In 2015, we founded the Purpose Foundation and have since supported companies in Germany and worldwide in learning more about steward-ownership and transitioning their companies to steward-ownership. From the beginning on, lighthouse companies inspiring and empowering others seemed important to our work and the steward-ownership movement. And what could be a better lighthouse company than Patagonia? Indeed, for years we have dreamed about exactly this step — because of our admiration for Patagonia’s work, because it needs pioneers who set examples and go new routes and because Patagonia has always been at the forefront of challenging seemingly given business practices.
So first of all: Congratulations to Patagonia, Yvon Chouinard and family for taking this step, once more leading the way in rethinking business and hopefully inspiring many more to follow.
Patagonia fundamentally rethought corporate ownership
The media and public discourse immediately picked up on Patagonia’s step. It created a lot of buzz and discussions. Statements such as “Patagonia now belongs only to the planet”, “Patagonia founder donated Patagonia to charity”, “All of Patagonia’s profits will now be used for climate protection”, “100% of Patagonia is now owned by a charitable foundation” and the likes made the rounds.
In our opinion, the debate so far has not entirely portrayed the depth and meaning of the step Yvon Chouinard and his family took — and revolved around many misunderstandings. We think this is partly because ownership is a topic not often discussed and because the structure is complex and unfamiliar. But their step actually goes much further than transferring the entire company to non-profit ownership — or to “only” dedicate profits to climate protection. They have fundamentally rethought the way Patagonia’s corporate ownership structure will be working from now on as well as the role that Patagonia will play in society going forward. They have created a different type of ownership — not based on maximizing shareholder value, but on the purpose and independence of the company.
But what does this mean exactly? And what does it have to do with the concept of steward-ownership — and how does it differ from it? To be able to compare Patagonia’s new structure with steward-ownership, let’s take a brief look at the concept.
What is ownership — and what is steward-ownership?
When talking about ownership and creating new structures for it, we need to first talk about what ownership actually means. So let’s briefly look at it: Ownership is often considered as one inseparable package when it fact it is a bundle of different rights:
(1) The right to extract economic value (dividend right)
(2) The control right (voting rights)
(3) The right to sell, transfer or destroy it.
Often, these legal ownership rights are bundled together and not differentiated, but they can also be unbundled and distributed separately. One specific way of doing so is steward-ownership:
“Its ambitious goal is to dethrone shareholder primacy and profit maximization as defining features of capitalism.” wrote the New Yorker in January 2022. And added “it rewrites the psychology of companies, changing the deep structures that shape their behavior. Business owners now have a potent new tool to translate their ideas for a better future into reality.” And it’s not only a new tool but has been used for centuries by companies like Bosch, Zeiss, Novo Nordisk or Carlsberg, particularly in Northern Europe.
Steward-ownership enshrines two principles in the legal structure of the company:
- Purpose-orientation: The company’s value as well as its profits cannot be extracted by the shareholders. Instead, profits serve the purpose of the company and are either reinvested in the company, stakeholders, used to cover capital costs or donated. The company is no longer an asset with the main purpose to create wealth for its shareholders (legally speaking) but is serving a purpose. Profits are not an end in itself, but a means to this purpose.
- Self-governance: The control over the company — i.e. the majority of the voting rights — is always held by people who are closely connected to the company, its operation, purpose and values. Voting rights are neither automatically inherited nor can they be speculated with and sold for financial gain of the shareholders. They are passed on from generation to generation of stewards not based on genetic relation or wealth but based on aligned abilities, values and familiarity with the company.
By enshrining these principles, the company’s structure ensures that money and power, economic rights and voting rights of the company are separated. And this is legally binding in the long run.
The New Ownership Structure of Patagonia
So now let’s take a look at Patagonia. Yvon Chouinard, founder of the outdoor apparel maker, and his family have transferred their ownership of the company, which is valued at around $3 billion according to the New York Times, to a specially designed trust and a non-profit organization. For Patagonia, the move was mostly taken as a succession model — they were looking for alternatives other than passing the shares directly to his children or selling the company.
The Patagonia Perpetual Purpose Trust and the non-profit Holdfast Collective were created to preserve the company’s independence and ensure that all distributed profits are used for climate protection and the preservation of undeveloped land around the globe.
