Corporate & Capitalist Transition & Transformation Models

Paper submitted by Michael Peck (Mondragon USA), Steve Dubb (The Democracy Collaborative, University of Maryland), and Rob Witherell (United Steelworkers Union) for the “Corporations in a Great Transition: Visions, Models, and Pathways for Transformation” event hosted by the Tellus Institute & MIT Sloan School of Management, in Boston on October 31st & November 1st, 2013.

Capitalism at a Crossroads

Although the theme of this roundtable is “Corporations in a Great Transition,” the authors would argue that corporations, especially those in the financial sector, mostly have not transitioned at all. Instead, the increasing wealth inequality and diminishing social mobility experienced by the United States reflects a capitalist system protecting shareholder-centric relics of past century technology and socioeconomic realities rather than the empowered stakeholder movements we see and in which we participate. In this anachronistic context, shareholder value is measured more on perception and popularity than on actual long-term performance and real wealth creation. Meanwhile, share ownership for the vast majority of people means little more than legalized gambling with an account balance.

• Case in point: Apple’s market capitalization recently increased by $10 billion overnight simply because of a report the CEO had dinner with a prominent investor.

Alarmingly, the traditional capitalism concept of building value over the sustainable long term has been tossed aside and replaced with maximizing short term profits at the great expense of anything sustainable, starting with the basic right of people to “life, liberty, and the pursuit of happiness.”

• Case in point: A major pharmaceutical company recently announced it would lay off thousands of its employees and abandon a number of research and development projects to focus on higher profit margin drugs because their profit margin wasn’t perceived to be high enough.
• Case in point: Vulture capital firms scoop up undervalued, but profitable companies either to doctor their income statements so the acquired business can be resold at a higher price, or suck out as much cash from continuing operations as possible until the carcass of plant, property and equipment can be sold off for a few dollars more.

In these cases, the cure is visibly worse than the disease for those left disenfranchised and behind. Jobs are eliminated and shipped to whichever place can offer the lowest poverty wages for workers coupled with the least restrictions on safety and environmental conditions. This is because global labor arbitraging has become the predatory capitalist market mechanism instrument of choice. We have replaced “slavery based on race and color” with a new form of slavery based on lack of ownership, viable options and means.

This current paradigm simply cannot sustain itself, nor should it as mankind (observed by the French philosopher, Jean Jacques Rousseau in the 18^th century and now even more true in the 21^st century) “is born free yet everywhere finds itself in chains.” If indeed we are entering into a “Great Transition,” to what better quadrant should we transition? A more sustainable and just economy can be built by turning stakeholders into shareholders through multi-localization, equal share worker ownership and community equity. Specifically, the United Steelworker Union – Mondragon union-coop, hybrid model movement together with emerging community wealth building initiatives in addition to Mondragon’s “Multi-localization” concept presented to the London School of Economics in July 2012 (which motivated the awarding of the Financial Times’ “Boldness in Business” award to Mondragon in 2013) showcase examples leading to the creation of globally situated but domestically centric local living economies free from traditional, zero-sum-bounded outsourcing and off-shoring practices.

The “Made In America” Problem

The U.S. currently ranks below Zimbabwe in income equality and social mobility attainment. What’s left of America’s rising working and beleaguered middle class faces a never ending cycle of institutional and social compact betrayals by every Congressional vote against food stamps, every daily Wall Street banking scandal and every public debate on whether to raise the minimum wage. Meanwhile, golden parachutes multiply for failed executives leading failed institutions and preferred carried interest provisions for hedge fund millionaires and billionaires who pay less federal taxes than their entry level staff resist all reform efforts to date. The last decade has witnessed the U.S. taxpayer bailouts of Wall Street banks, hedge funds and giant insurance companies to the tune of $1 trillion. The “bait and switch entitlement” economy, where the floor is a tenuous lifeline out of poverty and the roof is shingled with permanent crony capitalism welfare, has resulted in hugely unjustified wealth transfer payments from those with not enough to those who already have too much.

