Patagonia creates new business model

A couple of years ago, Yvon Chouinard—founder of the outdoor-clothing brand Patagonia—gave a talk at a sustainable-fisheries conference in Vancouver. He'd been invited to speak in recognition of Patagonia's longtime commitment to environmental issues and its reputation as a company that manages to churn out profit while minimizing ecological impact. Chouinard delivered his spiel, but he came away frustrated by the surprising ignorance of his audience. "They didn't know what they were doing," he says of the seafood merchants. "They had no idea about toxins, about incidental catch. Their customers are all going to want to know this stuff soon. Restaurants will want to know."

So, despite having zero background in the food business, Chouinard decided to launch his own salmon fishery. Patagonia Provisions, which debuted at the beginning of April, sells packets of salmon jerky ($12.50 for two ounces) next to rain jackets, hiking pants and organic cotton shirts. The salmon is caught in British Columbia's Skeena River, using traditional equipment that the company describes as "First Nations fish wheels and dip nets." Chouinard has so far poured $1.3 million into this curious experiment. He isn't sure when he'll make it back. "I can't help myself," he says. "I just want to show the fishing industry how it can be done."

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Photograph by Tierney Gearon

Chouinard's blacksmith shop, where he has forged climbing equipment for 30 years.

The idealism, ambition, self-assurance and total hubris at the heart of this salmon escapade are all hallmarks of the Chouinard executive style. His approach to leading a company is perhaps best understood as a sort of performance art—less about the bottom line than about providing a road map for future entrepreneurs. "I never even wanted to be in business," he says. "But I hang onto Patagonia because it's my resource to do something good. It's a way to demonstrate that corporations can lead examined lives."

That mission is already well under way. Chouinard's new book, "The Responsible Company," published this month, offers detailed checklists for making money without inflicting undue societal harm. Even megacorporations are paying attention to him these days. Chouinard has partnered with Walmart—an odd couple if there ever was one, in terms of size (Walmart's revenue exceeds Patagonia's 800-fold) and customer base—to advise the retail giant on reducing packaging and water use in its supply chains. Together the two companies teamed up to create the Sustainable Apparel Coalition, inviting other major brands, such as Levi Strauss, Nike, Gap and Adidas to join them in crafting clear, quantifiable standards for environmentally responsible clothing production. "I adore Yvon," says Mary Fox, an executive in charge of Walmart's global sourcing. "When we went around together to get other companies on board, we code-named ourselves David and Goliath. Because in the realm of sustainability, we were David. Patagonia was Goliath."

At 73, Chouinard is a short, thick fireplug of a man who still looks barely 60. He is fit and tan from surfing, which he does any day there are half-decent waves. He prowls Patagonia's headquarters, in Ventura, California, checking in on new designs (he showed me a sturdy down jacket that felt about as heavy as a paperclip and then said he'd kill me before telling me how they make it) and tinkering with a lightweight camp stove of his own invention at his desk. If he so chose, he could be easing himself into a delightfully active retirement: He and his wife are sole owners of Patagonia, a privately held company that brought in $414 million in sales last year and is projecting a 30 percent increase in sales this year. With little left to prove, Chouinard could sell the company and happily spend his time catching breakers (here or at his other home up the coast, in Hollister Ranch), fly fishing (near his house in Jackson, Wyoming, using flies he ties himself), and mentoring and donating to his favored environmental causes. But Patagonia's forefather isn't quite done with Patagonia yet.

The evolution of Patagonia into a clothing company began in the 1970s, when Chouinard—then a world-class mountain climber and a designer of mountaineering equipment—started importing durable rugby shirts and corduroy knickers for his climber pals to wear. Soon enough, Patagonia was designing its own line of clothes. Soon after that, sales of the clothes far outstripped sales of the climbing gear. This is how Yvon Chouinard became an accidental apparel mogul. This truly hit home when fashion models in New York City started wearing Patagonia fleece vests. He had no idea why, and didn't really care. But he realized his life had changed.

At his weathered beachside home in a gated enclave a few miles north of Patagonia's headquarters, Chouinard puts out a plateful of his salmon, smoked and sliced. "This isn't the farmed stuff," he says through bites. "Fresh caught." We nibble on almonds he roasted himself, sip from a chilled bottle of chenin blanc he's uncorked and talk about his improbable journey.

Chouinard was born in Maine, in far less posh environs, to French-Canadian parents who transplanted the family to Burbank, California, when he was seven. He didn't learn English until he was eight and says he spent much of his childhood in and around the Los Angeles River, wading for crawdads or hunting rabbits with a bow and arrow. By high school, he'd discovered rock climbing, becoming a self-described "dirtbag" who loved to tackle risky ascents.

