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Case- -Executive Crisis at Lululemon: Who Is Responsible for Establishing Company Culture?

Case Learning Outcomes By the end of the case study, students should be able to: . describe the relationship between leadership, culture, and a firm's financial performance through strategic map theory; discuss the role of a company's board of directors in managing both workplace culture and fiduciary duties; explain how a CEO's exit influences a brand from the perspective of multiple stakeholders; critically analyze advantages and disadvantages of workplace romance; and critically discuss gender-related issues in managing woman-oriented brands. Introduction Laurent Potdevin, the CEO of Lululemon Athletica Inc., resigned on February 5, 2018 with immediate effect. Potdevin, who served the company for four years, was accused by Lululemon's board of directors (henceforth referred to as the board) of falling "short of ... standards of conduct" (Thomas, 2018). He was accused of failing to "exemplify the highest levels of integrity and respect for one another" (Hsu, 2018). Lululemon, however, did not comment on the specific incidents where the integrity of Potdevin was found lacking. Some insiders of the company did mention that the misconduct was not related to any operational or financial issue. Employees of Lululemon, nevertheless, broke their silence and leaked to the media information related to the abrupt exit of Potdevin. Employees accused Potdevin of creating a toxic work culture. Workplace culture is defined as set of shared assumptions which guide behavioral expectations in organizations in various situations (Ravasi & Schultz, 2006). It affects the way employees interact and behave with each other as well as with other stakeholders. An organization suffers from a toxic work culture when merit-based performance is not promoted, employees avoid disagreement with the leader due to fear of reprisal, and where personal agendas are given preference over professional conduct (Gilbert, Carr-Ruffino, Ivancevich, & Konopaske, 2012, p. 30). Specific aspects of the workplace culture for which some employees assigned blame to Potdevin included Page 3 of 12 Executive Crisis at Lululemon: Who Is Responsible for Establishing Company Culture? SSAGE businesscases\fpreferential treatment given by Potdevin to a designer with whom he was romantically involved. Potdevin was further accused by employees for creating a glass ceiling effect since no woman was promoted to the top management team (Cotter, Hermsen, Ovadia, & Vanneman, 2001) during his tenure and for encouraging nepotism. which is recruiting candidates by using one's personal connections (Fu, 2015). The CEO was also accused of encouraging unhealthy competition among employees who wanted to be a part of his ingroup team, which is favoring few close employees over others (Sperry, 2009). Shareholders of Lululemon raised another set of concerns. They did not like the lack of transparency in the decision regarding Potdevin's departure, as the board of Lululemon did not formally disclose any information regarding Potdevin's exit. Two U.S. law firms, which were advocates of the Lululemon shareholders, launched investigations into the company urging them to disclose more details publicly about the reason for the sudden resignation of the CEO. Law firms like Kahn, Swick, & Foti also started investigating whether the board had breached their fiduciary duties as they were offering the 50-year-old executive USD 5 million as a separation settlement, whereas in Potdevin's employment contract, no severance pay clause was mentioned if the CEO's exit was voluntary. The official statement provided by Lululemon indicated that Potdevin resigned with immediate effect and was not terminated, implying he left voluntarily. As the Lululemon board was searching for a new CEO, some analysts commented that Potdevin's exit could cause a severe blow to the company. They cited how, immediately after his hiring in January 2014, Potdevin successfully turned around the company from its public relations crisis of 2013, which happened due to the recall of flawed yoga pants and the fat-shaming statement given by Chip Wilson, the founder of Lululemon. Also, between 2017 to early 2018, the stock price of Lululemon had gained value of 16.5%; however, following the announcement of Potdevin's sudden exit, stock prices fell by 3% in after-hours trading. Employees also had a divided opinion about Potdevin's exit, as some of them felt that for cultural issues such as toxic work environment, it is the human resources (HR) department which should take the responsibility, while others felt that the board should have been more actively involved in protecting Lululemon's workplace integrity and culture. A few employees also believed that the board's decision to ask Potdevin to resign was taken in haste. So, whose responsibility is workplace culture? Is it right to fire a competent CEO for poor workplace culture, especially when the CEO was responsible for a turnaround of the brand? Did the board of Lululemon fail in their fiduciary duties? In what ways will Potdevin's exit benefit or cause harm to the Lululemon brand? What factors should be considered during the search for the next CEO?Company Background Lululemon is a Vancouver, Canada-based athletic wear company with the prime focus on yoga clothing. Since its inception in 1998, Lululemon has designed products primarily for women. Known for his controversial blogs and statements, company founder Chip Wilson said he believed that Lululemon's existence was because "female education levels, breast cancer, yoga/athletics and the desire to dress feminine came together all at one time" (Edwards 2015) during the 1990s. Wilson's views about women and their changing roles in society were controversial. He believed that Lululemon's main customer segment, whom he dubbed Power Women, emerged during the 1970s and 1980s. A typical Power Woman, by Wilson's definition, used birth control pills, was divorced (Wilson postulated a causal relationship between hormone birth control for women and divorce), and took an active role in corporate board rooms, while retaining responsibility for household chores. He believed that breast cancer rates rose due to the increase in the number of Power Women who were smoking while using the pill, the smoking being attributable to stress. What women gained in power they gave up in lack