For 50 years there has been an impassioned debate about the appropriate aims and responsibilities of companies. Some side with Milton Friedman’s influential viewpoint, asserting that the only responsibility of business is to generate profits for shareholders. Others believe companies have broader responsibilities to society and the environment. Lately, even state legislatures have weighed in, proposing to ban financial managers who take ESG criteria into account. But while the battle of words continues, investors, customers, employees, and the public have moved forward. The question now is not whether but how far the pendulum has shifted towards responsibility and purpose. Surveys show that most investors believe ESG goals should trump short-term profit, and more than ever, employees and consumers are choosing companies based on what they stand for.
Great companies are loved and respected for their values and commitments to their communities in addition to what they make, not for the creation of shareholder wealth. This year Patagonia was named in the top group of most reputable companies based on criteria such as product quality, trust, citizenship, and ethics. So was Chick-fil-A. You couldn’t find two companies with more divergent values, but both have a clear purpose that extends beyond generating profits. They stand for something that people understand. Our most loved companies are already purpose-led organizations.
As a tech entrepreneur, public company CEO, and investor, I have benefited from shareholder capitalism. It’s a system that has brought us reductions in absolute poverty, longer lives through medical innovation, and many other improvements, as well as great shareholder returns. But let’s be honest: it made its gains at an enormous cost, including increasing inequality and widescale uncompensated environmental damage. We have subsidized buoyant shareholder returns by fraying the fabric of our societies and using up the planet we live on. We all know this is happening—the world is literally on fire.
Even Big Business knows the narrow extractive model of shareholder capitalism does not serve us. Leading institutions like The Business Roundtable and the World Economic Forum have worked to re-brand shareholder capitalism as stakeholder capitalism, adding responsibilities to workers, the environment, and society. Their investors demand this shift. But while this new moniker sounds good, to date actions haven’t caught up to words. The flowery language of annual reports is simply incompatible with standard forms of incorporation that require companies to only maximize shareholder returns.
Recently, a more concrete movement around company responsibility has gained momentum, the Benefit Corporation, which is a form of incorporation that puts people, environmental, and governance aims alongside profit inside company legal charters and requires specific goals and improvement over time. Similar efforts by accounting bodies and think tanks seek to develop general accounting standards for measuring companies’ social and environmental impacts that could be required for future company reporting. These two innovations are much more substantial progress toward making companies responsible players in building sustainable, prosperous societies.
At Patagonia, we signed up as a Benefit Company early on–and it has helped us clarify our responsibilities. For us, this means constantly measuring and managing our environmental footprint, seeking to reduce our use of water, carbon, and dangerous chemicals in our clothing. We invest in regenerative organic agriculture and in the circular economy by using recycled fabrics and repairing and re-selling used clothing. We price our products to reflect their real costs. We unapologetically support climate and environmental activism. And we transparently report our progress to our communities. We have used purpose capitalism to create a successful company that is committed to minimizing environmental impact and being a positive force in society.
A few years ago, we changed our mission to something both simple and hard: We’re in business to save our home planet. This clear definition of purpose is beyond any stretch goal. It has forced us to go much deeper into what it will take to have zero negative environmental impact while still making great products for our outdoor athlete customers.
Now in our 50th year, we’re going further still. Our founder Yvon Chouinard and his family have given all their Patagonia equity to a charitable entity to fund environmental conservation. We are directing all the value created by the company to specific conservation projects and advocacy. Instead of exploiting natural resources to make shareholder returns, we are turning shareholder capitalism on its head by making the Earth our only shareholder.
As a closely held company, this huge change was easier for us than others. But the point is for companies to make transparent purpose commitments that make sense to their business, and to be held to account by their communities.
Companies have responsibilities to their workers, customers, the environment, and yes, their investors. Shareholder capitalism advocates think goals other than profit will confuse investors. Nonsense. Investors already look to many company attributes when allocating capital. Over time, the market will continue to work and responsible purpose-led companies will attract more investment, better employees, and deeper customer loyalty. This is not “woke” capitalism. It’s the future of business if we want to build a better world for our children and all other creatures.
Charles Conn is the chair of Patagonia.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not reflect the opinions and beliefs of Fortune.
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