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At Viacom’s Annual Meeting, Anger On The Agenda
March 11, 2016
Now chairman and CEO, Philippe Dauman arrives in Miami facing a shareholder revolt, opposition from Redstone’s daughter, a dangerous lawsuit and an unpredictable business environment. Can he hang on?
Sumner Redstone, Shari Redstone and Philippe Dauman
For the first time on Monday in Miami, Philippe Dauman will convene the Viacom annual meeting as Chairman as well as Chief Executive Officer, which he has been since 2006, shortly after controlling shareholder Sumner Redstone separated Paramount, Nickelodeon, MTV and other assets from CBS.
Redstone, who was shifted to Chairman Emeritus in January, won’t be in Miami when Dauman drops the gavel. Redstone won’t be there to watch Dauman push management’s agenda though the well scripted meeting. He won’t have to personally vote down a move by some angry shareholders to force a recapitalization of Viacom that would give them a vote in the company’s future for the first time. It will be done for him.
Those shareholders are unhappy Viacom’s stock price has dropped over 40 percent in two years. They are concerned that under 61-year-od Dauman’s tight fisted management, the company’s crown jewel business units are no longer performing at the highest level in the industry. The pay TV channels have seen lower ratings and Paramount makes fewer movies than competitors and less money. Last year, for instance, Comcast owned Universal’s movie division made about ten times more than Paramount generated - and that was before the pending multi million write down by Viacom for Zoolander 2.
Viacom has yet to announce how many millions it will have to write off on Zoolander 2
Critics also aren’t happy that Dauman is among the ten highest paid corporate executive in the U.S. with compensation last year of some $54.2 million in salary, stock and bonus payments. That pay boost was part of a new contract Dauman signed last year, with a higher salary.
That that keeps him in place through at least 2018. Over the last decade or so at Viacom, Dauman’s compensation is almost $350 million. At present only Redstone’s opinion matters on recapitalization because he holds class A stock that gives him 80 percent of the vote. Most other stockholders hold class B shares with no vote. With the 92-year-old Redstone apparently almost incapacitated, Dauman has a virtual proxy to run Viacom as he wishes. He is executor of Redstone's will and since last October has been Redstone's "health care agent," which means when the mogul can't make his own choices, Dauman decides.
For years Redstone’s mantra was that he would never die. It was his excuse for not putting a proper corporate succession plan in place and for fighting with his children and grandchildren as if he will be around forever. Now age and some bad decisions are catching up with him.
One of his worst decisions was to involve himself with two “girlfriends” in the seven years after he divorced his second wife, a former schoolteacher 39 years his junior.
One of those gf’s for a time was making Redstone’s health decisions. Then last October, Dauman and others led a "coup" which removed her from his life against her will. A representative for Viacom objected to the use of the word "coup," The dictionary defines a coup d'etat as "a sudden attempt by a small group of people to take over," which is what happened here.
“To have the CEO as the health fiduciary of his or her boss is quite extraordinary,” Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, told Bloomberg News at the time. “I’ve never heard anything like it.”
That woman, Manuela Herzer, is now suing claiming Redstone could not have made the decision to terminate her because he is not in his right mind any more. After she was forced out, Redstone’s will was changed to disinherit her. That means she has at stake an estimated $60 million inheritance when Redstone passes away.
On Feb. 29, a L.A. Superior Court judge refused to throw the suit out as Dauman and his lawyers requested. Now a trial on Redstone’s mental competency is set in May.
Herzer also raises questions in court filings about whether it was really Redstone who signed documents which removed her and put Dauman in charge – raising questions of forgery by Dauman - and whether Redstone knew what he was doing.
It was a week after a court order was issued in her case to have a doctor visit Redstone to see if he was lucid and competent that there was a sudden end to his 31-year run as the decision maker for Viacom. That is how Dauman got his new job as Chairman, while the well thought of Leslie Moonves took on Chairman duties at CBS.
An even bigger problem may loom for Dauman. When he was elected chairman by the Viacom board in February, there were ten votes in his favor and one against - but that one counts a lot more than all the others combined.
That no vote was by Shari Redstone, the mogul’s 61-year-old daughter, who is as savvy in financial matters as her father, and apparently about as tough - which may be the reason father and daughter found it hard to get along over the years.
