A Failure of Cooperative Governance

Speakers:
Imanol Basterretxea, Professor, Universidad del País Vasco UPV/EHU (Spain).
Moderated by Fred Freundlich, Professor/Research Fellow, LANKI Institute for Cooperative Research,  Mondragon University (The Basque Country, Spain).

About the event:
This was recorded on June 18, 2021 as part of the International Co-operative Governance Symposium, hosted by the International Centre for Co-operative Management (ICCM) in the Sobey School of Business at Saint Mary’s University based in Halifax, Canada. The event is the second of its kind held by the Centre and this particular one was held online due to the travel restrictions related to COVID-19. More on the Centre, its research, online co-operative management degrees, events, and publications, can be found at managementstudies.coop

2021 Symposium Theme: Governance in Co-operatives - Participatory, People-Centred, Democratic

ICCM is collaborating on a research project through 2022 on co-operative governance with colleagues at the Katholieke Universiteit Leuven (KU Leuven) and with funding support from FWO Belgium (SBO project S006019N). The International Co-operative Governance Symposium was made possible with financial assistance from the Atlantic Canada Opportunities Agency's (ACOA) Atlantic Policy Research Initiative (APRI Project No. 217990).

Transcript

Sonja Novkovic: We now go to a not so great success story, Fagor, and I'm passing it to Fred to moderate this session. Thank you, Fred.

Fred Freundlich: Hi again, everyone. I'm Fred from from the last session. Imanol Basterretxea, did I see you there? I think I saw him, Imanol is a professor at the Business School of the University of the Basque Country. Hi, Imanol.

Imanol Basterretxea: Hi.

Fred Freundlich: He's been teaching and doing lots of research and writing about cooperatives and employee owned companies from various human resource, governance, and other organizational perspectives for many years now. A number of very interesting and provocative publications in recent years. And some of them have to do with this very sad case of a failure of the largest industrial co-op among the Mondragon group back in 2013. I won't get into any more detail there, I'll leave it to Imanol and our participants. Imanol, you have 15 minutes. I'll warn you when you have a minute left.

Imanol Basterretxea: Thank you very much. Good night, everybody. Good morning or good afternoon in the States or in Canada. I am Imanol Basterretxea, and I'm going to present you this research on the governance problems that accelerated the demise of Mondragon's biggest worker cooperative, Fagor Electrodoméstico. So we are going to talk about — if you don't know this company, this was the largest, the biggest worker cooperative of Mondragon. It was created in the 1950s and it was a very successful company during many, many decades, in the 70s and the 80s. And during all that second part of the 20th century, it was a very successful company. But then when the 21st century came the company began to have several problems. And even if the company grew a lot during those years, mainly because it bought a Polish company in 1999, and then it bought a very large competitor from France, Brandt Electroménager. And so it rates at close to 11,000 employees in 2006, but then a very sharp decline began. A very rapid deterioration of profits began, and the company went bankrupt in 2013. It is something that gained the attention of the most important economic media in the world because it was, as we have said before, the flagship of Mondragon during many decades. And when the company went...

Webinar Host: Sorry to interrupt you, but we're seeing your presenter view with your notes and your next slide. Is it possible to exit the presenter view and just show the full screen?

Imanol Basterretxea: I don't know how to do it. Sorry.

Webinar Host: Let's continue, then.

Imanol Basterretxea: So sorry. And so what is what you don't see? I don't know what you don't see.

Webinar Host: Even like that should be fine, actually. OK.

Imanol Basterretxea: So do you see the presentation?

Webinar Host: Yes, we do.

Imanol Basterretxea: So, we have tried to understand why the company disappeared: which were the reasons that provoked the demise of the company? And until the moment we have published three papers; two on human resource management policies that caused the demise of the company, one in Human Resource Management Journal and the other one in Annals of Public and Cooperative Economics — this one we have published last week. And then we have another paper on corporate governance and problems that affected the demise of the company in Economic and Industrial Democracy. And this paper is published Imanol Basterretxea, me, then Chris Cornforth from the Open University in the United Kingdom, and Iñaki Heras-Saizarbitoria, also from Basque University. And thus the paper we are going to talk about in the next minutes.

So what did we do? What kind of research we did? And we have maintained 44 in-depth interviews with different stakeholders of Fagor Electrodoméstico, mainly former managers and also former worker-members, mainly from the Social Council, the Governing Council of the Co-operative. And also we have maintained several interviews with other stakeholders. In those interviews, we have achieved a lot of internal documentation of the firm. We have all the strategic plans since 1999, till the demise of the company in 2013, all the annual plans. So we have a lot of internal documentation, longitudinal information, and then we have tried to triangulate all this information.

