Just two cheers for Patagonia’s Chouinard: Why ignore an ESOP?

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As a business consultant and nature lover, I have long admired Yvon Chouinard. Protecting nature is one of the four core values ​​of Patagonia, the global outdoor clothing and equipment company he founded half a century ago. Chouinard is also committed to the well-being of his employees, and Fortune even called it’s the ‘coolest company in the world’.

So I read with intense interest Chouinard’s bold decision to transfer his family’s $3 billion ownership of the gear maker to a nonprofit environmental organization and put his voting stock in a trust. “Earth is now our sole shareholder,” Patagonia’s headline headline.

I applaud the way Chouinard and his family have structured sales to continue environmental awareness in Patagonia. They have transferred all of their voting shares – approximately 2% of the total shares – to the Patagonia Purpose Trust. It will be overseen by family members and their closest advisers to ensure that the company lives up to its promise to run a socially responsible business and gives its profits away to a newly formed non-profit organization, Holdfast Collective, which supports the ordinary will own non-voting shares and use the profits on climate initiatives.

Is it at the same time? a missed opportunity? Over the past 20 years, I’ve advised hundreds of private and family businesses on the benefits of employee ownership, or ESOP, as part of a change of ownership. So I wonder why Chouinard and his advisors haven’t considered at least a partial ESOP structure—a plan that gives, say, 20% to 30% ownership in Patagonia to its 2,000-plus loyal and dedicated employees.

The omission is mind-boggling, especially since strong employee morale and commitment have been synonymous with Patagonia, and an ESOP could increase employee retirement security forever. Chouinard has repeatedly shown that he cares about his employees. The Ventura, California company was the first for-profit company in California to become a B Corp company measured by its social and environmental performance. The headquarters has no enclosed workspaces and Chouinard has no office. It was one of the first companies to set up its own childcare center.

Plus, his Philosophical Employee Handbook (which became the 2005 book) Let My People Go Surfing: Raising a Reluctant Businessman) essentially urges workers to stop working to ride the waves when the surf runs out. President Obama even recognized the company as a ‘Champion of Change’ for its commitment to working families.

To be sure, Chouinard has in the past raised — and rejected — employee stock options and employee ownership. In another book he published in 2012, The responsible companyhe revealed his fears about employee and public property.

He expressed concern that, “with stocks being more widely distributed, the company would become too cautious about taking risks in pursuit of its environmental goals.” He added that he was “willing to take risks that could disrupt broader ownership, even from employees committed to reducing environmental impact.”

Plus, I’d be rude not to acknowledge Chouinard and his family’s generosity. The structure of the transaction, whereby the family will donate its non-voting Patagonia common stock to the Holdfast Collective, means that the family will not receive a tax benefit for the donation. That’s because Holdfast is a 501(c)(4) capable of making unlimited political contributions, making donations non-tax deductible.

So, why did Chouinard fail to create an ESOP, which could have been achieved at no extra cost to himself? To be fair, as is often the case today, Chouinard or his advisers may not have fully understood the various tax, financial and other benefits that a partial or full ESOP can contribute to a company’s future growth and success, including a Certified B Corp.

ESOPs and B Corps share many similar core values. No wonder an article in ESOP Builders, a Canadian consulting firm, headlined “B Corps and ESOPs – the best of both worlds.” The Pennsylvania-based manufacturer of comfortable shoes, Dansko is a certified B Corp that became a 100% ESOP company in 2012. Co-founder and CEO Mandy Cabot says that becoming an employee-owned B Corp “protects our legacy and ensures we can not only remain independent, but continue to focus on being a great place to work, a valued member of our community and a good steward of the environment.”

So here’s my message to Chouinard and his board of directors. If the donation of the remaining 98% of Patagonia’s common stock to the Holdfast Collective has not yet been finalized, it is not too late to set up a partial ESOP, as Clif Bar did, and restore the legacy value for increase the workforce of this great company.

I have continued to observe many of the private companies I have helped to follow the ESOP route, and I can say without pause that they, their employees and their communities are benefiting. A 2019 ESOP Association Member Survey backs I on. Eighty-five percent said their ESOP had a positive impact on their corporate culture, and 75% said employees were more involved in ensuring the company’s financial success. Perhaps that explains why 72% of respondents have a separate questionnaire would prefer to work for an employee owned company.

Mr. Chouinard, have your advisers call me.

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