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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
                          Master's Dissertation Paper
                          University College London
                          MSc Environment, Science and Society
Abstract

This research concerns the Benefit Corporation, a new corporate status in the United States
that institutionalizes stakeholder interests, taking Patagonia Inc. as the case of study. Drawing
on recent scholarship from the discipline of positive organizational behavior, this research
applies 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 profitability
with making a positive impact (as a whole) on the environment and society, and understand
the company’s motivations and decision to elect B Corporation status.
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                                          Case of Patagonia, Inc.

Chapter 2: Background
In this chapter I present the assumptions, theories, and background information that formed the
foundation of my research. The chapter is divided into three sections. In the first section I present the
definitions, assumptions, relevant past literature and theories underlying this research. In the second
section I shift the focus to the narrative and recent current events of the Benefit Corporation
movement. Section three provides background information on Patagonia Inc.


2.1 Definitions, Assumptions and Theory
Firms as markets
I define a firm as a “bundle of practices” (Benner et al., 2010, pg. 114). This conception of the firm is
taken from the discipline of Economic Geography and characterizes a firm as an organization of a
multiplicity of dynamic interactions and networks. (Benner et al, 2010) The research presented here
assumes this conception as that which constitutes a firm.


Human socio-ecological agency
Form, function, and the values attributable to any one form or functions are inexorably influenced by
the context in which they exist. The concept of socio-ecological agency comes from the discipline of
Environmental Sociology. Human agency refers to the ability and capacity for humans to make
choices and act, and therefore perform as agents. Buzinde and Manauel-Navarrete (2009) argue that
human agency exists not in a vacuum of society, the human-centric world, and that the socio-nature
divide which has supported this conceived absence of the natural environment in our human context is
an unhelpful perspective. As such they propose that there exists a form of human agency, termed
socio-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 of
social change and ecosystem change at the local level, but also the main agents affecting the dynamics
and evolution of the global environment...global environmental change is forcing us to redefine our
agency in terms of global stewardship, and a transition from modern agency to socio-ecological
agency” (Buzinde, Manuel-Navarrete, 2009, p. 307).


Business has a Responsibility for the Whole
This research is approached from an assumption that business has, in addition to creating financial
wealth, a responsibility for the whole. This additional responsibility is assumed on the basis of past
history, current capacity and the present context in which business operates. This is a radically
different perspective for the role of business from that previously embraced in the history of
capitalism in the United States, to maximize shareholder wealth. Corporate law governing for profit
entities has remained consistent for nearly a century in its position of the role of business to society.




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In the early 1900’s the Michigan Supreme Court issued the following statement in Dodge v. Ford: “A
business corporation is organized and carried on primarily for the profit of the stockholders. The
powers of the directors are to be employed for that end. The discretion of directors is to be exercised
in the choice of means to attain that end, and does not extend to a change in the end itself, to the
reduction of profits, or to the non-distribution of profits among stockholders in order to devote them
to 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: “Directors
cannot 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 the
unraveling of fraud and corruption of large financial institutions, evidences a track record of negative
anthropogenic environmental behavior and social injustice channeled through business activity and its
profit maximizing objectives. At the same time business has also become the most powerful
institution on the planet. (Harman, 1990) Harman (1990) argues that with this power comes
responsibility. This responsibility is embedded through not only the logic of ethics and morality but
also practicality and the efficient use of resources. The context within which business operates today
happens to necessitate the most efficient and effective means be used to solve social and
environmental problems.


Shireman (1994) clearly explains how business is the institution that has such a capacity. “More than
any other institutions today, corporations, have the combination of skills, resources, motivation, and
agility to rapidly implement changes on a global scale. Half of the world’s hundred largest economic
entities are now corporations, not nations. And with 500 transnational corporations controlling
roughly three quarters of world trade, business is the planet’s dominant engine of resource use, service
delivery, waste generation, cash flow, and probably education and training. Business is THE leverage
point 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



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created the “B Corp certification”, a third party certification of sustainable business practices, for
companies interested in distinguishing themselves in the cluttered market of green business. The
certification comprises a set of transparent, comprehensive and comparable standards designed to
enable the marketplace to identify and support companies that meet rigorous third-party standards for
social and environmental performance.


