It's been said one should never let a good crisis go to waste. And for that reason, I am sorry that Viacom's former CEO Philippe Dauman is leaving so soon, putting an end to the vicious courtroom battles that erupted this summer.
While the human tendency is to move on, Viacom's recent troubles deserve further scrutiny. The media company’s boardroom problems demonstrate the need for corporate disclosure and public company listing standard reform.
Under the domination of a controlling shareholder, many boards, not just Viacom's board, fail to perform as they should to protect the interests of all shareholders and stakeholders. Often, in practice, these directors end up operating as mere advisors rather than overseers. In some instances, directors find that role disturbing.
"What are best practices in these situations. ... Am I just a token director?" a board member at a controlled company wrote me recently.
The question is apropos at Viacom, where directors re-nominated controlling shareholder Sumner Redstone to the board in 2016 despite his failure, according to a Fortune report, to attend board meeting in person in 2015 and 2016. In-person attendance is crucial to good board communications. You have to be there to witness facial expressions and participate fully in the conversations.
So why did the Viacom board re-nominate Redstone? Did the directors believe they had no choice? The Viacom board also re-nominated Redstone, even though Frederic Salerno, a member of Viacom's governance and nominating committee, asserted in a June court filing that the 93-year-old media mogul "lacks the capacity to make decisions concerning the future of his companies...can no longer stand, walk or maintain coherent communication. He can no longer read or write."
Clearly, backstops are needed to protect shareholders and stakeholders when a board's nominations processes break down. Federal securities laws use disclosure as the primary means to alert shareholders (and stakeholders) to a company's governance failures. But for disclosure obligations to matter, the rules must require honest and fulsome disclosure -- and they must be enforced. Stock exchange listing standards provide another way to protect shareholders and stakeholders from poor nominations processes, but currently they too are ineffectual.
The Viacom case confirms that existing disclosures about board nominees are inadequate. In the proxy, Viacom shareholders were told that Redstone was nominated partly because of his "understanding" of the industry. This disclosure is insufficient if the incapacities Salerno alleges are true. It's time to consider minimum qualification standards for board members in listed public companies (for example, the ability to make decisions) and disclosures that address those basic qualifications.
The case also shows how misleading the SEC’s disclosures regarding board meeting attendance can be. The Viacom proxies state that from 2011to 2015, "each of [the Viacom] directors attended more than 75% of the meetings of the Board." Would any normal reader guess from this that Sumner Redstone never attended a board meeting in 2015 in person?
University of Pennsylvania securities professor Jill Fisch says the SEC has not defined attendance, and it is presumed that each company uses the definition of attendance found in the state corporation law where the company is incorporated. For Viacom, that's Delaware, where attendance could mean just dialing in, even for a meeting that is supposed to be in person.
New disclosure requirements could help fix this. The Council of Institutional Investors (CII), which represents members and associate members with over $23 trillion in assets under management, recommends: "Companies should disclose individual director attendance figures ... [and] should distinguish between in-person and telephonic attendance." In response to a request for this article, Viacom did not provide information on who attends the Viacom board meetings by phone and who attends in person.
Of course, for better disclosure to work, the SEC must take enforcement seriously. The SEC did not provide comment for this article on how it enforces the current disclosure rule that may reference 50 different state statutes to define attendance. Fisch says she is unaware of any instance in which the SEC has asked a company to correct its board meeting attendance disclosure.
The independence of directors is important at all companies, and especially ones with a controlling shareholder. But current stock exchange listing standards do a poor job of assuring board member impartiality. In New York, a judge ruled in 2006 that the Viacom board was incapable of acting on behalf of minority shareholders and a demand on the board to do so "would be futile." The Redstones directly appointed Viacom's newest board members. And many of the old-time Viacom board members have numerous ties to the Redstones and each other that escape listing standard scrutiny and allow the directors to be called independent when they really aren't. Strengthening independence standards would improve disclosure and encourage less clubby board memberships.
The Viacom case suggests other fixes that would also have applicability more broadly, like listing standards that require equal voting rights for shares at public companies. If none of the above works, perhaps more drastic measures are in order. Perhaps companies should not be allowed to go public if it will result in one person or family owning a greater than 20% stake or voting power.
Clearly remedies are required. Viacom may represent the ghost of some companies' futures, especially firms like Facebook and Google, with multiple classes of shares. But its significance is broader. Trust in markets are destroyed when companies are not forthright with investors -- and board members and other backstops are lackadaisical. If markets are to be other than gambling magnets, listing and disclosure standards - and enforcement by the SEC - must be improved.
Eleanor Bloxham is CEO of The Value Alliance, an independent board education and advisory firm. She is the author of two books on corporate governance and valuation.
