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Corporate governance as a key aspect in the failure of worker cooperatives

February 2020
Economic and Industrial Democracy 43(1):0143831X1989947

DOI:10.1177/0143831X19899474

Authors:

Imanol Basterretxea

University of the Basque Country

Chris Cornforth

The Open University

Iñaki Heras-Saizarbitoria

University of the Basque Country

The article analyses governance difficulties at Fagor Electrodomésticos, for decades the world’s largest industrial cooperative, and sheds light on how the cooperative model and governance might have contributed to the firm’s bankruptcy. The case study examines how the cooperative model influenced the speed and quality of decision making. The roles of the main cooperative governing bodies (the General Assembly, Governing Council and Social Council) are evaluated and their limitations to effectively supervise and work with management to make difficult strategic decisions. Several governance improvement measures are proposed in order to help other large cooperatives combine democratic control and economically sound governance.

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Corporate governance as a key aspect in the failure of

worker cooperatives

Imanol Basterretxea*

Department of Financial Economics

Faculty of Economics and Business

University of the Basque Country UPV-EHU

imanol.basterretxea@ehu.es

Chris Cornforth

Department of Public Leadership and Social Enterprise.

Open University Business School.

chris.cornforth@open.ac.uk

Iñaki Heras-Saizarbitoria

Department of Management

Faculty of Economics and Business

University of the Basque Country UPV-EHU

iheras@ehu.es

This is the accepted version of the following article:

Basterretxea, I.; Cornforth, C.; Heras-Saizarbitoria, I. (2020): Corporate

governance as a key aspect in the failure of worker cooperatives. Economic and

Industrial Democracy. [DOI: 10.1177/0143831X19899474]

The copy-edited version is available at:

https://journals.sagepub.com/doi/pdf/10.1177/0143831X19899474

Abstract: The article analyses governance difficulties at Fagor Electrodomésticos, for decades the

world’s largest industrial cooperative, and sheds light on how the cooperative model and governance

might have contributed to the firm’s bankruptcy. The case study examines how the cooperative

model influenced the speed and quality of decision making. The roles of the main cooperative

governing bodies (the General Assembly, Governing Council and Social Council) are evaluated and

their limitations to effectively supervise and work with management to make difficult strategic

decisions. Several governance improvement measures are proposed in order to help other large

cooperatives combine democratic control and economically sound governance.

Keywords: Organisational failure; Cooperative degeneration; Cooperatives; Mondragon;

governance

Introduction

For the conventional capitalist firms, the academic theoretical and empirical literature on the study of

the governance bodies is prolific. For example, there are many well-known theoretical handbooks on

this topic (e.g. Clarke, 2004; Solomon, 2007), together with widely referenced empirical works (e.g.

Daily and Dalton, 1994; Heath and Norman, 2004).

Conversely, the governance of co-operatives, and in particular of worker cooperatives, is relatively

under researched in the scholarly field, with a scarcity of both theoretical and empirical works. There

are a set of works which have analyzed more or less tangentially this issue (e.g. Cornforth et al.,

1988; Pencavel, 2013; Storey et al., 2014), but with few exceptions (e.g. Cornforth, 1995; Bakaikoa

et al., 2004), these works either have not been focused on this topic as a key factor or have not

adopted an empirical approach. Nevertheless, in recent years there has been a growing academic

interest in the governance of cooperatives, and studies on the failure of large cooperatives, such as

Canadian agricultural cooperatives (Fulton and Hueth, 2009; Fulton and Larson, 2009a, 2009b) and

the near melt down of the UK Co-operative Group (Birchall, 2014a; Davis 2014; Myners 2014),

have highlighted corporate governance difficulties as a key source for failure.

In recent years, the bankruptcy of Mondragon’s flagship Fagor Electrodomésticos S. Coop.

(FED)

has attracted scholarly attention (e.g. Alzola et. al. 2015; Errasti et al., 2017; Arando and Bengoa,

2018; Bretos et al., 2018; Basterretxea et al., 2019). Yet, these studies have focused predominantly

on external factors, largely ignoring how those responsible for governance of the cooperative

attempted to deal with these problems. While not denying the importance of external factors, this

paper tries to increase our understanding of the potential challenges of the worker cooperative model,

shedding light on how FED’s cooperative model and governance contributed to the firm’s

bankruptcy. Special emphasis is placed on analysing how the cooperative model influenced the speed

of decision making and the adoption of painful decisions. The paper also evaluates the role of the

main cooperative governing bodies (the General Assembly, Governing Council and Social Council)

and their limitations to make key strategic decisions and effectively supervise and work with

management. Several governance improvement measures are proposed.

The article is structured as follows. The next section sets out the context of the case study and

reviews the relevant literature. The third section discusses the research methods used. The fourth

section summarizes the main findings of the study. The final section presents a discussion of the

findings and the conclusions of the article.

Case study’s context and literature review

In 2013 the world’s biggest industrial worker owned cooperative, and Europe’s fifth-largest maker of

household appliances, FED, collapsed. The demise of FED gained international media attention not

only in those countries where its factories where located (Spain, France, Poland, Morocco and

China), but also in the world’s leading economic journals. This media attention was due to FED’s

size and to its symbolic role as a model and launching platform for many other co-operatives that

now make up the Mondragon Group. "This group comprises close to 264 firms, 98 of them co-

operatives and has 81,837 employees and a total revenue of 11,936 million euro (Mondragon, 2019).

The largest Mondragon cooperative is the retailer Eroski, with 30,903 employees in 2018, one third

of them worker members. A large network of industrial firms producing goods in different sectors

employed 38,772 people in 2018, 14,455 of them in non-cooperative subsidiaries. Mondragon’s

There are several Mondragon cooperatives that share the “Fagor” name and brand that are still trading

successfully, such as Fagor Arrasate, Fagor Automation, Fagor Ederlan, Fagor Electrónica and Fagor

Industrial. We use FED only to refer to Fagor Electrodomésticos S. Coop.

industrial and service firms gravitate around what Roche et al. (2018) define as “core elements”. This

core is comprised of an Education network (Mondragon University and several vocational training

and management training centres); 15 research centres; Lagun Aro, the Social Security entity, and

Laboral Kutxa, the bank of the corporation. Mondragon differs from other corporations since power,

authority and ownership is decentralized in a “federal” or “inverted pyramid” organisational

structure. A consequence of this is that “any co-op that does not find that the Mondragon corporate

offices are adding value to their operations may secede at any time” (Smith 2001, p. 28), as was the

case with Irizar and Ampo in 2008. This “inverted pyramid” structure of autonomous cooperatives

that cooperate voluntarily has also been argued by Mondragon managers to elude group

responsibilities in the trials that followed the bankruptcy of FED.

During previous recessions Mondragon cooperatives had better relative performance compared to

ordinary firms (Arando et al., 2015; Basterretxea and Albizu, 2010; Bradley and Gelb, 1987; Morris,

1992) and a low failure rate (Arando et al., 2015; Ellerman, 1984; Smith, 2001). Thus, the failure of

FED came as a shock. Five years later, many post-closure lessons seem to have been learnt in the

group, with evidence of its inner strength and resilience. It is worth mentioning, for example, the key

role of Mondragon’s mechanisms of inter-cooperation which have helped to strongly mitigate the

effects of the employment crisis generated by the collapse of FED (Arando et al., 2018).

Business failure literature and FED

Business failure literature presents two conflicting views on the cause of closure: the deterministic

and voluntaristic perspectives (Mellahi and Wilkinson, 2004; Amankwah-Amoah, 2016). The

deterministic perspective attributes business closure to environmental factors over which

management has limited control. The voluntaristic perspective attributes business closure to factors

arising from within the firm. Failure is caused by management decisions and lack of competency to

reverse the decline caused by external factors (McGovern, 2007).

To a great extent, the deterministic perspective has guided many of the analyses of academics trying

to explain FED’s demise (Alzola et al. 2015; Errasti et al. 2016; Arando and Bengoa, 2018). Those

researchers, together with many voices in business-related media, resorted to defend the cooperative

model based on a simple analogy: in the same way that many corporations went bankrupt with the

economic crisis and the capitalist business model was not called into question; the bankruptcy of a

cooperative, however emblematic, should not call into question the viability of the cooperative

model. FED did not go bankrupt either because of its cooperative model or because of poor

management, but because of an exceptional fall in its main markets. In other words, due to purely

external factors. Environmental factors most commonly mentioned are Spain’s property bust and

subsequent fall in the sale of appliances; new low-cost competition from China and Turkey and the

entrance of aggressive Korean competitors in the mid-range market.

