Abstract
The cyclical nature of capitalism reflected in the current economic crises encourages a review of the economic downturn of the 1970s and 1980s in Europe where workers engaged in sit-ins, work-ins and worker buyouts to save their jobs. Hundreds were successful and thousands of jobs were saved. Spain was at the forefront of this strategy and introduced legislation in 1986 to enshrine the worker self-managed company, Sociedades Laborales, as a policy for corporate restructuring. This article reports on the research in Spain conducted into company failure due to insolvency and the subsequent rescue by an employee-centred equity buyout. Seven firms in the metals industry are examined where workers rescued insolvent factories using the Sociedades Laborales democratic model. The research shows that sustainable democratic corporate governance was possible based on worker self-management and this was achieved by the workers making choices to overcome the conundrum of balancing democratic governance and market efficiency.
Introduction
For employees of a financially distressed company, there is seldom a more emotionally wrenching issue than the treatment of their wage and benefit claims in a restructuring process. Employees, who are the lifeblood of the enterprise, too often find that they are treated as expendable and their pension or retirement savings may have evaporated. (INSOL, 2005)
The point of instability of capitalism, the collapse of the conventional firm due to insolvency, offers possibilities for the transformation of the failed firm into a worker self-managed firm. It can be argued that insolvency is capitalism’s moral and ethical conundrum. This moment where ‘the creative winds of destruction’ are blowing, a term coined by Joseph Schumpeter (1934), has for a long time been seen as a process by which capital is released from dying firms to new ones and weak firms are weeded out (Hart and Milstein, 1999). However this disequilibrium has also been seen as holding the possibility of a strategy to transform capitalism which was first raised by Frederick Engels in 1884 when he stated that this was a ‘way [to] introduce the gradual transition of the whole of production to co-operative ownership’ (Mellor et al., 1988: 72). This article focuses on the period of the 1970s and 1980s, when hundreds of companies across Europe were rescued from closure by their workers (Paton, 1989). Specifically, seven case studies in the metals industry in Spain, around Madrid and in the Basque Country, which originated between 1983 and 1997, are evaluated.
This article builds on the work of a number of scholars to present an industrial relations model of the firm which gives us a greater understanding of how the worker self-managed firm forms, succeeds and fails. It examines insolvency and the strategy of a worker buyout as a means of adding to our understanding of how the labour-managed firm (LMF) works from a theoretical and empirical perspective. It does this by examining the literature concerning the nature of the theoretical model which underpins the LMF – one that would explain its emergence and scarcity, its success and failure – and by presenting results on worker buyouts of insolvent companies in Spain.
The interest in insolvency has emerged again in the mainstream media, as both a proactive strategy and an opportunity to extend worker ownership. The film The Take (2004) 1 documented the 200 firms in Argentina taken over by their workers. An article in Le Monde diplomatique (14 December 2007) featured worker buyouts across Europe. This has given the phenomenon a high profile. The International Association of Artisanal, and Service Producers Cooperatives (member of the International Cooperative Alliance) declared that worker buyouts were one of the fastest areas for growth for worker cooperatives and federations had been set up in a number of countries and there was also a call for an Agency for the Transmission of Businesses to their Workers by the President of the French Worker Cooperative Association (International Cooperative Digest, 2007: 7). Some insolvency practitioners saw it as ‘thought leadership’ (director, Deloitte and Touche, 2005, personal communication). A new dimension was added by well-established cooperatives in Italy and Spain and ESOP (employee share ownership plans) firms in the USA in purchasing insolvent businesses to strategically consolidate and expand their market and protect jobs. However, there are also those who see this as a different, more difficult period as now some whole sectors of industry are threatened by uncompetitive cost structures due to globalization, and the worker buyout no longer has the unqualified support of the labour movement. The European Commission declared, controversially, in 1985, that the state-supported worker buyout of insolvent companies violates European Competition Law (Miguel Millana. president of the Spanish Employee Owned Companies Association, 2005, personal communication).
Insolvency, however, offers a rich area for a new paradigm of the labour-owned firm to be explored. Importantly, McCain (1999: 176) argues that an improvement in Pareto efficiency, namely some individuals becoming better off while no individuals are worse off, comes about by converting a capitalist enterprise to a cooperative; by workers acting against their individual rational self-interest and acting in a collectively maximizing way and thereby leveraging their firm-specific human capital. McCain (1999) however argues that the institutions of capitalism do not allow for this model to emerge and that public policy to encourage this phenomenon may be justified on economic efficiency grounds as well as equity.
The article, first, examines the Sociedades Laborales programme of worker-owned firms in Spain and especially examines the sustainability of worker self-management, which is argued to be the key variable in affecting performance. It does this through research on seven worker buyouts in the metals industry. The article concludes by commenting on the appropriateness of the strategy of the worker buyout of insolvent firms as a method of preserving jobs.
Second, the article is part of a larger research project which sets out to add to the work of economists by describing an industrial relations model of the LMF which takes its point of departure from the critical theory perspective that acknowledges class-based politics while reflecting on ‘the larger links between conflict, worker mobilisation and class politics’ (Giles and Murray, 1998: 90). Importantly, the article also draws on a labour process approach by taking an interest in how ‘the contradictory dynamics of conflict, accommodation and cooperation in the production relationship are organised and reorganised in the workplace’ (Giles and Murray, 1998: 92). Finally, this research continues an emerging industrial relations construct by drawing on historical and cross-national comparison through which to analyse the emergence of modes of LMF operation.
A review of the theoretical models of the labour-managed firm
As a way of organizing this debate I have grouped the key contributors into four schools of thought which reflect the evolving nature of our understanding of the worker-owned firm in relation to praxis: the Sceptics or those adopting a negative position; and then the Revisionists who challenged these theories re-examining the evidence, as well as being informed by finding new examples of worker democracy. Two other schools of thought which have informed this debate emerged: an ‘external’ favourable conjectures approach or contextual approach, which argued that the worker-owned firms’ presence reflected and was embedded in the nature of its historical, political, social and economic circumstances; and finally an ‘internal’ or evolutionary approach arguing for the ‘reformulation of the notion of the firm along more evolutionary lines’ (Lichtenstein, 1986: 52), and that the success of the firm depended on the correct design of its internal characteristics. This approach resonates with that taken by Mygind (1992) in his article ‘The choice of ownership structure’.
