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'Patagonia: A Shift to Stakeholder Capitalism'

Earth is now our only shareholder,’ wrote Yvon Chouinard, the founder of Patagonia.

Last month, Chouinard published an open letter announcing that the company’s profits, following reinvestment in the business, will be put toward fighting climate change.

This decision reflects a shift in recent years of attitudes towards stakeholder capitalism. In 2020, Danone, the multinational food company, adopted a similar structure in the form of France’s Entreprise à Mission.

This shift comes in contrast to the views of Milton Friedman, who argued that a company’s only social purpose was to make a profit for its shareholders. Instead, stakeholder capitalism mandates companies to extend this financial benefit to the interests of employees, customers, and the environment, among others.

As put by Charles Conn, Patagonia’s chair: “The only social responsibility of business is social responsibility. Put that in your pipe and smoke it, Milton!”

Rethinking Patagonia’s corporate structure

Patagonia was founded in 1973 in California. It has hundreds of stores across five continents. Its roots are in climbing equipment – Chouinard wished to create tools that did not damage rocks. Now the brand is best known for selling outdoor equipment.

The open letter proposed a change to the company’s corporate structure. Chouinard, who has a net worth of $1.2 billion, stated that he was transferring his family’s ownership to a trust and a non-profit organisation to channel profits to environmental causes.

Patagonia’s voting stock is being transferred to the Patagonia Purpose Trust, which will continue to be run by the family, whereas the non-voting stock is being transferred to the Holdfast Collective, a non-profit group. The company expects that this change will lead to $100 million a year being donated to the latter.

Interestingly, Chouinard stated that taking Patagonia public would have been a “disaster”. Listed businesses are “under too much pressure to create short-term gain at the expense of long-term vitality and responsibility”, he said.

This decision is by no means surprising. Since 1985, Patagonia has donated 1 per cent of sales to environmental causes – totalling approximately $89 million. It is safe to say that this is not, despite its influx, an example of ‘greenwashing’.

In an economy demonstrating increasing concern surrounding Environmental, Social, and Governance (‘ESG’) issues, where does this deal fit in this picture?

Pinpointing ESG

ESG is confusing. It is plastered everywhere. It is rare to see a day where it’s not somewhere, lurking, on the front page of the FT. Beyond confusing, this recent uptick in interest and concern has led many commentators to view ESG as frustrating! This is a sentiment shared by Stuart Kirk, ESG critic and former head of responsible investment at HSBC Asset Management (you don’t have to think too hard as to why former is emphasised).

Kirk argues that ESG has carried ‘two meanings from birth’. One views E, S, and G as inputs into an investment process. Portfolio managers, analysts, and data companies take these factors into account to try and assess the potential risk-adjusted returns of an asset.

In an ESG-input world, it would be fine to own a ‘polluting Japanese manufacturer with terrible governance if these risks are considered less material than other drivers of returns’.

The other is how you and I think of ESG – trying to put your money in a positive place. It is viewed as an output, or goals, to maximise. Upholders of this second definition would prefer a company that ‘does not burn coal, eschews nepotism, and has diverse senior executives’.

Patagonia is blatantly an output-focused business – it is both a ‘B Corp’ and a ‘Californian Benefit Corporation’. These business structures provide a way for socially responsible businesses to incorporate their stakeholder-driven motivations into law – but what are they?

Stakeholder Governance Models

Unfortunately, much like ESG, there is a lot of confusion surrounding what ‘B Corp’ actually means. This is largely because there are lots of similar-sounding terms: B Corps, Californian benefit corporations, benefit corporations, and finally public benefit corporations. Unfortunately, they mean different things.

In general, only a simple distinction needs to be made: a B Corp refers to third-party certification, whereas a Benefit Corporation (and its alternatives) is a legal business structure.

i. Third-party certification

‘B Corp’ is not an alternative corporate form, but rather a certificate. To obtain certification, companies must undertake a B Impact Assessment awarded by B Lab. They will evaluate the effect that the company’s operation has on workers, communities, the environment, and customers. B Corp certification is valid for three years.

ii. Legal business structure

To keep things simple, B Corps as a legal structure have two avenues for making a difference:

Firstly, the structure becomes relevant in the event of a company sale. In traditional corporate structures, directors are required to do their best for shareholders by selling to the highest bidder (Elon’s acquisition of Twitter, and its challenges, is a good example).

The PBC structure in Delaware takes away this role. The board are free to make a business judgement and account for other stakeholders – they don’t have to take the highest price.

Secondly, and rather obviously, PBCs are mandated to consider the interests of all stakeholders – it’s not an option.*

*However, note that the above business structure is unique to the Delaware court. This only applies to companies incorporated there.

Finally, we can now consider the benefits and challenges facing stakeholder capitalism.

B Corps – A trend? Or here to stay?

You may have seen the B Corp logo on packaging in your local supermarket. This suggests that shoppers are becoming increasingly familiar with the certification – perhaps, even, you are a socially conscious shopper who seeks it out. However, it is probably safe to say you probably do not pay attention to the business structures of the companies you buy from.

Moreover, research by PwC highlights that B Corps have “arguably fared better when compared to the wider UK economy”. However, this evidence comes from 55% of respondents to a B Lab survey who believed that being a B Corp contributed to improving the resilience of their business (you don’t need a statistics degree to see the glaring bias).

Furthermore, although B Corps are a step in a positive direction, it is nonetheless discretionary. UK companies are by no means compelled by law to consider the views of stakeholders.

For the law students among you, you may have had the opportunity to study company law and will be familiar with fiduciary duties. For those that are not, these are duties that the directors of companies must comply with or face legal ramifications. They may be found in the Companies Act 2006.

Section 172 of the Act states that companies are run for the benefit of their members (the shareholders), but only need to “have regard … to” employees, customers, suppliers, or indeed-long term consequences. Much of the Section underscores that it is often shareholders, and the price of their share, that is important.

Consequently, whilst companies are free to gain certification, this only has value from the eyes of the consumer – the failure to consider stakeholders is not necessarily legally binding.

Changes, however, are potentially on the horizon. The UK Better Business Act Campaign is pushing to amend section 172 of the act to mandate that all companies must align the interests of shareholders with those of employees, customers, suppliers, their communities, and the environment. Time will tell if this gets anywhere.

Looking forward, I am eager to see whether other companies with follow suit with Patagonia. Many businesses are adopting perceptively ‘social’ or ‘green’ practices, but perhaps stakeholder capitalism is what will separate the ‘greenwashers’ from those with genuine motivations.



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