The certification was developed for purposes mutually beneficial to consumers, businesses, and B
Lab. It helped businesses distinguish themselves in the saturated market where consumer trust had
been diluted. Consumers on the hand had a trusted and reliable tool for distinguishing a good
company from just good marketing. The certification also enabled B Lab to move closer to its
ultimate goal by building a community of firms that constituted the type of businesses which
ultimately would create their envisioned new sector of the economy. Since 2007 more than 700
companies have become certified B Corps, building a critical mass and collective voice for
influencing policy and legislation in the United States.


Informing Policy
B Lab’s goal to create a new type of corporation is a win-win situation for both government and social
enterprise businesses. According to the Benefit Corporation White Papers, The Need and Rationale
for the Benefit Corporation, there is a growing demand by a new type of business for an infrastructure
that enables them and protects their right to create social and environmental benefit as integrated
within the operations of the business. “The sustainable business movement, impact investing and
social enterprise sectors are developing rapidly but are constrained by an outdated legal framework
that is not equipped to accommodate for-profit entities whose social benefit purpose is central to their
existence. The Benefit corporation, which has already been established by statute in seven states and
which is the subject of legislative initiatives in several others, is the most comprehensive yet flexible
legal entity devised to address the needs of entrepreneurs and investors and, ultimately, the general
public. As a result, it has also attracted broad support from entrepreneurs, investors, citizens and
policy 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 economy
where business purpose and pro-social activity are combined, and that this is good for business, and
good 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




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                                     Case of Patagonia, Inc.

Patagonia is a private company, owned by the founders Yvon and Melinda Chouinard. In 2011 the
company had sales of $414 Million. Patagonia is known for its commitment to authentic product
quality and environmental activism. To date the company has contributes over forty-three million
dollars in cash and in-kind donations. (Bloomberg Business Online, “Patagonia”, Company Profile,
2012).




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Chapter 3: Research Methods
The overall objectives of this research were to understand why a corporation would choose to become
a Benefit Corporation, and uncover how a Benefit Corporation creates social and environmental
benefit for society through an in-depth case study. This section presents the methodology and methods
that were used to achieve the objectives of the research beginning with the methodological approach
and research design, followed by an explanation of fieldwork, methods of data collection and data
analysis. I used a qualitative research approach and chose the case study method to be the most
appropriate qualitative research tradition for this study. The following discussion will present the
rationale for choosing a qualitative methodology and explain why the case study method best fit the
needs and objectives of this study.


3.1 Methodologies and Methodological Approach
Qualitative Methodology
I chose a qualitative methodology for this research as I concluded it was the best means to achieve my
ends and fit most appropriately to my research questions. I made this decision for the following three
reasons. First, in the early stage of developing my research design I identified that my overall
objectives required developing a deep understanding of a recent event. This meant that I would need
to do a significant amount of information extracting and interpreting. Therefore when designing my
research I needed to ensure that my design and methods supported both discovery and description. I
considered the strengths and general applications for qualitative and quantitative methods. Qualitative
research facilitates the development of an in-depth understanding, while quantitative research applies
hypotheses testing in order to establish facts, and designate and distinguish relationships between
variables. 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 on
sustainable 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 Hock
1976; Orlitzky et al. 2003; Snider et al. 2003), and many papers criticized work on sustainable
business and CSR as being too often limited to what businesses should do, or offering no more than
an inventory of sustainability related activities (Crittenden et al. 2011; Basu and Palazzo 2008; Bansal
2005). Campbell (2007) bemoaned that little theoretical attention has been given to understanding
why corporations act, or not, in environmentally, socially, and economically responsible ways and
Basu and Palazzo (2008) argued that researchers have so far failed to understand the underlying
mechanisms 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 would
position my research to make a meaningful contribution to current literature and research on related
subjects of sustainable business.



