Restoration Hardware Co-Chief Steps Down After an Inquiry

Gary Friedman, the chairman and co-chief executive of Restoration Hardware, has stepped down from his positions after an internal inquiry into an intimate relationship he had with a 26-year-old female employee, according to people involved in the matter.

The leadership change earlier this week comes at a significant moment for Restoration Hardware as it prepares for an initial public offering. Mr. Friedman, 54, often appears in the company's catalogs in jeans and a T-shirt and is considered the driving force behind the company's vision and aesthetic, which includes high-priced faux antique furniture and hardware accessories. Mr. Friedman started his career as a stock boy at the Gap in San Francisco and was plucked out of obscurity by Mickey Drexler, the merchant prince who built Gap and now runs J. Crew.

Mr. Friedman worked his way up at Gap and later became the president and chief operating officer of Williams-Sonoma. He joined Restoration Hardware in 2001 whe n it was near bankruptcy and is widely credited with turning it into one of the nation's most successful high-end furniture retailers.

Mr. Friedman was confronted this month with the findings of the investigation by the company's board, which had formed a special committee and hired the law firm Weil, Gotshal & Manges to conduct the inquiry. Mr. Friedman was found to have had an inappropriate relationship with a female employee, who has since left the company, these people said. These people spoke on the condition of anonymity because the company's internal investigation has not been made public.

The board of Restoration Hardware was alerted to the relationship by an ex-boyfriend of the employee, these people said. Mr. Friedman, who has been divorced for seven years, is still in a relationship with the former employee.

The board, which began the investigation almost immediately after being contacted, was concerned about the credibility of the allegations b ecause the ex-boyfriend had a criminal record and was aggressively pressing the accusations both inside and outside the company, these people said.

The employee told company investigators that the relationship with Mr. Friedman was consensual and ongoing, these people added, but the board was apparently concerned about the appearance of the relationship as its stock offering proceeded.

A spokesman for the company declined to comment. A spokesman for Mr. Friedman also declined to comment.

Mr. Friedman's resignation comes at a time when corporate boards are taking a harder line when questionable personal conduct by top executives has been brought to their attention. In April, Brian Dunn, the chief executive of Best Buy resigned after the company's board raised questions about an “inappropriate relationship” with a 29-year-old female employee.

Mark Hurd, the former chief executive of Hewlett-Packard lost his job in 2010 after it came to light that he once had a personal relationship with a female marketing contractor who had been an actress in risqué movies. H.P.'s directors said that Mr. Hurd had violated the company's code of conduct with misstatements on expense reports.

Thus far, Restoration Hardware has been publicly silent on the reasons for the chief executive change. This week, Restoration Hardware announced in a news release a “reorganization” of the company's management and named the company's co-chief executive Carlos Alberini, who joined the company two years ago from Guess, as sole chief executive.

The company also said Mr. Friedman, who is the company's largest individual shareholder, would be starting a new “incubator” company with ties to Restoration Hardware. It said he would be the nonexecutive chairman emeritus and continue in an “exclusive advisory role, serving as creator and curator for Restoration Hardware with a focus on strategy, creative, and design direction.”

Th e statement also said that Mr. Friedman's new business “will be created to develop new lines of business, including apparel, accessories, footwear and jewelry, many of which will be complementary to the company's new product development strategy.”

Restoration Hardware said that it was taking a minority interest in Mr. Friedman's new company and “will have the exclusive right to acquire each of the new businesses when they reach an appropriate level of maturity and profitability.”

People briefed on the board's deliberations said that the company wanted to maintain a relationship with Mr. Friedman because he was personally associated with the brand, but that it could not allow him to remain an officer ahead of the public offering.

Lawyers for Restoration Hardware were working on Thursday to update the company's filings with the Securities and Exchange Commission, these people said. Goldman Sachs and Bank of America were selected to underwrite the offe ring. It was unclear whether the company would be forced to disclose the reason for Mr. Friedman's new role or the findings of the special committee's inquiry.

Restoration Hardware is controlled by two private equity firms, Catterton Partners and Tower Three Partners. The company, which was once public, was bought by the firms and Mr. Friedman in 2008 for about $175 million.

At the time, the company spurned an offer from Sears. Today, Restoration Hardware's public offering is expected to value the company at up to $1 billion.

While Mr. Friedman may no longer be the chairman or co-chief executive, his picture and letter will appear in the company's newest catalogs in the fall.

A version of this article appeared in print on 08/17/2012, on page B1 of the NewYork edition with the headline: Restoration Hardware Co-Chief Steps Down After an Inquiry.