Investigating the CEO is about protecting the company

Brian Dunn
Brian Dunn, CEO of Best Buy, speaks at a media event in 2009.
AP Photo/Mark Lennihan

Best Buy's board of directors is in the midst of investigating the personal conduct of Brian Dunn, who resigned last week as CEO.

When a CEO is accused of personal misconduct, corporate governance experts say the internal investigation can be as much about protecting the company and its investors as it is about identifying wrongdoing.

Although the report will not be out for a few weeks, the retailer's board has been steadfastly silent about the nature of Dunn's "personal conduct" that is under investigation. The company has pointedly said Dunn's conduct does not involve anything that should materially affect the company's financial health or shock investors.

Even if the stakes are apparently small, California business law attorney Lee Stimmel said boards should investigate when they get wind of possible misconduct within a company.

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"They have to be reasonable and thorough," Stimmel said. "And then they have to do whatever the fiduciary duty requires them to do at the end of the investigation, including filing action, terminating people, doing whatever they think is necessary to protect the company that's legal."

Stimmel said it is the job of the company's general counsel to represent the company's interests, not those of its employees. He said boards typically bring in an outside law firm, as the Best Buy board has with the Dunn investigation. It hired the high-powered Washington, D.C., law firm of WilmerHale to lead the investigation of Dunn's personal conduct.

That firm has assigned former U.S. Securities and Exchange Commission Director of Enforcement William McLucas and former U.S. Attorney for the District of Colorado Thomas Strickland to the case.

"These are extremely unpleasant steps you have to take when you're investigating your old friend or a business colleague," Stimmel said. "Bring in the outside people. They have no vested interests, supposedly, and they're not going to let emotions sway them."

Even so, the process can be messy and divisive, Stimmel said.

"You can have directors who become divided about what is appropriate conduct," he said. "You can have leaks of information that should not be transmitted to the public. You can have inaccurate information which is acted upon."

Best Buy's board assured investors the alleged misconduct is unrelated to the company's operations or financial controls, but the board needs independent verification of what it is telling investors.

"There's still the need to conduct this investigation, even if the ultimate effect is to confirm what the board may already know," said Jacob Frenkel, a former federal criminal prosecutor and former Securities and Exchange Commission enforcement lawyer now in private practice in Maryland.

"A lot of this investigation is about making sure something more was not at issue and the violations were not broader," he said.

Failure to find and disclose any such harm could lead to lawsuits from shareholders. Frenkel said neglecting to investigate alleged misconduct by executives could expose the company to costly and embarrassing litigation.

"The board is looking out for the company and it is the steward on behalf of shareholders," Frenkel said. "Shareholders have an expectation that the board will respond with dispatch and alacrity once it becomes aware of allegations of possible misconduct."

Best Buy is not disclosing who raised questions about Dunn's conduct. But the retailer encourages employees, customers, vendors and others to share concerns about the ethical behavior of employees and the company. Those concerns can be made anonymously by phone or through a Web form.

The company did not respond to questions about how many ethics complaints it has received, nor how many have been made anonymously.

The purview of the audit committee investigating Dunn includes financial matters and management's compliance with company ethics policies. Those policies cover investing and business conflicts of interest, as well as personal relationships between superiors and subordinates that may violate company policy.

"In an investigation into a personal matter, the question, obviously, is going to be: Was the company harmed by the actions?" said Charles Elson, director of the University of Delaware John L. Weinberg Center for Corporate Governance. "Were there monetary damages, reputational damages? Things like that."

Some investigations find substantial problems, but not all, Elson said.

"A lot of things can come out of these things," he said. "Or nothing at all. It really depends on the facts that come forward. You may discover nothing inappropriate happened. ... In any controversy there's a lot of rumor and innuendo floating around. And it's up to the board, before it makes any decision, to have everything factual in front of it."

So far, Wall Street hasn't been very concerned about the Dunn investigation. Investors have not pounded the stock down. Many figure the company has much larger issues and challenges to face than the personal conduct of a now-departed CEO.

Some investors wanted Dunn out as CEO, anyway. They were unhappy with his reactions to increased competition from rivals like WalMart and, and about a 30-percent drop in the company's stock price during Dunn's tenure as CEO.