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AnnualBenefitCorporationReportFiscal Year 2016May 1, 2015 – April 30, 2016
Annual Benefit Corporation ReportFiscal Year 2016Letter from Our CEODear Friends,We are living in unprecedented and turbulent times inwhich the foundations of our democracy are challenged.The planet is being threatened by those who deny thereality of climate science and eagerly pollute our air,water and soil and undermine our treasured public landsfor shortsighted private gain. As businesses, we mustbe vigilant, vocal and, most importantly, willing to takebold action—and so the burgeoning Benefit Corporationcommunity is more vital to our future than ever before.We must transform a conventional business model thatcurrently places profits above all else to instead ensureevery decision we make as business leaders reinforcesour commitment to the environment, our workers, ourcustomers and our communities.And in the end, profits can and will still be made, perhapsat greater levels than ever before, as in Patagonia’s case.Adopting a long-term outlook when short-term thinkingcurrently rules the day in nearly every C-Suite and boardroom is not only in the best interest of people and ourplanet, it’s ultimately in the shareholders’ interests as well,because an economy equipped for long-term successonly has room for businesses willing to expand the verynotion of a bottom line.The good news: Our movement is gaining realmomentum around the globe as more and more businessleaders take on the challenge of looking beyond profitsin defining the values we can and must deliver to peopleand the planet. There are now more than 4,700 legallydesignated Benefit Corporations across the country.Becoming a Benefit Corporation means balancing ourneed to achieve reasonable financial gain with purposefulaction to create additional benefits for multiplestakeholders whenever possible. In other words, BenefitCorporations take real steps to ensure business is goodfor people and good for the planet.This year, I’m proud to see the support Patagoniashows our employees, customers, the environment andthe global community involved in every level of ourbusiness reflected in a B Corp score of 152—up from116 in 2014. We have also made significant, measurableprogress in advancing our specific benefit purposes. Andsince becoming a Benefit Corporation, Patagonia hascontinued to achieve near-record growth each year.Patagonia became California’s first Benefit Corporationin 2012, which made these practices part of our legalcharter and embedded our core values into Patagonia’sfoundation forever. Since then, we’ve enjoyed continuedgrowth by all measures. Together, the Benefit Corporationstructure and B Corp accountability requirements providea real framework for decision-making at the executiveand board level and the key source of the model’s powerto improve corporate behavior without sacrificing profit.Our Annual Benefit Corporation Report describes whatwe’ve been up to this year. Patagonia is proud to be apart of this vital community of businesses, and I lookforward to more good news ahead.This is all good news, but it’s not enough. If businesshopes to rise to this challenge and scale our impact, itwill require the entire herd, not just a few quirky unicorns.And it can’t take 45 years. Businesses, big and small,around the globe, must take it upon themselves tocompletely reprioritize how we assess corporate returns.2Rose Marcario3
Annual Benefit Corporation ReportFiscal Year 2016Table of ContentsIntroductionLetter from Our CEO 03Introduction05Benefit Corporation Certified B Corp 07Specific Benefit Purposes 08B Corp Certification and Assessment10Since its inception in 1973, Patagonia has pursued its mission to build the bestproduct, cause no unnecessary harm, and use business to inspire and implementsolutions to the environmental crisis. We do so through the design, production,manufacturing and sale of a wide range of technical outdoor apparel andsportswear products under the Patagonia brand. Our Patagonia product offeringcovers nearly every activity that can be performed outdoors, including alpineclimbing, skiing and snowboarding, trail running, mountain biking, fishing, surfing,yoga and swimming. We also design, manufacture and sell surfboardsunder the brand, Fletcher Chouinard Designs.Patagonia’s Score 2016 11Benefit Purpose Performance 121% for the Planet 14Build the Best Product 20Cause No Unnecessary Harm 30Sharing Best Practices 34Transparency 38Supportive Work Environment 42The Experiment Continues 474In 2012, we extended our product offerings to includefood through our subsidiary, Patagonia Provisions, withthe goal of repairing the food supply chain by offeringhealthy products derived from sustainable fishing andregenerative organic agricultural practices. We alsolaunched our corporate venture capital fund, Tin ShedVentures, to invest in start-ups that offer solutionsto the environmental crisis with the goal of provingthat business—and