Viacom events shine light on governance issues at controlled companies
It will be interesting to see if anything comes of the spotlight that the Viacom media circus is shining on potential problems with multi-class shares at controlled companies. Possible interference with the efforts of Viacom’s board to fulfill its fiduciary responsibilities raises the question of how a company should handle the supposed wishes of a controlling shareholder when it’s not clear whether he’s still mentally capable.
A hearing held earlier Tuesday in a Massachusetts probate court is the first step in a lawsuit filed by Viacom CEO and executive chairman Philippe Dauman and fellow director George Abrams, who are contesting their removal two weeks ago as trustees of the trust charged with oversight of Viacom founder Sumner Redstone’s business holdings once he either dies or is declared no longer mentally competent to manage his own affairs, as reported by the Los Angeles Times. On June 6, lawyers for Dauman called for an ‘immediate mental evaluation’ of Redstone.
Separately, Viacom’s six independent directors are also preparing legal action, as described in a recent letter to shareholders, to prevent being ousted from the media conglomerate’s board. The directors’ decision to sell a minority stake in a Viacom subsidiary, Paramount Pictures, purportedly angered Redstone, but Dauman and other board members believe the aging mogul is being controlled by his daughter, Shari, who is non-executive vice chair of Viacom’s board. Shari Redstone has said publicly that she has no desire to run Viacom.
The call for a mental evaluation of Redstone in court papers filed on June 6 is thought to be a response to papers filed on June 3 by lawyers representing Redstone, in which a UCLA geriatric psychiatrist claims to have visited Redstone twice in late May and found him to have the legal mental capacity to amend his trust. Dauman says his attempts to meet with Redstone to discuss business matters have failed. The fact that others, including one of Redstone’s granddaughters, say they haven’t been allowed to see him for two months, feeds doubts about his competency.
Jon Lukomnik, executive director of the Investor Responsibility Research Center Institute (IRRCi), recently wrote about how the boards for controlled companies are built more for comfort than for financial performance. He says he doubts that any single case such as Viacom’s will result in a legal declaration that controlled companies are not in the public interest. But it could encourage more controlled companies to sunset their multi-class shares once the founding owner is no longer in control.
Viacom isn’t an anomaly. Lukomnik cites potential for similar turns of events involving 85-year-old Rupert Murdoch at News Corp, 75-year-old John Malone at Discovery Corp, and 79-year-old Richard Robinson at Scholastic Corp, among others.
The Council of Institutional Investors, which has warned about the risks of what happens when multi-class shares continue on into perpetuity, believes the Viacom situation has helped focus attention on the need for sunset provisions at controlled companies, which is appropriate, Lukomnik says.
‘There are companies that have said after X number of years or if the controlling shareholder sells their stake below a certain percentage, that those super-voting or special rights share classes convert to common [shares], and that would seem to be a logical way to deal with this,’ Lukomnik says. ‘If you have a visionary leader who can somehow get people to support him or her having control in excess of their capital at risk, that’s one thing. Having it extend forever is another.’
Given research showing that controlled companies have fewer independent board members than non-controlled companies, there might seem to be some irony in the fact that Viacom’s majority independent board is fighting to preserve its seats. But in view of Sumner Redstone controlling 80 percent of the voting power at Viacom and its various companies, the directors ‘didn’t get elected to that board without passing Mr Redstone’s approval’ Lukomnik says.
‘It’s clear that the board has fiduciary obligations to the company, not to Mr Redstone,’ which is what the board members are saying publicly and how they are trying to act publicly., he adds. ‘And that’s the reason why controlled companies are controversial. Now you have a situation where a board, which is reliant on Mr. Redstone to get elected, feels that its fiduciary obligation is contrary to what apparently Mr Redstone feels is the right business strategy.’
While the board’s fiduciary obligations are clear according to the law, the power politics at Viacom are messy and arguments about Redstone’s competence are roiling the waters even more, he says.