Communism During The Cold War

For a long time it was thought that there are only two approaches in economics, Communism, which was driven from economic theories of Karl Marx (Gans et al., 2012), and Capitalism, which mostly comes from theories of Adam smith (Gans et al., 2012). This disagreement led to biggest and most effective phenomenon of 20th century called Cold War. During this war a silent and humble but courageous and effective movement started and developed in Basque, Spain. The idea was simple; workers, owners and managers are same people. Their idea was brilliant and sustainability and development of the cooperatives are witnesses to this fact. Mondragon Cooperative Corporation (MCC) is the first and one the best examples of the cooperative corporations (Hogner, 1993)
This essay attempts to do a comparison between capitalistic and cooperative companies in terms of their approach in ethics, sustainability and corporate governance. In order to be more specific Citi has been chosen as a capitalistic company to compare its principles, regulations and corporate governance with MCC’s 10 core principles.
CitiGroup (Citi) is a multinational financial service corporation, headquartered in Manhattan, New York, United States. It first established in 1812 under the name of City Bank and during one of the history’s biggest joint ventures in 1998 became one of the world’s biggest financial corporations by combining Citicorp and Travelers Group. Citi now holds 200 million customers with 259,000 staff in 140 countries around the globe (Forbes, 2013). Despite huge losses during the global financial crisis, at the end of the first quarter of 2012, Citi had over $420 billion of surplus liquidity held generally in cash and government securities (Citi, 2012).
MONDRAGON Corporation is the embodiment of the co-operative movement that began in 1956, the year that witnessed the creation of the first industrial cooperative in Mondragón in the province of Gipuzkoa; its business philosophy is contained in its Corporate Values: Co-operation, Participation, Social Responsibility, and Innovation. Now MCC has 83,869 worker-owners around the world and they have reported revenue of € 14,832 million in 2011. MCC’s financial reports show 92% growth in net investments between 2010 and 2011 (Mondragon-corporation, 2013).
Before comparing the principles of two companies, there is a need to compare their ethical approaches in terms of ethical theories. According to MCC’s organizational structure and management approach the company follows the ethics of right and justice. They believe in equal right of participation in decision making, equal profit, equal wages and equal right of membership. By studying MCC’s other actions like reinvesting its profit in the region, facilitating the education and helping other cooperatives, it is deducible that MCC also practices the feminism theory of ethics. The theory states that Feminist ethics is an approach that prioritizes empathy, harmonious and healthy social relationships, care for one another, and avoidance of harm above abstract principles (Crane and Matten, 2010). However, Citi practices both egoism and utilitarianism. The main objective of the company is to fulfill the shareholders interests, which is higher profit. This approach complies with egoism theory of ethics. Besides, some other actions of the company like redundancies through the global financial crises comply with utilitarianism. The company decided to make 11,000 jobs redundant in sake of saving the whole company from the bankruptcy and also saving the US economy from a deeper crisis.
The first principle of MCC refers to its policies against discrimination, which is called “Open membership”. According to MCC this principle declares that MCC is open to all men and women, regardless of religion, race, gender, political convictions or origin. It almost declares the MCC’s concern on proficiency (Mondragon-corporation, 2013). MCC’s principle says the only criteria for acceptance are professional capability and a willingness to accept existing regulations. This principle maybe was a noble, modern and courageous one in the historical period of MCC’s initial establishment. Such matter come in to concern of legal authorities two decades after establishment of MCC, acts like The Sex Discrimination Act 1975 and the related Equal Pay Act 1970, and the Race Relations Act 1976.
Citi as a capitalistic company have even higher concerns about this matter than MCC. Citi in its code of conduct indicates that discrimination and harassment, whether based on a person’s race, sex, gender, gender identity or expression, colour, creed, religion, national origin, nationality, citizenship, age, disability, genetic information, marital status, sexual orientation, culture, ancestry, veteran’s status, socioeconomic status, or other legally protected personal characteristic, are repugnant and completely inconsistent with our tradition of providing a respectful, professional and dignified workplace (CITI Code of conduct, 2011). Besides, Citi also have anti-boycott principle which prohibits refusal of doing business with any persons and companies due to their nationality or the similar matters. Comparing with MCC’s, these codes seem to be more in depth and more universal (CITI Code of conduct, 2011).