The Sceptics
The Sceptics’ arguments and fierce opposition to the LMF extended over a long period of time and by 1960 it could be said that a conclusive argument had been made that the LMF was not a viable model to carry the aspiration for the transformation of capitalism. The basis of the non-dialectical arguments of Marx adopted by early Marxists, and those of Lenin, Luxemburg and Mandel (Eagan, 1990), the Webbs (Webb and Webb, 1920) and Cole (1944) was that the worker cooperative would fail, degenerate democratically or succumb to the forces of self-extinction. It would not only have to reproduce the shortcomings of the capitalist system but was a flawed democratic model.
Then a seminal article from Ward (1958) rejected worker self-management based on his economic analysis of the experiment of workers’ self-management in Yugoslavia and his conclusion that it was not sustainable. Ward’s argument, using the term the ‘Illyrian firm’ after a Roman colony in Illyria that failed, was based on assumptions of how a self-managed firm was designed and this reflected the Yugoslav model of the firm – collective ownership of the firm’s assets by the state (on loan to the workers) and a democratic governance system reflecting workers’ individual preferences. This would lead to the firm’s demise due to workers under-investing and firing fellow workers to maximize profits for themselves.
The Revisionists
However, in the 1970s, a revision of this negative position was initiated by a number of economists and writers. The ‘discovery’ of European LMFs such as Mondragon, (Oakeshott, 1975) and the Italian cooperatives (Oakeshott, 1978; Thornley, 1981) added to the empirical evidence. Others were inspired by vibrant activities of worker takeovers across Europe and the USA (Paton, 1989). First, the data were re-examined. Jones (1978) researched UK worker cooperatives and argued that the Webbs were incorrect and ideologically blinkered in their conclusion that the worker was unable to engage in participatory democracy. Oakeshott (1978) addressed the issue of professional management by illustrating that the democratic problem the Webbs observed could be simply corrected by separating the objective requirements of management from the subjective nature of democracy. Oakeshott (1978) explained how Italian cooperatives had been using a representative democratic structure with the election of a governing board since 1900 in contrast to the more anarchic primitive democracy observed by Webb and Webb (1920), and observed that the Italian cooperatives were also able to attract professional managers with a sense of idealism inspired by the Papal Encyclical Rerum Novarum (1891), by Pope Leo XIII on the ‘Condition of Labour’. Further, Batstone (1983) in his research on French cooperatives found worker cooperatives survived and grew more democratic.
Second, there was a debate on the sustainability of the design of the LMF model. Vanek (1975) modified the assumptions underpinning the Illyrian firm to produce a collective ownership model which required external finance, arguing that it was superior to the capitalist firm. Mygind (1986) further developed the economic modelling of the LMF by challenging Ward’s theoretical position of the inferior performance and the self-extinction of the labour-managed Yugoslavian firm and argued that with a different set of assumptions, namely individual ownership and individual preferences, the LMF could now be seen to be superior to its capitalist twin.
McCain (1999: 175–6) presented a model of the worker-owned firm which differs from the neoclassical model: the workers do not engage in rational game strategy and they succeed through building on their cooperative behaviour and firm-specific human capital to ‘yield a potential Pareto improvement’. Dow (2006) presented proposals for a new view of the LMF by stating that economic theory had taken us far as it could and new disciplines of history and social theory were needed.
The Contextualists
It was necessary to go beyond the economic model and explain that, while the LMF could be a superior performer, it was more prevalent in some countries than others. There are a number of writers who argue that a variety of capitalism approach enables an understanding the existence of the LMF. Poole (1986a) argued that to emerge the LMF needs to exercise a power function based on the values, and the latent and manifest power of workers and their representatives. This is manifested differently in different industrial relations contexts.
This argument was then developed by Greenberg (1983) in a taxonomy of four sociopolitical contexts in which the worker-owned firm might emerge: unmediated capitalism, mediated capitalism, support of revolutionary activity and a post-revolutionary situation. Greenberg’s (1983: 202) contextual argument reflected Poole’s (1986b), and stated ‘self management will have radically different effects depending upon the context in which it is located’.
Paton (1989) then, in a study of worker buyouts in Europe, confirmed this by recording the different national intensity of formation of these firms. Charny (1999) also argued that as a democratic form of organization LMFs were specific to the social systems in which they were embedded. Hall and Soskice (2004) argued more generally that all firms are relational and specific types of firms would only exist if they were able to negotiate the resources needed from the context in which they are situated.
The Evolutionists
The argument that the LMF had a life cycle which it went through, and could even be a criterion of success, was first developed by Batstone (1983) from the study of French worker cooperatives. Both Batstone (1983) and Lichtenstein (1986) developed life cycle models of the LMF based on a dialectical democratic process and distinguished three phases: start up, early maturity and late maturity and argue it is the firm’s trajectory through these, and the overcoming of the forces conspiring against it, which determines the success and failure. Lichtenstein (1986: 66) then stated: ‘The life cycle model presented here represents a significant methodological advance over the traditional neo classical model. It focuses our attention on the social relations of alternative organisations and connects these relations to economic performance.’ Here we also draw on Westenholtz (1986), Greenwood and Santos (1992), Gordon (1999), Borzaga and Tortia (2006) and Sarti (2006). Borzaga and Tortia (2006: 7–9) called for a new model based on ‘individual behaviour in an evolutionary theory’ and emphasized the process nature of democracy: ‘the logic of cost minimalisation is supplanted by an evolutionary one whereby the construction of new governance systems makes the difference’. In this process conflict becomes institutionalized and the balancing of conflict becomes the source of competitive advantage where there is a ‘zone of creative tension’ (Sarti, 2006: 5-8). Greenwood and Santos (1992: 146) describe the Fagor Cooperative at Mondragon ‘as a set of cultural discourses that promotes both solidarity and conflict’. Westenholtz (1986) describes it as the paradox perspective where mutually exclusive phenomena exist in an organization.
