DEFINITION of 'Mad Hatter'

A mad hatter is a chief executive officer (CEO) or managerial team whose ability to lead a company is highly suspect. Mad hatter CEOs are often characterized by misconduct or impulsive and puzzling decisions, which employees, board members and shareholders may question. Mad-hatter CEOs often take spontaneous actions with little regard for viable alternatives or the consequences.

BREAKING DOWN 'Mad Hatter'

The "Mad Hatter" refers to one of the many strange characters in Lewis Carroll's "Alice's Adventures in Wonderland." At the tea table, Alice meets the Mad Hatter, who is eternally caught in tea time and constantly quizzes Alice with nonsensical and unanswerable questions.

In the corporate world, the term "mad hatter" refers to an ill-equipped leader or CEO of a company who has assumed power as a result of his/her being a founder of the company, nepotism, or a poorly thought-out succession protocol. Once in power, mad- hatter CEOs tend to exhibit poor decision-making due to a variety of factors including, but not limited to, self-interest, haste, distraction, or gut feelings. As a result of incompetent, incapable or misguided leadership at the top of a company, the morale of managers and employees often suffers. Typically, mad-hatter CEOs are either removed or stay in power until their companies are run into the ground.

Mad hatters at the helm are more common in privately held companies, as they are often the founders and the money behind the operations. The combination of these factors often results in power that cannot be challenged, even when the shortcomings of the leader-in-charge are obvious. Mad-hatter CEOs of public companies, however, do not have the same level of job security as their counterparts in private companies, due to distributed ownership and voting rights granted to shareholders and the board of directors.

Mad Hatters and Shareholder Activism

Shareholder activism is often criticized as being based on generating short-term gains by corporate raiders regardless of long-term costs, but the removal of a mad-hatter CEO of public a company can be the difference between a company's survival and failure. Shareholder activism can take the form of proxy battles, litigation or publicity campaigns as shareholder votes are collected to oust the CEO or the management team.

Example of a Mad Hatter

While he was not directly labeled as a mad hatter, Dov Charney, founder and CEO of American Apparel Inc., exhibited many of the traits exhibited by mad-hatters. After 25 years as the CEO of company, he was ousted by the board of directors in 2014 after years of allegations of misconduct with female employees, poor judgment, and bad decisions. After he was firing, the company filed for Chapter 11 bankruptcy in October 2015 and emerged from reorganization in January 2016.

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