Patagonia Inc: A Benefit Corp Case Study

By, Lauren Turner Zahringer

Master's Dissertation PaperUniversity College LondonMSc Environment, Science and Society

The Benefit Corporation from Theory to Practice: A Case study of the New Corporate Model, Its Obligation to Maximizing

a Triple Bottom Line, and How the Environment and Society Benefit

Abstract

This research concerns the Benefit Corporation, a new corporate status in the United States

that institutionalizes stakeholder interests, taking Patagonia Inc. as the case of study. Drawing

on recent scholarship from the discipline of positive organizational behavior, this research

applies the theory and model of Hybrid Organizations as Agents of Positive Social Change

(Haigh and Hoffman, 2012) to uncover how Patagonia is able to couple financial profitability

with making a positive impact (as a whole) on the environment and society, and understand

the company’s motivations and decision to elect B Corporation status.

Case of Patagonia, Inc.

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Chapter 2: Background

In this chapter I present the assumptions, theories, and background information that formed the

foundation of my research. The chapter is divided into three sections. In the first section I present the

definitions, assumptions, relevant past literature and theories underlying this research. In the second

section I shift the focus to the narrative and recent current events of the Benefit Corporation

movement. Section three provides background information on Patagonia Inc.

2.1 Definitions, Assumptions and Theory

Firms as markets

I define a firm as a “bundle of practices” (Benner et al., 2010, pg. 114). This conception of the firm is

taken from the discipline of Economic Geography and characterizes a firm as an organization of a

multiplicity of dynamic interactions and networks. (Benner et al, 2010) The research presented here

assumes this conception as that which constitutes a firm.

Human socio-ecological agency

Form, function, and the values attributable to any one form or functions are inexorably influenced by

the context in which they exist. The concept of socio-ecological agency comes from the discipline of

Environmental Sociology. Human agency refers to the ability and capacity for humans to make

choices and act, and therefore perform as agents. Buzinde and Manauel-Navarrete (2009) argue that

human agency exists not in a vacuum of society, the human-centric world, and that the socio-nature

divide which has supported this conceived absence of the natural environment in our human context is

an unhelpful perspective. As such they propose that there exists a form of human agency, termed

socio-ecological agency, which envelops human existence within the context of the environment.

Buzinde and Manuel-Navarrete (2009) explain, “For the first time we are, not only the agents of

social change and ecosystem change at the local level, but also the main agents affecting the dynamics

and evolution of the global environment...global environmental change is forcing us to redefine our

agency in terms of global stewardship, and a transition from modern agency to socio-ecological

agency” (Buzinde, Manuel-Navarrete, 2009, p. 307).

Business has a Responsibility for the Whole

This research is approached from an assumption that business has, in addition to creating financial

wealth, a responsibility for the whole. This additional responsibility is assumed on the basis of past

history, current capacity and the present context in which business operates. This is a radically

different perspective for the role of business from that previously embraced in the history of

capitalism in the United States, to maximize shareholder wealth. Corporate law governing for profit

entities has remained consistent for nearly a century in its position of the role of business to society.

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In the early 1900’s the Michigan Supreme Court issued the following statement in Dodge v. Ford: “A

business corporation is organized and carried on primarily for the profit of the stockholders. The

powers of the directors are to be employed for that end. The discretion of directors is to be exercised

in the choice of means to attain that end, and does not extend to a change in the end itself, to the

reduction of profits, or to the non-distribution of profits among stockholders in order to devote them

to other purposes" (Moye, 2004, p. 401). In November of 2010, the Delaware courts, thought of as the

“seat of US corporate law” (Gilbert, 2010, p.1), issued the statement is Craigslist v. Ebay: “Directors

cannot defend a business strategy that openly eschews stockholder wealth maximization” (Gilbert,

2010, p.1).

