of 2008, which then adversely impacted the global economy.
“For the capitalist, the corporation is a center of production, the purpose of which is the acquisition of an optimum profit for the owners. Social improvement is a side effect or a by product. … the modern business corporation, as we know it, is fundamentally flawed and inappropriate as an institution and thus functions inadequately as the fundamental building block of society. … a reform of the capitalist model is necessary because its current structure is incapable of satisfactorily resolving a multitude of human, moral, and economic problems.”
– Greg MacLeod
From Mondragon to America
Side Note: From Mondragon to America – Experiments in Community Economic Development by Greg MacLeod
It’s sad because corporations are capable of so much more. They can accomplish great things because they are the most efficient organizers and educators of people. They have the structure and the wherewithal to lead teams of people to accomplish the seemingly impossible. The Industrial Revolution was possible because of big business, regardless if it was labeled a trust, limited partnership, or corporation. Mobilizing large amounts of resources, whether coal, steel, timber, textiles, or people, has always led to technological advance, and has always required sophisticated organizational structure (though it need no longer be autocratic thanks to sociocracy).
The rockets that took us to the moon, the faster airplane, the better light bulb, the safer car, almost everything that has improved our lives during the last two hundred years has come from companies. They can have tremendous positive impact and do more good than harm in the long run, esepecially when they put people and the planet on an equal footing with profits.
So, is there an alternative, something that could bring out the good in corporations and negate the bad, something that creates accountability and responsibility?
Mondragon is a community in the Basque region of Spain. It’s also a cooperative corporation comprised of over 260 companies employing more than 70,000 workers. It was founded in 1956 by five students of Father Don José Maria Arrizmendiarrieta, a Catholic priest with a very different idea of how things should be done. Like other ethnic minorities, the Basque have a language, culture and history unique from their countrymen in greater Spain. This made them an easy target for discrimination, which reached its peak under the dictatorship of Francisco Franco. In fact, Father Arrizmendiarrieta was imprisoned for a time because he chose to oppose the Franco regime. During that time he studied capitalism, socialism, and communism. He rejected them all until he learned about cooperativism.
Upon his release, the church assigned Arrizmendiarrieta to Mondragon where he soon realized that there were few, if any, opportunities available to young Basque men. They had no schooling and were destined for low wage jobs, if they could find jobs at all. So, he set about collecting money to establish a technical school where the youth could learn valuable trades that would lead to better employment and more opportunities. But he didn’t stop there. He also taught a business philosophy that was based partially on Catholic work doctrine, his studies of cooperatives, and on his own unique beliefs of how a business should operate, and what its responsibility was to the community and its employees.
Five of Arrizmendiarrieta’s students, engineers and recent university graduates, decided to put his teachings into practice and started a stove factory. That, by itself, would be no big deal. What was significant was how they designed the company. Each employee was considered an owner with one share and one vote, meaning no one held more than a single share – no monopolies, no majority owners, no one person in control. To further protect against inequities, salaries were capped at a ratio of three to one. (The ratio has since risen to the current rate of six to one.) That is, the highest paid person could earn no more than six times the lowest paid person. Compare that with the fact that, as a group, CEOs in the United States earn over 300 times their average employee’s pay.
The traditional corporate structure actually encourages kingdom building. Totally incompetent managers can surround themselves with layers of subordinates to the point that they never have to be culpable for anything. They can last for years while others take the fall for their mistakes. They often create more problems than they ever solve and the employees hate them for it. Yet, the rank and file workers are powerless to do anything because they don’t have a voice. We read about it almost every day – companies laying off hundreds or thousands of workers while those in management get bonuses or lucrative retirement deals. Why doesn’t management take the blame for bad business decisions? Mondragon solved the problem by making management directly accountable to the employee-owners.
And that’s just part of the Mondragon system. They also elected a board of directors, all of whom had to be employee-owners of the company. This board hired the managers on a contract basis. Since the managers were accountable to the board of directors, who were also owners and workers in the company, they had every incentive to be cooperative and productive. They had no choice if they wanted to keep their jobs. It’s a complete reversal of the current system. Within Mondragon, management is working with, and for, the employees, instead of against them. Compare this to the norm in most companies, wherein management does the hiring and firing and employees come and go. There, management is often at odds with employees and is considered the oppressor.
The founders of Mondragon also created a social committee to adjudicate disputes and conduct a yearly social audit. The social committee acts as a grievance committee to help settle disputes between fellow workers and between workers and management. The social audit is proactive, preventing many problems before they arise by taking the pulse of the employees and getting their input. Each year, the committee surveys the employees and asks such things as, “Are you happy working here? What can we do to be more productive, more cost efficient, etc.?” It allows solutions, innovative ideas, and frustrations to come to the surface easily and early, which, in turn, makes for a more content, more productive, and more profitable work force.