investments—can be engines ofpositive change.through our direct-to-consumer channels made upapproximately 41 percent of our total global sales, withproducts sold through wholesale partners at around 59percent of total sales.We have approximately 2,200 employees, withroughly one-quarter based in our Ventura, California,headquarters, another quarter in our Reno, Nevada,distribution and service center, around 500 employeesin our retail stores around the world, and 400 based inour regional offices located in Japan, the Netherlands,South Korea, Australia, Argentina and Chile. OurPatagonia Provisions operations are run out ofSausalito, California.We sell our products around the world in our ownedand operated retail stores, on our e-commercesites, and to third-party wholesale partners primarilyfocused on the specialty outdoor market who resellour products online and in their own brick-and-mortarstores. North America is our largest market, making upapproximately 75 percent of total sales. It’s followedby Japan and Asia Pacific at 15 percent, Europe at 8percent and Latin America around 2 percent. For ourfiscal year, which ended April 30, 2016, products soldThis report covers Patagonia Works and its U.S.operating subsidiaries—Patagonia, Inc., PatagoniaProvisions, Great Pacific Iron Works, and FletcherChouinard Designs, Inc.—which are all registeredBenefit Corporations.5
Annual Benefit Corporation ReportFiscal Year 2016Benefit Corporation Certified B CorpIn 2011, when the Benefit Corporation movement was justgetting started, Patagonia’s founders took note—not onlybecause it was in line with what the company had been doingfor decades, but because it could lock in that behavior for thefuture. As a Benefit Corporation, Patagonia would be legallyrequired to consider its environmental and social impacts, andcould even prioritize those considerations ahead of profits.Patagonia Works became California’s first Benefit Corporationon the day the law took effect, January 3, 2012.Patagonia then went a step further by incorporating specificand detailed obligations into our Articles of Incorporation,protecting the things that might otherwise be cut under aframework dedicated to maximizing profits at the expense ofthe company’s values. These became our six specific benefitpurposes. The board of directors fortified these commitmentsby requiring that any changes can be made only with unanimousshareholder approval.67
Annual Benefit Corporation ReportFiscal Year 2016Patagonia’s specific benefitpurpose commitments are:1.2.4.1% for the Planet Each year, we contribute one percent (1 percent) of our annualIn support of our commitment “to use business to inspire andnet revenues to nonprofit charitable organizations that promoteimplement solutions to the environmental crisis,” we will shareenvironmental conservation and sustainability.proprietary information and best practices with other businesses,including direct competitors, when the board of directorsdetermines that doing so may produce a material positive impactBuild the Best Product withNo Unnecessary HarmWe endeavor to build the best products and to cause no unnecessaryharm to the planet or its inhabitants by: (i) designing and fabricatingon the environment.5.Transparencythe highest quality products as defined by durability, multi-We will provide information through our website and print catalogsfunctionalism and nonobsolescence; (ii) designing and fabricatingthat describes the environmental impact of representative itemsproducts that are easily repaired and made from materials that canacross our different product lines based on the best science andbe reused or recycled; (iii) designing and fabricating products withdata practicably available.minimum impacts throughout the supply chain—including resourceextraction, manufacturing and transportation—on water use, waterquality, energy use, greenhouse gas emissions, chemical use,toxicity and waste; and (iv) partnering with customers to take mutualresponsibility for the life cycle of our products, including repair, reuseand recycling.3.Sharing Best Practices with Other Companies6.Providing a Supportive Work EnvironmentWe will endeavor to provide a supportive work environment andhigh-quality health care through measures, including, but notlimited to, providing on-site day care at our corporate headquartersor subsidized child care at our other facilities.Conduct Operations CausingNo Unnecessary HarmWe will conduct our operations in a manner causing no unnecessaryharm by continually seeking to reduce the environmental footprintand impact of our operations in water use, water quality, energy use,These specific benefit purposes govern Patagonia at the mostfundamental level, legally binding the company to its long-heldcommitment to prioritizing environmental and social valuesalongside financial return.greenhouse gas emissions, chemical use, toxicity and waste.89
