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? www.levick.com/insights

1. EDITION 5
Weekly August 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?

2. Executives
Behaving Badly,
Boards Behaving Well To be sure, sexual misconduct by a business personifies the brand. One hopes that a “no
executive is deplorable under any circum- one is indispensable” dictum would have
Richard S. Levick, Esq.
stances. On the eve of an IPO, however, it guided the directors to an appropriate reso-
Originally Published on Forbes.com
can be utterly disastrous. Restoration Hard- lution. But in this case the point is moot as
ware can certainly testify to that. Restoration Hardware was about to undertake
a $1 billion IPO. The potential risks of inaction
To be sure, sexual misconduct by a business
were untenable.
executive is deplorable under any circum-
stances. On the eve of an IPO, however, it can The Restoration Hardware board then formed
be utterly disastrous. Restoration Hardware a special investigatory committee and hired a
can certainly testify to that. brand-name law firm, Weil, Gotshal & Manges,
to conduct the probe. Not just a sense of recti-
Early last week, the company’s chairman and
tude, there were a few practical considerations
co-executive, Gary Friedman, resigned after an
forcing their hand. The whistleblower was the
internal investigation revealed he had an inti-
employee’s ex-boyfriend with a criminal re-
mate relationship with a 26-year old employee.
cord. He was also airing his grievances every-
Friedman has been the very face of Restoration
where he could, so the allegations were likely
Hardware, its public ambassador as well as
to surface anyway. Simple common sense thus
the business mastermind who steered the ship
demanded an investigation to both determine
from potential bankruptcy to success.
the accuser’s credibility and stay ahead of the
Normally, the board would have had a tough news cycle.
choice in disciplining the one executive who

3. Weekly
“ 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. ”
The Restoration Hardware situation is of The issues raised by the Restoration Hard-
general interest for at least two reasons. First, ware case are all the more precipitate as we’re
to what extent must boards simply hope that seeing an epidemic of personal misconduct
According to reports, even COO David San- board tapped a former federal judge to exam-
they’ll somehow be alerted to trouble in suf- charges against CEOs. Surprise, surprise, the
guinetti, who replaced Campbell, didn’t know ine the charges.
ficient time to control the situation—or, al- misconduct usually involves sex. On a list of
exactly what the inquiry uncovered. “I almost
ternatively, is there a formal mechanism, an the fifteen most “shocking CEO downfalls” Of course, asking for the CEO’s resignation
think that’s proper,” Sanguinetti told the
anonymous hot line of some sort, that can be compiled by Business Insider, twelve were provides some final proof that the board must
Chicago Tribune.
set up to increase the chances that the com- sexual in nature. (The list predates the April have done its job. In sexual matters, there
pany will learn of a problem before anyone resignation of Best Buy’s Dunn.) Well, perhaps more than “almost.” As it’s are a number of interesting approaches that
else does? The fact that Best Buy’s founder common practice for boards not to disclose companies have taken to manage the painful
It is instructive to take a closer look at a
Richard Schulze was forced out, because he details, there doesn’t necessarily seem to be announcement. When Boeing’s board forced
few of these instances with a particular eye
did not tell the board of the indiscretion that any expectation they should disclose, irrespec- the resignation of CEO Harry Stonecipher in
to how the boards dealt with the crises. At
finally prompted CEO Brian Dunn’s resigna- tive of what finally gets revealed in the media. 2005 because of a consensual relationship, the
Best Buy, the board was careful to note that
tion, further underscores the need for effective It’s enough to convince the world that a dutiful company’s non-executive chairman Lewis Platt
the investigation was “unrelated to the com-
informational channels. investigation was conducted; that the board said that the affair itself did not force the deci-
pany’s operations or financial controls,” and
did its job. The communications challenge is to sion; rather, “we just thought there were some
Second, what do you do when rules of gover- that Dunn chose to resign prior to its comple-
ensure that the public believes the investiga- issues of poor judgment that . . . impaired his
nance demand the investigation and possible tion. Importantly, the board itself did not
tion was indeed dutiful. ability to lead going forward.” L
dismissal of someone who is a tremendous divulge any specifics about the nature of the
asset to the company and its stakeholders? misconduct. Restoration Hardware had been Hiring the best outsiders (a great law firm, a Richard S. Levick, Esq., President and CEO of LEVICK,
Gary Friedman has already announced a new likewise discreet. represents countries and companies in the highest-stakes
prestigious individual to spearhead the inqui-
global communications matters—from the Wall Street
venture in which Restoration Hardware will be ry, etc.) is the first obvious and effective step
A 1999 scandal at Florsheim involved a simi- crisis and the Gulf oil spill to Guantanamo Bay and the
taking a minority interest. The implicit mes- in that direction. When, for example, J.P.
larly tight-lipped board when CEO Charles Catholic Church.
sage seems to be, “Gary, we did what we had to Bolduc, the former CEO of W.R. Grace, left of-
Campbell was accused of sexual misconduct.
do, but you know we still love you.” fice after allegations of sexual harassment, the

4. use Communications
to Boost Consumer
Confidence in Hard Times
Gene Grabowski
Originally Published on LEVICK Daily
To many economists’ surprise, consumer con- For corporate communicators, this current era
fidence in the United States is on the of economic skepticism has raised interesting
rise—albeit slowly. The Thompson Reuters/ questions about what—in anything—they can
University of Michigan preliminary August do outside of traditional advertising to help
index of consumer sentiment rose to 73.6, consumers feel better about opening up their
which is the highest it’s been in three months. wallets and checkbooks. In an era of decreased
revenues, some think that communications
Of course, this figure is still dwarfed by scores
and public relations represent “non-essential”
that hovered around 110 in the years preced-
business practices that ought to be reined in.
ing 2008’s economic collapse. While consum-
ers of everything from homes to cars to food The reality is quite the opposite. While adver-
are feeling a bit better about their collective tising tends to reinforce purchasing decisions,
financial outlook; they are nowhere near as strong public relations zthem—and that’s
confident as they were before the bottom fell precisely what’s needed at a time when more
out of the global economy. consumers are focused on what they need; as
opposed to what they want.

