levick weekly - aug 24 2012
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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/insightsTRANSCRIPT
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
1.
2.
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:
3.
4.
5.
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.