Guess Board Deep in Paul Marciano Controversy: Corporate Governance in the Spotlight

Ahead of the April 22 shareholder meeting, Guess Inc.'s board is urging shareholders to re-elect Paul Marciano to the board. Given that Marciano is a co-founder, chief creative officer, and former CEO, this proposal might seem routine—yet ongoing litigation over sexual misconduct allegations, public opposition from an activist investor, and an insurer's withdrawal make it particularly striking.

"We believe the growing number of sexual assault and harassment allegations against Paul Marciano, and the apparent enabling behavior of his brother Maurice Marciano, pose an existential risk to the company's brand, reputation, and ability to create value for shareholders," wrote Legion Partners managing directors Chris Kiper and Ted White in an April 11 letter to shareholders, urging them to vote against the Marciano brothers. "We also detailed why we believe the Guess board's handling of these allegations has ranged from grossly negligent at best to a breach of fiduciary duty by independent board members at worst."

The next day, Guess responded by dismissing the investment firm's demands as a "regurgitation of previously reported and addressed grievances," defended its handling of allegations against Marciano over the past few years, and stated it had formed another board committee to investigate the latest claims.

Legion's sharp language is typical of activist investors dissatisfied with governance. But the Guess board also faces a more unusual situation—far from its boardroom and proxy statement: several of Marciano's accusers have taken multiple board members to court.

Arick Fudali, a partner and managing attorney at The Bloom Firm, which represents Paul Marciano's latest accuser, said the board put his client in danger when it reinstated Marciano in 2019. The previous year, an internal investigation found Marciano had engaged in "inappropriate comments and text messages, unwelcome advances (including kissing and touching)," and determined that "on certain occasions, Mr. Marciano exercised poor judgment in his communications with models and photographers and placed himself in situations that could and did give rise to allegations of misconduct."

Since then, Marciano, who had stepped down as CEO, also resigned as executive chairman, but months later, with the board's support, he became chief creative officer. This year, two Guess models publicly alleged—one saying she suffered a serious sexual assault two years ago—and they named several Guess board directors in a lawsuit filed in March.

"In my view, bringing him back and putting him in a position of direct contact with models again is aiding and abetting sexual harassment," Fudali said in a phone interview. "A board or an entity only becomes vulnerable when it votes to bring back a known sexual harasser. If the board had stuck by its decision and not reinstated Paul Marciano in 2019, we likely wouldn't be where we are today. More importantly, my two clients wouldn't have experienced what they did in 2020. That's the key."

Guess did not respond to multiple requests for comment for this article. Two board members declined to comment; another referred inquiries from Retail Dive's sister publication to a board spokesperson, who did not respond to requests for comment.

A game-changer for the boardroom?

In the United States, boards have played a significant role in corporate governance for two centuries. But because their role has been loosely defined and lightly regulated for much of that time, boards have largely flown under the radar.

By and large, board members—men and increasingly women—have been seen as accountable to shareholders, which has often been interpreted as protecting the company's stock price first. But in an era shaped by the #MeToo and #BlackLivesMatter movements, and with growing attention to climate change, that picture has begun to shift.

According to Mark Lipton, professor emeritus at The New School, corporate board advisor, and author of "Mean Men: The Perversion of America's Self-Made Man," more companies are reshaping board composition and agendas to address flaws in their corporate culture.

"The most striking change for me is that so many organizations are trying—not always successfully, but certainly attempting—to change their culture," he said in a phone interview. "Whether it's 'toxic' men in the middle ranks or executive leadership at the top."

But Lipton also said Guess—a brand with a question mark in its logo, whose founder faces multiple allegations—appears to be turning a blind eye to the need for change.

"You know, the world turned a corner after Harvey Weinstein," he said. "I don't think Guess ever got that memo."

All hands on deck

As Legion has pointed out in its communications with shareholders and on its dedicated website (abetterguess.com), Guess's insistence on keeping Paul Marciano on board may be putting its brand reputation at risk.

According to research from consumer intelligence firm Brandwatch, social media discussions about the brand turned negative around the time the latest allegations became public in March. But overall, unlike many fashion brands closely tied to a founder or designer, Brandwatch found that most people did not directly associate Paul Marciano with the Guess brand. (That may be good news for another brother, Georges Marciano, who on Thursday sought to clarify the brand's origins, stating in a press release that it was he, not Paul, who founded Guess.)

"As these allegations surface, the Guess brand gets mentioned alongside the co-founder, but this won't cause lasting damage to the brand itself," Brandwatch concluded in an emailed report. "The brand is not synonymous with its co-founder, which is also common in fashion and luxury, and this time it benefits from that. Guess enjoys a certain iconic status online, meaning that even after allegations emerge, people still actively discuss its products and advertising."

That runs counter to the board's argument—according to Legion's White, the board believes there is no "Guess" without Paul Marciano.

"The company tells us Paul Marciano is Guess and Guess is Paul Marciano, and he's so important," White said in a phone interview. "You can't remove him. So (Brandwatch's findings) are the exact opposite of that claim."

However, Legion's own research shows that what it calls the "Marciano discount"—the hit to its valuation—has widened from 30% to 45% in recent years as allegations against him have accumulated. Experts say much of the blame can be placed on the board.

"I firmly believe the board bears responsibility," Lipton said, adding that lawsuits against directors over issues like sexual harassment may become more common. "In the past, you know, some boards might shrug and say, 'No big deal. We have D&O insurance; it'll pay out.' But I have a feeling that whoever underwrites Guess's D&O insurance is starting to balk."

Although Guess states in its proxy statement that it insures its board members to indemnify them "to the fullest extent permitted by law," insurers do get nervous. For example, in December, Beazley Insurance sued Guess and Paul Marciano in the U.S. District Court for the Central District of California, arguing it had no obligation to cover Marciano's latest legal disputes because they involved "the same or interrelated wrongful acts" from years earlier, predating Beazley's coverage of Guess.

Anat Alon-Beck, a professor at Case Western Reserve University School of Law, said board members should be concerned not only about reputational damage to the companies they govern but also about their own reputations. Her research focuses on corporate law and governance. She said that to respond appropriately, any Guess board member should ensure they have full details of all internal investigations, including those that may have been conducted before they joined.

That includes Guess's ongoing investigation into Marciano's recent conduct—which Legion argues should itself be sufficient reason to postpone the annual meeting and withdraw its recommendation to support his continued board service.

"When you sit on a board, you always face reputational risk, especially when there's litigation and the board appears to be shielding management," she said in a phone interview. "What companies should do is: first, take responsibility; second, ensure things don't happen; third, the board has a duty. Especially if a dog has already bitten someone, then you know it has that tendency. Honestly, today, under the #MeToo movement, there's no excuse for this."