Eight Companies Ruined By Their Founders

Story first appeared on USA Today -

For every Sergey Brin, there is a Michael Dell. While the Google co-founder and CEO made his company one of the most valuable in the world with its shares trading near an all-time high, Dell has laid waste to his namesake. Dell and financial supporters offered to buy the company for $13.65 a share, 40% lower than what it was worth when Dell returned to the company as CEO in early 2007.

Investors who bought Dell shares a year ago have taken a haircut of more than 20%. Dell's failure is not unique. He belongs to a group of founders of large public companies that showed great promise but were ultimately wrecked by poor decisions, legal problems, and a lack of innovation.

Perhaps the greatest hallmark of founders who ruin their companies is that they appear to look out mostly for No. 1 rather than the interests of the company and its shareholders. For starters, they accept excessive compensation.

Steve Jobs of Apple, earned $1 in salary and bonus in 2010. By contrast, Aubrey McClendon, who was recently ousted as CEO of Chesapeake Energy, made over $100 million in 2008, and remarkably large sums in the years since then. Some of his other actions, such as allegedly borrowing against assets that he co-owned with Chesapeake, raised concerns of conflict of interest.

Martha Stewart recently received a new contract from her company, Martha Stewart Living Omnimedia, which has lost money four years in a row. Under the arrangement, she will continue as founder and chief creative officer at the firm until 2017. That is in addition to the more than $20 million she made over the three years that ended in 2011.

Dov Charney, who drove the company he founded, American Apparel, to the brink of bankruptcy in 2011, made $11.6 million that year. Michael Dell, who in 2010 settled Securities and Exchange Commission charges that he helped misrepresent Dell's financials, made more than $21 million during the company's last three combined fiscal years.

A more complex measurement of these founders' performance is their lack of vision to transform their companies as the markets in which they operate change. None have shown the foresight Brin did when he moved Google beyond search and into mobile operating systems. And his company is also the dominant force in online video.

Dell did not drive any comparable revolution at his company, which never stepped aggressively into the new age of personal computing— tablets and smartphones. The same holds true for Mike Lazaridis, the co-founder of BlackBerry, which did not transform its market share in the corporate smartphone industry into a lead in the consumer sector.

Richard M. Schulze, who was the founder, largest shareholder, and de facto head of Best Buy oversaw a period in which the retailer failed to move into e-commerce quickly. In the meantime, Amazon has nearly bulldozed Best Buy under.

The most often damaging problem with founders is that they cannot be pushed out. Martha Stewart owns the controlling interest in her company. Groupon founder Andrew Mason and two other shareholders control that company. Schulze and Dell own commanding portions of the shares in the companies they founded.

24/7 Wall St.'s review of large, U.S. publicly traded companies included an analysis of company financials, as well as share price changes over time. We reviewed company documents filed with the SEC to identify voting share of the founders. If that could not be determined, we used the founder's total share ownership. In Dell's case, the voting share reflects his ownership before the completion of the company's pending leveraged buyout.

Eight Companies Ruined by Their Founders:

1. Dell, founded 1984
Founder: Michael Dell, 13.97% voting share
Dell started his company when he was 19 years old. By 2001, the company he founded as a college student was the largest computer systems provider in the world. In 2004, Dell resigned as CEO but returned to the position in February 2007. By then, the company had already begun to lose its appeal with consumers in the competitive PC business. Despite Dell's return, the company continued to struggle in its core business. Dell's worldwide PC market share fell from 15.9% in 2006 to 10.7% in 2012. Consumers' growing preferences for tablets and smartphones over PCs and regulatory scrutiny have hurt the company. In 2010, the SEC fined Dell $100 million, and Michael Dell $4 million, alleging the company engaged in accounting fraud intended to mislead investors about financial performance. On Feb. 5, Dell reached a deal with a group of investors that included Michael Dell to go private for $24.4 billion, the largest leveraged buyout since the 2008 financial crisis.

