the role of business in civil society governance cies y emes network

THE ROLE OF BUSINESS IN CIVIL SOCIETY GOVERNANCE

By Isabel Vidal Centre for Research on Economics and Society – CIES - Parc Cientific de Barcelona Torre R+I+D Baldiri Reixac 4-8 08028-Barcelona, Spain Phone: +34 934335490 Fax: + 34934034510 Email: [email protected] Web site: http://www.grupcies.com

Comunication presented at the 4rd EMES International Research Conference on Social

Enterprise. “If not for profit, for what? And how?, Panel Title: Governance and Democracy.

Thematic Line: Governance of social enterprise, July 1-4, 2013, University of Liege, Belgium.

mailto:[email protected]

http://www.grupcies.com/

T h e R o l e o f B u s i n e s s i n C i v i l S o c i e t y G o v e r n a n c e

2

Summary

This chapter describes the development of strategic alliances between civil society

organizations and business corporations. Strategy is understood as the determination of basic

goals and implementation of policies and action plans to achieve the established objectives.

Strategic alliance, in turn, is defined as a long term partnership which each member uses as a

tool for implementing strategic plans in their relations with the community.

This chapter presents the causes that promote the coordination, the benefits of cooperation as

a mechanism to share risks, the resources and the complementary skills as well as the

possibility for each individual member of the strategic alliance to more easily achieving its

objectives or goals.

In addition, the risks related to an alliance are described in comparison to the solitary

performance of an organization, e.g. the occurrence of problems related to the compatibility

of cultures and objectives (short-term orientation versus long-term, inadequacy of the results

to the expectations of each of the members of the alliance). Finally, the impacts of these

alliances on the governance of civil society organizations are described. These impacts include

greater emphasis on performance measurement and accountability of CSOs, a stronger

orientation of CSOs towards fields of interest to business partners, and adoption of corporate

governance models by CSOs.


3

I. Introduction

Formal and willing cooperation, as well as networking, are not themselves new. Cooperatives

are voluntary associations, very often, of small entrepreneurs that use the cooperative as a

tool that serves the sustainability of their own companies. The creation of industrial districts

(Marshal, 1890), (Becattini, 1979) or clusters (Porter, 1990 and 1998) are other formal and

informal cooperatives in a specific arena and specific time, with a goal to facilitate the viability

of private business. This chapter focuses its analysis on the formal and voluntary cooperation

between civil social organizations (CSOs) and business corporations. CSOs will be defined as

the set of non-profit organizations and social enterprises, sponsored by citizens, whose

primary objective supports the general interests of citizens. Business corporations will be

defined as those capital associations whose primary objective is the maximization of profits.

Civil social organizations and business corporations are similar. They are both organizations

that coordinate a set of inputs, which result in goods and services that are intended to

maximize the function and objective of each of the organizations. In a market economy that

fulfills duties of coordination, the question that arises is why should organizations exist that

have coordination as a function, when the market mechanism is already in place? As it is

emphasized by Fernandez de Castro and Tugores (1991:2) a market structure characterized by

product homogenization, symmetric information and voluntary changes “is not a universal

phenomenon”. As a consequence the central coordination emerges. Coase (1937) and

Hansmann (1980) justify the presence of the business and the CSO respectively as a

consequence of the existence of asymmetric information and transaction fees. Consequently,

it is said that the CSO and business corporation are the results of centralized coordination of

resources and wills. Easley and O’Hara (1986:85) remark that quite often “economists consider

the CSO as economic anomalies and organizations that are outside of the real economic

system”. Nevertheless, Weisbroad (1975), Hansmann (1980), Easley and O’Hara (1983) and

Avner Ben-Ner (1986) argue that the CSO exists not only for altruist or historic reasons, but

also because it represents the optimal organizational form or coordination for the provision of

certain goods and services, even more in market situations where asymmetric information and

incomplete contracts are present. This theoretical perspective allows us to consider that

businesses, public administrations and CSOs have their own function and space within the

market economies. The simultaneous occurrence of multiple actions of willful coordination is

complemented by the decentralized coordination provided by the different markets. The

existence of strategic alliances between the civil social organization (CSO) and the business


4

corporation is yet another kind of willful and centralized coordination; however, this time

between two parties, the business and the CSO. This type of coordination is not new either.

Favreu (1990) reminds us of examples of cooperation between businesses and social

movements that took place in the 1980’s and 1990’s in the U.S. and Canada, particularly in

Quebec, in collaboration with the local administration which resulted in the establishment of

community economic development corporations (CEDCO). In modern terminology these would

be examples of the public-private partnership (PPP). In the European project, The socio-

economic performance of social business in the field of work integration (PERSE)1, one of the

foremost conclusions for the Spanish case was that those CSOs with a primary objective was

the social integration of people of difficult employability, should work in a strategic alliance

with the business corporation to facilitate the transit of such people to the labor market.

Objective and Structure

This chapter focuses on two actors, the CSO and the business corporation. The chapter

objective is to consider the conditions that should be present so that these two parties choose

to formally cooperate with each other. To be able to accomplish this purpose, we start with

the conventional analysis of microeconomics, which supposes that the behavior of these two

parties always adopts the form of restricted maximization. Each actor must select from a

specific group of options, choosing which they think will the one maximize their primary

objective. In the case of the CSO, the primary objective could be “to do good”. In the case of

the business corporation, it may be the “maximization of profits”. However, the actions that

each one of these actors executes will depend upon the opportunities that are present. In the

same way, those opportunities frequently depend on the collective actions of other actors.

Furthermore, the consequences of each party’s actions depend on the choices made by the

other actors involved. Among the actors within this institutional framework of

interdependence, the option to cooperate creates an equilibrium between all parties and each

party thinks that it has made the best possible decision within the institutional framework.