This complacent view contrasts with a critical analysis conducted internally by the Mondragon

corporation (Ortega and Uriarte, 2015) more in line with the voluntaristic school. This internal

analysis points towards many cooperative model and cooperative governance failures,

mismanagement and internal communication problems. Similarly, the bankruptcy administrator,

considers not only environmental factors as the cause of failure, but also internal ones such as “not

following the same path as competitors by moving production to low cost countries, thus being

unable to adapt prices to market needs, something that generated a reduction of sales and generated

losses” or the “high debt leverage motivated mainly by the acquisition of the French firm Brandt and

by the negative results of the main subsidiaries that asked for new investments” (Insolvency

Administrator, 2014). Responsibility for these decisions lies with managers and governance bodies

responsible of overseeing management. For example, buying Brandt through massive borrowing was

proposed by managers, but then approved by 82% of members in the General Assembly. Not

following the same rate of delocalization of production was also a decision conditioned by the

governance bodies.

Literature on corporate governance in co-operatives

In this paper we define organisational governance as the ‘systems and processes concerned with

ensuring the overall direction, control and accountability of an organization’ (Cornforth, 2004,

2012). At the organisational level the body with the main responsibility for ensuring governance

functions are carried out is the organisation’s board or governing body. However, it is important to

remember that other actors may contribute to carrying out governance functions, such as

shareholders or members at annual general meetings, board sub-committees and any advisory

groups, and senior managers.

A variety of competing theories have been proposed to try to understand the role of boards in the

private sector (Hung, 1998). The two most dominant theories are agency theory (Jensen and

Meckling, 1976; Keasey et al, 1997), and stewardship theory (Muth and Donaldson, 1998). Agency

theory assumes that the owners of an enterprise (the principal) and those that manage it (the agent)

will have different interests. Hence the owners or shareholders of any enterprise face a problem that

managers are likely to act in their own interests rather than the shareholders. From this perspective

the main function of the board is to oversee management, to ensure they act in the shareholders best

interests. Consequently, board members should have the knowledge, skills and experience to monitor

and, if necessary, control the behaviour of management. In contrast stewardship theory starts from

opposite assumptions to agency theory. It assumes that managers want to do a good job and will act

as effective stewards of an organisation’s resources. Hence, the main function of the board is not to

ensure managerial compliance with shareholders/members interests, but to support and work with

management to improve organisational performance. From this perspective board members should

have background and expertise to support top management and add value to the organisation's

decision-making.

However, taken individually these different theoretical perspectives are rather one dimensional, only

illuminating a particular aspect of the board’s role. This has led to calls among corporate governance

researchers for approaches that can help integrate the insights of these different perspectives (Hung,

1998: 108-9; Tricker, 2000: 295; Cornforth, 2004). One such approach is offered by Sundaramurthy

and Lewis (2003) in a theoretical paper that draws on both agency and stewardship theories to

suggest the role of the board is paradoxical, that boards must both control and support management.

Their approach highlights important dysfunctions that can occur in the relationship between boards

and management. They argue that organisations may experience a cycle of decline if boards put too

much emphasis on either control or support roles. Too much stress on support can lead to groupthink

where management ideas and strategies are not adequately scrutinised and challenged. This can lead

to strategic persistence in good times and a cycle of organisational decline as performance

deteriorates. Conversely, too much emphasis on control can lead to a separation of responsibilities

between the board and management, and defensive attitudes where management feel unfairly

criticised. If this persists increasing levels of distrust may reinforce defensive attitudes hampering

communication and mutual learning, which can again lead to a cycle of organisational decline.

Tensions and challenges in co-operative governance

As well as the dysfunctions highlighted above co-operatives may face other tensions and challenges

resulting from their particular form of governance. A key principle of co-operatives is that they

should be governed democratically by their members based on the principle of one member one vote

(Cornforth, 2004; Novkovic, 2008). Importantly, any member can put himself or herself forward for

election as a board member. Expertise may be desirable but is not a central requirement, as is

suggested by other perspectives on governance discussed above. As a result, boards may lack the

skills and experience to effectively oversee management and contribute to decision-making.

There are other important differences between co-operatives and public companies which are likely

to make it more difficult for co-operative members to exert control over management (Spear, 2004),

or support senior management and add value to their proposals. In agency theory it is assumed that

the main interest of shareholders is to maximise profitability and that the market in corporate control,

such as pressure from major shareholders or the threat of takeover, as well as board monitoring, will

help to keep managers aligned to this goal. In co-operatives members, as owners, are the principles,

but in co-operatives’ shares are not traded in a market and members only have one vote irrespective

of the number of shares they hold. Hence there are not the same pressures on managers to perform,

such as pressure from major shareholders or the threat of takeover (O’Sullivan and Diacon, 2003).

In co-operatives the members collectively have overall control of the organisation. Small co-

operatives often practice direct democracy with the general meeting of members taking important

decisions, but as co-operatives grow this is usually not practical. A variety of studies suggest that

participation rates of members tend to decline as co-operatives age and grow (Chaves et al, 2008;

IFA, 2006; Spear, 2004; Lees and Volkers, 1996) and that general meetings are not an effective

arena for members to influence decision-making, with deliberations usually limited to approving the

annual accounts and reports (Mozas, 2004: Chaves et al, 2008).

This suggests that for larger co-operatives representative democracy in the form of an elected board

is the most important means that members have of trying to either control managerial behaviour or

improve management decisions, but at as noted above these boards may lack the expertise and skills

to exercise effective influence (Chaves et al. 2008; IFA, 2006, Lees and Volkers, 1996). This

problem is highlighted by Sivertsen (1996: 35) a senior manager in a Norwegian consumer co-

operative:

‘Co-ops tend to be management driven. Whereas board members in major private companies

are elected within the business environment, board members in co-ops are elected among

what we would call everyday people. Very often solid, earnest people with good judgement,

but without the necessary background to make strategic decisions in the business world.’

More recently several studies of credit, consumer and agricultural co-operatives that have

experienced crises or failure have pointed to weak governance by boards lacking the necessary skills

and experience to adequately scrutinise management proposals (Fulton and Larson, 2009a and b;

Birchall, 2014a; Myners, 2014).

In worker co-operatives differences in expertise may be less of a problem than other forms of co-

operative as the members work in the co-operative. However, as worker co-operatives grow and

employ professional managers it is likely that the gap in expertise between workers and management

will grow. Batataille-Chedotel and Huntzinger (2004) in a study of French worker co-operatives

suggest that once co-operatives grow to have more than 250 members boards do not have the

competency to make strategic decisions. Previous studies on FED indicate that governance problems

derived from co-operative members low business literacy and inability to understand financial

information have been present in previous decades. Greenwood and González et al. (1989) found that

FED co-operators felt that they were inundated with accounting data, business plans, technical and

production information; information that co-operators were not able to understand. At the same time,

many cooperative members also believed that key information was being kept from them.

(Greenwood and González et al. 1989, 145-149). Similarly, Whyte and Whyte (1988, p. 227)

wondered whether the members of FED were suffering from information overload and “given a

larger and more complex volume of information than most are able to absorb”. A decade later,

Kasmir (1996) also found that many cooperative members of FED were frustrated and complained

that they were unable to understand and make effective use of the information they received. “All

members of the cooperative are given a great deal of information, which they simply cannot get

through. Social Council members who make the effort to synthesize the material, often find they need

help interpreting information” (Kasmir, 1996, 138).

The incorporation of independent members onto cooperatives’ governing bodies has the potential to

bring relevant expertise and different external perspectives to strengthen the organisations’ decision

making (Johanson and Østergren, 2010). A study of the governance of 60 large cooperatives in six

different industries conducted by Birchall (2014b) found that around half of the 60 boards had

appointed independent board members and he expected more cooperatives to follow. However, this

was not the case at FED.

In addition, the boards of co-operatives may experience other problems besides a lack of skills. Low

participation rates by members in elections may mean boards are not representative of the wider

membership (Spear, 2004; Chaves et al, 2008). This problem can be exacerbated in worker co-

operatives if they employee non-worker members. Further challenges can arise when board members

feel they are on the board to represent and defend the interests of particular groups of workers or

members rather than work with management to further the best interests of the co-operative as a

whole (Cornforth, 2004).

FED and its main governance bodies

Created in 1956 by five ex-students from a technical college in Mondragon to produce heating

devices, FED soon expanded its production to other home appliances. Besides being economically

successful, this worker cooperative helped in the creation of many new cooperatives in the 1960s and

1970s that nowadays are part of the Mondragon Group. After three decades of internal growth, in

1989 FED began a process of external acquisition with the takeover of Fabrelec-Edesa, a Spanish

competitor in crisis with 790 employees. While employees of this firm were offered the possibility of

becoming cooperative members, this option was not given to workers of foreign firms acquired

afterwards (Errasti et al. 2016).

In 1994 FED opened a factory in Morocco. In 1996 it created a joint venture, Geyser-Gastech, with

the German firm Vaillant. Then, in 1999 it bought 76% of the Polish white goods company

Wrozamet (then FED-Mastercook), with 1,760 employees. In 2001 it created a joint venture in China

(Shangai Minidomesticos Cookware Co Ltd) to produce pressure cookers. In 2005 it bought a

kitchen furniture manufacturer, Grumal, with 400 employees. Finally, in 2005, FED made its biggest

acquisition, Brandt Electroménager, the French leader in household appliances, with 4,700

employees.

This process of non-cooperative growth abroad converted FED into what Errasti et al. (2016) call a

“coopitalist multinational” with 18 production plants in six countries, a workforce of 10,543

employees at the peak of its growth in 2006 and a complex structure as can be seen in Figure 1.

(Insert Figure 1 about here)

A quick glance at the structure highlights the complexity of decisions that rank and file members in

the General Assembly and those serving in the Governing Council had to face. Besides its many

production units in Spain and abroad, FED had nineteen subsidiary commercial firms in different

countries; seven firms devoted to provide after sales and customer services; several firms to provide

internal services such as R&D and a portfolio of twelve different brands aimed at reaching different

countries and market niches.

FED financed its internal and external growth strategies through borrowing, and when the financial

crisis broke in 2008 and the market for home appliances in its main markets collapsed the company

entered a sharp decline that finished with bankruptcy proceedings in November 2013, (Molina, 2012;

Errasti et al, 2016).

The main governing bodies of the cooperative were the General Assembly of all members, and the

elected Governing Council and Social Council. The General Assembly is the supreme body in the

cooperative. Each cooperative member has one vote in the Assembly, regardless his/her position in

the firm and regardless his/her investment. Formally it votes on the annual business plan, allocates

profits, decides on mergers and acquisitions, votes on the admission of new members and the

expulsion of any members, elects the Governing Council and monitors its performance (Kasmir,

1996, 36). In the case of FED, given its particular corporate culture, the General Assembly also

decided on many other minor issues, as the results section shows.

The Governing Council in FED was made up of 12 members elected by the General Assembly for

four years. The Governing Council appoints and oversees senior managers, prepares annual plans,

determines job classifications, presents annual reports and accounts to the General Assembly and

proposes the distribution of profits for the approval of the General Assembly (Kasmir, 1996: 36).

The Social Council, whose members are elected by the General Assembly, brings grievances to

management on behalf of workers (such as concerning health and safety, job ratings, work pace, job

assignments, recruitment and promotion criteria; pay policy, work schedules, relocations or pay

policy). Besides, the Social Council communicates managerial decisions and conveys information

downward (Kasmir, 1996: 37). Social Council members are elected from the different factories,

departments or sections where they work. While other big Mondragon cooperatives have maintained

a low number of members in their Social Councils (between 12 and 16), internal bylaws of FED

established a minimum of 40 and a maximum of 60 members. Besides being large, as will be shown,

the power of the Social Council at FED went far beyond its formal remit.

Methods

Due to the complex and interwoven characteristics of this study topic we adopted an exploratory

qualitative methodology (e.g. Glesne, 2006). This aimed to contextualize and interpret the case

following an abductive reasoning perspective, with an interactive engagement between empirical

material and theory (Dew, 2007; Sinkovics and Alfoldi, 2012). The research drew on three main

sources of information. First, public information available on the collapse of FED, such as

journalistic reports, public corporate reports and information from the judicial process into the

collapse of the company. Secondly, there was access to relevant internal reports from the cooperative

and the corporation. Thirdly, a series of in-depth interviews were carried out with different

stakeholders involved in the collapse of FED.

We conducted 30 interviews between October 2015 and December 2018, with a cross section of

people involved with the cooperative in a variety of roles, that aimed to improve the reliability and

richness of the information gathered (Miles et al., 2014) and cover the diverse interests at play

(Glesne, 2006). A total of three interviewers, two of the co-authors of this article plus a research

assistant, contributed to the data collection using a semi-structured script, which was further

modified as the fieldwork progressed (Denzin and Lincoln, 2008). The script followed certain pre-

determined general themes related to the case but allowed space for free-flowing discussions.

Interviewees were identified using a combination of theoretical, purposive and snowball sampling

(Patton, 2002). All in all, 15 senior executives (3 of them also representatives of the Governing

Council and 2 of them also members of the Social Council for different periods of time); 6 rank and

file worker owners, including 3 leading representatives of the Social Council for the last 25 years of

the firm; a senior union official who defended non-owner employees during the bankruptcy process;

4 senior managers in the Mondragon central offices; and 4 senior Basque Government officials

responsible for industrial policy. Most of the managers and rank and file employees interviewed

worked for FED for at least 20 years. Similarly, the external stakeholders were also very closely

linked to FED and Mondragon for long periods of time. It was decided to stop soliciting new

interviews when few new contributions and insights were being obtained, giving rise to theoretical

saturation (Miles et al., 2014).

In order to mitigate organisational silence (Morrison and Milliken, 2000) and potential social

desirability bias (Nederhof, 1985), we asked interviewees for their personal insights, assuring them

of anonymity. The interviews were carried out in Spanish and Basque — the later was used in order

to attain closer proximity between the interviewer and interviewee, as suggested in Heras-

Saizarbitoria et al., (2013). The interviews varied in length from 90 to 170 minutes and were

recorded and transcribed verbatim. Before the fieldwork the interviewers discussed possible

methodological distortions and biases related to interviewing people about a traumatic personal

experience, for example using the interview to primarily ‘tell his/her story’ as a form of catharsis

(Heras-Saizarbitoria, 2014), A distortion mentioned by Greenwood and González. (1989) in their

study of FED. In general, with a few exceptions, the interviewers did not find that this was a

significant problem.

Public information available on the collapse of FED was also analysed, including journalistic

accounts, the different strategic plans of the company and discussion documents, and conclusions of

the insolvency administrator. In addition, very extensive internal corporate data related to FED over

extended periods of time were gathered. This included specific reports to address the crisis, internal

working documents presented to various governing bodies and strategic plans and annual

management plans for different periods.

The information from these three sources was triangulated and analyzed as suggested in the literature

(e.g. Creswell 2003; Miles et al, 2014). Data was analyzed through constant comparison and

interpretation (Silverman, 2006). As a result of the iterative process of interpretation, discussion and

explanation (Glesne, 2006; Silverman, 2006) carried out by the three researchers, the following two

main problems of governance at FED were evidenced: the delay and challenges in making difficult

decisions; the lack of expertise of the governing bodies. These two issues are analyzed in depth in the

following section of the article.

Results

While this paper focuses on governance issues, other relevant factors affecting FED’s demise were

raised in our interviews. Environmental factors, such as the burst of Spanish property bubble and the

consequent drop in sales of household appliances, the increased bargaining power of big retailers, the

growing market share of new entrants from Korea, China and Turkey with cheaper products and

better quality-price ratios, or the increased competitive rivalry of big players such as Bosch and

Siemens. Those factors, in particular the burst of the property bubble, have been analysed in previous

papers on FED’s failure (Alzola et al. 2015; Errasti et al. 2016; Arando and Bengoa, 2018), but

despite the gravity of these external factors, most interviewees highlighted that the roots of FED’s

problems were already present at least a decade before the 2008 crisis.

