The Viacom boardroom has been a messy place of late. Very public conflicts over the control of the company and aging mogul/executive chairman Sumner Redstone’s fortune turned a page in recent months, and the impact has already been seismic. The dénouement of the power struggle included the ousting of four board members along with CEO Phillippe Dauman and the departure of COO Thomas Dooley, but the firm’s financial position and near-term prospects suggest more challenges ahead for the new CEO, Robert Bakish.
Viacom’s slashed earnings forecast and the halved quarterly dividend present an uncomfortable juxtaposition alongside the $115 million in cash severance owed to Messrs. Dauman and Dooley. The payouts suggest a classic pay-for-failure scenario after considering the stock’s 60% decline from the all-time highs seen in 2014. Moreover, a careful reading of key contracts suggests that some of the pain for Viacom’s shareholders can be pinned on overly generous employment agreements that may have ultimately undermined the succession planning process.
The Agreements
Messrs. Dauman and Dooley entered into amended employment agreements with Viacom effective January 2015 and March 2016, respectively. Full cash severance terms included three times annual salary and bonus plus a prorated bonus for the year of termination and other benefits. While striking in size, the formula is more or less in line with market practice.
The agreements depart drastically from the norm in the scenarios where the executives may resign with full severance. Beyond commonplace “good reason” resignation triggers such as relocation, pay cuts, or a loss of the CEO’s board seat, the agreements included the following:
- Succession conditions for Mr. Dooley that could be triggered if another person replaces Mr. Dauman as CEO without the role first being offered to Mr. Dooley, and similar conditions for Mr. Dauman in circumstances including the appointment of an executive chairman other than himself or Mr. Redstone.
- A committee continuity component for Mr. Dooley only tied to certain board members (or “qualified replacements” following a “voluntary resignation” or death) continuing to comprise a majority of two board committees.
- A chairman interference condition allowing for resignation if a chairman interferes with each executive’s duties and a predetermined remediation process does not address the issue.
The Showdown
The board infighting may not have been anticipated at the time of signing. However, the severance terms became particularly relevant on June 16 when National Amusement Entertainment Holdings LLC (a holding company owned by the Redstones and through which they control a majority of Viacom’s voting power) changed Viacom’s bylaws by written consent. At the same time, National Amusement removed Mr. Dauman and four other directors from the board in favor of new directors.
These changes could have allowed these executives (but certainly not required them) to invoke their “good reason” resignation conditions. Mr. Dauman’s removal from the board was explicit, and the “without cause” removal of directors on committees could conceivably have allowed Mr. Dooley to trigger the continuity condition. At once, two of Viacom’s top leaders immediately had millions of dollars in severance as leverage in their negotiations over the future of the company – all they would have to do was walk.
The ongoing legal battle forestalled any immediate action on this front as the ousted directors and Mr. Dauman pushed for reinstatement, however. On June 27, the Delaware Chancery Court issued a “Status Quo Order” blocking advances in the contemplated sale of Paramount Pictures and freezing the board of directors in its current state. After a few months of negotiations, punctuated by volleys of court filings and more news headlines, a settlement was reached on August 18. The Status Quo Order was formally dismissed by both parties shortly after on August 22.
The settlement finalized Dauman’s departure (and severance terms), and named Mr. Dooley interim CEO through September 30, 2016. It also increased the board’s size to 16 members temporarily to allow for the addition of the replacement directors while reconstituting all of the board committees.
With Mr. Dauman stepping aside, the spotlight turned to Mr. Dooley as questions about his interim status swirled. The agreement addressed his succession condition but stopped short of naming him as a permanent replacement. This resolved one issue, but the clock was still ticking; the board committee continuity condition may have still given Mr. Dooley up to 30 days to resign with full severance at the same time that negotiations on his future with Viacom became the key to stabilizing the transition process. Despite the Redstones’ voting control over the company, Mr. Dooley held a tremendous amount of leverage at this stage, with no clear replacement behind him, another enormous severance looming over company coffers and investors’ peace of mind all hanging on his decision.
On September 21, exactly 30 days after the dismissal of the Status Quo Order, Viacom released a statement indicating that Mr. Dooley would not become the permanent CEO and would depart from Viacom on November 15, 2016. The relevant agreement provided that he would get his “good reason” resignation severance, less the prorated bonus but with a retention bonus ostensibly granted in part to keep him at the helm beyond the minimum 30-day notice required for such a resignation.
Beyond the individual negotiations, in late September the Redstones also ordered the boards of Viacom and its former parent CBS to explore a business combination following months of rumors of a potential re-combination. This task would fall to long-time insider Robert Bakish, who was named acting CEO of Viacom and head of a newly established business segment on October 31. His term as acting CEO was explicitly tied to either the election of his successor as CEO or the closing of any business combination with CBS.
