The Magazine of Corporate Responsibility

American Apparel: Sex, Power and Terrible Corporate Governance

Update to this story 9/29/2014: American Apparel Hires New Interim Chief Executive

by Gael O'Brien

The American Apparel story gets crazier by the moment.

Actions taken by the company’s board two weeks ago to attempt to remove founder Dov Charney as chairman and CEO have prompted him to launch a counteroffensive to regain control of American Apparel.  Working with hedge fund investors, Charney has borrowed money to increase his shares in the company to 43 percent and is threatening a proxy fightBut the hedge fund investors working with Charney are now negotiating with the very board that fired him - and there's a possibility that a new management team could be appointed that does not include Charney.

American Apparel_8705_Alyssa-Nude_Feature2Whether Charney is successful or not, the result of his past leadership is an American Apparel characterized by two faces in opposition to each other. When that happens, the worst face eventually outweighs the best. The retail company’s  attempts at socially responsible practices -- clothes touted as ethically made in the United States – have ended up being plowed under by the repugnant behavior of its leader, who sexualized the workplace as a stalking ground for employee relationships called consensual, disregarding disparity of age and power.

American Apparel’s drama illustrates two key problems: In companies where there is a dominant founder running the company according to the beat of his (or her) own drum, how hands-on can a hand-picked board be when it is necessary to reign in the founder? And, when ethical issues surface in a company with a sexually provocative brand image, how does a hand-picked board ensure a clear stand is taken?

Charney’s hand-picked board supported him for years through several very public sexual harassment lawsuits -- not appearing to reign in his philosophy that a sexually-charged workplace fosters creativity; it authorized a quiet, internal investigation this year which uncovered examples where they said Charney misused company funds and didn’t prevent the posting of naked photos of a former employee who had sued him for sexual harassment a few years before.

Five days after being ousted, alleging some shareholders wanted him back as leader, Charney indicated in an SEC filing  that he intends to contest “vigorously” his termination, exercise influence and engage in discussions about how the company is run including board composition, assets, capitalization, financial condition, strategic plan and future of the 16-year old company. Transformed into an activist shareholder (upping his 27 percent stake to now 43 percent), Charney has a loan agreement with investment firm Standard General which has enabled him to increase his shares in an arrangement where Charney will work in consort with them.

In a defensive move last week, the board blocked his request for a special shareholder meeting and adopted a one-year shareholder rights plan designed to prevent Charney from taking control.

If this drama was playing out in a custody hearing, both the board and former CEO would have a lot to answer for regarding how they’ve safeguarded the welfare of the teenage offspring. Although the board made no mention of American Apparel’s declining fortunes under Charney’s leadership as a reason for his termination, both share a poor track record of oversight.

From a fiduciary perspective, bankruptcy close calls have dogged the company - calling into question Charney’s strategy that sex sells. The recent financial picture has been grim: a 2013 posted loss of $106 million, interest rates on some loans as high as 20 percent, and by this spring, a stock price of $.50 a share, down from  $15 in 2007. Charney has been accused of micromanaging, which accerbates problems, as does not following the rules. The company received letters threatening delisting from the New York Stock Exchange in 2010  and earlier this year  unless the company conformed to exchange standards.

From a reputation standpoint, a recent interview with Allan Mayer, new board co-chair, indicated that Charney’s reputation had caused the retailer trouble raising money. Mayer also said the board had spoken to Charney in the past about his conduct, but his defensive measures protecting himself from liability, as well as settlements often occurring before the facts of the case were evident, limited hard information the board received. This should have raised red flags early on for the board to retain an independent third-party to identify best practices for leadership behavior to hold Charney accountable to avoid vulnerability to sexual harassment or other misconduct allegations. A public company’s accountability to shareholders, customers and society transcends loyalty to any individual when boundaries are crossed.  

There isn’t a tradeoff between making products ethically and then acting disrespectfully or as a sexual predator in the workplace. Being handpicked for board service by a founder argues that for the protection of all concerned (including the founder and shareholders), there be a process for how a founder can be held accountable if behavior or actions jeopardize the reputation, culture or financial wellbeing of the company. It is one thing to break the rules for social media and advertising to create a sexually provocative brand. It is another to allow a founder to write his own rules with impunity to lead the company with a “bad boy” frat party persona that creates workplace drama, unwelcomed conduct, and a hostile work environment that puts the company in jeopardy.

I asked Thomas White, Conrad N. Hilton Professor in Business Ethics at Loyola Marymount University for his take on where American Apparel finds itself.

“The American Apparel sideshow is simply the latest example of the toxic combination of ‘star CEOs’ and acquiescent boards,” said White. “Playing with other people’s money and compromising the welfare of employees and customers, these companies end up operating more like grade school playgrounds than serious professional organizations.

Sadly, this is one more reminder that, in stark contrast to the hope that corporations should be forces for good in society -- whether we talk about damage to the environment, sexual harassment, invading customers' privacy or imposing personal values on employees -- too many businesses turn out to be the most regressive institutions in the United States.”

Note: This article has been updated from the original to reflect new information regarding the terms of Dov Charney's relationship with the investment firm Standard General. 

Gael O'Brien_2012_CropGael O’Brien, a Business Ethics Magazine columnist, is a consultant, executive coach, and presenter focused on building leadership, trust, and reputation. She publishes the The Week in Ethics and is The Ethics Coach columnist for Entrepreneur Magazine.

 

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