CEOs Gone Wild

The recent ouster by American Apparel of its CEO and cofounder, Dov Charney, is turning into an excellent model of what to do (and not to do) with respect to sexual harassment and corporate governance. There have been rumors for years about whether Charney sexually harassed and engaged in other inappropriate behavior with employees. Those rumors have been fueled by the sexually suggestive images that permeate the company’s website and advertisements. Numerous cases of harassment had been filed over the past ten years, but invariably were settled through mandatory arbitration, with findings kept secret. The problem with keeping the details of cases and their resolution secret, however, is that it makes it difficult to bring pressure to bear on repeated wrongdoers. This issue is compounded when the focus of multiple complaints is someone as high up as the CEO. A lower-level employee or manager might be dismissed after the first complaint, and certainly after the second or third. It’s much harder to dismiss the CEO however. The pressure of public disapproval is often needed, but when the details are kept secret, bringing pressure to bear becomes quite difficult. Even in this case, with years of complaints and rumors of seedy behavior, the board still didn’t feel it had the ability to take action until the company’s financial situation and results took a downward turn.

That brings us to the corporate governance aspect of the story. According to a story in today’s New York Times, American Apparel had a leadership vacuum at the higher levels of management:

“Yet another layer of anxiety inside the company stemmed from Mr. Charney’s management style. Current and former executives described him as relentlessly controlling and pointed to a power vacuum growing in the retailer’s upper ranks.

Analysts said the company had developed a reputation as a place where talented people did not want to work. And during the past year, Mr. Charney forced out important company executives, including the general counsel, Glenn A. Weinman. A company with about 10,000 employees was left with only one lawyer in the United States.”

The absence of strong executives meant there was nobody to influence the CEO and act as a check on his troublesome behavior. At the risk of sounding self-serving, having no general counsel meant there was nobody in place with the specific role of identifying and dealing with legal risks in an appropriate manner.

The composition of the board of directors was another problem. The New York Times article described the board as “handpicked” by Charney. That in itself isn’t uncommon in corporate America, but good governance principles require that the board of directors have a degree of independence, and the ability (and willingness) to properly oversee management’s performance. Far too many corporate boards fall short in this regard. Also troubling was this:

“Few if any board members had experience in retailing or major public companies, things that helped enable Mr. Charney to keep them at a distance and to keep board meetings infrequent.”

While diverse experience and views are valuable assets on a corporate board, there should also be expertise and knowledge of the industry in which the company operates. If the company is a public company, as is American Apparel, board members require a level of knowledge and sophistication appropriate to a public company. Morever, the board should meet frequently, in order to adequately ensure that the company is on the right track. The board of directors’ obligation is to the shareholders, not the CEO. As events have shown, it took far too long for American Apparel’s board to remember that.Follow me on Twitter @PaulHSpitz