Patagonia: A case study in managing a mission

By Andrew Kenney

Sustainability has driven innovation at outdoor equipment giant Patagonia for decades, ever since founder Yvon Chouinard reinvented fundamental mountain climbing gear to minimize his company's impact on the rock faces of Yosemite National Park.

The translation of those core philosophies into legal documents and measurable goals, as part of the formal conversion to a benefit corporation, has been a journey.

Crafting the mission: Initially, Patagonia questioned how — and in what level of detail — its philosophies should be ingrained in its benefit corporation structure, which was established in 2012.

Some advisers argued against committing to a higher level of specificity. But shareholders instead agreed on a set of commitments that, among other things, encourages sharing proprietary information with direct competitors to "produce a material positive impact on the environment," said Hilary Dessouky, the company's general counsel.

The company's leaders and shareholders "wanted it to completely memorialize, in a really impenetrable way, the things they cared most about," she said.

Patagonia's commitment to specificity now provides a backbone for some of the company's boldest decisions, such as encouraging contractors to provide child care for their employees or demanding that manufacturers in Taiwan return extorted fees to workers. The company also donates 1% of sales to environmental not-for-profits.

"It's really challenged the company to more publicly and more formally state the way that the company's evaluating itself," said Yvonne Besvold, the company's vice president of finance and treasurer. "It gives you that ability to really understand some of the resources needed and some of the changes that you're going to make."

Implementation and assessment: Patagonia dedicated a core team of four people to make regular reports on its stated benefit purposes. And the company regularly searches for ways to measure progress on its higher goals, which include designing products to be durable, multifunctional, reparable, and of minimal environmental impact — goals that require participation from the entire company.

The company examines its impact on workers, the community, the environment, and its customers. Patagonia employs a social-environmental responsibility team of 13 people who examine the impacts of the company's supply chain, including a focus on traceability, while up to 18 more people monitor the company's grants and community giving programs.

These people fulfill an audit role, but Patagonia often focuses on their subject-matter expertise in the hiring process. Many are trained in international relations, environmental science, environmental studies, or chemical engineering. "They're learning the skill and the art of the paper trail," said Logan Duran, the manager of Patagonia's B Corp and benefit corporation program.

That approach still leaves a lot of need for traditional financial professionals.

The role of finance: Financial professionals entering the world of benefit corporations have a twofold challenge: They must help create a rigorous, unified underpinning that can point the company toward its long-term goals. And they have to be a watchdog for the traditional financial objectives.

"We end up evaluating things, in a lot of cases, that a lot of companies would say, 'No way, that's crazy,'" Besvold said. "Sometimes you have to look for the long-term value in an answer. You have to understand the balance."

Here are some of the strategies Patagonia's leaders employ as they seek that balance:

  • Use comparisons and community: Benefit corporations and mission-driven companies often demand unusual strategies of themselves and their partners. Patagonia has challenged suppliers to make bids that include the cost of providing child care and organic food for employees. Those can be tricky demands to make politely. The company's leaders are constantly asking, "How can we share our experiences to inspire other companies to want to do this?" Besvold said. It does that in part through a fair-trade certification program that pays premiums and allows workers to democratically decide how the extra money should be spent.
  • Interrogate the company: The requirement of regular benefits reports helps synthesize on-the-ground perspectives of lofty ideals. "We've developed a process that includes going out broadly throughout the organization, to people who are working from the senior executive level all the way down to the individual contributor," Dessouky said. "We ask, 'What have you done in your role to deliver on this benefit purpose? Do you have actual examples and metrics that support that? What are some areas where we might have fallen short?'"

    With each assessment comes another chance to raise expectations. For instance, the company found in 2015 that it was limited in its ability to universally analyze its global energy consumption and greenhouse gas emissions.

    "We had been collecting the energy information — we just hadn't done much with it," Duran said. Patagonia now uses information from its global offices more effectively. "It becomes a mechanism to highlight where you may have an opportunity for environmental improvements," he added.

  • Establish metrics: Certain measures may be obvious, such as employee wages or carbon dioxide output from company facilities. But others will be unique to the company. Companies also can identify metrics developed by not-for-profit organizations, business groups, and others.

    Patagonia, for example, has worked with the Sustainable Apparel Coalition to develop the Higg Index, a kind of "nutrition label" for clothing.

    No matter the assessment, the key is to ensure that mission measures can be reliably executed. "It takes some of the subjectivity out of it," Besvold said. "You can't argue with a report card that says you've gotten D's for three years in a row."

  • Empower stakeholders: Patagonia makes supply chain decisions based on meetings with staff representing four major concerns: What is the business need for the product? Can the supplier meet Patagonia's product-quality standards? What are the environmental implications of the manufacturing process? And how does the manufacturer treat its labor and its community?"

    Each one of those stakeholders has a veto," Duran said. In other words, Patagonia has designated specialists in its core missions and handed them real power.

    Careful recordkeeping is critical. "They're coming with their supporting documentation," he said. "Often, there is a history: We audited this facility. We gave them these seven items, and they took no corrective action."

  • Keep sight of the financials: If the company isn't profitable, it won't be able to deliver on its mission — which can be particularly difficult when dealing with idealistic companies.

    In addition to minding the balance sheet, a financial leader must also be ready to assess and present the nonfinancial benefits of a costly mission-oriented program, such as Patagonia's generous repair policy.

    "We understand the cost of the program, we understand some of the benefits," Besvold said. "But the long-term story, the reason behind why it's being done, is where the company's really sinking our teeth."

Andrew Kenney is a JofA contributing editor.

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