2. Chesapeake Energy, founded 1989
Founder: Aubrey McClendon, under 1% voting share
McClendon, Chesapeake's CEO since he helped co-found it has become known for his lavish compensation packages and extreme bets on his company's performance. In 2008, McClendon lost much of his personal fortune after borrowing money to buy massive stakes in Chesapeake. McClendon was paid $100 million that year. Between 2009 and 2011, McClendon's earned more than $57 million in total compensation. In April 2012, Reuters reported that McClendon had again borrowed a large amount of money, in this case, $1.1 billion, using his stake in the company's natural gas and oil wells as collateral. Reuters also discovered McClendon was running a $200 million hedge fund from within company headquarters that speculatively traded in "the same commodities Chesapeake produces." Within weeks, McClendon gave up his position as chairman due to concerns over potential conflicts of interest. He is scheduled to resign as CEO April 1.

3. Martha Stewart Living Omnimedia, founded 1997
Founder: Martha Stewart, 86.7% voting share
Stewart's company continues to struggle while she remains chairman. Stewart's audience is aging and the company relies too much on it's print magazine revenue. Stewart's image took a serious hit in 2004, when she was found guilty of conspiracy, obstruction of justice, and making false statements to a federal investigator after she was indicted for insider trading. Although Stewart launched a high-profile "comeback" campaign after her release from prison, her efforts have not paid off for the company. It has not turned an annual profit since 2007. The company's stock price is down more than 58% the past five years. Part of the problem is executive turnover. There have been at least five CEOs and five CFOs since the company's start. Many executives argue that Stewart's excessive involvement has hampered their ability to make change. The sixth CEO, Lisa Gersh, announced in December that she was leaving the company after serving in the position for just five months. Despite the company's struggles, Stewart was paid more than $21 million between 2009 and 2011.

4.BlackBerry, founded 1984
Founder: Mike Lazaridis, 5.7% voting share (outstanding shares)
Lazaridis co-founded BlackBerry, formerly known as Research In Motion, in 1984 and served as co-CEO of the company, alongside Jim Balsillie, through January 2012. The two pioneered the smartphone revolution. Lazaridis, however, failed to prepare BlackBerry for the upcoming competition from consumer-facing rivals. Among the largest mistakes marking the end of Lazaridis' tenure were the failed BlackBerry PlayBook tablet, a four-day global service outage — which left phones unable to browse the Internet or access emails and texts — and a focus on business professionals even as iPhones and Androids absorbed market share. In the third quarter of 2012, BlackBerry's worldwide market share of mobile device sales, by operating system, was just 5.3%, down from 11% in the third quarter of 2011, according to Gartner research firm.

5. Countrywide Financial, founder 1968
Founder: Angelo Mozilo, less than1.5% voting share
Mozilo, former Countrywide CEO, became the face of the subprime mortgage mess after that market collapsed. Under his watch, his company began financing mortgages to high-risk borrowers, which during the housing boom drove the company's spectacular growth. In 2006, Countrywide financed about 20% of all mortgages in the U.S., more than any other mortgage lender in the country. But the company fell apart when the housing market tanked and borrowers defaulted on their high-interest loans. Countrywide was eventually sold to Bank of America in 2008 for $4 billion, with Mozilo forced out a few months later. The company faced a barrage of lawsuits, arguing that Countrywide had used deceptive practices to get people to apply for mortgages they could not afford. Mozilo's integrity was also called into question when it was reported that several government officials and politicians, such as then-U.S. Sen. Chris Dodd, received favorable mortgage deals simply by being "friends of Angelo." In 2010, Mozilo settled an insider trading charge with the SEC for about $67 million. He is permanently banned from serving as an officer and director of a public company, under the terms of the settlement.

6. Groupon, founder 2008
Founder: Andrew Mason, 19.5% voting share
Mason, Groupon's quirky founder and CEO, has stumbled repeatedly the past couple years. His company, which provides discounts and daily deals online, had to revise its financial reports in August 2011 after regulators and analysts took issue with its accounting methods. Groupon issued another revision to its financials in early 2012 as the company overstated its 2011 profit by more than $20 million. Because of these problems, along with general concern that the daily deal fad — the company's core business — may be slowing, the stock price has been declining. It is now roughly a quarter of its initial public offering price of $20 a share, with the company's market capitalization at $3.3 billion. It didn't have to be this way. In 2010, Groupon rebuffed Google's offer to buy the company for up to $6 billion. There has been talk that Mason isn't mature enough to run a company of this size. For instance, he was criticized for drinking beer at the company's annual meeting and for his public gaffes commenting on why it turned down buyouts.

