Patagonia Inc: A Benefit Corp Case Study


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This is an official draft of my master's dissertation, a case study on the new US corporate status B Corporation, taking Patagonia, Inc., as the case of study. No data, information, quotes, or content may be copied without official permission.

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Patagonia Inc: A Benefit Corp Case Study

  1. 1. The Benefit Corporation from Theory to Practice:A Case study of the New Corporate Model, Its Obligation to Maximizing a Triple Bottom Line, and How the Environment and Society Benefit By, Lauren Turner Zahringer Masters Dissertation Paper University College London MSc Environment, Science and Society
  2. 2. AbstractThis research concerns the Benefit Corporation, a new corporate status in the United Statesthat institutionalizes stakeholder interests, taking Patagonia Inc. as the case of study. Drawingon recent scholarship from the discipline of positive organizational behavior, this researchapplies the theory and model of Hybrid Organizations as Agents of Positive Social Change(Haigh and Hoffman, 2012) to uncover how Patagonia is able to couple financial profitabilitywith making a positive impact (as a whole) on the environment and society, and understandthe company’s motivations and decision to elect B Corporation status.
  3. 3. OFFICIAL DRAFT Case of Patagonia, Inc.Chapter 2: BackgroundIn this chapter I present the assumptions, theories, and background information that formed thefoundation of my research. The chapter is divided into three sections. In the first section I present thedefinitions, assumptions, relevant past literature and theories underlying this research. In the secondsection I shift the focus to the narrative and recent current events of the Benefit Corporationmovement. Section three provides background information on Patagonia Inc.2.1 Definitions, Assumptions and TheoryFirms as marketsI define a firm as a “bundle of practices” (Benner et al., 2010, pg. 114). This conception of the firm istaken from the discipline of Economic Geography and characterizes a firm as an organization of amultiplicity of dynamic interactions and networks. (Benner et al, 2010) The research presented hereassumes this conception as that which constitutes a firm.Human socio-ecological agencyForm, function, and the values attributable to any one form or functions are inexorably influenced bythe context in which they exist. The concept of socio-ecological agency comes from the discipline ofEnvironmental Sociology. Human agency refers to the ability and capacity for humans to makechoices and act, and therefore perform as agents. Buzinde and Manauel-Navarrete (2009) argue thathuman agency exists not in a vacuum of society, the human-centric world, and that the socio-naturedivide which has supported this conceived absence of the natural environment in our human context isan unhelpful perspective. As such they propose that there exists a form of human agency, termedsocio-ecological agency, which envelops human existence within the context of the environment.Buzinde and Manuel-Navarrete (2009) explain, “For the first time we are, not only the agents ofsocial change and ecosystem change at the local level, but also the main agents affecting the dynamicsand evolution of the global environmental change is forcing us to redefine ouragency in terms of global stewardship, and a transition from modern agency to socio-ecologicalagency” (Buzinde, Manuel-Navarrete, 2009, p. 307).Business has a Responsibility for the WholeThis research is approached from an assumption that business has, in addition to creating financialwealth, a responsibility for the whole. This additional responsibility is assumed on the basis of pasthistory, current capacity and the present context in which business operates. This is a radicallydifferent perspective for the role of business from that previously embraced in the history ofcapitalism in the United States, to maximize shareholder wealth. Corporate law governing for profitentities has remained consistent for nearly a century in its position of the role of business to society. L. ZAHRINGER 3
  4. 4. OFFICIAL DRAFT Case of Patagonia, Inc.In the early 1900’s the Michigan Supreme Court issued the following statement in Dodge v. Ford: “Abusiness corporation is organized and carried on primarily for the profit of the stockholders. Thepowers of the directors are to be employed for that end. The discretion of directors is to be exercisedin the choice of means to attain that end, and does not extend to a change in the end itself, to thereduction of profits, or to the non-distribution of profits among stockholders in order to devote themto other purposes" (Moye, 2004, p. 401). In November of 2010, the Delaware courts, thought of as the“seat of US corporate law” (Gilbert, 2010, p.1), issued the statement is Craigslist v. Ebay: “Directorscannot defend a business strategy that openly eschews stockholder wealth maximization” (Gilbert,2010, p.1).A survey of recent history, the oil industry’s pollution of oceans from Alaska to the Gulf of and theunraveling of fraud and corruption of large financial institutions, evidences a track record of negativeanthropogenic environmental behavior and social injustice channeled