It has been established that the LMF is a hybrid organization, with both collective and individual ownership and objectives, so there is a necessity to draw on literature dealing with the alternative organization, the worker-directed firm as well as the employee-owned firm.
Drawing the debates together
Modern sceptics Dow and Puttman (1999) focused on five reasons why the capital-managed firm (KMF) is preferred to the LMF. They proposed that capital usually hires labour because: work incentives and monitoring are best carried out by the firm’s residual claimants; workers tend to be poor and lenders are reluctant to finance the firm; workers are risk averse; LMFs have a problem in dealing with asset specificity; and transaction costs related to collective choice and managerial stability prevent LMFs from reaching collective decisions.
The importance of exploring this evolving debate over the theoretical model of the LMF, which had set out to explain its entry, success and failure, is that it clarifies the key functions the LMF needs to carry out to succeed as both an economic and social organization. The literature points out that the LMF needs to carry out four functions:
The Power Function, whereby the workers and their representatives are able to utilize their power within society to act collectively and secure the resources they require (Poole, 1986a).
The Institutional Function, whereby the actors have the resources to secure the appropriately designed organization for their values (Mygind, 1992).
The Entrepreneurial Function, whereby the LMF is able to carry out the tasks of collective entrepreneurship, raising finance and professional management (Fanning and McCarthy, 1986; Hall and Soskice, 2004).
The Democratic Function, whereby the LMF is able to embark on a process of transformation to overcome the contradictions between democracy and the market (Westenholtz, 1986).
This article argues it is the nature of the democratic process of the LMF that is the key variable in explaining why some firms failed, some succeeded and why some succeeded very well. Contrary to the sceptics, and others, democracy and efficiency can be balanced. Here we draw on Westenholtz (1986), Greenwood and Santos (1992), Gordon (1999), Sarti (2006) and Borzaga and Tortia (2006: 7).
In seeking a new model for sustainable corporate governance Rosenau (2005: 5) describes a model of governance that will deliver sustainability as ‘multilevel governance’ where ‘authority is voluntarily and legally dispersed among the levels of the community, where the problems are located and local needs require attention’, and also a process of ‘shifting the balance between hierarchical and network forms of organisation, between vertical flows of authority and horizontal flows’. These principles form the basis of the investigation into the Sociedades Laborales model of governance. This article now explores how these functions have been carried out in the Sociedades Laborales experience in Spain.
A Spanish experience with democratic governance
Sociedades Laborales (SALs), or Labour Societies, are a democratic corporate governance model that emerged in Spain in the 1970s under the Franco dictatorship when workers took over factories to save their jobs. ‘The movement was born in 1972 in strong politicized companies with approximately 500 employees. It was started by one communist trade unionist defying the union and leading a worker takeover of the company to save workers jobs’ (Isabel Vidal, Barcelona University, 2004, personal communication). The takeovers were underwritten by the right to work enshrined in the 1978 Spanish Constitution. They were also facilitated by the Credito Refructo Law which deemed that a worker’s labour was embedded in the products they make and in insolvency, when wages and entitlements are owed, workers can seize these goods and negotiate with the administrator triggering a worker takeover. These takeovers, as a result of spontaneous direct action, were initially opposed by the trade unions but eventually became accepted and supported as a strategy when many of the key concerns of the unions regarding participation and the formation of a secondary labour market, turned out to be unwarranted (Isabel Vidal, Barcelona University, 2004, personal communication).
However in the early 1980s the Spanish economy deteriorated further, experiencing 22 percent unemployment and the socialist government decided to fund mass worker takeovers of failing businesses based on the SAL model by ‘taking into account the importance of the workers’ role in the revival of firms through risk taking in profit investment’ (Miguel Millana, president of the Spanish Employee Owned Companies Association, 2002, personal communication). From 1975 to 1985 the country lost more than 800,000 industrial jobs.
In the period 1980–5 there were at least 1300 state-funded worker takeovers and 50,000 (could be 70,000–80,000) workers were involved mainly in the metal working, construction, timber, textiles and printing industries. Those that survived and prospered might have been only 25–30 percent of the total that started (Paton, 1989).
In 1997 the Sociedades Laborales Law was modified to enable firms with only €3000 capital to start as a SAL by unemployed workers rather than by workers who were about to become unemployed due their firm being in crisis. This has been a phenomenally successful policy of worker self-management: 12,000 SALs have been formed with approximately 120,000 workers. It has been the fastest employment creation project in Spain.
Methodology
The aim of the research was to carry out an initial exploration of a small number of firms that had recovered from insolvency through a worker takeover. Specifically the project focuses on successful LMFs. In this article the research question addresses the relationship between democratic corporate governance and efficiency, with the hypothesis that the success of these firms is related to maximizing the extension of the democratic process. The choice of the design for the research project is determined by both the need to develop a significantly robust approach to carry the conclusions as well as bounded by the time and resources available to the researcher.
The literature review outlined how economists have developed theoretical models to explain the behaviour of the LMF based first on microeconomic theory and then adding institutional evolutionary life cycle concepts. However, Borzaga and Tortia (2006) and Dow (2006) argued that the limits of this approach had been reached. Dow (2006) argued it was now important to draw on historical, sociological and cultural factors to explain LMF behaviour.
In order to do this requires a specific methodology, other than the commonly used empirical econometric surveys, drawing on industrial relations, human relations and corporate governance theory to understand the nature of the transformation from a capitalist firm to a worker-owned firm.
The research is underpinned by critical theory as it is emancipatory and seeks not only to understand the human condition but bring about change to the disadvantaged status of employees in insolvency. This research, by focusing on employees and insolvency, challenges conflict and oppression, calls current ideology relating to insolvency regimes into question and exposes forces of hegemony and injustice in the cause of freedom, equity and a just society (Crotty, 1998: 157).