5. Weekly
To help maintain momentum among U.S. consumers, The Congressman
here are five tips for designing communications
and public relations plans that are well-suited
Yoder Fiasco
for times of rampant economic cynicism:
1. Avoid going into the bunker when it
comes to communications. Instead, invest 4. Follow the lead of the best food and
consumer product companies by offer-
and apply your efforts strategically during ing more of a product or service for the same
a downturn to maximize the return on your price. Reducing prices only conditions buyers
investment. You can curtail some communica- to expect bargains and makes it harder to raise
tions activities and postpone others that may prices when the economy picks back up.
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.
5. You may note that times are challeng-
ing, but you must refrain from sending
any messages that paint the current economic
2. Shift your communications efforts away
from corporate responsibility and reputa-
condition as desperate. When consumers are
feeling overly-anxious, they close their wallets
tion issues and toward promoting your prod- and their minds. L
ucts and services in ways that extend beyond
Gene Grabowski is Executive Vice President at LEVICK, the
traditional advertising. This will conserve nation’s top crisis communications firm. He is also a contrib-
In this interview with Hearst TV, we comment on the options available to Rep. Kevin Yoder after
financial resources and keep you visible where uting author to LEVICK Daily. revelations that he took a skinny dip in the Sea of Galilee last summer. Mr. Yoder has already
you most need to be. publicly apologized but will still need to face his constituents back in Kansas.
3. 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
Financial Communications
their money.
Litigation
Corporate & Reputation
Public Affairs
Crisis
Sign Up Today

6. Is Best Buy
a good buy?
Kathleen Wailes
Originally Published on Seekingalpha.com
On Tuesday, August 21st, Best Buy (BBY) will for that deal, which would require Schulze
report its second quarter earnings before to raise as much as $10 billion in equity and
the market opens. Investors will be watching debt financing. The Board offered Schulze
closely to see whether the company’s results and his yet-to-be identified buyout group an
can put some life back into the stock price, opportunity for due diligence, but asked for an
which sold off in response to news that talks 18-month standstill agreement, which made
between the Board and founder Richard the diligence a useless exercise. When Schulze
Schulze had halted. refused, the Board hired a new CEO, Hubert
Joly—known as a turnaround expert but with
Best Buy has traded in a 52-week range of
no retailing experience—and essentially told
$16.97 to $28.52, and now is at the $18 level.
Schultz to “put up or shut up”, giving him 60
This is despite earnings exceeding consensus
days to come forward with a full-financed
for the last two quarters, and the expectation
offer. Considering that Schulze knows the com-
that Q2 results will benefit from the purchase
pany as well as anyone, two months should
of CPW’s profit interest. Investors foresee
have been sufficient if a deal could be done.
declining margins due to higher costs and the
continuing erosion of same store sales in re- Now that investor appetite for a deal has been
sponse to pressure from online retailers—and whetted, Hubert Joly and the Board have very
Amazon (AMZN) in particular. little time to act if they are to fend off Schulze
and whatever other bidders might surface.
Earnings, of course, are not the major driver
They must quickly articulate a plan to get the
of the stock price right now. Since founder and
stock price up and to demonstrate catalysts
former Chairman Richard Schulze offered to
such as improving margins that might drive
take the company private at $24-$26 per share,
value improvement. Management must dem-
the stock has risen and fallen on the prospects
onstrate that it can close the gap between
SeanPavonePhoto/shutterstock.com

7. Weekly
online retailers’ costs and those of Best Buy’s supported. That would take a lot of faith, as a
big box stores so that it will have a chance to turnaround of that magnitude would be a chal-
compete on price. If a viable plan can be put lenge to achieve.
forth to investors and management can win
So if Best Buy reports a blowout quarter to-
their confidence, Best Buy could be a great
morrow, what’s an investor to do? First, listen
turnaround story - right up Hubert Joly’s alley.
carefully to the conference call for hints of a
However, it is doubtful that Richard Schultz
turnaround plan to come. Second, evaluate
will go away quietly.
Hubert Joly’s track record and decide whether
What are the chances that a deal could be com- he can turn the company around amid declin-
pleted? First of all, Mr. Schulze would have to ing fundamentals despite his lack of retailing
raise billions in equity and ratchet up the debt. know how. Third, watch the stock price. The
In order to raise the equity portion, private further it declines, the more pressure there
equity would have to come in and put their will be on the Board to deal with Schulze and
money out of action for whatever period—like- the more doable a deal will become. Then ask
ly a few years—that would be required to turn yourself, in the immortal words of Clint East-
the company around and position it for sale wood’s Harry Callahan, “Do I feel lucky? Well
THE URGENCY
through acquisition or IPO. Richard Schulze’s do ya, punk?” L
in-depth knowledge of Best Buy should allow
Disclosure: I have no positions in any stocks mentioned, and
him to determine with precision how the
OF NOW.
no plans to initiate any positions within the next 72 hours.
numbers would work in such a buyout. He
Kathleen Wailes, Senior Vice President & Chair, Financial
must convince others that the deal can be
Communications Practice at LEVICK.