Shari, who is Vice Chairman of Viacom (and CBS), said she wanted a Chairman at Viacom (and CBS) who was not a member of her family, or associated with Redstone‘s will. That would rule Dauman out. “Dauman choice exposes a rift at Viacom,” said the L.A. Times in a headline on Feb. 16.
When Redstone dies, there is a group of five trustees led by Dauman who will administer the $42 billion estate on behalf of Redstone’s grandchildren. That includes Shari.
For now, Viacom management will beat back the shareholder revolt, but it does not solve the problems.
Even with the trust once Redstone dies, the stock will go to his family. Shari will control 20 percent. Of the five grandchildren the trust is to benefit, three are Shari’s kids. Together with mom they would control 68 percent of the voting shares.
As you might expect in the era of The Big Short (a mildly profitable Paramount movie), the angry investors includes hedge fund rebels. The surprise is that it also includes usually loyal investors like Mario Gabelli, the second largest holder of Viacom stock (even some class A shares). That is something Dauman has to take seriously.
Gabelli in February called for a “change in philosophy” at the company and urged the sale of assets including a stake in Paramount. “Philippe has to do something,” said Gabelli, adding that with all the earnings pressures and other problems, “Philippe has six to 12 months,”
Institutional Shareholder Services, a proxy advisory firm, blasted Viacom’s corporate governance in a report and gave it the worst possible score on their measuring scale. “CEO pay continued to rise for the third year in a row, said the ISS report, “despite two consecutive years of negative return to shareholders. Annual incentive performance thresholds were lowered from corresponding goals in the year prior without clear rationale.”
Dauman has always prided himself on “handling’ Wall Street. An important part of the reason he was hired as CEO when Redstone dumped Tom Freston in 2006 was that Dauman was considered better able to communicate with Wall Street.
Dauman has said that ISS and other disgruntled shareholders have their facts wrong and don’t see all the great things the company is doing.
Dauman, who is from New York City, was Sumner’s corporate lawyer and general counsel (Redstone himself was a lawyer), before he was tapped as the key executive at Viacom.
Dauman became Redstone’s pal and a loyal lieutenant who carried out the often-willful Redstone’s orders. With no other succession plan in site, Dauman became his heir apparent.
Dauman for his part was happy to carry out a cost conscious business plan that pleased a flinty New Englander who in his dotage has shown more interest in his tropical fish than the welfare of some of his employees. That tight fisted approach has meant rounds of layoffs, cut backs, out sourcing essential services and pushing for the last cent in every deal even if it left a sour taste.
For instance, in 2007 Dauman proudly took on YouTube over the use of video on which Paramount, MTV and other Viacom units held the copyrights. It was a legal war that finally ended with a whimper in 2014 when it was clear the courts would rule against Viacom again. When the battle began Viacom sought $1 billion in damages. When it ended seven years later terms of the settlement were not disclosed but it was clear no money changed hands.
In retrospect a lot of Wall St. analyst think Dauman would have done better at the time to make a deal with YouTube and its parent Google, which found a way to settle with others in Hollywood.
On Feb. 23rd, Dauman made a move to sell a minority stake in Paramount Pictures, as Gabelli and others suggested. Rumors have been flying about potential buyers with the most likely scenario a deal with the Chinese, who have been making major moves into Hollywood.
Dauman has talked about what he would do with the money. There are big debt payments coming up and his first move will be to repay some of that debt. There has been talk about a hookup with a digital platform, but mostly it seems to be about the money. Dauman has also said the money could be used to boost movie and TV production; it could be a special dividend to shareholders, or it could lead to yet another big buck stock repurchase to prop up the lagging stock price.
That has been tried by Redstone and Dauman repeatedly with poor results. Bloomberg Business reported in August 2015: “Viacom spent $15.2 billion buying back shares over the past five years, at an average price of $60.62 each, according to data compiled by Bloomberg. The stock closed at $47.02 Monday, meaning the company, controlled by 92-year-old Sumner Redstone and led by Dauman, has lost $3.4 billion investing in itself.”
In the past, selling a minority stake in a Hollywood studio has proven to be a disastrous decision, with one side or the other eventually being forced to buy the other out. It is very short-term thinking that smacks of desperation.
