May 25 (Bloomberg) -- Gianni Versace SpA’s board meets tonight and will decide the fate of Chief Executive Officer Giancarlo Di Risio, who may be fired after tensions flared over creative control with Donatella Versace, exacerbating disputes over cost cuts, three people familiar with the situation said.

Di Risio will likely be dismissed at a board meeting in Milan tonight, the people said, declining to be identified because the decision hasn’t been formalized. Donatella Versace, the company’s creative director, was displeased that Di Risio sidestepped her to license a cheaper line designed by someone else, one of the people said.

The CEO was recently unhappy that Donatella’s choice of photographer for an ad campaign was Mario Testino, who charges at least 100,000 euros ($140,000) a day. The people said the family has criticized Di Risio for not reducing new store plans.

The family brought in the former Fendi SpA chief in 2004 to stem losses. He worked closely with Donatella to make the collections less flashy and returned the label to profit, helped by sales of accessories and new booming markets, such as Russia.

“Di Risio did a good job of turning Versace around and positioned it well,” said Carlo Pambianco, a Milan-based fashion industry consultant. “Versace can’t try to compete with larger brands, such as Armani or Gucci. He established its own niche.”

Di Risio, 53, declined to comment, as did a spokeswoman for Versace. Messages left for Mario Testino’s spokeswoman on Sunday evening weren’t immediately returned.

Design Dispute

Clashes between Di Risio and Donatella, who owns a 20 percent stake, flared in February over handbags that the 53- year-old sister of late founder Gianni Versace hadn’t been consulted about, and heated up again about 10 days ago over other design issues, according to two of the people. They didn’t give more details on the most recent design dispute.

Another issue with the family was their perception that Di Risio focused on developing new products at the expense of relationships with other retailers, the people said.

Di Risio brought in staffers including Loredana Nastro from one of his former employers, Ittiere SpA, and installed her as commercial director to handle those relationships with him. Under Di Risio’s watch, Versace introduced the “Madonna” handbag named for the pop star, which sold for 2,600 euros.

Versace’s business is under pressure as the financial crisis hurts the 175 billion-euro luxury-goods market, which Bain & Co. predicts may shrink 10 percent this year.

However, Versace stayed profitable in 2008. Pambianco’s research shows Versace’s 8.3 percent sales growth last year made it Italy’s third-fastest-growing fashion brand, trailing only Geox SpA and Calzedonia and beating Car Shoe maker Tod’s SpA.

Versace dressed celebrities including Angelina Jolie and Lenny Kravitz at last week’s Cannes film festival. Even when the label lost money, Donatella built on relationships her brother had with show business figures such as Elton John to keep the brand in the public eye.

Family’s Dividend

Di Risio had won the respect of the family when he was marketing director at Ittierre SpA, which still makes Versace jeans collections under license.

He returned Versace to profit in 2005, a year ahead of schedule, by selling money-losing eyewear and fragrance units, overhauling management and taking control of distribution in Japan and Taiwan. That enabled the family to pay themselves their first dividend in at least four years in 2007.

The conflict between Di Risio and Donatella Versace was first made public by Italian newspaper Il Sole 24 Ore in a May 21 article that said the CEO might quit over strategic differences. The article was seen as a challenge by the family, which didn’t leak information to the newspaper, the people said.

The next day, the Versace family issued a statement denying the professional relationship with Di Risio had been terminated and confirming their support for the company’s growth.

Cheaper Fashion Line

The board will review a three-year plan developed with consultants Bain & Co. in the next few days, that statement said. The plan will also be presented to the board tonight, the people familiar with the situation said.

Di Risio signed a license in February that will see Verona, Italy-based Gruppo Facchini produce a new collection under the Versus label, a line that’s cheaper than the core Gianni Versace brand. He told Bloomberg News at the time that the move was necessary in the current market because accessible luxury goods “have a greater grip.” Versus handbags sell for about 800 euros, while Versace purses cost more than 2,000 euros.

The CEO then handed creative direction of Versus to U.K. designer Christopher Kane and established a new creative team that wasn’t under Donatella’s control, one of the people said.

Versace has 81 boutiques for its top Gianni Versace label, while the Versace Jeans, Sport and Versus collections have 56 freestanding stores, the company Web site shows. Di Risio had been concentrating on building stores in Asia, which he had said would become Versace’s No. 2 market this year.

Allegra’s Stake

Donatella’s 22-year-old daughter Allegra inherited a 50 percent stake in Versace after her uncle Gianni’s 1997 murder. She sided with her mother in the dispute with Di Risio, one of the people said. Five years ago, Allegra excluded her mother from management control when she came of age, voting by proxy to hire Di Risio and give her mother a creative-director contract.

A further 30 percent stake is held by Donatella’s uncle, 64-year-old Santo Versace. He no longer has an operational role at Versace and has moved into politics, winning a seat in Italy’s parliament. Santo, Donatella and a series of interim CEOs ran the label after Gianni Versace’s murder.

Both Donatella and Santo sit on Versace’s board, along with Milan-based financial consultant Paolo Colombo, who represents Allegra. The other board members are Luxottica SpA Chairman Leonardo Del Vecchio, and business consultants Marco Tullio Salomoni and Massimo Cremona. Di Risio was appointed by the board in August, 2004.

Last year, Versace’s profit fell to 9 million euros from 13 million euros in 2007 because of one-time expenses, the company said in March.

To contact the reporter on this story: Sara Gay Forden in Milan at sforden@bloomberg.net

Last Updated: May 25, 2009 06:14 EDT