A survey of recent history, the oil industry’s pollution of oceans from Alaska to the Gulf of and the

unraveling of fraud and corruption of large financial institutions, evidences a track record of negative

anthropogenic environmental behavior and social injustice channeled through business activity and its

profit maximizing objectives. At the same time business has also become the most powerful

institution on the planet. (Harman, 1990) Harman (1990) argues that with this power comes

responsibility. This responsibility is embedded through not only the logic of ethics and morality but

also practicality and the efficient use of resources. The context within which business operates today

happens to necessitate the most efficient and effective means be used to solve social and

environmental problems.

Shireman (1994) clearly explains how business is the institution that has such a capacity. “More than

any other institutions today, corporations, have the combination of skills, resources, motivation, and

agility to rapidly implement changes on a global scale. Half of the world’s hundred largest economic

entities are now corporations, not nations. And with 500 transnational corporations controlling

roughly three quarters of world trade, business is the planet’s dominant engine of resource use, service

delivery, waste generation, cash flow, and probably education and training. Business is THE leverage

point for change” (Shireman, 1994, g. 61).

Hybrid Organizations as Agents of Positive Social Change

“Looking around the world, we can witness the emergence of numerous new forms of

enterprise that are part of a broader movement. The behavior of these enterprises is

characteristic of this movement. These firms go beyond business as usual practices and

modes of thought regarding society and the natural environment. Whereas business as usual

engages the economics of balancing the debt of externalities, minimizing harm, or reducing

impact by coupling the negative with the positive. These pursue “business unusual” and

bridge together the form and function of two different types of organizations: for profit and

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created the “B Corp certification”, a third party certification of sustainable business practices, for

companies interested in distinguishing themselves in the cluttered market of green business. The

certification comprises a set of transparent, comprehensive and comparable standards designed to

enable the marketplace to identify and support companies that meet rigorous third-party standards for

social and environmental performance.

The certification was developed for purposes mutually beneficial to consumers, businesses, and B

Lab. It helped businesses distinguish themselves in the saturated market where consumer trust had

been diluted. Consumers on the hand had a trusted and reliable tool for distinguishing a good

company from just good marketing. The certification also enabled B Lab to move closer to its

ultimate goal by building a community of firms that constituted the type of businesses which

ultimately would create their envisioned new sector of the economy. Since 2007 more than 700

companies have become certified B Corps, building a critical mass and collective voice for

influencing policy and legislation in the United States.

Informing Policy

B Lab’s goal to create a new type of corporation is a win-win situation for both government and social

enterprise businesses. According to the Benefit Corporation White Papers, The Need and Rationale

for the Benefit Corporation, there is a growing demand by a new type of business for an infrastructure

that enables them and protects their right to create social and environmental benefit as integrated

within the operations of the business. “The sustainable business movement, impact investing and

social enterprise sectors are developing rapidly but are constrained by an outdated legal framework

that is not equipped to accommodate for-profit entities whose social benefit purpose is central to their

existence. The Benefit corporation, which has already been established by statute in seven states and

which is the subject of legislative initiatives in several others, is the most comprehensive yet flexible

legal entity devised to address the needs of entrepreneurs and investors and, ultimately, the general

public. As a result, it has also attracted broad support from entrepreneurs, investors, citizens and

policy makers interested in new corporate form legislation” (Clark, Vranka et al, 2011).

The rationale for the Benefit Corporation is it is seen as comprising the 4th sector of the economy

where business purpose and pro-social activity are combined, and that this is good for business, and

good for society. Reprinted from White Paper on the Need and Rationale for the Benefit Corporation

(Clark, Vranka et al., 2011) the major characteristics of the benefit corporation form are:

1) A benefit corporation must have a corporate purpose to create a material

2) An expansion of the duties of directors to require consideration of

3) An obligation to report on its overall social and environmental performance

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Patagonia is a private company, owned by the founders Yvon and Melinda Chouinard. In 2011 the

company had sales of $414 Million. Patagonia is known for its commitment to authentic product

quality and environmental activism. To date the company has contributes over forty-three million

dollars in cash and in-kind donations. (Bloomberg Business Online, “Patagonia”, Company Profile,

2012).