Arrizmendiarrieta’s students realized that their cooperative structure had the capacity to gather wealth just like corporations do, and that wealth could provide the means to take control of their destinies. This convinced them that they must guide their own banking affairs, if they were to have any chance of success. They had to be in control. Banking laws being what they are in Spain, the only option available to them as employee-owners was a credit union. So, they created their own called the Caja Laboral Popular. They then devised a clever way of distributing the financial rewards and responsibilities, to share the wealth and the burden. Net profits were split between a collective account, the individual employee accounts, and a social fund. The ratios have changed over the years to the point where they are now about twenty, seventy, ten. Meaning, 20% goes into the collective account, 70% percent to the employee accounts, based upon the now six-to-one pay scale, and 10% percent goes to a social fund for arts, culture and education within the community.
Side Note: As of 2012, the Caja Laboral Popular is now Laboral Kutxa. Per Wikipedia: Laboral Kutxa is a Basque credit union. It was born in March 2012 as a result of the merging of Caja Laboral Popular Sociedad Cooperativa de Crédito (known as Caja Laboral in Spanish or Euskadiko Kutxa in Basque) and Ipar Kutxa Rural Sociedad Cooperativa de Crédito (known as Ipar Kutxa).
Before its merging with Ipar Kutxa, Caja Laboral had 1.887 working members, 21.536 million euros in assets, 1.200.000 clients and 367 offices in the Basque Country and Spain.
For example, if a company made ten million dollars – I’m talking profits, after salaries, operating expenses, and the like – two million would go into the credit union, into what’s called a collective account. That money could be used for expansion, equipment upgrades, or simply saved for a rainy day. Seven million would be split among the employees and placed into their accounts with the amount for each differing, depending on where they fell on the pay scale while remaining within the six to one limit. The remaining one million would go into the social fund to be used for schools, festivals, the symphony, or whatever.
As employee-owners, the workers are responsible for the profits and the losses of the company. Meaning, they share the wealth in good times and share the burden in bad times. If the company goes into the red, they will attempt to turn it around using the two million in the collective account. If that doesn’t work, they dip into the employee accounts. The employee accounts are separate from the employee’s paychecks. They get paid every two weeks just like at any other company. The employee account is like a 401K, social security, and retirement plan all rolled into one. An employee can only get that money if they quit, retire, or die, in which case it passes to their designated heir. This creates a culture of responsibility. Fellow employees look after each other and no one is allowed to slack off. If they do, it costs everyone money. It’s a self-regulating system. The employee-owners aren’t just putting in eight hours to make someone else rich. They work for themselves and that makes all the difference.
In our modern, globalized world, with its rapidly changing industries and markets, many people realize that they should work for themselves instead of someone else. Yet, few do because starting a business is so hard. Most new businesses fail within the first three years. So, who can blame people for not wanting to do it? It’s easier to just get a job at a company where you work to earn a paycheck in return for making money for stockholders.
Mondragon is different. It’s a system where employees are working for themselves, but within the confines of a company and with all the muscle, opportunity and potential that comes with it. It’s the best of both worlds. They share the joys of being owners and profiting directly from their own endeavors, yet they don’t have to be knowledgeable in all things like most entrepreneurs. Accountants can focus on accounting, machinists on machines, and sales people on sales. People can do what they do best, support the entire effort and reap the dividends of a major company. Few entrepreneurs or small businesses have that luxury.
But, how can you fund a growing business if you only set aside 20% for upgrades and expansion? Given our ten million dollar example, two million dollars, or twenty percent, is placed in a collective account within the Caja – not an individual company account. The original stove-making factory grew and as it grew it split up into separate companies or helped form completely new ones from scratch. These companies all agreed to and signed Articles of Association, a contract whereby they agreed to work with, and for, each other and share their financial resources within a common credit union – the Caja. The end result is several companies all pooling their capital into the same financial institution.
Mondragon also developed secondary companies that could service the primary companies, most of which were involved in manufacturing of some sort. For example, in any business there are certain things that are needed; legal services, secretarial, copying, accounting, maintenance, etc. Instead of every company having their own accounting department, an employee-owned accounting firm was created to serve all the other companies. Those accountants could also seek contracts with businesses outside the cooperative. Thus, these new companies were providing services to the cooperative and generating revenue through their contracts with outside firms.
The key point is that within a cooperative system – especially one sharing the same financial institution – it makes sense to pay someone within the group for services whenever possible, because that keeps the money in-house and available for future use. If Company A makes widgets and needs accounting services, they will hire the employee-owned accounting company that is a member of the cooperative. The accounting firm will then place that profit back into the Caja where it will be available to everyone – including Company A.
It makes perfect sense and explains how multiple companies can be created quickly. If the member companies of the cooperative association need a particular service, they have the incentive and available capital to create a new company that will provide that service. The money paid to that new company is then put back into the system. Everyone wins. By working together cooperatively, they become stronger and therefore more competitive.
