CA Magazine reports on how Patagonia's shift towards a more ethical mode of capitalism will impact CAs
“Earth is now our only shareholder,” wrote Patagonia owner Yvon Chouinard recently when donating his company to an environmental trust. As the move from shareholder to stakeholder capitalism gathers pace, CAs will find themselves leading the way, reports Karam Filfilan
Billionaire philanthropists are not in short supply at the moment. In 2021, Warren Buffett gave away $4.1bn (£3.6bn) in shares in his Berkshire Hathaway holding company to a number of charitable organisations – including the Bill and Melinda Gates Foundation – to combat poverty and Covid-19. Amazon founder Jeff Bezos has committed to donate $10bn over the next decade through his Earth Fund, which he launched in 2020. And in 2021, Laurene Powell Jobs, widow of Apple founder Steve Jobs, announced a $3.5bn giveaway to tackle the climate crisis.
Yet none of these moves garnered the attention lavished on the decision by Yvon Chouinard, founder of multi-billion-dollar outdoor clothing giant Patagonia, to donate his company to a trust and non-profit group focused on fighting climate change. Hailed by some commentators as setting a new example in environmental corporate leadership, the move means the company’s annual profits of roughly $100m will go to the fight against climate change and protecting existing wild spaces, while maintaining existing employee rights and working conditions.
“Earth is now our only shareholder,” wrote Chouinard in an open letter to Patagonia’s customers and employees, explaining that he considered either selling the company and donating the proceeds or going public before alighting on the trust model. “Truth be told, there were no good options available. So, we created our own. Instead of going public, you could say we’re going purpose. Instead of extracting value from nature and transforming it into wealth for investors, we’ll use the wealth Patagonia creates to protect the source of all wealth,” he added.
The clothing company’s model works by transferring 100% of the retailer’s voting stocks to the Patagonia Purpose Trust, which will run the business as usual and protect its values, and 100% of its non-voting stocks to the newly created non-profit Holdfast Collective, which will fight climate change. Profits left over after reinvesting in the business will be distributed as a dividend each year.
Rise of ESG
Patagonia’s move is part of a wider trend towards companies showing a commitment to environmental, sustainability and governance (ESG) goals, particularly post-pandemic. With consumers and employees demanding business display more purpose, organisations are beginning to emphasise their wider social impact.
In fact, Patagonia’s new model aims to disprove Milton Friedman’s old axiom that the only purpose of a business is to create profits for shareholders, with the company Chair, Charles Conn, writing: “Great companies are loved and respected for their values and commitments to their communities in addition to what they make, not for the creation of shareholder wealth.”
More and more investors agree. Research from the Financial Times and data firm Morningstar found investing within an ESG framework is now the fastest-growing part of the asset management industry, hitting $2.7trn in 2021, a 53% year-on-year rise.
So are we entering a new era where business focuses on purpose over profit? If so, what impact will this have on CAs? “There is definitely a movement across all businesses to look at sustainable development and how they can do the right thing,” says Chris Barber, Chief Financial Officer at ICAS. “When I speak to my peers, everyone is talking about it. It’s top of the agenda in a way it wasn’t a few years ago.”
Barber cites the impact of Covid-19 as a moment of reflection when it comes to climate change, but also says generational differences are at play. “Customers are asking for action on climate change and so are employees. We have a new generation coming through who have a louder voice on this. And ultimately it’s the right thing to do. Doing the right thing is good for business as well as society,” says Barber.
For the accountancy profession, there’s a real opportunity to lead on sustainability reporting. The not-for-profit IFRS Foundation set up the International Sustainability Standards Board in November 2021 to create a comprehensive global baseline on sustainability reporting standards. While those standards are still being evaluated, Barber believes accountants will have a huge role to play in measuring progress in coming years.
“Accountancy has always been based in ethics and doing the right thing – and that’s the same grounding for sustainability,” he says. “In the near future, accountants will be asked to report, analyse and provide assurance on sustainability. It’s a really purposeful thing that the profession will be doing. We term it the ‘warrior accountant’ – it will be somewhere accountants can come in and make a real difference.”