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Third, I reflected on the potential for using a quantitative methodology, and considered what type of
information I would need and if I could identify potential sources for this quantitative data. Benefit
Corporations are a recent phenomenon and at the beginning this research, a very few number of
companies, less than 40, had become legal Benefit Corporations (most of which reincorporated within
a few months prior to this research), and no significant scholarly research on Benefit Corporations
could be identified. Consequently, with such a small number of companies, which in and of
themselves varied greatly by size, location, and accessibility, and no past research to leverage, I
considered 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 Method
Having already decided to focus my research on the new Benefit Corporation and that I was going to
use 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 my
research on the basis of my research subject, context, research questions and objectives. As a research
method, 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 a
good choice when a how or why question is being asked about contemporary events over which the
investigator has little control. As a tool the case study method tries to illuminate a decision or set of
decisions, why they were taken and how they were implemented. (Yin, 2009) This was precisely what
my research needed to achieve. I used a single case study design, rather than a multiple case study. A
multiple case study can be advantageous when doing comparative research, for example. Whereas a
single case study design is a great mechanism for achieving in-depth analysis of a single case
allowing 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 access
to 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 conducting
interviews, in the time leading up to and following the passing of the California B Corporation
legislation. The company also was the first to reincorporate as a B Corporation in the state of
California. I concluded that these facts potentially suggested Patagonia’s enthusiasm and openness
about its decision; perhaps meaning the firm would be willing to share its experience. On the need for
generalizing 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 solar
energy, or niche market specialty products made from recycled goods. On the other hand, Patagonia’s
products were not particularly distinguishable in features or styles from competitors such as The
Northface, and therefore, would allow a better chance for generalizable conclusions.


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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 and
removal 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 a
huge 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 culture
and values embodied an environmental mission.


Like other businesses Patagonia strives to produce high quality goods for its target market and remain
profitable. As Chouinard explains “If we wish to lead corporate America by example, we have to be
profitable. No company will respect us, no matter how much money we give away or how much
publicity we receive for being one of the ‘100 Best Companies,’ if we are not profitable. It’s okay to
be eccentric, as long as you are rich; otherwise you’re just crazy” (Chouinard, 2005, p.161). What is
unlike many other businesses is that the motivation for this is driven by its deeply embedded mission
of 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 here
where can we make the biggest difference, and that requires us to think through the source not just the
symptoms of so many of the issues our societies are facing today and we have concluded that the
sources of many of our societies environmental ills are based and rooted in environmental
degradation. We have initiatives, methods and practices that allow us to use our resources towards
improvement in those areas and that is our focus” (Ridgeway, 2012, interview zahringer).


Slow Growth
Slow growth is at the very core of Patagonia’s success. Growing too fast almost cost Chouinard his
company 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 and
continue to achieve its environmental and social objectives. In the early 1970’s Patagonia launched its
clothing line hoping to make easy profit to support the less profitable equipment line. “By 1972 we
were selling polyurethane rain cagoules and bivouac sacks from Scotland, boiled-wool gloves and
mittens from Austria, and hand-knit reversible schizo hats from Boulder” (Chouinard, Patagonia
Website, 2012, “our history”). The clothing line was doing well and the company continued to grow
its operations and product line. Being a small private company with organic growth enabled Yvon and
his friends to develop meaningful practices that reflected personal values, interests, and tastes across
the 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 soaring
demand. The company grew quickly throughout the 1980s but came to an abrupt halt in 1991


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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 to
drastically cut costs and dump inventory. We laid off 20% of our work force–many of them friends
and friends of friends. And we nearly lost our independence as a company. This was a very important
lesson and we have kept growth – and borrowing – to a modest scale ever since” (Chouinard,
Patagonia website, 2012, “our history”).


Positive Leadership
Positive leadership is defined as taking a proactive, ‘can do’ approach to management, and not
necessarily overtly. In his book, Let My People Go Surfing, Chouinard shares a story that illustrates
the 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 relationships
Patagonia seeks to internalize its relationships with the environment and society and sees these
externalities as relationships rather than costs. This is done through the creation of mutually beneficial
relationships that facilitate Patagonia to create a positive social and environmental change among
suppliers, communities, employees, and customers. Patagonia’s mutually beneficial relationships are
both the cause and effect of the firm’s high performance. This win-win effect also plays out in
Patagonia’s commitment of 1% to the planet. Patagonia is committed to using business to solve the
environmental 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 these
relationships below.




