Embattled founders 'victims of their own success'

Retail tug-of-war between innovator & investor
Retail tug-of-war between innovator & investor

When a company founder successfully builds his or her company from the ground up, it can be hard to hand over the reins to a third party that's trying to push them out of the equation.

As the creators behind a slew of retailers that have evolved into household names—Lululemon's Chip Wilson, American Apparel's Dov Charney, and last year, Men's Wearhouse's George Zimmer—have lost control of their branded offspring, battles have ensued within the companies' boardrooms.

At Lululemon, sources close to the matter told CNBC that Wilson is evaluating his options for the athletic wear maker, after earlier this month voting against two board members over concerns "that the board is not aligned with the core values of product and innovation on which Lululemon was founded."

Asked for comment by CNBC, a Lululemon spokesperson said the company's board and management are focused on strengthening its product lines, expanding the company and building "value for Lululemon shareholders."

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At American Apparel, Charney is threatening to take action against his former employer, whose board voted to oust him from his roles as CEO and chairman over an investigation into alleged misconduct. Last year, at Men's Wearhouse the board terminated former CEO Zimmer from its board, stating he was not acting in the interest of shareholders.

Although each situation has its own nuances, experts said they often have a common root. One such commonality is that the companies in question often grow to such size that the "rebels" who founded them are no longer able to satisfy investors, said to Les Berglass, CEO of retail placement firm Berglass + Associates.

"These are people who are absolute visionaries who create innovative businesses," Berglass said. "They become victims of their own success."

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Craig Johnson, president of Customer Growth Partners, said that although these power struggles are not restricted to the retail world—he pointed to Steve Jobs' ouster from Apple in 1985 as a non-retail example—often they perpetuate within the retail industry because many of its creative forces are "right-brained" people.

They need to be balanced out by the left-brained, numbers-oriented people to keep the business running on a day-to-day basis. That, he said requires a strong, independent board.

However, problems often rise when a business goes public, and the founder can no longer handpick a board that puts his or her vision ahead of the interest of shareholders—even when they own a large stake in the company, as Charney and Wilson do.

"That being said, these things don't happen when everything is going well," Johnson said. "When sales are up, profits are up, [the] stock is up, everybody's happy."

Dennis Chip Wilson, founder and chairman of Lululemon.
Source: MetsHat102 | Wikipedia

Still, it's important for all companies that have an actively involved founder to enlist an independent board, Johnson said. Not only is a strong board more likely to identify problems that a founder might chalk up as being a mere bump in the road, but they will also move to make sure those problems are resolved quickly.

Many of American Apparel's struggles, Johnson said, stem from the fact that its board failed to act on its performance and public relations issues, which should have been "nipped in the bud" a few years ago. As sales have struggled and management seeks to reassure shareholders that it will not go bankrupt, its shares are trading near 65 cents—about a 96 percent drop from its all-time high in 2007.

"It's a company that's been screaming out for some time," Johnson said.

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Abercrombie & Fitch, on the other hand, recently made strides in its rebuilding efforts by lessening the influence of controversial CEO Mike Jeffries, Johnson said. It did so by separating the roles of CEO and chairman, and by adding three retail veterans as independent board members.

"They now have gone from one of the weakest boards in the country in retail… to one of the strongest for a company its size," he said. "A fix would have been virtually impossible if it had been the same old management and the same old board."

Vincent Quan, associate professor at the Fashion Institute of Technology and an expert in corporate turnarounds, said that in all three of the above cases, the boards' efforts appear to be genuine attempts to increase returns for shareholders.

He said the divergence between founder and board often comes into play when a brand's competitor begins taking its share—as is the case with Gap's Athleta label infringing on Lululemon, and fast-fashion retailers such as H&M gaining on American Apparel's basics-oriented business.

Although boardroom battles bring a lot of question marks to investors, including the possibility of the firm going private, Quan said the best ways to ease shareholder worry are to have senior management express a well-defined strategy and work to create an objective board of directors.

But that doesn't make it any easier for the brand's founder, who many times simply doesn't want to let go.

"They built this company usually from the ground up," he said. "It's their baby."

By CNBC's Krystina Gustafson. CNBC's Courtney Reagan contributed to this report.