of time for exercise, a social life, and sleep. Lululemon, according to Wilson, happened at the right time because female education levels were, in the 1990s, rising at the same time as the other societal trends he cited. Wilson also courted attention when in an interview in 2004 he commented that having three "L's in the brand name "Lululemon" was intentional as it would be funny to see how Japanese consumers pronounce the brand, since the letter "L" is missing in the Japanese phonetic system. Nevertheless, the actual reason Wilson Page 4 of 12 Executive Crisis at Lululemon: Who Is Responsible for Establishing Company Culture? SSAGE businesscases SAGE SAGE Business Cases @ Arpita Agnihotri and Saurabh Bhattacharya 2019 gave for naming the brand "Lululemon" was that he had previously tasted success in the Japanese market with a skateboard brand called Homeless. Wilson believed that since the name "Homeless" had an "L," which the Japanese consumers found difficult to pronounce, it always stuck in the mind of the consumers. Thus, with Lululemon, which had three "L's, Wilson felt he was sure to succeed in the health-conscious Japanese market. These controversial views of Wilson regarding the existence of Lululemon and the naming of brand often created negative publicity around the brand and its products. Wilson likely knew that negative or bad publicity has been found in research to result in increased sales when the company is relatively new. However, Wilson's unfiltered thoughts and theories may have led to a larger, unhealthy pattern or culture within the company-Lululemon primarily operated through two channels: company-operated stores (see Table 1) and direct to consumer (online). Between 2014 and 2017, the growth rate in net revenue from the company-operated stores declined by 7.6%, while during the same period the growth rate in net revenue from the direct to consumer channel was 21.80% (see Table 2). The company by the end of 2017 was actively seeking to integrate its online (direct to consumer) and offline (company-owned stores) channels to provide consumers across its major markets, like the United States, Canada, Australia, China, and Japan, an enhanced omnichannel experience, that is, the strategy of serving the consumers wherever and however they want to shop. In fact, by the end of 2018, the company was planning to provide its Chinese consumers better omnichannel experience through WeChat. Table 1. Number of Company-Operated Stores (2014-2017) Country 2014 2015 2016 2017 United States 200 229 246 270 Canada 46 48 51 57 Australia 26 26 27 28 Rest of the world 17 27 42 Total 280 320 351 397 Note: There is significant growth in the number of company-operated stores across two markets-the U.S. growth was [(270 - 200)/200] * 100 = 35%; rest of the world growth was [(42 - 8)/8] x 100 = 425% between 2014 and 2017. Source: Developed by the authors based on information in Lululemon Athletica Inc. (2016, 2018). Table 2. Percentage (%%) Contribution of Different Channels to Net Revenue (2014-2017) Channels 2014 2015 2016 2017 Company-operated stores 75.00 73.60 72.70 69.30 Page 5 of 12 Executive Crisis at Lululemon: Who Is Responsible for Establishing Company Culture? SSAGE businesscases\fIn the middle of these controversies, Potdevin led Lululemon's growth through his unique strategies. For instance, he focused more on brand differentiation and innovation than direct competition. Explaining the brand differentiation, Potdevin in an interview commented, "[Lululemon is] an emotionally charged brand" Cao, 2018). He also noted, "It's really the craftsmanship, the construction and the raw material we use that differentiate us" (Cao, 2018). Potdevin also revamped the entire operations of Lululemon. He resolved problematic supply chain issues and made substantial investments into the supply chain to scale globally, in (see Table 2). Under Potdevin, Lululemon further launched new brands and product categories like the ABC pants for men, and expanded internationally in several European and Asian markets. In Asia, for the third quarter of 2017, Lululemon reported a 70% year over year market growth, while in Europe the year over year growth was 50%. Promoting yoga heritage, Potdevin himself advocated for meditation and mindful living. When a product recall was issued in 2015, owing to dysfunctional elastic cords in 318,000 jackets for women and hoode Page 6 of 12 Executive Crisis at Lululemon: Who Is Responsible for Establishing Company Culture? SAGE businesscases SAGE SAGE Business Cases @ Arpita Agnihotri and Saurabh Bhattacharya 2019 it was, according to analysts, more proactively managed compared to the product recall in 2013 and its financial impact was also less significant. Cultural Issues at Lululemon Although Potdevin was successful in the turnaround of the Lululemon brand, under his leadership, some employees described work culture as toxic, due to a lax attitude toward workplace romantic relationships (defined as a relationship between two employees of the same organization, where mutual affection and sexual attraction are present and the relationship is more personal than professional; Horan & Chory, 2011), favoritism, pressure to be part of the CEO's ingroup, lack of advancement for women in the company, and nepotism. Workplace Romantic Issues and Favoritism Lululemon used to host personal development seminars, known as "clearings" where employees were encouraged to share anything openly which was holding them back from doing their job efficiently. Potdevin in one of the clearing seminars acknowledged his relationship with a designer for Lululemon; employees accepted the relationship, as Poldevin's announcement squared with the company's policy of transparency and integrity. An employee of Lululemon's menswear design team mentioned, "It never felt like a scandal because everyone knew about them and there was no secrecy (Lieber, 2018). The HR department also benefited from such clearing sessions, as open announcements absolved them from any further responsibilities according to the policies of Lululemon. Some employees of Lululemon, however, felt that in the personal development seminars, the HR department should take some responsibility. One of the employees who wanted to remain anonymous mentioned, "There was literally zero accountability because HR's attitude was that Lululemon employees should take responsibility, share things in a clearing, and then move on" (Lieber, 2018).\f\f\f