Patagonia's bold move to donate the entire company to fight climate change only works if it stays competitive in business, CEO says
- Patagonia's announcement that its founder, Yvon Chouinard, and his family are giving away their ownership in the outdoor apparel maker to benefit climate change does not mean the company will become any less competitive.
- "This whole thing fails if we don't continue to run a competitive business and included in that is taking care of our people," Patagonia CEO Ryan Gellert told CNBC's "Squawk Box."
- Gellert said the decision to donate the company's profits toward fighting climate change was never intended as a way to avoid paying taxes.
Patagonia founder Yvon Chouinard and his family are giving away their ownership in the outdoor apparel maker they started five decades ago to benefit climate change. But that does not mean the company is going to become any less competitive or aggressive in meeting its business objectives.
"I think what people fail to understand about Patagonia, both the past and today and the future, is that we are unapologetically a for-profit business," CEO Ryan Gellert told CNBC's "Squawk Box" on Wednesday.
"We are extremely competitive. The Chouinards are extremely competitive about the business. We focus on making high-quality products, standing behind that product for the usable life of it. We compete with every other company in our space, aggressively. I don't think we have lost that instinct," Gellert said.
That also means that pay and compensation of employees will not suffer, he said.
"I think this whole thing fails if we don't continue to run a competitive business and included in that is taking care of our people," Gellert told CNBC.
The conversations that led to the decision started internally a couple of years ago.
If Patagonia had decided to take the company public or sold either a majority or minority stake in the company, "we had very little confidence in meeting with quite a few potential investors that the integrity of the company would be protected," Gellert said.
Instead, Patagonia opted to put the shares of the company into two trusts, the Patagonia Purpose Trust, which holds all the voting shares (2% of the total), and the Holdfast Collective, which holds the remaining, nonvoting shares. The Patagonia Purpose trust is dedicated to maintaining the company's values and the Holdfast Collective is a "nonprofit dedicated to fighting the environmental crisis and defending nature," Chouinard wrote in a statement describing the decision.
By transferring the overwhelming majority of the company to a social benefit trust, Patagonia avoids paying a large tax bill — an issue which was discussed immediately and loudly on the heels of the announcement that the Chouinard family was giving the company away.
Patagonia leadership was expecting the discussion of the tax benefit of their new structure, but tax avoidance was "never" part of the decision to give the company away, Gellert said.
"With the family, it was never a conversation in two years," the Patagonia CEO said. "It was not lost on us the tax benefit via the 501c-4," which is a designation of an organization that "must be operated exclusively to promote social welfare" and is therefore tax exempt, according to the Internal Revenue Service.
"But with the family, it was very clear from the beginning. There were two goals that were focused on: Create a structure that could ensure the integrity and the values of Patagonia and cash flow the environment in more meaningful ways now," Gellert said.
Gellert pointed out that the Patagonia founding family did pay $17.5 million on the 2 percent of stock that went into the Patagonia Purpose Trust.
Patagonia "has a history of always paying our taxes," Gellert said. "We are a company that very much believes in that. We are a company that has avoided complex structures both in the U.S. and globally to sidestep taxes. We are actually one of the few companies that have lobbied consistently and publicly for higher taxes particularly in support of climate legislation."
Patagonia's decision to donate the majority of the company's profits, which it expects to be approximately $100 million a year, comes amid a fierce debate about how politically and socially active businesses and business leaders should be.
Yet, Patagonia has managed to stay popular with both sides of the political divide. Its vests are the defacto uniform for many of the investment and venture capital set. In the annual Axios brand reputation poll, Patagonia does well on both sides of the political divide, "and that, candidly, is really encouraging and a little bit surprising, because we take positions with the environment at the center consistently and vocally," Gellert said. "What I take away from that is that people respect that we are very consistent."
"In this world, it is increasingly difficult to fake it," Gellert said. "And so I think that companies that don't have a deep commitment to the things they espouse, I think it falls apart pretty quickly."