through business activity and itsprofit maximizing objectives. At the same time business has also become the most powerfulinstitution on the planet. (Harman, 1990) Harman (1990) argues that with this power comesresponsibility. This responsibility is embedded through not only the logic of ethics and morality butalso practicality and the efficient use of resources. The context within which business operates todayhappens to necessitate the most efficient and effective means be used to solve social andenvironmental problems.Shireman (1994) clearly explains how business is the institution that has such a capacity. “More thanany other institutions today, corporations, have the combination of skills, resources, motivation, andagility to rapidly implement changes on a global scale. Half of the world’s hundred largest economicentities are now corporations, not nations. And with 500 transnational corporations controllingroughly three quarters of world trade, business is the planet’s dominant engine of resource use, servicedelivery, waste generation, cash flow, and probably education and training. Business is THE leveragepoint for change” (Shireman, 1994, g. 61).Hybrid Organizations as Agents of Positive Social Change “Looking around the world, we can witness the emergence of numerous new forms of enterprise that are part of a broader movement. The behavior of these enterprises is characteristic of this movement. These firms go beyond business as usual practices and modes of thought regarding society and the natural environment. Whereas business as usual engages the economics of balancing the debt of externalities, minimizing harm, or reducing impact by coupling the negative with the positive. These pursue “business unusual” and bridge together the form and function of two different types of organizations: for profit and L. ZAHRINGER 4
  5. 5. OFFICIAL DRAFT Case of Patagonia, Inc.created the “B Corp certification”, a third party certification of sustainable business practices, forcompanies interested in distinguishing themselves in the cluttered market of green business. Thecertification comprises a set of transparent, comprehensive and comparable standards designed toenable the marketplace to identify and support companies that meet rigorous third-party standards forsocial and environmental performance.The certification was developed for purposes mutually beneficial to consumers, businesses, and BLab. It helped businesses distinguish themselves in the saturated market where consumer trust hadbeen diluted. Consumers on the hand had a trusted and reliable tool for distinguishing a goodcompany from just good marketing. The certification also enabled B Lab to move closer to itsultimate goal by building a community of firms that constituted the type of businesses whichultimately would create their envisioned new sector of the economy. Since 2007 more than 700companies have become certified B Corps, building a critical mass and collective voice forinfluencing policy and legislation in the United States.Informing PolicyB Lab’s goal to create a new type of corporation is a win-win situation for both government and socialenterprise businesses. According to the Benefit Corporation White Papers, The Need and Rationalefor the Benefit Corporation, there is a growing demand by a new type of business for an infrastructurethat enables them and protects their right to create social and environmental benefit as integratedwithin the operations of the business. “The sustainable business movement, impact investing andsocial enterprise sectors are developing rapidly but are constrained by an outdated legal frameworkthat is not equipped to accommodate for-profit entities whose social benefit purpose is central to theirexistence. The Benefit corporation, which has already been established by statute in seven states andwhich is the subject of legislative initiatives in several others, is the most comprehensive yet flexiblelegal entity devised to address the needs of entrepreneurs and investors and, ultimately, the generalpublic. As a result, it has also attracted broad support from entrepreneurs, investors, citizens andpolicy makers interested in new corporate form legislation” (Clark, Vranka et al, 2011).The rationale for the Benefit Corporation is it is seen as comprising the 4th sector of the economywhere business purpose and pro-social activity are combined, and that this is good for business, andgood for society. Reprinted from White Paper on the Need and Rationale for the Benefit Corporation(Clark, Vranka et al., 2011) the major characteristics of the benefit corporation form are: 1) A benefit corporation must have a corporate purpose to create a material 2) An expansion of the duties of directors to require consideration of 3) An obligation to report on its overall social and environmental performance L. ZAHRINGER 6
  6. 6. OFFICIAL DRAFT Case of Patagonia, Inc.Patagonia is a private company, owned by the founders Yvon and Melinda Chouinard. In 2011 thecompany had sales of $414 Million. Patagonia is known for its commitment to authentic productquality and environmental activism. To date the company has contributes over forty-three milliondollars in cash and in-kind donations. (Bloomberg Business Online, “Patagonia”, Company Profile,2012). L. ZAHRINGER 9