In setting up this two-entity structure, Patagonia separates voting and economic rights: From what we gather, 100 per cent of the voting rights were allocated to the Patagonia Purpose Trust and 100 percent of its dividend rights are now embedded in the non profit structure. This is based on our understanding of Patagonia’s statement “each year, the money we make after reinvesting in the business will be distributed as a dividend to help fight the crisis”.
98% of the shares relating to the value of Patagonia are held by the Holdfast Collective, 2% by the Patagonia Perpetual Purpose Trust. However, this value cannot, in our understanding of it, be liquidated by either company and does not influence the distribution of dividend rights or voting rights — this is called a disproportionate distribution.
How Does Patagonia’s Structure (or what we know about it) Relate to Steward-Ownership?
So let’s take a look at the two principles of steward-ownership and how Patagonia has embedded them in its chosen structure:
1. Principle of Purpose-Orientation — Wealth generated by these businesses cannot be extracted by its shareholders. Instead, profits serve the purpose of the company and are either reinvested in the company, in stakeholders, or donated.
The different ownership rights of Patagonia were transferred to the charitable Holdfast Collective and the Patagonia Purpose Trust.
The Patagonia Purpose Trust is a Perpetual Purpose Trust that was established to protect the company’s purpose-orientation, independence and values. It holds all voting rights of the company, but no right to receive dividends. These shares will be held by the Trust in the long run.
100% of the dividend rights are held by the charitable Holdfast Collective, which focuses on activities that protect the environment and climate. When Patagonia distributes profits that are not needed for reinvestment in the company, they are paid out as dividends to finance the Holdfast Collective’s charitable activities. The Holdfast Collective doesn’t hold any voting rights.
From our point of view, this structure ensures the principle of purpose-orientation through a legally binding capital lock: No individual can extract the financial value of the company or its profits. The non-charitable Patagonia Purpose Trust cannot access the value or profits of the company. This way, the board of the Trust, which has control over Patagonia in the last instance, is not financially incentivized to maximize shareholder value or profits.
The Holdfast Collective which receives dividends of the company does not have any voting rights to influence the company’s strategy and decision-making. As a result, the Holdfast Collective can not force the company to maximize profits for charity.
Thus, the generation of profits is not a goal in itself, but profits are used as a means to serve the purpose of the company. After being reinvested in the company or its stakeholders, they are paid out as dividends to the charity. In Patagnoia’s case: to climate protection and the preservation of undeveloped land around the globe. The company’s purpose and its long-term independence is the focus, neither shareholder interests nor charity interests stand in its way.
2. Principle of Self-Governance — Control remains inside the company with the people directly connected to stewarding its operation and mission.
The control (100% of voting rights) of Patagonia is held by the Patagonia Purpose Trust. While CEO Ryan Gellert and the employees of Patagonia are responsible for the operation of Patagonia, the Patagonia Purpose Trust is where the last instance of control and accountability for the company’s long-term development lies.
Even though the legal rights are held by a legal entity, ultimately it is always the people behind this entity who exercise these rights. In Patagonia’s case, while the Trust holds the legal voting rights, the board of the Trust directs its actions. As the Trust is a Perpetual Purpose Trust, the board members are responsible for fulfilling the purpose of this trust: to protect the corporate values and purpose of Patagonia.
It is our understanding that the shares with voting rights held by the Purpose Trust cannot be sold or speculated with. The Patagonia Purpose Trust will be “guided” by the Chouinard family. Members of the family will elect and oversee its leadership. The family will also “guide” the philanthropic work performed by the Holdfast Collective.
To us, it is neither completely clear what “guiding” entails, as Patagonia frames the involvement of the family, nor is it clear whether Patagonia’s structure fully implements the principle of self-governance.
On the pro side: The voting rights cannot be speculated with as they are held by the Patagonia Purpose Trust. The people holding the voting rights (via the Perpetual Purpose Trust) also do not have access to paid-out dividends or company value. However, the way in which the governance within this Trust is set up is not transparent as of yet. It is not specified what the leading principles for a succession of this power is, who the trustees are and whether this position will remain in the family automatically or whether it can at some point in the future also be passed on to other people that are close to the business.
For now, the family plays a major role in decision-making in the company through its involvement in the Perpetual Purpose Trust (though the exact details of this involvement remains unclear). This might be Patagonia’s way of ensuring that people connected to Patagonia are stewarding the company — which in their case might be the family.
In steward-owned companies, the question who the most value and ability aligned stewards are often arises. There are many different answers and many variations of what self-determination actually means; from a democratic approach to a meritocratic one, from stewards very close to the inside operations of the company to stewards outside of the company.
