EDITION 5

WeeklyAugusT 24, 2012

Executives Behaving Badly, Boards Behaving Well

Use Communications to Boost Consumer Confidence in Hard Times

The Congressman Yoder Fiasco

Is Best Buy a Good Buy?

ExEcutivEs BEhaving Badly, Boards BEhaving WEllRichard s. Levick, Esq.Originally Published on Forbes.com

To be sure, sexual misconduct by a business

executive is deplorable under any circum-

stances. On the eve of an IPO, however, it

can be utterly disastrous. Restoration Hard-

ware can certainly testify to that.

To be sure, sexual misconduct by a business

executive is deplorable under any circum-

stances. On the eve of an IPO, however, it can

be utterly disastrous. Restoration Hardware

can certainly testify to that.

Early last week, the company’s chairman and

co-executive, Gary Friedman, resigned after an

internal investigation revealed he had an inti-

mate relationship with a 26-year old employee.

Friedman has been the very face of Restoration

Hardware, its public ambassador as well as

the business mastermind who steered the ship

from potential bankruptcy to success.

Normally, the board would have had a tough

choice in disciplining the one executive who

personifies the brand. One hopes that a “no

one is indispensable” dictum would have

guided the directors to an appropriate reso-

lution. But in this case the point is moot as

Restoration Hardware was about to undertake

a $1 billion IPO. The potential risks of inaction

were untenable.

The Restoration Hardware board then formed

a special investigatory committee and hired a

brand-name law firm, Weil, Gotshal & Manges,

to conduct the probe. Not just a sense of recti-

tude, there were a few practical considerations

forcing their hand. The whistleblower was the

employee’s ex-boyfriend with a criminal re-

cord. He was also airing his grievances every-

where he could, so the allegations were likely

to surface anyway. Simple common sense thus

demanded an investigation to both determine

the accuser’s credibility and stay ahead of the

news cycle.

Weekly

The Restoration Hardware situation is of

general interest for at least two reasons. First,

to what extent must boards simply hope that

they’ll somehow be alerted to trouble in suf-

ficient time to control the situation—or, al-

ternatively, is there a formal mechanism, an

anonymous hot line of some sort, that can be

set up to increase the chances that the com-

pany will learn of a problem before anyone

else does? The fact that Best Buy’s founder

Richard Schulze was forced out, because he

did not tell the board of the indiscretion that

finally prompted CEO Brian Dunn’s resigna-

tion, further underscores the need for effective

informational channels.

Second, what do you do when rules of gover-

nance demand the investigation and possible

dismissal of someone who is a tremendous

asset to the company and its stakeholders?

Gary Friedman has already announced a new

venture in which Restoration Hardware will be

taking a minority interest. The implicit mes-

sage seems to be, “Gary, we did what we had to

do, but you know we still love you.”

The issues raised by the Restoration Hard-

ware case are all the more precipitate as we’re

seeing an epidemic of personal misconduct

charges against CEOs. Surprise, surprise, the

misconduct usually involves sex. On a list of

the fifteen most “shocking CEO downfalls”

compiled by Business Insider, twelve were

sexual in nature. (The list predates the April

resignation of Best Buy’s Dunn.)

It is instructive to take a closer look at a

few of these instances with a particular eye

to how the boards dealt with the crises. At

Best Buy, the board was careful to note that

the investigation was “unrelated to the com-

pany’s operations or financial controls,” and

that Dunn chose to resign prior to its comple-

tion. Importantly, the board itself did not

divulge any specifics about the nature of the

misconduct. Restoration Hardware had been

likewise discreet.

A 1999 scandal at Florsheim involved a simi-

larly tight-lipped board when CEO Charles

Campbell was accused of sexual misconduct.

“ The issues raised by the Restoration Hardware case are all the more precipitate as we’re seeing an epidemic of personal misconduct charges against CEOs. Surprise, surprise, the misconduct usually involves sex. On a list of the fifteen most “shocking CEO downfalls” compiled by Business Insider, twelve were sexual in nature. ”

According to reports, even COO David San-

guinetti, who replaced Campbell, didn’t know

exactly what the inquiry uncovered. “I almost

think that’s proper,” Sanguinetti told the

Chicago Tribune.

