The Founder and the CEO, Revisited

Missed Opportunities

Although we finished 2010 in a position of strength, success, and with “best in the world” business practices, the next seven years would be a time of significant change for lululemon. Sadly, this change would include many missed opportunities.

Much of this is the cautionary tale of how “not firing” a manipulative employee quickly led to Directors acting in ways they would not have otherwise. To provide context, the following includes highlights from a paper called “Where Boards Fall Short,” written by Dominic Barton and Mark Wiseman for Harvard Business Review. The reader is encouraged to read the entire paper.

“Boards aren’t working,” Barton and Wiseman tell us.1 “It’s been more than a decade since the first wave of post-Enron regulatory reforms, and despite a host of guidelines from independent watchdogs such as the International Corporate Governance Network, most boards aren’t delivering on their core mission: providing strong oversight and strategic support for management’s efforts to create long-term value.”2

According to Barton and Wiseman, of some 700 directors surveyed, only a small percentage (34 per- cent) of directors understand their companies’ strategies; an even smaller percentage understand how their companies create value (22 percent).3 With these shocking figures in mind, how can boards better serve the companies they lead? The answer, as Barton and Wiseman put it, isn’t “good-governance box checking” – something I would see on lululemon’s own Board in the years to come.4

Barton and Wiseman suggest that it is crucial for everyone in a company to understand what a director’s duty is. Legally, that duty consists of “loyalty (putting the company’s interests ahead of your own) and prudence (applying proper care, skill, and diligence to business decisions).”5 A director, committed to his or her duty, does not prioritize short-term financial gain above all else. Rather, the dutiful director should, if necessary, push management to bet on a “credible corporate strategy that will take years to bear fruit.”6

Another key shortfall Barton and Wiseman observe is that public boards don’t do enough to attract the right expertise. “If you truly get the importance of thinking and acting long-term, you’ll do whatever it takes to attract [expertise].”7 Here was another weakness I would see – the lululemon Board of Directors had no interest in finding the right people…or, more critically, fulfilling on their number one job of planning for CEO succession.

The plan for lululemon should have been for our Board to attract directors with deep, relevant experience, who were able to think long term. Unfortunately, this was not the case. It is important to state that I am responsible as I allowed the Board to be set up and developed as it was. As with the law of attraction, “short-term directors will attract other short-term thinking directors and short-term driven CEOs.” To add to the law of attraction, “directors who lie to employees and shareholders will attract new directors who lie and will hire CEOs who lie”. A Director will subconsciously surround themselves with those who support their ego and survival.

Moving my Desk

In late 2010, Christine Day hired Sherri Waterson as the head of product. I liked Sherri, but she approached design primarily from a fashion viewpoint. I thought maybe she just needed time to prove herself.

In addition to hiring Sherri, Christine also hired consulting companies to look at the way we designed and brought a product to market. These consultants had never seen a technical vertical retailer, and by bringing them in, we essentially paid $2 million to educate them on our business. The consultants recommended we adhere to “best in practice” operations set out by wholesale companies. I never understood the point of this contract, but I do know that it slowly started to unravel our “best in the world” business practices.

These same consultants soon came out with an “expert paper” telling the world how vertical retailing worked. It was disheartening to me that we had shared our secrets of success with a group of consultants who would go on to invoice our competitors to teach them the lululemon business model. I considered myself the ultimate consultant, but our directors believed better processes, information, and validation were possible from East Coast apparel consultants who were experts in fashion wholesaling. Now I am going to be blunt. Christine and the board should not have hired consultants to help them understand what they themselves could not grasp. Their unwillingness to simply have ask management why lululemon worked so well was beneath them. Perhaps Christine was looking for an outside consultant to help her tell the board that lululemon-trained people needed to be replaced with people who would not challenge her.

Our most important Operating Principle had always been “The store Educator is the most important person in the company.” They deliver the technology and brand to the Guest. After the Educators, it was the managers, then the CEO, followed by the Board, and the shareholders. As the founder, I was at the bottom of that list. If a company wants to deliver amazing value to the shareholder, I believe they must elevate the very people who drive the profits – in our case, the Educators.

One day, a strange thing happened. The Board asked me to move my desk out of the design area. They explained this was so Christine could manage and be responsible for results without the messiness of dual direction and interference from me.

