by Chip Wilson
With the little power I had left, I was adamant that the upper levels of management would return to our foundational concepts. This meant our new CEO would have to understand fully how our culture ensured our best-in-the-world metrics.
One possible contender for the CEO role was Jerry Stritzke, who’d joined the lululemon Board of Directors in 2012. Jerry had a background with Coach, Inc. and Victoria’s Secret, which gave him much of the operational experience we required. Jerry and five lululemon people attended a course in Vancouver called “Creating a Leader” run by Werner Erhard and Michael Jensen. Jensen had joined the faculty of the Harvard Business School in 1985, founding what is now the Negotiations, Organizations and Markets Unit. I believe Erhard and Jensen’s world-class, three-page document on integrity should be framed and hung in every home and office (the document is available as an Appendix to this book).
Ultimately, Jerry felt that his Christian beliefs conflicted with the leadership-based concepts of Erhard and Jensen. The conflict for Jerry was so severe that he’d quit the seminar two days early. As far as the employees and I were concerned, this eliminated him from being our next CEO even though he might have been great. The Board thought I was nuts, but I knew the employees needed the right cultural person after two CEO-operators.
Again, I put forward Delaney Schweitzer, but the Board had little interest in a CEO who might be perceived as a “Chip ally.” Sadly, Delaney didn’t stand a chance.
Finally, after thirteen candidates had either declined or been rejected, the CEO head-hunter delivered a wildcard candidate. Laurent Potdevin was a mediocre-at-best candidate to take over a public company of this size.
We’d already put him through two interviews, but his appointment to CEO seemed a foregone conclusion with absolutely no one else in the pipeline. The pressure was immense for the Board to announce a new CEO.
I clarified that I wanted Laurent to take the Landmark course before he started with us.
With Laurent, I wanted to know upfront if he would fit with lululemon’s unique culture.
“We’ll make sure he does the course,” the Board assured me. “It’ll be one of the first things he does when he comes on.”
Until Laurent had committed to guided transformational development as part of due diligence and onboarding, I wouldn’t vote for him. Eventually, I was confronted by the Board. “Look, Chip, if you don’t agree with the rest of the Board, then it’s going to be all of us against you, and we’re going to vote him in anyway.” I didn’t want the optics of having a new CEO voted in by a divided Board, so I acquiesced.
Reaching Out
Laurent Potdevin was appointed CEO of lululemon in December 2013—a full year since the initial resignation of our last CEO. Despite all the difficulties that had occurred with our previous CEO, I wanted to hit the reset button, work collaboratively, and set Laurent up for success with lululemon. Not long after he’d started, I invited him over to my house to show him why the business model and philosophy were so powerful and distinctive from the competitors.
After a short while, I realized he just wasn’t engaged. I got the sense he wasn’t interested in anything I was saying. There was no real exchange of knowledge, and I felt lululemon was in for a rough time as I could sense he had no fundamental base to lead a cultural company. His character seemed conflicted, and he didn’t appear to be a leader to himself, let alone capable of being a leader to others.
After Laurent left my house, I realized this was one more nail in the coffin. In an earlier time, having someone so blatantly dismiss the business philosophy might have been a devastating feeling. At this point, I just felt tired.
Laurent ultimately attended the Landmark Forum seminar, given he promised the Board he would go, but I am confident he went only out of obligation and was not receptive to the learnings that were offered to him. Later, on “advice” from the head of HR, he eliminated the course from lululemon’s people development plan altogether and did not provide a substitute. Since then, I’ve come to believe the culture of lululemon is living on the fumes of its past. To newer employees, it appears great in comparison to other companies, but lululemon was built to be in a class of its own.
Kit and Ace and the New Dynamic
My family, at least, had moved on from 2013, and from lululemon. Early 2014 saw the beginning of Kit and Ace.
Shannon had ideas and designs for t-shirts, partly inspired by the technical cashmere she’d conceptualized a year or two earlier. As Shannon says: “We really started it as a hobby… I thought, well, why don’t I just hire a few people. I’ll get another designer, and I’ll bring along a fabric person, and we’ll probably need somebody to help us with some logistics, and we’ll work in the heritage building.”
It was all simple and straightforward.
“This was about the size of the business I wanted to have,” Shannon says. “Just one shop, getting the assortment right.”
As Kit and Ace got started, my son JJ also became prominently involved with it. He had been raised with Westbeach, and then when lululemon started, he’d always worked in the stores. From there he got a retail business degree from Ryerson University in Toronto, had spent a summer at Advent Equity in their retail department, and lastly, had returned to lululemon in 2014.
JJ was also the perfect age to understand the new social media and e-commerce landscape, so Shannon brought him on as a partner working on that end of the brand. I was proud to see it working as a true family business.
Dinner table discussions revolved around lululemon and Kit and Ace, but I had a lot to think about on my own.
