The Cooperative Principles and Its Economic Consequences
By Chaopeng Huang
The cooperative principles and values are complicated and intricate. Due to the word limit of the statement, I will concentrate on the discussion about 4 (out of 10) principles of Mondragón, and some consequences of the realization of those principles (principles are presented in the order that is convenient for discussion).
The first principle is open admission. It basically means that the membership is open to all those who accept the basic principles and are professionally capable. The only restriction put open admission is the practical needs and business requirements of the cooperative, and the worker’s performance during the probationary period. This principle does not reflect much difference between Mondragón and conventional firms. Conventional firms, though may not explicitly express, have admitting standards, which is the evaluative tool against prospective employees.
Professional management literature stresses that decision making structure and compensation structure are two important constituents of organizational structure. Taking this perspective, the second, third, and fifth principle of Mondragón constitute the most of the decision making structure and compensation structure. The combination of second principle and fifth principle set up the framework of decision making structure. Those two principles are the principle of democratic organization and principle of participatory management. As introduced by Smith (2001), the general assembly is the final authority in each co-op. Its powers include: appointing and revoking members of the governing council and the account auditors by means of a secret vote; examining company management; approving the annual accounts and the distribution of surplus and apportioning of losses; approving the general co-op policies and strategies; approving increases in share capital, and determining the rate of interest to be accrued by capital contributions and the entrance fees for new members; modifying the company statutes and approving everything implied by a substantial modification in the economic, organizational or functional structure of the co-op. |
As far as I can see, these two principles mirror the most distinguished feature of cooperatives, and its impact on the economic outcome of such cooperative is pervasive. It is obvious that cooperative is distinct from conventional firms in a sense that its members are the shareholders (collectively ownership of cooperatives) and board of directors. Therefore, one can conclude, though may be presumptuous and incomprehensive, that a cooperative is a shareholder managed entity, and every shareholder has an equal right. This conclusion has some very important implications.
First, by adopting such structure, it greatly reduces the agency problem and therefore the agency cost; hence it improves efficiency. Second, it eliminates the complication of rendering protection to minor shareholders because according to the democratic organization principle, a cooperative is operated on “one member, one vote” basis.
Third, the implementation of such decision making structure may pose problems when the organization is in jeopardy. Apparently, the decision making process in a cooperative is longer than conventional firms, which may be problematic when a quick decision needs to be made and implemented. Fourth, though the full transparency reduces the problem of information asymmetry, but it as well may deteriorate the quality of decision because sometimes the effectiveness of decision is greater when it comes as a surprise.
The third principle, termed as the sovereignty of labor, is associated with the incentive structure of a cooperative. It means that labor is granted full sovereignty and the wealth created is distributed in terms of labor provided and there is a firm commitment to the creation of new jobs; moreover, the income distribution is commensurate to the labor committed by each member not on the basis of holding in share capital. This incentive structure is better as opposed to the cooperatives in Yugoslavia, where the income is equally distributed to each member. The materialization of such incentive structure reduces the problem of social loafing, and gives incentives to additional labor commitment. Nevertheless, it creates a dilemma for performance appraisal, because always it is the quality of effort rather tan quantity of effort is what matters. Labor provided of a member could not be in accordance with the real performance of that member.
In sum, the cooperative in Mondragón is successful in a sense that it is at least equally competitive as conventional firms, but it gives members more equity. Future investigation on such cooperative system is still needed to answer the following two questions: Can the case of Mondragón be generalized as a success? Can such principles be applied on a larger scale, say a country, where a more intricate human network and grapevine is at presence?
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