Evidently, the equilibriums are dynamic and evolving. To suppose that the equilibriums evolve

signifies changes in the behaviors of the actors and it forces the parties to generate the option

of cooperation as an answer.

1 Between 2002 and 2005 the european network of researchers L’Emergene de L’Enterprise Social compleated the project the socio-economic performance of social enterprise in the field of work integration (PERSE). An outcome of this project was the book Nyssen, M. (editor) (2006), Social enterprise. At the crossroad of market, public policies and civil society. Routledge, Studies in the Managment of Voluntary and non profit organizations, London and New York. ISBN 10:0-415-37878-8, 2006 page 335.


5

This chapter is divided into eight sections. The first section is the introduction. Then, the

conditions with which the CSO and business corporation opt to cooperate are analyzed, with a

reflection about the advantages and risks of networking. Once the questions of “what for” and

“why” cooperation have discussed, attention is focused on the construction of strategic

alliances. A definition of cooperation is then given based on an essential condition that each

member in the web has its own vision and strategy prior to the alliance, hence, the concept of

strategic alliance. The fourth section describes the development process of the different forms

of cooperation between the CSO Atzegi and diverse partners, which resulted in the Gureak

Business Group. The fifth section relates networking to trust capital and trust capital to social

capital. It is maintained that prior to the alliance each member must have accumulated trust

capital. The sixth section explains the risks that a CSO takes on when it decides to use alliances

as mechanisms for business growth. This article ends with some final thoughts and the last

section the bibliography provides.

II. Conflict or Cooperation? Conditions for the Cooperation to Occur

After a long history of confrontational, parallel and solitary performance, Favreau (1990:6)

notes that the popular movement in the Province of Quebec rejected sectarianism and ask

quires, “is it a right turn or a new way to do politics?” To answer this question, Favreau

describes the social and economic context of the Province of Quebec and Montreal during the

70’s and 80’s in the twentieth century. During this timeframe Quebec and Montreal registered

a strong economic decline, manifested in the delocalization of businesses and total

abandonment of industrial sectors. The severe recession of economic activity impacted

employment, the citizens’ quality of life, and led to the progressive and rapid deterioration of

neighborhoods. To Favreau (1990:7) this radical change in the economic and business

surroundings is the reason that social movements begin to show interest in social problems

and to abandon their ambitions of radical social transformation; “in the eighties there were no

ambitions of social radical transformation: there is desire to support good causes, and be open

to collaborations”. Hamel (1990) points out that it is within this context of uneasiness in

regards to the local development that the partnerships between the public and private sector

came to life in Quebec. Hamel (1990) states that in situations where there is social stress it is

more likely that the social forces, social movements, businesses, unions, universities and

administrations choose cooperation as an efficient instrument to solve the daily problems that

are generated by the adverse environment to facilitating social innovation.


6

Harrisson, Chaari and Comeou-Vallée (2012) explain the confrontational process against

collaboration that occurred between the public utility, which produces and supplies energy

and the confederation of associations in defense of the consumers in Quebec. The situation

began as follows: The electric company cut off the power supply to those citizens that could

not pay their bill; in reaction to this, the confederation of associations in the defense of the

consumers orchestrated a campaign to protest against the electric company, since what they

were doing was affecting those with a greater need. This shows that the first option chosen by

both was to confront each other. Nevertheless, Harrisson, Chaari and Comeou-Vallée (2012)

show how the alternate option of cooperation proved to be the most satisfactory for both

parties, as each one of the actors achieved their goal. Dialogue and the achievement of

satisfactory agreements for both parties was possible due to the interrelated actions

perpetrated by the public utility and those of the confederation of associations in the defense

of consumers. This shows that what one actor achieves as a result of their behavior not only

depends on their own strategy but also on the strategy chosen by the other actor as well.

The strategic alliances developed among the different actors with distinct primary objectives

could be beneficial for everyone. The option to cooperate could be seen as a mechanism to

share resources, knowledge, abilities and supplementary skills, which facilitate the

achievement of the primary objective of each participant organization. For example, a

strength that a CSO has is its capacity to communicate with local people, as they have the

respect and the credibility of the citizens that gave it its moral authority. For a business that

wishes to create a new market for its products in a socially and culturally unknown

surrounding, finding and cooperating with a local CSO will allow it to have access to that new

market in an easier and more cost effective manner. Next, the case of Hindustan Unilever

Limited is presented. This is an example of success in business related to the bottom of the

pyramid (BoP)(Prahalad, 2005). In the Hindustan Unilever Limited case an instrument that

facilitated success for the business was the alliance that the business established with the CSO

and the local government. Hindustan Unilever Limited argues that if the local CSOs accepted to

play the role of the interface between the people, particularly the poor and needy and the

business corporation is because the CSOs saw the opportunity for personal hygiene products

to be within the reach of the BoP consumers. The CSO utilized collaboration as a supplemental

instrument in their primary objective to stimulate and educate the rural population on

personal hygiene habits.


7

The Hindustan Unilever Limited’s case

Hindustan Unilever Limited (Hindustan, from here on) is a branch of the Unilever Group in

India. Hindustan is considered one of the chief businesses of consumer goods in that country.

This branch markets a wide range of food products, drinks, personal care products and

detergents. In the fiscal year of 2010, the business showed a net profit of 358 million Euros

and revenues of almost 3,000 million Euros. Nowadays, detergents and personal care products

represent most of Hindustan’s revenue and are the product lines that provide more profit

margins to the business.

In 1987 Hindustan decided to introduce a low cost detergent. The population in India is

dispersed, located mostly in rural areas, (in 2002 they represented 72%) and lives with a lack of

infrastructure. Hindustan developed its business plan. The model was totally centered on the

specific needs of the bottom of the pyramid (BoP). The goals of Hindustan’s project in the BoP

were to increase the exposure of its products in the rural market (distribution system

approach), to change certain attitudes with regards to the use of diverse product categories

(product approach) and to catalyze rural prosperity and with that to boost market growth

(combining marketing strategy and strategic alliances approach).

