Spain: Laboral flies the co-op flag

Jon Emaldi Abasolo surveys the remains of Spain’s devastated banking landscape and scratches his head. He’s genuinely confused. “We know how we manage our bank,” says Abasolo, a director of the Basque savings bank Caja Laboral Kutxa, part of the Mondragon group of co-operative businesses (MCC), “and we know that it is managed properly. And we ask ourselves if it could be any better managed than it is if we paid ourselves 10 times more?” He answers his own question: “I don’t think so.” It’s a question that may well be asked of the British enterprise regarded by many as the grandfather of co-operative banking. Once seen as a global model for community banking and business, the Manchester-based Co-op has become a byword for notoriety, capped last month by losses of £2.5 billion ($4.2 billion), mostly accumulated at the Co-op Bank, revealed by its parent, The Co-operative Group after what the group admitted were “fundamental failings in management and governance at the group over many years”. Jon Emaldi Abasolo Jon Emaldi Abasolo, Caja Laboral Kutxa Abasolo’s musings come as he leafs through industry comparisons matching Laboral with competitor banks in Spain, including its main rival in this prosperous part of Spain, the Bilbao-based and privately owned Kutxabank. Unlike many of their competitors, such as the giant Bankia, still sputtering through Spanish banking’s prolonged crisis, neither Kutxabank nor Caja Laboral have needed – or sought – to be rescued by Spanish or other European taxpayers. And both have been healthily profitable in not doing so. In the past calendar year, Kutxabank made €108.3 million in profit. Caja Laboral, headquartered an hour’s drive east from Bilbao in the small mountain town of Mondragon, made €104.3 million. These banks have been fortunate to be primarily operating across the prosperous and heavily industrialized Basque region, which has been only slightly dented by Spain’s crisis because, many Basque nationalists argue, their homeland is not really Spain. Abasolo says hard work is an entrenched part of Basque culture, equating it to the British cliché about Scots being thrifty. But that’s where the comparisons end. Kutxabank’s senior managers achieved those results with average annual salaries of just over €400,000, low by recent standards in Spain, where bankers routinely award themselves €1 million-plus remuneration packages, running high-risk banks that would ultimately vanish during the crisis. At the Caja Laboral co-operative bank, executives managed to achieved its solid numbers while taking home an average annual salary of €88,000, a positively parsimonious number many bankers wouldn’t bother getting out of bed for. But, surely, given industry norms, Laboral’s labours must be ballasted by a generous share options and bonus package? No, insists Abasolo, who’s worked at Laboral and its Mondragon associates for the best part of three decades. He’s a part owner of Laboral, as are thousands of his colleagues through the Mondragon network, and owns stock worth about €150,000. Abasolo says the volume of business and productivity generated by staff at both banks is very close. His point is a simple, though unstated one: bankers pay themselves too much. He says that when he sees articles in the international business press about the gigantic salaries and bonuses of bankers elsewhere “we do tend to think they are a bit crazy”. The broader incentive Laboral executives work for is to do good for their community, he says. This community of purpose is more compelling to nationalist Basques banding together for the common cause than it is to get rich, he insists. “If you are personally ambitious, or if you became a banker to get rich, you won’t find your career here at Laboral,” Abasolo says. He adds: “You can be ambitious in wanting to reach a high post in a bank. Yes, you can do that here, but it won’t be to make a lot of money for yourself. We are a unique bank in Spain, and probably the world, because 90% of the employees are owners of the bank.” It’s clear that Laboral is not like other banks. With an asset base of €25 billion, outwardly Laboral operates as a normal retail bank, a traditional Spanish caja with its emphasis on housing and community. Its main retail business is centred in Spain’s northwest, bordering France, with some 380-odd branches through the Basque country and neighbouring Navarre region and around 20 in Madrid and Barcelona. In its home region, Laboral has filled the meat-and-potatoes retail niche largely abandoned by Spain’s traditional community-oriented cajas in their rush over the past decade to corporatize and transform themselves, often with catastrophic outcomes, into sharp and slick commercial banks. The caja branch network across Spain has fallen by more than a fifth since the crisis. As Spain roared, cajas like Laboral looked quaint and old fashioned in eschewing the big corporate borrowers, the proverbial tortoise to the impatient hares being reinvented in faster, sexier climes elsewhere. But by 2011/12, that strategy, if that’s what it was, looked prudent as scores of Spanish cajas-cum-banks crashed, were forced into mergers and begged for bailouts. Abasolo says Laboral watched as the world changed around it, but was precluded by Mondragon’s co-operative principles from joining the party. “We wouldn’t have been able to keep up even if we had wanted to,” he says. Mondragon, the Basque region’s biggest commercial enterprise, is better known as the world’s largest co-operative. Operating across manufacturing, finance, retail and education, it doesn’t have employees but ‘members’, around 80,000 of them and most of them – around 