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[9 comments]

American Apparel CEO to fight firing

June 23, 2014

Last week when American Apparel's largest outside shareholder, Johannes Minho Roth of the Swiss investment firm FiveT, expressed surprise over the firing of the company's founder and CEO Dov Charney, there were others who wondered why it took so long. Either way, it appears as though the story is far from over as Mr. Charney has made it clear he is not planning to go down without a fight.

A letter from a law firm representing Mr. Charney and published by The Wall Street Journal claims American Apparel's board first engaged in an "unlawful" and "coercive" attempt to get him to resign. When that failed, the board presented him with a termination notice based on allegations that were "completely baseless," claims the law firm. According to the letter, "Most involve activities that occurred long ago (if at all) and about which the board and company have had knowledge of for years. None of Mr. Charney's alleged actions caused injury to the financial condition or business reputation of the company, and none even comes close to constituting 'good cause' for Mr. Charney's termination under the employment agreement."

American Apparel's board has said that Mr. Charney was terminated for cause for unspecified misconduct. Press reports contain allegations that Mr. Charney used company funds to pay for his parent's travel. He is also alleged to have aided in the release of naked photos of a former employee who is suing him (the case is currently before an arbiter) as well as having lied in a legal deposition.

Stories about inappropriate, if not illegal, behavior by Mr. Charney with female employees and at least one member of the press have been around for years. He is alleged on at least once occasion to have danced around the company's office in his underwear.

American Apparel, under Mr. Charney, has lost $270 million since 2010 and seen its share price fall below $1 during that time. The company's board warned that in terminating Mr. Charney it risked going into default with some of its lenders. The company has begun discussions with banks and equity firms to avoid that scenario playing out.

Even though Mr. Roth has expressed support for Mr. Charney's efforts to get the company turned around, he told Bloomberg News that he does not plan at this point to support the ousted CEO in a proxy fight with the board.

FINANCIALS:     [NYSEMKT:APP] [ ]

Discussion Questions:

What do you make of the American Apparel mess? Will the company be able to come back from the battle taking place between the board and company founder Dov Charney?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Do you agree or disagree with the American Apparel board's decision to part ways with Dov Charney?

Comments:

I think on any given day in any given year, the board of directors could have fired Dov Charney. I have no idea why it decided that last Wednesday was "the day." As has been pointed out, the company was starting to turn its fortunes around a bit, and most of the offenses he was cited for are, indeed, old. So I have to assume there is something we don't know.

This is the second owner firing of a California company in the past month, as Donald Sterling was also banned from the NBA for life. Let's not forget Mr. Charney still owns 27 percent (I think that's the right number) of American Apparel.

It's an incredibly complicated situation. The board of directors has every right to fire him for cause, but he retains ownership, and as we're starting to find out, you can't force someone to sell something they own.

Will American Apparel come back? I think, much like Abercrombie and Fitch, the company has to reinvent itself. I think that may well have been the case with or without Mr. Charney's firing. Can the company find a visionary merchant to help the turnaround?

If the company decides to go the low-cost sourcing route, it will lose whatever good will it has with its customers, and be definitely out of step with the times. Staying the course has its own pitfalls.

With or without Mr. Charney, the company definitely has a problem.

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Paula Rosenblum, Managing Partner, RSR Research

This is way too typical in corporate America; let's ignore the bad (really bad in this case) behavior as long as the financial performance is good. But then, when the financial performance turns bad, let's use that bad behavior as an excuse to get rid of the leader. Charney has to go, but shame on this board for its bad behavior.

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Gene Detroyer, Professor, Independent

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 percent in the past five years.

It's hard to oust the CEO when he is the founder of the company and owns over 25 percent 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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Dick Seesel, Principal, Retailing In Focus LLC

Mr. Charney's personal behavior aside, the company has clearly struggled over the past six or seven years, incurring substantial losses. This should be the focus and substantiated reasoning for the American Apparel board to seek a new leader, or else the company is at real risk of becoming insolvent. Publicly airing the conflict between the founder and board only serves to harm and erode any remaining brand equity American Apparel has left at this point.

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Jeff Hall, President, Second To None

What I make of the mess? Let's toss any executive that has lost any reasonable level of leadership morals. The news spews this stuff and people accept it more and more as OK "because that person is CEO." Change the game—just because you are a leader and super-creative and invented some cool stuff does not give you special rights to do stuff that is just wrong.

American Apparel can be spun around and Dov can sit back and make some bucks off his 27 percent.

Change the game and make leaders live up to being responsible. It might help us to improve future generations of responsible leaders.

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Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

Another CEO in another battle with the board. This is becoming all too common in today's world. A company is failing so oust the CEO. No problem. But oust him for being a bad leader. Why oust him for his conduct and then say, "oh yes, he was a bad leader," too?

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

As I learned a long time ago, the person who has the ability to start a great business and take it to a notable size is not necessarily the same person that can manage that business or take it to a much larger scale. With rare exception, that's two different ways of looking at a problem, and usually two very different personalities.

So, my advice to Dov would be to move on. Move on, Dov! Start something new that's as exciting and awesome as AA once was. You can do it, and not many others can. So bury the bones, look forward, and give us some more greatness. Just get a good settlement out of them.

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Lee Peterson, EVP Creative Services, WD Partners

I agree with everyone who has commented. Between the underwear stories, the allegations of sexual harassment (is there a woman out there who hasn't got her own story?) and the pubic hair on mannequins, AA's merchandise has been eclipsed by its wackiness. It's time to right the ship.

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Cathy Hotka, Principal, Cathy Hotka & Associates

Dov Charney is a fascinating and accomplished man. If he wasn't so sketchy, he probably would not be as successful. It's part of who he is. But unless he owns 51% and has a no-fire contract, he doesn't have much of a defense. Whether he did anything he is accused of or not, that doesn't matter. In these matters it's not about the behavior, but all about the money. If he owned 51%, problem solved, and he can be inappropriate all day long as much as he wants. He's lost control of the company and perhaps it's time to move on. Otherwise the work environment will be tense. He's still young and perhaps he can go on to accomplish more good things.

David Livingston, Principal, DJL Research

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