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Chapter 3: Research Methods

The overall objectives of this research were to understand why a corporation would choose to become

a Benefit Corporation, and uncover how a Benefit Corporation creates social and environmental

benefit for society through an in-depth case study. This section presents the methodology and methods

that were used to achieve the objectives of the research beginning with the methodological approach

and research design, followed by an explanation of fieldwork, methods of data collection and data

analysis. I used a qualitative research approach and chose the case study method to be the most

appropriate qualitative research tradition for this study. The following discussion will present the

rationale for choosing a qualitative methodology and explain why the case study method best fit the

needs and objectives of this study.

3.1 Methodologies and Methodological Approach

Qualitative Methodology

I chose a qualitative methodology for this research as I concluded it was the best means to achieve my

ends and fit most appropriately to my research questions. I made this decision for the following three

reasons. First, in the early stage of developing my research design I identified that my overall

objectives required developing a deep understanding of a recent event. This meant that I would need

to do a significant amount of information extracting and interpreting. Therefore when designing my

research I needed to ensure that my design and methods supported both discovery and description. I

considered the strengths and general applications for qualitative and quantitative methods. Qualitative

research facilitates the development of an in-depth understanding, while quantitative research applies

hypotheses testing in order to establish facts, and designate and distinguish relationships between

variables. I contented that purely quantitative methods were unlikely to elicit the rich data I needed.

Second, needing more support for my decision of research methodology, I consulted the literature on

sustainable business. The findings from my preliminary review showed that past research on CSR,

Sustainable Business and other related topics often prioritized corporate practices (Fry and Hock

1976; Orlitzky et al. 2003; Snider et al. 2003), and many papers criticized work on sustainable

business and CSR as being too often limited to what businesses should do, or offering no more than

an inventory of sustainability related activities (Crittenden et al. 2011; Basu and Palazzo 2008; Bansal

2005). Campbell (2007) bemoaned that little theoretical attention has been given to understanding

why corporations act, or not, in environmentally, socially, and economically responsible ways and

Basu and Palazzo (2008) argued that researchers have so far failed to understand the underlying

mechanisms or triggers that shape activities related to sustainability. Although indirectly implied,

from this aspect of my preliminary review, I concluded that using a qualitative methodology would

position my research to make a meaningful contribution to current literature and research on related

subjects of sustainable business.

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Third, I reflected on the potential for using a quantitative methodology, and considered what type of

information I would need and if I could identify potential sources for this quantitative data. Benefit

Corporations are a recent phenomenon and at the beginning this research, a very few number of

companies, less than 40, had become legal Benefit Corporations (most of which reincorporated within

a few months prior to this research), and no significant scholarly research on Benefit Corporations

could be identified. Consequently, with such a small number of companies, which in and of

themselves varied greatly by size, location, and accessibility, and no past research to leverage, I

considered that access to sufficient quantitative data would be unlikely. Thus, for these three reasons,

in sum, I chose to use a qualitative methodology.

Case Study Research Method

Having already decided to focus my research on the new Benefit Corporation and that I was going to

use a qualitative methodology the next step was to specify which qualitative research tradition to use.

I chose to use the case study method because I found it was the most fitting methodology for my

research on the basis of my research subject, context, research questions and objectives. As a research

method, case study is an intensive description and analysis, and is often used to study an organization,

a social unit, or a specific phenomenon. (Berg 2004; Creswell 1998; Merriam 1998; Merriam &

Associates, 2002; Miles & Huberman, 1994; Stake 2001). Yin (2009) advises the case study to be a

good choice when a how or why question is being asked about contemporary events over which the

investigator has little control. As a tool the case study method tries to illuminate a decision or set of

decisions, why they were taken and how they were implemented. (Yin, 2009) This was precisely what

my research needed to achieve. I used a single case study design, rather than a multiple case study. A

multiple case study can be advantageous when doing comparative research, for example. Whereas a

single case study design is a great mechanism for achieving in-depth analysis of a single case

allowing the researcher develop a rich and descriptive study.

I chose Patagonia, Inc. as my case of study based on the criteria that I needed to have sufficient access

to data, and, to make the case meaningful, have it be as generalizable to other companies as possible.