Here the researcher is concerned with what human beings have made of themselves in the act of becoming industrial citizens. Critical theory offers an insightful way of contrasting the deterministic historical view that people are ‘ciphers in the broad sweep of history’ (John Roberts, Faculty of Economics, University of Sydney, 2009, personal communication), with the transformation approach where humans are capable of exercising choice within the capitalist system. Paton expresses these views in his study of worker takeovers where he observed:
. . . how moribund organisations have been transformed and industrial capacity preserved and reconstructed; and how men and women have surprised themselves by what they have become and have achieved. (Paton, 1989: 1)
This theoretical perspective is informed by a constructionist epistemology which frames the investigation of the LMF as a democratic structure. It allows both the examination of power relations within the firm and the observation of the ontological state of human emancipation. This draws on the work of Paulo Freire (1972) by viewing the worker buyout as an emancipatory experience. Freire as a humanist helps us understand this experience: ‘that the great humanistic task of the oppressed is to liberate themselves and their oppressors as well’ (Freire, 1972: 20–1, cited in Crotty, 1998: 152) and the ‘pursuit of full humanity cannot be carried out in isolation or individualism. It can only take place in fellowship and solidarity’ (Freire, 1972: 58, cited in Crotty, 1998: 152). Here a constructionist epistemology is informative as reality is not an objective truth waiting to be discovered but rather a process where reality ‘is constructed by human beings as they engage with the world they are interpreting’ (Crotty, 1998: 43).
In this context the methodology chosen was a case study approach to gain a snapshot view of the firm using the qualitative methodology of a semi-structured interview enabling the subjective reality of the employees to be explored. Spain was chosen as the SAL phenomenon was viewed as a highly innovative experiment in the transfer of ownership to workers but was virtually unknown in the English-speaking world (Robert Oakeshott, 2002, personal communication). It is supported by national legislation and has well-resourced support agencies. The author received assistance in identifying successful firms from CONFESAL, the National Association of Worker Owned Companies in Spain, and ASLE, the Association of Worker Owned Firms in the Basque Country.
For this research seven metal manufacturing firms were chosen which had recovered from bankruptcy when they were taken over by their workers, principally in the 1980s and 1990s. The number of such firms remaining in Spain from the pre-1997 period when new legislation was introduced was 2500, after which the high point of the strategy of forming new firms from insolvency had passed. However it was reported in a phone study of all the Spanish provinces that in two provinces SALs were still being formed from distressed companies. 2 Five of the sample were in the Basque Country and two around Madrid. They were SMEs ranging in size from 22 to 380 employees and had been in existence for a number of years: the oldest was formed in 1982 and the most recent in 1997. The seven firms were visited initially in the summer of 2005 and two were visited again in the autumn of 2008.
Interviews were conducted with a small number of employees and managers in the summer of 2005. These interviews are rich textured research as the author was allowed to walk around the factories and interview workers and managers at their station or in groups. Two firms were visited again in the autumn of 2008, as mentioned, when further interviews were conducted. Basic data on the firm’s employment history, date of the worker buyout and relationship with the trade union were also collected in 2005. Approximately 10 interviews were conducted in each firm with the assistance of an interpreter involving shop floor workers, managers and board members. Interviews with managers focused on accessing employment data and background information. Interviews with the blue-collar workers focused on their perceptions of the democratic process. Participant observation was an important feature of the research in witnessing the informal interactions, humour and collegiality between workers and managers.
This research gives the opportunity to examine the nature of the success of worker self-management. Failure is reflected in the firm ceasing to trade, selling out or being taken over. In fact the last two reasons can be argued to be a good outcome in preserving jobs and intellectual capital and delaying closure while other solutions are found. Success is defined as survival, longevity and the preservation of existing jobs. Highly successful is defined as going on to create more new jobs.
SAL corporate governance model
The SAL represents an extreme model of worker democracy, classified as worker self-management where ownership and control is transferred to the workforce, and presents an opportunity to explore the key issue of democratic governance, namely how much power to give the worker directors (Blair and Roe, 1999: 335). In an exchange with a member of the International Bar Association (Augustin Bou, 2004, personal communication), evaluating the Sociedades Laborales initiative of the 1980s, Bou argued that it was the wielding of power in these firms that was fundamental in determining the nature of their success and failure:
Those that survived do well acting as real entrepreneurs and hire real managers. Unfortunately many employees thought they were making real decisions regarding the fact that they could not be dismissed and that they could decide their own wages. However those that were successful were very successful.
This evaluation of the stability and sustainability of the SAL business model, and also the programme, by Bou, resonates with that of Paton (1989), who concluded that success depended on a homogeneous culture and strong leadership. Charny (1999) describes this conundrum in relation to the political culture of the firm, and sees it as a tension between a ‘grab strategy’ for increased wages, benefits and the protection of jobs and a ‘cooperative strategy’ of an investment in new production, allocation of labour, cooperation and new skills. While Charny (1999: 100) concludes that the resolution of this tension lies within the beliefs that the participants share about governance and the norms that guide their behaviour, the legal and governance structure chosen will also contribute to the type of outcome. Insights into how this cooperative strategy emerged in these firms will now be discussed.
Structure of ownership
A new form of labour corporation, Sociedades Laborales institutionalized what had been happening for some time by incorporating worker self-management in the 1986 Act with the aim of devising new ways of creating employment and at the same time increasing employee participation in their companies by placing ownership in the hands of the workers. This was made possible by an innovative financing mechanism providing workers with capital to invest in the company through an Unemployment Lump Sum. This capitalized two years’ unemployment benefits and was supplemented by central and local government loans or grants without control provisions. The SAL is a business model of collective self-management and a balance between individual and collective ownership and control where ownership is assumed to be the key prerequisite to control. The worker owners own 51 percent of the capital in the form of stock and there is a limitation on any one worker owning more than a third of the stock except public authorities, which can own 49 percent. There are two types of members – those who own a share and have an employment contract and those who invest but do not work there. SALs are required to invest in a collective special reserve fund to offset losses. There can be up to 20 percent non-member workers.