There are two matters which need to be considered in comparing these two companies about the anti-discrimination principles. First is that the Citi is actually following the US legislation in this matter. In other words the law does not let the Citi or any listed company to act else than this. However, the matter is different about the MCC. This principle was generated through the post-civil war period of Spain in which the political and regional discrimination was in its pick. This shows that this principle comes from the values and origins of MCC as a worker-cooperative corporation.
The second matter is the difference between the definition of member and employee. The MCC’s principle talks about members who are shareholders and workers at the same time and have special privileges in decision making for the company. However, Citi talks about employees, people who are going to work for the company and would not have any impact on major decisions of the company. Comparing these two shows that MCC is more open to people than Citi.
In spite of this difference, obviously, both sides are trying to prevent any ethical issue which is related to discriminations in employment and work place.
The second principle of MCC is related to its democratic method of governance. In contrary with capitalistic companies, MCC gives each member one vote. This is regardless to number of shares, seniority or position. The worker-owners vote under this method and they choose a board of directors among themselves. MCC’s sustainability report issued in 2009 indicates that the first level of participation renders all members equal with the right to attend the General Assembly, in which the cooperatives full sovereignty resides (Mondragon Annual report, 2009). This right has been embodied in the adage: “one person, one vote” (Mondragon-corporation, 2013). This approach complies with the theory of ethics of justice. The theory states that Natural rights are certain basic, important, unalienable entitlements that should be respected and protected in every single action (Crane and Matten, 2010). With this principle the company gives all the members equal right to participate in decision making.
On the other hand, Citi, as an example of capitalistic company, follows the approach of “one share, one vote”. It means that through the voting shareholders votes would be counted according their shares. Through this approach the company gathers the shareholders for annual meeting and takes their votes for major decisions like electing board of directors and CEO remuneration. Obviously, in this method major shareholders play bigger role in decision making and minority shareholder, the one who hold small shares, would not be hopeful for their voice to be heard. This approach complies with egoism theory of ethics in which major shareholders are following their personal interests and do not care about the rest shareholders, especially the minority ones.
The matter of suffrage criteria comes down with different ethical issues. First of all is the issue rises from private equities and leverage buyouts (PE-LBO). A research done by Nielsen shows that by entrance of PE-LBO there is a strong possibility that the system leads to more narrowing of goals and destruction of balanced responsibilities to multiple stakeholders than creative value added (Nielsen, 2008). This issue arises due to lack of democracy in capitalistic corporations. In cooperative corporations like MCC since the number of shares or investment brings no more votes, nobody could interfere the company’s decisions or jeopardize the rights of other stakeholders.
The second ethical issue is proxy voting. The voting regulations of the capitalistic companies and increase of using proxy voting and proxy advisory had came down with conflict of interests between shareholders and proxy companies. The Government Accountability Office of US (GAO) has identified a potential conflict of interest between the shareholders and owners of proxy firms. The report issued in June 2007 by GAO shows that some proxy firms were doing business with both issuers and investors (GAO, 2007). Such conflicts would not arise in cooperative companies like MCC as each worker-owner would vote for him/herself.
Worker sovereignty principle of MCC refers to the value of labour and worker in MCC (Mondragon-corporation, 2013). It indicates that as work is held to be the principle generator of wealth within the co-operative company structure, the corresponding distribution model should coincide with the degree of labour provided. This principle brings high job security for the MCC workers and immunizes them from financial or managerial tolerances. A witness to this fact is the MCC’s action to recent global financial crises. When the global financial crises took hold in 2009, Mondragon members voted for a 9 percent reduction in salary rather than making any worker redundant (McDonnell, 2012)
In capitalistic companies capital accumulation refers to the generation of wealth in the form of "capital"(Bond, np). In contrary to MCC, Citi responds to financial crises by laying off 11,000 of its workers in January 2012 (Schmid, 2012). This is a great ethical gap between these two companies and their organizational structure. In spite of such actions, Citi in its code of conduct mentions the company’s intention to preserve the rights of the employees. Citi gives its employees freedom of association and the right to organize and bargain collectively. However, when the things go though, Citi’s managers decide to cut the jobs rather than payments and in this decision nobody cares about the bargaining power of employees.
By taking redundancy action Citi, follows the ethical theory of utilitarianism and for sake of a greater good, which is the benefit of the bigger group who are shareholders and remaining employees. However, MCC again follows the ethics of justice and gives no right to company to lay off the workers because of crises that they did not cause.
