The Perfect Espresso
In the late ’90s, 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 10 years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 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.”1
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.2
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 at Starbucks has been dramatic. In February 2008, over 7,000 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 call the “Great to Good Phenomenon.”
If a company is pushing the creative envelope, once every 12 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 deem themselves smarter than creative people, who they consider unreliable. Operators can back their position because lower sales can be proven with metrics. Creative cannot prove in advance that next season will be better.
The “voice of reason” in a public company is based on the financial team, which is responsible for reporting on promised numbers to analysts. Finance ensures product buyers 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 creativity, the company becomes an old, commodity retail company run by fear of failure.
Public companies become mediocre because non-creative operators wait on the sidelines saying, “I told you so.” Given a lengthy 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 projects, 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 or chairwoman of the board to be a champion for the creative process.
I wish I’d known then how to communicate this concept to those directors who drove 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.
Adidas was one of these companies that fell from greatness to good. It became so metric-driven in the ‘80’s and ‘90’s and ‘00’s that creativity collapsed as did the value of the company. Because Adidas couldn’t internally create “creativity”, it went external and made a partnership with Stella McCartney. This partnership infused Adidas with a new look and started what is now known as “collaboration”. In my opinion, a company that needs to reach out for collaboration has failed at developing and running the essence of its business (notwithstanding the business model used by designers leveraging the drawing power of social media to elevate and cross-promote their brand).
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 as 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.”3
The chapter adds that these kinds of directors too often refer to what their own companies have 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.”4
Still, these are wise words. Of the three director 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: “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.”
In 2014, Tom Stemberg wasn’t up for re-election, but RoAnn was.
I released a public statement saying I would use my majority 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.
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.
I was convinced by Advent to sell them my shares because they told me they would come in and do a director review. Their opinion was the same as mine. Lululemon had too many old, ineffective directors. Advent’s strategy was to come in as new directors and then do an “independent” assessment of the Board. This assessment, they said, would create a “nice” way of approaching three to four of the directors and asking them to step down. They said this was the elegant way to handle the situation.
In August 2014, I sold half of my shares to Advent International.
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 that when the stock was crumbling, their investment would bring stability and an instant increase to share value. I was counting on it.
At any rate, as of August 11, 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.”
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.”5
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 to compete properly against Nike, Adidas, and Under Armour.
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 they gave 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 inves- tors and on the Board of a direct lululemon knockoff only added to the insanity.
Advent didn’t help me either. They seemed disappointed that Shannon hadn’t agreed to sell Kit and Ace to them when they’d offered. They said they lost face with their investors. With my part of the meeting over, David said, “Chip’s going to be leaving now.” And 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.
Advent’s so-called “independent study” on board composition showed that I was, in fact, the person the directors believed did not work nicely with other directors, and no changes were made. Unbeknownst to the Board, I also had an independent assessment done that proposed the removal of five board mem- bers for conflict of interest and for not having the expertise needed to be a director of a global apparel company. I now believe Advent worked out a deal with lululemon directors prior to buying 50 percent of my position, to remove me from the Board.
It is clear to me now that Advent created a Trojan Horse to remove me. When I offered to sell them half my shares to come in and help me change over the Board, it was in their best interest to work with the existing board. My presence on the Board wouldn’t work for their short-term PE interest, as my long-term views would conflict with their need for short-term gains. Advent needed board control and passive, uniformed institutional shareholders to fulfill their strategy.
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 to set a psychological price for the Mac so every savvy 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 now know how Steve felt.
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 a single director who understood the industry, culture, or vision. Lululemon was missing the pieces that would return the company to greatness.
There is a story in Matthew Syed’s 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 New York 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 crashed.6
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.
3. 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.
4. Ibid, page 71.
5. 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.
6. Matthew Syed, Black Box Thinking, The Surprising Truth About Success (Perigee/Penguin Group, 2015)