Lessons Learned in the Firing of American Apparel CEO Dov Charney

The opening line of a recent Huffington Post article on American Apparel founder and CEO Dov Charney’s firing for misconduct really says it all: “The big question is … why his ousting didn’t happen long ago.”

June 26 2014 by Lynn Russo Whylly


His antics of making the women in the company walk around in their underwear all day while he walked around in his have been well publicized for more than a decade. In addition, Charney has been hit with several sexual harassment lawsuits and has a history of running ads that objectify women. Some of his low-lights are even too distasteful to mention here. So why did his removal take so long?

On first glimpse, one might say that perhaps it is difficult to remove a founder. But yet, there are a handful of companies that have done it successfully, including Apple and Men’s Wearhouse. In Apple’s case, however, they failed miserably and begged Jobs to come back.

American Apparel, a $634 million clothing manufacturer which has 10,000 employees and operates 249 stores in 20 countries, had racked up $270 million in losses and was, as Hoover’s puts it, “teetering on the brink of insolvency” before applying for and receiving a loan this year. CNNMoney reports that American Apparel’s stock price is down 93% since 2007. One has to wonder what decision the board would have made—and when—if the company was making money hand over fist.

“Companies with a strong ethical identity tend to maintain a higher degree of stakeholder satisfaction, positively influencing the financial results of the company. Conversely, lack of personal and professional ethics can lead to negative financial results.”

Ironically, however, Charney’s behavior flies directly in the face of everything he founded the company to stand for. AA makes clothes without logos, defying ego and pretentiousness. They are manufactured in America, employees are paid a fair wage, and the company is environmentally conscious. But board director Alan Mayer told CNNMoney that the decision to fire Charney had nothing to do with operations.

“We uncovered some information we hadn’t known a year ago that was disturbing and suggests misconduct on his part,” Mayer said in a video interview with CNNMoney. We now know that that information was nude photos of someone who had filed a lawsuit against him for harassment. “It wasn’t that the board was blind or deaf to it previously,” he defends, “it’s just that we didn’t have concrete facts. When we got the facts, we launched an investigation.”

TAKEAWAYS FOR OTHER CEOS

According to the Ethical Investment Research Service, companies with a strong ethical identity tend to maintain a higher degree of stakeholder satisfaction, positively influencing the financial results of the company. Conversely, lack of personal and professional ethics can lead to negative financial results.

This is a case where everyone knew what was going on, even if it was more hearsay than evidence. But as the expression goes, customers are not a court of law, but rather, a court of feet and wallets. And in the case of American Apparel, the customer satisfaction was evident.

Lack of hard evidence coupled with a weak financial track record, as was the case with American Apparel, suggests there is something going on beneath the surface and executive teams and their boards must dedicate themselves to ferreting out the truth and dealing with it.

Having strong oversight is key. One thing AA’s board did as part of Charney’s removal was to add an extra layer of oversight by appointing two co-chairmen separate from the newly appointed interim CEO, John Luttrell.

TechCrunch offers great advice to help protect CEOs from getting ousted from their own companies, including getting everything in writing, planning your defenses early and constantly working the key players. In the end however, TechCrunch reminds us that we are all dispensable and should always have a backup plan.

Additional reading:

HOUSTON CHRONICLE: How Do Ethics Affect the Financial Results of a Company?

TECHCRUNCH: How To Avoid Getting Fired From Your Own Company

HUFFINGTON POST: Even Without The Sex Stuff, Dov Charney Was A Terrible CEO

HOOVER’S: American Apparel, Inc. Hoover’s Listing

AMERICAN APPAREL: Board Suspends CEO; Declares Intent to Terminate Him for Cause; Names John Luttrell Interim CEO