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Patagonia & Customers
Patagonia builds products for its “core users,” those who lead the “dirtbag” lifestyle. In developing its
products, 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 of
other outdoor apparel and 50% higher than mass-market brands for comparable products in both
performance wear and sportswear. Patagonia consumers had a median age of 38 years and an average
household 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 the
French aviator Antoine de Saint Exupéry’s statement, “Perfection is finally attained not when there is
no longer anything to add, but when there is no longer anything to take away.” Chouinard explained
Patagonia’s standard for quality: “Our goal is to offer only viable, excellent products that are as
multifunctional as possible so a customer can consume less but consume better. A ski jacket should
work perfectly for all disciplines of skiing, but… you should be able to wear it on a sailboat or in a
winter rainstorm in Paris.”


Progressive Interaction with Markets, Competitors, and Industry Institutions
Patagonia uses its knowledge and successful environmental practices to promote the diffusion of
sustainable products and practices, business wide overall, and specifically within its industry. These
are directed towards markets, competitors and institutions.


Patagonia launched the Product Lifecylcle, an extension to their Common Threads Initiative
Recycling Program, in 2010 in an effort to include consumers in Patagonia’s vision of environmental
responsibility. An internal document articulated that reducing Patagonia’s environmental footprint
required a pledge from both the company and its customers. The initiative thus consisted of a mutual
contract between the company and its customers to “reduce, repair, reuse, and recycle” the apparel
that 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 and
its resultant environmental harm (Patagonia Inc., Pr Newswire, 2011).


Patagonia’s Common Threads Initiative addresses what Chouinard sees as a significant part of today's
environmental problem – “the footprint of our stuff.” In order to be effective, the common threads
initiative depends on a commitment from Patagonia and its customers. Regarding the later, customers
are asked to not buy something if they don't need it. Patagonia promotes the approach of quality over
quantity. “If they do need it, we ask that they buy what will last a long time – and to repair what
breaks, reuse or resell whatever they don't wear any more. And, finally, recycle whatever's truly worn


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partners and help them achieve continuous, long-term environmental improvement. Bluesign system
partners agree at the outset to establish management systems for improving environmental
performance in five key areas of the production process: resource productivity, consumer safety,
water emissions, air emissions, and occupational health and safety. System partners regularly report
their progress and must meet improvement goals to maintain their status; Bluesign technologies
perform regular audits.


Summary
This section has provided evidence that social change is an organizational objective, and serves as the
backdrop for Patagonia’s business. The firm has three core elements: (1) an environmentally
embedded mission; (2) positive leadership; (3) slow sustainable growth. In sum these elements are the
source of Patagonia’s capacity to be an agent for creating a positive material impact on the
environment and society. Patagonia’s agency is manifested in its mutually beneficial relationships
with stakeholders, and then cyclically transferred through its progressive interaction with markets,
competitors and institutions. Patagonia thus, is both market driven and mission oriented, and this
model is sustainable through the inherent checks and balances of such a duality.


4.2 Research Objective (2): Why Patagonia Became a B Corporation
Before becoming a B Corporation Patagonia went through the process to become a certified Benefit
Corporation. Patagonia knew that B Lab was working towards developing legislation. Founder Yvon
Chouinard has spent over fifty years growing Patagonia and working with the business from the day
he founded it. Protecting the business he has built, in its focus on environmental causes is deeply
important. I asked Rick Ridgeway if becoming a Benefit Corporation helps Patagonia achieve its
environmental and business objectives.


        “In regards to the certification process we didn't 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


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        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 & Conclusion
In this report I have presented research on a new corporate structure for sustainable business, the
Benefit Corporation, through a case study of Patagonia, Inc. The Benefit Corporation provides many
opportunities for future research. Research comparing the triple bottom line performance of a
Benefit Corporation to a similar business as usual firm that has social responsibility and
sustainable development initiatives could help to better understand if there exists a
measurable advantage for society to the Benefit Corporation proposition. Benefit Corporations
represent an example of positive and pro-active business that goes beyond Corporate Social
Responsibility. Studies on business behavior of this type are needed as past scholarship within
business management has often failed to progress past innovative CSR.


By conducting a qualitative study, this research has produced a rich analysis and account of the
practices, characteristic elements, and values of a Benefit Corporation as embodied in the business of
Patagonia. The Benefit Corporation movement is still in the infancy of its emergence. Whether this
movement will continue to grow in support and number of firms is unknown. What is known is that
there exists, in the United States, the need for a more systematically just type of economic entity than
currently exists.