7. American Apparel, founded 1989
Founder: Dov Charney, 43.3% voting share
Charney started and ran American Apparel from his dorm room at Tufts University in the late 1980s. Twenty years later, in 2008, the apparel company had more than 6,700 employees and 197 stores worldwide. But provocative ads and rapid expansion did little to address problems plaguing the company. In 2009, the Immigration and Customs Enforcement agency said that a quarter of workers at the company's downtown Los Angeles manufacturing facility were illegal immigrants. In 2011, two sexual harassment lawsuits were filed against Charney. In December, a former store manager accused Charney of choking him and rubbing dirt in his face. Charney has denied all allegations of misconduct. The company has also struggled to stay afloat financially, running an operating loss in the last 12 months for which financial statements have been released.

8. Best Buy, founded in 1966
Founder: Richard Schulze, 20.24% voting share
Schulze has presided over a company that has struggled to stay relevant in a sector that is increasingly moving online. Best Buy's business has taken a sizable hit from online retailers such as Amazon.com. Some industry experts and analysts point out that Best Buy is increasingly becoming a showroom for electronics consumers — meaning that people go to the store to check out the product and then buy it cheaper online. In the most recent quarter, Best Buy lost $10 million as revenue fell 4% compared to the previous year. The company's share price is approximately one third of what it was five years ago. Schulze also found himself embroiled in a company sex scandal. A Schulze lieutenant, former CEO Brian Dunn, was forced to resign from the company after it was discovered he had an affair with another staffer. The founder received criticism after an internal investigation found that he had knowledge of the affair and did not report it to the board. Schulze announced his retirement from the board shortly after the investigation.

Big-name retailers Gap, Zara hit the international Internet

USA Today

 

LONDON — As spending in malls and stores remains sluggish, the strength of online fashion sales is enticing big-name international retailers to join the move into cyberspace.

Spanish clothing store Zara began selling online in Britain this week, hot on the heels of U.S. retailer Gap's first Internet shop outside the United States and just ahead of a planned launch by Sweden's H&M.

"It's becoming the new normal," says Jeremy Baker, consumer analyst at ESCP Europe Business School in London. "Companies need to have a presence online to compete."

Zara, which also went live in France, Germany, Italy, Portugal and Spain, already has around 4.5 million fans on social networking site Facebook and its iPhone application has been dowloaded 3.5 million times.

Converting just a fraction of those to its new shopping site would give the company, owned by Inditex Group, significant revenues.

"There is clearly demand for Zara product online," said Simon Chinn, retail consultant at Verdict Research. "It will comfortably complement its extensive store estate, adding an extra level of service for its customers."

Inditex recently overtook Gap (GPS) as the world's biggest clothing retailer by sales and Chief Executive Pablo Isla indicated that the group would launch online sites for its other brands, which include Massimo Dutti and Bershka.

Gap, meanwhile, launched sites for both its main brand and more expensive offshoot, Banana Republic, last week. Like Zara, it plans a wider rollout in Belgium, Denmark, France, Germany, Ireland, Italy, the Netherlands, Spain and Sweden.

Toby Lenk, president of Gap Direct has described selling online as an "efficient way to reach new international customers and test the waters for our brands."

That's particularly the case for Banana Republic — a brand that's been given big props by fashion editors across a broad range of publications in Britain but has yet to open a store outside the capital.

While going online makes cost-efficient sense for larger chains that already have well-stocked warehouses, analysts say it is fast becoming a necessity for any retail company to stay in business.

Internet sales are expected to grow to $145 billion in western Europe by 2014, up from $86 billion last year, according to consulting firm Forrester.

Asos, the market leader, which sells quickly updated fashions that copy those worn by celebrities, reported a 54% surge in sales in the first quarter of this year, compared with a year earlier.

Analysts say it's no coincidence that Internet leisure shopping is on the rise at a time that many people are feeling cash-strapped and over-worked — it both saves valuable time and often lets consumers feel they're not really spending money.

"You click, you don't put money on the table," says Baker.