  7. 7. OFFICIAL DRAFT Case of Patagonia, Inc.Chapter 3: Research MethodsThe overall objectives of this research were to understand why a corporation would choose to becomea Benefit Corporation, and uncover how a Benefit Corporation creates social and environmentalbenefit for society through an in-depth case study. This section presents the methodology and methodsthat were used to achieve the objectives of the research beginning with the methodological approachand research design, followed by an explanation of fieldwork, methods of data collection and dataanalysis. I used a qualitative research approach and chose the case study method to be the mostappropriate qualitative research tradition for this study. The following discussion will present therationale for choosing a qualitative methodology and explain why the case study method best fit theneeds and objectives of this study.3.1 Methodologies and Methodological ApproachQualitative MethodologyI chose a qualitative methodology for this research as I concluded it was the best means to achieve myends and fit most appropriately to my research questions. I made this decision for the following threereasons. First, in the early stage of developing my research design I identified that my overallobjectives required developing a deep understanding of a recent event. This meant that I would needto do a significant amount of information extracting and interpreting. Therefore when designing myresearch I needed to ensure that my design and methods supported both discovery and description. Iconsidered the strengths and general applications for qualitative and quantitative methods. Qualitativeresearch facilitates the development of an in-depth understanding, while quantitative research applieshypotheses testing in order to establish facts, and designate and distinguish relationships betweenvariables. I contented that purely quantitative methods were unlikely to elicit the rich data I needed.Second, needing more support for my decision of research methodology, I consulted the literature onsustainable business. The findings from my preliminary review showed that past research on CSR,Sustainable Business and other related topics often prioritized corporate practices (Fry and Hock1976; Orlitzky et al. 2003; Snider et al. 2003), and many papers criticized work on sustainablebusiness and CSR as being too often limited to what businesses should do, or offering no more thanan inventory of sustainability related activities (Crittenden et al. 2011; Basu and Palazzo 2008; Bansal2005). Campbell (2007) bemoaned that little theoretical attention has been given to understandingwhy corporations act, or not, in environmentally, socially, and economically responsible ways andBasu and Palazzo (2008) argued that researchers have so far failed to understand the underlyingmechanisms or triggers that shape activities related to sustainability. Although indirectly implied,from this aspect of my preliminary review, I concluded that using a qualitative methodology wouldposition my research to make a meaningful contribution to current literature and research on relatedsubjects of sustainable business. L. ZAHRINGER 10
  8. 8. OFFICIAL DRAFT Case of Patagonia, Inc.Third, I reflected on the potential for using a quantitative methodology, and considered what type ofinformation I would need and if I could identify potential sources for this quantitative data. BenefitCorporations are a recent phenomenon and at the beginning this research, a very few number ofcompanies, less than 40, had become legal Benefit Corporations (most of which reincorporated withina few months prior to this research), and no significant scholarly research on Benefit Corporationscould be identified. Consequently, with such a small number of companies, which in and ofthemselves varied greatly by size, location, and accessibility, and no past research to leverage, Iconsidered that access to sufficient quantitative data would be unlikely. Thus, for these three reasons,in sum, I chose to use a qualitative methodology.Case Study Research MethodHaving already decided to focus my research on the new Benefit Corporation and that I was going touse a qualitative methodology the next step was to specify which qualitative research tradition to use.I chose to use the case study method because I found it was the most fitting methodology for myresearch on the basis of my research subject, context, research questions and objectives. As a researchmethod, case study is an intensive description and analysis, and is often used to study an organization,a social unit, or a specific phenomenon. (Berg 2004; Creswell 1998; Merriam 1998; Merriam &Associates, 2002; Miles & Huberman, 1994; Stake 2001). Yin (2009) advises the case study to be agood choice when a how or why question is being asked about contemporary events over which theinvestigator has little control. As a tool the case study method tries to illuminate a decision or set ofdecisions, why they were taken and how they were implemented. (Yin, 2009) This was precisely whatmy research needed to achieve. I used a single case study design, rather than a multiple case study. Amultiple case study can be advantageous when doing comparative research, for example. Whereas asingle case study design is a great mechanism for achieving in-depth