Paul Krugman writes that the top one percent, America’s Oligarchic Class, believes in “redistribution from the 99 percent to people like them. This isn’t libertarianism; it’s a demand for special treatment. It’s not Ayn Rand; it’s ancien régime… The thing is, by and large, the wealthy have gotten their wish. Wall Street was bailed out, while workers and homeowners weren’t. Our so-called recovery has done nothing much for ordinary workers, but incomes at the top have soared, with almost all the gains from 2009 to 2012 going to the top 1 percent, and almost a third going to the top 0.01 percent — that is, people with incomes over $10 million.”

• Last year, the typical American household made $51,017, roughly the same as the typical household made a quarter of a century ago. The United States, land of equal opportunity, is not progressing as a peoples’ democracy but rather regressing into sharply divided ghettoes of over-the-top wealth versus suffocating insufficiency.

In this new abnormality, the real wages of factory floor workers are less than what they were in the early 1970s, while the already wealthy top ten percent of Americans accumulate and aggregate more than half of the income our country collectively produces. The 99%, on an actuarial basis, experience lives that are shorter, food that is less nourishing, local pollution levels that are higher, increasingly rent rather than own, depend more and more on food stamps and social security, and are increasingly underrepresented in the post “Citizens United” elections process where money has been turned loose to buy votes.

The Community Wealth Antidote

As resistance has grown to the widening gulf between the top one percent and the rest of the population, more Americans have looked to community wealth building as an alternative. The central idea is simple: people join together through some form of public, community or employee-owned business to meet local needs and thereby regain a measure of local economic democracy and control. The range of efforts is vast. Community wealth building institutions include community development corporations, community development financial institutions, social enterprises, community land trusts, employee-owned enterprises and cooperatives. All pool capital in ways that create living wage jobs, build wealth and anchor jobs in communities.

These efforts also provide new approaches to challenging corporate power—a strategy that changes who owns, controls and benefits from the underlying economic wealth of the system. It displaces private capital by developing community ownership of business. In other words, profits flow to workers, consumers or the community—rather than outside investors. What we have learned as a society is that the majority of waste is almost always at the top.

Mondragon Multinational, Multi-localization

As a global example, the Mondragon Group (“Humanity At Work” through Cooperation, Participation, Social Responsibility and Innovation) with 81,000 worker-owners is the world’s largest worker-owned industrial cooperative but also the top Basque region industrial group, ranked tenth in Spain with a presence in 70 countries, and winner of the 2013 Financial Times “Boldness in Business” award. Mondragon’s more than 57-year-old mission is to generate wealth for society through business development and job creation under the “one worker, one vote” cooperative framework where labor is sovereign and capital, while essential, is subordinate to sustainable job creation.

Undergirding the Mondragon models are a number of core principles:

• Worker empowerment through “one worker, one vote” share ownership based on the Mondragon principles: Open Admission, Democratic Organization, Sovereignty of Labor, Instrumental and Subordinate Nature of Capital, Participation in Management, Wage Solidarity, Inter-Cooperation, Social Transformation, Universality, Education
• Proving successful company and project examples demonstrating the Sovereignty of Labor and the Instrumental but Subordinate Nature of Capital
• Creating a Rising and Expanding Middle Class by Reorganizing Labor in ways that both empowers and rewards workers and produces more competitive business results

Mondragon Corporation’s group activities vary from the production of consumer and equipment goods, to the manufacture of industrial components, construction, research activities and financial services. All of these generate more than 70,000 jobs in Spain, and exceed 85,000 jobs globally.  Mondragon’s international presence has become stronger with the opening and launching of new affiliated companies abroad. This internationalization process, what Mondragon calls, “multi-location,” seeks to primarily avoid productive displacement by lower labor cost command and control economies, which would imply the destruction of domestic jobs in the parent cooperative companies. Following its own principal that “Labor is Sovereign,” Mondragon’s decision to internationalize was motivated by the need to preserve local jobs, not outsource and off-shore them. As a result, Mondragon’s globalization metrics show a better outcome than the zero-sum devastation practiced by shareholder-based global labor arbitrageurs.

