Purpose of Wealth

“As of now, Earth is our only shareholder.” Sportswear brand Patagonia, Inc.’s founder diverts the company’s profits towards charitable causes, signalling a growing trend for some of the world’s wealthiest to give back, or give away. Alice Killingbeck, Partner, leading Family Office and Private Client Legal at KPMG Law in the UK, examines how the purpose of wealth is undergoing a transformation.

In an extraordinary move on an otherwise unremarkable day on September 14, 2022, Yvon Chouinard, the 83-year-old founder of sportwear brand Patagonia, gave away his entire £3bn company and its profits to help fight the environmental crisis.

This is what disruption looks like for the new guard of high-net-worth individuals: the lobbing of a (legally well-structured) hand grenade at wealth by reimagining its purpose and leading by example a values-led change. Patagonia’s refit perfectly captures a zeitgeist, signalling a seachange that may evolve into a rupture of assumptions of wealth and succession as we know them.

Chouinard, his wife Matilda, and their two adult children rerouted the usual aims and responsibilities that a business owes to its shareholders, by expanding the beneficiaries of Patagonia’s success to include, well, everyone. In structuring the deal, Chouinard and his team said they dismissed the notion of simply selling Patagonia and then donating the money because “we couldn’t be sure a new owner would maintain our values or keep our team of people around the world employed.” Going public was also off the table, as “even public companies with good intentions are under too much pressure to create short-term gain at the expense of long-term vitality and responsibility.” Capitalism is no longer the default, it seems.

‘Responsibility’ in a business context used to mean ensuring and maximising returns for investors and shareholders, while - in the context of private enterprise and family-owned companies - it meant building the profits of a family’s business and increasing overall wealth for the next generation. For Chouinard and his family, their ‘responsibility’ is a different beast, a dramatic u-turn from the expected further enrichment of themselves, into giving back for the collective good of all. 

The holistic understanding of what it means to be good, do good, be seen to be doing good, to inspire others to do the same, and ultimately leave a legacy of something positive that benefits the environment and society, is an emerging and arguably contagious mindset. Corporate social responsibility, B Corps, and the now embedded ESG agenda are informing, or are informed by, our newish social and environmental conscience. Words such as ‘values’, ‘purpose’, ‘sustainability’ and ‘culture’ skip across every thought leadership piece. Capitalism looks a little outdated, a little grabby right now.

We are in a post-Pandora and Panama Papers period, woken to experiences beyond our own, living through a cost-of-living crisis while our governments mop up the chaos (and the bill) wrought after Covid. Ukraine remains under siege while the world burns and floods. What, then, of wealth? Where do the wealthy, those high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals, fit in this brave new world that now scrutinises and judges those who ‘have’ as never before?

For many seeking a purpose and a positive impact, the preservation of their wealth just may not fit the brief. An opportunity to help and to contribute to a fairer and safer world may instead trump the importance of ensuring that one’s own children and grandchildren will inherit family wealth.

Alongside these shifting values, there’s the new volume of wealth to consider. Dubbed ‘The Great Wealth Transfer’, over the next 25 years it is estimated that nearly $70 trillion will transfer to the next generation (Next Gen) of wealthy families. By comparison, the UK GDP in 2021 was a mere £3.3 trillion. This massive rise in wealth has been attributed to the generational handover from boomers to millennials, the rise of billionaires, and the phenomenon of tech and social entrepreneurs who have made vast amounts of money, quickly. The seismic shift the sector is about to undergo cannot be underestimated, signifying huge opportunities as well as challenges.

‘Next Gen’ is the term that includes Generation X (born in the years between 1965-1980) and Millennials (those born between 1981 – 1996). The demographics look a little different for this group than the generates preceding it: alongside an increase in women, there are more international families, families with cross-border investments, and an increase in family members that are unmarried or are the children of unmarried parents.

The Next Gen are also fundamentally different in terms of outlook. They are less traditional, and likely to have differing views to their elders on issues such as tax, trusts and offshore investments. They are much more informed investors owing to the abundance of information online, leading to greater engagement in the investment decision-making process (with or without advisors). They also form a link between the older generation and new industry as Next Gen are more open to investing in digital assets such as non-fungible tokens (NFTs) and cryptocurrencies, and with more focus on private equity and VC investments. 

In line with a broader cultural mindset change, this cohort of younger wealthy individuals also place a great value on social and environmental considerations. Many believe, as Patagonia’s founders do, that with the privilege of wealth comes a responsibility to use wealth as a force for good.

Attitudes towards tax, for example, have undergone generational change: many see aggressive avoidance as wrong, and instead desire to pay the ‘right’ amount of tax as a matter of fairness. This goes against the widely held assumption that tax minimisation is always desirable, as well as the assumption that wealth preservation is always desirable. Tax compliance, rather than tax avoidance, might be the way of the Next Gen’s future – paying their fair share. Some families will go even further than this, desiring to pay more than their fair share.

On May 14, 2021, the Jersey Royal Court handed down a contemporary judgment that goes some way towards articulating how a modern family might view its wealth, privilege, and wider responsibility. The case, “In the matter of the May Trust”, concerned a trust with the value of approximately £150 million. The beneficiaries of the trust were the principal beneficiary, his family and the family’s charitable foundation.

The court was asked to consider a proposed distribution directly to the principal beneficiary of £75 million so that he could make an onward gift to the foundation. This distribution triggered a deliberate personal tax liability which could have been legitimately avoided, but the triggering of the tax liability was welcomed.

The family in this case had agreed a briefing note setting out their family values and ethos of philanthropic giving, making it clear that they thought it was right for UK tax to be paid on part of the sum to enable the government to provide “a broader social benefit”.

The court accepted that the concept of “benefit” regarding a trust is not limited to financial benefit but could also encompass social and educational benefit for the beneficiary, and that benefit could include the application of a trust fund to discharge what a beneficiary feels is a moral obligation.

The law is clearly catching up, and families and wealthy individuals have options to put their money where their values lie. Those wishing to make a positive difference can now explore impact investment, create charitable foundations, and consider philanthropy in various forms.

There’s another generational divide at play here: traditionally, it may have been thought better to generate returns from investments and only then put those returns into philanthropic causes, but Next Gen consider ESG as essential to a family’s philosophy at the outset. The law agrees: it is now widely accepted that ESG considerations are a material financial factor when making an investment decision and therefore in accordance with a fiduciary duty of a trustee. ESG is increasingly on the agenda in the trust arena as beneficiaries and settlors incorporate ESG data into decisions on investment objectives and strategy.

Impact investing goes even further: investors are beginning to seek alignment of their portfolios with their personal values and societal goals, although it is not yet clear to what extent can trustees sacrifice financial return in exchange for a positive social environmental impact. Increasingly, Next Gen are requesting consideration of issues such as climate change or that certain industries be excluded from investment of a trust’s assets because of a negative environmental impact.

Many younger philanthropists also seek to give while living and have a long-term outlook that focuses on results and impact. Along with money, Next Gen also see the value in giving their time, talent, and influence, and demonstrate more of a desire to be hands-on.

The Great Patagonia Giveaway is perfectly characteristic of the switch in mindset sweeping through many wealthy individuals and families. As more companies and private enterprises are challenged by those who actively use their resources for good, and when new thinking begins to solve problems caused by old ways of thinking, we have a route to examine, assess, and reimagine the purpose of wealth. In a statement made to the New York Times on his extraordinary, unprecedented and disruptive move, Chouinard remarked: “Hopefully this will influence a new form of capitalism that doesn’t end up with rich people and a bunch of poor people.” The earth and those within it will be better for it.