I agreed that this was the best next step. I did not want to be the excuse used to explain why management did not hit their numbers or collect their bonuses. I said I needed six months to find the right person to head innovation – someone as finicky about apparel as I was, who had the same love of small technical details with a background in technical outerwear. Six months was not soon enough for Christine, so I acquiesced when I should have started fighting in the corners. I was an idiot for letting this happen.

In retrospect, moving my desk out of the design area was a huge mistake. Without me or an appropriate replacement, lululemon product innovation slowed to a crawl.

The Harvard Business Case

Around that same time, Christine had asked me if Harvard Business School could come in and do a case study on lululemon. She told me they wanted to document lululemon’s history. Since we’d never had the time to do so, it seemed like a win-win, and I agreed. Frankly, I had no idea what a case study was, nor did I ask enough questions up front. Again, my genetic makeup of trusting people would bite me yet again.

Harvard professors looked at our stores, our past performance, and our history. I took them up the Grouse Grind and answered interview questions about the transition between Bob Meers and Christine Day. That was the extent of my part, and after it was done, I didn’t give it much thought.

The business case was published in December 2010 as a series of 20 or so videos, each maybe three or four minutes long, designed to be presented in business school classes.

My heart sank when I looked at the published business case. The videos gave away 50 percent of our unique culture and business practices, our successful formula, and our Operating Principles.

Further, the videos were done in the context of Christine arriving at the company in 2008, at the worst of the Recession, and fixing everything. Christine was quoted as saying: “The whole organization slowed down . . . because people weren’t aligned.”8

This wasn’t a fair or accurate depiction, and it fully ignored the successes we’d experienced despite the Recession. In reality, the financial crisis was a positive. It gave us the opportunity to slow our growth, get our feet under us, and create a solid foundation.

Once the foundation was in place, all we needed to do was open more stores while sticking to our successful formula. Any good operator could do this or I as I sometimes said “a refrigerator could have run lululemon with the foundation we had set in place.” The whole case study seemed like a brand-building exercise for Christine herself - one that could’ve arguably cost lululemon billions of dollars as our successful formula was handed to the competition.

I wondered how I could have been so short-sighted as not to ensure that I got the final say on the history of lululemon. He who wins the war writes the truth, but the truth that Harvard got was wrong.

I went to Harvard to present my issues with the case study, and they were receptive to my concerns. They were embarrassed by the inaccuracies, so they let me record two additional videos to set the record straight (having said that, I saw the case study presented in Vancouver in 2016, and the new videos had not been included).

The people at Harvard explained that they’d needed a senior executive at lululemon to sign off on the case study, and Christine had been the person who’d signed off.

Trimming Expenses, Raising Prices

Christine was adding value to lululemon’s stock by trimming expenses and testing the upper limits of what we could charge for our product. I believed this created “bad profit.” The company priority was shifting to focus on quarterly expectations set by the public stock analysts.

For the first time, I wasn’t entirely sure Christine and I were pulling in the same direction. It seemed we were cutting costs and increasing prices for the wrong reasons.

As a long-term shareholder, I believed all we had to do to keep our “first in market” advantage was to continually increase quality and keep prices low enough to make it uneconomical for competitors. Our vertical model was unbeatable. If we continued with our strategy, we would eventually end up with more than 50 percent of the technical apparel market share and 10 percent of the future $1 trillion streetnic market.

We would become a mediocre company only if our quality failed or if we increased prices too much. If we increased prices, competitors would enter the market, take market share, and we would make less money.

Advent had sold down their position and needed to tend to other investments. In their parting words, Advent implored lululemon to pursue international expansion as soon as possible. They said we needed to be first in market with our global product. We had invented the break-even showroom/pop-up concept, and we could softly enter Europe and Asia on a break-even basis. We made so much money in North America that we could afford to slowly and authentically build our brand elsewhere. This would have meant an investment now for future growth with no projected return for at least five years. However, the rest of the Board did not agree as David’s parting words were not good for short-term financial reporting.

Gap Athleta, Nike, and Under Armour

In 2010, we owned streetnic (athleisure), even with other brands circling in on what we were doing. The Gap was floundering, but it made a great move by buying the infant online competitor Athleta in 2008 for $150 million and adding brick and mortar stores to build out the Athleta brand.

Athleta didn’t concern me as I saw them as a Microsoft (compared to our Apple) when it came to design. Lululemon and Apple had that undeniable, unquantifiable cool factor in their designs, technology, product and branding.