Metrics show that Mondragon “multi-localized” cooperatives reflect higher sales, higher salaries for domestic workers and create more domestic employment. As a result, Mondragon’s internationalizing or multi-location, worker-owner ecosystem emerges as a growth engine both in absolute and relative terms, assuming also an increase in workforce productivity. As a result, globalization through a “one worker, one vote” ownership system can serve as a strategic and efficient tool to optimize high cycle high stages, reduce costs in terms of production and generate employment during stagnating recession periods by diversifying production to the betterment of domestic workers, not the reverse.

U.S.:  Ownership Model Pathways Out of Poverty

In the U.S. alone, member-owned organizations account for $3 trillion in assets, $500 billion in revenue and more than one million jobs. There are more than 15,000 employee-owned companies throughout the United States, 11,000  of them with employee stock ownership plans, and almost 2,000 where the employees own the majority of the stock. America’s New Ownership Economy connects these corporate populations with the 350 million memberships that Americans hold in 29,000 cooperatives nationwide to provide heft and substance to the import and dimensions of building the Stakeholder America from the middle out. Companies with broad-based ownership are more stable than companies without broad-based ownership – the former produces less job losses than the latter, outperforming those with greater differences between executive versus employee compensation.

If a picture is still worth a thousand words, consider the following recent visual documentaries as proof of these principles:

• Shift Change: Putting Democracy to Work documentary showcases workers exercising a more productive sovereignty in worker-owned and cooperative businesses in the United States based on the acclaimed Mondragon model.
• “We the Owners” documentary by the metrics-conscious Foundation for Enterprise Development portrays three American companies practicing open book management, distributed employee ownership and high involvement cultures.
• PBS’ November 2010 “Fixing the Future,” is transcribed through the eyes of host David Brancaccio visiting communities across America deploying innovative approaches to create new economy jobs and rebuild local prosperity.

Another visual portrayal of the labor changes affecting America’s cities can be found in the “5 Cities in a Neoliberal Takeover; 5 Cities in a Progressive Boom” from In These Times. Chicago, San Francisco, Philadelphia, Atlanta and Baltimore are singled out as neoliberal takeovers. The series describes five other “cities on the verge of a progressive upswing:” Jackson, Mississippi; Cleveland; San Jose, California; St. Louis and, again, Chicago. In These Times also featured stories about New Haven, Connecticut and Richmond, California.

In September 2013 alone, the following worker-owner news was being made:

• Mondragon and National Cooperative Bank Partner in Growing Domestic Worker-Owned Cooperatives
• Loan Helps Our Harvest Union Co-op Grow Local, Sustainable Jobs in Cincinnati
• The Reading (Penn.) Revolution

Viewed together, these new economy murals represent an emerging “made in America” self-reliant upgrade to virtuous capitalist practices that are locally based, purposeful, profitable, working people-centric, planet-friendly and economically patriotic.

Nonprofit social enterprise is a community wealth building strategy through which nonprofits secure resources to meet their missions in the absence of adequate government support. In San Francisco, a group known as REDF (formerly the Roberts Enterprise Development Fund) has helped boost the business activity of 50 social enterprises that have employed 6,500 people and earned revenues of more than $115 million. Three-fourths (77 percent) of social enterprise employees interviewed two years later were still working. Average wages increased by nearly one-third (31 percent) and monthly incomes almost doubled (90 percent).

In Grayland, Washington, Coastal Community Action—a nonprofit agency that operates a range of housing, food, healthcare, and employment programs—has built a 6 MW wind farm consisting of four wind turbines. The wind farm, which sells energy to the electrical grid, generates enough power to satisfy the energy needs of more than 1,500 households. The nonprofit estimates that its ownership of the $14-million wind turbine project generates $720,000 in unrestricted income each year, enabling it to increase service delivery options, lessen its local dependence on outside funding and meet more of its community’s needs.

