Original Story: forbes.com
As the prospects of bankruptcy for American Apparel have shifted from “if” to “when,” the company is faced with mounting legal baggage. A bankruptcy filing would automatically pause all lawsuits against the company, but its docket has grown in recent months with complaints from vendors, employees, shareholders and its infamous former CEO, Dov Charney – himself the target of a series of sexual harassment suits. A Toledo bankruptcy lawyer is reviewing the details of this case.
Last week, the New York Stock Exchange notified the company that it is at risk of being delisted from the exchange. The company has until November 15 to come into compliance with listing standards, but will likely be in bankruptcy court before then. American Apparel is ironing out the preliminary details of a restructuring plan that would see it skip a $14 million coupon payment due October 15 and use the 30-day grace period to drum up revenues during its pivotal Halloween shopping period before filing for Chapter 11, sources have told Debtwire.
Outside the small world of lawyers and bankers who have long eyed a restructuring for the company, American Apparel is as well known for Charney’s antics as it is for its clothing. A 2004 Jane magazine profile described Charney repeatedly masturbating in front of its reporter during interviews, and other stories followed that Charney referred to women as “sluts” and demanded that his store managers fire “ugly” employees. Lawsuits followed, alleging sexual harassment against many of the company’s female employees. A Boston M&A lawyer represents business clients in company restructuring and acquisitions.
American Apparel’s board of directors ousted Charney as chairman in June 2014, with cause – accusing him of refusing to take sexual harassment training and using company funds as hush money for former employees. The board highlighted the mounting legal expenses the company faced while defending lawsuits aimed at Charney, and said that potential financing sources would not deal with the company while Charney was involved.
Following his dismissal, Charney pursued a hostile takeover of American Apparel, reaching a deal with hedge fund Standard General to increase its hold on the company’s stock to 43% and potentially prop up Charney to retake control of the company. This May, a group led by Eliana Gil Rodriguez, a former American Apparel employee and friend of Charney’s, sued the company in Delaware claiming that the board had concealed a plot to fire Charney after its reelection in June 2014 by issuing false and misleading statements.
But the alliance of Charney and Standard General was short-lived, as Charney filed a suit in June accusing Standard General and American Apparel of conspiring to remove him from the company. The hedge fund filed a lawsuit in July claiming that Charney had not met the financial conditions of the deal.
In September, American Apparel shareholders sued Standard General and board member Joseph Magnacca, the former CEO of RadioShack, claiming that the hedge fund is using the same vulture tactics on American Apparel that it used when it bought RadioShack debt to keep the company out of Chapter 11 before acquiring half its stores in bankruptcy. American Apparel’s shareholders claim that Magnacca and Standard General are too entangled, with Magnacca allegedly texting Standard General’s leader that he would be “anyplace anytime” for the hedge fund.
Vendor The Knit House Corp also sued the company last month, seeking $53,667 it claims was never paid on a fabric merchandise agreement. In June, BSG Tech LLC sued the company for infringement of its sound technology patents. More than 200 employees filed a class action against the company in April, claiming that they were laid off without proper legal notice. A Minneapolis class action lawyer is experienced in the effective resolution of class actions lawsuits as related to damage inflicted upon groups of people.
As bankruptcy fast approaches, shareholders are going after Standard General and Magnacca, Standard General and Charney are pursuing each other following their breakup, and Charney at this point is on no one’s team while he continues to make noise. Now Charney’s declaration of good faith at the time of his joining with Standard General has an ironic echo as the family drama comes under the jurisdiction of a bankruptcy judge. A Kansas City bankruptcy lawyer is following this story closely.
“The least important thing was me,” Charney said at the time. “I know that will be dealt with fairly later.”
Showing posts with label American Apparel. Show all posts
Showing posts with label American Apparel. Show all posts
Thursday, October 8, 2015
Thursday, November 13, 2014
FOR DOV CHARNEY OF AMERICAN APPAREL, AN ABRUPT FALL FROM GRACE
Original Story: nytimes.com
Dov Charney was no one’s idea of a button-down executive.
For years, Mr. Charney, the founder of American Apparel, has stood like a tabloid monument to fashion industry excess, a barely restrained id in a fitted black shirt. The stories about his personal life are legion: the accusations of sexual harassment, suggestive emails, nude photos — the list goes on.
But on Wednesday, the company that Mr. Charney founded in 1998 decided enough was enough. Worried that Mr. Charney had become a liability, the board ousted him from his roles as chairman and chief executive in a coup that leaves American Apparel facing an uncertain future.
“The company has grown a lot bigger than just one person and the liabilities Dov brought to the situation began to far outweigh his strengths,” said Allan Mayer, the board’s new co-chairman. A lawyer representing Mr. Charney did not return telephone calls on Thursday.
Exactly what prompted the move was unclear. People with knowledge of the situation said an internal investigation had turned up new details about Mr. Charney’s salacious behavior — only this time, they said, American Apparel could no longer afford the potential cost. Its creditors were growing anxious after years of losses at the company. Even a suggestion of new controversy might frighten stockholders, who have watched their investment plummet in value in recent years.