Concerning governance, which is the first problem most of the people we have interviewed highlight: the delay in making decisions. So in all cooperatives, the consultative process of decision making makes decisions slow, but when the cooperative is extremely big, as Fagor was with close to 11,000 employees — eight factories in Spain, four factories in France, one factory in Morocco, another one in China, another one in Poland, another one in Italy, a very big multinational like Fagor Electrodomésticos — when many, many decisions have to be made by the General Assembly — by the principle of one person, one vote — things go extremely slow. {indecipherable} asked me to try to focus my presentation in a quite positive way, if possible, so what can we learn from this? Which is from a positive point of view, if another co-operative grows too much, a potential solution would be to grow with or via spinoffs. Instead of growing as a solo cooperative, as a single cooperative, sometimes it's better to create different cooperatives when you grow too much. And each of them should have a number of members not extremely high, in order to achieve a democratic consultation model that is also, from an economic point of view, rational.

Another problem bigger than the slowness in the decision making was that some decisions were never made. This company had problems many years before the 2008 financial crisis. So here you have the results of 2005. Before the financial crisis came. Fagor was losing more than €14 million only in the fridges unit of Spain. OK? More than €6 million in the washing machines unit, €4 million in the dishwasher unit. They were losing a lot of money in some business units much before — 15 years before the demise of the company. And the company didn't decide to close down those business units that were losing a lot of money, that were not profitable in Spain. And it was not possible to make them profitable in Spain with our labor costs compared to the labor costs of main competitors. Producing the {indecipherable} or considering the quality of the approach of Fagor — there are some competitors that are able to produce in Europe and be profitable, for example Miele, but they produce very expensive, high quality products, not the kind of products that Fagor produces.

Continuing with some failures of the General Assembly, we have found that there was a very low attendance to compulsory General Assemblies. In Fagor, as in other Mondragon cooperatives, it's compulsory, it's obligatory to assist to the General Assembly. But if we find, we see, how many people attended the general assemblies, how many people voted in the general assemblies, we see that very few people attended to the General Assemblies. Only when very important decisions were made that affected the salaries of the members, for example when they have to vote if they have to reduce their salaries, in those occassions there was a higher participation of members in the General Assemblies. But in other ordinary General Assemblies, the participation was much lower. And again, from a positive point of view, or what can we learn from this experience: in very, very large worker cooperatives, with more than 3,000 employees — with more than 3,000 working members — like in the case of Fagor, many of the people we have interviewed consider that those cooperatives should have assemblies of delegates, and not a direct democratic participation of members in General Assemblies. For example, there is a very large worker cooperative in Mondragon, Eroski, a retailer. And in Eroski there is an assembly of delegates. The working members choose some delegates to go to a General Assembly that is not as big as in the case of Fagor.

And another potential solution is to delegate more on the General Counsel. In Fagor Electrodomésticos there was a culture in which everything had to be decided in the General Assembly. Even minor decisions such as should we increase the salary of this manager? Those decisions have to be made in a General Assembly and with the vote of 3,000 people in a very large sports arena, OK? That doesn't make sense from an economic point of view, from my point of view, at least.

So, if we go to another very important governing body of any cooperative, the governing council, we also found very, very important problems. The first big problem was the inability of many of the members of the governing council to understand the business information — the business plans, the business strategies — that the managers proposed to them. And they were unable to question the quality of the strategies that managers proposed because they did not have the training, the experience, the knowledge in order to understand this information. Some other people that analyzed Fagor in the 1980s, {indechiperable} and company, they also said that the members in the governing council were lost and they felt inundated with a lot of information and data that they were not able to understand. This problem got bigger and bigger when the company became a multinational, and the decisions that had to be made were much more complex. And the training and information of members was not bigger than in the 1980s. And when the people that are serving in the governing council don't understand the strategic information they are provided, the financial information they are provided, those issues are squeezed off of the board's agenda. They are not properly evaluated and controlled. And those board members that don't understand the information that managers provide them, they rubber stamp management plans. And then if those plans don't go well, they fire the manager. That's the logic.

And sometimes we find that very unimportant issues were given priority in the General Assembly and also in the Governing Council. OK, so sometimes in those Governing Councils they devote a lot of time to discuss about the parking of the factory, or a clock — about things of the shop floor, things that should be debated in the shop floor, not in the Governing Council, not in the General Assembly.

