Strategic Management and Sustainability #68
The Nonprofit Revolution: How Companies Like Patagonia are Redefining Ownership and Impact
Good morning,
In today’s newsletter, we delve into the remarkable journey of Patagonia, a company that is redefining the balance between profit and sustainability. Yvon Chouinard's visionary decision to entrust his company to the Patagonia Purpose Trust and Holdfast Collective is the main topic of this newsletter.
In the course of this newsletter, we will discover how this transformation is not only reshaping Patagonia but also reshaping the conversation about corporate ownership and responsibility. Furthermore, we will look at how Patagonia's bold move aligns with its mission to save the planet and how it can serve as inspiration for other companies to follow suit.
We hope you find this newsletter both informative and thought-provoking about the path to a more sustainable and socially responsible future for corporations worldwide.
This newsletter contains 1937 words and takes around 7 minutes to read.
Written by Cristina Floriano, Clara Falder, Sara Zarco, and Julie Stevens
Introduction
Are companies at a turning point, struggling to find the balance between short-term profits and long-term sustainability? Imagine an owner who dares to safeguard a company's commitment to environmental responsibility. Yvon Chouinard, the visionary behind the renowned Patagonia brand, has taken that bold step. He has generously earmarked his voting and non-voting shares to the Holdfast Collective, a non-profit organization committed to addressing environmental challenges and protecting the natural world. But what are the implications of this fundamental shift, for Patagonia?
Throughout this article, we will explore the strategy called "shareholders foundation". We will observe its evolution, the financial and ecological benefits as well as the possible complications. Could this trend serve as a catalyst, motivate others to follow suit, and nurture a better future for our planet and society?
Patagonia
Patagonia is a well-known U.S. outdoor clothing and equipment company that has had a major impact in the fields of outdoor exploration and environmental preservation. Founded in 1973 by Yvon Chouinard, Patagonia has grown from a specialty climbing gear manufacturer to a global symbol of sustainable business practices and premium outdoor apparel.
With its mission "We are in business to save the planet" the company goes beyond traditional corporate goals. It actively works to reduce its environmental footprint, support grassroots environmental initiatives, and promote sustainability throughout its supply chain. Patagonia has become an emblem of conscious consumption and responsible trade. Its story is one of transformation, commitment, and unwavering belief in the potential of business to drive positive change in the world. This move aligns with Patagonia’s long-standing mission to save the planet and serves as a unique example of how a company can use its ownership structure to ensure long-term sustainability.
Patagonia's New Owners and Structure: Holdfast Collective and the Patagonia Purpose Trust
The Holdfast Collective owns 98% of the company and all the non-voting stock. The Patagonia Purpose Trust owns 2% of the company and all the voting stock. Non-voting stock carries economic value, but not decision-making authority. The voting stock has both economic value and decision-making authority.
The Holdfast Collective is a non-profit organization that will advocate for causes and political candidates and make grants and investments that fight environmental crises, protect nature and biodiversity, and support thriving communities. It will receive an annual dividend of any Patagonia profits that are not reinvested back into its business. Holdfast Collective is reportedly organized as a social welfare organization, which is a type of organization that is exempt from federal income tax, but not considered charitable in the U.S. Unlike charitable organizations which are prohibited from engaging in any political campaign activity, social welfare organizations may engage in limited political campaign activity. In addition, contributions to social welfare organizations are not eligible for U.S. income tax deduction as contributions to U.S. charities are.
Even though the company has changed severely, the day-to-day operations of Patagonia have remained unchanged. CEO Ryan Gellert and his leadership team will continue to manage the company under the board’s guidance, and the employee experience for both store and corporate staff will remain at the forefront of Patagonia’s business priorities. Patagonia’s recent transfer of decision-making authority and strategic direction from profit-focused shareholders to entities with a balanced focus on both company performance and environmental protection marks a significant shift. One of Patagonia’s fundamental values is the preservation of nature, and this new ownership model strongly reinforces the company’s dedication to these values. While complete company ownership transfers like this are likely to remain relatively rare in the retail sector, Patagonia’s decision paves the way for other businesses to consider a similar approach on a larger scale.