Annual Benefit Corporation ReportFiscal Year 2016B Corp Certificationand AssessmentPatagonia’s 5In addition to our Benefit Corporation status under Californialaw, Patagonia is also a certified B Corp, which means that ourcompany’s overall environmental and social performance isOverall Ratingmeasured and independently verified by a third party, B Lab.B Lab’s standard, known as the B Impact Assessment, scorescompanies’ environmental and social performance on a 200-pointscale. We chose B Lab for the third-party verification required underthe California Benefit Corporation statute because we believe theirexperience certifying hundreds of companies and their social andenvironmental performance standards are the most comprehensiveand aspirational available. Our B Corp score is reassessed everytwo years. Following the most recent B Impact Assessment in 2016,our score was 152, up 36 points from 2014 and 45 points from ourfirst assessment in 2012.1011
Annual Benefit Corporation ReportFiscal Year 2016Patagonia’sPerformanceOn Achieving Our Six Specific Benefit PurposesFor Fiscal Year 20161213
Benefit Purpose Per formance1% for the Planet Inspired early on through our connection to the outdoors andseeing firsthand how grassroots environmental activists could makea difference, we made our first environmental grant in the early1970s to Friends of the Ventura River—an amount of 4,000—alongwith a desk to use in our Ventura office. In 1985, we formalizedour environmental grant-making program through a commitmentto donate 10 percent of company profits each year. In 2002, ourfounder Yvon Chouinard, and Craig Mathews, owner of Blue RibbonFlies, co-founded the nonprofit, 1% for the Planet , an organizationbringing together and certifying businesses committed to pledging1 percent of sales to environmental nonprofits, which assurescontributions even in an unprofitable year. In 2012, we made thiscommitment part of our corporate charter when we became aregistered Benefit Corporation.14
Fiscal Year 2016Benefit Purpose Per formance1% for the Planet Initiatives1st Grant to Friends ofthe Ventura River 4,000 Work SpaceEach year, we distribute 1 percent of our annual net revenue (total sales minus chargebacks and returns) to helpsupport grassroots environmental nonprofits. We do so primarily in the form of cash grants, along with some in-kindand product donations. A portion of these funds is also used to cover the cost of running our internal grants program.These amounts are reviewed and certified annually by 1% for the Planet, and in FY16 totaled 7.88 million.1970s198510% of Company Profits 92,7842001Co-Founded1% for the PlanetFY031% of Net Revenue 2,770,6432012Became a Benefit CorporationInstitutionalizing 1% GivingFY12 6,638,027 5,519,756FY13FY14 6,129,444FY15 6,374,353Activist- and EmployeeOriented Grant MakingRetail GrantsWhen a grant proposal comes from an organizationor project connected with an issue or area in theU.S. where we have a store, it goes to that store forreview. Each of our stores has a designated employeeacting as the environmental grants lead. This personspends a portion of their paid time off the floor vettingproposals and engaging colleagues in reading andawarding grants. In FY16, employees in our 32 U.S.stores allocated more than 1 million to more than 250grassroots environmental groups connected to thecommunities they serve.Most companies with substantial charitablegiving programs give large grants to a handful oforganizations. As a result, corporate environmentalgrants typically fund only the established, nationalenvironmental organizations, which make up just 2percent of U.S. environmental nonprofits, yet receivemore than half the funding. This leaves the smaller,grassroots groups of the environmental movementsignificantly underfunded.When we became a Benefit Corporation andinstitutionalized our 1 percent giving into our corporategovernance structure, we directed the companyto prioritize giving to these smaller, grassrootsenvironmental organizations operating in places wherewe do business. While we still fund a handful of larger,national organizations, we prioritize support for activistsworking on front-line issues in their backyards.Corporate and Media GrantsIf a U.S. grant proposal is not connected to a Patagoniastore location, it goes to our corporate grants councilsor, if media is a focus, to our media grants council atour Ventura headquarters. These councils are made upof employees who are nominated and elected by theircolleagues. Grants councils meet three times a yearto review and decide some 225 funding proposals.We estimate that grants council employees devote120 hours each year to the grant-making process.Our corporate and media grants councils awardedmore than 1.5 million in grants to 188 grassrootsorganizations around the U.S.Each year we fund hundreds of groups around theworld with small grants averaging 7,000- 12,000.Our small donations can have a big impact: 52percent of the nonprofits we supported last year haveannual budgets less than 300,000, and 75 percenthave fewer than 10 employees. Grant recipients andamounts