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BY CHARLES CONN, Chairman of Patagonia, in Conversation with Rik Kirkland

They met “in the most natural way possible,” recalls Charles Conn, “on a river.” After sharing a rain-soaked tent on a fly-fishing trip in British Columbia, Conn, a former McKinsey partner and CEO of the Rhodes Trust, and Yvon Chouinard, the founder of Patagonia, became fast friends.

Conn joined Patagonia’s board in 2007 and became chairman in 2020. In that role he helped the Chouinard family execute a bold decision to place their controlling stake in the multi-billion-dollar specialty retailer into a new kind of entity: a “purpose trust” to steer the company in line with the founders’ values and a foundation to support accelerating the world’s response to climate change. In this interview, Conn explains the trust-based thinking that lay behind the Chouinards’ quest to find an ownership structure that would stay right “for all time.”

Rik Kirkland: Patagonia’s recent big move is the culmination of a much longer journey. Take us back to the beginning.

Charles Conn: Trust is deeply foundational to the Chouionard family’s way of thinking. The brands that you love, you love not just because of what their product does for you — whether it exists to taste good or to keep the rain off or to connect you to your friends. You also love them because behind that product you trust that there is somebody working on it who actually care.

Yvon and his family would be the first to tell you that they didn’t wake up at birth with this insight. They built a business over 50 years, starting by selling pitons out of a truck. Gradually, they decided that, yes, while companies are incredible engines of innovation, they have to be about something more than just making great products. Because companies focused only on profits were destroying the planet and using up the earth.

So how can we harness capitalism for good and not just count on regulators to provide guard rails? That requires, they concluded, setting down in writing our relationship, not just to shareholders, but to customers, to staff, to the communities in which we operate, to national governments — to convey our sense of duty, purpose and responsibility.

In 2012, when the initial laws were passed in California to allow Benefit Corporations, Yvon put on a coat and tie and stood with his wife Melinda on the courthouse steps to be first in line to create the state’s first B Corp. It was a great thing. It allowed the Chouinards to enshrine in their charter values that they thought were important other than profit maximization.

Rik Kirkland: But that apparently wasn’t enough. Can you walk us through the logic of the most recent governance change?

Charles Conn: The unanswered challenge was how do you ensure that such a company will thrive while remaining true to its values, after the founder is gone? Many years ago on another river, this time in Chile, I had asked Yvon that question. He said then, ‘I’m probably going to shut it down. If my kids don’t want to run it [they were in their 20s then], I am not sure who we could trust to run it.’ But by the time he got into his 80s, he started seriously pondering this question again and for help to think it through. The goal was to ensure the proper stewardship of the company for all time, and at the same time to release the significant value that Patagonia’s success had created to help address the environmental crisis.

We looked at all the options, including taking the company public with a dual class shareholding structure. While a B Corp structure is helpful, it can be changed by a decision of two-thirds of the voting shares. And unlike in Europe, U.S. law doesn’t allow a foundation to own a public corporation. In the end, the Chouinards simply did not feel comfortable with the longterm certainty of any of these options. What we came up with, instead, was a structure that had never been used before for a big company: a so-called purpose trust, which lays down in very precise terms what the organization values and which can only be altered by the unanimous consent of its board. Both those features help ensure future managers can’t easily alter the mission. The trust holds all the voting shares in perpetuity but accounts for just 2 percent of Patagonia’s economic value. A foundation holds the other 98 percent of non-voting shares and is free to use that money in any way it deems fit to fight the climate crisis.

Rik Kirkland: Was there also a business case for making this change?

Charles Conn: That was not the goal. But as Yvon likes to say, ‘Every time we’ve done the right thing, it’s been good for business.’ It’s right in the long term, for sure. But I even think it’s right in the short term. We’re vigorous competitors. We want to beat our rivals. When it comes to choosing a nice impermeable raincoat, folks can pick one that works, or they can pick one that works and also does the right thing. And while it might cost a little bit more, people want to feel close to brands that reflect their values.

Rik Kirkland: So, you don’t buy Milton Friedman’s famous argument that the only social responsibility of business is to stay within the law and make a profit?

Charles Conn: I went to Harvard Business School and was trained in what we called shareholder capitalism. When I read Friedman’s 1970 essay forty years ago it made sense to me. It’s well-written and reasoned. But after years of studying economics, I began to say, wait a minute. He assumes perfect competition. Yet more and more companies are showing increasing returns to scale in a winner takes most world.

He assumes perfect regulation, when, in fact, it is easy for companies to engage in regulatory arbitrage. The other thing Friedman assumed is that there are no unregulated negative externalities. And that just isn’t so. Almost in our lifetimes, if you look at how the world has been transformed by naked capitalism it is almost unrecognizable. Seventy percent or more of the earth’s biodiversity has been extinguished.

