Co-ops in Spain’s Basque Region Soften Capitalism’s Rough Edges

If the Erreka Group operated like most businesses, the pandemic would have delivered a traumatic blow to its workers.

Based in the rugged Basque region of Spain, the company produces a variety of goods, including sliding doors, plastic parts used in cars and medical devices sold around the world. As the coronavirus ravaged Europe in late March, the Spanish government ordered the company to shut two of its three local factories, threatening the livelihoods of the 210 workers there.

But the Erreka Group averted layoffs by temporarily trimming wages by 5 percent. It continued to pay workers stuck at home in exchange for the promise that they would make up some of their hours when better days returned.

This flexible approach was possible because the company is part of a vast collection of cooperative enterprises, centered in the town of Mondragón. Most of its workers are partners, meaning they own the company. Though the 96 cooperatives of the Mondragón Corporation must produce profits to stay in business — as any company does — these businesses have been engineered not to lavish dividends on shareholders or shower stock options on executives, but to preserve paychecks.

The concept of the cooperative may conjure notions of hippie socialism, limiting its value as a model for the global economy, but Mondragón stands out as a genuinely large enterprise. Its cooperatives employ more than 70,000 people in Spain, making it one of the nation’s largest sources of paychecks. They have annual revenues of more than 12 billion euros ($14.5 billion). The group includes one of the country’s largest grocery chains, Eroski, along with a credit union and manufacturers that export their wares around the planet.

“Mondragón is one of the landmarks of the social economy movement because of its scale,” said Amal Chevreau, a policy analyst at the Center for Entrepreneurship at the Organization for Economic Cooperation and Development in Paris. “They show that it’s possible to be profitable but still act on social objectives.”

In a world grappling with the consequences of widening economic inequality, cooperatives are gaining attention as an intriguing potential alternative to the established mode of global capitalism. They emphasize one defining purpose: protecting workers.

The pandemic has highlighted and exacerbated the pitfalls faced by companies built to maximize shareholder returns. The shutdown of much of the world’s economy has sent joblessness soaring, threatening the ability of workers to feed their families and stay current on rent and mortgage payments — especially in the United States. Government rescue packages have emphasized the protection of assets like stocks and bonds, bolstering investors while leaving workers vulnerable.

Within the corporate world, high-profile initiatives have declared the dawn of a more socially conscious mentality. Last year, 181 members of the Business Roundtable, a leading group of chief executives, pledged fidelity to a new mission statement in which they promised to run their businesses not solely for the enrichment of shareholders, but also for the sustenance of other so-called stakeholders — workers, suppliers, the environment and local communities.

The pandemic posed the first real test of the principles of stakeholder capitalism. The results have been checkered, with one study finding that the signers of the pledge performed no better than the average company.

Many large businesses have distributed much of their earnings to shareholders in the form of dividends and purchases of their own shares, which lift stock prices. When the pandemic arrived, many lacked the reserves to weather a downturn, prompting managers to furlough and fire workers to cut costs.

Cooperatives have been expressly created to prevent such outcomes. They typically require that managers plow the bulk of their profits back into the company to prevent layoffs in times of duress.

“We have the philosophy of not firing people,” said Antton Tomasena, the Erreka Group’s chief executive. “We wanted people to not have too many worries.”

Yet even as cooperatives are increasingly part of the discussion about how to update capitalism, they remain confined to the margins of commercial life. They are found in Italy and Belgium. In the north of England, the city of Preston has promoted cooperatives as an antidote to a decade of national austerity. A series of cooperatives in Cleveland have been organized by a nonprofit, the Democracy Collaborative.

In Mondragón, the cooperatives trace their origins to the wreckage of the Spanish Civil War in the early 1940s, when a priest, José M. Arizmendiarrieta, arrived in the area bearing unorthodox ideas about economic betterment.

Rich in ore, the Basque Country had long been the scene of industry, especially steel-making, but most workers were poorly paid. People typically started working when they were 14 and advanced little.

When the priest approached the owner of a private vocational school to see about opening it to everyone, he was rebuffed. So he started his own, today known as Mondragon University.

The priest viewed cooperative principles as the key to lifting living standards. In 1955, he persuaded five of the first graduates of the local engineering program to buy a company that made heaters and run it as a cooperative. They elevated workers into owners — partners is the term of art — with each gaining a single vote in a democratic process that determines wages, working conditions and the share of profits to be distributed each year.