analysis of a single caseallowing the researcher develop a rich and descriptive study.I chose Patagonia, Inc. as my case of study based on the criteria that I needed to have sufficient accessto data, and, to make the case meaningful, have it be as generalizable to other companies as possible.Patagonia had been a salient figure in the news and media, voicing opinions and conductinginterviews, in the time leading up to and following the passing of the California B Corporationlegislation. The company also was the first to reincorporate as a B Corporation in the state ofCalifornia. I concluded that these facts potentially suggested Patagonia’s enthusiasm and opennessabout its decision; perhaps meaning the firm would be willing to share its experience. On the need forgeneralizing most of the companies that had become Benefit Corporations were “green” companies,meaning that they offered products and services within the market of green goods, such as solarenergy, or niche market specialty products made from recycled goods. On the other hand, Patagonia’sproducts were not particularly distinguishable in features or styles from competitors such as TheNorthface, and therefore, would allow a better chance for generalizable conclusions. L. ZAHRINGER 11
  9. 9. OFFICIAL DRAFT Case of Patagonia, Inc.the same well-tried routes in areas like El Dorado Canyon, the Shawangunks, and Yosemite Valley.The same fragile cracks had to endure repeated hammering of pitons, during both placement andremoval and the disfiguring was severe. After an ascent of the degraded Nose route on El Capitan,which had been pristine a few summers earlier, we decided to phase out of the piton business. It was ahuge business risk – pitons were then still the mainstay of the business – but it had to be done”(Chouinard, 2012, Patagonia website, “our history”). From this lesson Patagonia’s business cultureand values embodied an environmental mission.Like other businesses Patagonia strives to produce high quality goods for its target market and remainprofitable. As Chouinard explains “If we wish to lead corporate America by example, we have to beprofitable. No company will respect us, no matter how much money we give away or how muchpublicity we receive for being one of the ‘100 Best Companies,’ if we are not profitable. It’s okay tobe eccentric, as long as you are rich; otherwise you’re just crazy” (Chouinard, 2005, p.161). What isunlike many other businesses is that the motivation for this is driven by its deeply embedded missionof using business to solve “the environmental crisis” rather than goals indicative of business as usual,such as increasing market share. “With limited resources we have asked ourselves internally herewhere can we make the biggest difference, and that requires us to think through the source not just thesymptoms of so many of the issues our societies are facing today and we have concluded that thesources of many of our societies environmental ills are based and rooted in environmentaldegradation. We have initiatives, methods and practices that allow us to use our resources towardsimprovement in those areas and that is our focus” (Ridgeway, 2012, interview zahringer).Slow GrowthSlow growth is at the very core of Patagonia’s success. Growing too fast almost cost Chouinard hiscompany in the first few years. For Patagonia sustainable growth is means stable and slower growth,and slower growth, better growth, which in turn will allow the company to stay in business andcontinue to achieve its environmental and social objectives. In the early 1970’s Patagonia launched itsclothing line hoping to make easy profit to support the less profitable equipment line. “By 1972 wewere selling polyurethane rain cagoules and bivouac sacks from Scotland, boiled-wool gloves andmittens from Austria, and hand-knit reversible schizo hats from Boulder” (Chouinard, PatagoniaWebsite, 2012, “our history”). The clothing line was doing well and the company continued to growits operations and product line. Being a small private company with organic growth enabled Yvon andhis friends to develop meaningful practices that reflected personal values, interests, and tastes acrossthe board from human resources and general employee policies to office layout and cafeteria food.(Chouinard, 2005)In the early 1980s Patagonia introduced a bold color palette to its clothing line. The result was soaringdemand. The company grew quickly throughout the 1980s but came to an abrupt halt in 1991 L. ZAHRINGER 19
  10. 10. OFFICIAL DRAFT Case of Patagonia, Inc.consequent to the economic recession. “Our sales crimped during the recession and our bankers,themselves in trouble and up for sale, called in our revolving loan. To pay off the debt, we had todrastically cut costs and dump inventory. We laid off 20% of our work force–many of them friendsand friends of friends. And we nearly lost our independence as a company. This was a very importantlesson and we have kept growth – and borrowing – to a modest scale ever since” (Chouinard,Patagonia website, 2012, “our history”).Positive LeadershipPositive leadership is defined as taking a proactive, ‘can do’ approach to management, and notnecessarily overtly. In his book, Let My People Go Surfing, Chouinard shares a story that illustratesthe unique aspect of his positive