Little Black Stretchy Pants

by Chip Wilson

  Unfortunately, lululemon’s Board of Directors had a different take on the situation. I discovered this at a Board meeting in late 2014. Before the meeting started, David Mussafer took me out in the hall, telling me there was something I needed to know.

  “The Board is going to set up a special committee to run the company,” David said. He explained this “special committee” would consist of all Directors except me. The “official” Board meeting would last about two minutes, then the special committee would take over. Since I would not be part of that committee, I wouldn’t be needed after the first two minutes were up. They weren’t kicking me off the Board, David explained, but they were making me 100 percent ineffective.

  The reason for this was Kit and Ace.

  As the Board saw it, my connection to Kit and Ace constituted a conflict of interest. Obviously, I found this ridiculous. To call it a conflict of interest when Tom Stemberg and RoAnn Costin were investors and on the Board of a direct lululemon knockoff only added to the insanity.

  Advent didn’t help me either. They were disappointed that Shannon hadn’t agreed to sell Kit and Ace to them when they’d offered. They had lost face with their investors. With my part of the meeting over, David said, “Chip’s going to be leaving now.” That was that.

  I was clear that the issue was not my conflict with Kit and Ace but everything to do with Tom and RoAnn’s conflict with City Sports and the reputations of other Directors who were willing to throw lululemon under the bus to protect themselves.

  I realized I needed to get off the Board altogether. Trying to resolve things internally hadn’t worked and might never work. Staying on the Board would be the same as being complicit in bad leadership. I left the Board, and my one seat remained empty.

  On Steve Jobs

  From what I have read and seen about the ousting of Steve Jobs from Apple, it appears to me that Steve wanted a psychological price for the Mac so every cool person on the planet would buy it. Steve knew the market and the psychology of the consumer; his board did not. Steve was tossed out of Apple. I know how Steve felt.

  Reinventing Myself

  With Advent’s two seats on the Board, I felt like progress had been made amongst the Directors, but the Board now lacked diversity. It lacked directors who understood the industry, culture, or vision. We were still missing the pieces that would return us to greatness.

  There is a story in Black Box Thinking about a keen engineer who observed a specific pattern of bullet holes in planes making it back from bombing Germany in WWII. To save weight, he only reinforced the vulnerable areas, as revealed by bullet hole patterns (for instance, there would be more bullet holes on the wings and less on the belly of the plane). The pattern was also sent to a mathematical group in NY that was specially-formed to solve military issues. They wrote back to recommend the engineer only cover areas with no bullet holes because planes hit where there were no holes were the ones that crashed64.

  I sensed that the Directors, like that WWII engineer, were only covering the bullet holes—in other words, reinforcing the vulnerabilities as they perceived them—whereas I was focused on what would bring down the whole plane.

  I believed I could have more effect on the future of the company from outside the Board than I could inside, and I knew it was a waiting game. Back in 2012, I had foreseen what the five-year future of the company was likely to be—a steady decline in value in comparison to the stock market and other athletic companies. Now, unfortunately, I just had to wait until I could demonstrate that decline using metrics the Board would understand.

  ____________________

  59 Howard Shultz, memo to Jim Donald, February 14, 2007, as published on Starbucks Gossip, starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html.

  60 Ibid.

  61 Ram Charan and Dennis Carey, Boards That Lead: When to Take Charge, When to Partner, and When to Stay out of the Way, page 62. Harvard Business Review Press, 2014.

  62 Ibid, page 71.

  63 Reuters, “As Lululemon Seeks to Recover, Founder Chip Wilson’s Family Bets on Casual Luxury with Kit and Ace Venture,” Financial Post, October 28, 2014, business.financialpost.com/news/retail-marketing/as-lululemon-seeks-to-recover-founder-chip-wilsons-family-bets-on-casual-luxury-with-kit-and-ace-venture.

