The debate about the true role of a firm in society is a longstanding and recurring one. Since Milton Friedman publishing, in 1970, that managers bear the responsibility of conducting the business according to shareholders’ wants and requirements – generally achieved by maximizing shareholder value – the concept has evolved over time. Now, a broader definition comes into play, with many perceiving a company as being an entity that has a responsibility towards the environment and the society it is inserted in, which has subsequently led to the creation and adoption of concepts such as Corporate Social Responsibility (CSR). This extension of a firm’s responsibility towards other stakeholders and society more broadly has paved the way for companies that test the limits of the definition of for-profits, such as the American clothing company Patagonia, Inc.
Yvon Chouinard, an American rock climber since his 14 years old, founded Patagonia, Inc in 1973, having always shown an entrepreneurial spirit throughout his earlier life: from making his own rock-climbing tools to teaching himself blacksmithing, and later moving on to selling rock-climbing tools and clothing.
Patagonia has made significant strides in distinguishing itself from other brands, offering a wide range of products in its portfolio, from food to hiking clothing, while assuring a commitment to the environment and its causes. This fact stems a lot from its founder Chouinard, who has always sought to do more for the planet, pledging the word “activism” as a motto for the brand.
Consumer Activism Nowadays
In an increasingly connected world with access to more information and data than ever before, consumer demands are becoming ever greater and more ambitious. Consumers’ choices are based on their tastes and values and, therefore, they want to buy and use companies’ products that are aligned with their values. Nowadays, companies operate on an increasingly public stage, with mainstream media and social platforms accelerating consumer movements, leading to Consumer Activism, consisting of taking an action for (BUYcott) or against a company (BOYcott).
Indeed, according to a study conducted by Weber Shandwick, 60% of US and UK consumers have reported some form of activism, as of August 2017. Here, any activism action can range from something simple like stop watching a show that a brand is advertised on or recommending a brand to friends, to larger scale events such as taking part in demonstrations or protests against or in support of a brand.
Differentiating through environmental concerns
Patagonia has been able to create a competitive advantage in comparison to its peers by continuously differentiating itself in its environmental sustainability efforts, which are entirely aligned with the previously mentioned consumer activism. Patagonia’s stance and values can be comprehended through several examples of marketing practices which actually tend to be considered by many “anti-marketing” campaigns. A well-known example of this marketing strategy is Patagonia´s “Don’t Buy This Jacket” campaign that was launched in the middle of the Great Recession in which they demonstrated the impact that the production of one of their best-selling garments had on the environment.
Also, Patagonia is known for putting in practice the messages it preaches as it promotes used wear on its website, through the platform Worn Wear. There, customers can find second-hand items that have been cleaned and/or repaired, contradicting the fast-fashion trend and consumerism issue, which tends to be associated with higher profits for companies due to increased sales, but also a higher impact on the environment. Moreover, currently, Patagonia is pledging 1% of sales to the environment’s preservation and restoration.
The results of these actions and core values have not only led Patagonia to grow its business and brand recognition but also to occupy a distinct position in the customer’s portfolio, as it has become intrinsically associated with environmental consciousness, especially targeting consumers that are preoccupied with sustainability and climate change.
In September 2022, Chouinard donated his family’s ownership of the company, with a US$ 3 billion estimated valuation, stating that “Earth is now our only shareholder”.
Back then, before the donation, various paths presented themselves for Patagonia´s future, including those most referred to as “common route” ones, such as the possibility of selling the company to the highest bidder, and then proceeding with the donation of that amount, or quoting the firm in the stock market through an IPO. However, after analyzing the various available options on the table, Chouinard reached the conclusion that neither would be totally aligned with Patagonia´s (and his own) values, as made clear in his open letter posted on Patagonia’s official website. There, he states that they “ couldn’t be sure a new owner would maintain [their] values or keep [their] team of people around the world employed” or how quoting the firm in the stock market through an IPO wouldn´t also work because “even public companies with good intentions are under too much pressure to create short-term gain at the expense of long-term vitality and responsibility”, considering that the company managers would become myopic and succumb to short-run pressures to provide a return on the new stockholders’ investment.
So, faced with this situation, Chouinard and his team decided to tailor make a solution that would go in line with what the company represents, creating checks and balances to ensure that its mission and values remain unharmed. This solution, in which Patagonia will continue to operate as a private enterprise but the Chouinard family will not continue to have control over it was put into operation in two stages.
To begin with, back in August 2022, the family transferred irreversibly 2% of Patagonia to a newly created entity called Patagonia Purpose Trust. This trust will continue to be supervised by members of the family and their advisors and has voting stock, having as its main goal safeguarding that Patagonia remains independent and its average profits of US$ 100 million would be used to combat climate change and protect the forests. Due to the portion of voting stock, the family will have to pay US$ 17.5 million in taxes for the donation. Secondly, this September, the family proceeded to donate the remaining 98% to Holdfast Collective, a non-governmental organization that will use the profits to fight climate change, with this part of the donation consisting of non-voting stock.
The decision to donate the shares has an incalculable social impact attached to Patagonia, stakeholders and society. With this action, Patagonia, Inc. opens a new possibility in the markets, creating the potential of donating shares for the benefit of society instead of the unbridled pursuit of profits.
One thing is certain, this decision will be a subject of debate and study in the future in order to analyze if this solution will be the one that is able to yield the best results in the trade-off between cash flow maximization, including profit maximization towards these charitable causes, and ensuring that Patagonia remains the B-Corp corporation that continues true to its values for which their clients have come recognize it for.
Sources: Financial Times, Observador, Público, McKinsey, “Battle of the Wallets: The Changing Landscape of Consumer Activism” (2018), in Weber Shandwick