By Steven Davidoff Solomon
THE settlement of the Viacom dispute teaches several lessons. It is more or less a victory for Sumner M. Redstone and particularly for his daughter, Shari Redstone. Recently, the parties announced that the five directors nominated by National Amusements would be appointed. Philippe P. Dauman will leave as chief executive, and Tom Dooley will be interim chief executive through September 30 while he helps the new board develop a new strategic plan. Pending board approval, Mr. Dooley may take on the chief executive job permanently.
The new directors will control the nominating committee for the board, so expect the old directors to be replaced gradually. Three are already rumored to have agreed to depart. In conjunction with the Viacom settlement, the trust dispute will be settled, though details were not announced.
The settlement leaves Mr. Redstone and Ms. Redstone firmly in control, though the fight leaves no one unscathed.
Mr. Dauman appears to be the most bruised, the first lesson of the Viacom dispute. Sometimes people lose their heads, maybe more often when they are surrounded by their own people.
Mr. Dauman he is leaving with a $72-million pay package. But that is the amount he would have received had he departed several months ago before this brouhaha. This has gained the Viacom chief little, and at a cost to his reputation. Viacom itself has been buffeted, millions—if not tens of millions—were spent on lawyers, and the reputations of his fellow directors also have suffered.
Why did Mr. Dauman fight when the odds were against him and he ended up in the same place he would have been had he acquiesced in the first instance? Perhaps it was genuine integrity. Mr. Dauman reportedly felt that Mr. Redstone’s true intentions were being violated, that he never wanted Ms. Redstone to run the company. Or perhaps it was simple stubbornness or lack of self-awareness. Either way, Mr. Dauman’s seeming failure to recognize that legally he had an uphill fight seems inexplicable. After all he once practiced law himself. Moreover, the chief executive of a media company probably should have had a better handle on the public relations aspect of this. Mr. Dauman’s fighting looked to some (including, admittedly, me) not about helping Mr. Redstone but about saving his own job and trying to get between a father and daughter. He was never able to offer a compelling, alternative narrative.
Perhaps Mr. Dauman’s actions should just be chalked up to being too close to the situation. Whatever the reason, there is a lesson here for others: remember what your end game is and what is reasonable given your situation. Mr. Dauman never really had an answer to either other than keeping himself in power—and that has not worked so well as the board appeared to back away from supporting him (though, in fairness to Mr. Dauman and his fellow Viacom directors, he must be given credit for realizing this and settling now).
Another lesson might be for corporate underlings and advisers—be aware of your own loyalties. What happened in Viacom is a case study for ethics and loyalty. The company machinery was turned to the cause of Mr. Dauman and the board’s crusade against Shari Redstone. But in such situations, the corporate officers are better off leaving their loyalty to the company itself where it legally belongs. In the wake of Mr. Dauman’s and the Viacom board’s surrender, an exodus of top Viacom administrative talent is likely. Michael Fricklas the general counsel and Carl Folta the head of public relations appeared to be intimately involved in the defense and are likely candidates for early exits. Do not cry for either of them. Mr. Fricklas made $6.37 million last year down from $7.43 million the year before, according to Viacom’s latest proxy statement. But, still, one wonders if they should not have better advised their client and represented the company. Mr. Folta, for example, deplored National Amusements’ actions, calling them “illegitimate.” But now they have been validated by his own board. He went all in as a public relations representative and lost.
The next lesson is about governance. Viacom was and is a corporate governance disaster. It was run as the fief of Mr. Redstone because of Viacom’s dual class stock, giving him voting control even though he owns only about 10 percent of the shares outstanding. Questions about his health swirled, yet the company remained quiet for years. That such a dispute burst into the open is therefore no surprise. Perhaps bad governance breeds a culture of bad conduct. Here all the players are to blame for creating this environment, but none more than Sumner Redstone.
It is telling that the settlement does nothing to address the governance problems. The Redstones remain in control, and even the bylaw National Amusements put in requiring unanimous approval for a Paramount sale remains in effect, despite the fact that Viacom called the bylaw illegal.
The penultimate lesson perhaps is about the uses and abuses of litigation. The Viacom group was raised on litigation as a corporate tool and weapon. But this type of internecine warfare lays waste to all around it including the company that all were trying to protect. Litigation has its uses, but in this case just served to make a crazy situation crazier while wasting millions of dollars.
The final lesson perhaps involves governance generally. Dual-class shares and other types of mechanisms that preserve founder control can be beneficial, allowing the founder to focus on building the company and maintain it for the longer term. But the studies find that more often than not dual-class stock does not create value. Instead it can be abused as the founder’s ownership level declines and he gives himself private benefits. Viacom appears to be a case study in the problems of dual-class stock. Mr. Redstone paid himself and his handpicked lieutenants lavishly. He was paid $36 million as recently as 2013. Mr. Dauman’s compensation over the years approaches half a billion dollars. Minority shareholders were left to sit out the party as the stock lagged in recent years.
But the Viacom situation shows a problem with dual-class stock beyond simple abuse. Corporate governance arrangements that work when a founder is 30 may not work terribly well when that person is 93. To put it another way, people and founders change. A public corporation is not necessarily a family business to be run forever by that founder and his family. And putting an expiration date on dual-class stock to the extent it is used may be prudent. Other companies should consider such a mechanism, and prospective shareholders should consider demanding it before they invest.
Viacom now enters the next chapter. Perhaps in this one the company and its controllers—Mr. Redstone and his trust, and now Ms. Redstone—will realize that good governance may be something that has real value. As for Mr. Dauman and his crew, they are bruised but they have the chance to prove their talents outside the umbrella of Mr. Redstone. Good luck.
Sumner Redstone sits in his Los Angeles mansion, his health still in question. Let us hope all the actors here devote the same amount of energy they put into this fight into ensuring he is appropriately cared for, and into fixing Viacom’s governance problems.
© 2016 The New York Times
Image credits: Giuseppe Cacace/Age nce France -Presse /Getty Images, Robyn Beck/Agence France-Presse/Getty Images