  64 Matthew Syed, Black Box Thinking, The Surprising Truth About Success (Perigee/Penguin Group, 2015)

  Chapter 33:

  2015

  The Remaining 15 Percent

  I no longer had any official involvement with lululemon, but I still owned 15 percent. To be responsible to myself, the shareholders, and my family, I believed there had to be something I could do for the company. I wanted lululemon to achieve its full potential and regain its ability to elevate the world from mediocrity to greatness.

  I wanted the business to function well, I wanted David Mussafer and Steve Collins to bring direction to the Board, and I even wanted Laurent Potdevin to succeed as CEO.

  Since selling to Advent in March of 2014, the share price fluctuated wildly. The Board had believed lululemon’s issues were a function of growth, rather than culture and people development. The Directors implemented more metric structures because the company was losing its most knowledgeable people at such a staggering rate they had been forced to operate by command and control.

  As I said earlier, many of the core people had left, or were leaving. “We hit a few problems,” says Delaney Schweitzer, “Quality issues, et cetera, and the company and Board got scared and wanted to change things to play safe and take away some of the special things about lululemon to become more of a typical retailer. It became obvious in 2014 that the Board always felt external talent needed to be brought into senior roles at lululemon. My ultimate reason for leaving was that maintaining the unique culture and the brand essence of lululemon was less important to the Board than managing the short-term earnings.”

  “I gave my notice on May 1, 2015,” says Deanne Schweitzer. “My sister had also given notice. I wasn’t being challenged any longer, and my whole body told me I couldn’t do it anymore.”

  As Michelle Armstrong recalls, “I was Vice President of Women’s and Accessories Global Merchandising. But it had gotten to a point where there were too many people at the senior leadership level who never understood why we did what we did and didn’t appreciate what made us unique and successful. I felt like I could fight for our old way of doing things, but I might be fighting for the next ten years, and I wouldn’t win. Or I could bow out while I was still optimistic about the company.

  “Just before I resigned, I thought, ‘Lululemon looks like every other retailer out there now.’ I think it’s all out of fear. The risks we used to take in breaking the retail model, and breaking the way products load to a store, and breaking the way you build a line plan, and doing it the way we felt was best for the Guest… it was just a different way of working. But people sometimes think “different” is bad. Or unsafe. And I think we just slowly became like every other organization. I was sad to see it happen. It didn’t need to be that way.”

  Worse yet, it appeared quality people did not seem to want to work for lululemon, and Laurent hired disgruntled Nike people. As with Christine, Laurent was not a leader who could teach and develop people below him so the “law of attraction” worked the opposite way. Nike people brought constructs opposite to those on which lululemon was built. Laurent was building a wholesale management team for a vertical model. Two different models in one company will only stop the flywheel. It was the blind leading the blind.

  As George Tsogas, the former VP of Global Logistics and International Distribution, observes, “The Board hired a CEO in 2013 that was not a cultural fit, hence why all of Chip’s cultural programs were removed from the business to enhance bottom lines for short-term gain. This risked the formula that made lululemon so great to begin with.”

  2015

  I could not buy or sell lululemon shares without issuing a press release, and I chose not to a
ttend lululemon’s 2015 AGM. I wrote letters, and I asked insightful questions at successive Annual General Meetings; questions I believed if the Board discussed and answered would have added billions to lululemon’s value.

  In their brilliance, the Board instituted virtual AGMs in 2016, which enabled the Chairmen, Michael Casey and David Mussafer, to prescreen questions, not ask some, and rephrase others. Obviously by not asking a question they were deciding not to answer shareholders. When integrity doesn’t occur in dealings with chairmen of the board, it’s no wonder the company cannot attract a CEO of integrity.

  If vision, brand, people development, and innovation could be measured the same way as financial auditing, lululemon would be knee-deep in litigation.