Finding the climbing equipment of that era not up to his standards, he attempted to create superior gear. He bought a used coal-fired forge and taught himself how to blacksmith. The resulting equipment was hugely respected in the climbing community. But the products that would eventually make him rich were not pitons and carabiners, but rather fleece jackets, board shorts and plaid shirts. No longer just designing technical gear for his pals, and hoping to fund his own climbing expeditions, by the mid-1980s Chouinard found himself helming a red-hot, rapidly expanding, internationally known fashion brand.

He wasn't quite sure what to make of this unexpected role. "I wanted to distance myself as far as possible from those pasty-faced corpses in suits I saw in airline-magazine ads," he writes in his 2005 autobiography, "Let My People Go Surfing." "If I had to be a businessman, I was going to do it on my own terms."

“I've never seen a company tell customers to buy less of its product. It's a fascinating initiative.”

Those terms include adhering to what he calls his "MBA" management approach—"management by absence"—which sees him far away from Ventura, sometimes for months at a time, "wear testing" the company's outdoor gear while climbing or fishing. When he does clock in at the office, his daily uniform is jeans and a Patagonia button-front shirt. He has no computer at his desk, just an Etch A Sketch on which co-workers can leave friendly messages. When he greets employees in the hallways, he inquires about their recent climbing feats and invites them to surf at his house the next time the waves are rolling.

There are economists who insist that companies must focus only on the cold, hard bottom line—and that capitalism itself depends in part on this unwavering focus. Back in 1970, Milton Friedman wrote a legendary essay for the "New York Times Magazine" titled "The Social Responsibility of Business Is to Increase Its Profits." Friedman pooh-poohed companies' charitable efforts, arguing that it's the sole duty of a business executive to maximize profits for shareholders. If executives wish to do good, they are free to plow their salaries into charitable works. The company itself has no special competence in good-deed doing and should stay well clear of the game.

Few would fault a business for funneling a portion of its profits to an in-house charitable arm. But corporate social responsibility (or CSR, as it's known in business-school parlance) often gets treated as a cute sideshow. It's a minor penance, used by giant companies to shape their public images, or to salve the consciences of their higher-ups. Traditional CSR results in many admirable endeavors. For example, the Ronald McDonald House Charities provide aid to the families of ill and injured children—a worthy project that also has zero to do with the McDonald's business model.

Increasingly, CSR scholars argue that more profound results might be attained if companies like McDonald's considered social responsibilities related to their core operations. McDonald's could, for instance, examine the societal impact of its supply chain, its employment policies, its carbon footprint and so forth. And McDonald's has made efforts along these lines of late. But it has not yet engaged in anything akin to the radical self-flagellation that goes on daily at Patagonia.

Yes, Patagonia takes part in some traditional corporate social responsibility—since 1985 it has given 1 percent of revenue (sales, not profit), totaling $41.5 million, to grassroots environmental organizations. Over the years it has convinced 1,400 other companies worldwide to join this "1% for the Planet" initiative. But Chouinard argues this is merely a tithe—he refers to it as an Earth tax. A more systemic transformation of the company began in 1991, after a sudden slowdown following years of overambitious growth threw Patagonia into turmoil.

Credit was cut off—Chouinard says his accountant at one point introduced him to a mafia guy who offered to lend at 28 percent interest. The company was forced to make its first ever layoffs, of 120 employees, one-fifth of its workforce. Chouinard began to wonder whether he should stay in the game at all. He went to famed consultant Dr. Michael Kami, who recommended that Chouinard sell Patagonia for $100 million and just use the proceeds to do environmental good. "I seriously considered it," says Chouinard. "But I'd made the same mistakes every other company makes. I decided the best thing I could do was to get profitable again, live a more examined corporate life and influence other companies to do the same."

Chouinard got his books in order. He vowed to run the company debt-free, which he now does. Then he looked at everything Patagonia made, shipped or processed, and resolved to do it all more responsibly. He changed materials, switching in 1996 from conventional to organic cotton—despite the fact that it initially tripled his supply costs—because it was less harmful to the environment. He created fleece jackets made entirely from recycled soda bottles. He vowed to create products durable enough and timeless enough that people could replace them less often, reducing waste. He put "The Footprint Chronicles" up on Patagonia's website, exhaustively cataloging the environmental damage done by his own company. He now takes responsibility for every item Patagonia has ever made—promising either to replace it if the customer is dissatisfied, repair it (for a reasonable fee), help resell it (Patagonia facilitates exchanges of used clothes on its website), or recycle it when at last it's no longer wearable.

To be sure, these initiatives also serve as effective branding. Part of Patagonia's appeal stems from its commitment to the environment. Consider the clever reverse psychology of its recent advertising. Last November, on Black Friday—the unofficial American holiday of consumer gluttony—Patagonia took out a full-page ad in the "New York Times" with the bold-face headline "Don't Buy This Jacket." Below a picture of the fleece jacket in question, the ad copy listed, in grueling detail, how much water was wasted and carbon emitted in the course of its construction.

