Patagonia, the multibillion dollar clothing retailer, has recently published “The Future of the Responsible Company: What We’ve Learned from Patagonia’s First 50 Years,” a book written by Vincent Stanley, the company’s Director of Philosophy, and its Founder, Yvon Chouinard. This insightful read delves into Patagonia’s innovative ownership structure that garnered global attention a year ago.
This book offers a behind-the-scenes look at the fundamental aspects of Patagonia’s business, imparting valuable lessons learned from running an environmentally and socially conscious company. Stanley, who spearheaded numerous successful campaigns and initiatives that have solidified Patagonia as one of America’s most reputable and trusted brands, presents readers with an approach to corporate responsibility amidst deepening cultural divisions and an escalating climate and ecological crisis.
This release follows Yvon Chouinard’s implementation of a purpose trust, a visionary move to ensure Patagonia’s unwavering commitment to environmental sustainability and social responsibility. By transferring voting control of Patagonia to a purpose trust and the ownership to a non-profit organization, Chouinard aimed to ensure that the company’s profits would be dedicated to combating climate change and preserving undeveloped land. This unique structure allows Chouinard and his family to continue operating Patagonia as a for-profit entity, but with profits directed towards environmental causes rather than private shareholders or heirs.
A purpose trust differs from traditional trusts in that it is established for a specific, non-charitable purpose. Instead of focusing on providing financial benefits to named individuals or charities, purpose trusts are designed to achieve a particular objective. They are versatile tools that can be employed to preserve family assets, support specific business goals, or safeguard a family legacy.
The innovative use of a purpose trust in the Patagonia case exemplifies a growing trend in corporate governance and estate planning. The trend is shifting from traditional wealth transfer to incorporating broader social and environmental objectives. This case is significant example of how purpose trusts can be utilized for more than personal or family goals, but also for broader, socially driven purposes. Although using a purpose trust for this purpose is new and untested, we can anticipate both advantages and disadvantages:
Advantages:
1. Succession Planning: Purpose trusts ensure the company remains independent and intact even after the owner’s death. By eliminating gift and estate taxes associated with transfers to family members, the Patagonia case successfully transferred ownership and control of a multibillion dollar company for a net tax of approximately $40 million. This is crucial for preserving the founder’s vision and maintaining the business’s legacy.
2. Asset Protection: As purpose trusts have no beneficiaries, the trust shields assets from personal creditors, such as in cases of divorce. Furthermore, once control is transferred to the purpose trust and benefits are directed towards the non-profit, the company’s value and net profits are exempt from further taxation.
3. Avoidance of Probate: Since the trust and non-profit are the owners of the company shares, probate is bypassed upon the death of a beneficiary. This allows for uninterrupted business operations and ensures privacy.
4. Flexibility: Purpose trusts can be tailored with specific instructions for company management, guaranteeing adherence to principles or practices.
Disadvantages:
1. Complexity and Cost: Establishing and managing a purpose trust can be intricate and expensive. It involves drafting specific trust documents and may incur ongoing administrative expenses. The Board of Trustees of the purpose trust assumes executive decisions, such as hiring and firing the CEO.
2. Lack of Accountability: With no beneficiaries and limited oversight from the government, holding the Trustees accountable for their management of assets and operations becomes challenging. This can be a disadvantage if future generations desire an active role in the company.
3. Perpetuity Issues: Some jurisdictions have rules against perpetuities [1], which could restrict the duration of a purpose trust and complicate long-term control of a company.
4. Regulatory Compliance: As purpose trusts gain popularity, they may become subject to stringent regulatory requirements depending on the jurisdiction. This can create additional administrative burdens.
5. Potential for Conflict: Ambiguity in defining the trust’s purpose, or failure to strictly adhere to it, can lead to disputes among trustees, beneficiaries, employees, trustees of the non-profit, and other stakeholders. This scenario, often referred to as “the tragedy of the Commons,”[2] involves multiple demands on a single resource.
6. Irrevocability: Although flexible when created, once set up, purpose trusts are irrevocable, meaning they cannot be changed once established. This could pose challenges if the company’s circumstances change, and adjustments are necessary.
While purpose trusts present an innovative approach to preserving a company’s long-term objectives, they carry inherent challenges and complexities. From accountability issues to administrative burdens and potential conflicts, it’s essential to weigh these considerations carefully. Furthermore, the irrevocability of such trusts necessitates thorough deliberation before their establishment. Therefore, seek professional advice to ensure that the structure of a purpose trust aligns with your company’s vision and long-term objectives.
[1] The Rule Against Perpetuities, originally articulated in the Duke of Norfolk’s case of 1682 (3 Ch. Cas. 1, 22 Eng. Rep. 931 (Ch. 1682) is a common-law rule stating that for a future interest to be good it must vest after its creation within a life in being or lives in being plus 21 years plus the period of gestation of any beneficiary conceived but not yet born.
[2] The tragedy of the commons is a concept that is widely discussed in economics, ecology and other sciences. According to the concept, should several people, or groups of people, enjoy unfettered access to a finite, valuable resource such as a pasture, they will tend to over-use it, and may end up destroying its value altogether. To exercise voluntary restraint is not a rational choice for individuals – if they did, the other users would merely supplant them – yet the predictable result is a tragedy for all.
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