Best Buy deals tied to insiders draw scrutiny

Analysts point to business arrangements between retailer and its board members, including founder Richard Schulze.

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April 2000: Best Buy founder Richard Schulze

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While outside investigators probe allegations of misconduct by former Best Buy CEO Brian Dunn, some industry analysts suggest the retailer's troubles go deeper than the question of whether Dunn used company resources to pursue an inappropriate relationship with a female employee.

For years, analysts have expressed concern about the insular nature of the company's board and certain business dealings involving founder and chairman Richard Schulze, members of his family and longtime board members.

In March 2010, the independent research firm Management CV Inc. raised significant concerns about nepotism and business arrangements it considered "inappropriate for a public company."

As outlined in public documents, those dealings include six-figure jobs for Schulze family members, real estate and corporate aviation agreements that steer nearly $2 million a year to separate businesses owned by Schulze, millions spent on products from a company owned by Schulze's brother and spending on services from businesses affiliated with board members.

Best Buy has regularly disclosed these arrangements in filings with the Securities and Exchange Commission. Some analysts have directed sharp criticism at Best Buy for agreeing to the deals.

"Even if these many transactions are done at truly market rates, as the Board asserts, they are certainly rife with potential conflicts of interest," Management CV founder Renny Ponvert wrote.

Ponvert said in an interview Saturday that it's highly unusual "for such a big dominant public company to have such a long list of unflattering behaviors.'' He believes it stems from a corporate structure where Schulze remains chairman of the board and still controls 20 percent of Best Buy stock, a stake worth about $1.5 billion.

"It's really the 'Schulze Show,'" Ponvert said. "This is probably a more egregious case than some, but it's not that unusual when you have such a dominant co-founder. Politely, I'm not sure he cares much about what other people think."

A pivotal time

The company's board is filled with longtime friends of Schulze, said Mike Pachter, an analyst with WebBush Securities, based in Los Angeles.

He said the board "defers to Dick Schulze,'' the first of just three CEOs, including Dunn, to head the company in its 46-year history. Schulze was a mentor to Dunn, who abruptly resigned Tuesday in connection with an internal investigation of his behavior in regards to a relationship with a female employee.

Greg Hitt, a spokesman for the Best Buy board, issued a one-sentence statement Saturday in response to Star Tribune questions about the company's financial relationships with Schulze and related parties. "The company fully complies with all legal requirements, including public disclosure, regarding related-party transactions," the statement said.

The scrutiny of Best Buy's dealings comes at pivotal moment for the Richfield-based consumer electronics retailer, the nation's largest, with more than 7,800 Minnesota employees. It announced a major restructuring shortly before Dunn's departure, amid questions about whether it can recover its sales momentum from competitors such as Amazon.com and Wal-Mart.

Ponvert said the combination of Best Buy's sagging profits and the cloud created by Dunn's sudden departure could give new life to the uneasiness that has lingered among some outsider observers.

As long ago as 2006, the Wall Street watchdog group formerly known as Corporate Library was concerned about the issue of nepotism at Best Buy. However, Best Buy was still posting strong results at that time.

"One of the golden rules in business is that when you're winning, you have few critics," Ponvert said.

Many of the conflicts, listed as related party transactions, directly involve Schulze. He could not be reached for comment.

Arrangement details

SEC filings by Best Buy show that the company leases two of its stores from Schulze, an arrangement that dates to 1990. In 2011 alone, the company paid $1 million in rent for the two stores. The leases ran through 2011 and 2018, respectively.

Schulze also benefits from Best Buy's patronage of his corporate travel company, Minneapolis-based Best Jets International. According to Best Buy's proxy statements, it leased airplanes and chartered aircraft services from Schulze over the past five years for $3.56 million.

"Our senior management generally use the airplanes when it is more economical or practical than flying commercial airlines,'' the proxy statement said.

Best Buy purchases store fixtures from Phoenix Fixtures Inc. of Roberts, Wis., which is owned by Schulze's brother. The total amount paid to Phoenix in a five-year period that ended last year was $70.7 million, documents show.

Susan Hoff, Schulze's daughter who spends a significant amount of time at a home in California, is founder, chairwoman and CEO of the Best Buy Children's Foundation. In addition, she serves as a Best Buy vice president, receiving a base salary for fiscal 2011 of $242,000. The proxy statement said she was eligible for a cash bonus with a "target payout'' of nearly half of her salary.

Son-in-law Duane Hoff worked at Best Buy in the early 2000s, making $160,000 as vice president for business development in his last year.

Connections to the board

Best Buy also regularly has had business relationships with board members and some of their family members.

G. "Mike" Mikan, now interim CEO of Best Buy, is a former senior executive of UnitedHealth Group who has served on the audit committee at Best Buy. Mikan also has served as a Best Buy director since 2008. The company buys employee medical plans from UnitedHealth -- $175 million worth in fiscal 2009. About $14 million of that was for administrative and other services.

The proxy statement said the amounts paid to UnitedHealth were an "insignificant portion'' of consolidated revenue of Best Buy for each of the past three years.

"In addition, Mr. Mikan did not influence or participate in negotiating our agreement with UnitedHealth,'' the proxy said.

While the company has taken pains to distance itself from the inquiry into Dunn's behavior by hiring an outside legal team to perform the review, one of the lawyers on the team has connections to Mikan and UnitedHealth.

The attorney, Tom Strickland, was appointed executive vice president and chief legal officer of UnitedHealth Group in May 2007, when Mikan was executive vice president and chief financial officer.

Elliot Kaplan, a founding director who left the board last June, is a partner with the law firm of Robins, Kaplan, Miller & Ciresi LLP, the company's outside counsel. The company paid $12 million in legal fees to the Robins firm in 2011.

Jane Kirshbaum, Kaplan's daughter, is one of Best Buy's senior corporate attorneys and works in the human services department. Her total cash compensation for fiscal 2011 was $193,946.

Michael J. Stillman, Kaplan's stepson, was vice president for Best Buy Connect until he left the company several months ago. Stillman's total cash compensation for fiscal 2011 was $284,008.

pkennedy@startribune.com • 612-673-7926 tonyk@startribune.com • 612-673-4213 pmcenroe@startribune.com • 612-673-1745

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