awarded are determined entirely by Patagoniaemployees working in all areas of the company.These employee-driven grant-making programs areadministered by a team of three dedicated, full-timeemployees who make up our environmental grantsdepartment. We have 21 different employee grantmaking programs. They include:Other Ways We FundWe run more than a dozen other employeeadministered granting programs to fund our 1 percentcommitment. These include working with multibrandretailers that sell our products to identify organizationsin their communities, which we fund on their behalf,as well as various international grants programs inregions where we do business that are tailored to localcommunities and cultures.FY16 7,125,777 78 Mil lionLifetim e contrib ution of cash and in-kind service sTotal Number of.201420152016Grant proposals received1,3038757701,2348577661,403985824Proposals fundedEnvironmental organizations receiving grantsFiscal year ended April 30, 20161617
Fiscal Year 2016Benefit Purpose Per formance1% for the Planet Achievements in supportinggrassroots environmental activistsover the past year include:Stopping the Susitna Dam50 Miles of Trail in ChileFor the past few years, we have partnered with theSusitna River Coalition to stop a proposal to constructa 735-foot dam on the Susitna River in Alaska, donatingmore than 116,500 to the effort. The project wouldhave resulted in the second tallest dam in the U.S.and significantly impacted fish populations, cariboumigrations, recreation and tourism in the area. Throughcontinuous political pressure and public awarenessdriven by a number of groups, including the SusitnaRiver Coalition, the project was officially denied byAlaska Governor Bill Walker in mid-2016.Our Mile for Mile campaign was a companywide pushto raise funds and awareness to build new trails inChile’s Patagonia Parque—soon to be designated anational park. The campaign kicked off with a Patagoniaproduced film featuring three of our ultra-runningambassadors, who subsequently toured with the filmto a number of our stores, bringing in donations fromcustomers around the world and a matching grantfrom Patagonia. We raised over 90,000 for nonprofitConservación Patagónica, which will now build morethan 50 miles of trails.5 National Monuments CreatedAlaska’s Susitna River has been spared—at least for the moment. TRAVIS RUMMELBasin and Range National Monument, Nevada. TYLER ROEMERChallengesFor the past year, we have increased our involvementwith several environmental groups working for federaldesignation of a handful of public lands as nationalmonuments. Many of these campaigns move preciousecosystems into permanent protection, keeping wildlifecultural sites and recreational opportunities safe forgenerations. Through work with the ConservationLands Foundation, Amargosa Conservancy, MojaveDesert Land Trust, Tuleyome, and California WildernessCoalition, funded (in small part) by Patagonia donations,five national monuments were created in FY16. Thesemonuments span more than 2.5 million acres andinclude the Basin and Range, Berryessa Snow Mountain,Castle Mountains, Mojave Trails, and Sand to Snowmonuments.Scaling our 1% Giving andGrant-Making ProcessAs our sales grow, so do our donations—and the dollarsare piling up quickly. Our grants program has increasedby 50 percent since we became a Benefit Corporation in2012, this fiscal year totaling 7.1 million going to fundenvironmental work. As we continue to scale, we needto ensure our funding program has the resources to doan efficient job of supporting organizations, big andsmall, that are making a difference.Activism and Brand ReputationTools for GrassrootsActivists ConferenceActivists work together at Fallen Leaf Lake, California. AMY KUMLERMile for Mile, Chile. JAMES Q. MARTIN18Activism can be polarizing, especially for a businessor brand, as it involves choosing a side on oftencontentious and political issues. People with differingopinions may choose not to buy our products. Ifsomething we support creates a significant backlashthat impacts our sales, we’ll have less to contribute tothe fight to protect our planet. Our history indicates thatmost of our customers support environmental activismand challenging the status quo, but our activism mayalienate some potential customers.To complement our 1 percent giving, since 1994 we’vehosted a now biennial Tools for Grassroots Activistsconference where environmental activists come to learnbest practices to maximize their impact. This past year,we hosted 80 activists from grassroots organizationsaround the country for training sessions conducted by14 experts on topics such as community organizing,campaign strategy, communication, lobbying,fundraising, working with businesses, and effectivelyusing social media and other technology to advanceissues. Forty Patagonia employees, from store employeesto our CEO, participated in the three-day conference.19