Patagonia had been a salient figure in the news and media, voicing opinions and conducting

interviews, in the time leading up to and following the passing of the California B Corporation

legislation. The company also was the first to reincorporate as a B Corporation in the state of

California. I concluded that these facts potentially suggested Patagonia’s enthusiasm and openness

about its decision; perhaps meaning the firm would be willing to share its experience. On the need for

generalizing most of the companies that had become Benefit Corporations were “green” companies,

meaning that they offered products and services within the market of green goods, such as solar

energy, or niche market specialty products made from recycled goods. On the other hand, Patagonia’s

products were not particularly distinguishable in features or styles from competitors such as The

Northface, and therefore, would allow a better chance for generalizable conclusions.

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the same well-tried routes in areas like El Dorado Canyon, the Shawangunks, and Yosemite Valley.

The same fragile cracks had to endure repeated hammering of pitons, during both placement and

removal and the disfiguring was severe. After an ascent of the degraded Nose route on El Capitan,

which had been pristine a few summers earlier, we decided to phase out of the piton business. It was a

huge business risk – pitons were then still the mainstay of the business – but it had to be done”

(Chouinard, 2012, Patagonia website, “our history”). From this lesson Patagonia’s business culture

and values embodied an environmental mission.

Like other businesses Patagonia strives to produce high quality goods for its target market and remain

profitable. As Chouinard explains “If we wish to lead corporate America by example, we have to be

profitable. No company will respect us, no matter how much money we give away or how much

publicity we receive for being one of the ‘100 Best Companies,’ if we are not profitable. It’s okay to

be eccentric, as long as you are rich; otherwise you’re just crazy” (Chouinard, 2005, p.161). What is

unlike many other businesses is that the motivation for this is driven by its deeply embedded mission

of using business to solve “the environmental crisis” rather than goals indicative of business as usual,

such as increasing market share. “With limited resources we have asked ourselves internally here

where can we make the biggest difference, and that requires us to think through the source not just the

symptoms of so many of the issues our societies are facing today and we have concluded that the

sources of many of our societies environmental ills are based and rooted in environmental

degradation. We have initiatives, methods and practices that allow us to use our resources towards

improvement in those areas and that is our focus” (Ridgeway, 2012, interview zahringer).

Slow Growth Slow growth is at the very core of Patagonia’s success. Growing too fast almost cost Chouinard his

company in the first few years. For Patagonia sustainable growth is means stable and slower growth,

and slower growth, better growth, which in turn will allow the company to stay in business and

continue to achieve its environmental and social objectives. In the early 1970’s Patagonia launched its

clothing line hoping to make easy profit to support the less profitable equipment line. “By 1972 we

were selling polyurethane rain cagoules and bivouac sacks from Scotland, boiled-wool gloves and

mittens from Austria, and hand-knit reversible schizo hats from Boulder” (Chouinard, Patagonia

Website, 2012, “our history”). The clothing line was doing well and the company continued to grow

its operations and product line. Being a small private company with organic growth enabled Yvon and

his friends to develop meaningful practices that reflected personal values, interests, and tastes across

the board from human resources and general employee policies to office layout and cafeteria food.

(Chouinard, 2005)

In the early 1980s Patagonia introduced a bold color palette to its clothing line. The result was soaring

demand. The company grew quickly throughout the 1980s but came to an abrupt halt in 1991

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consequent to the economic recession. “Our sales crimped during the recession and our bankers,

themselves in trouble and up for sale, called in our revolving loan. To pay off the debt, we had to

drastically cut costs and dump inventory. We laid off 20% of our work force–many of them friends

and friends of friends. And we nearly lost our independence as a company. This was a very important

lesson and we have kept growth – and borrowing – to a modest scale ever since” (Chouinard,

Patagonia website, 2012, “our history”).

Positive Leadership

Positive leadership is defined as taking a proactive, ‘can do’ approach to management, and not

necessarily overtly. In his book, Let My People Go Surfing, Chouinard shares a story that illustrates

the unique aspect of his positive leadership.