And another problem we found is that the one person, one vote electoral system generates General Councils that over-represent the interest of some stakeholders. In the case of Fagor Electrodomésticos, most of the worker-owners were technicians and blue-collar workers of the factory. So then, almost all the members of the Governing Council were also blue-collar members and technicians of the factories. There were very, very few people from the marketing department, from the finance department, from the human resource department, from other departments that were very, very important for the future of the company. And the same thing happens in other worker cooperatives, OK? The one person one vote system generates bias in its Governing Councils, where all the stakeholders, all voices are not listened to.

So let's finish with several potential solutions, some of them we have mentioned them before. The first of them would be this one: grow via spinoffs. In the case — for example, there's another cooperative in Mondragon, ULMA. ULMA has had a tremendous growth during the last 20 years or so, but they have grown with creating different spin-offs: ULMA Packaging, ULMA {indecipherable}, ULMA...I don't know, many, many, many different ULMAs. Each of them of a size that is not extremely big, OK?

The second solution or the second suggestion should be this one: make sure that key stakeholders are represented in the General Council, OK? And let's take another example: in Eroski. In Eroski, most workers are workers of the supermarkets, OK? But we should try to make people in the governing council not only that are workers in the supermarkets, we should consider also people from the marketing department, people from the finance department, people from different departments, different stakeholders with different points of view should be represented in the General Council. Third...

Fred Freundlich: One minute, Imanol.

Imanol Basterretxea: OK, yes, I finished. Training of the General Council members. There is a lot of people who has been talking about this during all their talks of today. That can be possible in certain cooperatives, but not in all of them. For example, in Mondragon Assembly, 80 percent of the worker owners are engineers. It would be very easy to provide them with training in order to be very good members in the governing council. In our Fagor Electrodomésticos, that was not the case. Many members had no training at all, OK? And it's very difficult to be a very good member in the Governing Council if you don't have any literacy in economy, in a very big multinational like this.

Assist working members serving in the Governing Council with external, independent and professional advice. That was an advice that many interviewees gave us. And the last one: include independent board members on the General Council. In Mondragon cooperatives, in theory, it is possible to have independent board members, but many, many — or very, very few cooperatives have independent board members. Today, in the speeches that many of you have given before me that have been tremendously interesting, I have been able to understand why Mondragon cooperatives don't use independent board members, professional board members. I've been reading not only your speeches, or the speech of {indecipherable}, or the speeches of many of you, I was reading also the chat, and it was very interesting reading the chat because many of you were against the professionalization of governing councils in cooperatives. But in very big cooperatives as in Fagor Electrodomésticos, that is completely necessary. You have to have one, two or three members. If you have 12 members in the Governing Council, at least one, two, or three of them should be professional members. That's my point of view. Its not objective. I know that many of you do not agree, but that's our point of view. Thank you, everybody. If you have any question, I am ready to answer.

Fred Freundlich: Thanks very much, Imanol. Very interesting presentation and as you say, the connection with previous sessions today is is also very provocative. There weren't questions in the chat, but there were several comments about education, about making participation in governing bodies more mandatory. If anyone has a question, please feel free to raise your hand or put it in the chat. Any questions or comments out there? What do you think, Imanol, about a comment by Hannan about whether apathy among worker members is related to good economic times. Doesn't seem to be the case, and far worse since it was not hadn't been doing well for some time. But I'm interested in your point of view.

Imanol Basterretxea: Apathy, so I work in a public university, for example, and we also have apathy for certain positions. For example, nobody wants in my department now to be the head of the department, and it happens the same thing in worker cooperatives. Many students of mine are working in worker cooperatives. Many MBA students and some of them work in very profitable worker cooperatives. But they tell me that the there is not an equilibrium between the incentives you have to serve in the Governing Council, for example, and the responsibility you have if you serve in the Governing Council, OK? So there are very few candidates to serve in the governing council. There is a kind of apathy because the incentives are too low and the responsibility is too high. And so that also generates apathy. And sometimes there are no candidates at all to serve in the in the Governing Council of a Co-operative. Probably, if incentives were higher, and I don't talk only about economic incentives, but other kind of — for example, in many worker cooperatives, if you serve in the Governing Council, you don't have any free time to prepare your work as a member of the Governing Council. You have to continue working as before, you have your working time as before, and then you have to serve in the Governing Council. So there are no incentives. This is a problem if you want to to get people motivated.

