The Minnesota-based electronics retail giant faces challenge to keep investors behind the company
The toughest communications challenges IROs face are born of uncertainty. Keeping the conversation focused on the future during a major financial restructuring, leadership transformation or strategic redefinition when outcomes are still up in the air can tax even the most experienced communications professional.
Add in a very public board split with the founding chairman, the potential threat of a fight over board control or a private tender offer and you have some idea of the communications challenges Minnesota-based electronics retail giant Best Buy faces in keeping investors – not to mention employees, suppliers and customers – aligned with the company.
The fast-developing story has seen plot twists moving quickly from a business restructuring and strategic reorientation story to soap opera and now a looming high-stakes battle for corporate control.
The current drama began in late March with the announcement of a $1.7 bn fourth quarter net loss. Best Buy, with $50 bn in annual sales, has been struggling against competition from price-busting online retailers and has seen its stock price cut in half over the past two years.
The Q4 announcement was accompanied by plans to cut $800 mn in costs by shedding 400 jobs from headquarters and shutting 50 of Best Buy’s signature big box retail outlets across the US.
CEO departs under cloud
But the strategic story turned to melodrama barely two weeks later with the announcement that CEO Brian Dunn was leaving ‘by mutual agreement’ after a 28-year career with the company.
The real reason for Dunn’s abrupt departure was revealed the following day when the local newspaper, the Star Tribune, reported that the board was investigating allegations of an inappropriate relationship between the 51-year-old married CEO and a 29-year-old female employee.
In mid-May, the audit committee dropped another bombshell when its report on the Dunn investigation was released. While the report castigated Dunn for ‘extremely poor judgment and a lack of professionalism’ in carrying out the relationship, the audit committee also revealed that Best Buy founder and chairman Richard Schulze had known of the allegations against Dunn three months before they independently came to the attention of the full board.
Last December Schulze had presented Dunn with a memo outlining the allegations, including the names of employees who had complained about the relationship. Dunn denied the charges but Schulze failed to inform fellow board members.
The audit committee report blasted Schulze, charging he ‘failed to act in a manner consistent with the audit committee’s mandate and good governance practices, and he created serious risks of employee retaliation and company liability.’
As a result, the board forced Schulze to agree to resign his chairmanship at the upcoming annual meeting in late June, to be replaced by audit committee chair Hatim Tyabji. Schulze also agreed that in 2013 he would leave the board of the company he founded four decades ago.
Schulze turned the story from soap opera into high-stakes poker last Thursday, informing the board he was resigning ‘effective immediately, in order to explore all available options for my ownership stake’, which stands at 20.1 percent.
Best Buy’s board wasted no time in putting Tyabji in as chairman as well as amending the bylaws to increase board independence, all a mere two weeks before the annual meeting, scheduled for June 21.
The Star Tribune reported on Friday that Schulze is rumored to have hired ‘a top lawyer in New York’ to help the 71-year-old regain control of the company either by replacing the current board or taking the company private.
As further proof of his intentions, Schulze has also hired Sard Verbinnen, a well-known financial communications consultant experienced in crisis management and transactions.
With all the uncertainty Best Buy faces in executive leadership and ultimate corporate control, it might be easy to ignore the massive restructuring and strategic reorientation the company is also trying to achieve, but that would be a mistake, according to Bryan Armstrong, managing director at FTI Consulting, Chicago.
‘Whenever there are a set of risks in play around leadership, strategy or an unclear path forward, the risks surrounding the company supersede the risks surrounding the CEO position every time,’ he says.
While FTI is not involved the Best Buy saga, Armstrong refers to his firm’s research on investor reactions to CEO transitions, which he recently presented at the NIRI conference in Seattle.
The Best Buy board faces major strategic decisions about the direction of the company that ‘outweigh whether it has the right skipper in place,’ he says.
The board could find ‘a superstar’ CEO but it won’t know whether its candidate has the right skill set ‘if it hasn’t identified the path forward.’
Best Buy may need a CEO who is a turnaround expert before it opts for an executive who is an experienced growth leader, Armstrong observes. He adds that a potential run at the board or a bid by Schulze could complicate the communication challenges Best Buy faces and decisions investors will have to make.
On the one hand, investors looking at Schulze taking back control will see a founder with a large emotional stake in the company who ‘built the business from scratch. They’ll have a difficult time expecting change’ that requires big strategic decisions, Armstrong says.
But if Schulze is successful in lining up credible financing to pay a significant premium over the current stock price, investors may opt for the certainty of a payout today rather than the uncertainty of sticking with the incumbent board and its attempts to restructure the company for a potentially higher payout down the road.
‘It’s really difficult to sell the [restructuring] story to investors. It’s all about the strategy,’ Armstrong concludes.
Best Buy IRO Bill Seymour declined to comment for this story.