Retail Chains Embrace their Online Stores

LA Times

Traditional merchants such as Macy's are adapting to online shoppers, challenging themselves to find more sophisticated ways to compete with Internet-only retailers such as Amazon.com.

 

 

When shoppers at JCPenney Co. stores can't find what they want, sales clerks are steering them to the Internet — not at their home computers, but at new online kiosks right inside the stores.

Action sports retailer Zumiez Inc. has opened more than 200 stores over the last four years. But this year, it has scaled back its openings to focus on building its e-commerce sales.

Even Macy's Inc. is doubling down on its dot-com. The company whose name is almost synonymous with "department store" has seen its online sales rocket more than 50% in the last two years. It recently junked its standard cash registers for 50,000 high-tech ones that can check online for items that are out of stock in the store and place orders directly for customers.Welcome to Online Retailing 2.0. Traditional brick-and-mortar retailers once outsourced their online sales to specialty "fulfillment" companies. Today they are running their own online operations — and increasingly challenging their executive brainpower to find more sophisticated ways to compete with online-only retailers such as Amazon.com Inc.

"When you look at the big retailers, they clearly have not grown online at the same rate as Amazon has," said Marshal Cohen, chief industry analyst at market research firm NPD Group. "The online business has been the redheaded stepchild. That's starting to change."

To be sure, online revenue still accounts for a small percentage of total retail sales. Although online sales totaled $134 billion last year, the National Retail Federation estimates that's only about 7% of all retail sales.

But growth has been rapid, with online sales soaring nearly 400% since 2000.

Macy's, for example, said online sales last year topped $1 billion for the first time, accounting for about 4.3% of total revenue. That's up from about 3.3% in 2008.

Analysts say economics is driving the trend. It costs less to process online orders than to lease retail space and field an army of sales clerks. There are almost no limits on inventory, and bulky items such as luggage can be shipped from a warehouse instead of taking up precious floor space.

Time-starved consumers also are finding it more convenient to browse items online instead of driving to the mall, where they may or may not find the right size shoe or the exact color bed sheets they want.

Jay Hou, 34, says he does 95% of his shopping online these days, as his job at a telecommunications company and his 14-month-old daughter take up so much of his time. When he needed a suit for his wedding, he turned to designer apparel website Bluefly.com.

"I ordered four because they had a good return policy," the Santa Monica resident said. "I hung the suits up on the wall for about a month and kept looking at them and tried them on as the weeks went on. Then I decided on one and shipped three back."

To get more customers like Hou, retail executives are spending much of their brainpower on the challenge of boosting online sales. To better compete with Amazon, for example, book giant Barnes & Noble Inc. shook up its top management this year, replacing its chief executive with the head of its online division.

And besides offering more discounts and deals such as free shipping, they also are moving into more sophisticated models of online selling. Those include combining e-commerce and store divisions and expanding online selections and services.

"It's gotten to the point where you can't think about online retail the way retailers have thought about it in the past," said Kasey Lobaugh, a principal at Deloitte Consulting who advises major retailers on developing their online channels.

Lobaugh said his advice centers on making the buying process faster. He recommends systems that recognize customers and feature fewer clicks, such as a single-page checkout.

"It's actually a massive undertaking for most retailers because they've built up their organizations with separate operations for the stores and for e-commerce," he said. "All of that has to be redone and recast."

Gap Inc. is expanding its e-commerce network to Canada and Europe in the fall; Ann Taylor Stores Corp. is expanding its online selection, implementing a faster checkout process and adding personalization capabilities to its website; and Kohl's Corp., like JCPenney, is adding do-it-yourself online kiosks to its stores.

The transition is not without challenges.

Nordstrom Inc., for example, has long focused on customer service to sell its pricey products. When the retailer found that many online shoppers had questions because they couldn't touch and feel the merchandise, Nordstrom added a live Web chat feature and staffed it with specialists in beauty, designer brands and other categories.

The Seattle chain also found itself turning away customers online when its fulfillment center was out of stock on their desired items. So Nordstrom expanded the warehouse by 300,000 square feet and began filling online orders with inventory from its stores when possible, which increased merchandise availability.