Structure of control
Corporate governance principles aim to clarify the set of relationships between the main stakeholders – the shareholders, the management and the board. Democratic corporate governance involves a different set of issues relating to sovereignty and delegation of authority as the workers are the shareholders and appoint management. Ownership and control of the SAL is internalized in the one person. The structure of democratic corporate governance involves a network of five participatory institutions:
The Assembly or general council where sovereignty is exercised in a democratic process and where fundamental policy decisions are made with rights based on an authorized capital majority. Worker members vote according to their shareholding. Any type of decision of an economic and social nature can be submitted for debate by members. Non-members are not included.
The Assembly Board administers the SAL and is elected by the Assembly. The number on the board varies according to the size of the SAL. Members are elected for four years with the responsibility to represent, govern and administer. It is accountable to the Assembly every year.
Management of the SAL, when it is of sufficient size, occurs through functional specialization with the appointment of a hired manager or managers equivalent to directors. The SAL then has in effect a two-tier board. Managers report to the Assembly Board on a regular basis.
The Workers Committee, or Labour Board, has the function of delivering worker participation and represents all the workers, which is a requirement by law for all Spanish companies over 50 employees. It is elected from the trade unions and all workers are involved. This discusses salary, labour rights, workers rights and hours, leave, contract work and working conditions. Other bodies such as Committee of Staff or Committee of Hygiene and Safety or Works Council are set up in accord with labour law. Industrial and trade union bodies coexist.
The trade unions are an institution of corporate governance and have decided to remain in the SALs in a traditional collective bargaining oppositional role. The trade union can be either an agent of education and advice or a pressure group on working matters, negotiating and bargaining over wages, timetables and organization of work.
Discussion of results: Evaluation of the SAL model
The Sociedades Laborales model has been described as a cross between a cooperative and a conventional company. Its design, with an emphasis on individual share ownership and collective ownership as well as individual voting rights, resonates with the premium performance model described earlier by Mygind (1986). The SAL is a social enterprise and as such must succeed economically and socially and especially must be able to resist the forces of self-extinction. Therefore it is necessary to have some criteria of evaluating both economic and social performance as an indicator of the commitment to sustaining democracy. The economic performance is reflected in the ability to survive and create jobs. The social performance is reflected in the ability to resist the employment of non-members, the egalitarian way profits are shared and whether the trade union is able to function within the firm.
Economic evaluation
At a micro level the seven firms in this study demonstrated the economic success of worker self-management by the criteria of the firms having survived between eight and 25 years, fulfilled the objectives of the owners in providing job security and in the process most have created more jobs and delivered profits. Also some have become market leaders. In addition two suffered insolvency a second time before recovery was consolidated. After the seven initially lost 558 jobs in the process of transformation they then expanded the businesses to create 295 jobs (see Table 1).
Economic evaluation – SAL longevity and job growth
Economically the group could be split into two. Five market leaders and two followers. First SAL 3 (paint spraying equipment) and SAL 7 (fans and ventilation equipment) have become market leaders. SAL 4 is the largest SAL in Spain and the country’s fourth largest foundry. It is predicted to become number one by 2015, and produces castings for the automotive industry (customers include VW, MAN and Ford). It had recently completed the building of a fully computerized warehouse. SAL 5 is the number one drills maker in Spain and the fourth in Europe. SAL 6 produces screws for the automotive industry (customers: Citroen, Peugeot and Renault) and was the first manufacturing firm in the Basque Country to receive a Gold ISO9000 Award. The second tier consisted of two companies. SAL 1, in the metal fabrication sector, produced mainly radiators for the Cuban market, existed in a cramped factory unable to expand and reported a very satisfactory return to members especially in the value of their real estate which had been re-zoned. SAL 2 produced hardened drills and had plans for continued steady growth. Both firms were in dishevelled factories.
The economic significance of these SAL firms is that they were profitable and avoided the forces which had lead to the demise and extinction of other SAL firms as described by Charny (1999) and Bou (2004, personal communication). This is reflected principally in the collective decisions to reinvest profits in state-of-the-art machinery, by the top five firms in the study, and forego satisfaction of immediate wants to secure their jobs into the future. Legislation requires that only 25–30 percent of profits can be distributed.
Social evaluation
The interviews were conducted across a range of job types: the shop floor workers, foreman, middle managers and chief executives. These interviews demonstrated that underpinning the economic success in all the firms were vibrant collegiate cultures. This was further confirmed by participant observation during the tour of the factories. Discussions with men and women on the shop floor disclosed that there were leaders among them who argued against rational self-interest and for the collective good and mutuality. This specifically related to the reported debates on inviting new members to replace those who had left and the introduction of new young members to the board to replace the ‘old brigade’.
Most likely this was due to the unique culture of the Spanish worker and the mutuality developed in the drinking men’s clubs in the villages, especially in the Basque Country. Charny (1999: 100) sums up this cultural effect: ‘It is clearly impossible to obtain a consummate degree of cooperation by relying primarily on legal mechanisms.’
Cooperation is expressed through homogeneity and solidarity, the inclusiveness of culture and attachment to egalitarianism, These values are fundamental to sustaining democracy, developing the high performance work systems and the innovative cultures that were observed in the top five of the firms and also in the two less successful – but to a lesser extent. Three variables were used to evaluate social inclusion: the percentage of non-member employees, how the bonus was distributed and the attitude to the trade union. The tensions inherent in these policies will now be explored.
First access to membership. The SAL is a membership-constituted democratic firm and the ratio of members to non-members is required to be 80 percent or more. In two firms membership was 100 percent but in the rest the percentage of non-member employees was above the 20 percent limit. Table 2 shows the membership ranges in these other five firms from 38 percent in SAL 7 to 74 percent in SAL 5. Initially this would indicate the firms had followed the classic Illyrian model of self-extinction and acted to exclude workers from membership to increase rents to the remaining owners. In fact many SALs go on to demutualize when they get to this point.
