CEOs Gone Wild

Dov Charney, dressed down at last.

Of all the misbehavior that can get you fired as a chief executive officer -- misleading the board about the company's performance, say, or lying on your resume -- walking around the office in your underwear would seem to qualify. Dov Charney has done that and more in the seven years since American Apparel Inc. went public. Yet he lost his job as CEO just last month.

Which raises at least two questions: What took American Apparel's board so long? And does its reluctance say anything about the confused state of corporate governance in the U.S.?

In general, it's never easy for a board to fire a CEO. It can expose management lapses that companies would rather not publicize. Many board members also count the CEO as a friend or confidant. What's more, directors often disagree over when and whether to push out the CEO, with many preferring to postpone the hard choice until scandal or a hostile hedge fund forces their hand.

All these factors were present in the case of Charney. He is the charismatic founder of the company that was once admired for avoiding low-cost sweatshops -- American Apparel's clothes are made in Los Angeles -- and for paying garment workers decent wages. Now he is fighting to get his job back, or at least his severance. The board appears to be sticking to its decision, even though that triggers lender conditions that might force the company into bankruptcy. The corporate intrigue, suffice to say, has yet to play out.

It would be nice to think that boards simply do not tolerate frat-boy behavior, and Charney's -- including masturbating in front of a female reporter a decade ago -- was beyond the pale. But it’s the effect on the bottom line that really gets a board's attention. Misbehavior becomes especially relevant when it costs the company directly, harms the brand, alienates customers or alarms shareholders. This quadfecta appears to have been achieved at American Apparel, which has had to pay to settle sexual-harassment claims over Charney's behavior and has lost about $270 million since 2010.

In that sense, Charney's is an easy case. The question gets harder when a CEO does something that could be harmful to the company yet is neither illegal nor even unethical. A board's obligations are essentially threefold: under the law; to the company; and to society at large. What happens when these last two conflict?

Recall the case of Brendan Eich, the former CEO of Mozilla Inc., who lost his job last April for the sin of supporting a ban on gay marriage in California six years earlier. The board said his views ran counter to those of the company, a nonprofit that relies on the Internet community to use and improve its Firefox browser. More famously, there is the late Steve Jobs, whose abrasiveness got him fired as CEO of Apple Inc. in 1985 but wasn't a barrier to bringing him back a dozen years later. In both cases, the respective boards made a calculation, perhaps coldheartedly yet with an appropriately sharp eye on earnings, that the CEO's behavior was disqualifying.

Not all CEOs are polite and even-tempered, of course -- nor should they be. There is a place in the corner office for strategically eccentric or even offensive behavior. The American Apparel board may not have ousted Charney for all the right reasons, but its decision was the right one. The mistake was not making it sooner.

--Editors: Paula Dwyer, Michael Newman.

To contact the editor on this story:
David Shipley at