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What American Apparel CEO Dov Charney’s ouster says about the new world of corporate leadership; The long leash is tightening on CEOs – especially charismatic founders whose drive and influence have made them seemingly untouchable

What American Apparel CEO Dov Charney’s ouster says about the new world of corporate leadership

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Theresa Tedesco | June 23, 2014 | Last Updated: Jun 23 7:20 PM ET

Keith Bedford/BloombergDov Charney, the embattled CEO of American Apparel Inc., on June 18 was unceremoniously ousted from the clothing retailer he founded in 1997.

The long leash is tightening on chief executives — especially those charismatic founders whose drive and influence have made them seemingly untouchable.

That’s the lesson of Dov Charney, the embattled CEO of American Apparel Inc., who on June 18 was unceremoniously ousted from the clothing retailer he founded in 1997, over a range of concerns tied to his personal and corporate activities. Shocked, the controversial 45-year-old refused to resign as CEO and president and hours later was stripped of his chairmanship by some of the same directors he brought onto the company’s board.

Not surprisingly, Mr. Charney, American Apparel’s largest shareholder with a 27% stake, is fighting back, according to a regulatory filing with the Securities and Exchange Commission, and is said to be preparing a wrongful-dismissal lawsuit against the company.

How did it get to this acrimonious point? Keep in mind, this is the same guy who has as many as eight workplace sexual-harassment and abusive-behaviour cases filed against him in recent years, who strolled factory floors of the hipster-clothing company in his underwear, and was videotaped dancing naked in front of female employees — and yet he stayed in his job. The once-thriving retailer’s balance sheet has been on a roller coaster for years, plagued by weak sales and growing debt. It has flirted with bankruptcy and a threat of being delisted by the New York Stock Exchange, while criticisms of lax financial controls swirled. Still, Mr. Charney managed to stay on top.

So what suddenly caused the board of directors who had benevolently tolerated the misconduct of the “pants-optional” CEO of the $120-million enterprise to now view him as a liability?

“Some charismatic, dominant people have demons and have reputational issues that can be their undoing,” explained Richard LeBlanc, associate professor at York University, who also teaches governance at Harvard University.

The case of Mr. Charney illustrates five principles of the new world of corporate leadership:

1. Expense-account irregularities will ruin you faster than even the most perverse personal behaviour.

According to a report of the termination letter, Mr. Charney was dismissed for breaching his fiduciary duty, violating company policy and misusing corporate assets. In the four-page missive, the Montreal-born founder was told “you have willfully and continuously failed to substantially perform your job duties under the employment agreement and you have engaged in willful misconduct that has materially injured the financial condition and business reputation of the company.”

An internal investigation into Mr. Charney’s activities, launched by the company’s board in March, claimed he used corporate funds to book airline tickets for his mother (who is retained by the company as a design contributor) and that he and his friends used apartments owned by American Apparel for personal reasons. The report also claimed that Mr. Charney aided in the creation of a blog displaying naked photos of a former saleswoman who filed a US$260-million lawsuit against him and the company for sexual harassment in 2011. According to a report from Reuters, Mr. Charney’s alleged knowledge of the blog, and his failure to stop it, prompted the internal investigation that led to his termination.

Clearly, allegations of misusing corporate assets could do what Mr. Charney’s naked dancing and spotty financial track record could not.

“If you want to get rid of someone, you have to show misuse of assets,” says Prof. Leblanc. “It’s easier to show the effects of misuse of assets than salacious pictures or actions. Once you get into moral judgments, it becomes a subject for argument whereas financials are much more clean cut.”

2. Rogue founders beware: It’s all about the reputation of the company and its board of directors.

While the folks who create companies have generally enjoyed endless goodwill and deference because of their impact on management and board selection, it’s now becoming easier to part ways with a founder. Why? Boards are less forgiving of breaches of the company’s reputation and of senior executives who create an unhealthy distraction for companies. A founder gone rogue is dangerous because the reputation of a company is intertwined with the personality. In the case of American Apparel, the harassment suits were bad enough, but some directors became uneasy with the way Mr. Charney was responding. That, coupled with the adverse publicity surrounding the CEO and its effect on the firm’s thousands of employees, made him expendable.

3. Not doing something is not an option.

Activist boards are filled with fair-weather friends, no matter who put them in their seat at the boardroom table. It used to be that CEOs were judged almost entirely based on the health of the balance sheet, and boards were willing to turn a blind eye to a CEO’s extra-curricular activities. However, the pressure and personal liability of directors has grown so immense that most have far less tolerance for missteps that are coupled with lousy financial results. Witness how Mr. Charney’s attempts to round up directors to his cause have so far been met with deafening silence.

4. Nothing is private anymore.

The zone of privacy for senior executives is very small. Everything they say and do is now fodder for social media and executives are warned to expect to be taped even in private meetings. For entrepreneurial types who don’t tend to be circumspect, the new transparency can be their undoing.

5. The spoils may not come to those who wait.

It is curious that the board at American Apparel waited almost a decade to challenge Mr. Charney’s leadership. That may pose a problem if the ousted CEO makes good on his legal threat. By letting his questionable conduct go unchallenged for so long, Mr. Charney can argue the board indulged the very activity for which he is now being terminated, and in doing so, tacitly consented to it.

 

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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