How Purpose Trusts Can Support Corporate Sustainability
One of the stipulations for Organically Grown Company’s perpetual purpose trust involves supporting local organic farmers who are often squeezed out of a heavily consolidated agricultural supply chain. (Photo: Courtesy of Organically Grown Company)
For many corporations it’s all about the bottom line, and that can come at the expense of the environment, employees and consumers alike. But there’s another way to structure a for-profit company for a higher purpose. Sarah Joannides, the managing director of Alternative Ownership Advisors, joins Host Jenni Doering to talk about how perpetual purpose trusts can help companies uphold core values like sustainability.
BASCOMB: From PRX and the Jennifer and Ted Stanley Studios at the University of Massachusetts Boston, this is Living on Earth. I’m Bobby Bascomb.
And I’m Jenni Doering.
For many corporations it’s all about the bottom line, and that can come at the expense of the environment, employees and consumers alike. But there is another way to structure a for-profit company for a higher purpose. In 2018, Organically Grown Company, or OGC, a wholesale distributor of organic produce, adopted a unique structure that enshrines its goal to transform and sustain a healthy and fair food system. It uses a perpetual purpose trust, a type of corporate entity that exists to ensure the company will stay true to its mission in perpetuity. Sarah Joannides is the managing director of the consulting firm Alternative Ownership Advisors, an offshoot of Organically Grown Company. Sarah, welcome to Living on Earth.
JOANNIDES: Thanks so much for having me.
DOERING: So first, just what is a perpetual purpose trust? And why is it a useful framework for businesses that want to help care for the environment?
JOANNIDES: So a purpose trust, you can think of it like a benevolent owner, they are simply or it is simply an entity that can hold a company in perpetuity for as long as the company is viable. So typically, you have an owner, or owners that have the control of the company, and they have the right to take profits, and they can sell the company whenever they want to. So when you instead, think about trust ownership, what you're doing is you're putting the common stock of the company, and you're putting it into a mechanism that holds it. It's there to act as a governor of the company to ensure that the company remains focused on its purpose. So generally, governors of a company have a profit motive, because the decisions they make impact how much they will earn, at the end. With a trust, the stewards of the trust can make decisions based on what's right for the health of the business, and the health of the stakeholder community. Again, the difference here is the beneficiary of a purpose trust is the purpose of the organization.
DOERING: And what are some examples of this purpose that the trust would enable the company to pursue?
JOANNIDES: Right. So we see some people or some companies that establish a trust for the benefit of employees, other people focus on elements of their mission that are very important to them. So an example we use a lot of the time, which is actually our parent company, Organically Grown Company. And it's a company that's been focused on supporting organic agriculture and sustainable food systems for over 40 years. And the trust is there to enable the company in supporting sustainable agriculture and aligned businesses that support organic agriculture and sustainable food systems.
DOERING: And these are for profit companies. So when they do make a profit, where does that profit go exactly?
JOANNIDES: Good question. So generally, what we see is that the owners set up a framework for how they're going to distribute profits at the end of the year. So certainly, you need to have money set aside for capital expenditures to meet all of your obligations. But what's leftover, in this case, you design a framework that says this is how we're going to distribute profits, based on who we determine or the stakeholders of this company. With OGC they have what they call a cash flow waterfall. And so each says that after all of those obligations have been met, whatever's leftover is divided out in a manner that is fairly equal across the rest of the stakeholders. Employees get additional profit sharing, farmers get additional programs and grants that they can have access to, as do the customers and the community allies. So there's a way that each of them can participate in the economic benefit in a way that is equitable across all stakeholders.
DOERING: What is the problem with conventional business structures? Why do we need alternative models like the perpetual purpose trust?
