Dov Charney And The Trouble With Founder-Led Retail Companies

Corporate boards will typically tolerate a founder’s eccentricities, and even bad behavior, as long as the business is performing well. But as performance declines, so too does tolerance.

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The American Apparel board’s abrupt firing last week of Dov Charney, who founded and brought the retailer to mainstream recognition, underscores an unspoken corporate truth: as business performance declines, so does tolerance for the antics of even visionary leaders.

At American Apparel, for instance, accusations and lawsuits charging sexual harassment against Charney are not at all new. What’s new is that the company, which went public in 2006 by way of a shell firm and by 2008 was booking sales of $545 million a year, has lost money in 16 of the last 17 quarters and its stock price has been trading under $1.00 per share for the last four months. Not coincidentally, Charney’s handpicked board first started talking about firing him three months ago, though Allan Mayer, who was elevated to board co-chairman as a result of Charney’s firing, has said his removal stemmed from conduct issues and not business performance.

Charney’s bad behavior has been well-documented for years — he’s still dogged by a 2004 Jane magazine profile in which he masturbated in front of the reporter. American Apparel’s CFO resigned after Charney called him “a complete loser” in The Wall Street Journal. Former employees have brought so many sexual harassment complaints against Charney and American Apparel that Charney’s own cousin wrote a play based on them. The only difference between then and now is the performance of American Apparel’s business and certain unspecified “new evidence” the board claims came to light recently regarding Charney’s conduct.

Charney is not alone in the realm of retail company founders with an intense vision and outsized personality to lose board support recently. In the last year, Abercrombie & Fitch CEO Mike Jeffries, who is considered the modern-day founder of the brand, Lululemon’s Chip Wilson and George Zimmer of Men’s Wearhouse, among others, have either been ousted or had their authority and responsibilities severely curtailed in the face of poor business performance.

“There has to be some separation between their personality and their influence and the actual company and it’s products, and when that’s too blurred for too long, that can be problematic,” Dave Eaton, vice president of proxy research at Glass Lewis, said of retail company founders.

Abercrombie’s Jeffries and Lululemon’s Wilson, like Charney, are familiar with controversy. A comment Jeffries made in a 2006 interview with Salon about how Abercrombie is exclusionary and only markets to “cool, good-looking people” went viral last year. And Wilson drew fire for saying on TV that Lululemon’s yoga pants “don’t work” for all women’s bodies, and that some of the problem is “about the rubbing through the thighs.”

Those events not only opened the door for the boards of both companies to take action, but also came at a time when their businesses where struggling.

Lululemon’s growth skyrocketed after its IPO in 2007, going from $270 million in sales in 2008 to $1 billion just four years later. But the business has been far less stellar ever since last year’s sheer-pant fiasco — the company just cut its full-year earnings forecast and reported a decline in same-store sales. Abercrombie went public in the 90s — it was making $1 billion in sales in 2000; that doubled to $2 billion five years later, and most recently came in at $4.1 billion. But while Abercrombie and Hollister were hits, Jeffries has failed to introduce another successful standalone chain, costing the company a lot of money with both Ruehl and Gilly Hicks. The company has seen U.S. sales struggle in recent years and is relying on growth in Asia and other international locations to bolster earnings. Men’s Wearhouse, while growing, needed to acquire Jos. A. Bank to truly increase its weight in the menswear market. And American Apparel’s financial struggles have been well-documented — the company hasn’t posted an annual profit since 2009, it’s flirted with bankruptcy and it was so shoddy with its finances that its auditor resigned a few years ago.

Though each of these founders were felled by unique circumstances, they are all united by one common bond: none of them had voting control of their companies. None of these retailers had a dual class stock structure, which usually assigns more votes per share held by founders and other executives as a mechanism for them to maintain control after going public. The practice is commonplace in the media and technology industries, allowing founders or family dynasties such as News Corp’s Rupert Murdoch, Viacom’s Sumner Redstone, Comcast’s Brian Roberts, and Facebook’s Mark Zuckerberg to have their authority go virtually unchallenged from a corporate governance perspective.

Still, even without a dual class share structure, board directors are often initially sympathetic to management.

Abercrombie’s board, for instance, was slow to act against Jeffries despite years of revelations about questionable behavior. When he drew criticism in 2010 for excessive use of the company jet, the board’s so-called punishment was to “limit” his personal travel on the airplane to $200,000 a year and pay him a $4 million lump sum for agreeing to the deal. As more and more information leaked about the way Jeffries was running the company, from his partner’s unorthodox involvement to an impossibly-detailed 40-plus page manual for staff on the corporate jet, the board still didn’t act.

It was only in recent months — after repeated comparable sales declines in the U.S. and the involvement of activist shareholders — that the board removed Jeffries as its chairman, added more directors, and entered a shorter employment contract with him.

Boards are reluctant to take action against visionary founders because in many ways they are the face of the brands. They’ve cultivated them almost obsessively, created the initial vision for them, and are responsible for drawing loyal fans to the company in the first place.

Charney’s life since 1998 has been all about American Apparel. It’s hard to tell where he stops and the brand begins. It’s the same with Jeffries, whose entire world seems to be a page out of the old A&F Quarterly, and Lululemon’s Wilson, who last year told Fortune that “Lululemon is a culmination of everything I’ve ever done in my life.” Indeed, despite his ouster, The Wall Street Journal recently reported the Wilson hired Goldman Sachs to figure out how to gain more control over Lululemon’s operations.

Problems brew when “people impose their personal idiosyncrasies and their ego on the business,” says Allan Ellinger, a senior managing partner at investment bank and restructuring advisor MMG, which advises the fashion and retail industries.

Abercrombie’s Jeffries. AP Photo/Mark Lennihan, File

Pulling a founder apart from a brand they created is kind of like taking a child away from its parent, Eaton added. In many ways, it’s tough to get them to let go — and as a public company, that’s incredibly bad. After all, one of the board’s responsibilities is to ensure a succession plan is in place; it’s threatening for a company’s future to entirely hinge on one person. It’s the CEO’s job to make sure he or she is making such a plan.

Mickey Drexler, the outspoken executive who’s credited with the rise of Gap Inc. in the 90s and J.Crew’s success today, is a perfect example of a CEO with an outsized personality whose been able to groom strong talent within his organization. Ralph Lauren, who is known for his strong personality and strong point of view, had a strong relationship with his second-in-command, former chief operating officer Roger Farah, as well.

Those relationships were noticeably absent at American Apparel, Abercrombie, Lululemon and Men’s Wearhouse under the command of their founders.

Lululemon’s Wilson, for example, stayed on as chairman and in a head branding role after installing ex-Starbucks executive Christine Day as CEO. He “tended to zoom in and out” and created confusion about who was in charge, former employees told Fortune magazine last year. In firing founder George Zimmer last year, Men’s Wearhouse said in a terse release that he “had difficulty accepting the fact that Men’s Wearhouse is a public company with an independent board of directors and that he has not been the CEO for two years.” Abercrombie’s Jeffries has chased away multiple successors in the past decade, and the company is only now hiring brand presidents that could potentially become future CEO successors.

For his part, Charney bristled when BuzzFeed asked him about succession planning in an interview published in February, saying that he was “just cracking my knuckles and getting started.” He added that he would start looking at “passing on the torch” in about a decade. (Now, Charney, who owns 27% of shares, is apparently in negotiations to buy another 10% chunk, CNBC reported.)

“Entrepreneurs and visionaries, they want control and they want to micromanage but when a business gets so big, you can’t do that,” says Robin Lewis, CEO and founder of “The Robin Report”and co-author of The New Rules of Retail. “Then if you have eccentricities on top of it, when the business gets to a certain size and you’re public, they’re in a bubble and the world can now see what they’re doing, and it doesn’t bode well for the brand.”

Or, evidently, for the founders.

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