CHAPEL HILL – Yvon Chouinard, the founder of Patagonia, announced last week that he and his family will transfer ownership of Patagonia – valued at roughly $3 billion – to two newly created environmental trusts. While this move could be examined through a number of lenses – for example, an analysis of possible tax-related implications or motivations – we want to consider how Chouinard’s transfer intersects with the broader topic of stakeholder capitalism, given our yearlong exploration of the issue.
Four questions come to mind:
- How is this action going to impact Patagonia’s operations – i.e., will Patagonia change its behavior and favor the environment even more at the expense of other stakeholders such as employees?
- Will Patagonia seek to make smaller or perhaps larger profits?
- Does this action seek to raise profitability by increasing brand value?
- Does the earth really become Patagonia’s only shareholder? Or is this just altruism of the sort already practiced by other billionaires, such as Mark Zuckerberg?
Our research has tried to differentiate between win-win actions – such as increasing the brand value of Patagonia by illustrating its environmental commitment, which clearly fits into the profit maximization framework – and situations in which companies face challenging trade-offs where some stakeholders (e.g., the environment) win while others (e.g., employees or shareholders/profitability) lose. As a benefit corporation, Patagonia’s management already seeks to balance the needs of multiple stakeholders, but does this new ownership structure alter that balance?
Alter the balance?
The details of the deal provide some clues.
Chouinard transferred 100% of the company’s voting stock (2% of total company stock) to the Patagonia Purpose Trust, which will be overseen by the family and a small group of close advisers. The trust is tasked with creating a more permanent legal structure to enshrine Patagonia’s environmental mission, as well as broadly ensuring that Patagonia upholds its commitment to run a socially and environmentally responsible business.
The remaining 98% of shares will be transferred to the Holdfast Collective. This means that all of Patagonia’s profits that aren’t reinvested back into the company – projected to be roughly $100 million annually – will be distributed to the Holdfast Collective. The collective is allowed to make unlimited political contributions to grassroots environmental organizations focusing on nature-based climate solutions, such as preservation of wildlands.
Finally, no changes will be made to Patagonia’s leadership structure, and the Chouinard family will retain its board seats. In addition, Patagonia will remain a B Corp and continue to donate 1% of sales each year to grassroots activists.
It seems as if the management structure is not going to change, which means that Patagonia will continue to balance the needs of the environment and the employees in a similar fashion as it did in the past. However, the separation of the beneficiary of the profits to the Holdfast Collective, which is focused solely on the environment, raises the question of whether the collective will want Patagonia to increase its profits so that it can generate the largest environmental impact.
This is similar to the tension faced by any foundation: Do you seek to maximize the returns on your investment portfolio so that you can have the greatest mission impact or do you choose less profitable options because that is part of your mission? In Patagonia’s case, Holdfast would clearly never choose to sacrifice the environment for profits, but what about other stakeholders (employees, for example) or other missions (such as income inequality)? Will Patagonia sell clothing again to finance and tech firms with nonpermanent logos?
A moot point?
Perhaps this is a moot point, because all management control is held by the Patagonia Purpose Trust, but I would imagine that the collective and the trust might have some board overlap.
If the collective does not have any management control, then Chouinard’s gift is not about making the earth Patagonia’s only shareholder but rather plain old altruism. If the trust continues to run the company the way it has in the past, it will be managing the benefits to multiple stakeholders – the environment and employees.
Meanwhile, the collective will be just like any other foundation funded by noncontrolling share ownership or cash. Mother Earth will receive $100 million annually but have no say about how Patagonia is run. Clearly, Chouinard is both a stakeholder capitalist – in his founding and management of Patagonia – and an altruist. In terms of overall impact, however, this move might be less revolutionary and more in line with the altruism of Mark Zuckerberg.
© Kenan Institute of Private Enterprise