Mr. Mayer said Mr. Charney’s conduct, not the company’s financial performance, was behind the board’s decision. He said new facts had emerged this year, but declined to elaborate.
“The independent directors became aware of some facts we’d been previously unaware of,” Mr. Mayer said. “The only right and sensible thing to do at that point was to ask Dov to leave.”
Even if Mr. Charney’s conduct was the primary reason for his dismissal, the company’s numbers are unsettling. American Apparel’s share price has plunged more than 80 percent over the last five years. Financial institutions have demanded credit-card-style interest rates of up to 20 percent on its loans, a development that suggests how uneasy creditors are. Other financial companies flatly refused to have anything to do with American Apparel as long as Mr. Charney, 45, was at its helm.
About six weeks ago, the board began to start seriously considering forcing the founder to go.
At the end of the company’s annual meeting on Wednesday, Mr. Charney and five directors had a conference in a glass office tower in Times Square, where the board delivered the news that Mr. Charney was out. According to someone with direct knowledge of the episode, Mr. Charney was shocked.
The six men spent the next nine hours in that room, going around and around on the reasoning, as Mr. Charney made his case that the board was making a mistake. The board was unconvinced.
The company appointed John Luttrell, who has been with the company since 2011, as interim chief executive. David Danziger was appointed co-chairman of the board with Mr. Mayer. Under the terms of his contract, Mr. Charney will be suspended immediately and formally terminated after 30 days. The directors also voted to remove him as chairman.
Mr. Charney still owns 27 percent of the company’s stock.
According to a regulatory filing the company submitted on Wednesday, the decision to fire Mr. Charney comes not just with financial potential, but also with financial risk, because the move may initiate a default on some of the company’s credit facilities. If its lenders refuse to give American Apparel a waiver on the triggers, the filing warned, the effect “would have a material adverse effect on our liquidity, financial condition and results of operations, and could cause us to become bankrupt or insolvent.”
Mr. Charney, who was born in Montreal, moved to Los Angeles in 1997 to start a wholesale business that became American Apparel. Six years later, American Apparel became a retail business and immediately took off.
Early on, Mr. Charney received accolades for making clothing in the United States, even as more and more apparel production moved oversees, and for being vocal about workers’ rights. On Thursday, company executives said that neither the mission of the company — nor its suggestive marketing and advertising strategy, which has been frequently compared to soft-core pornography — would change.
“We are committed to staying true to being made in America, to being sweatshop-free, to being a high-quality basic and fashion product,” Mr. Luttrell said. “The targeted customer demographic will not change, either.”
But Mr. Charney’s penchant for inappropriate behavior has dogged him and the company for years.
In May 2005, three former employees filed two separate sexual harassment lawsuits in Los Angeles County Superior Court accusing Mr. Charney of creating an unsafe environment where women were subject to sexual misconduct and innuendo.
Nearly a year later, in February 2006, another former employee filed a complaint with the Los Angeles office of the Equal Employment Opportunity Commission, saying she was sexually harassed by an unidentified co-worker and was fired as a result of a hostile working environment.
The commission determined in August 2010 that the company not only discriminated against Sylvia Hsu, but also against “women, as a class, on the basis of their female gender, by subjecting them to sexual harassment,” the company’s annual report said.
In early 2011, five more former female employees filed sexual harassment lawsuits against Mr. Charney, including accusations that he had asked some of them to engage in sex acts against their will.
Despite his vocal support for workers’ rights, he was forced to let go of 1,800 workers, more than 30 percent of his factory staff, in 2009 as part of an immigration sweep when a federal investigation turned up irregularities in the identity documents the workers presented when they were hired.
An additional 700 left voluntarily, which company officials said had a devastating effect on American Apparel’s productivity in 2010. His management style, which executives described as controlling and disorganized, was also a problem.
And over the last year or so, current and former executives say that Mr. Charney created disarray by pushing out a large number of employees, including members of upper-level management like the general counsel, Glenn A. Weinman, who left the company in May.
In addition to disappointing earnings in recent quarters — the company’s net losses last year were $106.3 million — the company has struggled with a new distribution center opened last year. The new center had problems with missed shipments and personnel that created extra costs for the company and lost revenue from problems with inventory.
This is a crowded moment to be a retailer searching for a new chief executive, as companies like J. C. Penney and Target are also looking for new leadership. But a company insider said on Thursday that several attractive candidates had already expressed interest in running American Apparel — so long as Mr. Charney was in no way involved.
On Thursday, shares in the company rose nearly 7 percent to close at 68 cents a share.
Dov Charney was no one’s idea of a button-down executive.
For years, Mr. Charney, the founder of American Apparel, has stood like a tabloid monument to fashion industry excess, a barely restrained id in a fitted black shirt. The stories about his personal life are legion: the accusations of sexual harassment, suggestive emails, nude photos — the list goes on.
But on Wednesday, the company that Mr. Charney founded in 1998 decided enough was enough. Worried that Mr. Charney had become a liability, the board ousted him from his roles as chairman and chief executive in a coup that leaves American Apparel facing an uncertain future.
