By Brad Dorfman and Martinne Geller
(Reuters) – Best Buy Co Inc founder Richard Schulze is stepping down as chairman after he failed to tell the board that former Chief Executive Brian Dunn had violated company’s policy by having "an extremely close personal relationship" with a female employee, the electronics retailer said on Monday.
Best Buy said an investigation by the board had found that Dunn’s relationship "negatively impacted the work environment," but involved no misuse of company resources.
"I understand and accept the findings of the Audit Committee," Schulze said in a statement.
Schulze will be succeeded by Hatim Tyabji, 67, chairman and CEO of wireless network technology company Bytemobile and head of Best Buy’s audit committee. The change takes effect at the end of the company’s annual meeting on June 21, when Schulze will become chairman emeritus, an honorary position, and serve out his term as director through June 2013.
The demotion of Schulze, 71, signals a much-needed separation from the past for Best Buy, which has been criticized for becoming a showroom for televisions and other gadgets that people then buy at Amazon.com or other competitors. Schulze started the company with a partner in 1966.
Best Buy is still in the midst of what it expects to be a six- to nine-month search to replace Dunn, with board member G. Mike Mikan acting as interim CEO.
"This increases the probability that they bring in someone from the outside, and he or she is allowed the leeway to make the tough decisions that Best Buy clearly has to make now," BB&T Capital Markets analyst Anthony Chukumba said.
Dunn, who resigned on April 10, will receive a separation package of $6.6 million, including a severance payment of $2.85 million in exchange for extending his non-compete agreement to three years from one year. The package also includes his previously awarded fiscal 2012 bonus of $1.14 million, stock grants valued at $2.54 million, and unused vacation time.
Best Buy shares were up 1.7 percent at $19.61 in mid-day trade on the New York Stock Exchange.
"It’s been clear that the company hasn’t taken an aggressive enough measure to offset the competitive and structural pressures they face," Morningstar analyst R.J. Hottovy said. "Taking a clean slate and beginning with not only a new director, chairman but also with a new CEO is just what the company needed."
CALLS, LUNCHES, CONCERTS
The company has yet to decide on an executive search firm to help with the search, a spokesman said on Monday.
The audit committee’s investigation focused on a relationship between Dunn, 51 and married, and a 29-year-old female employee who was not identified in the three-page report. Dunn did not respond to an email seeking a comment.
During two trips abroad in 2011 – one lasting four days and the other five days – Dunn contacted the employee by cellphone at least 224 times, including 33 phone calls, 149 text messages, and 42 picture or video messages, according to the report.
In one instance, several photographs were discovered on his personal cellphone that contained messages expressing affection, one of which included the female employee’s initials.
Dunn and the employee acknowledged numerous social meetings outside the office, including lunches and drinks during the week and on weekends, the report said.
He also gave her tickets to at least seven concerts and sporting events. On one occasion, Dunn solicited a complimentary ticket for a concert from a vendor for the employee, according to the report.
He also personally loaned her $600 so she could change her plane ticket and allowed her to use an empty hotel room not paid for by the company or by her, the report said.
Both the ex-CEO and the employee "have said that the relationship was a close friendship that was not romantic or otherwise improper…Even accepting those statements as true, the relationship nevertheless reflected extremely poor judgment by" Dunn, the report said.
(Additional reporting Nivedita Bhattacharjee in Chicago; Editing by Gerald E. McCormick, Lisa Von Ahn and Leslie Gevirtz)