Benefit Purpose Per formanceBuild the BestProduct With NoUnnecessary HarmWith a product development calendar that spans nearly18 months from product conception to completion,and a supply chain made up of hundreds of contractedindependent suppliers, we rely on a number of differenttools and programs with the goal of embedding thecommitments described above into our product life cycleand measuring impacts along the way.20
Fiscal Year 2016Benefit Purpose Per formanceBuild the Best Produc t With No Unnecessar y HarmInitiativesYC Scorecard QuestionsPatagonia Design QualityMaximizing QualityTo influence the design process with the goal of makingthe best product possible, Patagonia developed aninternal product-rating system based on our founderYvon Chouinard’s design quality attributes. Known as theYC Scorecard, this rating system was designed to embeda focus on quality across all teams touching our productsand create a common “quality language” to answer thequestion: “Is it a Patagonia 10?” To get to that answer, aninternal team of experts evaluates the functional, socialand environmental performance of every Patagoniaproduct using the 10 Patagonia Design Quality Attributes(next page), assigning a score of 1 to 10 for each.1.The product-scoring teams typically consist of fivepeople from a mix of the company’s departmentsresponsible for product design, development, quality,repair, field testing, product category leadership, andcorporate social and environmental responsibility.Does the product fulfill a clear and needed functionalpurpose? Do the design and materials of the productserve the functional purpose? Without a seriousfunctional demand, we can end up with a product that,although may look great, is difficult to rationalize asbeing in our line—i.e., “who needs it?”2.YC Scorecard ResultsWe started using the YC Scorecard with our fall 2015 product line and have scored every new or redesignedproduct since, with 1,315 products scored to date. This process provides our design teams with real-timefeedback for improving product quality over time. Average minimum product scores have risen on our10-point scale from 7.2 to 8.04 since fall 2015. Because it’s an internal measure that can be largely subjective,we use the YC Scorecard for design and development purposes and not as a customer-facing metric.Spring ‘16Fall ‘16Spring ‘178.988.818.868.90Average quality score7.207.157.748.04Lowest score9.849.689.619.61Highest score644301192172Total number of products scored**The number of products scored was the highest in fall ’15, when we started and whenwe scored all products for the first time. Following that season, we look at only new orredesigned products.Quality Return RatesAs another measure of quality, we lookat return rates for products that ourcustomers tell us did not meet their qualityor fit expectations. Product returns forquality or fit reasons as a percent of totalsales have declined year-over-year sinceimplementation of the YC Scorecard.Is the product globallyrelevant/appealing?Is it multifunctional?Will the product fill the functional and aesthetic needsof core users in every locale? Does the design lenditself toward global acceptability, functional needs,sizing and color?8.2016.44%.41%1.96%1.85%Fiscal year ended April 30, 2016Quality returns as a percentage of salesFit returns as a percentage of sales5.Is it easy to care for?Is the product easy to clean? Does it require anymaintenance? Low maintenance of product is a criteriafor high quality. No ironing is required. Will it still lookacceptable on a plane ride home after washing it in asink on the way to the airport?Is it durable?9.Does it have aesthetic appeal(added value, authentic, art)?Does the aesthetic of the product differentiate it/makeit better than other products? Is it beautiful, timeless orauthentic? Are we making the “real” thing? Is it the bestof its kind? Real art is timeless.Can it be easily repaired?10.Can the product be easily repaired in the field with littleor no tools? Is the product a responsible choice fromits birth to death? There’s always going to be a needfor repairs, and we make sure that they are possible; azipper should be replaceable without the entire coathaving to be taken apart.2015227.Will the product stand up to hard, prolonged use? Doall the parts of the product wear out roughly at thesame time and only after a long life? Will the productgo threadbare before any one piece will fail? We testuntil something fails, strengthen that part, then seewhat fails next Until we’re confident that the product isdurable as a whole.4.Is the product simple?Is the product as simple as possible? Functionallydriven design is often minimalistic. Complexity is oftena sure sign that the functional needs have not beensolved. Is the product as simple as possible?Is this product able to serve multiple and variedfunctional applications? Does this one product preventthe user from having to carry or purchase other gear?Is the product designed creatively to allow for multipledifferent applications? The more you know the less youneed. Why buy two pieces of gear when one will do thework of both?3.Fall ‘156.Is it functional?Does it cause anyunnecessary environmental harm?Without sacrificing quality, could the product havebeen made in a less environmentally harmful or moresustainable manner? Is the product a responsiblechoice from its birth to death?Does it fit our customer?Does the fit of the product meet the needs of ourcore user, and is it appropriate for the activity itwas intended? Is the fit of the product consistentthroughout line? Will it fit after repeated wash/care?Does the fit take layering into consideration?23