On December 12, National Amusements publicly pulled support for the Viacom-CBS combination, publishing a letter to both companies’ boards to that effect less than three months after ordering the assessment. The letter lauded Mr. Bakish’s performance in his acting role, and the same day Viacom announced that he would stay as president and CEO, without the ‘acting’ designation. With the combination at least temporarily abandoned and his transition blessed by the Redstones, Mr. Bakish may find more room to breathe in his efforts to revitalize the business.
By The Numbers
While the severance basis for the CEO and COO was fairly standard, their high regular pay levels made for eye-watering separation payments. The settlement agreement finalized Mr. Dauman’s severance with the following benefits:
- $58 million in severance (over $46 million of which was payable almost immediately);
- A pro-rated bonus of $9.7 million based on fiscal 2016 company performance and his $20 million full-year target;
- $16.3 million in accelerated vesting of certain stock awards; and
- Close to $1.8 million in perquisites including insurance benefits and three years of office space in Manhattan with continued secretarial service.
Mr. Dooley’s severance benefits are similarly considerable, although his equity award acceleration entitlement did not result in any benefits because of the company’s poor performance over the measurement periods. Nonetheless, in addition to his $8.8 million regular annual bonus for fiscal 2016, he received:
- Cash severance of $57 million;
- A $4.4 million retention bonus in lieu of the prorated bonus initially delineated under his agreement; and
- $1.2 million in benefits
Adding to the sting of this sizable bill, the aforementioned March 2016 amendment to Mr. Dooley’s employment agreement removed a provision for potential severance reductions based on the duration of the employment agreement actually served.
A Potential Cash Crunch?
The September 21 news release included three other pieces of information: the company was shelving its contemplated sale of Paramount Pictures, earnings estimates were cut, and the quarterly dividend was slashed in half from the previous quarter’s $0.40 per share. Severance payments were explicitly referenced as one of the factors impacting the reduced earnings forecast.
Based on the Company’s outstanding share count as of fiscal year-end (September 30, 2016), paying the September 22 dividend at the prior level would cost some $159 million, versus $79.6 million at the reduced $0.20 per share level. At the end of the fiscal third quarter (June 30), Viacom’s balance sheet listed cash and cash equivalents of $192 million without giving consideration for the $115 million of severance payments largely due in the near-term. Nonetheless, the Company’s fiscal year-end cash and cash equivalents stood at $379 million even after payment of the September 22 dividend and a majority of Mr. Dauman’s severance.
While third quarter cash figures suggested that the Company might have been simply unable to pay dividends at the prior level given the severance obligations, the year-end cash balance confirms a greater ability to pay dividends at either level, if not necessarily comfortably. Three years of annual cash outflows alongside the gradual climb from the company’s first (and formerly lowest) quarterly dividend of $0.25 in 2012 certainly could have also put downward pressure on the September distribution. Stakeholders and analysts may have been particularly inquisitive absent the hindsight provided by full-year results with respect to the most recent declaration.
The fact that the severance payments comprised such a sizable portion of reported cash assets and the cost of a dividend for all shareholders remains noteworthy on its own. Even if the near-term payment obligations to Messrs. Dauman and Dooley did not impair the company’s ability to pay a dividend, the size of these payments could certainly have impacted the decision to reduce it and conceivably might have had dire effects in other circumstances.
Adding It Up
If nothing else, the lesson from this fracas is that shareholders should be aware not only of the dollar values but also the terms of executive agreements. That the board agreed to such generous conditions on both fronts in the first place should, at a minimum, raise eyebrows. For companies with similar terms in place or on the negotiating table, it may be worth considering what happens when executives with enormous entitlements decide not to go quietly as performance declines.
Shareholders had no significant input into the relevant agreements or Viacom’s recent course due to the Redstones’ control over the company’s voting power, making the billions in equity erased by recent declines in share price and the millions paid in severance even harder to stomach.
More broadly, the dual-class share structure in place at Viacom has left a majority of the company’s shareholders at the mercy of court rulings and internal squabbling amongst Mr. Redstone, his heirs and a board that, prior to recent additions, had an average non-employee director tenure approaching two decades (over 18 years). In recent years, newly-public companies have had no trouble attracting investors whilst maintaining control through dual-class structures. However, Viacom’s travails in the wake of Mr. Redstone’s declining health make a strong case for the importance of succession planning at founder-controlled companies. Viacom has announced Mr. Redstone’s intention to resign following the February annual meeting, which might address some of the lawsuits’ thornier claims. However, with Shari Redstone still vice chair of the board and National Amusements still holding voting control, the impact of the change may be limited.
Special thanks to Starlar Burns, Valeriano Saucedo and Greg Waters