Corporate Ownership: “The Rise of Shareholder Foundations"
Patagonia’s move aims to protect the company from short-term profit pressures and ensure long-term sustainability while supporting environmental philanthropy. Such transformations in ownership structure are becoming more common in the United States, thanks to changes in tax legislation that now allow charitable organizations to hold 100% of voting rights in a corporation.
What are shareholder foundations? They are models of shareholder foundations where a substantial part of large companies are owned by foundations. These foundations are usually set up by veteran entrepreneurs who wish to ensure the long-term stability of both their business and their philanthropic activities. In some cases, one foundation controls both voting shares and share capital, while in others two separate entities are formed to manage control through voting rights and share capital with philanthropic activities.
Regarding the financial performance of the shareholder foundations, and contrary to concerns that companies without human owners might falter, foundation-owned firms often exhibit similar or superior financial performance compared to investor-owned firms. They tend to have more stable growth, are less volatile during economic crises, invest more in research and development (R&D), and enjoy longer lifespans.
Another important issue about this model is that traditional shareholder-owned companies often prioritize profit maximization over philanthropy. The shareholder foundation model reconciles this conflict by making the shareholder a philanthropic foundation. This ensures that maximizing shareholder returns through dividends also maximizes potential donations, given the substantial size and revenues of many foundation-owned firms.
Moreover, for business owners committed to maintaining their economic and philanthropic mission in the long term, the foundation model provides an enduring solution. It safeguards the founder's values even if their descendants relinquish part or all of their inheritance due to high succession taxes or mismanagement risks.
However, the change to a shareholder foundation comes with governance challenges like the board composition, as striking the right balance between corporate, philanthropic, and family representation on the board is crucial to avoid one party dominating long-term decision-making. Also, decisions on whether to issue profits as dividends for philanthropic activities or reinvest them in the firm require careful consideration.
Critical Commentary
Patagonia’s audacious decision to restructure its ownership - the formation of the Holdfast Collective and the Patagonia Purpose Trust - is addressed. The Resource-Based View theory of strategic management is in line with this tactical change. Businesses should use leverage unique, valuable, and non-replaceable resources to gain a competitive advantage, according to RBV theory. By exploiting its ownership structure as a tool to advance its environmental mission, Patagonia’s ownership transition exemplifies this idea. The transition to a shareholder foundation minimizes the risk of short-term profit-seeking investors diluting the company’s core values, safeguarding its unique resource, which is the commitment to environmental and social responsibility.
Furthermore, according to core competence theory, this case instance shows how social and environmental responsibility may become a core competence. Based on this concept, businesses should concentrate on encouraging and developing distinctive capabilities that set them apart. Patagonia has positioned sustainability at the heart of its corporate strategy, making it a fundamental part of its brand identity. By doing so, the company has established a unique competency that not only attracts loyal customers but also aligns with its resource allocation, investment in research and development, and organizational culture.
The research offers evidence that, when compared to investor-owned businesses, foundation-owned businesses frequently show similar or better financial performance. This challenges the commonly held opinion that sustainability and a focus on financial return are incompatible concepts. The case of Patagonia demonstrates that maintaining an unwavering dedication to sustainability can be financially viable. This is consistent with the Triple Bottom Line concept, in which companies strive to balance profits, people, and the planet.
While Patagonia received plenty of admiration and praise after the shift in their ownership structure, they are also receiving some criticism.
The perceived luxury of privately owned status: One criticism directed at Patagonia is that as a private company, it enjoys a degree of flexibility and independence that public companies do not. Privately owned companies typically have more leeway to make decisions that align with their values because they are not dependent on public shareholders who prioritize short-term profits. Therefore critics argue that Patagonia’s move can be seen as a luxury that only privately owned companies can afford, and is not feasible for public companies with shareholders who demand financial returns.
Potential tax avoidance: Another point of the criticism revolves around the possibility that this ownership shift is a creative legal maneuver to reduce tax obligations, by taking advantage of favorable tax treatment for philanthropic foundations.
