Experts Weigh In on How Best Buy Handled CEO Scandal

While some experts have given the company high marks and praised it for taking a bold tack, others argue that the board was too lenient and should have taken a harsher approach.

Shortly after Best Buy Company, Inc., released the results of its independent investigation into ex-CEO Brian Dunn, experts began weighing in on how the company handled the matter-and their perspectives are widespread.

Richfield-based Best Buy said Monday that the investigation revealed that Dunn violated company policy by engaging in “an extremely close personal relationship with a female employee that negatively impacted the work environment.” Dunn “demonstrated extremely poor judgment and a lack of professionalism,” the investigation report said.

The investigation also found that Best Buy Chairman and founder Richard Schulze “acted inappropriately” when he failed to notify Best Buy's audit committee after learning in December about allegations of such a relationship-and the company announced Monday that Schulze would step down as chairman following its annual meeting in June.

Some experts have given the company high marks and praised it for taking a bold tack.

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

When a company executive provided Schulze with a written statement from an employee that contained allegations about a possible inappropriate relationship between Dunn and a female subordinate, Schulze confronted Dunn but failed to inform the audit committee about the allegations, according to the investigation report.

F. Daniel Siciliano, a law professor and head of Stanford University's Rock Center for Corporate Governance, told the Star Tribune that Schulze's exit was a “very good sign” that corporate governance is being taken seriously by the company's independent directors.

“The board acted pretty quickly and decisively about the chair's cover-up,” Siciliano added. “That behavior is more clearly inappropriate than the CEO's behavior. Sitting on an allegation? There is no real excuse.”

But some argue that the board should have taken a harsher approach.

Jeffrey Sonnenfeld, senior associate dean for executive programs at the Yale School of Management, told the Star Tribune that he found the board's response to both Dunn and Schulze “amazing” in terms of its leniency.

When Schulze steps down as chairman next month, he will become founder and chairman emeritus, an honorary position. He will also serve the remainder of his director term, which goes through June 2013.

Dunn, meanwhile, will receive a $6.64 million severance package that includes a previously earned bonus of $1.14 million, previously awarded restricted stock grants, compensation for unused vacation, and a severance payment of $2.85 million. The company said that the agreement extended his non-compete period from the standard one year to three years-and the severance package was “fair value” given that extension.

But Sonnenfeld told the Star Tribune that Schulze shouldn't be on Best Buy's board in any capacity and that Dunn shouldn't have received such a reward in light of the company's recent struggles.

“Could this company have done any worse without a board of directors? They had zero value here,” he told the Star Tribune. “Shame on this board.”

But Hodgson told the newspaper that Best Buy may not have had much of a choice in terms of Dunn's severance package. Employment agreements typically specify that money will only be withheld if someone is terminated for cause, and a felony charge is the only thing he knows of that constitutes “cause.” Dunn likely would have sued if Best Buy had withheld severance, he added.

To read the full Star Tribune story, click here.

Schulze, 71, has had strong ties to Best Buy since he founded it. In 1966, he opened a single stereo shop in St. Paul-and he later built it into the world's largest electronics retailer. He stepped down as the company's CEO in 2002 but vowed at the time that he would remain chairman “until I'm called away from this earth.”

According to the Pioneer Press, he remains the company's largest stockholder and controls 20 percent of its shares. Last September, Forbes estimated his net worth to be $2 billion, making him the 212th-wealthiest American.

Former CEO of Fridley-based Medtronic, Inc., and Harvard Business School professor Bill George told Minnesota Public Radio that it's unfortunate that Schulze and the company he grew are parting ways on such dismal terms.

“You know, it's sad. I wish, personally for his sake, he'd left a decade ago. Because now, it's like a Shakespearian tragedy. He's had an amazing career. Been entrepreneur of the year, and company of the year in 2004, and you know, he's done everything right until this point,” George told the media outlet. “But he was just, I think, too close to his second successor, Brian Dunn, and didn't take the appropriate action and now put the company at risk.”