Shaki Project

In the year 2000 through a pilot program in the state of Andhra Pradesh, Hindustan launched

the Shaki project with the intention of increasing its presence in the rural markets of the BoP.

That project was initially based on the system of access to credit created by Grameen Bank.

Using that system Hindustan offered or facilitated the access to credit to relatively small

groups of women. From there, Hindustan focused on offering to the receivers of credit the

opportunity to collaborate with them marketing their products. During this process Hindustan

requested the local CSOs’ collaboration with the idea of facilitating the access to credit to the

aforementioned groups. The project that Hindustan proposed posed a major change to the

traditional microcredit model. The intermediation or the facilitation of the credit was not the

end goal, but to offer the rural population a concrete and real possibility of increasing their

income and foster their entrepreneurial spirit. Towards the end of 2009, the Shaki project had

45,000 entrepreneurs, 3 million customers distributed between 100,000 villages. The revenue

from the Shaki project was came to about 10% of the total Hindustan rural revenue.

Hindustan also developed alliances with governments and local CSO to collaborate with them

and promote their entry in the BoP with specific projects. In Manwani in 2007 Hindustan’s


8

President stated that the best way to enter into markets that have a high social and cultural

complexity was through agreements with interested parties. The President concretely noted

that the branch of Unilever is a member of the Bhavishya alliance, which is based in different

agreements between the private sector, the government and the NGOs with the objective of

having a positive impact upon the level of malnutrition in India.

A clear example of the importance of the strategic alliances is the theatrical representations

that were part of Hindustan’s marketing strategy. Hindustan signed collaboration agreements

with UNESCO and with local NGOs interested in promoting hygienic habits among the rural

population.

Resource: Tomas Tomeo (2011) The relevance of the market of the pyramid base in the world

economy. Private businesses and new business models, (mimeo), doctorial theses read in the

Economics and Business Faculty in the University of Barcelona, July, 133-168.

From the examples we can see that for cooperation exist between the CSOs and the business

there should be: a) a strategic interdependence between these two parties: the results that a

partner can obtain depends on what the other partner would do b) the chances to easily reach

the primary objectives of each of the partners in the network. But, what are the advantages of

cooperation between a CSO and a business entity that voluntary opt to work in alliance? New

facilities that each of the members obtains for the achievement of their own objectives.

Nevertheless, as it is noted by Fernandez de Castro and Tugores (1991:2) synergies and

complements are necessary but not sufficient for cooperation to emerge. The value obtained

by each party from the cooperation itself should be superior to what it would spend to achieve

it on its own. Furthermore, each one of the participants should obtain at least the same result

that it could have achieved with the best available alternative, prior to the cooperation

agreement to which it is part of. In other words, its opportunity cost. Within this context, the

opportunity cost or alternate cost refers to what each of the members of the cooperation is

deprived of or what the member renounces when it elects to cooperate.


9

III. Building of Strategic Alliances

Intending to analyze the strategic alliances between businesses insists that the cooperation is

an instrument that private, for-profit, non-profit and public organizations have available to

them to easily develop their own strategy; this means, as stated by Trigo and Drudis (1999),

that before making any decision to cooperate, each partner of the alliance must have its own

strategy. Consequently, the cooperation is also called strategic alliance. For Trigo and Drudis

(1999) cooperation implies joint work among different partners for a more or less long period

of time. Joint work during a specific period of time is not considered an example of

cooperation. The success of the cooperation does not depend on its duration; success is

determined by the possibilities that it gives each of the members to achieve more efficiency

the objectives that each one of them had established for their own organization. When a

strategic alliance ends each one of the members must leave stronger than when joined.

Definition of Cooperation

The meaning that may be given to the term cooperation between one or many CSOs and the

business corporations varies greatly and there is no unique definition. One definition may be a

relationship between one or many CSOs and one or many businesses or business centers of

many businesses located in the same territory and where their members share risks, join in

their efforts or develop a new and different structure to achieve a mutual benefit. The

particular characteristic that this alliance has is that each one of its components preserves

their special identity, except for concrete aspects in which specific resources both human and

material become intertwined and shared in a common objective.

Definition of Strategy

Each cooperating member must design its strategy. There is a vast number of definitions of

strategy; Trigo and Drudis (1999) cite different strategy definitions. One is the one given by

Chandler (1962:13) who defines strategy as “the determination of long term basic goals and

objectives of an organization, and the adoption of courses of action and assignment of

necessary resources to achieve those goals”. Cooperation is a mechanism or an instrument

that serves the organization strategy. Ultimately, each member of the organization must first

have a clear understanding of its primary objective as well as the strategy that will allow it to

achieve that objective.


10

As Tomeo (2011) noted Hindustan had already paved its way for the further expansion of its

business in the markets located in the rural villages of India, and understood the value that the

collaboration agreements with governments and local CSOs would have. Next, we have the

example of the Gureak group located principally in the Basque country, north of Spain whose

principal partner is the Atzegi Association, Guipuscoana Asociation in favor of the intellectually

disable. The Atzegi Asociation was established in 1960 as a result of the voluntary association

of a set of people that had disabled family members. Nowadays, the Atzegi Asociation is the

foremost partner with nearly one third of the social capital of the Gureak Group, which in the

year 2011 was integrated for about 20 businesses that provided employment to more than

4,000 people. These people were spread among what in Spain is known as employment

special centers2 and a foundation that acts as a management agent in the provision of care

activities directed to those workers. The employment special centers were first recognized in

the 42nd article of the Law 13/1982. The CSO Atzegi was already creating employment before

it was formally recognized and had subsequent institutional support. In Spain CSO Atzegi was

one of the pioneer entities with the objective of social integration so that people who had

recognized disabilities would be able to work.