Well, perhaps more than “almost.” As it’s

common practice for boards not to disclose

details, there doesn’t necessarily seem to be

any expectation they should disclose, irrespec-

tive of what finally gets revealed in the media.

It’s enough to convince the world that a dutiful

investigation was conducted; that the board

did its job. The communications challenge is to

ensure that the public believes the investiga-

tion was indeed dutiful.

Hiring the best outsiders (a great law firm, a

prestigious individual to spearhead the inqui-

ry, etc.) is the first obvious and effective step

in that direction. When, for example, J.P.

Bolduc, the former CEO of W.R. Grace, left of-

fice after allegations of sexual harassment, the

board tapped a former federal judge to exam-

ine the charges.

Of course, asking for the CEO’s resignation

provides some final proof that the board must

have done its job. In sexual matters, there

are a number of interesting approaches that

companies have taken to manage the painful

announcement. When Boeing’s board forced

the resignation of CEO Harry Stonecipher in

2005 because of a consensual relationship, the

company’s non-executive chairman Lewis Platt

said that the affair itself did not force the deci-

sion; rather, “we just thought there were some

issues of poor judgment that . . . impaired his

ability to lead going forward.”

Richard S. Levick, Esq., President and CEO of LEVICK,

represents countries and companies in the highest-stakes

global communications matters—from the Wall Street

crisis and the Gulf oil spill to Guantanamo Bay and the

Catholic Church.

L

To many economists’ surprise, consumer con-

fidence in the United States is on the

rise—albeit slowly. The Thompson Reuters/

University of Michigan preliminary August

index of consumer sentiment rose to 73.6,

which is the highest it’s been in three months.

Of course, this figure is still dwarfed by scores

that hovered around 110 in the years preced-

ing 2008’s economic collapse. While consum-

ers of everything from homes to cars to food

are feeling a bit better about their collective

financial outlook; they are nowhere near as

confident as they were before the bottom fell

out of the global economy.

For corporate communicators, this current era

of economic skepticism has raised interesting

questions about what—in anything—they can

do outside of traditional advertising to help

consumers feel better about opening up their

wallets and checkbooks. In an era of decreased

revenues, some think that communications

and public relations represent “non-essential”

business practices that ought to be reined in.

The reality is quite the opposite. While adver-

tising tends to reinforce purchasing decisions,

strong public relations zthem—and that’s

precisely what’s needed at a time when more

consumers are focused on what they need; as

opposed to what they want.

gene grabowskiOriginally Published on LEVICK Daily

usE COmmuNICATIONs TO BOOsT CONsumER CONfIDENCE IN HARD TImEs

Weekly

Avoid going into the bunker when it

comes to communications. Instead, invest

and apply your efforts strategically during

a downturn to maximize the return on your

investment. You can curtail some communica-

tions activities and postpone others that may

be on the drawing board, but if you go dark in

digital, social or traditional PR in a recession,

you risk lowering confidence in your brand.

Shift your communications efforts away

from corporate responsibility and reputa-

tion issues and toward promoting your prod-

ucts and services in ways that extend beyond

traditional advertising. This will conserve

financial resources and keep you visible where

you most need to be.

Talk about value; not price. Right now,

nobody wants to be reminded of how

much they have to shell out for a particular

product or service. They would much rather be

reminded of what they’re getting in return for

their money.

Follow the lead of the best food and

consumer product companies by offer-

ing more of a product or service for the same

price. Reducing prices only conditions buyers

to expect bargains and makes it harder to raise

prices when the economy picks back up.

You may note that times are challeng-

ing, but you must refrain from sending

any messages that paint the current economic

condition as desperate. When consumers are

feeling overly-anxious, they close their wallets

and their minds.

Gene Grabowski is Executive Vice President at LEVICK, the

nation’s top crisis communications firm. He is also a contrib-

uting author to LEVICK Daily.