85% – owners of the businesses they work for. And they direct them too. Management at Mondragon is organized in linear structure, with power flowing from the bottom up. Via a series of assemblies and formal consultations, worker-members choose their executives – and can fire them too – and have the authority to make the critical decisions of the enterprise they work for. It’s the precise opposite of how power flows in conventional capitalism, with executive decisions handed down the power pyramid from executive board to factory floor. “The key word here is consultation, at every level,” says Abasolo. He says that every management conversation about risk and investment at the bank is underpinned by a firm belief in and adherence to the co-operative’s values. Abasolo’s point about salary and designs on accumulation of personal wealth is also well made. At Mondragon, executive salaries are restricted to just 6.5 times the lowest-paid workers’ salaries. The Mondragon Corporation lays claims to have virtually reinvented capitalism. It was founded in the early 1940s by a Catholic priest from a tiny Basque village – Father José María Arizmendiarrieta’s bust is proudly displayed in the Laboral lobby – at a time when Spain was still smouldering in the ashes of the civil war that had ravaged much of the Iberian peninsula. Jobs and security were needed and Arizmendiarrieta’s vision was a self-sustained and community-based bank, focused less on profit than on humanism. With a casual atmosphere that’s more university campus than Wall St, religion is absent from Mondragon’s guiding philosophy, Abasolo says. “When bankers talk about social responsibility, they are really talking about this,” he says. “I think our priest was 40 years ahead of his time.” Transparency at Laboral, explains Abasolo, means sharing everything within the reasonable boundaries of commercial discretion. “Some people who have dealt with us have said we are too transparent, that there is too much information.” Because of Laboral’s tendency to debate and decide via committee, it has been criticized as being too linear in its management style, and time-consuming in its careful, perhaps even over-analysed, decision-making. “Yes, this is a criticism that we have faced,” Abasolo concedes, “but when the crisis comes, there are no complaints about our speed. Not at all.” He sees it as maintaining a “special care” in customer relationships, almost to a degree familiar in private banking. “We are still here.” More than 50% of Laboral profits are ploughed back into Mondragon for reserves, as well as job creation and social goals, while 10% goes to various charities and community groups, including NGOs such as Amnesty International. Laboral also sponsors the region’s premier basketball team, Saski Baskonia, based in the nearby Basque capital, Vitoria, and a leading team in Europe’s peak basketball Euroleague competition. Given the huge imprint that the Mondragon co-operatives have over the Basque region, it is unsurprising that members have been elected to posts such as the Mondragon mayoralty and as head of the Basque regional government. But unlike the cosy politician-banker nexus that has developed elsewhere in Spain over the past decade, Abasolo insists neither were placemen of the co-operatives in seeking office. “We do not have politicians involved in Caja Laboral.” Politically, he says MCC employees tend to be “very nationalist”, which in this historically restive region has tended to means pro-Basque independence. “They have been left-wing in terms of independence from Spain,” he says, “but not necessarily in terms of their social commitment.” Euromoney asks Abasolo, a one-time lecturer in economics, if business Mondragon-style equals capitalism as it is conventionally understood and practised. He pauses for thought. “It’s a good question. It is market capitalism in the sense that the interchange of products and services takes place in the market, and the market here goes according to capitalist principles. But within the business itself, capitalist rules don’t apply up to quite a level.” That’s because, under Mondragon’s founding charter, workers participate in the ownership of their corporation’s assets, profits and management. “This is something that our group [of co-operatives] stresses.” Abasolo says the “most difficult one is the democratic management rule” in which MCC’s utopian principles need to give way to a more workable pragmatism, lest chaos reign. Given the banking-is-broken sub-text of much of the discussion surrounding global banking since the 2008/09 trans-Atlantic meltdown, and in wounded Spain in particular, it’s intriguing that the Laboral model has been put forward in corporate academic circles as a workable alternative to the sharper practices that contributed to banking’s fall, a return to a genuinely customer-focused relationship of years past. The curiosity is all the more so given that it is neither Wall Street, The City, nor even Madrid’s Azca district outside Laboral’s windows, but a small town in rural Spain, an hour from any city of size. Despite its politically restive reputation for independence, the Basque region has traditionally been healthier, economically, than the rump of Spain. Unemployment in Spain has reached 27%. In the Basque region, it is around 15%. Rusted-on Basque nationalists like to say that’s because their heavily industrialized homeland, which they call Euskadi, isn’t really Spain; that the region functions with a different mentality to the rest of a country that’s still reeling from the economic crisis, with its deep recession, crippling unemployment and collapsed property market. Laboral’s Abasolo laughs, and adds with a