Sumner Redstone Health Lawsuit Puts Viacom, CBS in Awkward Position (Analysis)

When asked who would take the reins at Viacom and CBS when he dies, Sumner Redstone used to joke that the answer was irrelevant because he was going to live forever. Now that he has reached 92 and is ailing, his vow is being taken less seriously.

The issue of Redstone’s health is dominating news reports this week in the wake of a lawsuit filed by the media mogul’s former girlfriend Manuela Herzer. Neither Viacom nor CBS are named in filings, but they have been left dealing with the fallout from claims by Herzer that the corporate titan is a “living ghost” unable to make decisions for himself.

Probate Judge Clifford L. Klein on Monday postponed an investigation into Redstone’s mental competence until January of next year, but if a ruling were to find the mogul’s mental state is weak, it could have significant ramifications for the $45 billion empire that Redstone forged. It may also put Viacom and CBS brass in the awkward position of having to defend the health of a man who still wields significant control over their corporate destiny, while shoring up plans for an inevitable shift in leadership.

“It’s a difficult situation and it’s in an area of elevated concern, because family enterprises frequently have monarchic leadership and somebody who thinks they were put on this earth to run the business in perpetuity,” said Jeffrey A. Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management. “When these empires are created, the leaders frequently only leave feet first.”

Attorneys for Redstone have quickly rebuked Herzer’s claims, which they describe as “preposterous.” The lawyers have suggested she was only interested in enriching herself.

Despite their protests, some of the optics give her claims a degree of heft.  Herzer’s allegations come after Redstone has largely retreated from public view. He did not attend the annual meetings of the two companies he controls this year. While he once spoke briefly on earnings calls for Viacom and CBS, it has been over a year since he was a vocal presence. His speech has become impaired and he has reportedly become increasingly frail.

It’s a situation with few precedents, according  to attorneys. Although some CEOs have dealt with health issues in public view, among them Apple co-founder Steve Jobs, Redstone is no longer in charge of the day-to-day operations of the two media conglomerates. Those responsibilities rest with CBS Corp. chief Les Moonves and Viacom head Philippe Dauman. However, Redstone has remained in charge as executive chairman of both companies and as chairman of National Amusements, the privately held exhibition company that holds a controlling stake in both businesses.

“His title suggests he has decision-making authority over the biggest deals and strategic moves,” said James Post, an emeritus professor of management at Boston University’s business school. 

That continued involvement means that both CBS and Viacom have certain obligations to disclose details of Redstone’s health. They do not have to share information about every hospital visit, experts suggest, but they do have to make public any health issues that could materially impair his decision-making faculties.

“If it affects his ability to carry out his decisions, it’s disclosable,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “The more you’re identified with the company and its stock price, the more material the health of its leader becomes.”

In the days since news broke of the legal battle, analysts and experts have been reaching to find corporate parallels for the delicate dance that Viacom and CBS must perform.

There are a few, but the situations have their own unique wrinkles. Last year, Donald Sterling lost control of the Los Angeles Clippers after he was declared mentally incapacitated after recordings surfaced in which he uttered racially-charged remarks.  In that case, Sterling’s comments were so offensive that his involvement jeopardized the future of the franchise. There have also been other business giants whose mental and physical health diminished while they retained power, such as Howard Hughes, who spent his last decades addicted to drugs and in isolation. However, the tool, aviation, and other businesses that formed the bulk of Hughes’ wealth were privately held.

Succession is always an issue in family-run enterprises. At 21st Century Fox, it practically inspired a cottage industry of palace watchers before founder Rupert Murdoch elevated sons Lachlan and James to key leadership roles last summer. Viacom and CBS have taken some pains to outline the steps that will take place with a change at the top.

There is a plan in place for what happens to that family trust that controls National Amusements upon Redstone’s death. Voting control will be held by seven trustees:  Viacom CEO Dauman; George S. Abrams, a Boston attorney who has been a Viacom director for years; David R. Andelman, a Boston attorney who is a director of CBS and National Amusements; Norman I. Jacobs, another attorney who has advised Redstone; Leonard L. Lewin, an attorney with ties to Phyllis Redstone, Sumner Redstone’s ex-wife; and two of Redstone’s heirs, Shari Redstone, his daughter, and Tyler Korff, his grandson. Shari Redstone and Tyler Korff will take over as trustees from Sumner Redstone and Phyllis Redstone, according to a statement from Leah Bishop, Sumner Redstone’s estate attorney.

Even if a court declares Redstone competent and Herzer’s claims are dismissed as baseless, analysts argue that the coverage surrounding the lawsuit potentially provides a sad coda to a legendary career. In the wake of the filings, media outlets have done everything from raise the possibility that a sex tape exists involving Redstone to seizing upon charges that his libido and appetite for steak remain undiminished. He is described as a pale shadow of the man who swallowed up companies and redrew the borders of the media landscape.

He was a very smart, skilled, capable guy who built an empire from a small chain of movie theaters,” said media analyst Hal Vogel. “There’s a lot to be impressed about, but for now, at least, everything being discussed will be the scandalous stuff that sells papers.”

A company’s willingness to let stakeholders in on the particulars of a founder or leader’s health varies, experts say. JP Morgan was quick to announce that  Chief Executive Officer Jamie Dimon had throat and prostate cancers, but United Airlines was criticized last month for taking 24 hours to confirm that CEO Oscar Munoz had suffered a heart attack.

Although Redstone has a right to privacy, his status as the head of two publicly-traded businesses means that certain information about his well-being must be communicated to investors. Still, there are good reasons some companies might be wary of over-sharing.

“A board’s primary obligation is not to lie,” said Jill Fisch, a professor at University of Pennsylvania’s law school.  “If the facts are unclear, it becomes problematic. It’s better to be silent than to lie.”

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