For 50 years there has been a heated debate about the appropriate goals and responsibilities of business. Some share Milton Friedman’s influential view that the only responsibility of corporations is to generate profits for shareholders. Others believe that companies have broader responsibilities towards society and the environment. Lately, even state legislatures have weighed in, proposing to ban money managers who consider ESG criteria. But as the battle of words continues, investors, customers, employees and the public have moved on. The question is no longer whether but how far the pendulum has moved towards responsibility and purpose. Surveys show that most investors think ESG goals should trump short-term profits, and more than ever, employees and consumers are choosing companies based on what they stand for.
Great corporations are loved and respected for their values and commitments to their communities in addition to what they do, not for creating wealth for shareholders. This year, Patagonia was named to the group of the most reputable companies based on criteria such as product quality, trust, citizenship and ethics. Chick-fil-A too. You couldn’t find two companies with more divergent values, but both have a clear purpose that goes beyond generating profits. They represent something that people understand. Our most beloved companies are already purpose-driven organizations.
As a tech entrepreneur, CEO of a public company, and investor, I have benefited from shareholder capitalism. It is a system that has brought us reductions in absolute poverty, longer lives through medical innovation and many other improvements, as well as great returns for shareholders. But let’s be honest: it has made its gains at enormous cost, including increased inequality and large-scale uncompensated environmental damage. We have subsidized sustained shareholder returns by unraveling the fabric of our societies and depleting the planet we live on. We all know this is happening – the world is literally on fire.
Even big corporations know that the narrow extractive model of shareholder capitalism does not serve us. Prominent institutions such as The Business Roundtable and the World Economic Forum have worked to rebrand shareholder capitalism as stakeholder capitalism, adding responsibilities to workers, the environment and society. Their investors are demanding this change. But while this new moniker sounds great, so far the actions haven’t caught up with the words. The flowery language of annual reports is simply incompatible with standard forms of incorporation that require companies to maximize shareholder returns only.
Recently, a more concrete movement around corporate responsibility has gained momentum, the Benefit Corporation, which is a form of incorporation that places human, environmental and governance objectives alongside profit in legal charters. business and requires specific goals and improvement over time. Similar efforts by accounting bodies and think tanks aim to develop general accounting standards for measuring companies’ social and environmental impacts that may be required for future corporate reporting. These two innovations are much more substantial advances in making companies responsible players in building sustainable and prosperous societies.
At Patagonia, we signed up early as a Benefit Company, and that helped us clarify our responsibilities. For us, this means continuously measuring and managing our environmental footprint, seeking to reduce our consumption of water, carbon and hazardous chemicals in our clothing. We invest in regenerative organic farming and the circular economy by using recycled fabrics and repairing and reselling used clothing. We evaluate our products according to their real costs. We unapologetically support climate and environmental activism. And we report our progress transparently to our communities. We have used capitalism to create a successful business that is committed to minimizing environmental impact and being a positive force in society.
A few years ago, we changed our mission to something both simple and difficult: we are in business to save our planet. This clear definition of purpose goes beyond any ambitious goals. This compelled us to go much further in what it would take to have no negative impact on the environment while still making great products for our outdoor athlete customers.
Now in our 50’se year, we are going even further. Our founder Yvon Chouinard and his family donated all of their Patagonia assets to charity to fund environmental conservation. We direct all the value created by the company towards specific conservation and advocacy projects. Instead of exploiting natural resources to generate revenue for shareholders, we are subverting shareholder capitalism by making the Earth our sole shareholder.
As a private company, this huge change was easier for us than for others. But the goal is for companies to make transparent commitments that make sense to their business and are held accountable by their communities.
Companies have responsibilities to their workers, their customers, the environment and, of course, their investors. Proponents of shareholder capitalism believe that goals other than profit will confuse investors. Absurdity. Investors already look to many attributes of the business when allocating capital. Over time, the market will continue to function, and responsible, purpose-driven companies will attract more investment, better employees and greater customer loyalty. This is not “woke” capitalism. This is the future of business if we want to build a better world for our children and all other creatures.
Charles Conn is the president of Patagonia.
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