In Search of Utopia

It was 5 March 2003 and I could feel the warm rays of the spring sun on my back. Six months into a study of corporate governance, I was standing on the steps of Fagor, a Mondragon co-operative, talking with Tim, Mikel, Harry and John (1) . Mikel, 30 years a teacher at Mondragon's management school, grew impatient.

"This is not paradise," said Mikel. "It is necessary to be self-critical."

His moment of irritation was triggered by John commenting on "happy workers".

"This is not Utopia," he continued. "Some people are happy, but some managers are not democratic. At Fagor, we have lower staff satisfaction than anywhere else."

Mondragon's approach to social enterprise is action-oriented and pragmatic. Culture talk is common but rhetoric regarding "core values" and "mission statements" is less prominent than concepts such as "equilibrio" and "solidarity". There is no complacency here. Democratic commitments are accompanied by realistic expectations of social conflict.

I found resonance with the views of Hugh Willmott that "freedom promises no certainty and no guarantee of anything. It causes therefore a lot of mental pain. In practice, it means constant exposure to ambivalence: that is, a situation with no decidable solution, with no foolproof choice, no unreflective knowledge of how to go on'. You can't have a nice democracy. All the dirt comes out". (2)

Mikel talked of the dirt. An executive group tried to take control of wage policy by linking executive pay to the labour market. As is the norm in Mondragon, the policy could not be imposed without the consent of the workforce:

"Normally there is about a 75% turnout, but this time everyone turned up and the discussion was angry and noisy. We debated from 5pm-11pm, and when the end came, 82% voted to keep the existing 6:1 ratio between the highest and lowest paid. The Governing Council tried to defend the proposal. A week later, they had to resign."

(Fieldnotes, March 6th 2003)

Following Fagor's example, all 150 co-operatives rejected the wage policy passed by its own parliament'. This ended its influence on the ground. The congress do not have powers to enforce. They can only suggest policy changes that are then accepted or rejected at grass-roots level. While Mondragon-style democracy is confrontational and full of ambiguities, the appearance of chaos is deceptive. The 45-year-old corporation has developed know-how that makes markets respond to democratic influence.

Upon our return, I engaged with Harry and John, two UK directors determined to further democratise their own successful enterprise. We then constructed proposals and governance principles for board-level discussion. Back in the UK, Harry and John's enthusiasm for employee democracy was constrained by the scepticism of other directors over democratic practices.

First to go was the idea of two elected councils (one for social issues, the other for economic strategy). Next to go was the power of elected representatives to veto executive managers' business plans and policy proposals. The elected Governing Council - supposedly the sovereign body - suddenly looked in danger of becoming a consultative body.

Councils in Mondragon are overwhelmingly dominated by blue and white-collar workers but John and Harry could not shake off their discomfort with the idea that non-managers could successfully run a business. Despite 144 successful examples, they focused questioning on the 145 th co-operative where there had been a stand-off with managers. This was taken up in discussion about how to avoid a "them and us" situation. John started to put forward arguments about electing "the right people" with rhetorical questions like "what is the danger of allowing just anyone to stand?" By the time board members engaged with middle managers, my concerns were growing.

The characterisation of democracy' in one management meeting made my mouth drop open and I could barely believe what I was hearing. Democracy is not just about voting, it is about social structures that encourage and support people as they try to influence debate and decision-making. Voting often inhibits this process, although it is ultimately the best way for people to declare the level of their support for a proposal. I was not sure whether John was trying to keep things simple or setting an agenda to keep everything under management control.

Next, executives proposed a two-year qualification period before an employee could stand for election. Then it was proposed that staff had to show commitment to "community" ideals by attending the company's 35-hour training course on culture. Lastly, it was proposed that employees be barred from standing if they had a disciplinary record in the previous two-years. When I pointed out how easily the disciplinary process could be abused, everyone looked at me in silence. I felt the ripple of tension that came from a realisation that these executives felt I was questioning their integrity. The moment passed, but my scepticism remained. It was fuelled not only by experience of management groups venting their collective frustrations to thwart individuals gaining popular support, but also by the comments of long-serving staff members.

Three people claimed the place was riddled with "management spies". Claims (and caution) about unfair treatment were noted in many settings. A high-earner claimed they shook with fear before meetings with directors. Clearly, concerns were not limited to low-paid or marginalised employees; educated people with years of experience expressed them also.

The "truth" was elusive. Senior executives were convinced the majority felt "appreciated, inspired and respected". Long-serving members, however, claimed "the vast majority were playing a game" to avoid the wrath of an executive group committed to forming a politburo.

Tensions surfaced in peculiar ways. Managers primary angst was a group of smokers they regarded as a "hot bed of discontent". They rearranged lunch tables, under the pretence of Health & Safety, to prevent them from talking to others during lunch breaks. The requirement to participate in workplace pranks, I joked at one point, ought to be written into contracts of employment. The line between humour and bullying was sometimes extremely thin.