The case of the CSO Atzegi and the Gureak Group

In 1960 the Atzegi Association, promoted by the family members of people with disabilities,

was established to create stable employment among people with disabilities. In 1975 having

created 300 jobs distributed between two production centers, Atzegi decided to create a

business structure in collaboration with: the Atzegi Association itself (with a 32.19% of the

capital), a local finance entity (19.15% of the capital), two levels of public, province and local

administrations, (both with a 23.63% of the capital), the ONCE Foundation (19.88% of the

capital) and workers (4.15 % of the capital). The end result was a business group, which legally

is a non-for-profit Limited Liability Corporation.

Furthermore, the Gureak group has a stable and permanent collaboration agreement for the

provision of services with 30 big and medium size businesses that operate in the Basque

Country.

2 The Law 137 of 1982 in its 42nd article recognized the special employment centers as businnesses that have an objective to do a productive work regularly participating in the market operations. The final objective of these centers is to reassure the paid employment and the provision of personal and soical services that their employees with disabilities may require. The staff must be made up of at least 70% of people who have a minimum of 33% reduction in their capacity to work.


11

Collaboration Requirements: Business activities

At the beginning there was the industrial subcontracting in the plastic sector of automotive,

electronics and injection. Nowadays, these economic activities are located in five businesses

of this group giving a total of 20 production centers that employ 2,000 people. This group of

businesses makes up what Gureak calls its industrial division, which has five technological

areas and their corresponding technical departments I+D+i. As they stated it “This allows us

to perform our duties within very high competitive sectors such as the auxiliary automotive

industry, renewable industries, industrial lifting, etc”. Starting in the nineties in the XX

century they started business in the services sector. Currently, it has business in direct and

promotional marketing with more than 700 workers spread among 16 employment centers

that in 2010 processed more than 127 million postal deposits. As it is mentioned in their

webpage: “A business that counts with the most stringent endorsements in quality and what

is even more important, our client’s trust”. At the present time, Gureak Services is made of

12 businesses starting from industrial cleaning and landscaping to hospitality, gestation

stations, vending or industrial laundry that employ close to 1,500 workers. As it is also stated

in their webpage: “through this diversification we have created synergies inside the Group

that have allowed us to offer integral solutions to our clients”.

The creation of employment is the result of Atzegui fulfilling its mission, and attaining its

vision and by working through its strategy.

In 2011 the Gureak Group facilitated employment for 4,286 people distributed as follows:

1.614 (37.66%) people with intellectual disabilities

695 (16.22%) people with mental health illnesses

990 (23.10%) people with physical disabilities

256 (5.97%) people with sensory disabilities and

731 (17.05%) people with no disabilities

These jobs were geographically spread throughout Gipuzkoa, Álava and Navarra (areas located

in the north of Spain).

Source: Information obtained from The Gureak Group and the websites:

www.grupogureak.com, www.fundosa.es, www.fundaciones.es, www.once.es, www.kutxa.net.

http://www.grupogureak.com/

http://www.fundosa.es/

http://www.fundaciones.es/

http://www.once.es/

http://www.kutxa.net/


12

IV. Employment development, the engine of cooperation

Some of the forms of cooperation that are laid out in this paper are:

Continuous, formalized and structured dialogue between businesses and the CSOs

Contractual agreements for the provision of services

Coproduction agreements

The creation of new structures horizontally co-governed by the business and the CSOs

Each one of these collaboration options reflects different levels of commitments between

organizations that cooperate. The higher the level of congruency of objectives held by

collaborating organizations, and the higher the level of complements between resources of

both parties, will result in a more intense level of cooperation and formalization of the

collaboration. The maximum expression of the collaboration occurs when the parties opt to

create a new organization where the partners are members of the new enterprise. However,

when we are talking about cooperation we should not always think of creating a new

organization where the collaboration takes place. Agreements are also an important

manifestation that shows a desire to collaborate.

From its establishment, the CSO Atzegi Association had very clear idea of its target functions

was the creation of stable and quality employment for people with disabilities. In the first

phase, between 1970 and 1975 the association at Atzegi worked by itself to reach its primary

objective. However, the strategy of acting on its own requires abundant resources. The

resources that this association had available were scarce, not allowing it to expand on its own.

As a consequence of this important limitation, in 1975 the Atzegi Association opted to create a

strategic alliance with other organizations, both private non-profit and public that would

contribute with the financial capital and business; such contributions enable the development

of employment among people with disabilities. The combination of different forms of

cooperation resulted in the Gureak Group. From that combination we will describe three

forms of cooperation.

1. The creation of a new business structure with a multi-stakeholder government

2. Permanent collaboration agreements with the different levels of public

administration that have responsibilities in managing public services towards

people with a recognized disability


13

3. Stable collaboration agreements with business corporations that Gureak provide

services.

Starting in 1975 gradually the CSO Atzegui chose to create a new structure, horizontally co-

governed in collaboration with public administrations, corporate foundations and workers, all

of which make up the Gureak Group. The formal result is a non-for-profit limited liability

corporation whose main stakeholder is the CSO Atzegui.

What is the objective of being a non-for- profit organization? The capitalization of a new

business structure, as Alkorta (2012) states it , the Counsel Administration president, is “the

profit gained that goes to the reserves is the capitalization mechanism that the Gureak Group

has available”. In 2011 Gureak Group had available 83,940 thousands € in its own resources, a

7% increase from 2010.

