American Apparel: A case study in board governance

The firing of American Apparel founder Dov Charney is still “breaking news,” as he maneuvers to get his job back. Nevertheless, there are some “lessons learned” for boards of public companies in this matter. Here’s a recent comment from RetailWire:

I’m not prepared or qualified to judge the specifics of the employment contract between the American Apparel board and Mr. Charney. A CEO works “at the pleasure of the Board” and I assume the directors were within their legal right to dismiss him for cause. This is something that will have to work its way through the courts.

However, the deeper issue is one of board governance. It appears that the directors of American Apparel stood idly by for years while Mr. Charney became a lightning rod for criticism and (in some cases) lawsuits. Meanwhile — while the allegations of bad behavior were surfacing over and over again — the value of the company’s stock has dropped over 80% in the past five years.

It’s hard to oust the CEO when he is the founder of the company and owns over 25% of the outstanding shares, but why did this take so long? This ought to make a good B-school (or law school) case study in the near future.

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