Best Buy founder Richard Schulze quits over Brian Dunn scandal

  • Article by: THOMAS LEE , Star Tribune
  • Updated: May 15, 2012 - 12:21 PM

Investigation found that Richard Schulze kept quiet about allegations involving former CEO Brian Dunn.

After 46 years as the driving force behind Best Buy Co., Richard Schulze resigned as chairman of the board of directors after an investigation revealed that he failed to alert the board about allegations of an inappropriate relationship involving the company's former CEO, Brian Dunn.

Best Buy said Monday an investigation concluded that Dunn carried out a relationship with a female employee that violated company policy. Schulze confronted Dunn with allegations about the relationship in December, but did not disclose them to the board of directors, a breach of corporate governance, the company said.

"The chairman revealed to the CEO the identity of the female employee and the employee who authored the [complaint]," the company said in a statement. "This action exposed the employees to potential retaliation and exposed the company to potential liability for such retaliation."

The board would not learn of the allegations about Dunn for another three months.

Schulze's resignation was a stunning development, as the investigation seemingly focused on the accusations against Dunn, who resigned last month. Schulze will step down as chairman on June 21, then resign from the board a year later, which will officially end his tenure at the $50 billion consumer electronics giant he had built from scratch.

"Talk about a palace coup," said Colin McGranahan, an analyst with Sanford Bernstein & Co.

Best Buy declined to make Schulze, company executives, or board members available for interviews. In a statement from the company, Schulze said he accepts the investigation's findings regarding his handling of the Dunn accusations.

"In December, when the conduct of our then-CEO was brought to my attention, I confronted him with the allegations [which he denied], told him his conduct was totally unacceptable, and contrary to Best Buy's policies and everything I and the company stand for," Schulze said. 

Best Buy said board member Hatim Tyabji, chairman and CEO of Bytemobile Inc., a leading global provider of video optimization and traffic management systems, will succeed Schulze as chairman.

In recent years, Best Buy has been beset with challenges -- from the migration of consumers online to competition from Wal-Mart and Amazon. With the departure of Schulze and Dunn, the company has a chance to embrace outside leadership, something the insular company has long resisted, former executives and industry observers say.

"It has got to seize [the moment] quickly," said Brad Anderson, who was Best Buy's CEO from 2002 to 2009. "If you go back to what you were doing, that's not such a good plan."

For the past three weeks, Best Buy has been forced to confront the allegations about Dunn, who resigned after a three-year reign that was punctuated by a plunging stock price and low morale at the Richfield-based retailer. Best Buy initially said Dunn left by "mutual agreement," but later acknowledged that the board's audit committee was investigating whether he had an inappropriate relationship with a 29-year-old woman who worked at the Best Buy Leadership Institute.

On Monday, the company released a report of its investigation, led by former U.S. Attorney Tom Strickland and William McLucas, a former director of enforcement with the Securities and Exchange Commission. The investigation concluded that Dunn violated company policy "by engaging in an extremely close personal relationship with a female employee that negatively impacted the work environment," the report stated.

Investigators also determined that Dunn did not misuse company assets, which had been alleged. While the report emphasized numerous private office meetings, hundreds of text messages and phone calls, the company declined to conclude whether Dunn and the employee had a sexual relationship.

With Dunn's resignation, determining whether the relationship was sexual became less of a priority, sources close to the investigation said. If Dunn had remained CEO, a sexual relationship, if proven, would have assumed greater significance because it would amplify the degree of bad judgment, the sources noted.

The board decided to award Dunn a severance package worth more than $4 million.

Schulze became entangled in the Dunn controversy in December 2011, when an executive provided a letter to Schulze from another employee, detailing the allegations between Dunn and the female staffer. Schulze then confronted Dunn with the letter.

Dunn denied the allegations, and Schulze dropped the matter. The board independently learned of the allegations in March and launched its investigation, according to the report. "By unilaterally confronting the CEO in December 2011, [Schulze] failed to act in a manner consisted with good governance practices," the report stated.

Investigators did not uncover any evidence that Schulze deliberately tried to cover up Dunn's behavior, sources said.

The board was right to punish Schulze, said Jacob Frenkel, who leads the white-collar crime practice at Shulman Rogers, a law firm in Maryland. Frenkel said Schulze failed to separate his personal relationship with Dunn, whom he has long mentored, from his duties as chairman.

Strickland credited the board's willingness to conduct such a probe.

"The board had a very clear level of independence and commitment to good corporate governance," he said.

But not everyone is satisfied. An analyst with a large institutional investor in Best Buy suggested his firm would support a campaign by an activist group to elect new directors to the board.

One name attracting attention is Greenlight Capital Inc., an investor with a record of challenging boards at other troubled companies. Since 2011, the firm has purchased 7.7 million shares of Best Buy stock.

"If activist investors step in, that could unlock value" in Best Buy shares, said the analyst who requested anonymity. "It could be a perfect time for them to step in and influence the selection of the next CEO."

Regardless of who Best Buy elects, the company will need to chart a path forward without its founder at the helm.

"I have no idea what the future will look like," Anderson said. "Dick was such a big force in the company."

Thomas Lee • 612-673-4113

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