I didn’t mind having Athleta in the market. The Gap was a merchandiser-led business where decisions were made based on past spreadsheet numbers rather than instant customer feedback. I knew spreadsheets and algorithms would show two big openings in the market. The older and plus sized markets had been underserved, and Athleta took this position. I knew their consumers were not iconic brand drivers, and in my opinion, Athleta would never be a market leader.

In general, I observed that older people preferred looser clothing and as age sometimes dictates, were typically larger in size than younger people. This meant a 30 to 40 percent increase in fabric with far less profit than lululemon.

There were also wholesalers Nike and Under Armour to consider. As of 2010, Nike was a footwear company trying to understand apparel, and Under Armour was still making garments with big logos for impressionable teenage boys and insecure men. I knew wholesalers would be very good competitors if they could use their model to produce huge volume and low margin (think of the McDonald’s hamburger model). Huge volumes meant they could take away production space from lululemon’s fabric and mill suppliers.

For a brief period, I even considered buying Under Armour.

For a few years after our IPO, lululemon was worth about twice as much as Under Armour, maybe even three times as much. About 85 percent of our sales went to a female market. Under Armour, meanwhile, was almost all male and did not appeal to the female market. Had we been able to take the Under Armour male brand and market it through the lululemon business philosophy, the result could have been a formidable opponent to Nike.

However, after a meeting with Under Armour CEO Kevin Plank in 2008, I couldn’t see Kevin’s macho philosophy working with that of the Super Girls. Lululemon stood for soft, rounded edges. We stood for yoga, mindfulness, and for everybody winning. Under Armour, I thought, had an in-your-face image of winning at all costs, male chauvinism, and leaving everybody else in the dust. With those things in mind, I did not pursue the idea of a merger.

In any case, I didn’t see Nike or Under Armour as a major concern for the moment as the expense of developing and running apparel retail stores was not in our competitors’ area of expertise.

As 2010 ended, I was thinking more about traditional media advertising than ever before – just because we hadn’t advertised in the past didn’t mean we shouldn’t do so in the future, especially with the changing horizon. Lululemon was still an underground brand, known mainly to its customers and employees (and competitors), but not as well-known to the rest of the world.

If Nike used its worldwide network, it would appear to Asians or Europeans that Nike was first in the women’s market. I thought lululemon needed to build 300 to 400 small breakeven community pop-up stores around the world and/or start buying traditional media advertising to inexpensively put our stake in the ground and flex our global e-commerce muscle. We had perfected the pop-up model - all we had to do was put it into action.

Anna Wintour and Jacques Levy

Around that time, Shannon and I had a meeting with Anna Wintour from Vogue Magazine at her New York Conde Nast office. We were introduced by one of our Directors, Brad Martin, the former CEO of Saks. We tried to paint a picture for her of how West Coast technical athletic apparel was starting to dominate fashion.

To provide a couture-related context, I asked Anna to imagine a future where wedding dresses would be made with stretch fabrics and have silver threads for anti-microbial stink control and mesh venting for breathability.

More and more, people were demanding the comfort and functionality of athletic wear in everything they wore, but the NY fashion scene hadn’t yet caught on to this paradigm shift. The fashion scene had always had a very cyclical relationship with itself – the same designers were covered by the same journalists with the same advertisers, year after year. The fashion media couldn’t make any money off lululemon because we were delivering runway styles to the consumer faster than NY and Paris couture designers. We were a threat to their existence.

For the last 12 years, I’d purposely pushed the fashion conversation out of the lululemon dialogue. This wasn’t difficult, as NY media didn’t believe west coast athletic apparel fell into their definition of “fashion”. To the NY media, athletic apparel was something you wore when not being fashionable. If athletic clothing was mentioned, it was only in the form of lip service like telling someone their baby was cute. Consequently “streetnic” or “Athleisure” was a mystery to fashion experts.

During our meeting, Anna rightly stated that the mass consumer knew nothing about lululemon and that our success existed only in our own mind.

We needed to advertise in a big, big way, Anna told me. People needed to know about lululemon be- fore multiple competitors could water down the idea that lululemon had invented a movement – before they could make us just one of many. I’d seen this exact same thing happen in the surf, skate, and snowboard industry, when the market became oversaturated. I wanted lululemon to be known as the inventor of the streetnic business, and I wanted us to be recognized globally. I knew if we were the first athletic company to advertise in old-school media, we would attract thousands of unpaid editorials, resulting in exponential future sales. This was an area of massive opportunity and I was super excited to get to work.