JOANNIDES: Well, I think, you know, many folks would agree that there's been a lot of unintended consequences with capitalism, with money being highly concentrated in the hands of few verses, more broadly shared prosperity. And part of that has to do with the ownership dynamic, where owners have the rights to the control of the company and all of the profits of the company. And while many, many companies act very responsibly from a corporate social responsibility standpoint, it's certainly not required of them. And so over time, as you have smaller companies that are running in a very mission driven way, being bought and consolidated into larger companies that are of a traditional shareholder primacy focus, you tend to have that control of the focus being on driving profits, versus on really thinking about the purpose. Especially in the situation where business owners, they are transitioning their business, they're getting ready to retire or they're ready to move on to something else. But they feel that there's a reason why the business should continue to exist because of the good it does in the world, through commerce but in the mission that it has.
DOERING: So walk me through the journey of your parent company, organically grown company, as it adopted this new trust structure in 2018 I think. Why did it seem like a good fit?
JOANNIDES: Yeah, well, they were certainly at an interesting crossroads. They were a company that had iterated their ownership structure many times, actually, they started as a nonprofit. Just a bunch of guys kind of in a garage.
DOERING: The Wikipedia page says a bunch of hippies came together.
JOANNIDES: Well, I was gonna say hippies and then I thought, well, maybe that sounds judgmental, but that's exactly what it is, right? It's a bunch of hippies, in Eugene, Oregon thinking about organic agriculture. And then they realized well, this is all fine and good but let's actually create a cooperative and let's help each other create a business model that is sustainable for selling organic produce. And they did that for a time and then they realized, well, actually, in the Northwest, there's only so many products we can grow in our region, and we want to actually become a distributor. And then a few years down the road, they said, we have this ownership divided up amongst all these farmers that started the organization but what about all these other employees that weren't original farmers that are bringing value? So they said, oh, well, let's start an employee stock ownership plan. And they were getting to a juncture in time where the employee stock ownership plan was actually creating obligations that they weren't sure that they could meet. Essentially, companies have to buy back the stock of the employees that leave and organic agriculture related industries, the valuations have gone kind of sky high in a lot of cases where there's a lot of almost speculation on the part of buyers saying I could go in and do something with this company, and I could make it really huge. So the obligations are really hard to predict. You're constantly buying back your stock. And so they sat down, and they wrote kind of a list of what do we really want. We want to be able to reward our employees in real time, we want to provide some liquidity for these early farmers that came on board. We want a ownership structure that ensures that the business won't be sold to another company that was really important to them. And unfortunately, with an employee stock ownership plan, the trustees of the ESOP have to entertain offers to sell the company if it's financially beneficial to the beneficiaries of the ESOP. And lo and behold, they came across trusts as an option. And they haven't been used very much for this purpose in the US. But there's a lot of companies in Europe that had been owned in a trust form of some kind or other, that had been very long lived, very multigenerational types of companies. So it was just this perfect storm of fit. So much of our mission is about helping the resiliency of our supply chain and of regional food systems and farming. And if we were to help them with different ownership solutions, isn't this work we should be doing? And so they decided to do that. And that's why, you know, I'm doing the work that I am today sort of spreading the word and helping others come to this particular solution.
DOERING: So most big emitters of greenhouse gases are larger, publicly owned corporations. And I'm wondering how much pressure you can put on these types of corporations with the perpetual purpose trust model.
JOANNIDES: Right, the types of companies that consider trust ownership are not publicly held companies and for the most part have not been really large companies more smaller to mid market companies. But I think what's worth saying here is that I think oftentimes, the smaller companies that are perhaps more mission driven and have been potentially acting in a way that's, you know, maybe being more responsible when it comes to emissions and other elements, giving them a way to remain viable as an independent company versus only providing them with options for being swallowed up by a larger company. That's where trust I think can provide a alternative that maybe doesn't address the large emitters. But hopefully, means that there's more smaller companies that can be resilient and sustainable over time. So again, not a solution to large emitters, but perhaps a helpful alternative that maybe reduces the amount of consolidation in some industries.
DOERING: Sarah Joannides is the managing director of Alternative Ownership Advisors, a subsidiary of Organically Grown Company. Thank you so much Sarah!
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