week 10

508 Case 13 Corporate Social Responsibility from the Outside In at Patagonia

This case was prepared by Mark Zekoff and Sarah Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell, © 2019. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material.

Introduction How can businesses make a difference in a world of decreasing resources? Patagonia, a privately held outdoor clothing company based out of Ventura, California, is working toward finding an answer to that question. Patagonia’s clothing has been developed and marketed toward a variety of outdoor sports, travel, and everyday wear. The company has integrated core beliefs and values into every product they produce and is known for their innovative designs, exceptional quality, and environmental ingenuity. Their high integrity and commitment to the environment has regularly placed Patagonia on the Ethisphere Institute’s “World’s Most Ethical Companies” list.

History of Patagonia Like many successful companies, Patagonia stems from one entrepreneur’s passion. In 1953, Yvon Chouinard, founder of Patagonia, developed a passion for rock climbing. His passion brought him West to the San Fernando Valley in California, where he became an expert at climbing and rappelling. Unfortunately, his passion was limited by a lack of appropriate climbing gear. The only available climbing gear were pitons, metal spikes that were driven into cracks or seams in rocks. These pitons were left in the rock, meaning that a long climb could require hundreds of these tools.

Recognizing a need for better, more environmentally friendly equipment, Chouinard began to make his own reusable pitons that were stronger than what was currently on the market. Word of Chouinard’s invention spread and he began selling his pitons out of the back of his car for $1.50 each. By 1965, Chouinard decided to partner with Tom Frost to create Chouinard Equipment. For nearly a decade, Chouinard and Frost made improvements on nearly every climbing tool. Soon Chouinard and his wife Malinda were selling clothing as a way to support the hardware business. By 1972, the clothing line had expanded to become a business venture. The name of the line was Patagonia and was intended to reflect the mysticism of far-off lands and adventurous places located beyond the map.

The clothing line was successful for many years. Financial hardships, coupled with Chouinard’s strong

focus on the environment, resulted in a change in the product material. The company switched to more expen- sive and durable organic cotton in 1996, a risky business move considering it increased the firm’s supply costs. The more durable the product, the fewer customers need to purchase from the company. However, the change had a net positive effect; consumers were more willing to do business with Patagonia due to their environmental con- sciousness and the fact that they could trust Patagonia’s products to last a long time.

As the change to organic cotton shows, Patagonia puts the values of integrity, accountability, and trust into practice in their business by backing their mission with action. As of late 2019, recycled materials account for 69 percent of their clothing. The company plans to hit 100 percent by 2025. Patagonia’s environmentally friendly fibers include hemp, organic cotton, recycled nylon, 100% recycled down, recycled polyester, recycled wool, Yulex, reclaimed cotton, denim made from organic cotton, sustainably source wool, and cellulose-based fibers REFIBRA lyocell and TENCEL lyocell. In addi- tion to clothing, Patagonia has also spoken out about sustainability practices in other areas. For example, the company has produced films about the environmental impacts of common business practices. One of these films, Artifishal, discusses the need for more natural salmon fishing rather than reliance on the controversial practices of fish hatcheries.

Today Patagonia is debt-free and is still willing to bend the rules. For instance, the firm—which constantly remarks that they place the environment over profits— has embarked upon a “Buy Less” campaign, among other initiatives that seem like they might discourage revenue growth. On the contrary, annual revenue has hit $1 billion in recent years.

Patagonia’s Purpose and Core Values When Patagonia was first developed, Yvon and Malinda agreed that the company would produce only products of the highest quality and manufactured in the most responsible way. They selected the following mission statement for the company: “Build the best product, cause no unnecessary harm, use business to inspire

Corporate Social Responsibility from the Outside In at Patagonia

CASE 13

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Case 13 Corporate Social Responsibility from the Outside In at Patagonia 509

and implement solutions to the environmental crisis.” Patagonia strives to live out their mission statement every day. To make their mission into a reality, Patagonia has adopted four core guiding principles for their operations: quality, integrity, environmentalism, and not bound by convention.

For Patagonia, this means working with friends, hiring self-motivated, intelligent employees, and giving them flexible time to enjoy surfing, climbing, and spend- ing time with their families. Another important value involves finding ways to be responsible by restoring or reusing, which has prompted the company to open retail locations in old buildings that have been restored. After the company nearly went out of business during the 1990s, Yvon Chouinard vowed to never again stray from the core values that he had adopted to develop Patagonia. These values are strongly embedded into all company operations and activities.