Even before the bursting of the property bubble, in those years of extraordinary growth, interviewees

noted that FED was losing market share (from 24.7% of the Spanish market in 2000 to 18.4% in

2007), obtained very low profit margins, lost huge amounts of money in some of its business units

and uncompetitive domestic plants (e.g. the unit producing fridges had lost money for many years

and lost 14.5 million euro only in 2004). The firm also faced important quality problems before the

crisis, which it found difficult to fix (e.g. after launching its Innova fridge in 2003, 30% of its units

sold in the following three years were returned by its customers due to quality problems).

Interviewees also highlighted long lasting human resource problems that became chronic, such as

high absenteeism, nepotistic recruitment and selection practices and the low commitment of

members (see Basterretxea et al., 2019).

Above all, interviewees blamed poor decisions about relevant investments made between the mid-

1990s and 2007 as the main root of the firm’s death. In this period FED invested heavily in renewing

its Basque factories and buying the French competitor Brandt. As a consequence, in 2012 FED

concentrated only 32% of its production in low labour cost regions, compared to 50% at Bosch, 55%

at Whirpoool, 62% at Electrolux, 70% at LG and Samsung or 100% at Arcelik-Beko, Haier and

Vestel. In addition, FED’s investments in Spain, Poland and France were financed by borrowing,

creating huge financial problems when demand began to fall. Behind those decisions (and also

behind the decisions that were postponed or never made) interviewees highlighted the central role of

the governing bodies.

Delay in making decisions

The interviewees pointed out that the characteristic cooperative consultative process entailed slow

and often difficult decision-making, a slowness that became more pronounced as FED grew in size

and complexity

"Very slow, everything was very slow. The cooperative model is already slow, because it

requires democratic decision-making. To the extent that every type of decision has to go

through different groups, different meetings, today you present it, next week you adjust it

again, the following week you wait for an opinion from the Social Council, then another

opinion, then it ends in a General Assembly...”. (FED manager, GC and SC member)

What was seen as more problematic than the delay in decision-making was that some decisions were

never made. Although the management and the worker members of FED were aware that some

business units were running at a loss for more than a decade, the cooperative’s governing bodies did

not discuss the closure of unprofitable plants in Mondragon, since managers presumed the

cooperative members would not vote in favour of closing the plants where they were working.

"Everybody talked about closing refrigerators, but they never actually considered closing it,

because it provided almost 700 jobs that would be lost in Mondragon... They would have

stopped being members of FED. That vote never came about, and if it had, it would never

have succeeded." (FED Manager. Member of the SC)

"The refrigerator business lost 11 million a year on its own. We should have made decisions

such as closing it 10 years before; closing what was unprofitable, closing it definitively. But

here, at the time when we should have closed them (10 years ago), we had 600 cooperative

members just in the refrigerator plant. It's a bit difficult to make people understand that a

business is dying and that it is best to just kill it. (…) The management was sure we had to go

there, they knew what needed to be done, but things were very slow.” (FED Manager.

Member of GC and SC)

Not only the executives interviewed, but also the members of the Social Council recognized their

responsibility in not making difficult decisions.

"In the Social Council we knew that refrigerators was in a bad way for a very long time.

Refrigerators was bringing us down significantly and Fagor Mueble was a total disaster. The

Governing Council informed the Social Council that refrigerators was bringing us down. And

in the social part, from the left, (we were) great defenders of the jobs above everything else.

…We put pressure on the Governing Council and that is a despicable way to win, because we

said: we are going to defend the jobs in the General Assembly and we knew that we would

win that vote.... And there, in the social part we were all wrong. It's a huge part of our

guilt.”. (Social Council Member)

Other hard decisions were also taken too slowly, in the eyes of the interviewees. The employment

policy of FED and other Mondragon cooperatives in times of crisis is characterized by flexibility in

work schedules, salaries and job duties, as well as the relocation of members from cooperatives in

crisis to those in need of manpower. The Insolvency Administrator's report (2014) notes that these

measures to reduce costs to adapt to the market "were never placed at the forefront, but rather, they

always dragged behind the negative events."

These problems were exacerbated by traumatic changes in the company's top management. In 2006,

the CEO proposed the first measures for wage reductions and unpaid overtime, but these were not

accepted by the General Assembly, who also dismissed the CEO. This dismissal and the subsequent

mass resignation of the entire Governing Council generated a reverse dominance hierarchy in which

hard decisions were slowed down in order to preserve social peace (Basterretxea et al. 2019). Thus,

some interviewees believe 2006-2010 was a lost period:

"From 2005 to 2010 we lost precious time. I think it was a time when we should have done

things differently. And I don't know if we would have managed to save the company, but at

least we would have generated a different culture from the one we started from when we

began the relocations, (a culture of opposition to relocations and adjustments)". (FED

Manager)

Governing bodies not qualified for the size and complexity of the business

General Assembly

The members of FED are eligible to take part in the co-operative’s General Assembly on the

principle of one member, one vote. Interviewees highlight that attendance at assemblies in the 1990s

and 2000s was generally low and only increased when salaries or austerity measures to address the

crisis were discussed. Low participation rates were considered by some interviewees as a worrying

indicator of members’ commitment, apathy, and lack of co-responsibility.

"People do not feel they are members, they do not assume that they are members, but they

talk about democracy. No. Participatory democracy is also a matter of co-responsibility, and

that co-responsibility is not felt. If it was not a salary issue, or a strong issue, people did not

go to the General Assembly. So, where is the democratic participation and where is this

question of co-responsibility? I don't accept it.” (Social Council Member)

FED’s Corporate Governance Reports prior to 2007 do not show the participation rates of members

in the General Assembly, but figures from 2007 and 2008 in table 1 offer numerical evidence of very

low attendance rates. Some rank and file interviewees said that many members signed at the entrance

to the General Assembly but immediately left without attending the debates and voting. Those

behaviours are in line with the findings of Arregi et al. (2018) in another Mondragon cooperative

(ULMA Archiuitectural Solutions), who found that workers had a moderately negative opinion of

adherence to cooperative ownership practices.

Table. 1. Evolution of participation of members in General Assemblies of FED

15/5/2007 13/5/2008 4/11/2008 13/5/2009 25/11/2009 11/5/2010 10/5/2011 15/5/2012 27/11/2012

Working

members

voting in the

General

Assembly*

1,029 671 2,411 2,001 1,981

1,501

1,201 1,239 1,599

Cooperative

working

members**

3,082 2,718 2,718 2,474 2,474 2,325 2,219 2,067 2,067

Participation

rate 33.4% 24.7% 88.7% 80.9% 80.1% 64.6% 54.1% 59.9% 77.4%

*Figures obtained from Corporate Governance Reports 2007-2012

**Figures obtained from Annual Reports 2007-2012

Participation increased significantly after the Extraordinary General Assembly of November 4

2008, when members had to vote on whether to renounce their Christmas bonus. Given the parlous

state of the company, participation rates in subsequent General Assemblies remained high as

members were asked to vote additional wage cuts and other austerity measures.

Many of the austerity measures proposed by managers were voted down in the General Assemblies

of FED’s final 10 years or approved with very small majorities. In the 2006 Assembly the proposal

to reduce the Christmas bonus by one quarter was rejected by members. Two years later, angry

exchanges between workers and managers over salary cuts again took place in the General

Assembly, and in 2008 the cut in the Christmas bonus was finally accepted by a small margin (1,262

votes in favour and 1,149 against).

The debates on these austerity measures, both in the General Assembly and in the previous

preparatory meetings were considered by interviewees to be conflictual and painful, with continuous

“boos, whistles and tantrums” when managers spoke, and applause when worker members criticized

managers.

“The 2006 Assembly was a complete disaster. Constant booing, a disaster. A lot of anger. ….

A huge brawl. The General Director resigned, he resigned in the next Governing Council. ….

Then we had another Assembly, after the closure [of FED], in February, in the Amaia

Theatre, in which an assistant got up to hit the president, and that was very hard.” (FED

Manager and Member of the GC)

Besides conflict, interviewees highlighted that most members in the General Assembly didn’t have

the knowledge and skills needed to vote on many strategic decisions of a big multinational like FED.