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                                      L. ZAHRINGER                                       29
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                                       L. ZAHRINGER                                        30
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                                                                                           31
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                                                                                      32

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Patagonia Inc: A Benefit Corp Case Study

  • 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 Master's Dissertation Paper University College London MSc Environment, Science and Society
  • 2. Abstract This research concerns the Benefit Corporation, a new corporate status in the United States that institutionalizes stakeholder interests, taking Patagonia Inc. as the case of study. Drawing on recent scholarship from the discipline of positive organizational behavior, this research applies 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 profitability with making a positive impact (as a whole) on the environment and society, and understand the company’s motivations and decision to elect B Corporation status.
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  • 6. OFFICIAL DRAFT Case of Patagonia, Inc. Chapter 2: Background In this chapter I present the assumptions, theories, and background information that formed the foundation of my research. The chapter is divided into three sections. In the first section I present the definitions, assumptions, relevant past literature and theories underlying this research. In the second section I shift the focus to the narrative and recent current events of the Benefit Corporation movement. Section three provides background information on Patagonia Inc. 2.1 Definitions, Assumptions and Theory Firms as markets I define a firm as a “bundle of practices” (Benner et al., 2010, pg. 114). This conception of the firm is taken from the discipline of Economic Geography and characterizes a firm as an organization of a multiplicity of dynamic interactions and networks. (Benner et al, 2010) The research presented here assumes this conception as that which constitutes a firm. Human socio-ecological agency Form, function, and the values attributable to any one form or functions are inexorably influenced by the context in which they exist. The concept of socio-ecological agency comes from the discipline of Environmental Sociology. Human agency refers to the ability and capacity for humans to make choices and act, and therefore perform as agents. Buzinde and Manauel-Navarrete (2009) argue that human agency exists not in a vacuum of society, the human-centric world, and that the socio-nature divide which has supported this conceived absence of the natural environment in our human context is an unhelpful perspective. As such they propose that there exists a form of human agency, termed socio-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 of social change and ecosystem change at the local level, but also the main agents affecting the dynamics and evolution of the global environment...global environmental change is forcing us to redefine our agency in terms of global stewardship, and a transition from modern agency to socio-ecological agency” (Buzinde, Manuel-Navarrete, 2009, p. 307). Business has a Responsibility for the Whole This research is approached from an assumption that business has, in addition to creating financial wealth, a responsibility for the whole. This additional responsibility is assumed on the basis of past history, current capacity and the present context in which business operates. This is a radically different perspective for the role of business from that previously embraced in the history of capitalism in the United States, to maximize shareholder wealth. Corporate law governing for profit entities has remained consistent for nearly a century in its position of the role of business to society. L. ZAHRINGER 3
  • 7. OFFICIAL DRAFT Case of Patagonia, Inc. In the early 1900’s the Michigan Supreme Court issued the following statement in Dodge v. Ford: “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to 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: “Directors cannot 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 the unraveling of fraud and corruption of large financial institutions, evidences a track record of negative anthropogenic environmental behavior and social injustice channeled through business activity and its profit maximizing objectives. At the same time business has also become the most powerful institution on the planet. (Harman, 1990) Harman (1990) argues that with this power comes responsibility. This responsibility is embedded through not only the logic of ethics and morality but also practicality and the efficient use of resources. The context within which business operates today happens to necessitate the most efficient and effective means be used to solve social and environmental problems. Shireman (1994) clearly explains how business is the institution that has such a capacity. “More than any other institutions today, corporations, have the combination of skills, resources, motivation, and agility to rapidly implement changes on a global scale. Half of the world’s hundred largest economic entities are now corporations, not nations. And with 500 transnational corporations controlling roughly three quarters of world trade, business is the planet’s dominant engine of resource use, service delivery, waste generation, cash flow, and probably education and training. Business is THE leverage point 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
