In the same week that a hedge fund, Standard General, essentially took over American Apparel, Bloomberg Businessweek published an eye-opening story about the company and its founder and former chief executive, Dov Charney.
Eye-opening not in the usual manner when it comes to Charney: The magazine didn’t uncover any new allegations of harassment. Instead, the Businessweek story focused primarily on Charney as a businessman.
That’s pretty salacious too, or at least it is if you’re a management wonk. As it turns out, both Charney and the American Apparel board offer a case study in how not to run a company. Here’s the money quote: “All along they were thinking that anything goes in Charneyville,” Thomas White, a professor of business ethics at Loyola Marymount University, told Businessweek speaking of the directors.
“They only started to worry when they looked up and saw financial disaster.”
Anything goes indeed. An infamous Jane magazine story was written a decade ago: That is how long the board has known about his antics. By the middle of 2005, reports Businessweek, Charney was facing two harassment lawsuits. (One was dismissed in arbitration; the other was settled for $1.3 million.)
Yet when asked about these early allegations, Allan Mayer, a public relations executive who is co-chairman of the board, said, “One of the things you learn when you do crisis management is that where there is smoke, there isn’t always fire.”
Of course, another thing you learn in crisis management is that quite often when there is smoke, there really is fire. But Mayer and the rest of the board simply didn’t want to know about it. Why was the board so willing to look the other way?
Indispensable
One reason is that Charney had founded the company. Its identity and that of its founder were intertwined. Charney himself had no other interests outside his company.
He viewed himself as indispensable, and the board went along with him. And if his sexually charged advertising helped make American Apparel a hit, well, you could hardly expect the office to be run like a convent.
But he also had the classic flaws of a founder. Though his passion got the company up and running, he lacked the skills necessary for guiding a large enterprise. His micromanaging drove off virtually every talented executive he ever hired.
In 2007, after the company went public and he had to bring in a chief financial officer, he told The Wall Street Journal that the man he hired was a “complete loser”.
Which of course caused the man to quit. He dreamed oversized dreams — even Charney now acknowledges that after the company’s IPO he probably expanded more quickly than he should have. He took pride in the fact that American Apparel’s clothes were made in America, but when the company was subjected to an immigration audit in 2009, it had to lay off half of its factory workers, according to Businessweek.
The disruption led to delayed shipments and an expensive hiring and training programme.
It has basically been downhill ever since. The company has consistently lost money — while piling up expensive debt — over the last four years. Its sales slowed dramatically. The stock has tanked.
Seasoned executives
It built a new automated distribution centre in 2013 that was supposed to save $5 million a year (Dh18.4 million). Instead, it was so error-riddled that it cost the company “at least $15 million”, says Businessweek. In February, Mayer, the board director, and a consultant close to Charney took him out to dinner and advised him to bring in some seasoned executives.
Instead, in May, Charney forced out the general counsel. To Businessweek — and to anyone else who will listen — Mayer insists that the board fired him because of his behaviour. But it is hard to imagine that it would have done so if the company was still making money.
Although American Apparel is still using Charney as a consultant, my guess is that he’ll never have a meaningful role at the company again. It needs executives who are grown-ups. One person who saw it all coming was Robin Lewis, who writes The Robin Report, a blog about retailing.
In 2011, he noted the departure of a man named Marty Staff, who had been American Apparel’s president of business development — and the former chief executive of Hugo Boss. Describing the loss of a pro like Staff as American Apparel’s “last chance for survival, lost”, he wrote: “Quite frankly, it amazes me that as CEO of a publicly owned company, given American Apparel’s financial condition and his questionable and storied behaviour, Charney still has a job”.
And to think: It only took the American Apparel board three more years to come to the same obvious conclusion.
