Probe puts the spotlight on Best Buy leadership

  • Article by: THOMAS LEE , Star Tribune
  • Updated: April 14, 2012 - 11:06 PM
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Brian Dunn

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As Best Buy Co. moves forward after its CEO's sudden departure amid allegations of impropriety, the company must move quickly to demonstrate that any failure of its top leader doesn't reflect deeper flaws in the company's leadership, investors and analysts say.

"Best Buy has the opportunity to manage the situation well if they take decisive action," said Carol Spieckerman, president of the retail consulting firm newmarketbuilders. But first, it must confront the problems that led to Brian Dunn's resignation, she said. If the board fails to do so, Best Buy's reputation will erode in the eyes not only of investors, but customers and employees too, Spieckerman said.

In a recent letter to employees, interim CEO G. "Mike" Mikan said the company is determined to push forward.

"We will prove to the marketplace that Best Buy is the best at what we do -- and that will be reflected in the customer experience, our employee engagement and ultimately in the value our shareholders place in our company," Mikan wrote.

Best Buy also promised to make the public the results of its investigation, led by former U.S. Attorney for Colorado Tom Strickland and William DeLucas, who served as enforcement director for the Securities and Exchange Commission.

"The prompt launch of the ... investigation is in keeping with Best Buy's tradition of good governance, and the plans to make the findings public further demonstrate a commitment to transparency," said Greg Hitt of H&K Strategies, who is acting as a spokesman for the company.

Coming amid restructuring

The timing of the scandal, coming after the company's poor performance in recent years, raises the stakes.

Best Buy is embarking on restructuring to better compete with online competitors such as Amazon.com. The consumer electronics retailer has seen its stock price drop 41 percent over the past three years as store sales have declined.

Despite the company's poor financial performance, the board of directors continued to support Dunn, who was considered the handpicked protégé of founder Richard Schulze. Many investors and analysts say the board was too complacent about Dunn's performance for too long, then watched him depart in an embarrassing episode.

As a result, Best Buy's board has a credibility problem with the investment community, said Mike Pachter, an analyst with Wedbush Securities, based in Los Angeles.

"Are [the board of directors] doing their jobs to maximize shareholder value?" Pachter said.

Investors also are troubled by the timing of Dunn's resignation, analysts say, which came just 13 days after Dunn was presented as the leader of the company's ambitious restructuring plan to cut $800 million in expenses over three years. Best Buy didn't mention it was investigating Dunn's personal conduct when it announced his departure Tuesday morning. Hours later, the company acknowledged the probe, after it was confronted about its existence.

Unhappy with uncertainty

The lack of disclosure creates a lack of trust and uncertainty, analysts say.

"Wall Street always hates uncertainty," said Jeremy Brunelli, an analyst with Consumer Edge Research in Stamford, Conn.

If any misdeeds are limited to Dunn, then the impact will fall on Dunn rather than on Best Buy, Spieckerman said. But if the investigation determines he frequently used company funds in the pursuit of an inappropriate relationship, then "heads will have to roll," she added.

Given the prominent investigatory backgrounds of the two attorneys leading the probe, legal observers say it will inevitably focus on the board members, since they supervised the ex-CEO.

If the board of directors knew about any indiscretions on Dunn's part and failed to take decisive action, they could be in trouble, especially if Dunn's actions threatened the company's financial health, said Thomas Bakewell, a St. Louis-based lawyer and consultant who specializes in corporate governance. The consequences could include lawsuits and the loss of insurance coverage, he said.

Former Best Buy CEO Brad Anderson, who spent several years as a director, said the board would not have ignored any allegations brought against Dunn. "They would act very quickly, very aggressively on such an extremely sensitive issue," he said.

Anderson added that if the board failed to do its duty, "It would look terrible."

Thomas Lee • 612-673-4113

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