There was a little part of me that wondered if Anna was just trying to sell advertising space in Vogue, but I had no problem agreeing with her premise, and I couldn’t deny the point she’d made.

Then, in early 2011, a man named Jacques Levy joined our Board of Directors. Jacques had served as CEO of Sephora and had 25 years’ experience in the high-end retail industry. Unfortunately, Jacques would not be with us long – he lost a battle with cancer less than a year after he joined our Board – but in the time we had him, he repeated what I’d heard from Anna: lululemon needed to advertise and bring our message to the masses.

As I mentioned earlier in the book, a personal mandate of mine holds that when I hear something three times, I must do it – almost as though hearing something three times were a sign. Hearing about big advertising first from Anna, then from Jacques, then more and more from my own subconscious as I considered the changing market, prompted me to act. I approached our CEO and Board of Directors and told them the authentic community way our brand was built had worked for a long time, but we now had to double down. We needed to continue our community branding, but also advertise in a big way. The rest of the world needed to know who we were as competitors were now discovering that what we were doing was taking their market share. We needed to invest now so we could own the future.

The Fearful Boardie

Grassroots networking and word-of-mouth promotion had worked for lululemon for 10 years. Not only had it worked, but it had also contributed to the company’s unprecedented success. Lululemon’s marketing costs were 2 percent of sales compared to wholesale companies’ marketing costs of 10 percent. But I couldn’t convince the Board to spend money for the future. This was weird because neither the Board nor our CEO really understood how or why our brand strategy worked in the first place.

I could not prove advertising would work and this was frustrating. I had always done well at knowing the right time to venture into something new for the future of the company.

Lululemon had a strong Board and CEO. It was the perfect combination as far as share ownership and distribution went. I owned 30 percent and $2 billion of the stock. My 30 percent represented the company’s voice for brand, vision, and innovation on the Board. The other Board members represented audit, compensation, governance, and in Christine’s position, operations.

Michael Casey, the lead independent director, delivered the message: If I couldn’t prove the unknown future, then my advertising idea had zero validity.

I sensed something was amiss. I knew lululemon had a financial wizard in Michael Casey as the lead independent director. I also knew he felt his job was to secure the money lululemon had in the bank, whereas I wanted to use the free cash to make money for our shareholders. I was okay with Michael being fearful and cautious, as that’s what the company needed to balance out the Board’s diversity. But I wondered if the Board was truly diverse.

It occurred to me that the combination of a security-driven lead director and a CEO-operator was not synergistic for the company. I believe the decision to not step up advertising cost lululemon $5 billion in future market value from 2010 to 2015.

Who is John Galt?

“A company is stronger if bound by love and integrity rather than fear and lies.” – Chip Wilson

If the Lululemon board declined to invest in big advertising, that didn’t mean we couldn’t leverage our best branding asset internally. We would ask the world one compelling question: “Who is John Galt?” John Galt was an idea I raised at a creative brand meeting with 12 people and our CEO, Christine Day, in early 2011. The focus of the meeting was to up the ante on lululemon’s shopping bags. The bags had successfully displayed our Manifesto for many years, but perhaps the time had come to think of something new.

I’d read Ayn Rand’s Atlas Shrugged when I was 19 and working on the pipeline, but I’d also reread it when I was 50. As I reread the book all those years later, I recognized how much influence the book had had on my life. I’d absorbed the characters’ uncompromising quest to make a quality product, their love for their employees, their passion, and their refusal to make money off the backs of other people. I was fascinated by the convergence of both self-interest and providing for the world.

Not long before this creative meeting, Christine and I had done a joint on-stage interview. We laughed during the interview because we both said the one person we would want to have dinner with was the author Ayn Rand.

At the meeting in 2011, I mentioned that Atlas Shrugged had been an important book for me in laying the foundations of lululemon’s culture. I thought this book represented the perfect Super Girl philosophy. I proposed we allude to Atlas’s influence on our iconic bags. I loved subtle branding. Only highly-educated, well-read people like our Super Girls would understand if we put “Who is John Galt?” on the side of our bags. This was the kind of marketing no other company would think of doing. The brand team agreed.