Patagonia’s Leadership And Management Style Yvon Chouinard set out to create a company that was proactive in their approach to how business is conducted by embracing a progressive corporate culture. As stated, Patagonia believes that employees should be out enjoying nature or tending their children when sick. Such a culture has made the company widely popular with employees and has steered the company toward innovation and success on a global platform.

Although Yvon Chouinard owns Patagonia, he sur- rounds himself with talented leaders to help advance the company’s goals. Patagonia’s leadership is well-known for ethical conduct and for guiding the company accord- ing to their corporate mission and values. Patagonia’s CEO, Rose Marcario, is committed to Patagonia’s vision of environmentalism and is one of Business Insider’s 100 “People Transforming Business.” Originally the company’s CFO in 2008, she earned the CEO position in 2014. She has been influential in driving the company to continue pursuing their environmental and social responsibility goals.

Environmental Initiatives Over the years, Patagonia has teamed up with other corporations to develop and create initiatives aimed at reducing the environmental footprint businesses leave behind. They have pioneered revolutions in clothing technology development and manufacturing. Patagonia has also been an innovative force in creating programs that deal with the environmental crisis head-on.

1% for the Planet The organization 1% for the Planet is an alliance of businesses that donate part of their proceeds to

environmental organizations to support sustainability and the preservation of the environment. Since 1985, Patagonia has committed to donate 1 percent of their sales to environmental organizations around the world that work to conserve and restore the natural environment. Since they started to support 1% for the Planet, Patagonia has contributed $74 million in donations. In addition to 1% for the Planet, Patagonia regularly contributes additional dollars to environmental groups. For example, in 2018, following corporate tax cuts, Patagonia took the money they saved and donated $10 million to non-profit environmental organizations.

Worn Wear Initiative After years of hosting Worn Wear pop-up events where customers could bring used clothing for either repair or exchange, Patagonia launched a permanent Worn Wear store on their site in 2017. Now, customers can buy, sell, and trade Patagonia gear second-hand. Patagonia also educates their customers on how to repair their purchases. This initiative embraces the concept of extending the life of each product, allowing customers to reuse, recycle, repair, resell, or recycle to keep products out of the landfill.

Conservation Alliance The Conservation Alliance was co-founded by Patagonia in 1989. The purpose of the Conservation Alliance is to encourage businesses in the outdoor industry to contribute to environmental organizations. Throughout the years, the Conservation Alliance has grown beyond their four founders to include 180 businesses. The Conservation Alliance has donated over $10 million and Patagonia remains actively involved with the alliance, maintaining a seat of the board.

The bluesign® System Patagonia has worked with bluesign technologies in their quest to reduce resource consumption since 2000 and became the first official bluesign system partner in 2007. For those resources that cannot be reduced, bluesign helps Patagonia use more sustainable resources that will have less of a negative impact on the environ- ment. Patagonia’s goal is to have “bluesign approved fabrics” on 100 percent of their products in the future. There are now more than 400 partners of the bluesign System including brands, manufacturers, and suppliers.

Corporate Social Responsibility In addition to their many environmental initiatives sat- isfying stakeholder groups throughout the community, Patagonia also focuses on satisfying their employees. As described earlier, Patagonia believes in a work/life balance philosophy. Because of this strong relationship

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510 Case 13 Corporate Social Responsibility from the Outside In at Patagonia

with their workforce, the company has a 4 percent turnover rate compared to the industry average of 13 percent. Patagonia averages 900 applications per job opening, providing them with the opportunity to hire the best talent. Patagonia also works with factories to ensure that their products are being produced in alignment with Patagonia’s corporate values and environmental integrity. In 1990, Patagonia developed the Contractor Relationship Assessment, a scorecard used to rate a fac- tory’s performance. In 1996, Patagonia became a found- ing member of the FLA (Fair Labor Association), which conducts audits and training on factory conditions. In 2007, the firm joined the Fair Factory Clearinghouse (FLC), which is a database that helps Patagonia collect and manage supplier data that deals with social and environmental issues. This information is shared with other firms in Patagonia’s industry and can help establish benchmarks for best practices.

