The Fight From Within – Founders and Their Boards

The Fight From Within – Founders and Their Boards

The genteel reputation of Canadians is unfortunately being sorely tested once again, but this time the eyebrow raising occurrences aren’t in Toronto politics, but in corporate boardrooms. Specifically, as a result of actions surrounding the Canadian founders of two iconic companies, Lululemon and American Apparel.

In brief, at Lululemon, the founder Chip Wilson who is still a board member and the largest company shareholder with 27% ownership, voted against the nomination of two of his fellow directors that were up for election at the recent annual shareholder meeting, and issued a press release advising his intent immediately before the meeting.

At American Apparel, founder, chairman & CEO Dov Charney, also the largest shareholder, was suddenly dismissed by the board for cause. As expected, the result of these very public actions have put both companies and their boards very much in the spotlight, and in crisis mode as significant expected repercussions are well underway.

On many occasions I’ve seen first-hand how the founder dynamic can be particularly challenging for fellow board members to successfully grapple. Internal disputes that become public are one of the most dysfunctional events companies may face. Since it’s typically very difficult to dismiss a board member (outside of a shareholder meeting election), it can quickly become complicated for non-partisan board members to hold strategy meetings to deal with these issues, where you may only want certain (independent) board members attending, when all may have a right to attend. Secret/late notice board meetings, (in hopes certain board members can’t attend), etc., are just some of the cloak and dagger tactics used to try and deal with a hostile internal situation.

Founders are visionary risk-takers that bring significant expertise, passion, charisma and personal capital (all of which are critical to successfully developing an idea from the proverbial napkin to commercial viability), and typically hold a very significant influence over the board (and management), regardless of voting stake. Over time however, as a company becomes solidly established a different leadership skill set may be desirable to optimally manage and grow the company, which the founder may be unable/ill-suited or uninterested in providing. Compounding the situation is that founders often comprise their boards (at least early iterations) with like-minded, supportive members. However, over time as companies grow and become more successful, the board’s composition typically evolves, becoming increasingly more sophisticated, attracting higher profile and experienced board members with independent views, strong track records, and good governance principles. This natural development can lead to increased tension with the founder if not managed diligently.

There are basic, sound board governance structures designed in theory to offset disproportionate bias/influence any single board member or founder/CEO may have. These include having boards comprised with an overall majority of independent directors, and specifically on key committees including audit, nominating and compensation. Separation of the Chairperson and CEO roles also is designed to reduce disproportionate influence. Lastly, where the founder is Executive Chair, a lead director structure is designed to balance power in the boardroom.

Having independent directors unfortunately is not the same as having independently minded directors. As Barrick’s founder Peter Munk stated, in defending the compensation paid to his hand-picked successor John Thornton, “don’t blame the board, it was my idea.” So the challenge continues whenever there is a founder involved with a company, to demonstrate to shareholders there is meaningful and functional independence of thought on the board.

Practical tips for boards working within a founder environment:

Creating a meaningful communication conduit, with mutual trust and respect between independent chair/lead director and founder is critical.

Founders are very knowledgeable of, and have significant relationships with, key shareholders which can become problematic if the board/founder dynamic deteriorates. The board should regularly obtain independently sourced shareholder intelligence to assist with shareholder risk oversight, complementing/corroborating management information.

Select board member(s) should develop a transparent and appropriate level of dialogue with key shareholders to complement existing relationships. Major institutional investors are requesting board access so this will satisfy multiple objectives.

Clearly delineated roles and responsibilities for founders and incoming CEO’s will help set expectations and minimize potential future conflict. Potential CEO’s recognize the challenge of joining a board where the founder is (over)actively involved.

Board member orientation should reinforce importance of both collaboration and independence of thought. 360⁰ director reviews, robust succession planning strategy and confidential mechanism for key shareholder feedback are also helpful policies.

Founders have a wealth of corporate knowledge and experience, which can be of strong value and benefit for an extended period of time. Lululemon and American Apparel serve as a reminder to boards however, that founders influence can also be a painful dual-edged sword if not handled properly.