Lululemon investor alleges that board ignored company’s “toxic” culture

Posted in Employment, labor and pensions Corporate M&A and securities

In a recently filed lawsuit, an investor in athletic retailer Lululemon Athletica Inc. (“Lululemon”) alleges that the company’s Board of Directors (“Board”) ignored the behavior of ex-CEO, Laurent Potdevin, allowing a “toxic” work culture to develop at the company. Specifically, the complaint by investor David Shabbouei filed in Delaware Chancery Court alleges that the CEO’s leadership promoted practices such as bullying, sexual harassment and gender discrimination, and that the Board failed to prevent these practices.

Former CEO Potdevin resigned from his role in February of this year because his behavior failed to comply with Lululemon’s code of conduct. After that time, the complaint alleges that deeper issues were revealed at the company, including that certain women were denied promotions while other women (such as those in romantic relationships with Potdevin) and other executives were given leadership opportunities. Shabbouei also claims that Potdevin fostered a “boys club” mentality, used an “inner circle” management style, and engaged in illicit activities with other Lululemon employees.

Additionally, Shabbouei claims that, while Lululemon could have terminated Potdevin’s employment for cause, Lululemon instead chose to pay the ex-CEO a $5 million severance package. According to Shabbouei, the Board’s decision to allow Potdevin to resign with such a lucrative severance package not only unjustly enriched Potdevin, but also is a breach of the company’s fiduciary duties to its shareholders and a waste of corporate assets. Shabbouei further claims that the ex-CEO’s actions caused financial harm to the company and damaged the company’s reputation.

Given Shabbouei’s allegations, his lawsuit has the potential to transform what may have been perceived as an isolated case of executive misconduct into a cultural corporate issue, similar to the issues faced by Nike and Under Armour this year. In the wake of the #MeToo movement, the lawsuit may also indicate a trend to hold corporate boards—who have not traditionally become involved in personnel matters—accountable for preventing and combating workplace harassment and “toxic” work cultures.

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