Changing course at Best Buy

Questions on founder Richard Schulze's actions presented board with another delicate situation.

The investigative report that Best Buy directors received over the weekend presented them with their second sensitive personnel situation in just a couple of months.

First they'd learned of what the report called an "inappropriate relationship" involving CEO Brian Dunn, leading to his April departure. Now they faced a situation that was in some ways even trickier: a report that reflected badly on company founder Richard Schulze, the man who has led Best Buy in one capacity or another for nearly half a century.

On Monday, the company announced that Schulze, too, would go.

"It's a rare company that will turn on its founder with any kind of real discipline," said Paul Hodgson, senior research associate at New York-based GMI Ratings, a governance researcher formerly known as the Corporate Library. "I think this was pretty strong."

Schulze is stepping aside for failing to alert the board's Audit Committee in December when he received a whistleblower's signed statement with allegations about Dunn's behavior. Several corporate governance experts on Monday gave the giant consumer electronics retailer good marks for its response to what one called a "coverup."

F. Daniel Siciliano, a law professor and head of Stanford University's Rock Center for Corporate Governance, said Schulze's departure was a "very good sign" that corporate governance is being taken seriously by the company's independent directors, who asserted their power.

"The board acted pretty quickly and decisively about the chair's coverup," Siciliano said. "That behavior is more clearly inappropriate than the CEO's behavior. Sitting on an allegation? There is no real excuse."

Schulze steps down as chairman on June 21 and will serve out the remainder of his term as director through June 2013. He also becomes founder and chairman emeritus, an honorary position that allows him to continue to keep an office at Best Buy's Richfield headquarters, and for him and his wife to receive medical insurance benefits.

The board also said it will support a shareholder proposal to vote on all directors every year.

Some thought the board should have done even more, noting that Schulze remains a director and that Dunn walks away with a goodbye package worth more $6 million.

Jeffrey Sonnenfeld, senior associate dean for executive programs at the Yale School of Management, said he found the board's response to both Dunn and Schulze "amazing" in its leniency.

Schulze should not be on the company's board in any capacity, he said, and Dunn should not have been rewarded given Best Buy's recent struggles. He said he couldn't understand the payments "unless they're paying him for silence about somebody else who has been in cahoots here."

"Could this company have done any worse without a board of directors? They had zero value here," he said. "Shame on this board."

"The best they could hope for is that Wal-Mart would hire this guy."

Best Buy officials defended Dunn's severance package, arguing that the payments were "fair value" given the length of Dunn's no-compete period. Normally companies and ex-CEOs agree to a one-year period, but Dunn can't work at a competitor for three years.

B. Espen Eckbo, founding director of the Lindenauer Center for Corporate Governance at Dartmouth's Tuck School of Business, said the decision to keep Schulze around probably reflects Best Buy's deep financial challenges. The big-box retailer lost $1.2 billion last year as it slashed prices to keep pace with more nimble rivals Amazon and Wal-Mart.

"My sense is that the board is trying to handle this in a decisive but not panicky way," Eckbo said. "They are sidelining [Schulze] without necessarily losing the input of all his experience. It's hard to generalize whether he should have been pushed all the way out at this point or not."

Millions for ex-CEO Dunn

As for signing off on Dunn's separation agreement, Best Buy's directors probably had less latitude on that decision, several noted. Dunn receives a package worth more than $6 million, including a $1.14 million bonus for the company's fiscal 2012 year, which just ended, and a $2.85 million severance payment, despite findings that Dunn used "extremely poor judgement" and violated company policies.

Rotten judgment and policy violations aren't enough to cut payments, said Hodgson, at GMI Ratings.

"Clearly he violated company policy, but employment agreements are written very, very carefully and that will not be reason to terminate somebody for cause, which is what you need in order to withhold the money," Hodgson said. "From my experience the only thing that leads to cause is a felony charge of some kind."

Dunn likely would have sued his former employer if it withheld severance, Hodgson said, and such costly litigation is the last thing the struggling company needs at the moment.

Former Best Buy CEO Brad Anderson, reached at his home in Minneapolis, said he was "still perplexed by the story."

"Why is Brian Dunn getting a severance package?" Anderson asked.

Staff writer Thomas Lee contributed to this report. Jennifer Bjorhus • 612-673-4683

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