leadership. “Climbing mountains serves as an example for both business and life. Many people don’t understand that how you climb a mountain is more important than reaching the top. You can solo climb Everest without using oxygen, or you can pay guides and Sherpas to carry your loads, put ladders across crevasses, lay in six thousand feet of fixed ropes, and have one Sherpa pulling and one pushing you. You just dial in “10,000 Feet” on your oxygen bottle, and up you go. Typical high-powered, rich plastic surgeons and CEOs who attempt to climb Everest this way are so fixated on the target, the summit, that they compromise on the process. The goal of climbing big, dangerous mountains should be to attain some sort of spiritual and personal growth, but this won’t happen if you compromise away the entire process. Just as doing risk sports will create stresses that lead to a bettering of one’s self, so should a company constantly stress itself in order to grow. Our company has always done its best work whenever we’ve had a crisis. I’ve never been so proud of our employees as in 1994, when the entire company was mobilized to change over from using traditional cotton to organically grown by 1996. It was crisis that led to writing down our philosophies. When there is no crisis, the wise leader or CEO will invent one. Not by crying wolf but by challenging the employees with change. As Bob Dylan says, “He not busy being born is busy dying.” New employees coming into a company with a strong culture and values may think that they shouldn’t rock the boat and shouldn’t challenge the status quo. On the contrary, while values should never change, every organization, business, government, or religion must be adaptive and resilient and constantly embrace new ideas and methods of operation” (Chouinard, 2006, p.192).Mutually beneficial relationshipsPatagonia seeks to internalize its relationships with the environment and society and sees theseexternalities as relationships rather than costs. This is done through the creation of mutually beneficialrelationships that facilitate Patagonia to create a positive social and environmental change amongsuppliers, communities, employees, and customers. Patagonia’s mutually beneficial relationships areboth the cause and effect of the firm’s high performance. This win-win effect also plays out inPatagonia’s commitment of 1% to the planet. Patagonia is committed to using business to solve theenvironmental crisis, and donates 1% of sales to environmental causes and grassroots organizations.Supporting these organizations is a deeply imbedded mission. I will expand on each of theserelationships below. L. ZAHRINGER 20
  11. 11. OFFICIAL DRAFT Case of Patagonia, Inc.Patagonia & CustomersPatagonia builds products for its “core users,” those who lead the “dirtbag” lifestyle. In developing itsproducts, Patagonia primarily focuses on three criteria: quality, environmental impact, and innovation.Patagonia claimed that these elements allowed it to charge prices roughly 20% higher than those ofother outdoor apparel and 50% higher than mass-market brands for comparable products in bothperformance wear and sportswear. Patagonia consumers had a median age of 38 years and an averagehousehold income of $160,000.To create quality products for its core users, the company seeks to create products that are simple,functional, and multifunctional. Simplicity is Patagonia’s principal design concept, inspired by theFrench aviator Antoine de Saint Exupéry’s statement, “Perfection is finally attained not when there isno longer anything to add, but when there is no longer anything to take away.” Chouinard explainedPatagonia’s standard for quality: “Our goal is to offer only viable, excellent products that are asmultifunctional as possible so a customer can consume less but consume better. A ski jacket shouldwork perfectly for all disciplines of skiing, but… you should be able to wear it on a sailboat or in awinter rainstorm in Paris.”Progressive Interaction with Markets, Competitors, and Industry InstitutionsPatagonia uses its knowledge and successful environmental practices to promote the diffusion ofsustainable products and practices, business wide overall, and specifically within its industry. Theseare directed towards markets, competitors and institutions.Patagonia launched the Product Lifecylcle, an extension to their Common Threads InitiativeRecycling Program, in 2010 in an effort to include consumers in Patagonia’s vision of environmentalresponsibility. An internal document articulated that reducing Patagonia’s environmental footprintrequired a pledge from both the company and its customers. The initiative thus consisted of a mutualcontract between the company and its customers to “reduce, repair, reuse, and recycle” the apparelthat they consumed. In September of 2011 Patagonia launched its Common Threads initiative,described in the official press release as a partnership with its customers to reduce consumption andits resultant environmental harm (Patagonia Inc., Pr Newswire, 2011).Patagonia’s Common Threads Initiative addresses what Chouinard sees as a significant part of todaysenvironmental problem – “the footprint of our stuff.” In order to be effective, the common threadsinitiative depends on a commitment from Patagonia and its customers. Regarding the later, customersare asked to not buy something if they dont need it. Patagonia promotes the approach of quality overquantity. “If they do need it, we ask that they buy what will last a long time – and to repair whatbreaks, reuse or resell whatever they dont wear any more. And, finally, recycle whatevers truly worn L. ZAHRINGER 24