Who are the Gureak Group Stakeholders? Powell (1987) affirms that Gureak Group would be a

hybrid organization whose social capital was distributed among the following shareholders:

CSO Atzegi is the major shareholder with a third of the social capital and also the lead

promoter of the Gureak Group creation in 1975

Floral Deputation of Gipuzkoa owns 20.12% of Gureak Group’s social capital. The

Deputation is a territorial level of public administration with competence in the field of

social insertion employment, for people with recognized disabilities in the Gipuzkoa

province

Donostia Town Hall- San Sebastián, also a public administration that owns 4.5% of

Gureak Group’s social capital

Fundosa Group General Partership3, which is included as a shareholder of the Gureak

Group in 1995 and in 2011 owned 19.88% of the social capital

Kutxa Foundation owns 19.15% of the Gureak Group’s social capital and is the

managing agent of the relations with the community of a financial entity which

principal base of business is found in the Basque country

Workers: some of the Gureak Group workers are shareholders. This group owns

4.15% of its social capital

3 Fundosa Group LLC is the business division created by the ONCE Foundation in 1989 with the objective of generating stable employment for people with disabilities. In 1988 The ONCE foundation was establish to Cooperate and Integrate People with Disabilities. ONCE was established by the Once General Counsel and its objective was to be a cooperation and solidarity instrument for the blind in Spain towards other people with disabilities. The main source of founding for the ONCE Foundation for each fiscal year derives from the 3% of the net income of the lotto sells managed by ONCE. ONCE is a non-profit corporation whose mission is to better the quality of life of the blind or vision impaired in Spain. The Spanish government is the exclusive supervisor through the ONCE’s Protector Counsel constituted by The minister of Public Health, Social policy and equality, work and immigration, Finance and Economy, Interior as well a broad representation of ONCE. To find more information visit the webpage: www.fundaciononce and www.once.es

http://www.fundaciononce/

http://www.once.es/


14

Legally, the Gureak Group is an association of capital. This signifies that the assembly and the

regent counsel, both political decision making bodies of the organization, make the decisions

based on the votes that are proportional to the capital that each one of the shareholders

owns.

Alkorta (2012) distinguishes three key phases in the business growth of the Gureak Group, all

related to the development of cooperation agreements.

1975-1982

In 1975 the CSO Atzegui and the Savings Bank Kutxa developed a business structure that took

the name, Gureak Group LLC. The Savings Bank Kutxa participates with 20% of the social

capital in the new merchant society without taking on any commitment in relation to expenses

or the implication of results.

The first strategic decisions of the founders were the following

a. Hire local directors, as main executives to promote Gureak, who were not directly

affected by disability, meaning, business leaders who do not have relatives with

disabilities

b. Choose professional management with growing autonomy for the directive team

c. Have the business management culture ”normalized”

d. Create employment for people with disabilities, preferably for those who live in the

area of the Gipuzcoa province.

From the beginning, the search for self-finance becomes an essential motivator of the duties of

the Gureak directors.

Stable agreement of collaboration with the Savings Bank Kutxa

The Savings Bank Kutxa became a stable client of Gureak. The social department of Kutxa4

hires Gureak’s services to act as an intermediary for labor actions for all types of people with

disabilities and risks of exclusion. As time went by, the good performance of Gureak facilitated

its recognition as a specialized supplier of specific services, by the remaining financial entities.

4 Saving banks are non-for profit entities where the portion of benefits not reinvested in the financial business are given to philanthropic corporations, which the law calls “social work”.


15

1982-1992

In Spain, between the time of 1982 and 1986, what are known as autonomous5 communities

were established. These autonomous communities are territorial governments that take on

growing responsibilities for the provision of social services.

In the beginning of the 1980’s, the construction of the welfare state in Spain becomes realizes,

which is shown in an increase in revenues and public spending that has as a result that the

public administration will take on a public commitment with people with a recognized6

disability. One of the results of taking on public responsibility towards people with disabilities

was the signing of an annual collaboration agreement with the social service department of

the Gipuzcoa Provincial Deputation. During this period of time, the representatives of the

deputation government and the autonomous government of the Basque country came to be

part of the administration counsel of the Gureak Group without contributing any capital. In

this first phase of institutional participation, the counsel representing the public institutions

could be considered stakeholders with a voice and a vote in the administration counsel of

Gureak. However, there has been no contribution of capital on their part.

The annual collaboration agreement with the social service department of the Gipuzcoa

Provincial Deputation establishes in a mutually agreeable manner the growth of target centers

and their financing. Gureak Group then commits to the creation of employment opportunities

between people with recognized disabilities in an equal way in the whole area. An indication of

this objective is that a person should not travel more than 20 kilometers from their home to

their place of work.

This collaboration agreement, which is still in force in 2012, incorporated two major

innovations of different types. These are:

Social innovation - in an agreed manner Gureak Group commits to creating

employment for other people with difficulties in becoming part of the labor force, such

as people who suffer from any type of mental illness. Up until that point the Gureak

Group had exclusively focused on the employment creation among people with mental

disabilities.

Organizational innovation – the Gipuzcoa Deputation gave autonomy to Gureak for the

management of a service that was from 1982 a public responsibility; they are goal

orientated. This form of stable and goal-orientated collaboration of public

5 In Spain the development of the welfare state model initiated in the eighties in the 20th century. 6 Law 13 of April 7, 1982 of handicapped social integration, BOE nº 103, April 3, 1982.


16

administration enables Gureak directors to evolve their business model and

experiment with new social insertion types in relation to the work force.

1992 until Present

In 1992 the Gureak Group organizes a capital expansion, which allows that the Provincial

Deputation of Gipuzcoa, Donostia City Counsel (San Sebastian) and Fundosa all become new

shareholders. This capital expansion causes CSO Atzegi to lose a percentage of its ownership,

but Alkorta (2012) states that Atzegi “…maintains its profile of main shareholders and all its

influence in the administration counsel”. From a business point of view this capital expansion

implies an important injection of capital that facilitates the financing of a new ambitious

investment plan which allows them to increase the production capacities.

Collaboration Agreements for the Provision of Services to Business Corporations

Through time the Gureak Group also builds other forms of collaboration with businesses

preferably of the small and medium sizes, in the areas of Gipuzkoa, Álava and Navarra. Again

this collaboration is also based on specific reasons. In Spain the Law 13 of 1982 forces private

businesses with 50 or more employees to reserve two percent of jobs for people with

disabilities and public entities to reserve five percent. This law allows for alternatives, which

are: a) donations or promoting actions to foundations of entities of public utility whose

objective is the formation or labor insertion of people with disabilities b) acquisition contracts

of products or services to special centers of employment. The production centers that make up

the Gureak Group are special employment centers. The Gureak Group facilitates that the

business corporation meet its legal obligation through the hiring of the professional services

for a market price. It was never in doubt that the main merit of the Gureak Group is to have

met its target objective (more than 4,000 people employed in 2011). It must be stated that

another merit of the Gureak Group is to have made it possible for the creation of cost-effective

and specialized inputs of services that have made it cheaper for business to fulfill the law. The

Gureak Group also facilitates the competitiveness of its clients while offering a competitive

service in price and quality (Gureak is integrated into the customer value chain).


17

V. Creating Trust

A prerequisite to dialogue, and a stable agreement to work together signifies that both, the

CSO and business, separately and toghether have accumulated trust capital, meaning that the

businesses trust the CSO and vice versa. The geographic area where the Gureak Group

operates is small, where a volume of people with disabilities that work is more than 1 per 100

of the active population. The citizens have developed a strong culture of influence in the

community. The behavior of the community influences the way in which the businesses in the

area operate. However, it is important to state that those external factors, the small

geographic location and the strong sense of belonging among citizens in the community, are

positive factors but not sufficient to explain the complex relations that the Gureak Group has

been able to make in the network among the businesses throughout its history.

What have been the important reasons that can explain this cooperation? Since the

establishment of Gureak Group, there are three key elements, including primary function,

vision and strategy. Perhaps in a theoretical framework, the primary function of social

integration for people with disabilities could be shared with other businesses that also practice

such integration. However, the vision of the Atzegi CSO has been that the Gureak Group would

be a transitional business for disabled employees. To meet this vision a key factor in the

Gureak Group strategy is that it needs to have relations with businesses and mimic the

practices of those businesses. Such practices include the delivery of a good product, good

service, and the fulfillment of agreements in form and time. Ultimately, the Gureak Group

from the beginning had to commit so that all their action would be professional and that its

legal orientation in the market would preferably be in the private sector. It is important to

emphasize that legally the Gureak Group is a corporation and that the businesses that are part

of this group are Limited Liability Corporations (LLC) and the only shareholder is Gureak. From

this statement it is important to remark that Gureak uses the legal commercial forms used in

the business world as a tool to communicate that the LLC that make up the Gureak Group are

a business. The use of the legal commercial forms is not exclusive to the case of Gureak in

Spain and it is infrequent among organizations whose objective is integration.

Gureak’s professionalism in their businesses and their private market orientation are two

characteristics that have allowed other businesses to endorse Gureak as a business group that

is respected and highly valued for business reasons. Other businesses think that Gureak does

things well, and ultimately, those businesses trust Gureak. The trust that third parties deposit

in a CSO should be regarded as a very important asset that is part of the organization’s capital.


18

If Atzegui was able to create the Gureak Group as a strategic alliance, it was because

previously between 1960 and 1975, Atzegui had been accumulating trust capital. For Pérez

(2005) trust capital is the nucleus to social capital, which in this case was accumulated by

Atzegui and later on by Gureak among its partners or interest groups.

Social capital and trust capital are two concepts that the economists have overlooked. To be

able to give the concept of social capital its value from an active business view, the traditional

economic analysis needs to be modified. As it is stated by Pérez (2005) too often the economic

theory analyzes the organizations whether private, lucrative, non-profit, public, as an

individual agent. However working in a network, cooperating requires that we go from this

individual analysis to an analysis that includes mutual influence among the different agents

that cooperate together and the relations of reciprocity. Besides this, the uncertainty effect in

the economic decisions and in social relations need to be taken into consideration, as well as

the effect of informational asymmetry among the different agents that cooperate with each

other.

Within the context of working in a network between the CSO and the business corporation,

what should be understood as social capital? It is the development of trusting relations and

cooperation. Such trusting relations and cooperation should be considered as an intangible

asset (Williamson, 1993). The trust in a specific organization from other agents could be

defined as the total time that the other interest groups do not spend in verifying the actions of

the organization. The strong development of the CSO in providing general interest services

reflects the trust that the CSO has been carving out among the business corporations and the

public administration. To be able to gain that trust, the CSO must have been professional and

transparent. If the business corporation trusts the CSO in its work, this signifies that the

corporation thinks that through its association it can gain profits.

VI. The Role of Business in Governance

The advantages of the option to cooperate have been discussed and its been stated that those

advantages could give a CSO instruments to achieve their objective faster. Now is the moment

to analyze the possible risks that could fall onto the CSO member of the strategic alliance, as a

consequence of having chosen the option to cooperate. The classic literature, which analyzes

performance of the strategic alliances among businesses, distinguishes two types of main risks,

fiduciary risk and environmental risk. The fiduciary risk refers to the possible non-fulfillment of


19

expectations of a partner or to the possibility that the internal information of another business

member of the network will be released. The environmental risk encompasses three

dimensions: i) politics, with the risk of losing property ii) cultural, in two aspects, different kind

of culture and different level of risk between the members, iii) technology, relative to the

expropriation and disclosure of technological knowledge.

In this chapter the analysis of the cooperation between the CSO and business corporations has

been fundamentally done based on those two cases.

Shaki Project, collaboration between Hindustan Unilever Limited and other local CSOs

based on the coproduction of goods and services provided to the communities in the

rural areas of India

Gureak Group, collaboration between the CSO, other public administrations, and

business foundations. This collaboration materializes in the formation of a business

group whose mission is to create employment among people with disabilities of a

working age and that are also inhabitants of Gipuzcoa Province

The CSO develops a very different role in each one of these cooperations

In the Shaki Project the business corporation leads in the action of cooperation; the CSOs share

objectives and provide complementary resources.

In the case of Gureak, the CSO is the mother of the new business developed and its name is

Gureak Group. The CSO Atzegi leads the cooperation project. The other partners, public

administrations, corporate and third-sector foundations, and business corporations are aligned

with the target function of creating employment for people with disabilities and providing

resources in the form of capital and service contracts.

In the case that the cooperation works, such as the case of Gureak, a type of environmental

risk would be the loss of property. Then the question that arises is, what is the probability that

another shareholder of the Gureak business group will buy the shares of the CSO at Atzegi? As

it has been stated in the introduction of this chapter, non-profit businesses exist in our market

economy not only because of altruistic and historical reasons, but also because being so gives

them comparative advantages in relation to the public sector, and in relation to the business

corporation in reference to the provision of services of a social nature. All this means that in

this game of complementarities there are three agents that are essential for the functioning of

Gureak Group as an instrument of a employment generator. As it was aforementioned, the


20

cooperation is an instrument that facilitates the achievement of the primary function in a

faster and more efficient way than the option to work alone. It is necessary to restate that

Atzegi started its work in 1960 taking on the commitment of providing all types of services that

a person with disabilities may need in his/her lifespan; one of these services is employment.

During the time of 1960 and 1975 Atzegi had created 300 jobs, but in 1975 it opted for indirect

management. The Gureak Group constitutes a cooperation with other agents and it

specializes in providing different employment services that a person with disabilities may

request. From that moment on Atzegi continues to provide care services that a person with

disabilities demands such as residential, educational, mobility and leisure, and above all, Atzegi

is the political actor in defense of the people with disabilities’ interest in the territory they

influence, Gipuzcoa (Atzegi, 2012). Until March of 2012, 1,965 family members, 2,775 people

that donated money and 9,073 volunteers, encompassed the associative base of Atzegi.

(www.atzegi.org). The sum of these three collectives gives a total of 13,813 families. Atzegi is a

very important institution in the defense of the interest of people with disabilities in the

territory where they are influential. During the current situation of financial crises, due to the

sovereign debt of the public institutions, Atzegi is not worried that other shareholders will buy

its shares in the Gureak capital; however, on the contrary, its directors are more concerned for

the future ownership of other shareholders in the Gureak group of shareholders.

Another case, not related to the strategic alliances, is the function of the administration

counsel in a highly professional business group as it is Gureak. There is plenty of normative

literature about corporate governance and specifically about the role of the board. There are

two main theories, the Agency Theory and the Theory of Administration or partner model. The

Agency Theory is considered as the leading model; this theory states that the board’s main

function is to control decisions that the group of directors makes (Leys, Opstal van, and

Gijselinckx, 2009 for the case of agrarian cooperatives). The Administration Theory or

partner’s model supposes that executives and shareholders establish collaborative relations.

The role of the counsel is not to control the directors, but on the contrary, the members of the

counsel should develop proposals and help the directors achieve excellent performance as an

organization. In Cornforth and Edwards (1999) and Cornforth (2004), a third model is

mentioned, a model that is too frequently mentioned in the Spanish current situation, a model

of “affixing signatures”. A functional analysis of the boards shows that the three theoretical

perspectives live within the management of the organization’s governance. (CIES, 2010 for the

case of consumer cooperatives in Spain). In Gureak, its shareholders have opted to appoint as

the president of the administrative counsel the person who for more than 30 years performed

http://www.atzegi.org/


21

as the general director. This practice helps to reduce asymmetrical information between the

board and the group of directors. This practice allows the board to easier perform its own

duties regarding the agency theoretical perspective, and to also collaborate with the current

group of directors.

VII. Conclusion

Too often business corporations and CSOs work in silos. Frequently the analysis that connects

businesses and CSOs is limited to the donations of time and money that businesses can give to

a CSO through its politics of community relations. The studies related to CSOs are becoming

more popular among the academic community, but they lack sufficient empirical and

theoretical analysis that is focused on the different expressions of partnerships between the

CSO and business. Presumably with more frequency in the future those analyses will focus on

a) verification of the existence of the cooperation b) the different forms that such a

cooperation takes. The use of network research among businesses could be the first tool to

help those economists that are interested in the study of CSO to better understand the

economic and financial efficiency and sustainability in these non-profit organizations; all this in

an economy dominated by business corporations. The assumption holds that the practices of

organizations in the third sector cannot be seen as isolated practices. The growing strength of

the entities from the third sector rests in their capacity to build relations and coordinate with

private businesses and public administrations.

The theoretical perspective that has been used in this chapter is based on the assumption that

the development of the strategic alliances between CSOs and business corporations, and

ultimately the collaboration among different agents that pursue different objectives, is the

result of the division between work and specialization. From the economic analysis it is

assumed that if the CSOs and business corporations in a given geographic area and time

collaborate it is because each one of these actors hopes that such collaboration will facilitate

better transmission of information and better allocation of available resources. As a result they

will be able to better meet their own action plans. This is the result of a positive collaborative

game where the interdependence of its parts invites them to use the cooperation as a

instrument to better achieve the primary function.

Prior to opting for cooperation, each member of the network should have its own action plan

or strategy, and must be convinced that the cooperation could be a useful instrument for the


22

achievement of their plan of action in that particular arena. A key element is the selection of

partners. A strategic alliance among different players includes ingredients such as credibility,

reputation and mutual trust. Since it is impossible to foresee all the contingencies that could

affect their relations while the cooperation is active, and even after when such collaboration

has ended, these ingredients are necessary.

Cooperation does not mean the elimination of the conflict interest between the two groups;

however, if it is assumed that at the moment at which one of the two parties voluntarily opts

to cooperate, both parties know of the existence of the differences in terms of interest, needs,

and limitations. Regardless of these differences, they express their willingness to work in

coordination based on a formalized and continuous dialogue that stems from the cooperation.

There is also a need to remark that for a cooperation to thrive, each interest group should

recognize the value and importance of the contribution that each will make to be able to

achieve the desired results and to know what is the place and function of each member in such

cooperation.

VIII. Bibliography

Ackerman, S-R. (1986), The economics of nonprofit institutions, Oxford University

Press.

Becattini, G. (1979), “Del ‘settore’ industriale al ‘distretto industriale’. Alcune

considerazioni sull’unità d’indagine dell’economia industriale” en Rivista di economía e

política industriale 5:1, pp 7-21.

Ben-Ner, A. (1986) “Nonprofit Organizations: Why Do They Exist in Market Economies?

en Ackerman, S-R. (1986), The economics of nonprofit institutions, Oxford University

Press, chapter 5, pp 94-113.

Boletín Oficial del Estado (1982), Ley 13/1982 de 7 de abril, de integración social de los

minusválidos, nº 103, de 30 de abril del 1982, pp. 11106-11112.

Coase, R.H. (1937) “The nature of the firm”, Economica, nov. pp. 386-405. Reprinted

en O.E.Williamson y S.G.Winter (editors) (1991), The nature of the firm: Origin,

Evolution, and Development , ed. Oxford University Press.

Chandler, A.D. (1962), Strategy and Structure. Chapters in the History of the Industrial

Business, Cambridge, MA: MIT Press, pp. 13. Citado en J. Trigo y A. Drudis (1999),

Alianzas estratégicas. Las claves y la práctica de la cooperación entre empresas, ed.

Gestión 2000, Barcelona.


23

Easley, D.,and O’Hara, M. (1983), “The economic role of nonprofit firms, Bell Journal of

Economics 14 (Autumm):531-38, citado en D. Easley and M. O’Hara (1986)“Optimal

Nonprofit Firms” S-R Ackerman, (1986), The economics of nonprofit institutions, Oxford

University Press, chapter 4, pp.85-93.

Easley, D. and O’Hara, M. (1986), )“Optimal Nonprofit Firms” S-R Ackerman, (1986),

The economics of nonprofit institutions, Oxford University Press, chapter 4, pp.85-93.

Favreau, L. (1990), “Nouveaux enjeux au sein du mouvement populaire” en

Coopératives et Dévelopment, vol 21, nº 2, pp. 5-20.

Fernández de Castro, J. y Tugores, J. (1991), Fundamentos de Microeconomía, segunda

edición, McGrawHill, Madrid.

Hamel, P.(1990) « Le dévelopment local en milieu urbain : la nécessité d’un aprtenariat

privé-public ? » en Coopératives et Dévelopment, vol 21, nº 2, pp. 29-50.

Hansmann, H.B (1980), « The role of nonprofit business » Yale Law Journal, 89, pp.835-

901, reprinted in Susan Rose Ackerman (editor), The economic of nonprofit institutions,

Oxford University Press, pp.57-84.

Harrisson, D. Chaari, N. Comeau-Vallée (2012)“Intersectoral Alliance and social

innovations: when corporations meet civil society” Annals of Public and Cooperatives

Economics, 83:1:2012, pp. 1-24

Marshall, A. (1890), Principles of Economics, Londres, McMillan.

Nyssen, M. (editor) (2006), Social enterprise. At the crossroad of market, public policies

and civil society, Routledge, Studies in the Management of Voluntary and non-profit

organizations, Londres y Nueva York, 2006. ISBN 10: 0-415-37878-8, 2006, 335 páginas

Pérez, F. (dir.)(2005), La medición del capital social. Una aproximación económica, ed.

Fundación BBVA, Madrid.

Phelps, E., (editor) Altruism, Morality and Economic Theory, New York: Russell Sage

Foundation.

Porter, M: (1990), The competitive advantage of Nations, Free Press, New York. La

versión en lengua castellana disponible es de 1991: La ventaja competitiva de las

naciones, Plaza Janes editores, Barcelona.

Porter, M. (1998) “Clusters and the new economics of competition” , Harvard Business

Review, noviembre-diciembre, pp. 77-87.

Tomeo, T. (2011), La relevancia del mercado de la base de la pirámide en la economía

mundial. Empresas privadas y nuevos modelos de negocio, (mimeo), doctorial theses

read in the Economics and Business Faculty in the University of Barcelona, July.


24

Trigo, J. y Drudis, A. (1999), Alianzas estratégicas. Las claves y la práctica de la

cooperación entre empresas, Barcelona: Ediciones Gestión 2000.

Weisbrod, B.A. (1975), Toward a theory of the voluntary nonprofit sector in a three-

sector economy, in E. Phelps, (editor) Altruism, Morality and Economic Theory, New

York: Russell Sage Foundation, pp.171-195.

Williamson, O. y Winter, S.G. (editors) (1991), The nature of the firm: Origin, Evolution,

and Development , ed. Oxford University Press.

Williamson, O. (1993), “Calculativeness, trust and economic organization”, Journal of

Law and Economics, 34: 453-502, citado en F. Pérez (dir.) (2005), La medición del

capital social. Una aproximación económica, Fundación BBVA, Madrid.

Bibliography from the Web

Fundación ONCE: www.fundaciononce.es

Fundosa: www.fundosa.es

Grupo Gureak : www.grupogureak.com

Kutxa: www.kutxa.net

ONCE: www.once.es

http://www.fundaciononce.es/

http://www.fundosa.es/

http://www.grupogureak.com/

http://www.kutxa.net/

http://www.once.es/