The spectacle of a corporate board openly revolting against the company’s controlling shareholder is rare, but not unprecedented.
CBS’ independent directors this week sought a restraining order against Shari Redstone, who controls the company through the National Amusements holding company. The network’s legal argument hinges on a case involving a Canadian media mogul who ran amuck as CEO of one of the world’s largest newspaper publishing groups.
The media baron, Conrad Black, was accused of egregious behavior — including fraud, racketeering, obstruction of justice, money laundering and epic self-dealing (including diverting nearly $200 million in excessive management fees through his holding company, Ravelston, into his and his associates’ own pockets). Three members of the Hollinger International board moved to oust Black as CEO, who owned 30% of the company’s equity but was able to control more than 70% of its voting interests.
CBS cites the case as a legal precedent for taking action against Redstone, who owns a 10% economic interest in the company but controls 80% of its voting power through National Amusements.
The network’s independent board members argue that Redstone has taken actions contrary to the interests of all shareholders, including improperly injected herself into negotiations with Viacom and expressing a willingness to replace CBS directors to force a merger.
“As in Hollinger, there is a real risk that Ms. Redstone might remove the board or otherwise frustrate board action,” CBS argues in its court filing. “In those circumstances, then (Judge Leo) Strine granted an injunction against any action by the controlling shareholder that would harm the public stockholders.”
Black went so far as to re-write the company’s bylaws, refuse to abide by a restructuring agreement he had authorized, and went behind the back of the board to try and sell a newspaper, The London Telegraph.
Corporate governance experts say the dual class stock ownership, in which an individual with a minority equity stake in the company nonetheless holds a controlling interest in the voting shares, is problematic in publicly held companies.
“This whole controversy come up because of that corporate structure,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, saying it creates “improper incentives.”
“Dual class structures with unequal voting rights rob shareholders of the power to press for change when something goes wrong,” said Amy Borrus, deputy director of the Washington, D.C.-based Council of Institutional Investors.
Borrus called Viacom’s lackluster performance, during the waining years of the Sumner Redstone era, “Exhibit A of what could go wrong.”