Viacom is a mess.
On Thursday, Viacom's controlling shareholder, National Amusements, announced a major board shake-up at the media giant, moving to oust five directors and replace them with five new members.
Viacom Chairman Emeritus Sumner Redstone owns 80% of National Amusements and his daughter Shari Redstone has a 20% stake. Both are also Viacom board members. They are asking the”Delaware Court of Chancery to affirm the validity and effectiveness of these actions” before the switches are made official.
For their part, the board members who are on the chopping block are filing a suit to halt the changes. If forced out, the directors stand to lose annual awards of stock and cash in the range of $300,000 to $400,000.
The changes in board composition at the media giant are just the latest moves in an ongoing drama that has engulfed the company and comes a mere three months after the directors were approved at the company's annual meeting in March. (Some recent articles from Fortune on the unfolding Viacom saga can be found here, here, and here.) With all that has transpired, Viacom is poised to go down in history for its enormous collection of governance flaws.
The shifts in board power have been dramatic in recent months. Viacom CEO Phillippe Dauman, who is renowned for his massive paydays and was awarded $135.7 million in compensation over the last three years, was one of the five National Amusements moved to oust from the board on Thursday. It's quite a reversal for a CEO named chair of the company just four months ago, despite the objections of both shareholder activist SpringOwl Asset Management and board member Shari Redstone. Earlier this year, Dauman claimed that Sumner Redstone, 93, was mentally fit to serve Viacom. But as the winds of power shifted away from his favor, he began to sing a different tune about Redstone’s fitness. Although Dauman currently remains CEO of Viacom, that could end soon, too. Even with a jump on Thursday, Viacom's current stock price remains below levels it achieved five years ago.
The five directors slated to go are among the oldest members of the board; two are in their 80s and one is in his 70s. Those who will remain on the board with the Redstones include Tom Dooley, Viacom's COO (who was awarded $93.4 million over the last three years), along with two directors in their 50s, and one in her 40s.
On Wednesday, before the announcement, Tom Freston, former Viacom CEO, had told CNBC the board needed younger members who understood current media culture. He also said it was time for Dauman to go, and he discussed the loss of creative talent and the many strategic opportunities that had been squandered at the company: "They spent $18 billion, that is a ton of money, on stock buybacks, in a period in time where the whole world was changing and they could have bought any number of things like Time Warner and Disney and NBC – and others did. But they used all that money to sort of prop up the stock price."
With the move to add new members, Sumner and Shari Redstone are overriding Viacom's governance and nominating committee, which could have done more to refresh the board. The committee only met four times last year and all of its members are slated to get the heave-ho if the Delaware courts agree. The chairs of both the compensation and audit committees are also in line for the boot. Two of the audit committee members and two of the compensation committee members will remain. Still, the shake-up will certainly be disruptive.
The newly appointed board members represent a growing phenomenon and a break from the past: directors willing to take board seats from other directors at the prompting of a shareholder. Unfortunately, of the five new members of the board, four will be "over-boarded,” meaning they will have too many board seats and job responsibilities to be able to effectively contribute to resolving the mess at Viacom. And one has past ties to the company.
The abrupt board succession is just one problem at Viacom. The saga puts in sharp relief the many problems with aging founders at founder-controlled companies, that often have problems such as shareholders without voting power and board members without meaningful sway.
This year, Viacom weighed a shareholder proposal for the company to adopt a one-share one-vote policy. In proposing the change, the shareholder, Missionary Oblates of Mary Immaculate, noted that "MCSI's ISS Proxy Exchange platform gives Viacom a governance score of 10 (the worst possible score) and red flags across all the categories in board structure, compensation and shareholder rights. GMI gave Viacom an "F" grade for its governance."
The low scores aren't flights of fancy. Viacom has exhibited the following governance flaws:
- Strategic missteps and squandering of assets? Check.
- Exorbitant CEO and executive pay? Check. Amid layoffs? Check.
- Succession planning disaster? Check.
- Lack of board independence? Check.
- Poor governance structures and conflicts of interest? Check.
- Shareholders with no voting power? Check.
- Distractions and shareholder-board-management in-fighting and litigation? Check.
At Viacom, the chickens are coming home to roost. And they are squawking loudly.
Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.