wink. “I wouldn’t say so, even if I think it.” But there is no doubting Laboral, and indeed the MCC, takes its Basque cultural identity very seriously, as evidenced by the distinctive works of the late and celebrated sculptor Eduardo Chillida, regarded as a national treasure in the region, whose large sculptures surround the Laboral buildings. (Indeed, in the culture battle waged alongside the violent 50-year terror campaign by Basque extremists, Chillida’s style was often copied by such groups so as to underline their nationalism.) txomin garcia Txomin Garcia Txomin Garcia has been Laboral’s executive chairman since 2009, coming to Laboral from industry, not banking. And it has been an eye-opener. “The losses in the system, with provisions and so on, have been equal to the total capital of our banking system as at the beginning of the crisis. We have lost 25 banks. Just disappeared,” says Garcia. “But the situation here at Laboral is very different. We didn’t have a real estate boom like the Mediterranean coasts. The different thing about the Basque region is that the industrial base is more than double that of other parts of Spain.” Despite the recent Brussels-directed clean-out, Garcia foresees further restructuring of Spanish banks, citing the crisis-merged Bankia among others as needing to be sold or merged into stronger entities. Garcia says the main reason why the Basques have been able to dodge the worst of the crisis that has beset the rest of Spain is because the local government administrators, who operate autonomously from Madrid, are more efficient. “We are much better regulated and managed,” he says. Industrialization has also helped. The region’s economy has a manufacturing and exporting base that is 10% higher than the Spanish average. He cites Laboral’s non-performing loans, compared with the overall bad debt in the Spanish banking system. He says that by the end of 2014, NPLs are expected to account for 14.3% of all loans in the Spanish system, up from 10.4% in 2012. But it’s a different picture at Laboral, with NPLs measured at 7.9% at the end of June last year, as against the national average of 12%. Moreover, Laboral says around a third of what it classifies as NPLs are actually functioning and serviced. “It is just that we apply a very conservative rule to our portfolio.” In common with many Spanish banks, Laboral had bonds from Lehman Brothers, amounting in its case to €162 million. It absorbed a €70 million hit in 2008 when Lehman failed. Such numbers haven’t escaped the notice of the ratings agencies. In October last year, Moody’s measured Laboral as a Ba1 risk, one of the highest of the Spanish banks it follows. Moody’s said “the confirmation of the ratings reflects the bank’s ongoing resilience to the challenging operating environment, as evidenced by the very moderate asset-quality deterioration in Q2 2013, significantly better than the Spanish banking system average.” Fitch too was complimentary. In ascribing a BBB rating to Laboral, the same as the Spanish treasury itself, just shy of the BBB+ plus it afforded to big Spanish banks Santander and BBVA, but better than the BBB- of Madrid and EU-assisted Bankia, Fitch noted that Laboral’s “conservative risk management prior to the crisis has resulted in fairly low exposure to troubled real-estate developers and relatively low impaired asset books. In Fitch’s view, Laboral’s impairment reserves appear strong.” Things were even better a year earlier, before the conservative Laboral embarked on a rare expansion. In November 2012, Laboral took over the smaller Basque caja Ipar Kutxa, based in nearby Bilbao, which had failed to seal a 2011 deal with France’s Crédit Agricole and its Basque-based Bankoa operation. Laboral had been following negotiations closely, and when the French demurred, distracted by worsening numbers back home, Laboral stepped up. Abasolo says Laboral knew Ipar Kutxa well, and was close to it in culture and co-operative philosophy. Although Ipar Kutxa was a fifth the size of Laboral and easily absorbed, the merger helped earn the combined entity a ticking off from Moody’s. The ratings agency noted that Ipar Kutxa appeared to be more exposed to the struggling commercial real estate sector, making the merged bank “more vulnerable to scenarios of further economic deterioration”. Although Moody’s said it believed Laboral’s strong retail franchise would help the bank fiscally weather any drama that might arise, it was enough to earn a downgrade to “Ba1, outlook negative”, the level it maintains. Abasolo says Laboral has been growing an average 5% annually in the savings market over the past decade, despite the wider national catastrophe. He says savings have been stable because the bank took a conscious decision at the outset of the crisis not to participate in the price war that Spanish banks embarked on in a desperate bid to win new business to offset loan losses when the national property bubble burst through 2008/09. He says that decision meant a slowing of new business after 2011, as the fuller extent of the meltdown gripped Spain, but that period has now passed. “We don’t share the view that the crisis is over,” he says. “From a technical point of view, yes, but not measured by demand and confidence, the view of the man in the street.” The recession will break in the last quarter of 2014, he predicts. At Laboral, lending to property developers accounts for less than 6%, while mortgages to first-home buyers are around 75% of its loan portfolio. “We have a basic rule: no speculation,” Abasolo says. But he says it’s a rule that is leading to a loss of opportunities, as asset classes have tumbled in price to attractive investment levels. “We