While this may require some reskilling, the core technical competencies are similar to those in accountancy. As Barber puts it: “A lot of it is about being able to read and analyse technical data. It might be carbon emissions, not cash, but largely the same skillset is required.”
Corporate sustainability may be a relatively recent concern for business, but it is now a key component of any forward-looking strategy, argues Ted Franks CA, Partner and Fund Manager at WHEB Group, a pioneering asset management firm focused on sustainable and impact investing. “Before 2016, we were not talking to investors in terms of impact or mission. It was all about the bottom line,” says Franks. “Since the political shocks of 2016, there has been a stampede towards ESG and it has been remarkable how quickly it has happened.”
Companies now have to consider how non-financial narratives affect their image in the eyes of employees, investors and customers – and how they demonstrate their impact. “The number of companies with sustainability functions, goals and reporting goes up each year. Companies who don’t have that on their radar are in a really difficult position,” adds Franks.
What makes Chouinard and Patagonia’s model so interesting for Franks is that it is a living change of mission that has an ongoing impact on both the environment and the organisation. He cites vegetable box service Riverford Organic Farmers – which became an employee-owned business in 2018 when founder Guy Singh-Watson rejected outside investment and placed 74% of the business in an employee trust – as another example of a founder changing the ownership model to ensure the purpose of the company can live beyond its leadership.
“What Chouinard has done is distinct from what other wealthy founders have done, which is to make as much money as you can and then be philanthropic with it. I would applaud both, but Patagonia’s model is more powerful. The business is still alive, it still has its values and has the potential to continue growing,” says Franks.
In 2016, the former Archbishop of Canterbury, Dr Rowan Williams, in a lecture called “Can capitalism be ethical?”, said: “Capitalism is not an ethical system; it can plausibly be said to have ethical by-products in certain circumstances, but so long as they are by-products, we have a problem about the basic motivation which can keep going not only the system of capitalist exchange but the institutions of public good in a society.”
This year's model?
So will models such as Patagonia’s change our perception of ethical business and the impact companies can have for good? Martyna Śliwa, Professor of Business Ethics and Organisation Studies at Durham University Business School, believes that while it is too early to suggest we are moving to an era of ethical capitalism, the introduction of advanced ESG reporting regulation demonstrates a shift from shareholder to stakeholder-based approaches.
“Capitalism might not be an ethical system in itself, but we can see a shift towards a more ethical model of capitalism where business activity is infused with a ‘higher purpose’, aimed at generating social good as well as profit,” says Śliwa.
Within this, Patagonia’s model offers an “all-encompassing” approach to ESG, as opposed to the rather fragmentary way many other organisations approach the issue. Śliwa contrasts the Giving Pledge – Buffett and Bill and Melinda Gates’s campaign for billionaires to promise they will give away most of their riches – with Chouinard’s move. “The Giving Pledge encourages the ultra-wealthy to commit to give the majority of their wealth to charitable causes. Yvon Chouinard’s decision is different in that he has actually given away his assets. Moreover, Patagonia will continue to run as a company according to a specific set of values, for example in how it treats its employees,” says Śliwa.
Ultimately, businesses need to get on top of sustainability and ethical issues – not just because employees and consumers increasingly demand it, but because it’s the right thing to do. “The necessity for business leaders to become more proactive on social and environmental issues is of existential significance,” says Śliwa. “The climate is breaking down and we only have a narrow window of opportunity to save our existence on planet Earth. As business activity has been a major contributor to environmental destruction, business leaders have the capacity and responsibility to reverse it. Likewise, thanks to their economic and cultural power, businesses have the scope for becoming a force for social good.”
If, as UN Secretary-General António Guturres told the recent Cop27 summit, we are indeed on a “highway to climate hell”, perhaps this is where accountants help business to seize the opportunity to take the next exit.
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