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By Trevor Laurence Jockims

Many brands are aligning profits with purpose, but Patagonia’s decision in September to convert its for-profit business to one under which all the profits flow through to fighting climate change is the most complex move yet by a U.S.-based company in the realm of sustainable capitalism. Is it a model for other companies to pursue in the future?

For the family founded firm, it’s in some ways a natural evolution. Patagonia has long been on the vanguard of responsible business practices. As far back as 1985, Patagonia deployed portions of its profits to the environment, via an “Earth tax.”

 

It’s far from the only well-known U.S. brand to be structured in a way that allows 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, now totaling half a billion dollars in contributions. But that business, with a pure non-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 little more sophisticated.” 

A business model already in Europe

Yet while Patagonia made headlines in the U.S. for being a novel marriage of capitalism and charity, similar corporate structures are already in use with several large family-controlled European companies, from Carlsberg to Ikea and Novo Nordisk. “Nothing new in this model,” said Morten Bennedsen, professor of family enterprise at INSEAD and the academic director of the Wendel International Centre for Family Enterprise.

Even in the U.S., one of the most iconic retail brands, has long had a No. 1 shareholder devoted to charitable causes and designed by the family founder: Hershey’s.

It is a model that is attractive for family firms that do not want to continue as classical family firms and want the long term stability and the increased professionalization that comes with enterprise foundations,” Bennedsen said. It often is very attractive from a corporate tax perspective, too, which has been noted of both the Ikea and Patagonia business models. “That is another driver of this,” he said.

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

 

‘Unapologetically a for-profit’

Patagonia’s CEO went further in a September interview with CNBC’s “Squawk Box,” dismissing any idea that this change will lead it to focus less on beating the competition. “What people fail to understand about Patagonia, both the past and the future, is that we are unapologetically a for-profit business, and we are extremely competitive,” Ryan Gellert said. “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 do not 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 gets lost if the story fails to recognize that Patagonia is a for-profit business with its profits being 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 chosen by Yvon Chouinard and Paul Newman. “Most founders like to maintain control and have for-profit (less altruistic) sensibilities,” Whelan said. 

B-Corp status, employee-ownership, and mutual organizations and cooperatives are all models that allow more focus on creating stakeholder value, in addition to shareholder value.

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

Indeed, since 2011 the number of B-corps has steadily been on the rise, with the total number recently topping five thousand

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

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

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 may serve as a role model for other family businesses, just like the Giving Pledge, created by Warren Buffet, and Bill and Melinda Gates, caused many billionaires to rethink how they donate their wealth. “That said, it isn’t so much the specific form that is used that is unusual. It is more their level of generosity,” Pendergast said. “It isn’t that hard to set up a non-profit to accept shares. It is hard to get a family to agree to disavow future wealth for the benefit of a worthy cause.”

Long-term friction between purpose and capitalism

The new structure does leave open some long-term questions about the integration of profits and purpose. Rather than having a for-profit company deciding on a yearly basis how much and how a portion of its profits will be committed to charitable practices, the structure of the Patagonian Purpose Trust and the Holdfast Collective codifies the commitment. “In our model, the entity that is receiving the economic value doesn’t have a vote, and the entity that has the vote gets very little economic value. There’s no incentive for Patagonia to ever make a decision that isn’t aligned with ensuring the purpose of the company going forward,” Curtis said.

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

While this structure can be an option for both family and non-family controlled firms, Bennedsen said it works particularly well for family entrepreneurs who do not want to transition the firms within the family, and do not want to go public or sell the legacy firm.   

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

“The tension between growth and environmental impact is one we know well,” Curtis said. “We would be ignoring our commitment to responsible growth if we just maxed out sales for the purpose of giving away more money.  Further, it is important to resist the assumption that our value comes from the money we give away. We don’t think about it like that,” he said. “Our value comes from being a for-profit business and a Benefit Corporation.”

“The challenge for his [Chouinard’s] family will be in later generations,” Pendergast said. “They will need to determine who will be the trustees of the shares held by the non-profit that will determine how that non-profit uses the proceeds they get from Patagonia. It is easy now because it appears he and his family are aligned in their goals. Further down the road, that could be more difficult.”

“At times there are some tensions,” Gellert said in his CNBC interview. “But the default 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 is all an important layer, but we want it to be better, and to continue to be innovative.”

Retail companies and their wares are replete with tales of the enthusiastic farmers who picked the beans for the expensive cappuccino and the sustainability of a particular bag, all of which helps the consumer to feel less like a mere consumer and more like a conscious buyer whose choices are making a 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.

The company is already a B Corp, has been a leader in sustainability practices across issues including its workforce and environmental footprint, and built a successful brand while upholding these values. “The fact that it was able to become and sustain a $3 billion business is a proof point of the business value of sustainability and the potential of stakeholder capitalism to be financially viable,” Whelan said. “The ‘giving away’ of the company may be an anomaly, but the sustainable and responsible business model is one that we are already seeing replicated.”

“The idea of committing to ESG goals and at the same time making profit is not a paradox anymore,” Bennedsen said.

Original Article – CNBC

The Wire

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