It is important to note that these criticisms, while valid concerns to address, should not overshadow the positive aspects of Patagonia's ownership shift. The move aligns with the company's long-standing commitment to environmental and social responsibility, and it has the potential to create a significant positive impact on philanthropic causes. Moreover, the legal and tax aspects of such ownership structures are subject to oversight and regulation by relevant authorities, which ensures that companies operate within the bounds of the law.
Hypocrisy: Patagonia is often accused of hypocrisy because they are a growing company that makes and sells clothing on the one hand and claims on the other that customers need to consume less in order to lighten the environmental footprint. Let’s look at an example of this criticism: Patagonia’s 2011 Black Friday ad in the New York Times. Patagonia ran an ad on Black Friday that said ‘’Don’t Buy This Jacket’’. The meaning behind this ad was to raise awareness among customers about overconsumption. More specifically, this means that businesses should make fewer things, but of higher quality, and that customers should think twice before they buy something. This ad received quite some negative backlash and in their response to the accusations of hypocrisy, Patagonia said the following:
‘’It would be hypocritical for us to work for environmental change without encouraging customers to think before they buy. To reduce environmental damage, we all have to reduce consumption as well as make products in more environmentally sensitive, less harmful ways. It’s not hypocrisy for us to address the need to reduce consumption. On the other hand, it’s folly to assume that a healthy economy can be based on buying and selling more and more things people don’t need—and it’s time for people who believe that’s folly to say so.’’ (Patagonia, 2022)
These criticisms highlight the ongoing debate about the role of businesses in society and the trade-offs they face in balancing profit motives with broader social and environmental goals. However, the fact that Patagonia launched this campaign in 2011, shows that the company has always been ahead of its time, and is a real pioneer in the retail sector when it comes to sustainability.
Conclusions
In summary, Yvon Chouinard's decision to transfer ownership to Patagonia Purpose Trust and Holdfast Collective reflects a broader trend in shareholder foundations. This shift emphasizes the strategic importance of a long-term perspective, balancing profit with purpose, reinforcing resilience and stability, and making philanthropic impact a core part of a company's mission.
While Patagonia's decision has received both admiration and criticism, it illustrates the ongoing debate about the role of corporations in society and their ability to balance profit motives with broader social and environmental goals. The company's pioneering efforts in sustainability and its willingness to address these challenges, such as overconsumption, demonstrate its commitment to making a positive change.
This shift in ownership structures is transforming not only the way companies operate but also the strategic management focus. As more U.S. companies adopt these models, they can create a positive impact, fostering responsible foundation-owned businesses in times of uncertainty and change. As Patagonia continues to lead by example, by paving the way for a more sustainable and socially responsible future in the corporate world, it reminds us that businesses can play a vital role in nurturing a better future for our planet and society, even in the face of complexities.
References
Bohannan, S. (2022, September 15). Patagonia transfers ownership to Patagonia Purpose Trust & Holdfast collective. Boardsport SOURCE. https://www.boardsportsource.com/patagonia-transfers-ownership-to-patagonia-purpose-trust-holdfast-collective/
Cha, W., Rew, D., & Jung, J. Y. (2022). Corporate Philanthropy and Firm Performance: The role of Corporate strategies. Society and Business Review, 18(1), 104–123. https://doi.org/10.1108/sbr-12-2021-0249
Don’t buy this jacket, Black Friday and The New York Times. (2022, 22 November). Patagonia Stories. https://www.patagonia.com/stories/dont-buy-this-jacket-black-friday-and-the-new-york-times/story-18615.html
Gautier, A., & Bothello, J. (2022, October 10). What happens when a company (like Patagonia) transfers ownership to a nonprofit?. Harvard Business Review. https://hbr.org/2022/10/what-happens-when-a-company-like-patagonia-becomes-a-nonprofit
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Pavarini, M. C. (2022, September 15). The brands: Patagonia’s new owner is the non-profit holdfast collective. The Spin Off. https://www.the-spin-off.com/news/stories/The-Brands-Patagonias-owner-yields-the-company-to-non-profit-company-Holdfast-Collective-16667
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