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Mar 14, 2016

The naked truth about American Apparel

How it wasn't just Dov Charney's personal eccentricities that cost him his job

In 2016 American Apparel’s investor relations became an oxymoron when the board that nominally represents its shareholders ousted company founder Dov Charney and wiped out the stock of all equity investors (including Charney). It wasn’t a proxy battle as we know it, given that shareholders were pretty much ignored: it was fought in the Delaware bankruptcy court and the result showed that bond-holders trump all other stakeholders, equity investors and employees.

Overturning the divine right of CEOs, the decision probably also marked the end of one of the 21st century’s most interesting brands. The shareholders ended up with worthless paper that, in today’s electronic age, they cannot even frame and put on the wall for posterity. The company now belongs to the hedge fund that its naïve founder brought in to rescue the firm, promising him it would restore his management. Charney, whose enterprise and quasi-erotic eccentricities gave rise to American Apparel, is now crying poverty as the company sets about grinding the bones of his reputation.

Charney made (wayward) lifestyle part of the American Apparel brand. Its ads pushed the envelope in flaunting teenage sexuality, emphasizing the feel-good factor both sexually and socially. He also raised hackles when he decided to make his skimpies in the US, instead of in some steamy tropical sweatshop, and paid his workers way above sweatshop wages, giving them family healthcare and free international calls. That was a major benefit to the company. He recruited Americans (as well as illegal immigrants living in the US) and paid them more, by all accounts increasing productivity to unheard-of levels. When the company listed, every employee got stock, not just the C-suite.

Workers, making sexy lingerie, had to sign to affirm that they were OK with innuendo and a sexually charged workplace ambience. Charney wandered around the workplace in his underpants rather than in Brook’s Bros suits. But that was part of the buzz of the brand he built and of which he was a major shareholder.

When the board fired him, it reported that ‘it was not the result of any problems with the company’s operations’ but rather that his ouster ‘grew out of an ongoing investigation into alleged misconduct.’ It spent more than $10 mn of the company’s scarce cash on an inquiry into Charney’s conduct, while the new chief executive claimed the firm could not afford yarn to make new inventory. The board also hired a firm of union-busters to keep out the union its own workers had formed.

Charney was hardly a steady hand at the helm: at one time he had also fought attempts to unionize the company, though last year he backed an attempt to start a union whose major aim was his reinstatement. The lawyer who had pursued him doggedly over allegations of sexual harassment, and whom he lacerated publicly, is obviously redeemed despite his failure to win those cases: he is now Charney’s attorney against the new management.

American Apparel is an interesting exercise in comparative corporate governance. One cannot help but wonder whether Charney’s eccentric habits in not offshoring and insisting on paying workers well had more to do with uniting outraged financiers behind his ouster than his eccentric personal behavior, which had almost been a marketing tool for the company even though it ultimately used it to pull him down. There is something disturbing about a founder being thrown overboard by bankers.

This article appeared in the Spring issue of IR Magazine