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  • 9. OFFICIAL DRAFT Case of Patagonia, Inc. created the “B Corp certification”, a third party certification of sustainable business practices, for companies interested in distinguishing themselves in the cluttered market of green business. The certification comprises a set of transparent, comprehensive and comparable standards designed to enable the marketplace to identify and support companies that meet rigorous third-party standards for social and environmental performance. The certification was developed for purposes mutually beneficial to consumers, businesses, and B Lab. It helped businesses distinguish themselves in the saturated market where consumer trust had been diluted. Consumers on the hand had a trusted and reliable tool for distinguishing a good company from just good marketing. The certification also enabled B Lab to move closer to its ultimate goal by building a community of firms that constituted the type of businesses which ultimately would create their envisioned new sector of the economy. Since 2007 more than 700 companies have become certified B Corps, building a critical mass and collective voice for influencing policy and legislation in the United States. Informing Policy B Lab’s goal to create a new type of corporation is a win-win situation for both government and social enterprise businesses. According to the Benefit Corporation White Papers, The Need and Rationale for the Benefit Corporation, there is a growing demand by a new type of business for an infrastructure that enables them and protects their right to create social and environmental benefit as integrated within the operations of the business. “The sustainable business movement, impact investing and social enterprise sectors are developing rapidly but are constrained by an outdated legal framework that is not equipped to accommodate for-profit entities whose social benefit purpose is central to their existence. The Benefit corporation, which has already been established by statute in seven states and which is the subject of legislative initiatives in several others, is the most comprehensive yet flexible legal entity devised to address the needs of entrepreneurs and investors and, ultimately, the general public. As a result, it has also attracted broad support from entrepreneurs, investors, citizens and policy 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 economy where business purpose and pro-social activity are combined, and that this is good for business, and good 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
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  • 12. OFFICIAL DRAFT Case of Patagonia, Inc. Patagonia is a private company, owned by the founders Yvon and Melinda Chouinard. In 2011 the company had sales of $414 Million. Patagonia is known for its commitment to authentic product quality and environmental activism. To date the company has contributes over forty-three million dollars in cash and in-kind donations. (Bloomberg Business Online, “Patagonia”, Company Profile, 2012). L. ZAHRINGER 9
  • 13. OFFICIAL DRAFT Case of Patagonia, Inc. Chapter 3: Research Methods The overall objectives of this research were to understand why a corporation would choose to become a Benefit Corporation, and uncover how a Benefit Corporation creates social and environmental benefit for society through an in-depth case study. This section presents the methodology and methods that were used to achieve the objectives of the research beginning with the methodological approach and research design, followed by an explanation of fieldwork, methods of data collection and data analysis. I used a qualitative research approach and chose the case study method to be the most appropriate qualitative research tradition for this study. The following discussion will present the rationale for choosing a qualitative methodology and explain why the case study method best fit the needs and objectives of this study. 3.1 Methodologies and Methodological Approach Qualitative Methodology I chose a qualitative methodology for this research as I concluded it was the best means to achieve my ends and fit most appropriately to my research questions. I made this decision for the following three reasons. First, in the early stage of developing my research design I identified that my overall objectives required developing a deep understanding of a recent event. This meant that I would need to do a significant amount of information extracting and interpreting. Therefore when designing my research I needed to ensure that my design and methods supported both discovery and description. I considered the strengths and general applications for qualitative and quantitative methods. Qualitative research facilitates the development of an in-depth understanding, while quantitative research applies hypotheses testing in order to establish facts, and designate and distinguish relationships between variables. 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 on sustainable 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 Hock 1976; Orlitzky et al. 2003; Snider et al. 2003), and many papers criticized work on sustainable business and CSR as being too often limited to what businesses should do, or offering no more than an inventory of sustainability related activities (Crittenden et al. 2011; Basu and Palazzo 2008; Bansal 2005). Campbell (2007) bemoaned that little theoretical attention has been given to understanding why corporations act, or not, in environmentally, socially, and economically responsible ways and Basu and Palazzo (2008) argued that researchers have so far failed to understand the underlying mechanisms 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 would position my research to make a meaningful contribution to current literature and research on related subjects of sustainable business. L. ZAHRINGER 10