  Before the 2017 AGM, Glenn Murphy and David Mussafer as co-chairmen reached out to talk to me. I did not wholly trust David because in my view, he had conspired with Michael Casey not to answer my 2016 virtual AGM questions. I did not know Glenn Murphy well, but he was separately incentivized by Advent and therefore definitely did not seem independent. I had to wonder if their desire to talk to me before the 2017 AGM was another way to silence me (during a long stretch of underperformance and with another lousy CEO at the helm). I concluded a private conversation could not be fruitful.

  The reason I dropped off the Board was that I had no internal credibility after the Christine Day era. I made the decision to step down so I could use the public forum to expose the Board’s poor long-term performance, archaic governance practices, and lack of integrity. It seemed to me I could continue to be more effective outside of the Board than from within.

  In retrospect, I could have met David and Glenn, but my failure at lululemon was the result of trusting conflicted Directors. It seemed both these parties were driven by short-term gain and would say whatever they needed to say to convince me of their long-term vision. I had already seen lululemon’s long-term interests sold out by Advent when they incentivized Bob Meers to build too many US stores too quickly in 2007 and 2008.

  In turn, I chose not to trust them (using that critical distinction between deciding and choosing). I had no emotion around my choice. I understood I was two people. One of my personas was the emotional founder and deepest lover of lululemon. The other persona was the long-term business investor. I had lately realized I needed to think like an investor.

  Can I get over this now? Certainly. I can choose to be a collaborator and work with a team. I believe I am much smarter about people and their motivations than I was as a neophyte board person. I also know enough to understand most directors do not know very much about the actual workings of the company. As a result, I don’t necessarily have to defer to ideas that were learned in another business. There is marginal correlation between other companies and a vertical technical apparel company like lululemon.

  It is a sad world in the public realm when the largest and most informed shareholder can be ignored at virtual AGMs so the Directors can save face. It’s a sad world when the SEC will not enforce the one time each year that shareholders have a right to question operations.

  My questions for the 2016 AGM were questions that deserved to be asked and answered. They were direct and pointed out the core issues that lululemon needed to solve in order to move forward in a new direction.”

  1. Do you plan to get back to our original leadership position compared to our competitors, in a market we invented and built? If yes, by when, and what are the exact signs, metrics, and signals we should be looking for to indicate your plan is working?

  2. The 2016 proxy states: “With three-year terms, directors develop a deeper understanding of our business, competitive environment, and strategic goals. Experienced directors are better positioned to provide effective oversight and advice consistent with the long-term best interest of stockholders.” Shareholders are entitled to judge performance and hold Board members accountable. Shareholders deserve the right to vote on all the Board members and, if they so choose, make a change. Will you act in accordance with 90 percent of companies in the S&P Index and voluntarily move to declassify the Board so shareholders can vote for a full slate in 2017?

  3. This was a three-part question about the integrity of the 2016 proxy.

  a. The 2016 proxy states: “Our board of directors believes that a classified board structure provides valuable stability and continuity of leadership for lululemon which is important to long-term stockholder value.” In the last four to five years under long-term Directors, and the last three years under Laurent Potdevin, lululemon stock has massively underperformed in the stock market and the industry. This underperformance is happening while the most significant change in the way people dress in the history of the world is occurring, and that change is happening in a market lululemon invented. Does the Board still believe its classified board structure provides long-term stockholder value as set out in the 2016 proxy?

  b. The 2016 proxy states: “Shareholders have repeatedly and consistently registered their approval of the Board of directors for the last three elections.” Given that I voted my 30 percent against the Board slate two years ago and agreed to not vote under an agreement with the Board last year, what percentage of votes for the Directors do you consider “repeatedly and consistently”?

  c. Given that there are serious questions about the veracity and truthfulness of the proxy, is there anything else about which investors should be concerned in the proxy?