Social evaluation – the incidence and distribution of profit sharing
However, in these SALs a pragmatic compromise position had been reached between the ideal and commercial reality. Sarti (2006) argues that the success of the LMF which reflects the ‘complex nature of social organisations’ is due to the ‘ability to incorporate seemingly opposite operations’. There was a tension between the leadership, in realizing that the long-term survival of the SAL depended on new members, and those that espoused the desire to exclude new members and operate a core periphery model as well maximize rents. These firms consciously resisted self-extinction by recruiting new members to replace those that left.
Some argued that the problem had been created by the structure of the SAL model of worker investment which with appreciation in capital value made it too expensive for new members to buy in. One worker commented:
This should have been resolved at the beginning. It is now too difficult. (Machinist, SAL 2)
Also an important point mentioned by SAL members was that (in the liberal postmodern society) not all employees want to become members and have responsibility and they have a different attitude to the original founding member vanguard that were forced to invest capital to save their jobs. ASLE now has a programme to assist SALs develop financial packages to include new members.
Second, the manner of the distribution of the bonus is argued to be a sign of solidarity and an indication of how these firms met the social aspirations of inclusiveness and fraternal behaviour. The results demonstrated a tension existing between solidarity and self-interest in the group. Four of the firms included non-members in the bonus. Three of these included all workers in an equal fashion. The accountant of one of these firms, the largest of the group, SAL 4, smiled and stated: ‘A little bit of socialism’ when acknowledging that all workers receive an annual bonus and the most recent was a €3000 payment. Interestingly, the firm that voted not to have a trade union also displayed the least solidarity and did not pay non-members a bonus.
These firms demonstrated in the interviews, that instead of succumbing to the ‘grab strategy’, mentioned by Bou (2004, personal communication), they could engage in a ‘collective maximizing strategy’. This often had began at the point of the worker takeover when workers agreed in an act of solidarity to take pay cuts and make an increased effort for no return and being willing to make changes to the workplace, invest in new equipment, learn new skills and make a large investment in human capital.
Third, there is the opportunity to examine this question further when observing whether the trade union is suppressed or is active internally and whether this impacts on firm culture. The firm sample is limited but a pattern was observed which, on the one hand, tentatively supports observations of the influence of cultural solidarity in the Basque Country referred to by Whyte and Whyte (1988), while on the other points to the influence of firm size. In the three largest firms (SAL 2, SAL 4 and SAL 5), all from the Basque Country, the presence of a trade union and an elected Labour Board (compulsory in firms with over 50 workers) was positively correlated with the widespread inclusiveness demonstrated by the distribution of firm bonuses to all workers and the wider extension of SAL membership. In the two smaller Basque SALs, interestingly, the pattern continued. SAL 1 only had a few trade unionists and as a consequence only distributed a smaller bonus to non-members. Further (SAL 6) voted not to have a trade union and also does not distribute the bonus to non-members. Therefore in the larger firms the presence of trade unions and an elected Labour Board can be argued to impact on working-class solidarity, as exhibited in the equality of the distribution of the bonus, when embedded in the Basque culture.
The other two firms (SAL 3 and SAL 7) were from around Madrid. In SAL 3, which was small, there was not a union, all workers were members of the SAL and all had an equal bonus. There were no non-members. However, in SAL 7, in Madrid, which was also in the larger range, all workers were in the union, they had an elected Labour Board, but the bonus only went to the members of the SAL and there was the lowest membership of the SAL, indicating the lack of a positive cultural effect in this firm in the Madrid region which the trade union and Labour Board did not counter. Of course this is simply an observation, albeit an interesting one, where the bonus distribution is related to firm size as well as Basque culture, the presence of the trade union and a Labour Board. The findings are summarized in Table 2.
These firms, in conclusion, demonstrated that they could survive and succeed in the marketplace. It was also observed that while they had to make compromises they managed the tension by not abandoning totally their social and egalitarian principles and this can be argued to be a source of their competitive advantage. Charny (1999) argues that this is done through cultural influences which are embedded within the firm and are mediated through structures of corporate governance. We now examine how effective are the democratic governance processes in these SALs.
The democratic process
The SALs in this survey, despite some differences, were seen to succeed economically. It is argued here that this is associated with maintaining a commitment to practices which reflect social and economic egalitarianism and cohesion. However it was mediated by a compromise with market demands in that most of the firms had high levels of non-members. Participant observation and the interviews, especially on the shop floor, also revealed that they were vibrant democracies with collegiate cultures. They had made their own compromises in relation to limiting democratic values in the cause of economic reality, for example in respect of the non-rotation of managerial positions. However, there was the impression that something special in the sphere of industrial democracy had been created here and this is now explored using the data from the interviews.
In the first instance by critiquing and drawing on the work of Westenholtz (1986) a framework is provided for the analysis of the democratic process. This leads to the observation that workers were able to overcome the contradictions inherent in democratic corporate governance and also were able to embark on a process to evolve sophisticated participatory systems. Their economic results demonstrated that they had been able to resolve conflicts of interest among themselves and also make credible commitments to each other. Thus, according to Charny (1999: 92), corporate governance added value to the firm.