The Fourth principle of MCC is related to capital and investment. The Mondragon Co-operative Experience considers Capital to be an instrument subordinated to labour, which is necessary for business development, and therefore merits a remuneration that is; fair, adequate, limited in amount and assurance of equilibrium. Besides, it should be an availability subordinated to the continuity and development of the cooperative (Mondragon-corporation, 2013).
In Citi also the capital is used for development of the company, however, Citi’s approach to capital and their intentions from capital is different from MCC. The Citi tries to pay maximum dividends to shareholders and of course this is what shareholders desire. These dividends may not be always adequate and is not necessarily assurance of equilibrium. Citi’s core objective, just like other capitalistic, companies, is to maximise profit; however, the objective of the co-op is maximizing net earnings per unit of worker- member (Ward, 1985).
The fifth principle of MCC focuses on participation in management. In its principles MCC indicates that the democratic nature of the co-operative organisation extends to all members, and implies their active participation in the management of the company (Mondragon-corporation, 2013). In action MCC’s board of directors is chosen from the owner-workers, by their direct votes. This method of board election increases the accountability of the management and of course there would not be any conflict between the interests of agents and principle.
In Citi the management approach is different. In Citi the directors are elected by the stockholders at each Annual Meeting by majority vote (other than in contested elections), to serve for a one-year term, which expires on the date of the next Annual Meeting. The Nomination, Governance and Public Affairs Committee nominate annually one of the members of the Board to serve as Chairman of the Board. One of the Board 's most important responsibilities is identifying, evaluating and selecting candidates for the Board of Directors (Citi Corporate Governance, 2012).
In capitalistic companies, like Citi, there is a high potential for conflict between interests of mangers and shareholders. Shareholders want profit and increases in share price, which require major effort on the part of managers, and may suggest low salaries. Managers want to have high salaries and might pursue power and prestige to the detriment of shareholder value (Crane & Matten, 2010).
Besides, in capitalistic corporations employees, as one of the core stakeholders, have little chance to call for their rights. In cases like merging and acquisitions, which would deeply impact the employee’s work place, they have no votes. During the joint venture agreement between the Citi and Morgan Stanley in 2009, 15,000 of Citi’s employees transferred to new company to work under new conditions and new management (Morganstanley, 2009). It has been decided by the management and none of the employees were asked about it. However, in MCC the employees could directly decide about such major strategies.
The other issue which comes down with departure of management and ownership of capitalistic companies is insider trading. Obviously, matters such as insider trading are a result of conflict of interest between employees and shareholders. However, in cooperative corporations as the workers and owners are same group such matters are less likely to happen.
In sixth principle, MCC states that wages should be sufficient, comparable with those of other salaried workers in the region and in keeping with the means of the co-operative (Mondragon-corporation,2013) . At MCC, there are agreed-upon wage ratios between the worker-owners who do executive work and those who work in the field or factory and earn (in theory) a minimum wage. These ratios range from 3:1 to 9:1 in different cooperatives and average 5:1(Herrera, 2004). Besides, MCC’s principle emphasises that wages and work hours should also be comparable throughout the corporation as a whole.
In Citi like other capitalistic companies the situation is different. According to statistics of Payscale the difference between annual remuneration of Citi’s CEO and its employees median salary is more than 106%. While the CEO earns $7,720,000.00 annually the employees earn $72,300.00 in average (payscale, 2012). Wage ratio is in its worst case in Wall-Mart with ratio of 1034:1, and this is only through comparing CEO’s remuneration with average wage not the lowest wage. As an ethical dilemma, Carr & Valinezhad indicate that “agency theory views top management as self-cantered opportunistic agents who would shirk and violate the rights of the shareholders if proper control mechanisms were not developed and enforced” (Carr & Valinezhad, 1998).
In order to reduce the impacts of this issue, capitalistic corporations have tried to impose long-term compensation packages. However, the effectiveness of such packages is strongly related to the culture of the board of directors and compensation committee (Rampling, 2012).