Over the decades, scores of other cooperatives took root, dominating the town’s economy. Each business is autonomous, but they operate under shared principles, especially the understanding that if someone loses a job at one cooperative, he or she has the right to take a position at one of the others. If there is no job, partners are entitled to job training plus unemployment benefits lasting up to two years.

In the United States, the chief executives of the largest 350 companies are paid about 320 times as much as the typical worker, according to the Economic Policy Institute in Washington. At Mondragón, salaries for executives are capped at six times the lowest wage.

The lowest tier is now €16,000 a year (about $19,400), which is higher than Spain’s minimum wage. Most people earn at least double that, plus they receive private health care benefits, annual profit-sharing and pensions.

Every cooperative pays into a collective pool of money that covers unemployment benefits and aid to member cooperatives that are struggling. When a crisis requires limiting production, workers continue to get paid as normal, while accruing balances of working time owed that management can assign later.

The system proved robust during the global financial crisis of 2008, followed by the so-called sovereign debt crisis across Europe. Joblessness soared beyond 26 percent in Spain. But in Mondragón, the cooperatives apportioned the pain through wage cuts and advance payments on future hours. Unemployment barely budged.

The crisis did set off the downfall of the original cooperative, Fagor, which made household appliances, including refrigerators. That left nearly 1,900 people jobless.

The collapse of Fagor provoked talk that a weakness of the cooperative model had been exposed. A different kind of business, one managed to maximize returns, would have concluded much earlier that making refrigerators was a treacherous enterprise for a Spanish company, given stiff competition from low-wage countries in Asia. Intent on preserving jobs, Mondragón sustained Fagor for years in a failed effort to revive its fortunes.

Yet within six months of Fagor’s demise, 600 of its former workers had found positions at other cooperatives, and the rest gained severance and early retirement packages, according to the group. As the leaders in Mondragón portray it, the fact that Fagor collapsed while its employees were protected affirmed the value of the cooperative model.

“When a typical company goes bankrupt, we don’t say it’s the end of the capitalist system,” said Ander Etxeberria, who oversees Mondragón’s communications.

In recent years, the cooperatives have added contract and temporary workers who lack ownership rights, raising questions about whether the model can endure as their operations grow and compete with larger players. Many of Mondragón’s businesses have expanded abroad, following their customers to Mexico, Brazil, China and scores of other countries. Most of the international subsidiaries are not cooperatives but traditional businesses. They operate under a loose directive to improve on local working conditions, but Mondragón’s leaders acknowledge this is more aspiration than reality.

After all, the Mondragón cooperatives were created to improve livelihoods in Mondragón, not reform labor markets worldwide.

“The cooperative model does protect its people, but it has to be competitive,” said Zigor Ezpeleta, who oversees social programs at Mondragón. “Otherwise it disappears.”

During the spring, as many of Mondragón’s customers had to shut their factories because of the pandemic, orders for parts plunged. Production at Mondragón factories plunged to 25 percent of capacity. The cooperatives responded with the 5 percent cut in pay. No one was happy about it, but opposition was limited.

Since then, nearly all the cooperatives are back to nearly full capacity, as partners pay back the hours for which they were compensated when factories were shut down. Over all, the cooperatives expect to be profitable for the year.

Mondragón cites its pandemic performance as evidence of its nimbleness, as well as the operational advantages of trust flowing from a sense of shared purpose.

“When you explain the situation very clearly, and when people know that they are the owners of the business, you are able to do these kinds of efforts,” said Iñigo Ucín, president of the Mondragón Corporation.

For most multinational companies adapting to the pandemic, the interests of shareholders and employees typically diverge. Executives have continued to cash in on stock-based compensation buoyed by public bailouts even at companies that have resorted to layoffs.

At Mondragón, workers know that, as owners, they stand to benefit from sacrifices that strengthen their businesses.

“This is more than a job,” said Joana Ibarretxe Cano, a production manager at the Erreka Group, whose factory was closed for all of April. “This is being part of a team.”

The mother of two said she was anxious as the first wave of the pandemic played out — for her family, for the team she supervises and for the business. “Nobody likes not being able to go to work,” she said.

But the way the company has weathered the crisis has reinforced her faith in the structure of her company. Her income was largely unaffected, even as the factory remained closed.

“The cooperative system has given us peace of mind,” she said.

Rachel Chaundler contributed reporting.