However, Dauman for now, is in charge and doing it his way. He lashed out at his critics at an industry conference in February: "Our outlook and the facts have been distorted and obscured by the naysayers, self-interested critics and publicity seekers."
Dauman is facing a tough business environment for TV and cable networks, unpredictable movie results, a low stock price, nasty lawsuits and smoldering resentment by Shari Redstone. He will be wielding the gavel in Miami, but ultimately he may not have much more time left to prove he can keep the empire Redstone built from breaking apart after the mogul’s passing.
CORRECTIONS AND NOTES - 3/11/2016 at 6:15 p.m. pst - A spokesperson for Viacom objected by email to some facts and opinions expressed in this article. The following facts have been corrected:
Dauman's extraordinary salary last year of over $54 million included his signing bonus for inking a new contract. The story treated the salary and bonus as separate items.
Dauman was elected Chairman as well as CEO in February 2016, not in November 2015 as the story previously stated. it is correct that he suddenly got the job days after the judge in Herzer's case ruled her doctor could examine Redstone.
The rep pointed out Dauman has stated at financial industry events his plans for any money gained from a sale of a minority statke in Paramount. That section of the story has been re-worked to inlclude his stated plans. The earlier verison of the story said it was not clear how the money would be spent but made all the same points about how it might be used, except Dauman has added they might pay a cash dividend above the current 40 cents a share to unload the cash.
Dauman also has raised the discredited idea of more stock buybacks, after his past efforts (with Redstone as head cheerleader) have cost the company over $3 billion in stock market value. The price of a stock is only impacted by buybacks when all other things are equal. They are not equal at Viacom which as the story states, is under fire from several directions, including a shift away from pay TV to pay per byte.
I would also note the Viacom spokesperson objected to other things. Some updating has been done to provide better context, but it is all covered as well here.
Dauman's rep said that even though he was named Redstone's "health care agent" last October when Herzer was forced out (as detailed in her lawsuit), the rep insisted Dauman does not make Redstone's health care decisions at present. Dauman is quoted as claiming Redstone makes all his own decisions. Remember that Herzer is contending Redstone is "a living ghost." Can't wait for that trial in May to see who really speaks for Redstone.
Viacom's rep objected to how I characterized the importance of Shari Redstone's voting power after her father passes away: "The story claims Shari Redstone’s “one vote counts a lot more than all others combined.” Can you substantiate this claim?"
Yes I can, and i believe I now have. What this question implies is that somehow Shari is seen at Viacom, where she is Vice Chairman, as just another member of the five person trust Dauman will head up after Redstone's death to oversee his estate.
I would argue Shari is more important because she is Redstone's daughter and a major stockholder. This remained true even after Redstone's will was changed to give the bulk of his wealth to his grandkids instead of his daughter, with whom he was having one of their frequent disagreements. Three of those grandkids are her children, and together with Shari they will have majority voting control.
The rep added: "The story contains two references to a “shareholder revolt.” This feels extreme and is not the anticipated tone for the Annual Meeting." Response: When you have miultiple hedge funds, ISS and the company's second largest investor (Gabelli) speaking out, to me, it amounts to an "shareholder revolt."
I did get a chuckle out of the idea the Viacom brass can script what will happen at the annual meeting. They may stick to the script but it is unlikely some of the audience will not want to voice differing opinions (even in Miami).
Yes, the proposal to give the bulk of shareholders a vote on corporate matters will go down in defeat after Redstone's shares are voted, but as this article relates, it is unclear if Dauman is up to the longterm task of fixing Viacom's enormous problems.
The rep also complained: "About YouTube, the story states the case 'finally ended with a whimper.' Viacom settled after two appeals, and after Viacom took YouTube to court, YouTube launched its content ID system." Response: Aside from the untold millions that Viacom spent on legal fees over seven years, their lawyers originally demanded $1 billion in damages. They got zero. YouTube did take down about 79,000 videos, which they happily do for anybody who asks.
During the period Viacom was litigating, other studios were making deals with Google and YouTube that showed they were friendly to new technology and expanding platforms. Instead Dauman played to Silicon Valley like Uncle Scrooge. In the end Dauman, the lawyer, did not settle because of some great victory he would win, but rather to save face. Viacom had lost both of its earlier legal rulings and was almost certainly going to lose in court anyway, so it cut its losses. Mazel Tov Philippe.