Best Buy Debacle Offers Lessons in Crisis Management

When Best Buy CEO Brian Dunn resigned suddenly in April over allegations of inappropriate personal conduct, it reminded many in Corporate America of the resignation of Mark Hurd from Hewlett-Packard, an episode widely considered to have been poorly handled by H-P's board of directors.

Yet now that the dust has settled on Best Buy's CEO crisis, it's looking more like the board got it right in this instance. Some even say its serves as a case study in how to handle a crisis.

What made the situation at Best Buy so difficult is that Dunn resigned before the completion of an independent investigation into allegations of the inappropriate relationship. In situations like Best Buy's the board has to weigh the need to conduct a full investigation that is fair to all involved with the need to provide shareholders and the public with the facts and a transparent process.

Compliance officers are often caught in the middle. Taking part in an investigation of the CEO is no easy task, and the need to maintain a high level of sensitively and thoroughness, while remaining decisive and making proper disclosures can be a brutal balancing act.

“The compliance officer will eventually do the right thing by relying on professional standards and moral values to protect the organization, but a defined and documented set of procedures for dealing with issues involving high-profile executives will make that journey much smoother and quicker,” wrote David Frishkorn, chief compliance officer at Comverse Technology, in a recent Compliance Week column.

Best Buy later said 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,” according to a company statement.

Dunn wasn't the only casualty of the incident. The investigation also revealed that Best Buy's founder and chairman, Richard Schulze, “acted inappropriately” by failing to alert the audit committee about Dunn's inappropriate behavior after it was brought to his attention in December 2011. Best Buy wasted no time in ending Schulze tenure as chairman.

It was this decisiveness that served the Best Buy board well.  The demise of Best Buy's CEO and chairman aside, the crisis highlights the importance of a well-crafted crisis management plan. Lawyers say that companies do themselves a disservice when they don't take allegations of inappropriate conduct seriously. According to Michael Chertoff, senior of counsel at Covington & Burling and former Secretary of Homeland Security, the worst thing companies can do is underestimate the significance of an adverse event. “More often than not, that is a bad idea because you end up under-reacting, and you have to play catch up.”

“What usually happens is you're running against the clock. You don't have a lot of time to plan,” says Chertoff. “You've got to just swing into action.”

More often than not, however, a company has no crisis management plan in place. That can lead to mishandled crises that can do great damage to a company's reputation. “It's amazing to me that reputation is not always treated like an asset,” says James Donnelly, senior vice president for crisis management at public relations and marketing agency Ketchum. “Making sure you have a reputation-management plan in place is very important.”

“Compliance officers need to make sure the regulators are satisfied. The board can make sure that shareholders are satisfied.”

—James Donnelly,

SVP for Crisis Management,

Ketchum

Crisis management experts offer the following elements of a best-in-class crisis management plan:

Establish a crisis response team. Members of this team should include individuals who are “dedicated to fact-finding and intelligence gathering,” says Tom Fedorek, managing director in the international risk and investigations practice of FTI Consulting. “You need people who can separate facts from noise and people who can distinguish sources who are well-informed from blowhards who don't know what they're talking about.” Members of the company's legal and compliance functions often excel at these skills.

The team should be clear about who will be responsible for what, with someone from senior management in a decision-making role overseeing the process—but that individual should not have so significant a role that they overtake the process. Senior management often wants to lead the company through the crisis, “and that is exactly what they should not be doing,” says Fedorek. “They should be concentrated on running the business, while the dedicated crisis management team deals with the day-to-day events of the crisis.”

Identify the company's key constituencies. The type of information and message that the company will want to communicate depends on its target audience, whether the constituencies are shareholders, employees, customers, or regulators.

The questions the crisis response team should consider include:  What issues are the company's constituencies most concerned about? What is the purpose of disclosing this information? Is the company putting itself at a competitive risk by releasing certain information?

Identify what can and cannot be disclosed. Corporate policy or regulatory requirements put restrictions on what information is never appropriate to disclose, such as information that could violate privacy laws. “The law trumps transparency,” says Ernest DelBuono, senior vice president and chair of the crisis management team for Levick Strategic Communications. Other material information may be required to be reported.

BEST BUY INVESTIGATION DETAILS

Below are key findings and results of the Best Buy investigation:

Key findings of the investigation include:

The CEO violated company policy by engaging in an extremely close personal relationship with a female employee that negatively impacted the work environment.

The CEO's relationship with the female employee demonstrated extremely poor judgment and a lack of professionalism, but the inquiry revealed no misuse of company resources. The inquiry also revealed no misuse of aircraft.