Introspection
Was I being a leader? Was I creating a future that would otherwise not have occurred? Was I giving before expectation of return? Were my internal struggles about my vision (elevating the world from mediocrity to greatness) at odds with the new lululemon? Was I the weird uncle to be kept quiet? What was my commitment to employees and family? Was my identity as a person too wrapped up in the identity of lululemon? Could I recreate myself to live something other than the life I felt born to live? Was I in choice?
Big questions.
Taking Action
I knew if I blamed other people, I lost the power to change a situation. Blaming does nothing to shift a power balance. A rule I’ve adhered to for a long time is this: if I ever complain twice about something, I either must act or shut up. The time had come for me to apply this rule to my present situation with lululemon.
For starters, I’d never taken the time to write the story of lululemon. Under new management, lululemon’s PR and social media machines were reframing the company’s foundations and my history. With social media, once anything is documented on a digital platform, it may as well be true.
Now that I had “resigned” as chairman, the dynamic had changed. I could make it my mission to hold the lululemon Board and upper management accountable for its performance since 2011. The athleisure wear and stock markets had gone ballistic, but in January of 2018 lululemon was at the same stock value as five years earlier.
The company was no longer an agent for change or a social experiment, but maybe, just maybe, that could be fixed. I thought investors would want to know how lululemon could again recreate the world of technical apparel.
The challenge that I encountered was that the lululemon shareholder base was primarily comprised of financial institutions who would sell if the company didn’t fit into their short-term growth parameters. Institutions will not work to change the rules of how directors are elected. Activists gain little from agitating as lululemon does just well enough not to be worth the effort, and it cannot be broken up into smaller, more profitable entities.
Lululemon’s governance structure doesn’t allow shareholders to change the Directors as fast as the world changes. This has created nepotism and a “leave it be” mentality. A principal foundation of lululemon culture was to view everything as though “nothing works.” Within this context, we never rested on our laurel
s, and we were willing to abandon what looked good to perfect a better future.
Chapter 32:
Pouring My Heart Into It
The Perfect Espresso
In the late 1990s, after I’d sold Westbeach, Howard Schultz’s book, Pour Your Heart Into It, was an inspiration for culture and expansion of the small-box retailer. Now, amid my difficulties with the Board and upper management of lululemon, I was inspired by Schultz once again.
Back in 2007, Schultz had emailed a memo to his company’s executives. In it, he wrote, “Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than one thousand stores to thirteen thousand stores and beyond, we have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”59
Throughout the rest of the email, Schultz decried what had happened to Starbucks as they’d endured their own literal watering-down. “[We] desperately need to look into the mirror and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience,” Schultz added.60
Schultz was eight years into a hiatus from Starbucks when he wrote that memo to the leadership. Not long after, he was reinstated as CEO, and since then, the turnaround in Starbucks has been dramatic. In February 2008, over seven thousand Starbucks stores in the United States closed for half a day (at the cost of $6 million in revenue) so that baristas could be retrained on brewing a perfect espresso.
What Happens to a Design-Led Company Over Time?
The downfall of public companies occurs because of something I think of as the “Great to Good Phenomenon.”
If a company is pushing the creative envelope, once every twelve quarters, something in design or brand will not go right. It is the outer edges of the envelope that develop a high margin business, creates brand value and differentiates a company.
When the underperforming twelfth quarter comes, as it inevitably does, design puts out a line that doesn’t meet projections. And when design fails, then better-spoken, better-educated, and less emotional operators/merchants (who are bonused on projections) get permission from an operational CEO to take charge. The so-called voice of reason takes over because operators apparently know better than unreliable creative people. Operators can back their position because lower sales are proven with metrics. Creative cannot prove next season will be better.
The voice of reason is based in finance, who is responsible for reporting on promised numbers to analysts and on product buyers who are bonused on one-year margin projections. Both finance and buyers are therefore incentivized to be risk-averse.
Operators naturally step up because they want power, even if subconsciously. If the CEO cannot protect creative, the company becomes an old, commodity retail company run by fear of failure.
Public companies become mediocre because non-creative operators wait on the side saying, “I told you so.” On a long enough timeline, these operators will eventually be correct. If neither the CEO nor the board understands creative, then they won’t know how to hire, manage or protect creative. They become uncomfortable with “creative” much like I would be uncomfortable overseeing technology or logistics projects.
A CEO-operator who doesn’t want to take the public wrath of short-term failure will tell stock analysts “everything is now under control.” But that control easily kills the reason the company was differentiated, by killing differentiation itself. If a public company is going to survive, the solution is for either the CEO or the Chairman of the board to be a champion for the creative process.
I wish I knew how to communicate this concept to Directors who drive the same route to work every day.
The problem is, once power has been taken from design and brand, it is never given back. After the power shifts from creative to operations, creative teams are given metric parameters from which they can never escape.
The “voice of reason” creates fear of failure, resulting in stability, then mediocrity, and then a commodity product. A commodity product means lower margins and dropping sales.
