A signage of a Patagonia store is seen on Greene Street on September 14, 2022 in New York City.
Michael M Santiago | News from Getty Images | Getty Images
Many brands align their profits with purpose, but Patagonia’s September decision to transform its for-profit business into one with all profits going to the fight against climate change is the most complex move by a U.S. company in sustainability capitalism. Is it a future model for other companies?
In a way, it’s a natural progression for the family business. Patagonia has long been at the forefront of responsible business practices. As early as 1985, Patagonia used part of its profits to help the environment with a “earth tax”.
It’s far from the only well-known US brand structured to allow profits to be donated to charity. Newman’s Own, the food brand founded by Hollywood icon Paul Newman, is perhaps the best known. Since 1982, Newman’s Own has given 100% of its profits to charity, which now totals half a billion dollars in contributions. But this company, with a purely for-profit structure, was more of a “first-generation” model for sustainable business, says Tensie Whelan, founding director of the NYU Stern Center for Sustainable Business. “The Patagonia model is a bit more sophisticated.”
A business model already in Europe
But while Patagonia made headlines in the US for being a novel marriage of capitalism and charity, similar corporate structures are already in use by several large European family companies, from Carlsberg to Ikea and Novo Nordisk. “Nothing new about this model,” said Morten Bennedsen, professor of family business at INSEAD and academic director of the Wendel International Center for Family Enterprise.
Even in the US, one of the most iconic retail brands has long had a #1 charitable shareholder designed by the family founder: Hershey’s.
“It’s a model that’s attractive to family businesses who don’t want to continue as classic family businesses and want the long-term stability and increasing professionalism that come with starting a business,” said Bennedsen. It’s often very attractive from a corporate tax perspective. “That’s another driver for it,” he said.
100% of Patagonia’s profits now go to the new non-profit Holdfast Collective – which owns all non-voting shares in the company (98% of total stock). A Patagonia spokesperson said the move shows that it is possible to “do good for people and the planet and still be a successful company.”
Patagonia’s CEO went further in a September interview with CNBC’s “Squawk Box,” dismissing any notion that this change would make it less focused on beating the competition. “What people don’t understand about Patagonia, both past and future, is that we are a hard-line for-profit company and extremely competitive,” said Ryan Gellert. “We compete aggressively with every other company in our space. I don’t think we’ve lost that instinct,” he said. “The whole thing will fail if we don’t continue to operate competitively.”
“How we make our products, how we sell them, and then the goal of unlocking value to help the environment… the alignment of those goals will be lost if the story doesn’t recognize that Patagonia is a for-profit company with its profits being unlocked.” to help the environment,” said the spokeswoman. “That’s a key difference.”
For values-driven founders, there are less extreme options than the paths taken by Yvon Chouinard and Paul Newman. “Most founders like to be in control and have a for-profit (less altruistic) sensibility,” Whelan said.
B-corp status, employee ownership, and mutuals and cooperatives are all models that allow for a greater focus on creating stakeholder value alongside shareholder value.
“We’re seeing significant growth in these alternative models,” Whelan said.
In fact, the number of B Corps has steadily increased since 2011, with the total recently surpassing five thousand.
For its part, Patagonia will remain unchanged as a day-to-day company, but all profits (after reinvesting in the company, paying employees, etc.) will be donated to the Holdfast Collective to help fight climate change, an annual stream of profits estimated at around $100 million a year becomes.
“This was a process I’ve never been a part of before,” said Greg Curtis, executive director of the Holdfast Collective. “It really started with what I want to happen to the company in the long run so that the purpose doesn’t change in the future. We want to recognize natural lifespans… What does that actually mean for capitalism? What really motivates people – is it gain, is it purpose?”
Patagonia founder Yvon Chouinard poses at his store in a November 21, 1993 photo. He founded the company in 1973, and in a letter announcing the plan to give away the company, he wrote: “If we have any hope of a thriving planet — let alone a business — we must all do what we can to do with resources.” , which we have. We can do that.”
Jean Marc Giboux | Hulton Archives | Getty Images
Jennifer Pendergast, executive director of the John L. Ward Center for Family Enterprises at Northwestern University’s Kellogg School of Management, said Patagonia’s decision could serve as a model for other family businesses, just like Warren Buffett’s Giving Pledge Bill and Melinda Gates caused many billionaires to reconsider how they donate their wealth. “However, it’s not so much the specific form used that is unusual. It’s more their generosity,” Pendergast said. “It’s not that hard to start a nonprofit organization to take stock. It’s hard to get a family to agree to forsaking future wealth for a good cause.”
Long-term friction between purpose and capitalism
The new structure leaves some long-term questions about the integration of profit and purpose. Instead of a for-profit company deciding annually how much and how a portion of its profits will be donated to charity, the structure of the Patagonian Purpose Trust and the Holdfast Collective codifies the commitment. “In our model, the company that receives economic value has no voting rights and the company that has voting rights receives very little economic value. There is no incentive for Patagonia ever to make a decision that is not consistent with ensuring the Company’s purpose going forward,” Curtis said.
But with the founder and his family no longer in control of Patagonia, how will the for-profit company’s board of directors be selected and managed? “That will develop, the board, and at the moment it’s the family and their closest advisors,” said Gellert. But he added that no better option had emerged during a multi-year process to select the best option for the company’s future. The company considered a public offering or sale of shares to investors, “but we would have lost control,” he said. “We had very little confidence in discussions with a number of investors that integrity would be maintained.”
While this structure can be an option for both family-run and non-family-run businesses, Bennedsen says it works particularly well for family entrepreneurs who don’t want to transfer the businesses within the family and don’t want to go public or sell the old business.
However, expect the back and forth between profit and purpose to remain in any corporate venture.
“We’re well aware of the tension between growth and environmental impact,” Curtis said. “We would be ignoring our commitment to responsible growth if we only maximized sales to give away more money. It’s also important to resist the assumption that our value comes from the money we give away. We don’t think about it that way,” he said. “Our value comes from being a for-profit company and a benefit corporation.”
“The challenge for him [Chouinard’s] Family will be in later generations,” Pendergast said. “They must determine who will be the trustees of the interest held by the nonprofit that will determine how that nonprofit uses the proceeds they receive from Patagonia. It’s easy now because it seems that he and his family are aligned in their goals. It could get harder further down.”
“Sometimes there’s some tension,” Gellert said in his CNBC interview. “But the standard for Patagonia is purpose. Patagonia needs capacity and profit to take care of its people, to expand, to keep the supply chain running, and that’s all an important layer, but we want it to get better, and to keep innovating.”
Retail establishments and their merchandise are filled with stories about the enthusiastic farmers who picked the beans for the pricey cappuccino and the sustainability of a particular bag, helping the consumer feel less like a mere consumer and more like a conscious shopper in their choices make a difference. But there is an appropriate cynicism and altruism fatigue in response to corporate sustainability branding. Still, “a lot of the Patagonia model is repeatable,” Whelan said.
Already a B Corp, the company has been a leader in sustainability practices across everything including its workforce and environmental footprint, and has built a successful brand while upholding those values. “The fact that it has been able to become and sustain a $3 billion company is a testament to the business value of sustainability and the potential for stakeholder capitalism to be financially viable,” Whelan said . “Gifting away the company may be an anomaly, but the sustainable and responsible business model is one that we already see replicated.”
“The idea of committing to ESG goals while making profits is no longer a paradox,” said Bennedsen.