Eight Companies Ruined by Their Founders

February 5, 2013 by Douglas A. McIntyre

Dell logoFor every Sergey Brin, there is a Michael Dell. While the Google co-founder and CEO has made his company one of the most valuable in the world with its shares reaching an all-time high, Dell has laid waste to his company.

Dell and financial supporters offered to buy the company for $13.65 a share, 40% lower than what it was when Dell retook the CEO job in early 2007. Investors who bought shares a year ago have taken a haircut of more than 20%. Dell is not alone in his failure. He belongs to a group of founders of large public companies that showed great promise for a time, and then were wrecked by poor decisions, serious legal problems, and lack of innovation.

Click here to see the eight ruined companies 

Perhaps the greatest hallmark of founders who ruin their companies is that they — at least appear to — look out mostly for number one rather than the interests of the company and its shareholders. This is reflected largely in their generally excessive compensation. By contrast, it is worth remembering that Steve Jobs of Apple, earned only $1 in salary and bonus in 2010.

Aubrey McClendon, who was recently ousted as CEO of Chesapeake Energy, made over $100 million in 2008, and remarkably large sums in the years since then. Some of his other actions, such as allegedly borrowing against assets that he co-owned with Chesapeake, raised concerns of conflict of interest. Martha Stewart recently received a new contract from her company, Martha Stewart Living Omnimedia, which has lost money four years in a row. Under the arrangement, she will continue as founder and chief creative officer at the firm until 2017.

That is in addition to the more than $20 million she made over the three years that ended in 2011.

Dov Charney, who drove the company he founded, American Apparel, to the brink of bankruptcy in 2011, made $11.6 million that year. Michael Dell, who in 2010 settled SEC charges that he helped misrepresent Dell’s financials, made more than $21 million during the company’s last three combined fiscal years.

A more complex measurement of these founders’ performance is their lack of vision to transform their companies as the markets in which they operate change. None have shown the foresight Brin did when he moved Google beyond search and into mobile operating systems. And his company is also the dominant force in online video.

Michael Dell did not drive any comparable revolution at Dell. The company never stepped aggressively into the new age of personal computing — tablets and smartphones. The same holds true for Mike Lazaridis, the co-founder of BlackBerry, which did not transform its market share in the corporate smartphone industry into a lead in the consumer sector. Richard M. Schulze, who was the founder, largest shareholder, and de facto head of Best Buy oversaw a period in which the retailer failed to move into e-commerce quickly. In the meantime, Amazon has nearly bulldozed Best Buy under.

Finally, the most maddening, and often damaging, problem with these founders is that they cannot be pushed out. Martha Stewart owns the controlling interest in her company. Andrew Mason and two other shareholders control Groupon. Schulze and Dell own commanding portions of the shares in the companies they founded.

24/7 Wall St. reviewed large, U.S., publicly traded companies that have been irrevocably damaged by their founders or co-founders. We included in our analysis a review of company financials, as well as share price change over time. To reflect the amount of control these individuals have, we reviewed company documents filed with the U.S. Securities and Exchange Commission to identify voting share of the founders. If the voting share could not be determined, the total share ownership of the founder was used instead. In the case of Dell, Michael Dell’s voting share reflects his ownership before the completion of the pending move to go private.

These Are the Eight Companies Ruined by Their Founders:

1. Dell
> Founder: Michael Dell
> Percent voting share: 13.97%
> Year founded: 1984

Michael Dell started his company in 1984, when he was just 19 years old. By 2001, the company he founded as a college student was the largest computer systems provider in the world. In 2004, Dell resigned as CEO but returned to the position in February 2007. By then, the company had already begun to lose its appeal with consumers in the competitive PC business. Despite Dell’s return, the company continued to struggle in its core business. Dell’s worldwide PC market share fell from 15.9% in 2006 to just 10.7% in 2012. Consumers’ growing preferences for tablets and smartphones over PCs have also hurt the company. In addition to losing ground to competitors, the company also caught the attention of regulators. In 2010, the SEC fined Dell $100 million, and Michael Dell $4 million, alleging the company engaged in accounting fraud intended to mislead investors about its performance. On February 5, 2013 Dell reached a deal with a group of investors that included Michael Dell to go private for $24.4 billion, the largest leveraged buyout since the financial crisis, according to The New York Times.

Also Read: America’s Most Misleading Product Claims

2. Chesapeake Energy
> Founder: Aubrey McClendon
> Percent voting share: Less than 1%
> Year founded: 1989

Aubrey McClendon, CEO of Chesapeake Energy since he helped co-found it in 1989 has become known for his lavish compensation packages and extreme bets on his company’s performance. In 2008, McClendon had lost much of his personal fortune after borrowing money to buy massive stakes in his own company. That same year, Chesapeake paid McClendon $100 million. Between 2009 and 2011, Chesapeake paid McClendon more than $57 million in total compensation. In April 2012, Reuters reported  that McClendon had again borrowed a large amount of money, in this case $1.1 billion, using his stake in the company’s natural gas and oil wells as collateral. Reuters also uncovered that McClendon was running a $200 million hedge fund that speculatively traded in “the same commodities Chesapeake produces” from within company headquarters. That same month, McClendon gave up his position as chairman due to concerns over potential conflicts of interest with shareholders. He is scheduled to resign as CEO on April 1, 2013.