Second, these were mature firms where the relationship between democracy and economic efficiency had been pushed to a new optimum. Westenholtz (1986) argues that the emergence of a democratic governance model is based on a dialectical process where workers consciously evolve mechanisms to overcome contradictions. Greenwood and Santos (1992: 146) observed this at Fagor, the largest of the Mondragon cooperatives: ‘a conception of Fagor as a set of institutional processes and cultural discourses that promote both solidarity and conflict. Every core value has its attendant debate and all institutional processes contain important alternatives’ and ‘debates about efficiency, participation, authority, power, communication, co-operation’. Westenholtz (1986) identified three contradictions in the process of organizational democracy which these SALs overcame. The first contradiction relates to qualifications where ‘the level of knowledge of many of the employees is not adequate for running the business’ (Westenholtz, 1986: 150). In the case studies the SALs overcame this by selecting and appointing professional management. In an interview one executive reflected the views of the firms in commenting proudly:
We have hired the best manager that we can afford. (Accountant, SAL 4)
There was no rotation of management as would be expected by democratic principles. A ‘servant leader’ collegiate approach by managers broadened and deepened the management process throughout the SAL. Two firms had dismissed their managers when they departed from this style. Management was not democratized, such that everyone took part directly in management, but decision-making at all levels was placed in the hands of people who had the expertise and information to make those decisions. The second contradiction relates to the time factor – business often requires quick decisions and it is important not to divert members’ time from production to decision-making. This was solved in the groups by delegating power to the assembly board and management as one interviewee reported:
However most issues are dealt with by the board – eight people – it’s easier than 130. There is a workers committee as well. There are two levels of consensus. (Foreman, SAL 4)
It was apparent that only certain decisions needed to be brought to the assembly for discussion, reflecting the claim that ‘democratic management does not need to involve everybody in everything’ and ‘it does not result in total agreement on every issue’ (Westenholtz, 1986: 150).
The third contradiction relates to the democratic ideology of the LMF that everyone has a responsibility for management but no one feels responsible for the implementation. Instead time is spent on production (Westenholtz, 1986: 151). This is resolved in a number of ways. Specific jobs are created which have specific management functions attached. Decision-making is dispersed to those who need to make certain decisions as the response below from one firm testifies:
The EFQM model which we have implemented is the key to our success. It’s the European Forum for Quality Management. The EFQM approach involves working through processes so that everybody in the organisation is part of a process and works jointly towards a common goal. There are 15 processes and nine sub-processes. They have processes meetings – quite regularly. At this meeting anyone can bring in their opinions and they can speak openly about whatever they want and they can discuss it all together. (Quality control manager, SAL 6)
Responsibility is enhanced by horizontal monitoring, peer pressure, where workers emulate each other and vertical monitoring whereby management is exposed to worker shareholder observation. One manager, in SAL 4, commentated on ‘being watched by one hundred and fifty pairs of eyes’.
The dialectical resolution of these contradictions reflects that a governance model has emerged whereby the general manager, the assembly board and general assembly together all form a ‘collective entrepreneur’ where they are integrated into a decision-making and innovation process (Bataille-Chedotel and Huntzinger, 2004: 91–2). These case study firms flourished through the development of a collective entrepreneurship model which is in reality a high performance work system. It can be argued that this is the unique phenomenon which was observed in these SALs in the Basque Country. This model is now described.
The collective entrepreneurship model
The collective entrepreneurship model is based on maximizing the functioning of worker participation in the four spheres described by Westenholtz (1986: 150): direct and indirect democracy at both the company level and at the shop floor. Critiquing this structure using the results of the interviews, primarily with shop floor workers, a picture was constructed of the highly evolved nature of the democratic process in the five top performing SALs that were studied. It was through the successful attempt to make democracy work in these four areas that the workers overcame the contradictions between democracy and the demands of market efficiency to arrive at an ‘optimal point’ of democratic management (Westenholtz, 1986: 149). A range of quotations from workers and managers in the seven firms illustrates this proposition. One worker in the study described the solidarity and commitment of this new ‘species’ of entrepreneurial worker:
We support one another. Remember yourself and your workmates. Be prepared to sacrifice. Have flexibility in approaching your role. Be prepared to work not 8 hours but 11 or 15. Change your mentality. The salary is paid to be an entrepreneur and a worker. (Machinist, SAL 5)
There are four facets of this collective entrepreneurship model which Westenholtz (1986) described.
1. Direct democracy at the level of the firm
Direct democracy in the running of the firm was exercised in annual general meetings through discussion and debate with major decisions taken by a vote after a degree of consensus was achieved. When asked whether they actually felt they had power, shop floor workers replied:
Of course I do. It’s my company. (Machinist, SAL 7) In the meetings we are all the same. Everyone does their best. (Foundry worker, SAL 4) Day to day management is the same but now we contribute to vision and future direction. (Machinist, SAL 1)
All workers and management reported favourably in the interviews on the democratic manner in which the assembly functioned. These assemblies and provided the forum for discussions and major decisions to be made by all partners. The assembly, the cradle of democracy, has to be held a least twice a year, and is in the hands of the worker members. First, the blue-collar president of one SAL commented on the democratic nature of the assembly:
Yes. Yes. No doubt about it. All the issues are open for debate. There is no dictatorship. I don’t know before I started. There has been conflict but nothing really very important. (Blue-collar president and machinist, SAL 6)
Another SAL member, a foreman commented on whether democracy was effective:
Totally. There is no other way to work. Because all important issues are decided in meetings so there is always participation. They don’t see any other way to do it. We have all the same shares so no one can stand out and say I am the boss and what I say goes. (Foreman, SAL 4)
2. Indirect democracy at the level of the firm
The elected assembly board was potentially the weak link as sound management and direction requires a balanced board with a range of commercial skills that workers generally do not have. They overcame this challenge through a two-tiered board which met monthly and which acted as a consultative, information sharing mechanism delegating authority to a general manager with commercial acumen sympathetic to the values of worker ownership. A worker described how difficult this process was for a board consisting of workers, giving the example of making a fellow worker redundant, a decision which in a normal firm would be taken by management:
The Board. Yes. They explain all the plans and make the decisions. It is hard to have to tell workers if they are redundant. You are there to make decisions. Normally these decisions are made by the managing director. (Machinist, SAL 6)
Managers were prepared to work for below market rates. The manager would be asked to develop a corporate plan which would go to the assembly board, then to the assembly. The workers appeared content that they had appointed the best CEO they could find.