Fred Freundlich: It's a big debate in Mondragon, these days. Could be a topic for another presentation. Dionne, had your hand raised as it's still up?

Dionne Pohler: Sure, can you hear me, Fred?

Fred Freundlich: Yes.

Dionne Pohler: OK. Yeah, it was really interesting presentation. I think, I just wanted to kind of reiterate at the end, because I think I do want to make clear that my opinion on professionalization of the board, it's really context dependent. I think that I think that any kind of proposal that sort of says, you know, professionalization or professionals on boards, it's always good or always bad, I think is part of the problem. I think that it really does depend on the context that a co-op is operating in. And I think really it comes down to how can that co-op best resolve the governance challenges that we talk about in our framework. And I think that in this case, there were tons of ways in which I think that those governance challenges were not being addressed appropriately. I don't know if professionalization would have been the way to address those challenges, but I just wanted to make really clear that I think it's important to think about the context when thinking about the kinds of governance practices that we use.

Imanol Basterretxea: Thank you, I love your presentation, Dionne. And a context is everything. Context is everything. And in this case, and in many other cases of Mondragon cooperatives, that we have very large worker cooperatives international worker cooperatives, cooperatives that sell more than 70 percent of their production abroad. And then they have governing councils of worker owners that haven't gone abroad. Never, ever. They are born in Mondragon and they don't know anything more than Mondragon, OK? So they are not able — one manager of Fagor told me — and Fred knows him — told me, "when I went to the Governing Council to convince them to buy Brandt — a very large French company with more than 4,000 employees — one of the members of the Governing Council told me, 'How can I make a decision to buy a French company if I never go abroad, if I've never gone out of my town? I do not have knowledge. I do not have experience.'" And OK, if you have one, two or three members in the Governing Council with this profile, it's not a problem. If the 12 members have this profile, you have a very large problem in a big multinational like like Fagor.

Fred Freundlich: Right, right, right. Jerome has his hand up. Go ahead, Jerome.

Jerome Warren: Thank you very much for the presentation, and I'm not sure if this entirely related, but I'm curious as to the extent to which industrial policy might have also contributed to sort of softening the blow of the loss of Fagor, and particularly I'm looking at the concept of worker buyouts. So — can you hear me OK? OK? So, for instance, in Italy, there's the Macora Law, which sort of gives subsidies for converting existing firms to cooperatives or starting a new cooperative. And to what extent is a lot of the the sort of clinging to legacy firms like Fagor a product of the slow rate of the creation of new cooperatives? And to what extent could one cushion the blow by simply creating more cooperatives in general?

Imanol Basterretxea: In Spain, we also promote worker cooperatives and employee ownership, and there is a tax system that is very favorable for worker cooperatives. And most Mondragon cooperatives pay less taxes than ordinary firms because they are cooperatives. And so that's not the problem, I guess, because there is a lot of public support for cooperatives in Spain, and furthermore in the Basque Country. And we have our tax system, and with our tax system we promote cooperatives a lot. So that's not the problem at all. That's my point of view.

Fred Freundlich: That's also a subject of significant debate. It's been a subject of debate in the Basque country for several years since the Great Recession. But there certainly are policies favorable to cooperatives in Spain, and on top of those others in the Basque country. No question about that. But it's a complicated issue. I mean, as a colleague of mine argued years ago, I mean, the entire system, the economic system is designed for a different type of company. And when Mondragon — and in talks in public, when people point out contradictions and paradoxes in Mondragon, my favorite answer is when one manager said, "Of course, how could it be any other way?" I mean, we are cooperative islands in a capital sea, and what have you.

I wanted to see if we can get to one more question before we before we close up. I'm going to have to ignore a number of people. I'm terribly sorry, but I see a question here by Courtney Berner. I found your critique of one member, one vote interesting. What would you suggest as an alternative? What would you have suggested in the case of Fagor?

Imanol Basterretxea: And the question is that the one person, one vote system in this company. Again, the context is important. We are talking about a very, very large company and where many of the decisions had to be made by the General Assembly, with 3,000 people sitting in a very large sport arena, doing hours discussing, each of them had the right to say whatever he wanted to say. And so that's very difficult to function, OK? So in those large cooperatives, many people we have interviewed — I don't have a clear idea — but many people we have interviewed considered that worker members should choose some delegates and conform a smaller General Assembly. And in three or four years those delegates could be chosen again. It could be a system like this. But I don't know. In very large cooperatives, it's a very, very difficult to implement the one person, one vote system.

Fred Freundlich: Right. Thanks very much, Imanol.