"I've never seen a company tell customers to buy less of its product," marvels Harvard Business School professor Forest Reinhardt. "It's a fascinating initiative. Yvon has the confidence to pull it off." In fact, Chouinard says the ad boosted Patagonia sales—though he argues it didn't drive more overall consumption, but rather stole existing customers from his competitors.

Reinhardt co-authored a Harvard Business School case study of Patagonia in 2010. Like many of the other business-school professors I spoke with about Patagonia, he seemed genuinely impressed by Chouinard. Which is logical: In one sense, Patagonia's current success stems from classic business-school principles. The brand has maximized what B-school types refer to as WTP, or willingness to pay. Patagonia's perceived quality and do-gooder aura convince customers that its goods are worth a higher price.

It's not just the marketplace Chouinard is affecting—it's the workplace. His flex-time policies allow workers to come and go whenever they want—say, when waves are high at the nearby surf point—as long as deadlines are met. There's a yoga room available any time of day (I walked in on the head menswear designer meditating there at around 11 a.m. on a Tuesday.) At the prodding of Chouinard's wife, Malinda, Patagonia was one of the first companies in California to provide on-site, subsidized day care. Even the chief bean counter, COO and CFO Rose Marcario, seems spiritually fulfilled. In previous jobs at other companies, she says, "I might have looked for ways to defer taxes in the Cayman Islands. Here, we are proud to pay our fair share of taxes. It's a different philosophy. My life is more integrated with my work because I'm trying to stay true to the same values in both."

Skeptics argue that this kind of feel-good stuff could never work at a giant, publicly listed corporation, or at one that doesn't charge eye-popping prices for its gourmet gear. But when Chouinard counseled Walmart on sustainability, the retail behemoth found it actually saved money through environmental initiatives, like reducing its packaging and water consumption. "We are very focused on lowering prices for our customers," says Fox. "There were some investments we needed to make at the beginning, but the returns were quick enough that it came back in a reasonable time frame."

Similarly, Levi Strauss—with more than 10 times the annual revenue of Patagonia—has embraced Chouinard's efforts to set data-driven benchmarks for improving apparel makers' environmental practices. Levi's has spent the past 18 months redesigning processes to save 45 million gallons of water, along with the energy that would have heated that water. This is not simply altruism. While the company won't share specific numbers, "the business savings costs are real," says Michael Kobori, Levi's V.P. of social and environmental sustainability.

There's genuine shareholder value at the heart of many of Chouinard's ideals, which could carry over to all types of enterprise. A more fulfilling, happier workplace attracts and retains better workers, who in turn design superior products and develop smarter strategies. Thinking now about environmental impact helps companies get in front of inevitable future regulation—offering a jump on unprepared competitors. And it's just good brand management: Customers are increasingly aware of organizations' social ethics.

Many critics argue that big business has lost its moral compass over the decades, but new legislation in seven states, including California, offers a different model. Registering as a "benefit corporation" lets a firm declare—in its articles of incorporation—that the fiduciary duty of its executives includes "consideration of the interests of workers, community and the environment," and not just the bottom line.

Chouinard marched into state offices on the morning of January 3, 2012, to make Patagonia the very first company to register as a benefit corporation in California. It remains the most prominent company nationwide to have registered thus far. For Chouinard, the value of this is less about the present than the future. He can do whatever he wants at Patagonia right now, with no threat of shareholders revolting if he sacrifices a bit of profit in the name of menschy communitarianism. He owns the place in full, for as long as he's alive. But he's cagey about succession, and it's clear what he fears: He never wants Patagonia to go public, or to lever itself up in search of rapid growth, as it mistakenly did before. He's convinced that becoming a benefit corporation will help prevent that from ever happening.

Though he left New England when he was only seven, Chouinard still retains the unimpressed, dismissive mien of a flinty Mainer. But after hanging out with him for a while, you begin to glimpse what stokes his fires. It's not being indoors—you get the sense that he's not entirely comfortable under a roof. It's not technology—he neither has a cell phone nor uses a computer. And it's not luxury—he drives a beat-up Subaru wagon with 95,000 miles on it.

Among the few times I saw him truly light up: When he spotted some ring-necked doves on the shore near his house; when he showed me a new pair of Patagonia aluminum crampons that he'd had a hand in designing; when he described the best wave he'd ever caught, which happened at age 50, off the South Pacific island of Moorea. He still occasionally blacksmiths in a little tin shed on the Patagonia campus, and he showed me his latest project, a metal mussel knife that he's been beating into perfect shape—sharp at the blade to pry open the shells, blunt at the handle to knock away the barnacles. He was dissatisfied with all extant mussel knives. So he made a better one himself. He looks forward to testing it in the shoals.

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