And to better integrate the store and online sides of its business, and to respond to Web shoppers' desire to get their products quickly and without having to pay shipping costs, Nordstrom, like other traditional retailers, implemented a "buy online, pick up in store" feature.
"The main thing is, does the customer feel like it's one Nordstrom, versus these kinds of silos of business units?" President Blake Nordstrom said. For online sales, "our challenge now is things are accelerating."

For its fiscal first quarter, Nordstrom said its direct sales division, which includes its online and catalog businesses, rose 38.7% from a year earlier and accounted for 7.2% of the company's total sales.

In some cases, this is increasing competition between online-only outlets and old-school retailers that are no longer content to lose market share to Internet rivals.

As brick-and-mortar retailers seek a bigger market share online, they're up against tough pure-online competitors such as Amazon and shoe seller Zappos.com, which have honed their websites through years of trial and which don't have to collect sales tax in states where they don't have a physical presence.

Henderson, Nev.-based Zappos began selling shoes 11 years ago and has since expanded to clothing, accessories and housewares; last year, it was purchased by rival Amazon in a stock deal valued at more than $1.2 billion at closing.

During an interview at Zappos' headquarters, Chief Executive Tony Hsieh said that although physical stores are better able to "form an emotional bond" with their customers, purely online sellers have an edge because they are singularly focused on their websites and don't have the overhead of running physical stores.

With those savings, Zappos can allow customers to return purchases with no shipping or restocking fees for up to 365 days. Hsieh said that has been a huge selling point for people who are wary of buying shoes online without trying them on first.

The company also set up its distribution facility — which stocks more than 4 million products — in Kentucky to be near the primary hub of UPS. The location enables Zappos to ship items faster and do surprise overnight-shipping upgrades.

"It's innovation versus lack of innovation," Hsieh said. "In the online world, there's just much more of a culture of embracing change and experimenting."

As e-commerce continues to grow at robust rates — the sector posted a 10% year-over-year sales increase in the first quarter, according to market research firm ComScore Inc. — experts have predicted that online sales could grow to as much as 30% of total retail sales over the next few decades.

"The entire retail industry, in one way or another, is becoming driven by digital, and the days of just going to the store and shopping are really declining," said Andrew Lipsman, senior director of industry analysis at ComScore. "We're really at the tip of the iceberg."

No one expects physical stores to disappear. Even overnight shipping can't deliver the instant gratification of bringing home a purchase right away, and in some cases, consumers still want to see an item in person before buying it.

But retail experts said stores are likely to wane in importance. Some say they might evolve into showrooms where shoppers try on or test out products before ultimately purchasing them online.

"To expect the consumer to come in and to convince them to buy a product that's folded on a shelf is irrelevant," said Cohen, of NPD Group. "No one shops like that anymore."

Many Shopped Black Friday From Home

Information Week

Online retailers are continuing to muscle in on bricks-and-mortar stores as evidenced by the 3% increase in holiday spending to date by consumers buying online compared with 2008. Shoppers spent $595 million on Friday's online shopping alone, according to comScore.

The online measuring firm said $10.57 billion has been spent by online shoppers. The $595 million spent on Black Friday represented an 11% increase over last year's Black Friday.

"While this acceleration in spending suggests the online holiday season may be shaping up slightly more optimistically than anticipated," said comScore chairman Gian Fulgoni in a statement, "it may also reflect the heavy discounting and creative promotions being put forth by retailers that now encompass the use of social networks such as Facebook and Twitter."

comScore reported that Amazon was the most visited online retail property on Black Friday. The online retailer delivered gains of 28% over last year. Close behind was Walmart, which grew 22% while Apple.com Worldwide Sites, Target Corporation andBest Buy (NYSE: BBY) Sites also showed gains.

Deal sites have also fared well in the early days of the holiday shopping period. comScore said BFads was in the forefront of deal sites with 3.9 million unique visitors. That number represented a 4% gain over its numbers for the previous year.

comScore is continuing to compile figures for the holiday season. "Cyber Monday - the traditional kick-off to the online holiday shopping seasons - and the subsequent weeks will be the real test for how online retailers fare this season," said Fulgoni. "That said, this is a very encouraging start."

