Dov Charney, the enfant terrible of the apparel industry, has been (dis)gracing headlines again lately as the company he created, American Apparel, files for Chapter 11 bankruptcy. Though he was fired well over a year ago, Charney remains a threat to the company as they attempt to restructure. Charney’s outrageous behavior has been well known for years, so one might ask why he still thinks he has a leg to stand on. But seeing how long his “misconduct”—a rather light word for what the mother lode of horrifying text messages, e-mails, photos, and videos Charney saved to the company servers revealed—went on unchecked, it’s little wonder Charney considers himself above reproach. How did it get this far? On June 18, 2014, a sweltering summer day in New York City, the board of American Apparel gathered in a small conference room at the Times Square offices of the company’s legal counsel. Ten hours later, theyemerged with a firm decision to remove Dov Charney as chairman and fire him as president and CEO of American Apparel.
Those ten taxing hours in the conference room were spent hashing out their reasons while Charney relentlessly and unsuccessfully defended his case. But the board stood behind its decision.
The board’s coup left American Apparel facing an uncertain future. “The company has grown a lot bigger than just one person and the liabilities Dov brought to the situation began to far outweigh his strengths,” said Allan Mayer, the board’s new co-chairman.
What prompted the urgentmove was news that Charney continued to psychologically harass a former employee who’d charged him with sexual abuse. An internal investigation unearthed new details about his salacious behavior—only this time, the board of American Apparel could no longer afford the potential cost. For years creditors had been growing anxious about the company. The board believed even the suggestion of new controversy might spook stockholders, who had watched the value of their investment crater. In the spring of 2014, the stock price had plummeted to a low of $0.47 a share, down from $15.00 in 2007.
When the markets opened the next day and news of Charney’s firing swept the media, the stock prices jumped 7 percent. By the ninth day after his firing, the stock had risen nearly 30 percent, a reflection of how the market felt about the aggressive action the board took against him.
It’s not surprising that Charney hasn’t gone quietly into that good night. Boards firing founders is messy stuff. In the case of Charney, press reports from Mayer and others framed the decision as the ethically and morally sound one, a message that they would no longer look the other way. But if that was the case, what took so long? Investigations and legal charges of Charney’s abusive, racist, sexist, and all-around disgusting behavior had been public for more than a decade. The consensus among many observers is that Charney was fired for driving the company into the ground, not for behaving badly.
Founders being fired from their companies is not unheard of—remember, Jobs was fired from Apple—but if we believe they get axed because of their bad behavior, we’ve got it backwards. The misconduct of mean men ultimately makes them ineffective as leaders and takes a toll on the companies they create, often causing serious, lasting damage. And what helps a founder become so successful in launching a company little to do with the managerial skills it takes to scale the business and keep it healthy in the long term.
So many CEOs are fired from young companies because investors often hold all the cards as major or majority shareholders. And many veteran investors, as savvy students of management, know that companies need emotionally intelligent leaders to reach their potential.
It’s a very different story, though, when founders hold the cards as majority or dominant shareholders. As one study of “high-flying founders” and board composition showed, “Successful founding CEOs . . . show a tendency towards adopting weak boards.”
American Apparel is a prime example of this. Charney was the dominant stakeholder in the company, and he bolstered his control by filling the board with weak directors who followed his lead. What undid him, though, is that he came to own less of the company as it went downhill—and thus had less control over the board.
By the time he was finally fired, the firm was like a strung-out junkie. It was mainlining cash infusions and jonesing for more. As the firm started going into a tailspin, private equity firms were the only ones willing to deal. The greater American Apparel’s addiction to cash infusions grew, the greater the need to find private equity firms willing to take the higher risks. In most cases like this, an additional cost typically extracted for these fixes are demands from lenders to put their own guys on the board. Charney, obsessed with control, maneuvered around this. What he did lose, a result of his scramble to find cash, was ownership; his shares became diluted as lenders demanded some skin in the game. His reputation made lenders skittish about working with his company, and even with some loans costing as much as 20 percent in annualized interest, many lenders outright refused to get involved.
It finally became apparent that the business could not generate enough cash to sustain its high interest payments. With new complaints of Charney’s misbehavior surfacing regularly, the board finally had their epiphany: Charney’s presence had become thoroughly toxic to the business.
In the case of Charney, as leaks to the New York Times and the Wall Street Journal would report, the decision to dump him ultimately came down to the horrific publicity (but not necessarily the behavior itself) he was generating. Bad press, in the board’s view, was jeopardizing the firm’s ability to find more sources of funding. The board made a plain and simple business decision to cut the firm’s losses withCharney. In the end, Charney wasn’t fired for being terrible; he was fired for bringing attention to it.
Now it seems American Apparel might never be free of the despicable Charney. But considering how long the board and investors let him get away with murder, perhaps that’s poetic justice.