As the company stops performing due to lack of innovative product or bland marketing, operators blame design and brand for not elevating the company from the onslaught of competitive pressures. Inevitably, the best creative people exit the company, as great people are not fulfilled by fear-based management or a metric-driven CEO. Especially a CEO who blames his or her subordinates, or fears having to explain a bad quarter.
After the operators take over a creative company, the company has a default future it doesn’t know how to get out of.
Looking to Advent
David Mussafer explained to me that Christine had made no money during her time at Starbucks. At lululemon, she was given three-year short-term options with no incentive to add value for the long run. With a great company like lululemon, she took the opportunity to cut the expenses of quality, people, and product, and then raise prices. These actions did not affect short-term value because our world-class brand would stay strong for years… even as its cultural foundation was crumbling.
Lululemon’s 2014 shareholders’ annual general meeting (AGM) was coming up, and three Board member positions were coming up for re-election. Maybe this would be the opportunity to make the changes we needed.
The 2014 AGM and Strategic Voting
At this point, I turned to a book called Boards That Lead, by Ram Charan and Dennis Carey, published by Harvard Business Review Press. In chapter four, Charan and Carey say: “In our experience, as many as half of Fortune 500 companies have one or two dysfunctional directors… It becomes a drain for everyone involved—except the dysfunctional director.”61
The chapter adds that these kinds of directors too often refer to what their own companies had done and that the best course of action for dealing with them is to remove them from the board. Not an easy process, Charan and Carey acknowledge, “since few directors readily exit on their own accord.”62
Still, these are wise words. Of the three Directors positions up for re-election that summer, one belonged to Michael Casey, the new Chairman of the Board, and one belonged to RoAnn Costin.
Both RoAnn Costin and Tom Stemberg were direct investors in a Boston-based company called City Sports, which was a vertical-retail yoga clothing company in outright competition with lululemon. I had raised my concerns about this, but this only made me an enemy of Tom Stemberg.
The core of the lululemon Board was comprised of Tom Stemberg’s business associates. The legal opinion the Board received was: “Well, you can have people on the Board that have a conflict of interest if the Board knows it’s a conflict of interest, and if they agree that it’s not going to affect the value of the company adversely.”
Now, in 2014, Tom Stemberg wasn’t up for re-election, but RoAnn was.
I released a public statement saying I would use my shares to vote against Michael and RoAnn’s re-elections, and I encouraged other shareholders to do the same.
As part of my statement, I said, “I am concerned that the Board is not aligned with the core values of product and innovation on which lululemon was founded and on which the company thrived.” I added that for far too long we’d been focused on short-term profits at the expense of long-term vision and value.
As of July 2014, our stocks had hit a low of $36 a share.
All-Time Low
In 2014, the lululemon stock was weak. There was no new blood coming on to the Board, and because the stock was continuing to drop and there was Board volatility, lululemon couldn’t attract quality Directors.
I could see no upside for lululemon in its present form. I thought the only way forward was to sell half my shares (and, effectively, two Board seats) to Advent and shake up the Directors.
In August 2014, I sold half of my shares to Advent Equity. By then, I felt I’d exhausted my other opt
ions to affect the changes I wanted to see with the Board. I also thought that the stock was low and incapable of increasing with the current Board composition and a CEO who seemed disinterested in the business philosophy.
Advent had completed its original investment in lululemon back in mid-2009 and hadn’t been involved since, but now they seemed happy to reinvest. They knew an investment by them when the stock was crumbling would bring stability and an instant increase to share value. I was counting on it.
At any rate, as of August 11th, it was done.
Advent also offered to buy Kit and Ace, and I agreed it was a good idea. However, it wasn’t my company to speak for, and after the Advent deal was done, Shannon, who owned Kit and Ace, said no to their offer. “The timing didn’t seem right. There was a lot of flux at lululemon, and they had already told me very clearly, they didn’t want the idea. Kit and Ace had been open only a few months. I felt responsible to the people who had come on board at Kit and Ace and was unsure of their future with a possible change of ownership.” I supported her decision.
Competition and Conflict
“Life is a rip-off when you expect to get what you want.
Life works when you choose what you got.
Actually, what you got is what you chose.
To move on, choose it.”
—Werner Erhard
Meanwhile, Kit and Ace’s growth brought speculation that it was poised to compete with lululemon. The Financial Post said, “[while] Kit and Ace is still in its infancy, it will probably appeal to a core segment of lululemon consumers.”63
Kit and Ace used natural fibres, while lululemon used synthetic. Lululemon was made for sweat and for working out, and Kit and Ace was made for those same people who wanted technical apparel that they could wear to the office.
Besides, as they’d done with mindfulness, lululemon had already taken a pass on the technical cashmere and the designs that formed the foundation of Kit and Ace. Lululemon’s real competition was represented in the billion-dollar opportunities of competing properly against Nike, Adidas, and Under Armour.