“The company has grown a lot bigger than just one person and the liabilities Dov brought to the situation began to far outweigh his strengths,” said Allan Mayer, the board’s new co-chairman. A lawyer representing Mr. Charney did not return telephone calls on Thursday.
Exactly what prompted the move was unclear. People with knowledge of the situation said an internal investigation had turned up new details about Mr. Charney’s salacious behavior — only this time, they said, American Apparel could no longer afford the potential cost. Its creditors were growing anxious after years of losses at the company. Even a suggestion of new controversy might frighten stockholders, who have watched their investment plummet in value in recent years.
Mr. Mayer said Mr. Charney’s conduct, not the company’s financial performance, was behind the board’s decision. He said new facts had emerged this year, but declined to elaborate.
“The independent directors became aware of some facts we’d been previously unaware of,” Mr. Mayer said. “The only right and sensible thing to do at that point was to ask Dov to leave.”
Even if Mr. Charney’s conduct was the primary reason for his dismissal, the company’s numbers are unsettling. American Apparel’s share price has plunged more than 80 percent over the last five years. Financial institutions have demanded credit-card-style interest rates of up to 20 percent on its loans, a development that suggests how uneasy creditors are. Other financial companies flatly refused to have anything to do with American Apparel as long as Mr. Charney, 45, was at its helm.
About six weeks ago, the board began to start seriously considering forcing the founder to go.
At the end of the company’s annual meeting on Wednesday, Mr. Charney and five directors had a conference in a glass office tower in Times Square, where the board delivered the news that Mr. Charney was out. According to someone with direct knowledge of the episode, Mr. Charney was shocked.
The six men spent the next nine hours in that room, going around and around on the reasoning, as Mr. Charney made his case that the board was making a mistake. The board was unconvinced.
The company appointed John Luttrell, who has been with the company since 2011, as interim chief executive. David Danziger was appointed co-chairman of the board with Mr. Mayer. Under the terms of his contract, Mr. Charney will be suspended immediately and formally terminated after 30 days. The directors also voted to remove him as chairman.
Mr. Charney still owns 27 percent of the company’s stock.
According to a regulatory filing the company submitted on Wednesday, the decision to fire Mr. Charney comes not just with financial potential, but also with financial risk, because the move may initiate a default on some of the company’s credit facilities. If its lenders refuse to give American Apparel a waiver on the triggers, the filing warned, the effect “would have a material adverse effect on our liquidity, financial condition and results of operations, and could cause us to become bankrupt or insolvent.”
Mr. Charney, who was born in Montreal, moved to Los Angeles in 1997 to start a wholesale business that became American Apparel. Six years later, American Apparel became a retail business and immediately took off.
Early on, Mr. Charney received accolades for making clothing in the United States, even as more and more apparel production moved oversees, and for being vocal about workers’ rights. On Thursday, company executives said that neither the mission of the company — nor its suggestive marketing and advertising strategy, which has been frequently compared to soft-core pornography — would change.
“We are committed to staying true to being made in America, to being sweatshop-free, to being a high-quality basic and fashion product,” Mr. Luttrell said. “The targeted customer demographic will not change, either.”
But Mr. Charney’s penchant for inappropriate behavior has dogged him and the company for years.
In May 2005, three former employees filed two separate sexual harassment lawsuits in Los Angeles County Superior Court accusing Mr. Charney of creating an unsafe environment where women were subject to sexual misconduct and innuendo.
Nearly a year later, in February 2006, another former employee filed a complaint with the Los Angeles office of the Equal Employment Opportunity Commission, saying she was sexually harassed by an unidentified co-worker and was fired as a result of a hostile working environment.
The commission determined in August 2010 that the company not only discriminated against Sylvia Hsu, but also against “women, as a class, on the basis of their female gender, by subjecting them to sexual harassment,” the company’s annual report said.
In early 2011, five more former female employees filed sexual harassment lawsuits against Mr. Charney, including accusations that he had asked some of them to engage in sex acts against their will.
Despite his vocal support for workers’ rights, he was forced to let go of 1,800 workers, more than 30 percent of his factory staff, in 2009 as part of an immigration sweep when a federal investigation turned up irregularities in the identity documents the workers presented when they were hired.
An additional 700 left voluntarily, which company officials said had a devastating effect on American Apparel’s productivity in 2010. His management style, which executives described as controlling and disorganized, was also a problem.
And over the last year or so, current and former executives say that Mr. Charney created disarray by pushing out a large number of employees, including members of upper-level management like the general counsel, Glenn A. Weinman, who left the company in May.
In addition to disappointing earnings in recent quarters — the company’s net losses last year were $106.3 million — the company has struggled with a new distribution center opened last year. The new center had problems with missed shipments and personnel that created extra costs for the company and lost revenue from problems with inventory.
This is a crowded moment to be a retailer searching for a new chief executive, as companies like J. C. Penney and Target are also looking for new leadership. But a company insider said on Thursday that several attractive candidates had already expressed interest in running American Apparel — so long as Mr. Charney was in no way involved.
On Thursday, shares in the company rose nearly 7 percent to close at 68 cents a share.
Monday, February 11, 2013
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.
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.
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