It is worth mentioning that not all capitalistic companies have high wage ratios. For example, annual remuneration of Google’s CEO, Larry page, is just $ 1.00 while the employees median wage is $102,000.00. Or Microsoft’s CEO earns not more than 1,370,000.00 while the employees earn $110,000.00 in average (Payscale, 2013). This makes the Microsoft’s wage ratio 12:1 which is considerably lower than majority of capitalistic companies. By comparing the companies’ profits, revenues and average salaries, it seems that factors like, success of business, nature of corporation and high payment rate comparing to market are the main reasons to these low wage ratios.
The seventh principle of MCC has two aspects. One aspect of this principle is direct co-operation between co-operatives through the creation of profit-pooling subgroups with homogenous sociolabour systems, the transfer of worker-members and the development of potential synergies derived from overall size (Mondragon-corporation, 2013). Other aspects include the creation of mutually beneficial inter-subgroup super-structural entities and bodies, as well as the collaboration of MCC with other co-operative organisations from the Basque Country, Spain, Europe and the rest of the world through agreements aimed to promote joint development.
The situation in Citi is totally different. Citi feels no commitment to help other companies and there is no such a principle in its policies. Citi, just similar to other capitalistic entities, follows the ethics of egoism. The most important matter for the company is its own profit and objectives, no matter what happens to others.
According to its eighth principle, MCC feels committed to contribute to the social transformation of the region in which it operates in the hope of building a freer and more just society (Mondragon-corporation, 2013). This principle of MCC shows the company’s concern to society. MCC reinvests the majority of its profits to support community development to promote local culture and a social security policy based on solidarity and responsibility.
Citi also shows commitment to the society. According to Citi’s code of conduct, Citi plays a strong role in supporting the communities in which it does business (Citi Code of conduct, 2012). Although Citi shows commitment to the society, its attempts are limited only to philanthropic actions. In contrast, MCC tries to increase the welfare of the society by reinvesting its profits and making new employments. This commitment would have deeper and more long lasting effect on society than philanthropic actions.
In its ninth principle MCC proclaims its solidarity with all those who work towards economic democracy in the field of “Social Economy” and share the common objectives of the international co-operative movement: Peace, Justice and Development (Mondragon-corporation, 2013). In this principle MCC practices the feminism ethics in which they try to do all actions to care for one another and to improve the society’s health and homogeneity. They declare that they will support all the similar cooperatives to reach to cooperative values.
Citi as a capitalistic company does not claim responsibility to spread and develop any value through the world. Of course Citi supports the human rights, anti-racism and freedom of speech, however, none of them has been mentioned as the objectives of the company or its responsibilities. According to Citi’s official website, the primary objectives of Citigroup 's funding and capital raising activities are to support the execution of our business strategies while ensuring: Sufficient sources of funding and capital to support business objectives and future growth plans and Liquidity across market cycles, and through periods of financial stress (Citigroup, 2013). Besides, Citi does not claim any solidarity with any other corporations. Any relationship or collaboration with other companies, like their recent joint venture with “Morgan Stanly”, is just for profit maximisation.
The development of the all above principles is only possible if sufficient attention is paid to education and the necessary human and economic resources are provided for both cooperative and professional training (Mondragon-corporation, 2013). The outcomes of this principle are obvious in establishment and support of University of Mondragon, which is established by MCC as one of the core educational subgroups of MCC. Statistics shows that Mondragon University’s graduates find jobs within 3 month after graduation due to strong link between MCC and university.
Citi also emphasises on education. In 2003 the company established Citi Financial Education Curriculum which mainly focused on increasing the financial knowledge of the customers. The program, which ultimate in 2011, seems to be more a customer service rather an attempt to increase the society’s knowledge. Citi have also provided financial education facilities for its employees to have 24/7 access to resources to increase their financial knowledge (CitiBank, 2013). However, none of these facilities seem to be an action in sake of the society but are mostly designed according to company’s profit making approach.
In conclusion, it seems that two companies follow approaches according to their objectives. Citi’s target is to maximise the profit and their actions from educating staff up to redundancies comply with it. However, MCC’s objective is higher profit per capita, welfare for the members and the society as whole. So, they have designed their principles aligned to these goals. Although they have some similarities in principles like anti-discrimination regulations, there have a great gap in their approach toward the society, employees and shareholders. Due to difference of context, objective and nature of society’s economics, it is really hard to say which one follows the better approach, but a brief comparison of outcomes shows that cooperative companies have had better impacts on their society comparing with capitalistic ones.

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