Wolff: The Sumner Redstone dilemma

Dual-class share structures are an anomaly of corporate governance in which one class holds a minority of a company’s shares but casts a majority of its votes. Sumner Redstone, at 93 in a deeply diminished capacity and, according to claims by personal and business intimates, completely out of it, is still in theory calling the shots at Viacom and CBS, companies at which he owns about 10%, but with his special class of stock votes 80%. In other words, in an ultimate demonstration of the perils of dual class shares, these two major public companies are controlled by…well, that’s the mystery now being extensively litigated, Nobody knows who is in actual control.

The entire premise of good corporate governance is to impose logic and transparency on management so that shareholders can accurately evaluate and their interests can be fairly represented in a company’s decision making process. To say that the Redstone companies represent an inversion of that ideal is itself a comical understatement. This is the Hieronymus Bosch of corporate governance, bizarre and perverse — and in plain sight of helpless shareholders and an amazed public.

Viacom and CBS, with Redstone’s chosen executives and often disenfranchised family members fighting over control of his yet-still-breathing corpus, are less like modern corporations and more like an 18th century royal court. Redstone, with his extensive symptoms of dementia, including vast memory loss, uncontrollable rages, incontinence, feeding tubes and sexual mania, spelled out in court documents, is mad King George.

Up until recently, his companies were run in a kind of construct of mental capacity, in which his family and lieutenants insisted that, with Redstone hidden from view, they knew his desires. The dual class of shares not only gave outsize control to one man, but now it effectively gave it to people claiming to speak for him. Transparency reached something near zero.

Then, outsiders in the form of girlfriends/caregivers began to wrestle for control — representing that they knew what the man they were shielding from the view of others wanted. That spooked his lieutenants and family. They argued, on the contrary, that he had given them the go ahead to take back control, hence they forcibly ejected the remaining girlfriend/caregiver, Manuela Herzer. In court, she argued that he could not take control from her because he lacked the capacity to do so.

His lieutenants and family might have reasonable argued that he did not have the capacity to give control to Herzer in the first place (along with the $70 million he also reportedly gave her). But, alas, they couldn’t make that argument, because they had been running his companies under the premise that he was yet in control. To refute that now meant they’d have been lying to shareholders (shareholders might not have been able to equitably vote their shares, but they do have the right to know who was actually voting the voting shares), inviting suits and SEC investigations.

In court, his lieutenants and family, showing a videotape with a monosyllabic Redstone sputtering obscenities and unable to remember his given name (Rothstein), managed to avoid a finding of incompetence (but not an affirmative finding of competency). On that thin basis, Redstone’s daughter, Shari, who has spent much of her adulthood estranged from her father, recently used her father’s theoretical control – and what one of his doctor's has characterized as a "legal mental capacity" – to remove Viacom CEO Philippe Dauman and one his allies from the trust that, up until then, Dauman controlled. He would have legitimately assumed Redstone’s control after his death. (In theory, Dauman, if he had acted first in Redstone's name, might have been able to remove Shari Redstone from the trust).

Dauman has been joined in his suit by one of Redstone’s granddaughters, a direct beneficiary of the trust. He now argues that, contrary to his recent position with regard to Herzer, that Redstone, held incommunicado, is being unlawfully manipulated by his daughter, who will now be able to run the empire, even though her father has repeatedly cast her out — and even though her father only owns 10% of the empire anyhow.

Voting control by a minority shareholder is generally thought to have started, or at least become respectable, when The New York Times went public in the 1960s. The idea here was that the longtime owners of the paper, the Sulzberger family, would remain as the institution’s stewards, with their vote sheltering it from short-term Wall Street demands.

This structure was adopted by many other newspaper companies, including The Wall Street Journal and The Washington Post. Then it was adopted by the mogul class, interested less in editorial protections then efficient power, giving Rupert Murdoch and Redstone absolute control over vast companies with a small percentage of the stock. Now dual shares have became a favorite structure for tech companies, among them Google and Facebook. Mark Zuckerberg might one day be Sumner Redstone.

While control in such companies can pass seamlessly — it did at The New York Times, although the company’s fortunes have surely lagged under its system of family inheritance, and another generation is now preparing to do battle with itself — the far more likely result is a fraught and operatic game of thrones. In the Murdoch house, for instance, four votes, each in the hands of his four adult children, without a tie-breaking mechanism, will determine, or be unable to determine, who controls the less than 20% stake in the Murdoch companies that controls 100%.

As the age of moguls ends — moguls who, by a fluke of personality and circumstance, were able to use other people’s money to create vast empires over which they had personal control — many of their relatives and cronies will, as they always have, do anything it takes to hold on to that unique and happenstance power. And, less because of dementia and more because of the nature of absolute and illogical power, we will see many more messes like the one playing out now on a daily basis around Sumner Redstone..