That also means even more companies, with everyone giving twenty percent to the collective account. So, using our previous example, if Company A makes ten million they contribute two million to the collective account. Company B contributes three million. Company C half a million, and so on. In time, there is a large pile of money that can be loaned out to whatever company needs it. Not all companies are going to need to upgrade equipment, expand facilities, or hire new workers, but those that do have access to a larger pool, instead of just their own earnings. This system of cooperation gives them much more financial muscle than they would ever have if they attempted to go it alone.
And it works. Mondragon’s annual revenue is about $14 billion as if 2017. Assets total almost $30 billion. The technical institute that they created to help train their workforce is considered one of the best in Spain, and Laboral Kutxa (formerly Caja Laboral Popular) is rated among the most efficient financial institutions in the world. It has a track record of over forty years that few can match.
In addition to making money, Mondragon is also able to give back to the community in ways that other business enterprises can’t. Remember that ten percent goes to a social fund for arts, culture, and education. It’s so fundamental that it’s part of the agreement, the Articles of Association, that each member company signs. That money goes directly into the communities where the employees live and work. It further establishes the cooperative in the fabric of society and makes it an active, vital participant instead of a parasite, and it doesn’t stop there. The cooperatives also do everything they can to educate and train the workers (who are also owners) so that they avoid unemployment.
For example, if a company retools its factory to remain competitive, but that retooling renders thirty employees obsolete, they aren’t fired. Instead they are retrained and offered jobs in other companies within the cooperative. They take their employee accounts with them to their new jobs within the cooperative. The Caja simply logs the transfer in the ledger and the money is transferred from one company’s assets to another. The employees don’t lose the money they’ve earned. Remember, they are all owners and they look after each other. It’s even more incredible when you realize that the Basque region has seen unemployment as high as twenty-four percent over the years, but unemployment within the cooperatives has consistently remained below one percent! It’s a very efficient and benevolent system.
Imagine, treating workers like human beings instead of commodities that could be tossed aside the moment they were deemed unnecessary. The difference is that these aren’t just workers – they are owners. Therefore, they have every right to demand they be treated fairly. Employees of most corporations have no such luxury. They are always at the mercy of the market, management, and moneyed interests.
It all depends on the system. Create a good system, and you get good results. Create a flawed one and you get less than good results. The trick is knowing if you have a good system or a flawed system without having to wait two hundred years. In a machine this is easy enough to discover. It will either work as designed or it won’t. It doesn’t take long to figure out. However, corporate systems are more difficult to figure out, and it takes longer to know if you’ve done it right or not. The only way to know – within a machine or a company – is through feedback.
In simple terms, feedback is any information that allows a decision to be made. The process of gathering such information is called a feedback loop. A feedback loop is what allows a mechanism, a computer, coffee pot, or missile to function properly. All systems contain feedback loops. The shorter the loops, the sooner the ‘brain’ or central processor, or whatever the decision-making entity is, can make adjustments. The faster adjustments can be made, the more accurate the system. A thermostat is a good example. You set it for the desired temperature and when that temperature is achieved the device shuts off and only comes on again when changes in the air temperature trigger a response. A thermostat is able to do this because it has a thermometer that gathers the data necessary to make a decision. The thermometer provides the feedback to the system that determines if more hot or cold air is needed.
“By linking businesses, university and research institutes into one operational organism, with their own cooperative bank, Mondragon has created a synergy which has been extremely effective in generating new businesses and jobs.”
– Greg MacLeod
From Mondragon to America
This is the genius of the Mondragon system. They have created feedback loops and built in a system of checks and balances, not unlike the Founding Fathers did with the Constitution of the United States. The system provides the information needed to make decisions rapidly and accurately. Employee-owners are a very effective form of feedback loop. Since their livelihood depends on the proper functioning of the process, they can, and will, react immediately as needs arise. They don’t have to wait for a decision to be made by the owners since they are the owners. Chain of command is eliminated in favor of a web of command. A company of two hundred employees is a company of two hundred owners – two hundred feedback loops directly engaged in all processes of the company organism. They are the organism. They are the company.
The founders of Mondragon included all the branches of constitutional government. The Board of Directors acts as the legislative branch making decisions to be carried out by management. The managers are the executive branch, executing the decisions of the Board and making their own decisions when needed. The social committee is the judicial branch, overseeing the whole process and settling disputes among all parties. Through Laboral Kutxa they have the pecuniary branch. The whole thing is controlled by the people who are the employee-owners of it all. The Basque people of Spain have done what America’s Founding Fathers were unable to do. They have put the constitutional system of checks and balances in the workplace where it counts most. Add the power and potential of sociocracy to the mix and the Mondragon system becomes even more responsive and capable because all voices within the cooperative can be heard quickly and efficiently, bringing forth feedback in the form of new ideas, options, and strategies.
Tim Wardell is a deep thinker, gardener, husband, father, would-be science fiction sex comedy novelist, and margarita aficionado. When not doing any of those things, he reads, studies, practices, and blogs about sustainability.