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How American Apparel decided to oust its CEO

Dov Charney, chairman and CEO of American Apparel, in New York on July 29, 2010. Photographer: Keith Bedford/Bloomberg

One of the most controversial CEOs in the retail industry is being shown the door.

On Wednesday, the board of hipster fashion brand American Apparel announced its plans to terminate the company's president and CEO, Dov Charney (following a 30-day period required in his contract). It also said it has decided to replace him as chairman and ask for his resignation from the board.

Over the years, Charney has made press for his provocative behavior. In 2004, a writer for the magazine Jane claimed that he masturbated and engaged in oral sex in front of her. He is also reported to have appeared in front of employees in his underwear, and has faced several sexual harassment lawsuits that have been dismissed, settled or sent to arbitration.

Add to this that the company has struggled financially, losing money in recent quarters and watching its stock price fall to less than $1 earlier this year.

So why has the board waited until now to remove Charney? In its announcement, the board did not provide details other than to say the ouster was "for cause" and that it "grew out of an ongoing investigation into alleged misconduct." In an interview with the Post, Allan Mayer, a crisis communications adviser who is also an American Apparel board member and one of two new co-chairmen of the board, says "the board was not deaf and blind to all of these stories. We were well aware of the rumors and the allegations. But we need more than rumors and allegations to be able to act."

Charney, reached via phone, said he did not have any comment at this time about the board's decision.

It is not unusual for a board to oust a company founder, says Sydney Finkelstein, a professor at Dartmouth's Tuck School of Business who has studied CEO transitions. Yet when a founder has real power within a company, such as being the face of the brand or being a long-tenured CEO, it's somewhat rarer. "It's true that very powerful CEOs will hold on longer," he says.

Charney's provocative image (his official company bio lists him as a "self-described 'hustler'") was very much part of the American Apparel brand identity. Neil Stern, a senior partner with the retail consulting firm McMillan Doolittle, says "there's a much greater tolerance for eccentric CEOs when their brands are more tied in to the personality of the CEO," as has been the case with both American Apparel and Abercrombie & Fitch, whose CEO has also sparked controversy.

Still, Charney's position as the company's founder and the public face of American Apparel didn't delay the board's decision, according to Mayer. "If there was something that did perhaps make us act with more deliberation," he says, it's that "we're talking about a company whose culture is very edgy."

Mayer says the main question the board wrestled with was this one: "Is the solution of the problem going to cause an even bigger problem?" That is, how integral was Charney to the company? Ultimately, he says, the board felt "extremely confident that what Dov built is now bigger than him. It’s a company, not a cult."

For now, the board has installed the company's chief financial officer, John Luttrell, as interim CEO, and is beginning the search for a permanent replacement. Mayer, who says operational issues were not a factor in the board's decision, adds that the company is not seeking a CEO who intends to make a strategic change. The board he says, is committed to the "principles on which Dov built American Apparel — sweatshop free, Made in the USA, marketing driven, an edgy company. That's not going to change."

Whoever takes the job will face a crowded marketplace with steep competition from other brands, as well as questions over whether young shoppers have tired of the "porn chic" trend. The new CEO, says retail consultant Stern, will have to "determine what really has driven the success of the brand: Is it that they're Made in America? Or is it their image as a provocative, sexy brand that pushes boundaries?"

It could be both. After all, Stern says, "without those, it's just a T-shirt company."

Read also:

The board of directors of the retailer American Apparel voted to oust CEO and founder Dov Charney on Wednesday after investigating "alleged misconduct." (Reuters)

Lululemon founder tries to shake up the board

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Jena McGregor writes a daily column analyzing leadership in the news for the Washington Post’s On Leadership section.



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