3. Martha Stewart Living Omnimedia
> Founder: Martha Stewart
> Percent voting share: 86.7%
> Year founded: 1997

Martha Stewart remains chairman of Martha Stewart Living Omnimedia even as the company continues to struggle. Stewart’s audience is aging and the company relies too much on the its print magazines. Martha Stewart’s image took a serious hit in 2004 when she was found guilty of conspiracy, obstruction of justice, and making false statements to a federal investigator after she was indicted for insider trading. Although Martha Stewart launched a high-profile “comeback” campaign after her release, her efforts have not paid off for the company, which has not turned a profit in any year since 2007. The company’s stock price is down more than 58% in the last five years. Part of the problem is executive turnover. There have been at least five CEOs and five CFOs since the company’s inception. Many executives argue that Stewart’s excessive involvement has hampered their ability to make change. The sixth CEO, Lisa Gersh, announced in December that she was leaving the company after serving in the position for just five months. Despite the company’s struggles, Martha Stewart was paid more than $21 million between 2009 and 2011.

4.BlackBerry
> Founder: Mike Lazaridis
> Percent voting share: 5.7% (of outstanding shares)
> Year founded: 1984

Mike Lazaridis co-founded BlackBerry, formerly known as Research In Motion, in 1984 and served as co-CEO of the company, alongside Jim Balsillie, through January 2012. The two pioneered the smartphone revolution. Lazaridis, however, failed to prepare BlackBerry for the upcoming competition from consumer-facing rivals Apple and Samsung. Among the largest mistakes that marked the end of Lazaridis’ tenure were the BlackBerry PlayBook tablet, a four day global service outage — which left phones unable to browse the Internet or access emails or instant messages — and a focus on business professionals even as consumer-centric products such as the iPhone absorbed market share. In the third quarter of 2012, BlackBerry’s worldwide market share of mobile device sales, by operating system, was just 5.3%, down from 11% in the third quarter of 2011 according to Gartner.

5. Countrywide Financial
> Founder: Angelo Mozilo
> Percent voting share: 1.5%
> Date founded: 1968

Former Countrywide CEO Angelo Mozilo became the face of the subprime mortgage mess once that market collapsed. Under his watch, his company began financing mortgages to high-risk borrowers, which during the housing boom drove the company’s large growth. In 2006, Countrywide financed about 20% of all mortgages in the U.S., more than any other mortgage lender in the country. But the company fell apart when the housing market tanked and borrowers defaulted on their high-interest loans. Countrywide was eventually sold to Bank of America in 2008 for $4 billion, with Mozilo forced out a few months later. The company then faced a barrage of lawsuits arguing that the company used deceptive practices to get people to apply for mortgages they could not afford. Mozilo’s integrity was also called into question when it was reported that several government officials and politicians, such as then-U.S. Sen. Chris Dodd, received favorable mortgage deals simply by being “Friends of Angelo.” In 2010, Mozilo settled an insider trading charge with the SEC for about $67 million. He is also permanently banned from serving as an officer and director of a public company.

Also Read: The Biggest Car Recalls Of All Time

6. Groupon
> Founder: Andrew Mason
> Percent voting share: 19.5%
> Date founded: 2008

Andrew Mason, Groupon’s quirky founder and CEO, has stumbled repeatedly in his role during the past couple of years. His company, which provides discounts and daily deals online, had to revise its financial reports in August 2011 after regulators and analysts took issue with its accounting methods. Groupon issued another revision to its financials in early 2012 as the company overstated its 2011 profit by more than $20 million. Because of these problems, along with general concern that the daily deal fad — the company’s core business — may be slowing, the stock price has been declining. It is now roughly a quarter of its initial public offering price of $20 a share, with the company’s market capitalization at $3.3 billion. It didn’t have to be this way. In 2010, Groupon rebuffed Google’s offer to buy the company for up to $6 billion. There has been talk that Mason isn’t mature enough to run a company of this size. For instance, he was criticized for drinking beer at a company meeting and for his public gaffes commenting on why it turned down buyouts.

7. American Apparel
> Founder: Dov Charney
> Percent voting share: 43.3%
> Date founded: 1989

Dov Charney started and ran American Apparel from his dorm room at Tufts University in the late 1980s. Twenty years later, in 2008, the apparel company had more than 6,700 employees and 197 stores worldwide. But provocative ads and rapid expansion did little to address the problems plaguing the company. In 2009, the Immigration and Customs Enforcement agency said that a quarter of workers at the company’s downtown Los Angeles manufacturing facility were illegal immigrants. In 2011, two sexual harassment lawsuits were filed against Charney. In December, a former store manager accused Charney of choking him and rubbing dirt in his face. Charney has denied all allegations of misconduct. The company has also struggled to stay afloat financially, running an operating loss in the last 12 months for which financial statements have been released.

Also Read: 2013’s Most Profitable Companies

8. Best Buy
> Founder: Richard Schulze
> Percent voting share: 20.24%
> Date founded: 1966

Best Buy founder Richard Schulze has presided over a company that has struggled to stay relevant in a sector that is increasingly moving online. Best Buy’s business has taken a sizable hit from online retailers such as Amazon.com. Some industry experts and analysts point out that Best Buy is increasingly becoming a showroom for electronics consumers — meaning that people go to the store to check out the product only to buy it online at a lower price. In the most recent quarter, Best Buy lost $10 million as revenue fell 4% compared to the previous year. The company’s share price is approximately one-third of what it was five years ago. Schulze has also found himself embroiled in a company sex scandal. A Schulze lieutenant, former CEO Brian Dunn, was forced to resign from the company after it was discovered that he had an affair with another staffer. The founder received criticism after an internal investigation found that he did not report that information to the board despite knowing about Dunn’s affair. Schulze announced his retirement from the board shortly after that investigation.

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