  12. 12. OFFICIAL DRAFT Case of Patagonia, and help them achieve continuous, long-term environmental improvement. Bluesign systempartners agree at the outset to establish management systems for improving environmentalperformance in five key areas of the production process: resource productivity, consumer safety,water emissions, air emissions, and occupational health and safety. System partners regularly reporttheir progress and must meet improvement goals to maintain their status; Bluesign technologiesperform regular audits.SummaryThis section has provided evidence that social change is an organizational objective, and serves as thebackdrop for Patagonia’s business. The firm has three core elements: (1) an environmentallyembedded mission; (2) positive leadership; (3) slow sustainable growth. In sum these elements are thesource of Patagonia’s capacity to be an agent for creating a positive material impact on theenvironment and society. Patagonia’s agency is manifested in its mutually beneficial relationshipswith stakeholders, and then cyclically transferred through its progressive interaction with markets,competitors and institutions. Patagonia thus, is both market driven and mission oriented, and thismodel is sustainable through the inherent checks and balances of such a duality.4.2 Research Objective (2): Why Patagonia Became a B CorporationBefore becoming a B Corporation Patagonia went through the process to become a certified BenefitCorporation. Patagonia knew that B Lab was working towards developing legislation. Founder YvonChouinard has spent over fifty years growing Patagonia and working with the business from the dayhe founded it. Protecting the business he has built, in its focus on environmental causes is deeplyimportant. I asked Rick Ridgeway if becoming a Benefit Corporation helps Patagonia achieve itsenvironmental and business objectives. “In regards to the certification process we didnt go through those exercises so we could learn where we were or where we weren’t. Rather, the process of B corps certification for us had a different attraction. That is that we knew that California legislation was in the process of considering the adoption of b corp stats as an option for corporate election in the state, and that is what really attracted us. That assuming that legislation passed and that consequently we would have the option of officially becoming a b corp then we also had an opportunity to memorialize the values we had built up over the past 30 years, into what are called our corporate articles of incorporation that would allow us to formalize those values in a way that could theoretically survive any transition scenario in our company in the future. So as a private business owned by the family, the business will in all likely hood will pass to there children who do work here and are doing a great job of getting integrated into the company and it might happen another 16 or 17 years from now when they transition out and there children or someone else takes L. ZAHRINGER 27
  13. 13. OFFICIAL DRAFT Case of Patagonia, Inc. over or what might happen if there is an unforeseen tax event and there were others shareholders who came in too, who might know in what degree of ownership, how would you protect the values that we have built up over the near 40 years that we have been in business so that those values would be protected against any scenario that you might imagine over the next 100 years and the b corp legislation has allowed us to do just that.” (Ridgeway, 2012, interview zahringer)4.3 Directions for Future Research & ConclusionIn this report I have presented research on a new corporate structure for sustainable business, theBenefit Corporation, through a case study of Patagonia, Inc. The Benefit Corporation provides manyopportunities for future research. Research comparing the triple bottom line performance of aBenefit Corporation to a similar business as usual firm that has social responsibility andsustainable development initiatives could help to better understand if there exists ameasurable advantage for society to the Benefit Corporation proposition. Benefit Corporationsrepresent an example of positive and pro-active business that goes beyond Corporate SocialResponsibility. Studies on business behavior of this type are needed as past scholarship withinbusiness management has often failed to progress past innovative CSR.By conducting a qualitative study, this research has produced a rich analysis and account of thepractices, characteristic elements, and values of a Benefit Corporation as embodied in the business ofPatagonia. The Benefit Corporation movement is still in the infancy of its emergence. Whether thismovement will continue to grow in support and number of firms is unknown. What is known is thatthere exists, in the United States, the need for a more systematically just type of economic entity thancurrently exists. L. ZAHRINGER 28
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