In the world today, we can’t assume that the right answer for society is simply for companies to maximize profits, for governments to police the lanes and for individuals to make great philanthropic decisions. In retrospect, I know that view was never correct. Go back in history and look at a company like Lever Brothers, the predecessor to Unilever. Look at how it put people first a century ago.

Rik Kirkland: What about the current counterargument that stakeholder capitalism is just another word for ‘woke capitalism’?

Charles Conn: The idea any company that engages in social issues is guilty of ‘woke capitalism’ is just plain wrong. It’s not ‘woke capitalism’ for companies to stand for something and be responsible to their communities. What’s important is to not to view this as purely a left or right issue. When people line up to buy at a Chick-Fil-A to buy that sandwich, they’re also doing that partly because they want to support a company that reflects the values it does. I don’t agree with those values, but I’m for that transaction. I’m for a world where companies are explicit about what they stand for.

When you invest in a company like Patagonia, you are investing in something that has a number of characteristics. One is the margin structure and cash flows over the last five years. The other is what it stands for, the commitments it makes to the environment, to paying its people a fair wage. Why is Apple one of the most valuable companies on earth? Because they make good stuff? Sure. But they make good stuff, and it’s a really good place to work. And they’ve taken a stand that people’s data should be protected. I am happy to pay more for Apple because I think they’ve got my back on privacy.

More broadly, we want the innovation that comes from people taking risks, being clever and having their creativity rewarded. That’s the fundamental idea behind capitalism. But don’t we also want that creativity and innovation to go towards purpose and responsibility? I do. I don’t want to live in a world where the government decides what products to make, or where other people tell me what to do. But I also don’t want to live in Milton Friedman’s pretend world of value-free profit maximization. I want to live in world where companies say what they are about — and act on it.

Rik Kirkland: There's a lack of trust in ESG today. Any thoughts on how to improve it?

Charles Conn: ESG is a long way from where it needs to be. Most ratings agencies don’t agree on standards. It’s very difficult to construct accurate aggregate measures, and there’s a lot of greenwashing across those industry and company ratings. I believe the answer is to work at the product level, not the company level. When you buy an organic cotton T-shirt today from Patagonia, you can be sure we’ve used the least environmentally damaging sourcing. The standards are clear. But when it comes to a fleece jacket, it’s much harder. With current technology there is no environmentally perfect solution. Eventually, corporate ratings based on rolling up such nuanced individual product ratings versus constructing a misleadingly precise top-down measure may produce better, more trustworthy outcomes.

Rik Kirkland: Recent ������reports [2022 ������Trust Barometer Special Analysis: The Changing Role of the Corporation in Society and 2022 ������Trust Barometer] showed a clear majority 1) believed corporations can and should have a positive impact on issues like wage inequality, prejudice, climate, and joblessness due to automation, and 2) that they are not doing enough. Do you agree?

Charles Conn: It’s not just consumers who think companies should stand for something. So do investors — 64 percent or more, depending on which survey you look at. Whatever the reason — because they want to believe a soap company is trying not to pollute the water their kids drink or because it’s better for long term returns, or both — sentiment has shifted.

So why are things so slow to change? It’s partly because under Delaware law, which is the law of the land for most U.S. corporations, any time there is a conflict between doing the right thing by employees or the environment and maximizing profits, the courts are likely to find that maximizing profits prevails. When it comes to choosing a nice impermeable raincoat, folks can pick one that works, or they can pick one that works and also does the right thing. And while it might cost a little bit more, people want to feel close to brands that reflect their values.

While Benefit Corporations are legal under Delaware law, a lot of private companies that were B Corps have found it difficult to exist as public Benefit Corporations. Shareholder activism always pushes you toward profit maximization, which is why Yvon ultimately did what he did. Even with dual class shares, the family just couldn’t get comfortable that these pressures wouldn’t force them to shortchange purpose. It’s also genuinely hard. Profit pressure at big public companies, measured under quarterly returns, is always a strain. Sometimes it feels like doing the right thing costs more. And sometimes it does. We pay more for the fibers used to make Patagonia clothes because we require documentation of their origins, including the energy expended and water used. Our view, though, is because we stand for something, we can also charge closer to what I would argue is the true economic cost of a garment.

Of course, it is important not to let the perfect be the enemy of the good. Patagonia is a closely held company and its family owners decided to give away all its value to fight for what they believe in. Public companies don’t need to go that far to do better. But they will need to do better — their customers, communities and investors are demanding it.

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