Is Patagonia the endgame for profits in a world of climate change?

A Patagonia store sign is seen on Greene Street on September 14, 2022 in New York City.

Michael M. Santiago | Getty Images News | Getty Images

Many brands are aligning profits with purpose, but Patagonia’s decision in September to convert its for-profit business to one where all profits flow into the fight against climate change is the most complex move ever made by a company based in the United States in the realm of sustainability capitalism. Is this a model that other companies will be able to pursue in the future?

For the family business it is in some ways a natural evolution. Patagonia has long been at the forefront of responsible business practices. As early as 1985, Patagonia distributed part of its profits to the environment, through a “land tax”.

It is far from the only well-known US brand to be structured to allow profits to be donated to charitable causes. Newman’s Own, the food brand founded by Hollywood icon Paul Newman, is perhaps the most familiar. Since 1982, Newman’s Own has given 100% of profits to charity, totaling half a billion dollars in contributions. But that business, with a purely nonprofit structure, was more of a “first generation” model for sustainable business, says Tensie Whelan, founding director of NYU Stern Center for Sustainable Business. “The Patagonia model is a little more sophisticated.”

A business model already in Europe

However, while Patagonia has made headlines in the United States for being a new marriage of capitalism and charity, similar corporate structures are already in use with several large family-owned European companies, from Carlsberg to Ikea and Novo Nordisk. “Nothing new in 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 United States, one of the most iconic retail brands, has long had a No. 1 shareholder. 1 dedicated to charitable causes and designed by the founder of the family: Hershey’s.

It’s an attractive model for family businesses that don’t want to continue as classic family businesses and want the long-term stability and increased professionalism that comes with corporate foundations,” Bennedsen said. It’s often very attractive from a tax perspective. company, too, which has been noted in both the Ikea and Patagonia business models. “That’s another driver of that,” he said.

One hundred percent of Patagonia’s profits are now committed to its new non-profit Holdfast Collective, which owns all of the company’s non-voting shares (98% of total stock). A Patagonia spokeswoman said the move makes it clear it was possible to “do good for people and the planet and still be a successful business.”

“No excuses for profit”

The Patagonia CEO went further in a September interview with CNBC’s “Squawk Box,” dismissing any notions that this change will lead him to focus less on beating the competition. “What people fail to realize about Patagonia, both past and present, is that we are unapologetically a for-profit company and we are extremely competitive,” said Ryan Gellert. “We compete with every other company in our space aggressively. I don’t think we’ve lost that instinct,” he said. “This whole thing fails if we don’t continue to run a competitive business.”

“How we build our products, how we sell them, and then the goal of unlocking value to help the environment…the alignment of these goals gets lost if history fails to recognize that Patagonia is a purpose-built company. of profit with its profits be released to help the environment,” said the spokeswoman. “This is an essential distinction.”

There are less extreme options for value-driven founders than the paths chosen by Yvon Chouinard and Paul Newman. “Most founders like to stay in control and have for-profit (less altruistic) sensibilities,” Whelan said.

B-Corp status, employee ownership, and mutual and cooperative organizations are all models that allow for a greater focus on stakeholder value creation, in addition to shareholder value.

“We’re seeing significant growth in these alternative models,” Whelan said.

Indeed, since 2011 the number of B-corps has been steadily increasing, with the total number recently surpassing five thousand.

For its part, Patagonia as a company will remain unchanged in terms of day-to-day operations, but all of its profits (after reinvestment in the company, employee payouts, etc.) will be handed over to the Holdfast Collective to fight climate change, a flow of annual profit estimated at about $100 million annually.

“This was a process unlike any I’ve ever been involved in before,” said Greg Curtis, executive director of the Holdfast Collective. “It really started with what is going to happen long-term with the business, so that the purpose doesn’t change in the future. We want to recognize the natural length of life… What does this actually mean for capitalism? What really motivates Is it people, is it profit, is it purpose?”

Patagonia founder Yvon Chouinard poses in his shop in a November 21, 1993 photograph. He founded the company in 1973 and wrote in a letter announcing plans to divest the company: ‘If we have any hope of a thriving planet, much less a business, it’s going to take us all to do what we can with the resources we have. That’s what we can do.”

Jean-Marc Giboux | Hulton Archive | Getty Images

Jennifer Pendergast, executive director of the John L. Ward Center for Family Enterprises at Northwestern University’s Kellogg School of Management, said the Patagonia decision could serve as a model for other family businesses, just like the Giving Pledge, created by Warren Buffett , and Bill and Melinda Gates, have caused many billionaires to rethink how they give away their wealth. “That said, it’s not so much the specific shape used that’s unusual. It’s more their level of generosity,” Pendergast said. “It’s not that hard to set up a non-profit organization to take stock. It’s hard to get a family to agree to forgo future wealth for the benefit of a worthy cause.”

Long-term friction between purpose and capitalism

The new structure leaves open some long-term questions about the integration of profits and purposes. Rather than having a for-profit company decide on an annual basis how much and how much of its profits it will engage in charitable practices, the structure of the Patagonian Purpose Trust and the Holdfast Collective codifies the commitment. “In our model, the entity that receives the economic value has no voting rights, and the entity that has the vote receives very little economic value. There is no incentive for Patagonia to ever make a decision that is not in line with the assurance the company’s purpose going forward,” Curtis said.

But when the founder and his family are no longer in control of Patagonia, there will be the question of how the for-profit company’s board will be selected and managed. “This will evolve, the board, and right now it’s the family and his closest advisers,” Gellert said. But he added that no best option has emerged during a multi-year process to choose the best option for the company’s future. The company has considered a public offering or selling shares to investors, “but we would have lost control,” he said. “We had very little confidence in meetings with quite a few investors that integrity would be protected.”

While this structure could be an option for both family-owned and non-family-owned businesses, Bennedsen said it works particularly well for family-owned entrepreneurs who don’t want to move businesses within families and don’t want to go public or publicly traded. sell the previous company. .

But expect the push and pull between profits and purpose to persist in any corporate venture.

“The tension between growth and environmental impact is something we know well,” Curtis said. “We would ignore our commitment to responsible growth if we maximized sales just for the purpose of giving away more money. Also, it’s 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 subsequent generations,” Pendergast said. “They will have to determine who will be the trustees of the stock held by the nonprofit who will determine how that nonprofit uses the proceeds they get from Patagonia. It’s easy now because it seems like he and his family are aligned in their goals. Further down the road, it might be more difficult.”

“Sometimes there are some tensions,” Gellert said in his CNBC interview. “But the default for Patagonia is purpose. Patagonia needs capability and profit, to care for its people, to expand, to keep the supply chain moving, and that’s all on an important level, but we want that is better and continues to be innovative.”

Retail businesses and their wares are filled with tales of enthusiastic farmers who harvested the beans for the expensive cappuccino and the sustainability of a particular bag, which helps the consumer feel less like a mere consumer and more like a knowledgeable shopper. whose choices are making a difference. But there is a reasonable cynicism and altruism weariness in response to corporate sustainability branding. However, “much of the Patagonia model is repeatable,” Whelan said.

The company is already a B Corp, has been a leader in sustainability practices on issues such as workforce and environmental impact, and has built a successful brand by championing these values. “The fact that it has been able to grow into and sustain a $3 billion business is evidence of the corporate value of sustainability and the potential of stakeholder capitalism to be financially viable,” Whelan said. “The ‘divestiture’ of the company may be an anomaly, but the sustainable and responsible business model is one we are already seeing replicated.”

“The idea of ​​committing to ESG goals while making profits is no longer a paradox,” Bennedsen said.

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