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Power Sheet – May 10, 2016

After a judge abruptly dismissed a lawsuit over Sumner Redstone’s mental competency yesterday, casual observers may conclude that the issue is settled – that at least in the view of Judge David Cowan, Redstone is competent. But it isn’t settled at all, and in fact the proceedings in the case last week raise a new issue: Did the CBS and Viacom boards, of which Redstone was executive chairman, have a duty to tell shareholders about his condition?

The suit was brought by a former girlfriend, Manuela Herzer, who is apparently miffed that the 92-year-old billionaire threw her out of his house last fall, removed her as his health care agent, and wrote her out of his will. She challenged his mental competency. But Judge Cowan’s ruling yesterday focused only on Redstone’s health care in declining to restore Herzer as Redstone’s health care agent. Cowan emphasized that he was not ruling on Redstone’s mental competency.

The significant revelation for outsiders was Redstone’s videotaped testimony, recorded at his home last Thursday and played in court Friday. The video has not been publicly released, but a transcript has been, and it reveals that Redstone is barely able to speak. In 17 minutes of testimony, he frequently couldn’t answer simple questions (“What was your birth name?”) or couldn’t be understood. A court official designated as an “interpreter” repeatedly asked him to repeat himself more slowly and loudly, but he was frequently incomprehensible. Sometimes he was asked to spell out his answer by pointing to letters on a board, but that never worked. The one phrase he seemed able to enunciate clearly was “f—ing bitch,” which he used several times when asked about Herzer.

Until February 4 of this year, when Redstone became chairman emeritus of CBS and Viacom, he was executive chairman of both companies. The key word is “executive.” That means he wasn’t just chairing board meetings; he had operating responsibilities. Now, maybe six months ago he was completely different from how we was in the deposition last week. But if not, it seems inconceivable that he could possibly have carried out operating duties.

Investors were told nothing. They noticed that he had long since stopped speaking on earnings calls, and the entertainment industry was rife with rumors about his health, but last week’s deposition was the first evidence of his condition in many months, and it was shocking. Did the board bear a duty to tell investors about his condition?

No SEC rule requires a company to say anything about an executive’s health. Remember that Apple didn’t even disclose that CEO Steve Jobs had had a liver transplant until after the media reported it. But SEC rules do require a company to disclose material information. I’d say that when the CEO has a liver transplant, that’s material, and when the executive chairman can’t answer simple questions and can scarcely express himself, that’s material. But those are just my opinions.

And in this case there’s a larger issue. Redstone owns controlling stakes in CBS and Viacom, so he can replace both boards if he wants to; nothing happens that he doesn’t want to happen. It’s another reminder to investors that when they buy stock in a company with a controlling shareholder, they’re just along for the ride, for better or for worse.

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What We’re Reading Today

The Philippines ushers in new president  

Rodrigo Duterte, who bullied his way through his campaign, joking about killing thousands of criminals and ending democracy, is the presumed winner of the presidency after his closest rivals conceded last night. It could take days before official results are announced. He’s calling for a change in the country’s government, moving to a federal system, and his first step will be asking for the congress to hold a constitutional convention.  The Guardian

DOJ, North Carolina file suits against each other 

The two sides filed suits over the right of North Carolina to pass its transgender bathroom law. Justice head Loretta Lynch called it the modern version of a Jim Crow law in a scathing attack discussing the lawsuit. The DOJ argues that the law violates the Civil Rights Act, while Gov. Pat McCrory says the Justice Dept. has overstepped its boundaries in trying to prevent North Carolina from enforcing the law. Politico

Facebook answers questions about its editorial bias

Mark Zuckerberg‘s company uses human editors to decide what’s a “Trending Topic,” and they’ve been accused of suppressing stories that might be of interest to someone with a conservative political view. Now Zuckerberg is facing pressure to outline how Facebook selects Trending Topics, since its algorithm isn’t the only thing determining content. Fortune

Medivation to explore sale 

The cancer drug maker, which turned down a $9.3 billion offer to merge with Sanofi, will consider a sale. CEO David Hung was facing pressure to consider offers, as Sanofi CEO Olivier Brandicourt threatened to try to replace the board if it didn’t. Medivation has also received interest from Ian Read‘s Pfizer and Robert Bradway‘s Amgen. Reuters

Building a Better Leader

The 25 top-paid hedge fund managers collected…

…$12.94 billion in 2015. All that money was doled out in what was a terrible year for hedge funds. NYT

One thing corporate America can learn from nonprofits… 

…is to motivate through your ideas, not the power of your office.  Fortune

If CEOs want to be trusted during earnings calls…

…they should go off script. Using natural language has a higher rate of trustworthiness. Quartz

Worth Considering

Sumner Redstone’s competency trial dismissed

Judge David Cowan dismissed the suit brought by Redstone’s former companion Manuela Herzer after viewing a taped deposition from Redstone on Friday. While the decision puts an end to a case that has been in the news for over six months, the damage has been done as Redstone’s personal life became open to public consumption and he had to step down as chairman from Viacom and CBS. NYT

Rousseff impeachment proceedings take a U-turn

The acting speaker of Brazil’s lower house of Congress, Waldir Maranhao, said he planned to annul the results of an impeachment vote due to irregularities. Less than 24 hours later, he changed his mind. President Dilma Rousseff‘s impeachment vote heads to the Senate. The Senate will likely vote on Wednesday whether to move forward with the impeachment trial. If they vote to do so, Rousseff will be removed from office while the proceedings progress. BBC News

Zenefits investigation blames former CEO

The HR software startup conducted an investigation into a computer system that was used to fraudulently speed up the insurance licensing process in California. The investigation concluded that current CEO David Sacks had no knowledge of the system and it was put in place by founder and former CEO Parker Conrad. Sacks didn’t find out about the system until last fall even though he had worked as COO of Zenefits starting in late 2014. Fortune

Up or Out

The Container Store co-founder Kip Tindell will step down as CEO. Melissa Reiff has been named Tindell’s successor.  Dallas Business Journal

ADT has named Donald Young as its CIO.  WSJ

Fortune Reads and Videos

Gap sales continues to deteriorate 

The company hinted at closing overseas stores after it had its 24th straight month without growth in comparable sales. Fortune

MTV will undergo a makeover 

MTV President Sean Atkins says the network will recommit itself to music, but that doesn’t mean more music videos. Fortune

Groupon takes on IBM

IBM sued Groupon two months ago over patent infringement and now Groupon has hit back with a lawsuit of its own. Fortune

Hyperloop company says tech is safer than high-speed trains

Hyperloop Transportation Technologies says the technology is cheaper, too.  Fortune

On this day… 2011, Microsoft announced that it was buying Skype for $8.5 billion. It was the largest acquisition ever made by Microsoft.  Fortune

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Produced by Ryan Derousseau