* Schulze failed to inform audit committee about Dunn allegations-probe
* Tyabji to become chairman June 21
* Dunn gets $6.6 million severance pact
* Shares up 1.5 percent
By Brad Dorfman and Martinne Geller
May 14 (Reuters) - Best Buy Co Inc founder Richard Schulze is stepping down as chairman after he failed to tell the board that a former chief executive had an improper relationship with a female employee, the electronics retailer said on Monday.
Best Buy said the board's investigation had found that former CEO Brian 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.
Hatim Tyabji, 67, chairman and CEO of wireless network technology company Bytemobile and head of Best Buy's audit committee will succeed Schulze. The change takes effect at the end of the company's annual meeting on June 21, when Schulze, 71, will become chairman emeritus, an honorary position, and serve out his term as director through June 2013.
Schulze's demotion 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 remains 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.
Best Buy shares were up 1.5 percent at $19.57 in mid-afternoon trade on the New York Stock Exchange.
Aside from his role at Bytemobile, Tyabji also is chairman of Jasper Wireless, which provides operators with cloud-based device management services.
"Mr. Tyabji's background includes roughly 40 years of experience throughout multiple segments of the tech industry, making him well-suited for the role and for understanding the degree of change that is necessary," Credit Suisse analyst Gary Balter said in a research note.
But the question remains whether the current board, including Tyabji, are prepared to make the changes, which some say should involve doing away with the company's traditional big-box store format.
"I don't think it even occurs to them that their strategy is messed up," Wedbush Securities analyst Michael Pachter said.
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 pick an executive search firm, 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.
Schulze was notified about the allegations of inappropriate behavior in December, and confronted Dunn, who denied any inappropriate conduct or romantic relationship with the employee, the report said.
Following that conversation, Schulze did not tell the appropriate board members or company personnel about the allegations or his discussions with Dunn, the report said.
The board found out about the issues from the company's general counsel in mid-March after allegations of the inappropriate relationship came to the attention of a senior human resources employee, the report said.
According to the report, 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.
The relationship between the two damaged morale and created an unnecessary distraction and speculation about the nature of the relationship, while Dunn's "perceived favoritism toward the employee undermined her supervisor's ability to manage her," the report said.
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