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?


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LEVICK Weekly - Aug 24 2012

  1. 1. EDITION 5Weekly August 24, 2012Executives Behaving Badly,Boards Behaving WellUse Communications to BoostConsumer Confidence in Hard TimesThe Congressman Yoder FiascoIs Best Buy a Good Buy?
  2. 2. ExecutivesBehaving 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 haveRichard 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. 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’reto 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 almostternatively, 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 theanonymous 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, therepany 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 thatelse 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 aRichard 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 eyedid 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. Atfinally 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 thattion, 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 someSecond, 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 hisnance demand the investigation and possible tion. Importantly, the board itself did not tion was indeed dutiful. ability to lead going forward.” Ldismissal of someone who is a tremendous divulge any specifics about the nature of theasset 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 Streetventure 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 thetaking 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. 4. use Communicationsto Boost ConsumerConfidence in Hard TimesGene GrabowskiOriginally 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. 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 samea downturn to maximize the return on your price. Reducing prices only conditions buyersinvestment. You can curtail some communica- to expect bargains and makes it harder to raisetions activities and postpone others that may prices when the economy picks back up.be on the drawing board, but if you go dark indigital, 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 economic2. Shift your communications efforts away from corporate responsibility and reputa- condition as desperate. When consumers are feeling overly-anxious, they close their walletstion issues and toward promoting your prod- and their minds. Lucts and services in ways that extend beyond Gene Grabowski is Executive Vice President at LEVICK, thetraditional 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 afterfinancial 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 alreadyyou 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 howmuch they have to shell out for a particularproduct or service. They would much rather bereminded of what they’re getting in return for Financial Communicationstheir money. Litigation Corporate & Reputation Public Affairs Crisis Sign Up Today
  6. 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 betweenSeanPavonePhoto/shutterstock.com
  7. 7. Weeklyonline retailers’ costs and those of Best Buy’s supported. That would take a lot of faith, as abig 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, listenturnaround story - right up Hubert Joly’s alley. carefully to the conference call for hints of aHowever, it is doubtful that Richard Schultz turnaround plan to come. Second, evaluatewill go away quietly. Hubert Joly’s track record and decide whetherWhat 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 retailingraise billions in equity and ratchet up the debt. know how. Third, watch the stock price. TheIn order to raise the equity portion, private further it declines, the more pressure thereequity would have to come in and put their will be on the Board to deal with Schulze andmoney out of action for whatever period—like- the more doable a deal will become. Then askly 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 URGENCYthrough acquisition or IPO. Richard Schulze’s do ya, punk?” Lin-depth knowledge of Best Buy should allow Disclosure: I have no positions in any stocks mentioned, andhim 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, Financialmust convince others that the deal can be Communications Practice at LEVICK.