3. Direct democracy on the shop floor
There was a great deal of democracy and autonomy observed. Humour was never far from the discussions, as one interview with a shop floor worker demonstrated:
Before I reported to the boss. Now I am an employee and boss. There is no conflict in that role. I lose more hair and have to think more. (Machinist, SAL 3)
Workers were given problems to solve both individually and collectively. Job rotation and job enrichment ‘is simply a characteristic part of everyday life’ (Westenholtz, 1986: 143) as a worker explained:
They used to work for a boss. The machines had names. What scared them was letting go and doing something else. One day to the next this disappeared. We now adapt to whatever comes. Develop self-belief that we can change it. Used to be work, work, work, work nothing else. (Machinist, SAL 5)
4. Indirect democracy at the shop floor
Work on the shop floor was organized in teams in which workers participated and which had a coordinator. One manager explained team-based production:
We need to make a model for the future. This is part of the democratic model – there are nine coordinators who make many decisions. The team is part of that decision. Each part of the company has its own decision-making. Workers are in self-managing teams and contribute. (Manager, SAL 2)
The teams on the shop floor demonstrated the ability to make managerial decisions by directly solving problems as they arose.
The maximizing of democracy across the SAL reflects the characteristics of the stakeholder organization that features a combination of both cooperative and individual interests. The general manager, assembly board and general assembly all together form a collective entrepreneur where they are integrated into a decision-making and innovation process (Bataille-Chedotel and Huntzinger, 2004: 91–2).
What is clear from the interviews is that there was widespread support for the proposition that a collegiate democratic culture had been formed in these successful firms in the Basque Country of Spain. This offers a glimpse of successful worker self-management where everyone works and everyone manages, where conception and execution, the hand and the head, have been reunited. The SAL legal model placed unrestrained democratic power in the hands of the blue-collar workers and therefore the SAL experience must be seen as defying the arguments of the ‘sceptics’ who predict that the worker-owned firm will fail economically, democratically and socially. The key question is how much of this success is culturally specific.
Charny (1999: 101) adds to our understanding of this cultural phenomenon where ‘cooperation is facilitated when rational actor models would predict defection’. This is done through cultural influences which are embedded within the firm and are mediated through structures of corporate governance. Charny (1999) argues these cultural influences are focal points of labour traditions and ideology, deliberative or institutionalized procedures, and sanctions. These prevented workers engaging in a ‘grab strategy’ over wages and protecting jobs, which had lead to the demise of other SALs, rather than the ‘cooperation maximizing’ strategy which they have apparently done. This presents an interesting area for future research.
Conclusion
The limited scope of this study does not allow for definitive conclusions to be drawn but it does allow for us to speculate on significant issues pertaining to the tension between organizational democracy and economic efficiency. This study points to the formation of a new organizational form of the worker-owned firm. The Sociedades Laborales experiment in Spain aimed to bring about a situation where workers were prepared to secure their jobs through entrepreneurial activity. This certainly appeared to be the case in these firms where the SAL legislation provided a flexible and participative legal form in which workers had evolved in a technical and personal sense into highly skilled operatives who participated effectively in managerial activities.
The case study firms offer hope that such an objective is achievable and one which can be explained by the framework that emerged from the literature review. The worker buyouts emerged because workers had power which was grounded in their experience in the ability to use direct action and this was supported by the SAL legislation and the access to finance. The workers’ values were underpinned by the design of the SAL legal model where governance was based on a full democracy. This legislation presupposed a confidence in workers’ ability to self-manage and the legal model enabled the emergence of the phenomenon of the collective entrepreneurial firm. However, the SAL was also susceptible to failure due to the ‘grab strategy’ unless constrained by cultural checks and balances enforcing restraint and the ‘cooperative maximizing strategy’.
The results address the key debate as to whether worker self-management is sustainable and is able to resist the forces of degeneration. The case study firms demonstrated that they were economically sustainable but in doing so some made social compromises in employing non-members above the maximum number designated. However, social cohesion was related to some firms fostering a collegiate culture where profit sharing occurred across the whole workforce – members and non-members. This cohesion seemed to be associated with the size of the firm, being situated in the Basque Country and having the presence of the trade union and elected labour board.
The Sociedades Laborales experiment adds to our knowledge of the evolution of the competitive firm in advanced capitalism. A new form based on ownership and control by the workforce. The firms in the study were mostly small and of an artisanal production nature. They were highly flexible and two had integrated the customer into production. Jobs had been enlarged in skill and responsibility by being involved in participatory processes and corporate governance. Conception and execution had become integrated. There was greater worker autonomy. This new organizational form was based on almost guaranteed long-term employment and high trust between workers and managers. Here we view the possibility that a bankrupt firm can be transformed, in certain circumstances, into a high performance work system.
The important question in the study of worker buyouts of insolvent firms is whether they are sustainable and will continue to meet the challenges of economic restructuring or whether they will eventually revert back to a capitalist firm in the economic upswing or indeed fail. This article argues that, provided certain conditions are met, the longevity of the case studies gives reason for arguing that the worker buyout of an insolvent company is able to produce an efficient model for ongoing economic restructuring. As a result this strategy is one that has wide policy implications and warrants further research.
The success of these SALs provides a model that demonstrates the workings of effective democratic institutions which have overcome the negative aspects of democracy and produced a superior transitional form in some of the firms. A vibrant model of collective entrepreneurship emerged in which workers have engaged in cost cutting, innovation and ideas generation, improved productivity and had better access to and the use of information in improved decision-making.
This study demonstrates that in certain circumstances workers could exercise managerial power effectively, carry out strategic decision-making and engage in sustainable democratic corporate governance. These SALs, while only a small example, offer encouragement that the inherent problems and contradictions of democratic corporate governance, identified by the Webbs, can be resolved. Significantly, these firms have remained small and avoided the problems of democracy experienced by larger worker-owned businesses such as Mondragon. The Sociedades Laborales experiment has also demonstrated that these firms do fail and demutualize and that democratic corporate governance does not work in every situation. Finally, while showing that something transformational in the way work is organized has been created, the study poses questions as to the transferability of the SAL model of worker self-management to other countries where there is the lack of enabling legislation and the absence of cultural traditions of experimenting with democratic models of industrial organization. This offers a promising area for future research.
Footnotes
This research was funded by a grant from Cooperative Action in the United Kingdom.