A 1991 poll by the Library of Congress and Book of the Month Club found that Atlas Shrugged was the second most influential book after the Bible. Another poll conducted in 2007 found that 8.1 percent of adult Americans had read it, but almost none of the young women who worked for us had read the 1957 novel, let alone heard of it. This was surprising to me because if there was anywhere a woman could look for inspiration to be great in business, it was in protagonist Dagny Taggart.

Christine loved the idea of putting the John Galt question on our bags. A few months later, the new bags came into circulation in all of our stores. I thought of this as both a branding strategy and a way to start a philosophical conversation. It would also help us solidify the people who “got it” as our core customers.

To supplement the bag’s release, we added this explanation to our community blog: “Many of us choose mediocrity without even realizing it. Why do we do this? Because our society encourages mediocrity. It is easier to be mediocre than to be great. Our bags are visual reminders for ourselves to live a life we love and conquer the epidemic of mediocrity. We all have a John Galt inside of us, cheering us on.”

Although I loved Rand’s work, I was not aware of just how politically divisive she was in the United States. With the 2012 US election on the horizon, right-wing political factions were using Atlas Shrugged as a touchstone. This gave the left wing (who I am sure had not read it) all the more reason to hate the book, as well as the rest of Rand’s work. Many pointed out there was an incongruity between a brand influenced by yoga and Rand’s objectivism.

But I didn’t see it that way. Lululemon’s philosophy is about building people up, influencing everyone around you to be great, and elevating the world. Atlas’s Dagny Taggart is a driven, professional female in her 30s – someone in whom lululemon’s ideal customer might see herself reflected.

I also noticed that the loudest complaints seemed to come from people who were not striving for greatness or fighting to do something extraordinary. These people were the antithesis of our iconic customer and I knew it did our brand a disservice to have mediocre people buying our product.

To build a brand, our CEO and directors needed to understand that strong resistance to social media from non-customers outside our “tribe” actually helps build real brand value. Core customers don’t want to be lumped in with the loud naysayers, and their loyalty only increases as a result.

Meanwhile, the media had a wide swath of analyses of the bag. The Globe & Mail acknowledged the “lively conversation” the bag had stirred up, while Slate and Forbes pointed out Ayn Rand’s status as a Tea Party heroine.9

Overall, I was happy with the chatter, but this was also the beginning of social media. Suddenly, anyone with a computer was an expert on any given subject. Endless political debate aside, we were doing something right. We’d sparked a conversation, and we were marketing our brand in our own unique way.

Many of our directors did not want to understand our unique branding as it was the opposite to what was taught in business schools. Our branding emanated through my experience in the surf, skate, and snowboard industry where brands were created by being anti-establishment. This created a “tribe” who then created a social movement that others wanted to emulate (no different than the aspirational jet-set- ting advertising we see promoted by luxury brands). These are the subtleties of how word-of-mouth branding works, as described in the book The Tipping Point10.

Christine’s reaction to this was nothing but weird.

But in the Board meeting, Christine told the directors that she had never seen the shopping bags, nor had she given approval. The notion that Christine didn’t know was baffling. I had to take time to check in with myself to ensure I had not made up a story in my own mind.

I thought it best to talk to the brand team to make sure I wasn’t going crazy. When I brought up Christine’s lie in a separate meeting with Lead Director Michael Casey, I could sense he didn’t believe me.

My integrity took a hit, and the John Galt bags were removed from the stores.

In my opinion, that recall was damaging to our brand because our Super Girls could sense misalignment in our stand for greatness. The people from the creative meeting wondered why I didn’t stand up for them and why Christine had thrown us all under the bus. I couldn’t explain myself.

Christine stood firm in her story and received accolades for managing a stable company with a wildcard founder. It seemed the love of a rising stock value compelled the Board to err on the side of caution. Over the next several months, she would go on to tell the media the same story she’d told the Board. She maintained that she had no oversight or agreement on the production of the shopping bags.

The culture at lululemon changed immediately. The company culture shifted to one where people wanted nothing more than to look good, protect their own interests, and embrace mediocrity. It seemed Christine had ensured that our employees had no direct access to the directors, and the directors seemed determined not to interfere or examine such things under the guise of good governance. I was speaking for the employees at the board level, but sensed I had lost influence. The culture of integrity was taking a hit at the highest level.

As you read onwards in the book, you will begin to see a series of disasters that occurred one after the other. Taken as a whole, one would think I attracted the missteps and deserve what I got. To them, I say, fair enough. I also think not firing Christine the first minute I knew she wasn’t the right fit created a seemingly never ending domino effect.