Although the cooperative did have representative bodies a culture had grown up where anything

major also went to the General Assembly. Size was often stressed, and many interviewees consider

that direct democracy in General Assemblies is not well suited to big multinational cooperatives,

suggesting the need for representative democracy:

"A cooperative of the size we have had, where we have had more than 3,000 members, is

ungovernable, it's a mistake. It is difficult for me to renounce the principle of one member one

vote, but I'm more and more convinced. I will have to learn to delegate my vote to those

qualified people who can be in a small assembly in which decisions can be made. And if after

4 years, those people have not convinced me, I will change them. …. That's my opinion after

this." (FED Manager and Member of GC and SC)

Some interviewees believe that the slow decision-making and a large part of the conflicts were due to

the fact that many decisions in FED were made by the General Assembly, and they proposed that in

larger cooperatives decisions should be concentrated in the Governing Council.

"In other big Mondragon cooperatives as Eroski the Governing Council is more likely to

make decisions compared to the Governing Council of the Fagor Group. For example, the

amount of our salaries or wages was decided at the assembly. Do you have to decide not to

receive [your salary] at an assembly? (...) Now the Governing Council (of other nearby

cooperatives) is given greater power for cases such as that of having to carry out harsh

measures." (FED Manager and member of the General Council).

It is significant that even those people who had been on the Social Council for long periods and who

in the past criticized the Governing Council when it made decisions without consulting the General

Assembly, now advocate giving more power to the Governing Council:

"Can a company operate by taking everything to the assembly? It's not possible. Especially

when you have to make economic decisions, present real management plans, people have to

know the facts. I believe that some decisions should be left in the hands of the Governing

Council." (Social Council member).

Governing Council

In theory, any cooperative member can put himself or herself forward for election as a board

member. In practice, as in most Mondragon cooperatives, half of the members were elected among

the candidates proposed by the Governing Council itself, and the other half among candidates

proposed by the Social Council. According to interviewees, the profile of candidates proposed by the

Governing Council were mainly technicians and middle managers. The Social Council proposed

both rank and file members and technicians and middle line managers with a ‘fighter profile’ against

management. According to many interviewees, board members sponsored by the Social Council

failed to understand their governance role and went to the board meetings wearing their Social

Council hat, with a behaviour closer to that of a union representative than to that of a board member.

The greatest deficiency mentioned by all interviewees is that the electoral system produced a

majority of board members that lacked relevant skills to carry out effective supervision of managers

and make decisions. This was not only a problem of rank-and file cooperators on the Governing

Council, but also of middle ranking technicians. Many of our interviewees served as members of the

Governing Council, and they acknowledge that despite their university degrees and experience, they

were ill prepared to fulfil their role. All interviewees, including some former members of FED’s

Governing Council, admit the inability of the majority of members to understand the complex

business issues presented to them and therefore to question the quality, robustness or completeness

of the information and the strategies that managers proposed.

"The training and knowledge of the members of the Governing Council were not sufficient to

monitor the management team and make decisions... No, no. (FED Manager and Member of

GC and SC)

"Did the members of the Governing Council have the skills to make the decisions they were

making, to control the managers? No. I don't think so. I don't think so.” (FED Manager)

"Until 2010, perhaps four or five of the 12 members of the Governing Council had the

knowledge to question the executive's approach and to make demands, but the rest was a type

of member who was not managing these issues on a day-to-day basis and who were distanced

from these issues. So they cannot make demands (on the management), or debate and say yes

(to management's proposals). I think there has to be a debate in the Governing Council."

(FED Manager)

Besides their monitoring role, and in line with the assumptions of the stewardship theory (Muth and

Donaldson, 1998), some managers thought that the Governing Council should help managers to

improve strategy and add value to top decisions. Those managers felt that FED should have selected

some independent board members based on their professional expertise, as most corporate

governance regulations and codes propose. Spanish and Basque laws allow the appointment of up to

three independent board members, but FED, as most Mondragon cooperatives, relied only in its

worker members.

"I missed a much more professionalised Governing Council. I missed having even one

(independent) member with voice but not vote, but who could guide management. (FED

Manager)

A similar electoral system – often with poorly prepared candidates- was used to choose the members

of many other committees that made important decisions, such as the Appointments and

Remuneration Committee, Health and Safety Committee, and Job Evaluation Committee.

Many interviewees highlight that given the inability of board members to monitor managers and

address important strategic and economic issues, those issues were often squeezed off the board’s

agenda and unimportant issues were given priority. A similar difficulty to differentiate between the

domains of the shop floor and higher levels of management occurred in many General Assemblies,

where many important multi-million euro investment decisions were often made without much

discussion and debate, while economically trivial and irrelevant issues could provoke lengthy and

self-destructive debates. Both in the General Assembly and in the Governing Council, many

members exerted social control over managers on unimportant and trivial matters that should have

been discussed in other forums or not discussed at all.

"When a member of the Governing Council asked me about parking, or other minor issues,

trivial stuff, or about things that should be discussed in the Social Council …, that tells me

the level of the Governing Council." (FED Manager)

"The Governing Council is less qualified than a board of directors in a large PLC to enter

into a true control of management. And it exercises a type of social control and debates that

are unprofessional and that take up more time than in a conventional private company.

(...)And that same Governing Council may be ignoring more important decisions that are not

evaluated and controlled." (Senior Basque Government Official)

When members of the Governing Council didn’t understand the information and the robustness of

the strategies management proposed to them, they simply trusted and rubber-stamped management’s

proposals and plans without being really convinced, and without engaging in critical and sound

dialogue. Afterwards, if management proposals turned out to fail and provoked poor economic

results, the Governing Council would fire the manager.

"Do I have enough knowledge to discern if we should buy a company like Brandt? Whether it

is a good strategy or not? What ability do I have to make such a decision? I am more

involved in other operational issues of the company, so when I am elected to the Governing

Council and the CEO sells me the internationalisation strategy and the convenience (of

buying Brandt), I trust him, because this (system) is based on trust." (Member of the GC).

"The qualification of the Governing Council is a problem in cooperatives that are starting to

become large and starting to internationalise, like FED. There is always an approach by the

Governing Council of "I'll let you do it, I don't understand it, but hey, if you (management)

say so, let's go with it. However, if it doesn't go well, I'm going to ask for your head", and

that's the only relationship at the end that the Governing Council has with the management

team." (Senior Basque Government Official)

In order to overcome the low business literacy of many members serving on its Governing Councils,

Mondragon cooperatives have made important training efforts. In 2000 Otalora, Mondragon’s

Corporate Management and Cooperative Development Centre, began to offer a 100-hour course to

candidates who wanted to become members of cooperatives’ boards (Basterretxea and Albizu, 2010).

In 2019 Otalora offers three different courses to members of Governing Councils, totalling 88 hours

of training. In those courses, training on financial topics (such as analysis of financial statements and

Management Annual Plans) occupies a tiny part of the programme and is not enough to close the

skill gaps of many board members. Even if Otalora and FED provided additional training to

members of the Governing Council, most interviewees consider it naive to think the skills gaps of

many members could be closed by training programmes.

Some managers, mainly those with marketing responsibilities, stressed another corporate governance

problem that has not been analyzed in previous research. Most members of FED were industrial

workers and technicians in its Basque factories. Meanwhile, most people working in sales positions

in different regional and international sales teams were employees without any ownership rights.

Thus, the electoral system generated board members who were industrial workers and technicians

whose interests prevailed over the global interests of the firm and the interests of other key functional

departments and stakeholders.

"A product manager responsible for marketing has to define brands and ranges based on

what the market demands. That was not the case in FED. … you defined the range according

to the market needs and then they told you: "Yes, yes, it's fine, but the San Andrés plant needs

to be fed". From the commercial area we suggested to the Governing Council that if we

wanted to continue in the market or make money in some businesses,… the manufacturing

had to go to another country. They didn't even listen! No way!” (FED Manager)

Given the complexity of the firm in its last years, rank and file workers suggested that not only

members of the Governing Council, but also top managers lacked the skills to manage the company.

They stressed that between 2006 and 2013 FED had four different CEOs and four presidents of the

Governing Council. As Errasti et al. (2017) underline, this management turnover undermined

effective leadership needed to face strategic challenges. Our interviewees also highlighted that those

changes often involved changes of many management positions in functional areas, subsidiaries and

factories. Those replacements took place so often in the last years of the company, that many

interviewees felt newly appointed managers didn’t have enough time to properly conduct their tasks

before they were replaced.

When our interviews took place, most of the managers interviewed were relocated to other

Mondragon cooperatives, so they could compare the governance problems of FED with those of

other cooperatives. There was unanimity that board members of other Mondragon cooperatives also

lack relevant skills to supervise their managers effectively, but that the problems are less severe in

small cooperatives where board members have to face simpler decisions than in a big multinational

cooperative like FED.

When asked how FED managed to overcome two economic crises (in the 1970s and in the 1980s)

with the same governance structure, several answers were given. Bigger size and complexity of the

firm in its last years are almost unanimously cited by interviewees as a key answer. The older

interviewees also point to the existence in the 1970s and 1980s of other governance mechanisms

used to supervise managers. Back then FED was part of the ULARCO regional group of

cooperatives and the CEO of ULARCO could oversee managers of the cooperatives who were not

doing a good job and if necessary propose their replacement. Whyte and Whyte (1988, 159-162)

offer a detailed account of the measures taken in the crisis that FED faced in 1983. That year, the

president of ULARCO questioned the management of FED, called for changing three of the four

men in top positions and all the plant managers. He proposed a new CEO and many structural

changes to the governing council of FED. According to interviewees, Mondragon central offices and

Fagor group didn’t play a similar role in the final crisis of FED. In fact rhetorical questions asking

“where was Mondragon?” were frequent, criticizing Mondragon for not supervising FED’s managers

and their decisions properly. The fact that the CEO and the CFO of Mondragon in the last years of

FED had been promoted from FED, and so didn’t have enough independence to supervise the actions

and strategies of the firm was also stressed by many interviewees.

Older interviewees also highlight the supervisory role of the entrepreneurial division of Laboral

Kutxa (the bank of Mondragon) in the crises of the 1970s and 1980s when it replaced many

managers of cooperatives in crisis (see Cheney, 1999; Ellerman, 1984;: Morris, 1992; Whyte and

Whyte, 1988). This entrepreneurial division of the bank disappeared in 1991 and the supervisory role

of the corporate bank became secondary when Laboral Kutxa was forced by the Bank of Spain to

diversify risks and reduce its credit exposure to Mondragon cooperatives. As a positive effect, the

collapse of FED has not led to the fall of the corporate bank.

Social Council

While other Mondragon cooperatives opt for a clear differentiation between the functions of the

Governing Council and the Social Council; the cooperatives of the Fagor group developed a

distinctive culture that gave more weight to the Social Council. This led to greater confusion and

duality between the social and the executive channels.

At FED it was common for many management decisions to go to the Social Council for consultation

and approval. An example is the purchase of the Polish company Wrozamet in 1999:

"When the debate about the purchase of Wrozamet came up, the president said: "This

decision is going to be made together by the Governing Council and the Social Council. And

the president and other members of the Social Council are going to go to Poland and you will

meet with the members of the Solidarity union and they will come here and meet with you and

you will explain how this works and then we will have the technical and economic debate, to

see what numbers come out and then the social debate. The Social Council's report was

favourable on the purchase of Wrozamet, it was taken to the Assembly and 82% voted yes".

(FED Manager and Member of the SC).

According to the interviewees, decisions that should be made by the Governing Council were

actually taken by the Social Council that put pressure on the Governing Council even in decisions

such as the dismissal of the CEO, generating a culture where rights prevailed over responsibilities

"You have to go back to February 24, 2006 that is when they cut off the CEO's head. The

decision to dismiss the CEO is (theoretically) the Governing Council's... and in the General

Assembly the president of the Social Council, [name and last name removed], took the stand

…, saying that they, the Social Council, were the ones who removed the CEO... It was

unsustainable, who's steering this ship? ...... It didn't make sense... a place where the

decisions are not made among the experts...” (FED Manager)

Effectively giving decision-making power to the Social Council, reflected the management's priority

for maintaining social peace. Some interviewees pointed out that some members of the Social

Council had more influence than some CEOs:

"With the purchase of Wrozamet, I remember perfectly well that [name omitted] was the head

of the Social Council at that time. She was the real power. She was the one who ruled for

about 25 years, she was a woman with a strong political and union position and with a very

important team of that type around her. …The strength of the Social Council here in the

Fagor Group is not remotely similar to that of the rest of the Mondragon group cooperatives.

…. Here the Social Council had a lot of strength and the rights, social conquest, were much

more important. There was always talk of rights." (FED Manager and Member of GC and

SC)

"The Social Council was so strong that it could make the executive and the Governing

Council stop projects. The Social Council had a very big influence, very big. I don't know

how to explain why the Social Council had so much power. I was totally amazed at times.

Maybe it had so much power because of the people on the Social Council. Because of their

personal leadership.” (FED Manager)

As was the case with the control exercised by the General Assembly and the Governing Council, the

type of control that the Social Council exercised over top management was often aspects of day-to-

day operational management, issues that should have been solved in lower bodies of the company.

"In the end you get used to "I want to talk to the manager". The Social Council members went

to the manager's office every day for matters that they could have discussed with their direct

superiors. Why do you involve the manager? What does the manager know about whether to

extend this person’s contract or not? The manager does not understand because they are

dealing with other things, strategy issues." (FED Manager)

As in the case of Governing Council members, Social Council members often lacked the skills to

conduct some of their tasks. One of the functions of the Social Council in FED is to communicate

managerial decisions and convey information downward. Kasmir (1996) found that Social Council

members were often unable to interpret the information by themselves. According to our

interviewees, this problem persisted until the end of the firm.

In addition, workers’ representatives in FED’s Social Council and Governing Council stressed that

cooperatives should give them access to external independent advice, such as professional lawyers

and management accountants, to assist rank and file workers that serve as board members. This

demand is not new and Social Council members of FED interviewed by Kasmir (1996, 137)

criticized the “lack of access to outside professionals impeded workers’ ability to exercise their

democratic rights to manage their firms”.

Conclusion and Discussion

The research shows that it is too simplistic to blame the failure of FED simply on external factors.

While recognizing the importance of the external challenges that contributed to the demise of FED,

as previous research highlights (Alzola et al. 2015; Errasti et al. 2016; Arando and Bengoa, 2018),

our paper shows that internal factors linked to the cooperative’s governance system and culture

influenced key failed strategic decisions and reduced the capability of the firm to reverse the decline

caused by external factors.

The research shows that democratic governing bodies can slow down or indefinitely postpone

painful decisions concerning the closure of factories and units that lose money but employ worker

owners. Painful measures that could have saved part of the firm weren’t taken or even proposed by

management to the General Assembly, since managers knew in advance that the worker owners

would vote them down.

This research also contributes to the literature by allowing a better understanding of how

organisational factors, such as organisational size and internationalisation through the takeover of

foreign subsidiaries pose challenges for the cooperative model of democratic governance.

Participants in the study believed that the level of direct democracy at FED is ill-suited to large

multinational cooperatives. The application of the one- member -one vote principle in massive

General Assemblies, with thousands of cooperative members that have to vote on complex strategic

decisions they do not fully understand, is questioned by most of the interviewees. Given that many

other Mondragon cooperatives are economically successful and some of them are also growing with

over 4,000 working members, this growth may also be the seed of future governance problems like

those found in FED. In fact, some interviewees highlight that similar conflictual and unproductive

General Assemblies and subsequent mass resignations of Governing Councils are also taking place

in other large Mondragon cooperatives, and they suggest large cooperatives should limit the power

of General Assemblies and move to a stronger form of representative democracy.

In a largely conceptual paper Sundaramurthy and Lewis (2003) draw on both agency theory and

stewardship theory to highlight an important paradox that boards face, namely that they need to both

control and support management. They argue that if boards focus too strongly on either of these roles

at the expense of the other it can lead to organisational problems. They propose that if boards are too

critical and unsupportive of managers they may get trapped into defensive spirals of behaviour,

which lead to processes of organisational decline. The case of FED provides evidence to support this

proposal. In this destructive spiral, FED’s Governing Council, heavily influenced by the Social

Council, was very critical of management proposals and fired the CEO in 2006; afterwards other

managers resigned and one year later there was an “en masse” resignation of the entire Governing

Council. This destructive spiral generated fear among subsequent managers that then tried to

maintain social peace by keeping proposals that might be opposed by worker members off the

agenda that lead to a 'reverse dominance hierarchy' (Basterretxea et al., 2019) and contributed to

FED’s demise. Nevertheless, some interviewees felt that a 'reverse dominance hierarchy' is part of

the raison d’etre of the cooperative model itself. Thus, the challenge is how to make this dominance

and the voice of the members in the Governing Council and General Assembly work more

effectively to supervise and guide managers. Some interviewees highlighted the example of ULMA,

that has grown through spin-offs and creating new cooperatives, each of a size that can make

democratic governance easier. A recent paper (Bretos et al. 2019) also offers interesting examples

from Fagor Arrasate and Fagor Ederlan, that have achieved the involvement of members at all levels

in the discussion and elaboration of strategic plans through several mini councils.

Our study also contributes to the scholarly literature when cooperative membership is restricted to

certain groups. In the case of FED, membership was not offered to the foreign subsidiaries the co-

operative took over. In addition, the one-member one-vote principle generated a General Assembly

and Governing Council composed mainly of industrial workers and technicians from FED’s Basque

factories. As a result, the interests of other key functional departments, such as marketing, and

foreign subsidiaries were either under-represented or not represented at all. Interviewees believed

this led to the downsizing of uncompetitive domestic plants being postponed and to a progressive

loss of competitiveness.

Another key lesson from the experience of FED relates to the competency of worker board members

to understand and act on the information they are presented with in large complex cooperatives.

Giving all the information is not the solution, if cooperative members can not understand it. Indeed,

it can create apathy and the rubber stamping of management proposals, unless workers feel their

direct interests are threatened, when it may lead to greater involvement and conflict. According to

our informants, thinking that training for business literacy and efforts to improve communication in

simpler formats can equip worker board members to address complex economic and strategic

problems facing multinationals like FED is naive.

The failure of FED made many other Mondragon cooperatives think that this competency gap can

not be filled by training alone. Thus, a growing number of voices are asking for the

professionalization of Governing Councils. While the nomination of board members based on

meritocracy limits some of the governance problems of cooperatives, it also generates Governing

Councils that do not reflect the plurality of interests of the members from different backgrounds.

Professionalising totally the Governing Councils, as informants have told us that some Mondragon

cooperatives are doing, is likely to mean that expertise is acquired at the expense of representation of

certain groups of workers.

A potential solution to this governance problem as suggested by some of managers interviewed is to

include independent board members on the Governing Councils. The appointment of independent

directors has been possible since the approval of the Basque Cooperatives Act in 1993. However,

FED and most of the Mondragon cooperatives have not made use of this opportunity. One possible

reason is that bringing in expert independent directors on to the board is costly, and Mondragon

cooperatives’ practice of not paying the members of the Governing Council for their role makes it

difficult to attract professionals who could play this role. Nevertheless, as the failure of FED

highlights, having poor Governing Councils can be far more costly if the cooperative fails.

As a result of FED's failure, the Basque government is drafting a new cooperative law (Gobierno

Vasco, 2018) that, among other things, proposes to professionalise the governing councils and

encourage the use of independent members. The draft bill increases the maximum percentage of

independent members from one quarter to one third of the governing council. In order to make this

position attractive, the draft bill contemplates payment for independent board members, which is

proportionate to the cooperative's importance, its current economic situation, and, above all, the

skills and experience that the independent board members bring.

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Figure 1. Firms belonging to the Fagor Electrodomésticos Group in 2012 Ownership%

Source: Internal documentation

Fagor Electrodomésticos

S.Coop

Fagor France SA

Fagor S. Coop.

Fagor

Hometek

Coop.

Ibai S. Coop

Geyser Gastech, SA

Meridional SAT, SL

Lidersat, SA

Naparsat, SL

Galisat, SL

Extra

Electromenager SA

Morocco

Fagor Mastercook, SA

(Poland)

Fagor Ireland Ltd

FagorBrandt SAS

(Brandt Ind. SAS)

Ascorp, SA

Fagor

America SA de CV

Mexico

Fagor Confort UK

Fagor Lusitania

Electr. LDA

Fagor America

Inc ( USA)

Fagor Elektro

SRO( R. Ch.)

Fagor Slovensko

SRO ( 23-3

06)

Fagor Hungaria

K. Kft

Fagor Benelux

bV ioHolland

Fagor Home App.

( Thailand) Co. Ltd

Fagor Hausgerate

Gmbh( Germany)

Fagor Home App.

(M) SDN BDH Malasia

Fagor Trade Shangai

Co Ltd (China)

49,65%

79,85%

60%

10%

63%

99%

97,55%

50%

100%

60%

100%

88,65%

99,99%

30%

100%

49%

100%

99%

100%

80%

30%

Grumal, SL

100%

Agora SAS

,5%

Suminist Electr

Penins, SA

Brandt Italia SPA

De Dietrich Kitchen

Appliances Ltd UK

Brandt Suisse SA

Brandt Asia PTE Ltd

Singapore

Br. Nordic A/S

Denmark

Br. Overseas Srl

Italy

100%

Proiek Habitat

& Equipment, SA

Fagor Electroménager

(France).

Brandt Cust. Serv

S.A.S.

Brandt Appliances

S.A.S.

Brandt SNC

100%

Brandt Middle

East FZE Dubai

100%

Rotartica SA

Lidersat madrid

2008 SL

51%

Polar

IndustriesSRL

(

Russia

)

50%

25%

(EBRD)

45%

De Dietrich

Electrodomestici

Italia, S.p.A.

100%

LLC Polar Industries

(Rusia)

50%

Br. Polska

SP ZOO

HWRC Holdings

BBV Holland

ElcoBrandt

Israel Ltd

100%

Shangai Minidomesticos

Cookware

Ltd(China)

30%

Commercial

Production

After Sales

Holding

Services

Brandts Property

Without Activity

In Liquidation

SITL

10%

Edesa S. Coop

of the Creative Commons Attribution 4.0 International License (CC BY NC ND). https://creativecommons.org/licenses/by/4.0/ Factors Affecting the Sustainability of Agricultural Cooperatives in Namibia: A Case Study of Onghalulu Farmers' Cooperative, Ohangwena Region, Namibia

Article

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Employee-owned firms and Support Organizations: Are we there yet?

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The challenges faced by cooperative Human Resources (HR) in the era of Society 5.0 are becoming increasingly complex because they require the integration of digital technology with human needs, forcing cooperatives to not only focus on technological progress alone but also on developing their human resources. This research aims to understand in-depth and provide solutions to the challenges faced by cooperative HR. This study uses a qualitative approach with a systematic literature review method and is searched comprehensively using relevant keywords in searches through various online databases. The literature selection process was carried out by considering the reputation of the journal and the recency of the publication (last 5 years) and analyzed in depth using the content analysis method. The conclusion from the research findings is that the challenges for cooperative human resources in the era of society 5.0 are: adaptation to digital technology 5.0 era, cultural transformation, development of new skills, retaining members, collaboration and partnerships the 5.0 era

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Credit unions in Latin America play an important role in the financial system, making a significant contribution to the achievement of the Sustainable Development Goals (SDGs) through their focus on financial inclusion, sustainability, and economic resilience. Assessing the social responsibility of these cooperatives ensures ethical, sustainable operations that benefit the population. Unlike traditional financial institutions, cooperatives are based on principles focused on mutual benefit, democratic participation, and responsibility toward their members and the community. This critical literature review, conducted through scientific databases, synthesizes findings on social responsibility in credit unions. The financial system is relevant for global economic stability and growth, comprising institutions like credit unions that facilitate capital flow. It operates through financial instruments, intermediaries, and markets, ensuring efficient resource allocation and risk management. Effective financial management involves planning, organizing, directing, and controlling resources to achieve stability and growth, integrating social responsibility. Credit unions in Latin America highlight cooperative principles, emphasizing member service, community development, and sustainable practices over profit maximization, thereby fostering economic inclusion and ethical business practices. In conclusion, credit unions provide affordable financial services while promoting values of solidarity and equity. However, as entities directly linked to communities, it is essential for them to monitor their actions in terms of social responsibility. This is important to measure and ensure their impact on society and its context. Finally, future research should focus on balancing economic viability with social responsibility, exploring innovative models, governance frameworks, and technological impacts.

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The study focuses on assessing the financial management practices and accounting mechanisms in agricultural cooperatives in Tulsipur Sub-Metropolitan, Dang District, Nepal with a focus on understanding their implications for financial performance and organizational effectiveness. The sample size of total cooperatives (n = 46) was divided into Savings and Credit Cooperatives (n = 18) and Multipurpose Cooperatives (n = 28), respectively, with a total number of respondents (n = 138) categorized into managing directors, employees, and general members. Using a mixed-methods approach that combines quantitative analysis of financial data with qualitative insights gathered through interviews and surveys, the study emphasizes the importance of modern financial practices, improved reporting mechanisms, and relevant staff training for long-term sustainability. Recommendations include the integration of criteria and evaluation tools to assess cooperative performance, with Hamro Pahunch Multipurpose Cooperative identified as a high performer. Emphasizing the need for robust financial management strategies to navigate the complexity of the agricultural sector, manage risks, and achieve sustainable development, the study notes frequent preparation of financial management reports on a monthly and annual basis, and predominantly annual accounting management. Most cooperatives are using computerized models to present financial positions, but face challenges such as lack of marketing infrastructure, cooperative skills, and technical support. Ultimately, the study advocates for educating policy makers, cooperative leaders, practitioners and stakeholders on the role of effective financial management and accounting in enhancing the resilience, expansion and socioeconomic impact of agricultural cooperatives, thereby fostering their long-term prosperity and viability as drivers of rural development and empowerment.

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This study aims to analyze the positive and significant influence on motivation, compensation, and work environment on employee performance. The research methodology used is quantitative method and uses multiple linear regression analysis with processing using Statistical Product and Service Solutions (SPSS) version 26 with data collection methods through questionnaires to 110 employees of the Koperasi Konsumen Mulia RSUD Majalaya. The results of this study indicate that there is an influence between Motivation (X1) and Employee Performance (Y) of 0.630 and has an influence of 63.0%. For the effect of the variable between Compensation (X2) and Employee Performance (Y) of 0.306 and has an effect of 30.6%. For the influence variable between the Work Environment (X3) and Employee Performance (Y) 0.441 and has an influence of 44.1%. The results showed that motivation, compensation, and work environment had a positive and significant impact on the employee performance of the Koperasi Konsumen Mulia RSUD Majalaya.

Critical issues of co-operative governance in large co-operatives

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Anu Puusa

Sortition and the democratic governance of cooperatives

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Simon Pek

Is there life after degeneration? The organizational life cycle of cooperatives under a ‘grow‐or‐die’ dichotomy

Article

Full-text available

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This article provides an in‐depth, longitudinal analysis combining real‐time and retrospective data on a set of Mondragon's industrial cooperatives that are organized as international groups. We examine the life cycle of these international cooperative groups, which is expected to evolve differently to that of small‐ and medium‐sized cooperatives that operate exclusively on a local scale. The article is theoretically informed by the cooperative life cycle theory, as well as by recent insights from the degeneration and regeneration theses. Our analysis yields an intricate picture of the evolution of cooperatives faced with a ‘grow‐or‐die’ dichotomy. On the one hand, our findings reject the highly simplistic and deterministic view of the degeneration thesis by demonstrating that these cooperatives can mobilize resources to revitalize cooperative values and practices. On the other, we find that regeneration may not occur in a consistent, sequential fashion as the previous literature suggests, but rather degenerative and regenerative tendencies can occur simultaneously, even leading to long‐lasting, unresolvable situations. In light of this, the article asks future research to draw on power‐aware and politically informed approaches for further understanding of how cooperatives manage the tensions at each organizational stage of their life cycle, and of which organizational actors benefit, and how, from reversing some degenerative tendencies while maintaining others intact.

Innovation in the governance of large co-operative businesses: the alarming case of UK Co-operative group

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Johnston Birchall

The Governance of Large Co-operative Businesses

Technical Report

Full-text available

Mar 2017

Johnston Birchall

This is the second edition of a report written for Co-operatives UK. It was commissioned because of the difficulties experienced by the Co-operative Group in 2014, which led to questions about whether large co-operatives can successfully be governed. The first edition analysed the governance of the world's 60 largest co-ops and found that - with one or two exceptions - their governance was sound. It also provided some new conceptual tools for analysing and redesigning their governance. However, it failed to provide a systematic typology of governance types; the sheer variety was too confusing. I carried out the same research again two years later, updating my findings and - by simplifying the language used by co-ops to describe their own governance - managed to provide a comprehensive typology.

Can employee ownership and human resource management policies clash in worker cooperatives? Lessons from a defunct cooperative

Article

Full-text available

Feb 2019
HUM RESOUR MANAGE-US

The article analyzes the interaction between employee ownership, HRM policies and practices, and HRM outcomes in what was the world's biggest industrial worker cooperative for decades, and now defunct, Fagor Electrodomésticos. Using longitudinal internal data and detailed interviews with key stakeholders, this paper sheds light on how employee ownership conditioned HRM policies. HRM outcomes—such as job satisfaction and absenteeism—are also analyzed over a long period of time. Chronic nepotism when recruiting new members, failures in the training policy, impoverished and Taylorist working systems, and reverse dominance hierarchies are analyzed as factors that increased free riding and caused low satisfaction and the disengagement of working members. This case study contributes to the literature on HRM and worker cooperatives as it provides some insights that are rarely found in that literature. It also provides guidance to worker cooperatives about increasing the fit between employee ownership and HRM policies and outcomes.

Introduction: The Corporate Governance ProblemCompeting Diagnoses And Solutions

Chapter

Jul 1997

There is little doubt that corporate governance has become one of the key issues for students of business and management in the 1990s. The text is the first to draw together the various strands of the debate from economics, finance, and accounting perspectives, and from an international angle that includes discussion of the issues as they relate to governance in the UK, USA, Germany, Japan and Eastern Europe. The editors identify four main approaches to Corporate Governance. These approaches can be divided into four models: The Principle-Agent or Finance Model; The Myopic-market Model (short-termism); The Abuse of Executive Power; and The Stakeholder Model. Topics covered include: the role of institutional investors the corporate board the market for corporate control management buyouts and venture capital regulation and auditing governance in the public sector This will be an essential purchase for anyone studying corporate governance whether on an undergraduate degree or MBA.

Corporate Governance: Economic, Management, and Financial Issues

Article

Jul 1997

Values at Work: Employee Participation Meets Market Pressure at Mondragón

Book

Dec 2019

George Cheney

Inter-Cooperation Mechanisms in Mondragon: Managing the Crisis of Fagor ElectrodomÉsticos

Chapter

May 2018

The closure of Fagor Electrodomésticos in October 2013, the most iconic cooperative in the Mondragon Group, not only cast doubt on the economic and social management of the cooperative itself but also called into question the very viability of the overall cooperative model. In addition to describing the evolution of this cooperative in its last years in business, this chapter offers a comprehensive review of the mechanisms of inter-cooperation in the Mondragon Group and the way in which they were applied in the crisis at Fagor Electrodomésticos. The methodology applied is a qualitative research methodology mainly based on semi-structured interviews. The main conclusion of the chapter is that the closure of the cooperative was largely caused by market conditions. The chapter also highlights the validity of the mechanisms of inter-cooperation applied in managing employment which contributed to a rapid resumption of the employment situation of surplus personnel from Fagor Electrodomésticos. The main contribution of this chapter comprises a detailed description of the methods used by the Mondragon Group to manage employment adjustment at the time of closure of its largest industrial cooperative during the recent general economic crisis (2008–2014), and thus avoid large-scale unemployment, its concommitant problems, and deeper deterioration of social capital in the Mondragon area. Further research is needed to compare this process with other international experiences based on cooperation.

Mondragon’s amorphous network structure

Article