I WAS STILL WONDERING why I was really in business when, in 1991, after all those years of 30 to 50 percent compound annual growth, Patagonia hit the wall. The country had entered a recession, and the growth we had always planned on, and bought inventory for, stopped.

Our sales crunch actually came not from a decline from the previous year but from a "mere" 20 percent increase; still, it nearly did us in. Dealers canceled orders, and inventory began to build. Neither the mail-order nor the international division could meet its forecasts, and both returned inventory as well. We cut back production as much as we could for spring and fall. We froze hiring and nonessential travel. We dropped new products and discontinued marginal sellers. On July 31, 1991, Black Wednesday, we let 120 employees go—20 percent of the workforce. That was certainly the darkest day of Patagonia's history.

Our own company had exceeded its resources and limitations; we had become dependent, like the world's economy, on growth we could not sustain. We were forced to rethink our priorities and institute new practices. First step: I took a dozen of my top managers to Argentina, to the windswept mountains of Patagonia, for a walkabout. In the course of roaming around those wildlands, we asked ourselves, once again, why we were in business and what kind of business we wanted to build.

When we returned, we put together our first board of directors, made up of trusted friends and advisers, including author and deep ecologist Jerry Mander. At one of our board meetings, when we were struggling to put our mission into words, Jerry skipped lunch and went off by himself. He returned with a perfectly crafted article that outlined "an ‘ecology' of values that can mitigate the environmental and social crisis of our time." Those words became the basis for Patagonia's philosophies, clear and specific principles that expressed our thinking as it applied to different parts of the company: design, production, distribution, images, human resources, finance, management, and the environment.

I had long practiced my M.B.A. theory of management—management by absence—while I wear-tested our clothing and equipment in the most extreme conditions of the Himalayas and South America. It fueled new and exciting ideas for products, new markets, or new materials, but it also fueled my growing awareness of the environmental and social devastation going on around the world. Rather than bailing out in disgust, I saw an opportunity to create an entirely new kind of company. I wanted to make sure every employee at Patagonia understood our business and environmental ethics, so I began to lead multi-day employee seminars in the philosophies, going by bus to Yosemite or the Marin Headlands, north of San Francisco, where we'd camp out and gather under the trees to talk.

I realize now that I was trying to instill in my company the lessons I'd already learned as an individual and a climber, surfer, kayaker, and fly-fisherman. I had always tried to live my own life fairly simply, and by 1991, knowing what I knew about the state of the environment, I had begun to eat lower on the food chain and reduce my consumption of material goods. Doing risk sports had taught me another important lesson: Never exceed your limits. You push the envelope, and you live for those moments when you're right on the edge, but you don't go over. You have to be true to yourself; you have to know your strengths and limitations and live within your means. The same is true for a business. The sooner a company tries to be what it is not—the sooner it tries to "have it all"—the sooner it will die.