“Climbing mountains serves as an example for both business and life. Many people don’t understand that how you climb a mountain is more important than reaching the top. You can solo climb Everest without using oxygen, or you can pay guides and Sherpas to carry your loads, put ladders across crevasses, lay in six thousand feet of fixed ropes, and have one Sherpa pulling and one pushing you. You just dial in “10,000 Feet” on your oxygen bottle, and up you go. Typical high-powered, rich plastic surgeons and CEOs who attempt to climb Everest this way are so fixated on the target, the summit, that they compromise on the process. The goal of climbing big, dangerous mountains should be to attain some sort of spiritual and personal growth, but this won’t happen if you compromise away the entire process. Just as doing risk sports will create stresses that lead to a bettering of one’s self, so should a company constantly stress itself in order to grow. Our company has always done its best work whenever we’ve had a crisis. I’ve never been so proud of our employees as in 1994, when the entire company was mobilized to change over from using traditional cotton to organically grown by 1996. It was crisis that led to writing down our philosophies. When there is no crisis, the wise leader or CEO will invent one. Not by crying wolf but by challenging the employees with change. As Bob Dylan says, “He not busy being born is busy dying.” New employees coming into a company with a strong culture and values may think that they shouldn’t rock the boat and shouldn’t challenge the status quo. On the contrary, while values should never change, every organization, business, government, or religion must be adaptive and resilient and constantly embrace new ideas and methods of operation” (Chouinard, 2006, p.192).

Mutually beneficial relationships

Patagonia seeks to internalize its relationships with the environment and society and sees these

externalities as relationships rather than costs. This is done through the creation of mutually beneficial

relationships that facilitate Patagonia to create a positive social and environmental change among

suppliers, communities, employees, and customers. Patagonia’s mutually beneficial relationships are

both the cause and effect of the firm’s high performance. This win-win effect also plays out in

Patagonia’s commitment of 1% to the planet. Patagonia is committed to using business to solve the

environmental crisis, and donates 1% of sales to environmental causes and grassroots organizations.

Supporting these organizations is a deeply imbedded mission. I will expand on each of these

relationships below.

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Patagonia & Customers

Patagonia builds products for its “core users,” those who lead the “dirtbag” lifestyle. In developing its

products, Patagonia primarily focuses on three criteria: quality, environmental impact, and innovation.

Patagonia claimed that these elements allowed it to charge prices roughly 20% higher than those of

other outdoor apparel and 50% higher than mass-market brands for comparable products in both

performance wear and sportswear. Patagonia consumers had a median age of 38 years and an average

household income of $160,000.

To create quality products for its core users, the company seeks to create products that are simple,

functional, and multifunctional. Simplicity is Patagonia’s principal design concept, inspired by the

French aviator Antoine de Saint Exupéry’s statement, “Perfection is finally attained not when there is

no longer anything to add, but when there is no longer anything to take away.” Chouinard explained

Patagonia’s standard for quality: “Our goal is to offer only viable, excellent products that are as

multifunctional as possible so a customer can consume less but consume better. A ski jacket should

work perfectly for all disciplines of skiing, but… you should be able to wear it on a sailboat or in a

winter rainstorm in Paris.”

Progressive Interaction with Markets, Competitors, and Industry Institutions

Patagonia uses its knowledge and successful environmental practices to promote the diffusion of

sustainable products and practices, business wide overall, and specifically within its industry. These

are directed towards markets, competitors and institutions.

Patagonia launched the Product Lifecylcle, an extension to their Common Threads Initiative

Recycling Program, in 2010 in an effort to include consumers in Patagonia’s vision of environmental

responsibility. An internal document articulated that reducing Patagonia’s environmental footprint

required a pledge from both the company and its customers. The initiative thus consisted of a mutual

contract between the company and its customers to “reduce, repair, reuse, and recycle” the apparel

that they consumed. In September of 2011 Patagonia launched its Common Threads initiative,

described in the official press release as a partnership with its customers to reduce consumption and

its resultant environmental harm (Patagonia Inc., Pr Newswire, 2011).

