When company founders fight back

June 27

Dov Charney, chairman and chief executive officer of American Apparel Inc., speaks during an interview outside a company retail store in New York, U.S., on Thursday, July 29, 2010. Photographer: Keith Bedford/Bloomberg

Dov Charney is not planning to fade into the California sunset. The controversial founder of Los Angeles-based American Apparel, whose board announced last week that it was stripping Charney of his chairman's title and intended to fire him as CEO "for cause," said in a regulatory filing late Friday that he is working with an investment firm to boost his stake in the company as he fights the board's move to oust him. He also said he planned to continue talking with shareholders about potential changes to the clothing brand's board and management. In a filing earlier in the week, he had said he would contest his termination "vigorously." 

Since the board's announcement, several accounts have chronicled his ouster with more detail than tends to publicly air when a CEO is fired. Charney's termination letter has even been published online, in which the board cites his failure to stop an employee from creating "false, defamatory and impersonating blog posts" about former employees, as well as misuse of corporate assets. (His lawyer has called the accusations "baseless.")

But while Charney's example may stand out for its lurid details and the public nature of the fight, governance experts and psychologists who work with executive transitions say what's not unusual is for founders to push back — albeit rarely with much success. "Founders have much more emotional attachment," says Charles Elson, director of the Charles L. Weinberg Center for Corporate Governance at the University of Delaware. "For an average CEO, it's a job and money. For a founder, the company is an extension of self. It becomes much more personal."

A year ago, for instance, Men's Wearhouse founder George Zimmer was unceremoniously ousted as executive chairman of the company he founded 40 years before. After being shown the door, Zimmer, famously known for his "you're going to like the way you look" ads that made him the public face of the brand, issued a statement that left open the possibility he would try to take the company private. In it, he said he was "greatly concerned" about the future of the company. (Zimmer later decided against making a move, and Men's Wearhouse has since acquired Jos.A. Bank in a heated takeover battle.)

Other founders retire or step aside from executive roles with less pushback initially, but then attempt to re-exert their influence later when the company stumbles. Earlier this month, for example, Lululemon founder Chip Wilson voted against two of the company's directors, saying in a statement that he is "concerned that the board is not aligned with the core values of product and innovation on which Lululemon was founded." Wilson had already resigned as chairman following a verbal gaffe he made in the aftermath of the company's sheer yoga pants recall, but still owns 27 percent of the company's shares. Though the company fired back with its own response, Wilson is reportedly in talks with bankers about his options to shake up the board.

And back in 2012, Best Buy co-founder Richard Schulze, who had not been CEO since 2002, stepped down as chairman following a probe into why he hadn't alerted the retailer's board sooner to an alleged inappropriate relationship between the then-CEO and a female employee. Within months, Schulze began trying to buy out the company and take it private. The talks ended early last year with no deal; Schulze was given the honorary title "chairman emeritus" as well as the right to name two directors to the board until January 2016.

Of course, it can be good for a company when founders return to influence, whether through their own moves or at the urging of the board.

Kerry Sulkowicz, a psychiatrist and psychologist who advises CEOs and boards, says that "as emotional and irrational as creative entrepreneurs can get under circumstances of transition — and as blind as they can be to some of the consequences of their behavior — some of their core criticisms about the direction of the company are often spot on. They're often absolutely right about what the company needs, or what is currently wrong with it." Few would argue, for instance, that the return of Steve Jobs to Apple wasn't good for the tech behemoth.

Some founders say they are motivated by wanting to improve the company rather than by personal pride. In his statement from last year, Zimmer said the board was trying "to portray me as an obstinate former CEO, determined to regain absolute control...for my own personal benefit and ego. Nothing could be further from the truth." And Chip Wilson's spokesman, Greg Lowman, characterizes the Lululemon founder as having "the long-term focus of the company in his heart and his actions reflect that."

Yet for all founders, says Sulkowicz, their identities are still closely tied to the companies they've started. So the question is not if they have a personal attachment, but how much. "The best ones are often the ones who are most wrapped up in it," he says. "Their identity and the identity of the company is almost inseparable. It's wonderful when it works. But it's also a source of great vulnerability."

That's particularly the case for leaders in creative industries, such as retail or fashion, who tend to have more emotional and less corporate personality types that match their creative endeavors, according to Sulkowicz. "Without them, these companies would not exist," he says — but the much less welcome side of that personality can be narcissism. Many founders "have an unconscious desire to prove that they are needed forever and that the company can't survive without them."

That fusion of professional and personal identity is what can make it particularly painful for founders when they become sidelined, end up fighting with the board, or get stripped of their authority. Jeffrey Sonnenfeld, a professor at the Yale School of Management who has studied CEO retirements, classifies such leaders as monarch CEOs. "Their business is defined around them and their life is defined around the business," he says.

At American Apparel, for instance, Charney's overtly sexual persona has always been part of the company's racy image. Charney, who has been trailed by allegations of sexual harassment for years, has appeared in several of the company's suggestive ads, including one where he and two women — wearing clothes — look to be holding a meeting on a mattress. The caption? "In bed with the boss." His personal style mirrors the 1970s- and 1980s-inspired hipster aesthetic American Apparel sells in its stores. As he told the Financial Times: "I am a deep part of the brand."

And like most founders, he appears to have lived and breathed the company he founded. When a new distribution center began running inefficiently, Charney has said he had a shower built and literally moved in to the facility to try to fix the problems. A source close to the situation said Charney worked 24/7 and had little life outside the company. (When reached via phone, Charney said he was not able to speak for this article.)

The single-minded focus that helps many founders succeed is the same attribute that can also come back to haunt and hurt them. "The kind of people who start businesses are highly motivated risk-takers," says Michael Freeman, an executive coach and clinical professor of psychiatry at the University of California, San Francisco. They tend to be "somewhere on the scale between assertive and aggressive," he says, and have a dominant personality. "The worst thing that can happen to somebody like that would be public humiliation."

Still, it isn't just founders who face the public shame of getting pushed out who have a hard time letting go, says Paul Winum, a psychologist and senior partner with RHR International's board and CEO services practice. "You worked 70 hours a week for years and years to build a business for years, and you feel like this is yours — both in terms of having a big financial ownership and a tremendous psychological ownership."

When the change happens abruptly, as it did for Charney, the experience can be particularly jarring, Winum says. It takes a long time for any CEO, even a non-founder, to prepare for the idea of succession and for losing the power that goes with a leadership position. "When suddenly someone is being forced to separate from their baby," he says, "that's when the resistance — and the fight — can be vigorous."

Read also:

Lululemon founder tries to shake up the board

How American Apparel decided to oust its CEO

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