Newswise — In 1970, Milton Friedman famously wrote that “the social responsibility of the firm is to increase its profits.” The recent gift by the Chouinard family of all their shares in Patagonia challenges this logic, even as it reflects a seismic shift in the way some business owners think about their businesses. For Patagonia, profits will serve the company’s mission rather than be the mission.
As reported on September 16, 2022, Yvon Chouinard, along with his spouse and their two children, transferred voting control of Patagonia to a purpose trust and transferred their remaining interest in the company to a 501(c)(4) nonprofit organization. The purpose trust will manage Patagonia as a for-profit entity, continuing Chouinard’s emphasis on the well-being of its employees, and the company’s profits will be distributed to the nonprofit to fund climate solutions and protect undeveloped land.
Mr. Chouinard hopes that his family’s actions “will influence a new form of capitalism….” The idea of using a company’s profits to serve its mission rather than solely generating profits for shareholders is already gaining ground, but Mr. Chouinard’s high-profile use of a purpose trust will surely generate more interest in this structure.
In 2018, Organically Grown Company, the largest organic produce distributor in the Pacific Northwest, with 250 employees, transferred ownership of the company to a purpose trust. OGC was owned by a group of founders who were ready to retire and wanted to protect OGC’s long-standing commitments to educating the public about the benefits of organic produce, supporting organic farmers, treating employees well, and making charitable contributions to the community. They worried that these important attributes would be lost if the company were sold to outside investors. OGC used a purpose trust to protect OGC’s mission. Unlike the Patagonia situation, the OGC founders could not afford to give their stock to the trust, so the trust purchased their voting stock.
In 2019, the Oregon legislature adopted a statute to support the use of purpose trusts to hold and manage businesses. Called “stewardship trusts” in Oregon, the idea of using a purpose trust to protect a company’s non-financial mission when the founders leave the business has generated interest from a variety of businesses of different sizes.
The business owners may want to preserve protections for employees or maintain a company’s non-financial mission as well as its profitability. A business might be an important community fixture that could be lost if the business did not survive the founder’s death or was sold to a national company. The purpose trust structure provides a way to lock in protection for the mission.
A purpose trust has no beneficiaries. Instead, the trustee must carry out the purpose of the trust, and the trust document can provide for advisors to direct the actions of the trustee. In the Patagonia case, it appears that the Chouinard family will act as advisors. In the purpose trust created by OGC, a committee elected by stakeholder groups—employees, farmers, customers, nonvoting preferred shareholders, and the community—directs the trustee. Other purpose trusts might give control to a committee elected by employees, similar to the structure used effectively by the John Lewis Partnership in England for nearly 100 years.
A purpose trust locks in the founder’s vision. With no individual owners, no financial incentives exist for deviation from the trust’s purpose. Removing private financial incentives means that the company can focus on its mission rather than on making as much money as possible for shareholders. In this regard, a purpose trust provides more protection for the company’s mission than other structures. Shareholders can vote to remove a company’s B-corp certification (Etsy shareholders did just that after the company went public), and employees who own a company through an ESOP can cash out individually or can agree to a sale of the company.
But can a business succeed without profit motives for individuals? Some people may wonder whether personal financial incentives are essential for a business to succeed. While that may be true for some individuals and some families, the Patagonia example demonstrates that for some business owners the non-financial benefits the company provides are as meaningful as any financial benefits. The growing use of purpose trusts represents a fundamental challenge to Friedman’s dictum about the social responsibility of business—one that holds promise for checking capitalism’s most rapacious social and environment tendencies.
ABOUT THE AUTHOR
Susan N. Gary has taught trusts and estates, estate planning, nonprofit organizations, and an undergraduate course on law and families. As a professor emerita and formerly Orlando J. and Marian H. Hollis Professor at the University of Oregon School of Law, Gary has written and spoken about the regulation of charities and fiduciary duties, including the prudent investor standard, purpose trusts (also known as stewardship trusts) as a new form of business ownership, the definition of family for inheritance purposes, donor intent in connection with restricted charitable gifts, and the use of mediation to manage conflict in the estate planning context.
Gary received her B.A. from Yale University and her J.D. from Columbia University. Before entering academia, she practiced with Mayer, Brown & Platt in Chicago, and with DeBandt, van Hecke & Lagae in Brussels. She is a member of the American Law Institute and an Academic Fellow and former Regent of the American College of Trust and Estate Counsel, the preeminent U.S. organization for estate planning lawyers and academics. She has also served on the Council of the Real Property, Trust and Estate Section of the American Bar Association. She served as the Reporter for three projects of the Uniform Law Commission: the Electronic Wills Drafting Committee, the Uniform Prudent Management of Institutional Funds Act, and the Model Protection of Charitable Assets Act. She is currently a member of the Fiduciary Duty Working Group of the Intentional Endowments Network and has served as a member of the Advisory Board of the NYU National Center on Philanthropy and the Law. She has held leadership positions in three sections (trusts and estates, elder law, and nonprofits) of the Association of American Law Schools.
Significant recent articles are “Best Interests in the Long Term: Fiduciary Duties and ESG Investing,” 90 Univ. of Colorado L. Rev. 731 (2019) and “The Oregon Stewardship Trust: A New Type of Purpose Trust that Enables Steward-Ownership of a Business,” 88 Univ. of Cincinnati L. Rev. 707 (2019). Both are available on SSRN.
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