didn’t decide not to invest in real estate. We did, but did it fairly late and we saw it as a business that was not worth the risk and without community benefit. “It is not a question of having our type of values, but a question of the way we manage our bank.” The current debate at Laboral, as Spain’s trashed economy shows signs of recovery, is whether or not Laboral should invest in nascent SMEs seeking start-up credit. “We tend to think we need to provide more loans to SMEs,” Abasolo says. “We will continue to be extremely conservative in capital markets, whereas in SMEs we are a bit less conservative.” All this prudent prosperity is supposed to guarantee job security, seen as one of the guiding principles of the Mondragon ethos. Indeed, in the town of Mondragon and its surroundings, where MCC provides about half the jobs, unemployment is largely nonexistent, a stark contrast to the 26% being suffered elsewhere in Spain. Indeed, such is its reputation that the region has been a magnet for jobseekers from other, crisis-stricken parts of Spain. Still, there is no such thing as corporate utopia, as a rudimentary protest in the centre of Mondragon village betrays. A crude sign locals never thought they would see asks: “MCC? Sabeis lo que significa de la palabra co-operativismo? – Do you know the meaning of the word co-operative?” That it is written in Castellano, or conventional Spanish, and not the Basque Euskera that’s commonly – and controversially – spoken in these nationalistic parts. It makes the protest message more eloquent, implying that Mondragon’s predicament isn’t simply a local drama; it’s a national crisis. The protest has been prompted by the €1 billion-plus bankruptcy of MCC’s main business unit, the big Spanish domestic appliances maker Fagor, the Mondragon flagship. There has also been the less than edifying sight of a sit-in at industrial estates around Bilbao, where Fagor has long been a big employer. At one visited by Euromoney, about 200 staff gather around winter log fires in a rolling vigil in what ordinarily has been a Fagor distribution and despatch bay. “They’ve abandoned us,” says one protestor. “They say they will place us in other companies, but there has been nothing yet. They are liars.” Another complained that the worker-members have not been given a say in Fagor’s plight, and that management has trashed the business. Fagor has been the victim of a perfect storm, and partly of Mondragon’s own corporate principles. As a leading appliance maker, competing with Philips, Ariston et al, Fagor has seen its competitors maintain price-effectiveness by sending manufacturing offshore, particularly to low-cost China. That’s an anathema to Mondragon and its community-first ethos. But if that was a tough strategy in maintaining low costs, the economic crisis made it a struggle too far. Sales at Fagor slumped from €1.7 billion in 2007 to €1.2 billion in 2011. As the parent co-operative kept bailing it out, debt piled up, eventually reaching more than €1 billion before Mondragon pulled the plug. Former Mondragon executive Adrian Zelaia, who now runs an economic think-tank for the Basque region, says Fagor ignored basic business principles in not investing in product development and seeking new markets. “It thought it could get by with being a big supplier in Spain and France,” he says. Fagor’s failure has shocked Mondragon, leading to criticism that the co-operative is little more than a fair-weather friend. Abasolo says he understands the outrage, adding that it’s natural that when people lose their jobs they look to the co-operative for protection. But he says the co-operative system is not a safety net. “We are not the government, providing the shelter of a nanny state. That is absolutely impossible in this economy,” he says. He says the community is riven by a debate as to why MCC has decided not to put more money into saving Fagor, its flagship business. “We have lost a lot of money [at Fagor],” says Abasolo. “There comes a moment when it’s no longer possible to go on. You should find another way to develop your business.” Mindful of the dramas besetting Fagor, Abasolo is keen to point out that loans to other parts of Mondragon amount to just 3.2%. “We are not the private bank of Mondragon,” he insists. Despite the dramas at Fagor, Mondragon’s plight is a long way from the crisis and scandals that have beset the UK’s Co-operative Group in recent months. Abasolo says a posse from the Co-op visited Mondragon in the late 2000s to seek help in developing what Abasolo describes as a “better equilibrium” between its members. They also came looking for investment. “They thought our model was sounder,” Abasolo says. “We made some steps, but it was not possible at that time. Our interests here are more calibrated. We don’t have problems with trade unions. We have a different culture.” Is being Basque the key defining point, Euromoney asks? He’s diplomatic, saying that the Co-op Bank’s struggle in the UK springs from the fact that it operates on a national scale, whereas Laboral’s more nationalistic focus is as an alternative bank for the prosperous Basque region. “If they were focused on Manchester, it would be a completely different profile.” “When we have gone outside the Basque country [Laboral opened 30 branches in Spain’s Zaragoza region just before the onset of the crisis], it worked only up to a point. Ten branches were subsequently closed. “It’s very important to be relevant in the market. The Co-operative Bank has this problem. They are spread everywhere and they are not really relevant. “Who goes into a Co-operative Bank? Someone who is politically interested, who is left-wing. But that is not enough.”