  • 14. OFFICIAL DRAFT Case of Patagonia, Inc. Third, I reflected on the potential for using a quantitative methodology, and considered what type of information I would need and if I could identify potential sources for this quantitative data. Benefit Corporations are a recent phenomenon and at the beginning this research, a very few number of companies, less than 40, had become legal Benefit Corporations (most of which reincorporated within a few months prior to this research), and no significant scholarly research on Benefit Corporations could be identified. Consequently, with such a small number of companies, which in and of themselves varied greatly by size, location, and accessibility, and no past research to leverage, I considered 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 Method Having already decided to focus my research on the new Benefit Corporation and that I was going to use 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 my research on the basis of my research subject, context, research questions and objectives. As a research method, 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 a good choice when a how or why question is being asked about contemporary events over which the investigator has little control. As a tool the case study method tries to illuminate a decision or set of decisions, why they were taken and how they were implemented. (Yin, 2009) This was precisely what my research needed to achieve. I used a single case study design, rather than a multiple case study. A multiple case study can be advantageous when doing comparative research, for example. Whereas a single case study design is a great mechanism for achieving in-depth analysis of a single case allowing 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 access to 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 conducting interviews, in the time leading up to and following the passing of the California B Corporation legislation. The company also was the first to reincorporate as a B Corporation in the state of California. I concluded that these facts potentially suggested Patagonia’s enthusiasm and openness about its decision; perhaps meaning the firm would be willing to share its experience. On the need for generalizing 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 solar energy, or niche market specialty products made from recycled goods. On the other hand, Patagonia’s products were not particularly distinguishable in features or styles from competitors such as The Northface, and therefore, would allow a better chance for generalizable conclusions. L. ZAHRINGER 11
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  • 22. 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 and removal 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 a huge 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 culture and values embodied an environmental mission. Like other businesses Patagonia strives to produce high quality goods for its target market and remain profitable. As Chouinard explains “If we wish to lead corporate America by example, we have to be profitable. No company will respect us, no matter how much money we give away or how much publicity we receive for being one of the ‘100 Best Companies,’ if we are not profitable. It’s okay to be eccentric, as long as you are rich; otherwise you’re just crazy” (Chouinard, 2005, p.161). What is unlike many other businesses is that the motivation for this is driven by its deeply embedded mission of 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 here where can we make the biggest difference, and that requires us to think through the source not just the symptoms of so many of the issues our societies are facing today and we have concluded that the sources of many of our societies environmental ills are based and rooted in environmental degradation. We have initiatives, methods and practices that allow us to use our resources towards improvement in those areas and that is our focus” (Ridgeway, 2012, interview zahringer). Slow Growth Slow growth is at the very core of Patagonia’s success. Growing too fast almost cost Chouinard his company 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 and continue to achieve its environmental and social objectives. In the early 1970’s Patagonia launched its clothing line hoping to make easy profit to support the less profitable equipment line. “By 1972 we were selling polyurethane rain cagoules and bivouac sacks from Scotland, boiled-wool gloves and mittens from Austria, and hand-knit reversible schizo hats from Boulder” (Chouinard, Patagonia Website, 2012, “our history”). The clothing line was doing well and the company continued to grow its operations and product line. Being a small private company with organic growth enabled Yvon and his friends to develop meaningful practices that reflected personal values, interests, and tastes across the 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 soaring demand. The company grew quickly throughout the 1980s but came to an abrupt halt in 1991 L. ZAHRINGER 19
  • 23. 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 to drastically cut costs and dump inventory. We laid off 20% of our work force–many of them friends and friends of friends. And we nearly lost our independence as a company. This was a very important lesson and we have kept growth – and borrowing – to a modest scale ever since” (Chouinard, Patagonia website, 2012, “our history”). Positive Leadership Positive leadership is defined as taking a proactive, ‘can do’ approach to management, and not necessarily overtly. In his book, Let My People Go Surfing, Chouinard shares a story that illustrates the 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 relationships Patagonia seeks to internalize its relationships with the environment and society and sees these externalities as relationships rather than costs. This is done through the creation of mutually beneficial relationships that facilitate Patagonia to create a positive social and environmental change among suppliers, communities, employees, and customers. Patagonia’s mutually beneficial relationships are both the cause and effect of the firm’s high performance. This win-win effect also plays out in Patagonia’s commitment of 1% to the planet. Patagonia is committed to using business to solve the environmental 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 these relationships below. L. ZAHRINGER 20
  • 24.
