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FEATURE-Corporate founders battle boards to overturn forced exits

Source: Reuters - Fri, 15 Aug 2014 21:35 GMT
Author: Reuters
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(Adds comments from representatives of Charney and Wilson in paragraphs 10, 18 and 19)

By Nadia Damouni

NEW YORK, Aug 15 (Reuters) - From American Apparel Inc to Lululemon Athletica Inc, Men's Wearhouse Inc and Best Buy Co Inc, a series of boardroom battles across North America underscore how difficult it can be for companies to part ways with their founders.

In each of these cases, the boards decided it was time for the founders to step down from their roles either as chief executive or chairman, but faced stiff resistance from the founders, some of whom used their substantial equity stakes to fight back.

Corporate governance experts expect more such corporate dramas as shareholders are increasingly holding boards accountable for succession planning, investment returns and overall fiduciary duties. As a result, boards are asserting their authority more frequently, which can put them on collision courses with CEOs, including founders.

"Today's boards are increasingly feeling pressure to anticipate the CEO leadership needed to drive future success. This is especially true when the CEO is the founder of the company," said Jane Stevenson, head of the global CEO succession practice at Korn Ferry International.

"In these situations the board can feel significant conflict between appropriate homage to the past and the leadership needed to drive success in the future."

As many as 42 Fortune 500 companies have founders in CEO positions, according to data compiled by recruitment firm Heidrick & Struggles for Reuters. These founder-CEOs have an average tenure of 22.5 years, compared with around six years for non-founder CEOs.

"Founders are often the ones that have the 'special sauce' that makes a company's offering and culture work, so they might be given additional latitude ... as their vision drove value creation in the first place," said Heidrick & Struggles' Vice Chairman John Wood.

American Apparel, under Charney's leadership, was known for its racy advertising and "Made in the USA" sweatshop-free model. However, the company has posted losses in almost every quarter in the last four years and came under fire in 2010 for lax financial controls.

In June, the board fired Charney for allegedly misusing corporate funds and helping to spread nude photos of a former employee on the Internet, a source previously told Reuters. The photos were allegedly posted on a blog by another American Apparel employee who was impersonating the former employee.

A spokesman for Charney, Keith Estabrook, said, "He was terminated for allegedly failing to prevent the use of impersonating materials, and he did not actively participate."

Charney has denied the allegations and is fighting to regain control of the company. He increased his stake in the apparel retailer to 44 percent, from about 27 percent, but signed over his voting rights and shares to the hedge fund Standard General as collateral for a loan.

Charney intends to have a say over key decisions, such as the makeup of the board or M&A deals, whether or not he returns as CEO, a source close to the matter said this week.

American Apparel is waiting for the results of an internal investigation before deciding what to do about its founder. A spokesman for American Apparel declined to comment.

FOUNDERS' SHADOW

In the case of Lululemon, the Canadian yoga apparel chain was once one of the hottest stocks in retail but it suffered a damaging recall last year involving see-through yoga pants. Late last year, Chip Wilson, the company's founder, stepped down as non-executive chairman to pave the way for new CEO Laurent Potdevin to run the company.

Wilson, however, remained on the board so that directors could tap his knowledge about the company and its customers. The board assured Potdevin that he would be able to run Lululemon without undue influence from Wilson, according to a source familiar with the situation who spoke on condition of anonymity.

But tensions began to build as some directors felt Wilson wanted to be excessively involved in management decisions; at the same time, Wilson, who has a 27 percent stake in Lululemon, became increasingly frustrated that he was not being fully heard, the source said.

The problems spilled out into the open in June, when Wilson lashed out at the board, saying its new chairman and another director were too focused on short-term growth.

A spokesman for Wilson said he had stepped down from management in January 2012 to give then CEO Christine Day the room she wanted to run the company. Lululemon's board then asked Wilson to return from Australia to address a product quality issue, said the spokesman, Jim Courtovich.

"Chip Wilson has always been focused on doing what is in the best interests of Lululemon and its shareholders," Courtovich said. "Since then, he has been providing important input that has changed the direction of the company."

A representative for Lululemon declined to comment.

The two sides settled last week, when Wilson agreed not to wage a proxy contest and to sell half his stake to private equity firm Advent International.

Still, shares of Lululemon have fallen more than 40 percent since Potdevin's appointment in December, underscoring the toll such corporate clashes can take on share valuations.

Similar battles between the boards and founders of Men's Wearhouse, Best Buy and Groupon Inc have rattled their investors until the disagreements were finally settled.

"Numerous times I've seen first-hand how the founder dynamic can be particularly challenging for fellow board members to successfully grapple with. Internal disputes that become public are one of the most dysfunctional events companies face," said Brad Allen, the founder of Branav Shareholder Advisory Services, which counsels boards and shareholders on governance issues.

FOUNDERS AS AN ASSET

To be sure, not all founder departures are acrimonious. Directors and recruiters say many founders have a deep well of knowledge about their companies and customers, and they can be invaluable to their successors.

Former Nielsen Holdings N.V. CEO David Calhoun said he used to seek advice from Arthur Nielsen Jr on how to resist pressure from media clients for favorable research. Nielsen Jr is credited with transforming the company, which his father founded in 1923, into a name synonymous with television ratings.

"Art Jr's advice went to the heart of our business: the potential conflict between serving client's needs (the companies we measure) and our commitment to objective measurement," said Calhoun, who is now executive chairman at Nielsen.

Bill Ford had fully supported Alan Mulally when he took over as CEO of Ford Motor Co in September 2006, said Marshall Goldsmith, an executive coach who has worked with Mulally.

Early in his tenure, when some top executives challenged Mulally's initiative to conduct a weekly review of business priorities, he had the backing of Ford, who helped Mulally implement the plan. The weekly review turned out to be central to the No.2 U.S. automaker's successful turnaround, according to Goldsmith.

Goldsmith said his advice to founders is to pick a date to hand off the company and start working on a succession plan.

"Leave with dignity, don't get thrown out," Goldsmith said. (Reporting by Nadia Damouni; Additional reporting by Euan Rocha; Editing by Paritosh Bansal and Tiffany Wu)

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