In Seattle, Pioneer Human Services, founded in 1963, offers drug- and alcohol-free housing, employment, job training, counseling and education to recovering alcoholics and drug addicts. It employs 1,000 people and finances 99 percent of its $70 million budget through fees for services and earnings generated in the manufacture, distribution and sale of products. Businesses include retail cafés, sheet metal fabrication, aerospace precision machining (it’s a contractor for Boeing), wholesale food distribution and contract packaging. Not only do these enterprises build community wealth and provide independent resources that finance social services, the businesses themselves are central to Pioneer’s mission of helping “people on the margins of society” stay out of prison and off the streets, enabling Pioneer to employ more than 700 men and women drawn from the ex-offender, homeless and drug-recovery populations it serves.

Domestically, community development corporations (CDCs), formed initially in the 1960s in a crucible of urban riots and rural neglect, now are community wealth builders across the United States. CDCs can be found in virtually every major city. A Massachusetts study found that between 2003 and 2011, Massachusetts-based CDCs created or preserved over 9,000 homes and 14,000 jobs, while supporting more than 8,000 businesses and 160,000 families, generating nearly $2 billion of economic activity. A 2010 study found that, over the previous two decades, CDCs produced more than 1.6 million units of affordable housing nationwide.

Community development financial institutions (CDFIs), first given federal recognition in the 1990s, aim to build wealth in low-income communities through providing financing where conventional lenders fear to tread. Even in the face of a weak economy, assets in community investing institutions more than doubled from $25.0 billion in 2007 to $61.4 billion in 2012.

Community land trusts provide still another powerful illustration of community wealth building. Beginning in the 1960s and 1970s, pioneers like Bob Swann in western Massachusetts and Charles Sherrod in Georgia struggled against huge odds to develop modest land trusts efforts, often also involving other concerns, like respect for environmentally sound land use practices and rural community development. Today hundreds exist; in Irvine, California, the city’s strategic plan calls for 5,000 units of housing to be developed using land trust strategies.

Trusts of this kind keep the ownership of land underlying housing in nonprofit or public ownership. Appreciation in land values is split via a formula between the homeowner and the trust, thereby avoiding gentrification. A study of a community land trust in Burlington, Vermont — the nation’s largest — also found that during its first two decades, 61.9 percent of residents who sold their land trust home after an average residency of six years were able to “step up” to traditional homeownership. Meanwhile the equity gain that the trust retains enables it to continue providing affordable housing to future generations. In a down market, community land trusts are even more important. Simply put, community land trusts keep people in their homes. A 2011 study found that at the end of 2010 land trust homeowners were 10 times less likely to be in foreclosure proceedings (0.46 percent of all units) than conventional homeowners (4.63 percent).

Employee ownership is another powerful community wealth building strategy. The National Center on Employee Ownership (NCEO) estimates that in 2009 there were 9,800 companies owned in whole or part by workers through their pension contributions through a form of ownership known as an employee stock ownership plan or ESOP. As of 2009, 10.3 million were employee-owners of companies owned in whole or part by ESOPs, with net assets of $869 billion. In other words, the average employee-owner has an ownership stake of over $84,000.

Employee ownership also has powerful economic stabilizing effects: between 2000 and 2008, while the number of manufacturing jobs fell 29 percent in the state of Ohio, employee-owned manufacturing jobs held steady, dropping only 1 percent. Nationally, in 2010, 12.1 percent of all workers—nearly one in eight—had faced a lay-off in the previous 12 months; by contrast, only 2.6 percent of workers who were employee-owners were laid off.

There are more benefits: employees at ESOP companies have, on average 2.5 times more retirement benefits than employees at comparable companies that are not employee owned.  Wages, depending on industry, are 5-12% more than jobs at comparable non-employee-owned companies. Productivity at employee-owned companies is also higher (this is why, of course, ESOP companies can provide higher wages and better benefits). On average, productivity increases by 4 to 5 percent in the year ahead an ESOP is adopted; over a ten-year period, ESOPs have 25 percent faster job growth than comparable non-ESOP companies.

Perhaps the most visible form of a community wealth building is the cooperative. More than 130 million Americans are currently members of a co-op or credit union. Because many Americans own shares in more than one co-op or credit union, the total number of co-op memberships in the United States exceeds 350 million. Overall, a 2009 University of Wisconsin study found that nearly 30,000 cooperatives in the U.S. account for more than $3 trillion in assets, $514 billion in total annual revenue, and provide 856,000 jobs.

