Following a near-disastrous monthlong period in which quirky fashion retailer American Apparel (NYSEMKT:APP) almost went belly up after its board of directors ousted founder and CEO Dov Charney, a sense of stability is returning to operations. A new board is overseeing things, and with two female members -- a first for the retailer -- it has the potential to fundamentally transform the company.
Allegations of impropriety have dogged Charney for years. He was said to have interviewed employees for hire while dressed only in his underwear and was slapped with a number sexual harassment lawsuits, several of which the retailer quietly settled.
The most recent drama occurred when the board said it had received evidence of behavior by Charney that apparently went beyond the pale; it gave him a choice of going quietly or being summarily dismissed. Charney refused the offer, the board terminated him, and set in motion a chain of events that nearly brought the retailer to the brink.
American Apparel's loan covenants contained a "key man" provision that prevented Charney from being terminated. As a result of the ouster, lender Lion Capital called in its $10 million loan and could have sunk the company, but the retailer was ultimately saved when a white knight stepped forward to loan it money and ultimately take control of American Apparel. By banding together with Charney, Standard General demanded and got the resignation of most of the board of directors. Though it has yet to rule on Charney's future, Standard's decision to bring in five new faces to the seven-person board, including two women, signals it's not willing to allow business to continue as usual.
American Apparel announced last week that Laura Lee, East Coast head of content partnerships for Google (NASDAQ:GOOG) and its video outlet YouTube, would join Colleen Brown, a former top executive at several media companies who now serves on the retailer's nominating committee and chairs its governance committee, on the American Apparel board.
In announcing the appointment, Brown was quoted in a company press release as saying that Lee "will be a tremendous resource and will bring a fresh perspective to the company." Together, they just may change the face of what had otherwise been a troubled, erratic retailer, though that may not mean scrapping its oftentimes racy advertising campaigns. Those ads are as much a part of its DNA as its commitment to making its apparel in the U.S., and it says its ads are synonymous with its name.
Moreover, other retailers with women on their boards produce equally controversial ads. Abercrombie & Fitch (NYSE:ANF) has long had women on its board and has a reputation for racy ads and U.K.-based French Connection Group (NASDAQOTH:FCOGF) has often stirred up passions with the naming and advertising of its products. AdAge reported that more than a decade ago, media and marketing plans for fragrances in one of the company's lines were scrapped after "two teen magazines refused to carry innuendo-laden ads and the country's largest department store de-listed the products."
While the company had no women on its board at that time, it has had one since 2008, and ran a campaign last year featuring nude models that it said was in line with its "edgy" image, but which consumers reportedly found offensive.
As much as American Apparel's ads tread close to the line of good taste and decency, it has made a name for itself with similarly edgy images, and a more buttoned-up campaign might ruin its aura.
Where Brown and Lee can make the biggest impact is in changing the culture of the company, moving it away from Charney's seemingly fratboy-like antics to one of greater maturity and responsibility.
According to new research from Simon Fraser University in Vancouver, British Columbia, and cited by CNBC, the presence of even one woman on a board of directors can improve a company's corporate governance ratings almost immediately. .
Institutional Shareholder Services ranks American Apparel as a 10 out of 10 on its governance risk scale, with the higher the number the greater the risk. Its QuickScore covers board composition, compensation, shareholder rights, and audit. Within those four broad areas it takes into consideration individual factors such as board practices and polices, auditing and accounting controversies, voting issues, and equity risk management.
Aside from Charney's alleged shenanigans, he also publicly called his CFO a "loser" and said the CFO had no credibility in the industry, while the company has been sued by a former accountant amid charges Charney demanded he "pad the inventory" accounts, had its independent auditor Deloitte & Touche resign over questions about its financial reporting, and reappointed the auditor that was terminated just prior to Deloitte coming on board, which had raised the same questions.
It may be surprising in this day and age, but some 90% of Fortune 500 companies still had no women on their boards as of the end of last year. The boardroom, apparently, remains very much a male-dominated club. In contrast, a separate survey found only 40% of Canada's Financial Post 500 companies in 2013 had no women directors.
The professor conducting the research found that the more women that companies have on their boards the more their governance scores improve, but just one woman taking a seat at the table can have a salutary effect. She believes boards operate better with women members because they tend to be more detail-oriented.
American Apparel is going to need to be detail-oriented, as well as a better corporate citizen, if it wants to change its performance. No doubt C-suite distractions helped fuel the 6% decline in same-store sales this past quarter -- a 180-degree reversal from the year-ago period -- which led to a 2% decline in profits. The official blame was laid at movement away from retail and online sales and toward its lower-margin wholesale business.
Charney still lurks in the background at the moment as a "strategic consultant," as Standard General awaits the conclusion of a new independent investigation into the allegations against him. Depending on the findings, the hedge fund will determine what if any role he will play in the retailer's future.
It will be the women of the house, though, who may just set the new tone for how American Apparel is perceived in the marketplace.
Rich Duprey owns shares of Abercrombie & Fitch Co.. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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