Is Patagonia the end of profits in a world of climate change?

Many brands are aligning profits with purpose, but Patagonia’s decision in September to convert its for-profit business to one in which all profits are dedicated to fighting climate change is the most complex decision yet. day taken by a company based in the United States in the field of sustainable development. capitalism. Is this a model for other companies to follow in the future?

For the family business, it’s sort of a natural evolution. Patagonia has long been at the forefront of responsible business practices. As early as 1985, Patagonia devoted part of its profits to the environment, via an “Earth tax”.

It’s far from the only well-known American brand to be structured in a way that allows profits to go to charitable causes. 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 this company, with a purely nonprofit structure, was more of a “first generation” model of 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

Yet while Patagonia has made headlines in the United States as an innovative 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. “There is nothing new in this model,” said Morten Bennedsen, professor of family business at INSEAD and academic director of the Wendel International Center for Family Business.

Even in the United States, one of the most iconic retail brands, has long had a #1 shareholder dedicated to charitable causes and designed by the family founder: Hershey’s.

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

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

“Shamelessly a Profit”

The Patagonia CEO went further in a September interview with CNBC’s “Squawk Box,” dismissing any notion that the change would cause him to focus less on battling the competition. “What people don’t understand about Patagonia, both in the past and in the future, is that we’re unabashedly a for-profit company and we’re 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. “All of this 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 those goals gets lost if history doesn’t recognize that Patagonia is a company to profit with its profits released to help the environment,” the spokeswoman said. “It’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 be in control and have a (less altruistic) for-profit sensibility,” Whelan said.

B-Corp status, employee share ownership, mutuals and cooperatives are all models that allow greater focus on the creation of partnership 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 steadily increased, with the total number recently exceeding five thousand.

For its part, Patagonia as a company will remain unchanged in its day-to-day operations, but all of its profits (after reinvestment in the company, compensation of employees, etc.) will be given to the Holdfast Collective to fight against climate change, a flow of annual profit estimated at around $100 million per year.

“It was an unprecedented process that I have ever been part of,” said Greg Curtis, executive director of the Holdfast Collective. “It really started with what’s going to happen long term with the business, so the purpose doesn’t change going forward. We want to recognize the natural lifespans… What does that mean really for capitalism? What really drives 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 Patagonia’s move could serve as a model for other family businesses, much like the Giving Pledge, created by Warren Buffet, and Bill and Melinda Gates have caused many billionaires to rethink how they donate their wealth. “Having said that, it’s not so much the specific form used that’s unusual. Rather, it’s their level of generosity,” Pendergast said. “It’s not that hard to set up a nonprofit to accept stock. It’s hard to get a family to agree to disavow future wealth in favor of a worthy cause.”

Long-term friction between purpose and capitalism

The new structure leaves open some long-term questions about the integration of benefits and purpose. Rather than letting a for-profit company decide on an annual 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 commitment. “In our model, the entity that receives the economic value has no vote, and the entity that has the vote gets very little economic value. There is no incentive for Patagonia to make a decision that does not is not aligned with the company’s goal going forward,” Curtis said.

But when the founder and his family no longer control Patagonia, the question will arise of the selection and management of the board of directors of the for-profit company. “It’s going to evolve, the board, and right now it’s the family and their closest advisors,” Gellert said. But he added that no better option has surfaced during a multi-year process to choose the best option for the company’s future. The company considered a public offering or sale of stakes to investors, “but we would have lost control,” he said. “We had very little faith in meetings with a number of investors that integrity would be protected.”

While this structure may be an option for family-owned and non-family-controlled businesses, Bennedsen said it works especially well for family entrepreneurs who don’t want to transition businesses within the family and don’t want to go public or sell the inherited business. .

But expect the back and forth between profit and purpose to persist in any business.

“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 put our sales to the max in an effort to give away more money. Additionally, it is important to resist the assumption that our value comes from the money we give. We don’t think about it like that,” he said. “Our value comes from being a for-profit business and a for-profit company.”

“The challenge for his [Chouinard’s] family will be in future generations,” said Pendergast. It’s easy now because it seems like he and his family are aligned with their goals. Further down the road it could be more difficult.”

“Sometimes there’s tension,” Gellert said in her CNBC interview. “But the default for Patagonia is purpose. Patagonia needs capacity and profit, to take care of its people, to grow, to keep the supply chain moving, and all of that is an important layer, but we want it to be better and to keep innovating.”

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

The company is already a B Corp, has been a leader in sustainability practices in areas such as its workforce and environmental footprint, and has built a successful brand while upholding these values. “The fact that it was able to grow and sustain a $3 billion business is proof of the business value of sustainability and the potential for stakeholder capitalism to be financially viable,” Whelan said. “The corporate ‘gift’ 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.