From a steward-ownership perspective, it is key to find governance solutions that move beyond automatic succession and genetic relations, whilst still allowing family members to become stewards if they are the best fit for the role. From our perspective, it is unclear whether Patagonia has found such a governance solution.
Another consideration is that the Chouinard family also has control rights over the Holdfast Collective’s philanthropic work. This could (but does not need to, depending on how it is set up exactly) affect the separation of voting rights and dividend rights built into the Patagonia structure. If the same family members make decisions both in the Holdfast Collective and in the Patagonia Purpose Trust, they might have an incentive to make decisions to maximize profits to increase the dividends paid out to the charitable Holdfast Collective. This is one of the reasons why companies like Bosch or Mahle not only have separate entities, but also separate groups of people stewarding the voting rights and the charitable entity.
However, Patagonia addresses this on their website, stating they will not maximize sales to give more money to charity: “This is not an excuse to ignore the real tension we’ll continue to face between growth and the environmental impact of our operations. But the new ownership structure provides a way to put the value that comes with responsible growth to work fighting the climate crisis. Patagonia is 50 years into an experiment, and plans to stay in business, operating profitably in line with our values, for the next 50 years and beyond.“
Patagonia and the Tax Question
In many articles, the “tax benefits” or “tax avoidance” of Patagonia’s new ownership structure is discussed (Bloomberg, Sierra). In our understanding Chouinard and the family gifted 2% of the company value with 100% of the voting rights to the Patagonia Purpose Trust. This is not a charitable organization, meaning they had to pay a gift tax of about $17.5 million. 98% of the company shares with all dividend rights were gifted into the charitable Holdfast Collective — which is tax-exempt due to its status as a 501(c)(4). That means the government considers the activities of the Holdfast Collective to be serving the common good so no gift taxes have to be paid. US law also includes political campaigning in this. This status has been used by both sides of the political spectrum in the US to campaign for their political beliefs. As this is out of our direct area of expertise we do not consider ourselves the right ones to shed a clearer light on the pros and cons of including political campaigning in the charitable status of an entity in this article.
Does Patagonia’s new ownership structure avoid taxes for the family? It is correct, that they had to pay less taxes than if they would have made an exit and sold (or gifted) Patagonia to another individual or non charitable organization. In this case they would have been able to liquidate the full value of Patagonia to increase their private wealth. And pay taxes accordingly. But this is not what they did: Instead, they actually have given away all rights to access the company’s wealth or profits in the future. The taxes they are supposed to have “avoided” are thus taxes they would have had to pay only in the case that they would have continued to financially benefit from the company — which, with the structure they set up, they cannot anymore.
Deep Respect for Yvon Chouinard and a Great Milestone for Steward-Ownership
There still remain questions regarding details of Patagonia’s governance. But from our understanding, most — if not all — aspects of steward-ownership have been implemented. This step is a big one — and it deserves a lot of respect. Having worked closely with many entrepreneurs during their process of designing a corporate ownership that suits their mission, corporate culture and values, we comprehend the gravity of the decision and the emotional process behind it.
It is a step that other companies and entrepreneurs have also taken: early on, like Ecosia, Europe’s largest independent search engine that plants trees and Signal Messenger, or as a succession solution and when the company was already highly valued like US-based Organically Grown Company, Alnatura, Germany’s biggest organic food retailer, Bosch, Carlsberg and Zeiss.
There are more and more examples of a new form of understanding entrepreneurship and structuring ownership and financing. As Prof. Kate Raworth states in her book ‘Doughnut Economics”, “(a regenerative economic design) calls for redefining the purpose of business and the functions of finance. (…) It is a redesign process that will emerge not from textbook theories, but from the innovative experiments of those who are trying to bring it about.” Establishing steward-ownership as one option amongst many is an important step towards enabling all entrepreneurs to set up legal structures that are aligned with the company they want to build and the mission they want to bring to the world. This fit between legal structure and purpose unlocks potential — for the people working in the companies, their stakeholders and society.
Patagonia’s step is worth taking note of not just for Patagonia itself, but also for a whole field and movement of entrepreneurs, companies and investors around the world who are striving to create self-determined and purpose-oriented structures suitable for the 21st century.
Learn more about steward-ownership and the movement behind it:
Book: Steward-ownership: Rethinking ownership in the 21st century
New Yorker article about steward-ownership
Case studies of other steward-owned companies:
