Lululemon board battle highlights pressure for short-term shareholder gain

Lululemon board battle highlights pressure for short-term shareholder gain

Theresa Tedesco | June 11, 2014 | Last Updated: Jun 11 8:01 PM ET
Having watched his iconic creation stretched too thin, the founder of yogawear maker Lululemon Athletica Inc. took an unusually bold stance. Chip Wilson went public with his battle against the Vancouver-based company’s board of directors at the annual general meeting on Wednesday by voting against the reappointment of two independent directors, most notably the chairman of the board.

The seeds of Chip Wilson’s spat with Lululemon’s board were planted long before his unsuccessful call for the ouster of the retailer’s chairman

By publicly defying the board of directors, not only did Mr. Wilson break the code of corporate solidarity, he focused attention on the long-standing tension inside almost every boardroom across North America – the pressure to deliver short-term, quarterly profits and the need to create sustainable companies with steady growth.

“I am concerned that the board is not aligned with core values of product innovation in which Lululemon was founded and on which the company thrived,” Mr. Wilson declared in a statement issued hours before the annual meeting.  Citing what he called a “palpable imbalance,” Mr. Wilson accused the company’s board of directors of focusing on short-term results at the expense of product, culture, brand and long-term corporate goals.

Mr. Wilson’s attempt to shake up the boardroom failed, as the two directors Michael Casey, a former Starbucks executive and Roann Costin, a Boston-based private equity executive, were re-elected by shareholders. Even so, the retailer’s largest shareholder (Mr. Wilson owns a 27% stake) has called into question whether Lululemon’s corporate leaders are willing to sacrifice their responsibilities to guide the future sustainability of the company in favour of managing the short-term expectations of the marketplace, most notably industry analysts and some shareholders.

Financial denizens on Bay Street, Wall Street and elsewhere tend to fixate on quarterly earnings that show growth in sales and profits, which are widely disseminated by the media. As a result, corporate executives are under intense pressure to deliver the numbers or risk the wrath of downgrades and negative guidance reports that tend to cause a company’s stock to nose dive. When that happens, shareholders aren’t happy; neither are boards of directors. Thus, to meet the demands of the Street, executives often make decisions to impress in the short-term, which are often achieved at the expense of achieving long-term goals.

At the same time, the drive to maximize returns is also being driven by CEO compensation. Top executives are rewarded in good measure through short-term stock incentive programs and bonuses and must meet certain targets to collect their handsome pay packets. Ironically, boards of directors who set CEO pay should be focussing on creating profitable companies with staying power but instead have contributed to shortening the CEO’s attention span.

“These are drastic moves he [Mr. Wilson] is using to make a point,” said Richard Powers, senior lecturer and governance expert at the Joseph L. Rotman School of Management at the University of Toronto. “The research certainly supports the long-term view but he is acknowledging that the reality is something completely different.”

Professor Powers points to a recent survey of 1,000 senior executives and board members across Canada and the United States that revealed 63% said the pressure to deliver short-term results has increased in the last five years. Yet, 86% of the respondents admitted that companies need a longer time frame of three years or more to develop and executive a business plan that will generate better returns and create companies that last generations.

“The quarterly pressures go against all the governance rules and principles we teach,” Prof. Powers said, “but so far, no one has really found the way to balance them in practise.”

Not that Mr. Wilson, who founded Lululemon in 2000, is without blame for the company’s missteps. He was chairman of the board when a costly product recall in March 2013 involving black yoga pants that were deemed too see-through resulted in a loss of US$67-million in revenues and colossal hit to the company’s reputation. Making matters worse, Mr. Wilson, who had stepped down from his role as chief innovation and brand officer in 2012, was forced to resign in December after he blamed women’s thighs for the faulty athletic pants.

The result: the company that had once been a stock market darling saw the value of its shares drop almost 25% last year. And that may be Mr. Wilson’s point, albeit viewed with the benefit of hindsight: focusing on the short-term may create instant gratification for shareholders and the Street, but the flip side is uncertainty and volatility. For now, there’s no evidence of a realignment in sight.

 

Lululemon founder Chip Wilson’s rift with executives rises to the surface in board backlash

Hollie Shaw and Tristin Hopper, Financial Post Staff | June 11, 2014 | Last Updated: Jun 11 8:07 PM ET

TORONTO/VANCOUVER • The seeds of Chip Wilson’s spat with Lululemon’s board were planted long before his unsuccessful call Wednesday for the ouster of the company’s chairman.

Lululemon Athletica Inc founder Chip Wilson has gone public in his fight to remove two board members, saying their corporate goals are hurting the yogawear company’s culture.

Never one to bury his opinions in a bid to please others, the Ayn Rand-loving entrepreneur has been a relentless promoter of the corporate philosophy he popularized along with Lululemon’s $100 yoga pants when he founded the retailer as a single Vancouver store in 1998.

Mr. Wilson has maintained deep ties and a sizeable stake in the company as it grew into a brand with a market capitalization of US$6.5-billion-dollars, despite stepping further away from the executive suite. But he challenged executives along the way who did not embrace his brand vision, according to former insiders of the company.

“He was not driven by a number, but by a philosophy,” said Darrell Kopke, founder of Vancouver business accelerator Institute B and former general manager at Lululemon.

Indeed, in a statement explaining why he would vote against the re-election of chairman Michael Casey and director RoAnn Costin at the company’s annual general meeting of shareholders Wednesday, Mr. Wilson, who owns 27% of the shares, said the board had strayed from Lululemon’s core values, and was too “heavily weighted towards short-term results at the expense of product, culture and brand.” The company “must address this imbalance if Lululemon is to fully recover.”

At the very brief meeting held in one of Vancouver’s ritziest hotels, Mr. Wilson slipped in through a side door, and slipped out as soon as it was wrapped without speaking to anyone.

During the event he sat directly in front of Mr. Casey, who noticeably paused a beat before reading out “Chip Wilson, founder” while he introduced attendees. And despite taking his feud with the board public, shareholders did not take Mr. Wilson’s advice Wednesday, re-electing Mr. Casey and Ms. Costin to the board.

The relationship looked more promising a year ago, when Mr. Wilson returned from living in Australia after the board asked him for help through the aftermath of a vast recall of overly sheer yoga pants, one which ultimately cost the company about $60-million in lost sales.

But clashing ideologies have been a recurring issue between Mr. Wilson and executives for some time.

According to another former company insider, Mr. Wilson had argued with former CEO Christine Day over his desire to preserve the company’s culture while it embarked on a vast global expansion.

His relationship with the board was said to have worsened significantly after comments he made in a TV interview about fabric pilling and “rubbing through the thighs” were interpreted to mean he believed unfit women should not wear Lululemon’s form-fitting designs.

“You always hear the phrase that any PR is good PR, but we learned that that is not always the case,” chief financial officer John Currie told the ICR XChange conference in Orlando, Fla. last January, vowing  to win back customer approval after a year of blunders.

Mr. Wilson’s son JJ (John) alluded to the tense situation in a Facebook post after his father stepped down from the chairman position in December and announced Mr. Casey would take his place, implying Lululemon’s mojo might go out the door with his father: “Remember when Jobs was asked to go back to Apple?”

As Mr. Wilson crafted it, Lululemon’s culture championed continuous self-improvement, happiness and empowerment through daily physical exercise and meditation, goal-setting and the power of positive thinking. The founder was its truest believer, outlining maxims in a brand manifesto on the company’s website, including “success is determined by how you handle setbacks” and “stress is related to 99% of all illness.”

Beyond a commitment to making and sourcing high-quality products, Mr. Kopke said, “what made Lululemon great to begin with was a total commitment, above and beyond the shareholders, to building the health of communities, and making sure that the work environment was second to none in the world. Those were the values that Chip fostered.”

As to what worsened the rift, a new apparel venture from Mr. Wilson’s wife Shannon might have played a role. Kit and Ace is a Vancouver-based designer of “technical” cashmere, according to its company description.

“Chip is not directly involved, but everyone knows that he will have input and authority in it,” said a former company insider, adding a number of Lululemon employees that had ostensibly left the retailer to take a “break” were later found connected to Kit and Ace-related projects.

“Vancouver is a small town, especially when it comes to apparel,” the source said. “They also hired a number of employees that were previously let go from Lulu. Obviously, this may be seen as a conflict of interest.”

Beyond Mr. Wilson’s latest moves, new chief executive Laurent Potdevin kept his remarks brief at Lululemon’s meeting, and Mr. Casey quelled recent market rumours about a possible takeover.

“We haven’t heard any overtures in that regard,” Mr. Casey said.

The retailer’s shares, which have lost half their value in the past year, closed down 3% to US$44.30 on the Nasdaq Wednesday.

 

Lululemon Athletica Inc founder Chip Wilson calls for board shakeup to defend yoga-wear giant’s ‘core values’

Hollie Shaw | June 11, 2014 7:22 AM ET
Lululemon Athletica Inc founder Chip Wilson has gone public in his fight to remove two board members, saying their corporate goals are hurting the yogawear company’s culture.

The apparel company’s founder, who owns 27% of the Vancouver company’s shares, says he is voting against the re-election of chairman Michael Casey and director RoAnn Costin at the company’s annual general meeting Wednesday. Shares fell 2% in midday trading.

“I have found a palpable imbalance in board representation, which is heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals,” Mr. Wilson, who earned the ire of some consumers last year after implying the retailer’s snug-fitting tights were not suited for all women’s bodies, said in a statement.

“I believe this is impacting the company’s prospects. My vote today sends a signal to the financial community that the company must address this imbalance if Lululemon is to fully recover.”

Mr. Wilson, who founded the company in 1998, said the board asked him to come back from Australia to help the company after a recall of overly sheer yoga pants last year.

“While I am excited about the new management team that I helped put in place, I am concerned that the board is not aligned with the core values of product and innovation on which Lululemon was founded and on which the company thrived.”

RoAnn Costin is president of Wilderness Point Investments, a private Boston-based equity company that specializes in consumer and retail investments. Mr. Casey, a former Starbucks executive, was named chairman after Mr. Wilson announced last year he intended to step down from the role, not long after his controversial comments aired on a TV interview.

Mr. Wilson has long been a promoter and defender of Lululemon’s internal culture, which he created and outlined in a brand manifesto on the company’s website.

It places an emphasis on better living through daily exercise and meditation and the power of positive thinking. The retailer pays for employees’ fitness classes, and encourages them to share their athletic pursuits and life goals with each other and with customers.

News of a board squabble comes at a dicey time for the company, whose shares have lost half their value in the last year after the pants recall, a series of supply chain stumbles which led to out-of-stock product, and the resignation of CEO Christine Day.

Lululemon shut down Mr. Wilson’s assertions in a statement later Wednesday.

“Contrary to Mr. Wilson’s assertions, Lululemon’s board members are aligned with the company’s core values and possess the necessary expertise to successfully lead Lululemon forward,” it said.

The company is focusing on innovation, “controlled” global expansion, supply chain improvement and improving customer service. “We are confident that Lululemon, under new CEO Laurent Potdevin’s leadership, will provide guests with the high-quality, technical products they know and love and create value for shareholders.”

Mr. Potdevin, former head of Toms Shoes and Burton Snowboards, will speak with industry analysts on Thursday when the retailer issues first-quarter results.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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