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  • 27. OFFICIAL DRAFT Case of Patagonia, Inc. Patagonia & Customers Patagonia builds products for its “core users,” those who lead the “dirtbag” lifestyle. In developing its products, 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 of other outdoor apparel and 50% higher than mass-market brands for comparable products in both performance wear and sportswear. Patagonia consumers had a median age of 38 years and an average household 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 the French aviator Antoine de Saint Exupéry’s statement, “Perfection is finally attained not when there is no longer anything to add, but when there is no longer anything to take away.” Chouinard explained Patagonia’s standard for quality: “Our goal is to offer only viable, excellent products that are as multifunctional as possible so a customer can consume less but consume better. A ski jacket should work perfectly for all disciplines of skiing, but… you should be able to wear it on a sailboat or in a winter rainstorm in Paris.” Progressive Interaction with Markets, Competitors, and Industry Institutions Patagonia uses its knowledge and successful environmental practices to promote the diffusion of sustainable products and practices, business wide overall, and specifically within its industry. These are directed towards markets, competitors and institutions. Patagonia launched the Product Lifecylcle, an extension to their Common Threads Initiative Recycling Program, in 2010 in an effort to include consumers in Patagonia’s vision of environmental responsibility. An internal document articulated that reducing Patagonia’s environmental footprint required a pledge from both the company and its customers. The initiative thus consisted of a mutual contract between the company and its customers to “reduce, repair, reuse, and recycle” the apparel that 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 and its resultant environmental harm (Patagonia Inc., Pr Newswire, 2011). Patagonia’s Common Threads Initiative addresses what Chouinard sees as a significant part of today's environmental problem – “the footprint of our stuff.” In order to be effective, the common threads initiative depends on a commitment from Patagonia and its customers. Regarding the later, customers are asked to not buy something if they don't need it. Patagonia promotes the approach of quality over quantity. “If they do need it, we ask that they buy what will last a long time – and to repair what breaks, reuse or resell whatever they don't wear any more. And, finally, recycle whatever's truly worn L. ZAHRINGER 24
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  • 30. OFFICIAL DRAFT Case of Patagonia, Inc. partners and help them achieve continuous, long-term environmental improvement. Bluesign system partners agree at the outset to establish management systems for improving environmental performance in five key areas of the production process: resource productivity, consumer safety, water emissions, air emissions, and occupational health and safety. System partners regularly report their progress and must meet improvement goals to maintain their status; Bluesign technologies perform regular audits. Summary This section has provided evidence that social change is an organizational objective, and serves as the backdrop for Patagonia’s business. The firm has three core elements: (1) an environmentally embedded mission; (2) positive leadership; (3) slow sustainable growth. In sum these elements are the source of Patagonia’s capacity to be an agent for creating a positive material impact on the environment and society. Patagonia’s agency is manifested in its mutually beneficial relationships with stakeholders, and then cyclically transferred through its progressive interaction with markets, competitors and institutions. Patagonia thus, is both market driven and mission oriented, and this model is sustainable through the inherent checks and balances of such a duality. 4.2 Research Objective (2): Why Patagonia Became a B Corporation Before becoming a B Corporation Patagonia went through the process to become a certified Benefit Corporation. Patagonia knew that B Lab was working towards developing legislation. Founder Yvon Chouinard has spent over fifty years growing Patagonia and working with the business from the day he founded it. Protecting the business he has built, in its focus on environmental causes is deeply important. I asked Rick Ridgeway if becoming a Benefit Corporation helps Patagonia achieve its environmental and business objectives. “In regards to the certification process we didn't 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
  • 31. 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 & Conclusion In this report I have presented research on a new corporate structure for sustainable business, the Benefit Corporation, through a case study of Patagonia, Inc. The Benefit Corporation provides many opportunities for future research. Research comparing the triple bottom line performance of a Benefit Corporation to a similar business as usual firm that has social responsibility and sustainable development initiatives could help to better understand if there exists a measurable advantage for society to the Benefit Corporation proposition. Benefit Corporations represent an example of positive and pro-active business that goes beyond Corporate Social Responsibility. Studies on business behavior of this type are needed as past scholarship within business management has often failed to progress past innovative CSR. By conducting a qualitative study, this research has produced a rich analysis and account of the practices, characteristic elements, and values of a Benefit Corporation as embodied in the business of Patagonia. The Benefit Corporation movement is still in the infancy of its emergence. Whether this movement will continue to grow in support and number of firms is unknown. What is known is that there exists, in the United States, the need for a more systematically just type of economic entity than currently exists. L. ZAHRINGER 28
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