  2017 and Beyond

  In an article for the New York Times (published, oddly enough, just days before lululemon’s first virtual AGM), corporate law professor Steven Davidoff Solomon bluntly stated that virtual shareholder meetings are “a bad idea as it lets a company deal with troublesome shareholders and their often-uncomfortable questions, since the people running the meeting can privately view and manage shareholder questions without broadcasting to other attendees.”65 Solomon talks about virtual AGMs where the shareholder Q&A portion is handpicked, and how the Council of Institutional Investors staunchly opposes virtual AGMs.

  I could never convince the Board of how poorly the company was being run, especially from 2011 to 2017. The only possible metric to prove the non-quantifiable aspects of the business (brand, product, and culture) is a five-year graph comparing lululemon to a basket of athletic companies and the stock market. From January 1, 2013 to January 1, 2018, lululemon stock grew from $74.02 to $79.69. This was an annualized return of 1.49 percent. Other stats for the same period were 16.98 percent for athletic competitors (Under Armour, Nike, and Adidas), and 18.95 percent for the NASDAQ.

  Spoken another way, if you had invested $100 over that same period (January 1, 2013 to January 1, 2018) you would have profited $8 from lululemon. Conversely, that same $100 investment would have netted you an average of $119 from lululemon’s athletic competitors and $138 from the NASDAQ.

  Five-year metrics proved lululemon’s Directors could not operate for the long-term. Big deal. I got to say, “I told you so.” But I was still on the outside. The Directors continued to support antiquated governance that protected weak Board members and, consequently, an inappropriate CEO. If Directors with fixed mindsets remained blind to a diversity-of-growth mindset, then nothing would change. It was cognitive dissonance at its very best.

  To the Board’s credit, changes to directorship were made in 2017, resulting in a big difference. These included bringing in Jon McNeil from Lyft, Tricia Patrick from Advent, and my nominee Kathryn Henry. Another significant change was bringing in Glenn Murphy, the former CEO of the Gap, as co-chairman and obvious backup for a problematic CEO. Michael Casey was removed as chairman (although, as of this writing, he remains on the Board).

  Despite these changes, I asked three questions at the 2017 virtual AGM and encountered the same deception.

  Amazon later went on to announce a partnership with lululemon’s main supplier Eclat, the very company I had wanted us to invest in to inhibit competitors from easily entering the marketplace.

  New Developments
>
  A rising tide lifts all boats. The last half of 2017 and first half of 2018 have created the biggest stock value increase in history for the US stock market. If one were to look at lululemon’s performance over only the last 18-month period, it would be seen as amazing. Inside of a longer time frame however, it has been only good.

  One would ask, is lululemon’s market capitalization increase a result of a long-term strategy of the Board of Directors? Let me suggest a few other mitigating factors;

  1. Investors have determined lululemon will survive the Amazon effect.

  2. The Directors have approved a massive stock buyback meaning more dollars are chasing fewer stocks.

  3. The American economy is on fire and consumers are spending on consumer goods at record rates.

  4. The Federal Government has reduced corporate taxes to near record lows and instant profits above projections are imminent. The low tax rate is driving international money to USA stocks creating unprecedented demand.

  5. My strategy to change board dynamics to infuse lululemon with new Directors with the goal of replacing its inappropriate CEO is working.

  6. The remaining fundamentals of the lululemon business model are still working and lululemon was/is naturally coming out of a 5-year hole.

  7. Under Armour went through a collapse in early 2017 and other athletic companies took market share. The share value of all athletic companies has reflected an amazing last 18 months. Under Armour shares have doubled in the last 12 months.

  Imagine This

  If the Directors of a public Board were mostly visionaries and creative brand / product people, the company would have tremendous brand presence and provide incredible innovative, high margin products. This type of one sided director will have trouble getting the product to market and counting money in an appropriate way. This type of board provides a multiplier of 1 to the management and the company value. Conversely, if a Board is comprised mostly of operators or financial Private Equity people, the company is excellent at counting its money, but the company has no context as to what sales and profit could be with innovative product and differentiated brand. This type of board also provides a multiplier of 1 to the management and company value.