Online Retailers Dangle Free Shipping, Discounts

Online retailers dangled more free-shipping offers and bigger discounts to get shoppers clicking on Cyber Monday as new signs of spending cutbacks appeared.

There was some evidence that the effort to establish the day as the online equivalent of Black Friday was working. Online retailers including IAC/InteractiveCorp's Shoebuy.com and Buy.com Inc. said early results had visitor traffic and sales up over a year ago.

Consumer traffic was so heavy that JCrew.com went down for a few hours, Gap.com for a brief period and Staples.com's site slowed, according to Keynote Systems Inc., an Internet consulting company that helps companies improve their Web sites. A Gap spokesman confirmed the outage. J. Crew Group Inc. declined to comment. These sites openly support Organic SEO.

Sales on Cyber Monday are closely watched because it's the first day after the Thanksgiving weekend when workers get back to their offices and start shopping at their computers for holiday gifts. Last year, online sales on the day were up 21%, to $730 million. Results typically provide a barometer for how the rest of the online holiday shopping season will unfold.

But some online retailers said consumers were buying less expensive gifts on Monday than in previous years, potentially biting into profit margins. And many said they expect sales gains for the holiday season to be less robust overall than in previous years as ecommerce begins to mature and behaves more like other retail segments, subject to the same economic buffeting as bricks-and-mortar stores.

"It is mirroring more the general, bricks-and-mortar retail," said William Lynch, executive vice president of marketing and content for HSN.com, HSN Inc.'s Web site. "Online will continue to take share (but growth) just won't be in the mid-20 (percent) we were seeing in 2004, 2005 and 2006." Amazon.com Inc. declined to divulge sales or traffic figures. "Cyber Monday is another day in the holiday shopping season," said spokesman Craig Berman.
[slowing clicks]

Official figures for Cyber Monday sales won't be out until later this week but early surveys showed that ecommerce sales are being hurt by the economy. According to a survey of 100 retailer's chief marketing officers by BDO Seidman LLP, online sales for Cyber Monday are expected to increase by just 2.4% over last year.

And online sales were already slow going into Cyber Monday. Online sales on Black Friday were essentially flat, growing just 1% to $534 million, according to research firm comScore Inc. By comparison, last year's Black Friday saw online sales increase 22%. The number of page views at online retail sites was also down 8.6% on Black Friday from a year ago, according to marketing firm Coremetrics.

Nonetheless, online retailers said consumers responded to steep discounts and free shipping offers they had rolled out for Cyber Monday. Web sites FashionBug.com, American Eagle Outfitters and Beauty.com offered free shipping on all orders Monday, for instance. White + Warren, a women's cashmere apparel seller, offered 25% off across its entire inventory Monday.

Such discounts caught the eye of shoppers like Jessica Beard of Wilmington, N.C. On Monday, the 30-year old paralegal visited Gap.com, Target.com, Express LLC's Express.com and Bath and Body Works, a division of Limited Brands, Inc., looking for discounts. She said she planned to buy items such as a pair of jeans from Express.com before the day was out.

"I feel like I'm doing them a favor by visiting their Web site and helping them get rid of inventory," said Ms. Beard.

Overall holiday retail sales are tanking, but amid the gloom there was one bright spot as sales over the Internet spiked. (Dec. 5)

At Buy.com, the site recorded double-digit increases in sales and traffic through mid-afternoon Monday versus last year, said Neel Grover, chief executive of Buy.com. In particular, Mr. Grover said he saw customers trading down in brand for better value. An LG Electronics Inc. 52-inch LCD television was selling on the site for $1,400, a 53% discount from its original $3,000. "They [holiday sales] are working out better than expected," he said.

Other online retailers said despite increased traffic, consumers were spending less per order. Scott Savitz, chief executive of Shoebuy.com, said shoppers were spending between $50 and $200 on orders, compared with up to $1,000 last year, he noted.

Other online retailers saw sales increase during Black Friday and the Thanksgiving weekend only to dip on Cyber Monday. Chris Hardisty, director of global ecommerce for Timberland Co., said sales at the shoe retailer's site experienced a "substantial" increase through the weekend. While customers in the past visited stores over the weekend and went online on Monday, he said this year customers went to its stores on Friday and then purchased online throughout the weekend.