Patagonia keeps a close eye on their supply chain with regular factory audits. They also score factories based on how they measure up to social responsibility and environmental goals. For their materials suppliers such as mills, Patagonia has Environmental Health and Safety requirements as well as a Raw Materials Social Responsibility program. Under this program, Patagonia’s materials suppliers must audit their factories to measure whether they are compliant with safety, social responsibility, and environmental criteria as well as areas of improvement. By raising the bar for social and environmental responsibility among their suppliers and factories, Patagonia is attempting to incorporate corpo- rate social responsibility among all of their stakeholders.

In 2019, Patagonia made a controversial decision to limit the sales of their custom vests, only selling them to companies that “prioritize the planet,” according to the company’s announcement. The vests, which have become trendy among business people often feature company logos on the chest opposite the Patagonia logo. The move, which only impacts new partners, protects the Patagonia brand from being associated with environmentally-unfriendly companies and holds other companies to a higher standard.

What the Future Holds for Patagonia Patagonia shows no signs of slowing down and neither does Yvon Chouinard. The company remains dedicated to advancing environmental awareness among businesses—even if it entails partnering with some unlikely companies. For instance, Patagonia partnered with Walmart and Adidas to form the Sustainable Apparel Coalition. Patagonia realizes that to create last- ing change, they must not only improve their sustainabil- ity operations but also assist in helping other businesses learn how to reduce their impact on the environment. By 2025, Patagonia hopes to be carbon neutral and would like to be carbon positive in the future.

Chouinard continues to see himself as an innovator rather than just an inventor. Under his influence and the influence of company leaders such as CEO Rose Marcario, Patagonia seeks to make a difference and create a revolution in how businesses view sustainability. Rather than taking from the environment, the goal for Patagonia is to educate consumers and businesses about how they can help to preserve it. Patagonia demonstrates how strong corporate values and ethical leadership can create a company that is both successful and a role model for those who desire to make a positive difference.

Questions for Discussion 1. How has Patagonia been able to promote sustainability

among other businesses? 2. Do you think it is beneficial for Patagonia to branch

out into ventures other than apparel? 3. Does Patagonia—a privately held, debt-free company—

have an advantage over public companies with shareholders by being socially responsible?

Sources Ashley Lutz, “A Clothing Company Discourages Customers from

Buying Its Stuff—and Business Is Booming,” 14, Business Insider, September, 2016, 1–2 (accessed October 31, 2017).

Associated Press, “Patagonia Gives $10 Million GOP Tax Windfall to Environmental Groups,” CNBC, November 29, 2018, https://www.nbcnews.com/business/business-news/ update-patagonia-gives-gop-tax-windfall-environmental- groups-n941551 (accessed October 25, 2019).

Bradford Wieners, “Solving Climate Change with Beer from Patagonia’s Food Startup,” Bloomberg Business Week, October 3, 2016, https://www.bloomberg.com/news/ features/2016-10-03/solving-climate-change-with-beer-from- patagonia-sfood-startup (accessed October 31, 2017).

Daniel Bentley, “Doing Good and Making a Profit: These Apparel Companies Are Proving They Aren’t Mutually Exclusive,” Fortune, January 23, 2019, http://fortune.com/2019/01/23/ patagonia-art-eden-sustainability/ (accessed August 10, 2019).

Daniela Sirtori-Cortina, “From Climber to Billionaire: How Yvon Chouinard Built Patagonia into a Powerhouse in Own Way,” Forbes, March 20, 2017, 1, https://www.forbes.com/sites/ danielasirtori/2017/03/20/from-climber-to-billionaire-how- yvon-chouinard-builtpatagonia-into-a-powerhouse-his-own- way/#387feacf275c (accessed November 2, 2017).

Hailey Gunderson, “Patagonia’s Strategic Management, “Patagonia’s Code of Ethics,” Blog, 25, April, 2012, 1, http:// hrgunderson08.blogspot.com/ (accessed August 10, 2019).

Hailey Gunderson, Patagonia’s Strategic Management, “How Patagonia Satisfies Customer Wants,” Blog, 01, May, 2012, 1. http://hrgunderson08.blogspot.com/ (accessed August 10, 2019).

J. B. MacKinnon, “Patagonia’s Anti-Growth Strategy,” The New Yorker, 21, May, 2017, 1–2). https://www.newyorker.com/ business/currency/patagonias-anti-growth-strategy (accessed August 10, 2019).

Jeff Beer, “How Patagonia Grows Every Time It Amplifies Its Social Mission,” Fast Company, February 21, 2018, https://www.fastcompany.com/40525452/

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