Is Patagonia the endgame for profit in a climate-change world?

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September 14, 2022 in New York City, a signage of a Patagonia store is seen on Greene Street.

Michael M. Santiago | Getty Images News | Getty Images

Many brands align their profits with their purpose, but Patagonia’s decision in September to convert its for-profit company into one with all profits going to fighting climate change is the most complex move yet by one in the industry. US based company in the field of sustainable development. capitalism. Is it a model for other companies to emulate in the future?

For the family business it is in some ways a natural evolution. Patagonia has long been at the forefront of corporate responsibility. As early as 1985, Patagonia devoted part of its profits to the environment, through an “Earth Tax”.

It is far from the only well-known American brand structured in such a way that profits can 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 donated 100% of its profits to charity, now totaling half a billion dollars in contributions. But that company, with a purely not-for-profit structure, was more of a “first-generation” sustainable business model, says Tensie Whelan, founder and director of the NYU Stern Center for Sustainable Business. “The Patagonia model is a little more advanced.”

A business model already in Europe

But while Patagonia made headlines in the US for being a new marriage between capitalism and charity, similar corporate structures are already in place at several major European family businesses, 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 US, one of the most iconic retail brands has long had a No. 1 charitable shareholder and was designed by the founder of the family: Hershey’s.

It’s a model that appeals to family businesses that don’t want to continue as traditional family businesses and want the long-term stability and increased professionalism that come with business creation,” says Bennedsen. It’s often very attractive from a business point of view. corporate tax as well, which has been noted from both Ikea’s and Patagonia’s business models. “That’s another driver,” he said.

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

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‘Unashamed profit motive’

Patagonia’s CEO went further in a September interview with TBEN’s “Squawk Box,” dismissing any idea that this change would cause it to focus less on beating the competition. “What people don’t understand about Patagonia, both past and future, is that we are unashamedly a for-profit company and we are 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. “This whole thing will fail if we don’t continue to run a competitive business.”

“How we build our products, how we sell them, and then the goal of releasing value to help the environment…the alignment of these goals is lost if the narrative doesn’t recognize that Patagonia is a for-profit company with its profits are released to help the environment,” the spokeswoman said. “That’s an essential distinction.”

There are less extreme options for values-driven founders than the paths Yvon Chouinard and Paul Newman have chosen. “Most founders like to be in control and have a (less altruistic) sense of profit,” Whelan said.

B-Corp status, employee ownership, and mutual organizations and cooperatives are all models that allow for more focus on creating stakeholder value 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 on the rise, with the total number recently surpassing five thousand.

For its part, Patagonia will remain unchanged as a company in terms of its day-to-day operations, but all profits (after reinvesting in the company, paying employees, etc.) will be transferred to the Holdfast Collective to fight climate change, an annual profit stream estimated at approx. $100 million a year.

“This was a process like I’ve never experienced before,” said Greg Curtis, executive director of the Holdfast Collective. “It really started with what’s going to happen to the company in the long run so that the purpose doesn’t change in the future. We want to recognize natural longevity… What does this really mean for capitalism? What really motivates people – is it profit, is it a goal?”

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 role model for other family businesses, much like the Giving Pledge created by Warren Buffet , and Bill and Melinda Gates led many billionaires to rethink how they gift their wealth. “Having said that, it’s not so much the specific form used that’s unusual. It’s more their level of generosity,” Pendergast said. “It’s not that hard to create a non-profit organization that accepts stock. It’s hard to get a family to forego future wealth in favor of a good cause.”

Prolonged friction between purpose and capitalism

The new structure does leave open some long-term questions about the integration of profit and purpose. Rather than letting a for-profit company decide annually how much and how a portion of its profits will be spent on charitable causes, the structure of the Patagonian Purpose Trust and Holdfast Collective codifies the commitment. “In our model, the entity that receives the economic value has no vote, and the entity that has the vote receives very little economic value. There is no reason for Patagonia to ever make a decision that is inconsistent with ensuring the company’s goal in the future,” said Curtis.

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

While this structure can be an option for both family and non-family businesses, Bennedsen said it works especially 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 company. .

But expect the push and pull between profit and target to persist in any business venture.

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“The tension between growth and environmental impact is one we know well,” Curtis said. “We would be negating our commitment to responsible growth if we simply maximized sales to give away more money. Furthermore, it is important to resist the assumption that our value comes from the money we give away. We don’t think there is about it,” 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. It’s easy now because it seems he and his family are aligned in their goals. It can be more difficult later on.”

“Sometimes there are some tensions,” Gellert said in his TBEN 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 moving, and that’s all an important layer, but we want it to be better and to stay innovative.”

Retail companies and their wares are full of stories about the enthusiastic farmers who picked the beans for the expensive cappuccino and the sustainability of a particular bag, all of which make the consumer feel less like a regular consumer and more like a conscious buyer whose choices make the difference. But there is reasonable cynicism and altruism fatigue in response to corporate sustainability branding. Nevertheless, “much of the Patagonia model is repeatable,” Whelan said.

Already a B Corp, the company has led sustainability practices in areas such as workforce and carbon footprint, and has built a successful brand while maintaining these values. “The fact that it was able to become and sustain a $3 billion company is a testament to the business value of sustainability and the potential of stakeholder capitalism to be financially viable,” said Whelan. “Giving the company away may be an anomaly, but the sustainable and responsible business model is one we are already seeing being replicated.”

“The idea of ​​committing to ESG goals and making a profit at the same time is no longer a paradox,” said Bennedsen.