In late 2022, global outdoor clothing and equipment business Patagonia made major changes to its corporate structure, highlighting the creative options available to founders wishing to embed purpose into the fabric of their organisation. In this update, Bates Wells explores some of the key learnings from Patagonia’s example, and how the ‘steward-ownership’ approach can help businesses ensure the resilience of their purpose and values in the long run.
The entire issued share capital of Patagonia is now held by the Patagonia Purpose Trust and the Holdfast Collective, with each entity having a specific role to play in ensuring the business’s corporate purpose. Ownership is now structured so that the dividends of Patagonia will be invested in combatting the current environmental crisis. This is projected to be worth somewhere in the region of USD$100 million per year, depending on Patagonia’s financial performance.
An evolution towards purpose-beyond-profit?
A recent trend shows that some shareholders are re-evaluating their company’s purpose and changing focus from short-term financial return to long-term impact for multiple stakeholders; an approach that recognises the interdependence of people and planet with profit.
There are several ways to implement this shift in focus, including “steward-ownership”. Bates Wells and the Purpose Foundation have been collaborating on work to define and demonstrate some of the innovative structures that can be used to promote steward-ownership and governance.
Key characteristics of steward ownership
Steward-ownership enshrines two principles in the legal structure of the company:
Purpose-orientation – This prevents too much of the value and profits of the company from being extracted by shareholders. Instead, profits are generally used to fulfil the purpose of the company either through reinvestment into the company or by donation or investment into furthering its purpose. Where absolutely necessary, investors and founders can be fairly compensated with capped returns / dividends (without automatic rights of control).
Self-governance – This ensures that only those individuals focussed on the purpose and value of the company are able to control its decision-making.
The steward-ownership model serves to separate economic and voting rights to create a legally binding “capital lock” to ensure complete focus on the company’s mission. Examples of well-known steward-owned businesses include John Lewis, Bosch and IKEA.
Patagonia’s new structure broadly reflects this approach, having separated out the right to economic participation into the Holdfast Collective, which will use the dividends received to pursue environmental projects, and the voting rights for control over the business into the Purpose Trust, to protect the business’s purpose.
Another potential mechanism for steward-ownership is a “golden share” structure. This involves a “golden shareholder” holding enhanced control rights to ensure that no decisions can be made which affect the overall mission or objects of the business without their consent. Typically, the golden shareholder will have no right to economic participation in the business nor day-to-day control over running the business. A golden shareholder arrangement would not preclude economic participation by founders or investors. You can find out more about golden share structures – as well as a range of additional steward-ownership mechanisms – in this guidebook on legal frameworks produced by the Purpose Foundation and NYU School of Law (which Bates Wells contributed to from a UK law perspective).
Looking to the future
It will be interesting to see if the changes made by Patagonia inspire other purposeful businesses to consider shaking up their ownership structure to achieve their long-term goals. Steward-ownership may be of particular interest for family or founder-led businesses considering protecting the longevity of the business’ purpose, or to any business that wants to demonstrate its genuine commitment to a triple bottom line. Bates Wells has supported many businesses to embed purpose into their organisation, whilst tailoring the approach to suit the business’s objectives and investor profile.
If you would like to discuss any of the themes mentioned in this article, or potential options for succession planning, please do get in touch.