Despite these concerns, a sense of anticipation gradually swept through the workforce that democratisation might also bring liberalisation. In February 2004, both employees and shareholders embarked on consultations over employee ownership and control. Harry exhorted them to "back themselves" and "buck the trend". In a flurry of rhetoric he asked "who rightly owns this company?" The audience, like the faithful at a political rally, broke spontaneously into applause.

The ship, once launched, did not sink. It sailed carefully to its destination and by October 2004, two new companies were formed. An Employee Trust took a majority stake in a new trading company. Employees elected a Governing Council. The remaining 49% of shares were offered to individual employees. Harry and John got compensation for years of commitment to developing the company. Board fears that sales and profitability might fall proved unfounded. By 2005, the company was listed as one of the fastest-growing companies in the UK.

All of this poses some interesting questions for the social enterprise movement. During the CIC consultations, DTI documents repeatedly emphasised non-profit objectives, and the sector's dependance on philanthropic sources of capital. Employee-ownership, distributing the proceeds of capital growth, and sharing surplus, were regarded with suspicion. And yet, at Mondragon, these principles are embraced. The companies are still growing. They are profitable and have institutionalised their surplus-sharing model to support integration with the public and private sector. They also channel 1000% more than profitable UK corporations into educational and social projects 3 .

Harry's goal was similar. He wanted the company to which his friends and family had devoted their lives to entrench "community" control. He wanted organisation members to continue benefiting from their own wealth-creating activities. His concept of "community" was rooted in the idea that benefits should be repatriated to the individuals and families who contributed to the social and economic health of their organisation. The most important qualification for any future member (and governor) was a willingness to invest labour and intellectual energies, not just capital.

My own contribution was to paint a picture of the creative and productive tensions that can exist in cultures attempting to develop democracy. As Michel's once argued, the main obstacle is the inability of organisation leaders to establish structures capable of managing sustained conflict. The first step, therefore, is to see conflict as normal and potentially healthy. The response is to develop conflict resolution processes that channel emotional energy into productive debate.

Mondragon achieves this by prioritising, both legally and culturally, the idea that an organisation's executive is accountable to the organisation's workforce and stakeholders. By way of example, we visited the university where students, teaching and support staff each had one third control in governance. At the supermarket chain (unlike The Co-op in the UK), customers and employees shared governance rights in a 50/50 split. The lesson from Mondragon is that people working in the organisation are frequently more focused on long-term planning than other stakeholder groups.

Such an enlightened attitude is still rare in the UK. Government and management thinking is still wedded to a 300-year-old model that presumes external governors and the governed should be separate groups of people. Employees (and volunteers) are seen as accountable to those who supervise their activities, while two-way accountability is rarely permitted or legally sanctioned.

After 13 years as a practitioner and 6 years of study, I can assert that co-operative and democratic cultures are not Utopian. Engaging in debate takes us out of our cosy safe world into one that is emotional, sometimes intimidating, and on occasions awash with personal attacks by those who find it difficult to lose an argument. The outcome for those who can survive it, however, is an experience that is vibrant, inclusive and deeply intimate. Over time, our fear of conflict dissipates to be replaced by reflection and confidence that avoids complacency. Done well, it delivers the social and economic goods.

The 2005 Community Interest Company legislation in the UK was less radical than I expected. My personal disappointment is that it failed to overturn the 300-year old assumption that governance is something that "governors" do to, or for, the "governed". It is, therefore, time to switch playing fields. Co-operative law may still enable the UK to catch up with its continental partners. Those committed to co-operative entrepreneurship may yet free themselves from the constraints of company and employment law.

We have the advantage of hindsight. Democratically organised, profit-making, surplus-sharing co-operatives can play an important part in establishing the financial capital and management know-how to sustain the social enterprise movement. To help it on its way, however, will take more than tinkering with company law. We need a new body of law so that entrepreneurs engaged in co-operative practices can emerge from the shadow of the conflict between capital and labour.

Copyright 2005, Rory Ridley-Duff. First published on the Social Enterprise Magazine web-site (SEM Extra).

Footnotes

(1) For ethical and legal reasons, Tim, John and Harry are pseudonyms. Mikel Lezamiz is the real name of the person who hosted our field trip to Mondragon.

(2) Willmott, H. (1993), "Strength is ignorance; slavery is freedom: managing culture in modern organisations", Journal of Management Studies, 30(4): 515-552.

(3) 10% of profits were set aside for investment in social and educational projects. In the UK, 1% of profits are invested by UK companies into the social economy.

Dr Rory Ridley-Duff was a director of the workers' co-operative Computercraft Ltd for over ten years. In 2001 he published Silent Revolution: Creating and Managing Social Enterprises, a project that led to three-years' funding to investigate alternative corporate governance models. He is now Senior Lecturer in Human Resources and Organisation Behaviour at Sheffield Hallam University. In 2007, he authored a ground-breaking new book called Emotion, Seduction and Intimacy: Alternative Perspectives on Organisation Behaviour that rethinks the prevailing wisdoms on gender relations.  He recently secured a contract to co-author a new book called Understanding Social Enterprise: Theory and Practice for Sage Publications.