L

thE congrEssman

In this interview with Hearst TV, we comment on the options available to Rep. Kevin Yoder after

revelations that he took a skinny dip in the Sea of Galilee last summer. Mr. Yoder has already

publicly apologized but will still need to face his constituents back in Kansas.

Crisis

LitigationFinanCiaL CommuniCations

Corporate & reputationpubLiC aFFairs

sign up today

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to hElp maintain momEntum among u.s. consumErs, hErE arE fivE tips for dEsigning communications and puBlic rElations plans that arE WEll-suitEd for timEs of rampant Economic cynicism:

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yodEr fiasco

SeanPavonePhoto/shutterstock.com

is BEst Buy a good Buy?On Tuesday, August 21st, Best Buy (BBY) will

report its second quarter earnings before

the market opens. Investors will be watching

closely to see whether the company’s results

can put some life back into the stock price,

which sold off in response to news that talks

between the Board and founder Richard

Schulze had halted.

Best Buy has traded in a 52-week range of

$16.97 to $28.52, and now is at the $18 level.

This is despite earnings exceeding consensus

for the last two quarters, and the expectation

that Q2 results will benefit from the purchase

of CPW’s profit interest. Investors foresee

declining margins due to higher costs and the

continuing erosion of same store sales in re-

sponse to pressure from online retailers—and

Amazon (AMZN) in particular.

Earnings, of course, are not the major driver

of the stock price right now. Since founder and

former Chairman Richard Schulze offered to

take the company private at $24-$26 per share,

the stock has risen and fallen on the prospects

for that deal, which would require Schulze

to raise as much as $10 billion in equity and

debt financing. The Board offered Schulze

and his yet-to-be identified buyout group an

opportunity for due diligence, but asked for an

18-month standstill agreement, which made

the diligence a useless exercise. When Schulze

refused, the Board hired a new CEO, Hubert

Joly—known as a turnaround expert but with

no retailing experience—and essentially told

Schultz to “put up or shut up”, giving him 60

days to come forward with a full-financed

offer. Considering that Schulze knows the com-

pany as well as anyone, two months should

have been sufficient if a deal could be done.

Now that investor appetite for a deal has been

whetted, Hubert Joly and the Board have very

little time to act if they are to fend off Schulze

and whatever other bidders might surface.

They must quickly articulate a plan to get the

stock price up and to demonstrate catalysts

such as improving margins that might drive

value improvement. Management must dem-

onstrate that it can close the gap between

Kathleen WailesOriginally Published on Seekingalpha.com

Weekly

online retailers’ costs and those of Best Buy’s

big box stores so that it will have a chance to

compete on price. If a viable plan can be put

forth to investors and management can win

their confidence, Best Buy could be a great

turnaround story - right up Hubert Joly’s alley.

However, it is doubtful that Richard Schultz

will go away quietly.

What are the chances that a deal could be com-

pleted? First of all, Mr. Schulze would have to

raise billions in equity and ratchet up the debt.

In order to raise the equity portion, private

equity would have to come in and put their

money out of action for whatever period—like-

ly a few years—that would be required to turn

the company around and position it for sale

through acquisition or IPO. Richard Schulze’s

in-depth knowledge of Best Buy should allow

him to determine with precision how the

numbers would work in such a buyout. He

must convince others that the deal can be

supported. That would take a lot of faith, as a

turnaround of that magnitude would be a chal-

lenge to achieve.

So if Best Buy reports a blowout quarter to-

morrow, what’s an investor to do? First, listen

carefully to the conference call for hints of a

turnaround plan to come. Second, evaluate

Hubert Joly’s track record and decide whether

he can turn the company around amid declin-

ing fundamentals despite his lack of retailing

know how. Third, watch the stock price. The

further it declines, the more pressure there

will be on the Board to deal with Schulze and

the more doable a deal will become. Then ask

yourself, in the immortal words of Clint East-

wood’s Harry Callahan, “Do I feel lucky? Well

do ya, punk?”

Disclosure: I have no positions in any stocks mentioned, and

no plans to initiate any positions within the next 72 hours.

Kathleen Wailes, Senior Vice President & Chair, Financial

Communications Practice at LEVICK.

L thE urgEncyof noW.