Fiscal Year 2016Benefit Purpose Per formanceBuild the Best Produc t With No Unnecessar y Harm2015Minimizing Impacts from Materials58%24%15%3%To facilitate a transition away from fabrics made from virginpetroleum-based materials—like polyester and nylon—in early2015 we quantified the total amount of virgin, recycled andnatural fibers used across our entire product line to develop abaseline. In 2016, we decreased the use of virgin materials inour products from 58 percent to 54 percent.2016Virgin petroleum-based products (polyester/nylon)Recycled materialsCotton and other plant-based materialsWool and other animal products54%26%18%2%Minimizing Impacts from ManufacturingThe modern apparel supply chain is complex, with manylevels of suppliers. Nearly all products are made fromcomponents sewn and assembled by third-party finishedgoods manufacturers using materials from other thirdparty suppliers. Most apparel brands track and auditfactory conditions only at their “Tier 1” suppliers—thefactories that assemble their finished products—and oftenonly for social compliance as required by the Fair LaborAssociation. We assess all 81 of our Tier 1 suppliers for awide range of things, including social, environmental andquality standards.We redesigned our line of NanoPuff products for fall 2016. Whilethe shell and lining were always100 percent recycled polyester,the insulation was made entirelyfrom virgin material. So we workedwith our supplier Primaloft , Inc.to develop high-performanceinsulation containing 55 percentpostconsumer recycled fibers,saving the equivalent of twomillion plastic bottles from thelandfill in the first year alone.We redesigned the shell of ourTorrentshell Jacket, replacing124,000 pounds of virgin materialin that product alone with recyclednylon in spring 2016.We redesigned our wetsuits toreplace the traditional neoprene,made from oil with a materialmade with 85 percent naturalrubber by polymer content.The natural rubber comesfrom plantations managed inaccordance with the ForestStewardship Council to ensurethey aren’t contributing todeforestation, maintain theecological functions andintegrity of the forest, andconserve biodiversity andsustainable livelihoods.24the root cause of the problem and then determinewhether working with the factory toward a long-termsolution will lead to positive change.Remediating systemic problems can take time, resourcesand continuous monitoring. But we view sustainableremediation as the most valuable outcome of ourmonitoring efforts, because it raises standards acrossthe board, improving social, environmental, and healthand safety conditions in a factory, not just for us, but forother brands as well. This is important because Patagoniatypically represents only a small percentage of a factory’stotal business. We spend a good deal of time helpingfactories identify and implement impactful solutionsto their biggest challenges. We often require them toparticipate in specific training, education or continuousimprovement programs, which Patagonia helps pay forin part or full. In FY16, we participated with our suppliersin the following capacity-building programs: fire-safetytraining; grievance-system training; root-cause-analysisassessments; management-system assessments; faircompensation assessments; Better Work, a programcommitted to improving working conditions on globaltextile and apparel supply chains; Fair Trade USAcertification process; and the Fair Labor AssociationParticipating Supplier program.In 2012, we expanded our social and environmentalaudit program to include our Tier 2 suppliers, focusingprimarily on those providing the raw materials—fabricsand trims—we use in our products. By the end of FY16,we had completed the process of bringing 40 of theminto our social audit program, auditing those that supplyapproximately 80 percent of our fabrics and trims.Nearly every audit uncovers an opportunity forimprovement, and all substandard audit findings must beremediated in a timely manner. What constitutes “timely”can vary, depending on the complexity of the issue.When an audit reveals significant problems that requirein-depth analysis, we work with the
Patagonia Provisions operations are run out of Sausalito, California. This report covers Patagonia Works and its U.S. operating subsidiaries—Patagonia, Inc., Patagonia Provisions, Great Pacific Iron Works, and Fletcher Chouinard Designs, Inc.—which are all registered Benefit Corporations.
