Mondragon cooperatives use capital accounts

Worker cooperatives are worker-owned businesses. The left likes them for two main reasons. First, workers capture the profits the business makes, not separate owners. This arrangement therefore eliminates exploitation in the Marxist sense of the word. Second, workers control the business, not separate owners. This arrangement therefore reduces alienation, at least the part of alienation that pertains to having a boss dictate to workers.

I have always been curious about how such a firm can actually manage the worker ownership part. It is easy to imagine a group of people starting a business that they are the worker-owners of. But how do you handle the hiring and departure of workers from that point? When you leave, can you sell your part of the business? And if so, to whom? Presumably not to an external buyer, as that would make the business no longer purely worker-owned. When you hire someone, do they immediately become equal owner, which would cause all of the prior owners to have a smaller equity share in the business?

As there are actually-existing cooperatives in the world, obviously this specific management question has been dealt with. In the US, Employee Stock Ownership Plans are somewhat popular and have legally established mechanisms for dealing with this. But ESOPs are not really full-fledged cooperatives: they seem to function much more like an employee benefit plan than they do worker-ownership.

Hoping to answer this question, and many others (which I may write about later), I started reading Making Mondragon a few days ago. The way Mondragon handles this ownership issue is with individual capital accounts.

Neither members nor outsiders own stock in any Mondragon cooperative. Rather a cooperative is financed by members’ contributions and entry fees at level specified by the governing council [elected management board] and approved by the members. It is as if members are lending money to the firm. Each member thereby has a capital account with the firm in his or her name. Members’ shares of profits are put into their accounts each year, and interest on their capital accounts is paid to the members semi-annually in cash.
Members share in the remaining profits in proportion to hours worked and pay level. […] From 1966 to the present, all shares in profits have gone into members’ capital accounts.
Those unfamiliar with accounting terminology might assume that a member’s capital account consists of money deposited for the member in a savings bank or credit union […]. On the contrary, capital accounts involve paper transactions between the members and the firm. Real money is, of course, involved because management is obligated to manage the cooperative with sufficient skill and prudence so that the firm can meet its financial obligations to members if they leave the firm or retire. In practice, however, the financial contributions of members are not segregated from other funds but are used for general business expenses.

So there are no equity owners in Mondragon cooperatives. When you begin at a cooperative, you start a capital account. In that capital account, you have your contributions and entry fees. The money in the capital account collects interest, which is paid out in cash. The profits that flow to you based on your hours worked and pay level is deposited into your capital account. So none of the profits actually flow to you like dividends; they are all retained by the firm in this capital account.

The capital account is not set aside somewhere. It is simply a figure on a piece of paper that you are entitled to when you leave or retire. When you do leave or retire, the cooperative pays out your capital account to you from its general funds (it has a reserve fund set aside as well).

Thus, your ownership share in the firm is whatever figure is in your capital account. You own that much of the cooperative’s capital basically. Regardless of the size of your capital account however, you only get one vote in the general assembly that ultimately controls the cooperative.

Like every other cooperative scheme I’ve seen, this worker-ownership scheme has risk diversification problems. To have a bunch of your “capital” invested in the same firm that you work in means that negative shocks to the firm have the ability to harm you twice, once as an employee and again as an owner. If the firm goes under altogether, you would lose both your job and your investment. Ouch.

A cooperative complex of Mondragon’s size could probably mitigate some of this individual risk by internally insuring members of each cooperative against these catastrophic possibilities. If one firm fails, it could use funds from the umbrella Mondragon entity to make sure its workers are paid out and such. I have not read anything yet in Making Mondragon to that effect, but I’d be surprised if they didn’t have some internal system that deals with cooperative failures and the impact they have on members’ capital accounts.