In addition, as part of the investigation, it was determined that the chairman of the board of directors acted inappropriately when he failed to bring the matter to the audit committee of the board of directors in December 2011, when the allegations were first raised with him.

“In December, when the conduct of our then-CEO was brought to my attention, I confronted him with the allegations (which he denied), told him his conduct was totally unacceptable and contrary to Best Buy's policies and everything I, and the company, stand for. I understand and accept the findings of the audit committee,” said [former Best Best Buy Chairman Richard] Schulze.

In light of these findings, the audit committee of the board will launch an effort to review and enhance, if appropriate, Best Buy's relevant corporate policies and procedures. The goal of this review is to ensure a positive and consistent workplace environment for all employees at all levels.

In addition to electing a new chairman, the independent directors of the board have moved from a neutral position to a recommendation that the shareholders approve the shareholder proposal recommending declassification of the board, which would require every director to stand for reelection on an annual basis.

“As a Board, we support the proposal for annual elections as an additional demonstration of our commitment to strong corporate governance practices. Each of us—with no exceptions—will be subject to approval by the shareholders on an annual basis,” said [Director Hatim] Tyabji.

The full report can be viewed at http://www.bby.com.

Investigation Methodology

The inquiry relied upon voluminous interviews, documents and other data. The inquiry included 45 interviews of 34 current or former employees; searches of e-mails and other documents on the CEO's and the female employee's computers; a review of relevant internal ethics complaints; a survey of personnel records; a review of the CEO's and the female employee's purchase records using their employee discount; an analysis of the log of products the CEO tested as product samples; and an analysis of the CEO's and the female employee's Company phone records. The Company did not have access to the CEO's complete personal cell phone records. In addition, the Company's Internal Audit staff performed an in-depth analysis of expense reports, records reflecting corporate use of aircraft, and records of the CEO's use of a Company credit card over a three-year period.

Source: Best Buy.

Compliance officers and general counsels play a crucial role in this process by helping to ensure that any proprietary information or financial information is not compromised, and that material information that must be reported in an 8-K is filed. “Compliance officers need to make sure the regulators are satisfied,” says Donnelly. “The board can make sure that shareholders are satisfied.”

Get the facts straight. Typically in a crisis, the biggest challenge a company faces is the dual challenge of satisfying constituencies' demand for transparency with the need to protect corporate privacy, as well as the individual privacy of those involved. “Getting that balance right is one of the most important challenges for a board in dealing with a crisis,” says Chertoff.

A common mistake companies make during a crisis is to act too quickly, which typically leads to a “deficit in fact-based information” and a “surplus of misinformation,” says Fedorek. 

Getting in front of a crisis is impossible without first understanding the facts. Best Buy is an example of a company that handled the situation correctly by waiting until it had actual facts before making a disclosure, Fedorek says.

The ultimate goal is to aim for “strategic transparency,” says Donnelly. “A lot of people say, ‘the public demands transparency.' I'm not sure I fully agree with that. The public demands accuracy and competence. Many special interest groups are looking for full transparency, and I think there is a fine line between those two things.”

DelBuono also cautions against releasing so much information that the message the company is trying to convey winds up getting lost in the shuffle. Also take care to make sure, he says, that nothing is buried in those reports that suddenly becomes another unwanted news story in itself.

Bring in outside consultants. Another way in which Best Buy serves as a “textbook example” in how to deal with a crisis is that they immediately put the audit committee, who are all independent directors, in charge of conducting the investigation, says Fedorek.

“The role of the board, particularly the independent members of the board, is critical in any crisis situation involving a public company, because they are the ones who really have to take the reins,” Fedorek adds. Best Buy also excelled by hiring an outside law firm, WilmerHale, to conduct an independent investigation, he says.

Just as important, make sure to keep a list of outside service providers who you can immediately call upon in the event of a crisis. These contacts may include an external law firm, communication firm, and subject-matter experts.” You want to have all these people on call,” says Fedorek.

What separates great crisis leaders from so-so crisis leaders, says Donnelly, are those that “look beyond the plan and really make it part of the DNA of the company.”

They have regular training and testing through simulations and drills. They meet a few times a year to discuss crisis management, such as potential crises that potentially could hit the company based on recent changes to the organization or marketplace, adds Donnelly. “It's making sure there is a capability in place that goes beyond just a binder-on-the-shelf plan.”

If it's a well-managed company with a solid reputation and consistently delivers for its customers and shareholders, Fedorek says, “that's a company I would expect to be successful at weathering a crisis.”