Damage Control

The CEO Resigns

Christine’s statement that she wanted out came as a big surprise to the Board. Succession planning had not been considered, and the Board ultimately convinced Christine not to resign and to stay on – at least for an interim period – avoiding any public announcement that would have caused further jitters to an already fragile Wall Street while enabling the Board to quietly begin a CEO search.

Had she been removed immediately, I believe the company could have rebounded from the quality issues quickly, but the Board wasn’t willing to take that chance.

I thought Delaney Schweitzer was ready to be the CEO. We just had to hire a world class COO to support her brilliance. The Board did not agree.

Another possible solution would have been to make me interim CEO, as it seemed we were in the same situation as when Bob Meers went AWOL. When Howard Schultz returned to Starbucks, the analysts and Wall Street were all aghast, since by their metric-driven standards, Howard was unsophisticated and didn’t know what he was doing. The same went for me, apparently. The Board was scared of Wall Street’s possible reaction to the return of an opinionated founder.

Either way, the Board was in trouble, and they knew it. Because the directors’ reputations were on the line, they bent over backwards for Christine until they could fill the gap.

The situation did not improve, and ultimately, Christine tendered her resignation to the Board in June at the time of the first-quarter conference call.

“This was a personal decision of mine1,” was Christine’s own brief statement about her resignation. A few months later, in an interview with Fortune, Christine said she left lululemon because her vision, hadn’t matched mine, and that I loved disruption and clash.2

Christine committed to stay on until the Board found a successor, but this would prove difficult as she’d also put word out on the street that I was a challenging person to work with.

In its present form, I knew lululemon could not take advantage of the next two to five years, which would likely see the most dramatic change in the way people dressed in the history of the world. The company did not have a succession pipeline in place for the top 5 executives, and it had not invested in infrastructure.

The morning of Christine’s announcement, the stock was close to an all-time high, then the stock fell 10-15 percent. As a large shareholder, I was only able to sell lululemon shares with a 10B-5-1 trust account, which would allow me to tell a broker which shares I wanted to sell, at what price and at what volume, a year in advance. I was always bullish on lululemon and I didn’t need the money, so I always set my target price high. As luck would have it, the trustee implemented a small sale just prior to Christine’s announcement. Optically, it looked like I was selling the stock with inside information. Michael Casey was visibly upset I had not told him I had sold, and I think blamed me for making lululemon look bad. A legal case ensued for which I was absolutely cleared.

I cannot remember how much I sold that morning, but assume my sales amounted to $40 million. To Michael Casey, the amount seemed like a lot of money - but to me, it was negligible in relation to my wealth. My incremental small sales over a long period were so inconsequential I had never checked, and I wouldn’t have asked until the trust period had expired.

Innovation Revisited

When we were living in Australia, Shannon had developed a couple of design ideas, based on a fabric called technical cashmere. The concept of this fabric was to design clothing that felt like cashmere but performed like athletic apparel.

Shannon and I had both found ourselves preferring to wear softer fabrics when we were not working out. Shannon’s dream was to put cashmere-based fabric into a hot washing machine and dryer without shrinkage or visible pilling for everyday wear. We wanted to wear clothing that felt luxurious but could endure the same five-year quality standards we had developed for athletic apparel.

This could have supported an exciting new lululemon extension and was the exact innovation the company needed. Lululemon had had no innovation since 2010, and competition was taking a toll. In August 2013, via correspondence with Deanne Schweitzer (VP Design and Creation), Shannon offered lululemon her technical cashmere fabric. A revolutionary innovation like that had the potential to add $2 billion alone to the stock value.

The only major concern Shannon had was that design might accept the fabric from her – only to have directors or the CEO scrap it and shelve it. Shannon thought she’d better cover herself, and in her correspondence with Deanne, she said she wanted to reserve the right to use the fabric if lululemon wasn’t going to.

New Designs Not Welcome

In October, Shannon received a reply from Christine. She thanked Shannon for assisting lululemon’s product design on a “volunteer basis.” She then went on to say that Shannon’s continued work with Cirqq Designs (the company Shannon had incorporated to protect her intellectual property) could lead to a conflict of interest with lululemon.

“We do not feel it is appropriate for you to continue your volunteer work with lululemon and we here- by confirm the termination of any such arrangement,” Christine added.3

So, not only did Christine not want innovation or Shannon’s new fabric or designs, but she was also effectively firing Shannon from her volunteer position. If that wasn’t bad enough, it appeared there was a thinly veiled threat about the usage of designs or any of lululemon’s intellectual properties. Given that Christine had resigned months prior, it was frustrating to us that she still had this kind of control.

A week later, Shannon crafted a response, with input from our lawyers. She expressed regret that anything she was doing could be construed as a conflict of interest.

Shannon also emphasized how – in addition to her volunteering in design – she had offered to give lululemon the right to use Cirqq’s new fabric, without any cost or obligation. An offer which Christine turned down.

“Our family has the most to gain from any benefit that I can give to lululemon,” Shannon added, “and the most to lose by anything I could do to hurt it.”4 As I said before, every dollar lululemon went up or down affected us $40 million. Only someone with an ulterior motive might suggest that Shannon was in a conflict of interest.

In Shannon’s own words: “That whole time was quite emotional because there were people in the business that were so great, and still wanted the business to be great, and I think people were really excited when Chip came back to help. I think we were sad because there was a noticeable shift in the business. A shift away from the culture, and people were disappointed. They were disappointed that lululemon had this mark against it in terms of the quality.”

Not the Only Wilsons

It wasn’t only Shannon and I who were no longer welcome at lululemon. My son, JJ, was affected as well. In 2012, JJ had been hired in marketing at a menswear company called Wings + Horns. This had been a dream job for him, and it had allowed him to build an identity of his own. “I loved my job at Wings + Horns,” JJ recalls. “I’d created something for myself separate from lululemon and the Wilson family name.”

Not long after starting this dream job, JJ was asked to come back to lululemon to work on the Men’s Design team. Lululemon’s ethos had emanated from our earliest connections with yoga.

The original male yogis were often small and slight. As lululemon had been using women’s fabrics, the style and feel had been more feminine. In 2008, we broke out of this mold. We were confident men’s apparel was the next big business, and we knew we could get mens sales to $1 billion by 2011. (In the end, it would take lululemon until 2020 to hit $1 billion in mens business.)

Because our head of product wasn’t familiar with the men’s market, she didn’t know how to build the foundation for exponential growth. I maintained that lululemon’s men’s business needed to become ultra-masculine. I had asked the Head of Brand to focus on professional ice hockey and rugby teams as our new focus. We needed to align the men’s market with sports we knew well and in which we could be authentic. I asked for a design head from a West Coast surf, mountain, or snowboard company as our head of men’s product – somebody that understood men and would drive masculinity at all levels.

Instead, the head of product had hired a fashion-focused men’s design director from New York. This was the opposite of what was needed. The result was an inappropriate product that was too fashion-oriented and technically deficient. It didn’t capture the attention of that ultra-masculine market, and as a result, lululemon lost five years of men’s growth and billions of dollars in market capitalization.

This was the state of the men’s design team when JJ was asked to come aboard. It was difficult for him to say no to this opportunity, so he accepted out of loyalty to the company.

As JJ says: “I had left my dream job to go back to lululemon, a company I would have done anything for, only a year later to be told by HR that, ‘You, as a member of the Wilson family, are no longer allowed to be a part of this.’”