Moving Forward

The evidence is irrefutable.  Worker-owner solutions:

• Reject oligarchic predatory capitalism in favor of stakeholder-centric, virtuous capitalism;
• Redefine self-reliant ownership economy from the bottom up and the middle out by creating equal ownership opportunities on a “one worker, one vote” basis
• Eclectically borrow and integrate best workplace, ownership, and operational execution practices into new “made in America” hybrid models ineluctably wedded to “place”, that is local living economies (LLEs).

Mondragon demonstrates a global entity rooted in local enterprise that is an exemplar of productivity, innovation, profitability and justice.  The USW-Mondragon union-coop model and the Cleveland model of worker-community hybrid ownership are two prominent examples that reflect core American values of self-reliance, community solidarity, and equal opportunity ownership principles and practices as working “Bill of Rights” components of a reinvigorated American dream.

The key to success is metrics – both in defined in principle and proven in practice. Only virtuous economy metrics will prove that the power of the “New  Economy” lies with democratically expanded ownership models demonstrating improved, self-reinforcing, customer satisfaction through higher accountability, productivity, and efficiency.  Shared common goals, principles and practices broaden the definition of value above and beyond the “bottom line” and into the peoples’ quadrant so that more live better lives through an enhanced concept of work as owners rather than commodities to be traded by those who would practice the 21^st century version of economic slavery because they believe they are entitled and empowered to do so.

• Demonstrating “Doing Well by Doing Good” performance metrics proving that: companies which stick to their core values are more sustainable and profitable over the long haul (Financial Times) and that companies with broad-based ownership are more stable than companies without broad-based ownership – the former produces less job losses than the latter, outperforming those with greater differences between executive compensation and rest of employees (Foundation for Enterprise Development & the Ohio Employee Ownership Center)
• Building hybrid worker-ownership models and nationwide networks illustrating those models through companies & projects.

As part of a transformational “Great Transition,” virtuous economy metrics that need to be tracked include: the number of jobs created, quality of jobs, additional social and economic impact through solidarity with surrounding communities, local living economy sustainability, individual worker ownership and participation, product and service competitiveness, cost per job created over number of jobs created, diversity and inclusivity, and the ability through union participation to offer the highest possible benefits per worker at the lowest possible cost resulting in high impact to worker-owners but low overhead burden

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Appendix: Worker-owner/union Coop Projects in the U.S.

To date, U.S. worker-owner, union coop projects can be found in various development stages in ten locations: Cincinnati, Pittsburgh, Buffalo, NYC-Bronx, Denver, Las Vegas, Reading/PA, Chicago; Los Angeles-Sacramento/CA; and Columbia-Charlotte/SC. Additionally, three worker-community hybrid cooperatives have opened to date in Cleveland, OH; with development efforts under way in Amarillo, Texas; Atlanta; and metropolitan Washington, DC.

Key union-coop model allied institutions to date:

• The Cincinnati Union Cooperative Initiative (CUCI)
• The United Steelworkers Union (USW) and other participating unions (SEIU, UFCW, Operating Engineers)
• The Ohio Employee Ownership Center (OEOC)
• The National Cooperative Bank (NCB)
• The City University of New York Law School (CUNY Law) Community Economic Development Clinic
• The California Council of Churches (CCC)
• Mondragon International USA
• The MIT Cooperative Laboratory (MIT CO-LAB) and the Bronx Cooperative Development Project (BCDI)
• The University of Maryland Democracy Collaborative
• The Pittsburgh Clean & Green Laundry Working Group
• The Heartland Capital Strategies Responsible Investing (RI) Forum
• The Blue-Green Apollo Alliance
• The Business Alliance of Local Living Economies (BALLE)
• The American Sustainable Business Council (ASBC)
• The Foundation for Enterprise Development (FED)

This article first appeared on Michael Peck’s original One Worker One Vote blog which has been moved and archived here.