Patagonia’s Common Threads Initiative addresses what Chouinard sees as a significant part of today's

environmental problem – “the footprint of our stuff.” In order to be effective, the common threads

initiative depends on a commitment from Patagonia and its customers. Regarding the later, customers

are asked to not buy something if they don't need it. Patagonia promotes the approach of quality over

quantity. “If they do need it, we ask that they buy what will last a long time – and to repair what

breaks, reuse or resell whatever they don't wear any more. And, finally, recycle whatever's truly worn

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partners and help them achieve continuous, long-term environmental improvement. Bluesign system

partners agree at the outset to establish management systems for improving environmental

performance in five key areas of the production process: resource productivity, consumer safety,

water emissions, air emissions, and occupational health and safety. System partners regularly report

their progress and must meet improvement goals to maintain their status; Bluesign technologies

perform regular audits.

Summary

This section has provided evidence that social change is an organizational objective, and serves as the

backdrop for Patagonia’s business. The firm has three core elements: (1) an environmentally

embedded mission; (2) positive leadership; (3) slow sustainable growth. In sum these elements are the

source of Patagonia’s capacity to be an agent for creating a positive material impact on the

environment and society. Patagonia’s agency is manifested in its mutually beneficial relationships

with stakeholders, and then cyclically transferred through its progressive interaction with markets,

competitors and institutions. Patagonia thus, is both market driven and mission oriented, and this

model is sustainable through the inherent checks and balances of such a duality.

4.2 Research Objective (2): Why Patagonia Became a B Corporation

Before becoming a B Corporation Patagonia went through the process to become a certified Benefit

Corporation. Patagonia knew that B Lab was working towards developing legislation. Founder Yvon

Chouinard has spent over fifty years growing Patagonia and working with the business from the day

he founded it. Protecting the business he has built, in its focus on environmental causes is deeply

important. I asked Rick Ridgeway if becoming a Benefit Corporation helps Patagonia achieve its

environmental and business objectives.

“In regards to the certification process we didn't go through those exercises so we could

learn where we were or where we weren’t. Rather, the process of B corps certification

for us had a different attraction. That is that we knew that California legislation was in

the process of considering the adoption of b corp stats as an option for corporate

election in the state, and that is what really attracted us. That assuming that legislation

passed and that consequently we would have the option of officially becoming a b corp

then we also had an opportunity to memorialize the values we had built up over the past

30 years, into what are called our corporate articles of incorporation that would allow

us to formalize those values in a way that could theoretically survive any transition

scenario in our company in the future. So as a private business owned by the family,

the business will in all likely hood will pass to there children who do work here and are

doing a great job of getting integrated into the company and it might happen another 16

or 17 years from now when they transition out and there children or someone else takes

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over or what might happen if there is an unforeseen tax event and there were others

shareholders who came in too, who might know in what degree of ownership, how

would you protect the values that we have built up over the near 40 years that we have

been in business so that those values would be protected against any scenario that you

might imagine over the next 100 years and the b corp legislation has allowed us to do

just that.” (Ridgeway, 2012, interview zahringer)

4.3 Directions for Future Research & Conclusion

In this report I have presented research on a new corporate structure for sustainable business, the

Benefit Corporation, through a case study of Patagonia, Inc. The Benefit Corporation provides many

opportunities for future research. Research comparing the triple bottom line performance of a

Benefit Corporation to a similar business as usual firm that has social responsibility and

sustainable development initiatives could help to better understand if there exists a

measurable advantage for society to the Benefit Corporation proposition. Benefit Corporations

represent an example of positive and pro-active business that goes beyond Corporate Social

Responsibility. Studies on business behavior of this type are needed as past scholarship within

business management has often failed to progress past innovative CSR.

By conducting a qualitative study, this research has produced a rich analysis and account of the

practices, characteristic elements, and values of a Benefit Corporation as embodied in the business of

Patagonia. The Benefit Corporation movement is still in the infancy of its emergence. Whether this

movement will continue to grow in support and number of firms is unknown. What is known is that

there exists, in the United States, the need for a more systematically just type of economic entity than

currently exists.

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Patagonia Inc: A Benefit Corp Case Study

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