Business hit, family failure: The woes of Sumner Redstone
Everything the Viacom chief touches seems to turn to gold, except for his family relationships.
You’ve read about the Pritzker family’s legal squabbles over their Hyatt Corp. Hotel empire. You recall the Revson brothers, who made a success of Revlon but destroyed their relationship to such an extent that Charles Revson once remarked, “What brother? I don’t have a brother.” You’ve heard about the Murdoch children’s inclination to put oceans between themselves and their father, Rupert.
You may even recall the lament of the late billionaire oilman J. Paul Getty: “There is a Law of Compensation in Nature. Every plus is somewhere, somehow offset by a minus. I have long been able to exercise a very considerable degree of control over my display of emotions. This has been an asset to me in business…. In the more personal spheres of my life, it has often been a distinct liability.”
Now it’s time to revisit yet again Rottenberg’s Fourth Law of Family Business, to wit: The more effective the business leader, the more disastrous the family leader.
Consider our latest example: In the course of half a century, Sumner Redstone built his father’s National Amusements chain of drive-in movie theaters into a vast media empire that now includes Viacom, MTV, CBS and Paramount and is valued at about $8 billion. Today, at 83, Redstone remains Viacom’s CEO and controlling shareholder, with a net worth estimated by Forbes magazine at $7.5 billion.
As for Redstone’s record as family patriarch:
• In 1972, after feuding with his brother Edward, Sumner bought out Edward’s shares of National Amusements, the family’s movie theater chain, and the two brothers went their separate ways.
• Early last year, Sumner’s son Brent, 56, filed suit against his father, seeking to gain direct control of Brent’s personal stake in the family empire. Brent argued that he was entitled to a one-sixth interest in the family’s holding company, and he wanted to liquidate that stake (valued at more than $1 billion) so he could receive the cash.
Later last year, Sumner was also sued by his nephew Michael Redstone, who claimed that Sumner engaged in self-dealing back in 1984 when, as trustee of trusts set up for Michael and three siblings, Sumner bought back the shares of the trusts for just $21.4 million. Michael’s suit claimed the trusts’ stake in National Amusements would now be worth about $4 billion.
• Sumner Redstone also appears to be quarreling with his presumed primary family ally: his 52-year-old daughter, Shari, whom he designated seven years ago as his likely successor. When asked by Vanity Fair last year if his daughter was his heir apparent, Sumner replied, “Now you are putting me on the spot.” In a TV interview on CNBC, he said, “My wife is closer to me these days than my daughter,” in effect pitting Shari against his new wife, Paula Fortunato, 44, a former schoolteacher he married in 2003.
To be sure, most family therapists will tell you that there’s nothing wrong with a husband feeling closer to his wife than to his children —on the contrary, it’s quite healthy. Also to be sure, the value of Brent and Michael Redstone’s stakes has grown exponentially over the years not through their doing, but through Sumner’s.
Michael, in addition, may be carrying psychological baggage in his feud with his uncle Sumner. According to a National Amusements spokesperson, Sumner “essentially rescued Michael from a difficult family environment, removed him from a mental institution, paid for his education and gave him a job at NAI. It is unfortunate that this is how Michael has chosen to repay Sumner Redstone’s care and generosity.”
But set aside the legal and technical issues of right and wrong here. The key question, to my mind, is: What are the Redstones doing in court?
Every family has its dirty laundry. Why does this fabulously successful business family seem clueless about resolving their differences privately?
Which brings me to Rottenberg’s Fifth Law of Family Business: Most financial and legal issues spring from emotional roots. That being the case, often you’re better off hiring a therapist than a lawyer. An hour or two in a room, where every aggrieved party has an opportunity to vent his complaints and resentments, can nip many incipient family disasters before they explode.
It’s too late for Sumner Redstone to capitalize on this wisdom, of course: In his case, the toothpaste is already out of the tube. And he might not recognize its value anyway. When you rule an empire worth billions, sometimes it’s tough to remember that the biggest things in life are the small kindnesses.
Mr. Sulzberger, meet Mr. Wrigley
Dual-class shares are a sour deal for outside investors. Can they be sweetened?
The assault on two-tier stock structures—used by many business families, from the Fords to the Lauders to the Murdochs to the Wallenbergs (see next item), to maintain their control of public companies—seems to be gathering steam.
The latest critic is Morgan Stanley money manager Hassan Elmasry, whose London mutual fund owns a 7.6% stake in the New York Times Co. Last November this modern-day Don Quixote submitted resolutions asking the Times Co. to switch to a one-share, one-vote system.
Elmasry argued that the Times Co. structure is unfair because owners of the non-voting shares represent more than 99% of the company’s equity yet elect only four of its 13 directors, while publisher Arthur Sulzberger and his family (descendants of Times patriarch Adolph Ochs) represent less than 1% of the company’s equity yet elect nine directors (true).
Elmasry further complained that the Times Co.’s market value had declined by 52% since June 2002 (also true).
Elmasry contended that Times Co. managers might do a better job if they had to answer to their stockholders on a one-share, one-vote basis (logical). But under Times Co. bylaws, its dual-class structure can’t be changed without the approval of at least six of the eight family members in the trust that owns the family’s Class B voting shares (true again).
Each of these points raised by Elmasry is valid. But they’re also irrelevant. The germane question here is: If Elmasry feels this way about the Times Co.’s stock structure, why did he invest in the company in the first place? As John Gapper observed in the Financial Times, “Outside investors should know full well when they buy equity with inferior voting rights they are merely coming along for the ride.” We are not talking about deceptive advertising here.
A greater threat to dual-class structures can be found in a 2005 study by economists at Harvard and the University of Pennsylvania. It concluded that disproportionate insider voting rights tend to reduce the value of companies with dual-class shares. The reason, says Raffi Amit of Penn’s Wharton School, is that outside shareholders suspect the controlling family will grab special benefits for themselves or initiate strategic moves to serve the family’s business interests but not those of other investors. (Think, for example, of the way Conrad Black abused his preferred voting rights to loot his publishing company, Hollinger International.)
To put it another way: An investor who buys shares with inferior voting rights isn’t merely acquiring equity; he’s also, in effect, writing a put option to ditch the shares sooner or later. At some point, notes Gapper of the Financial Times, inside shareholders will do something against the company’s financial interests: “There is no way of knowing when this will occur, or how much damage will be done, only that it will happen.”
As economists develop better tools to measure the precise cost of this handicap, the debate over whether to restrict dual-class structures will become moot: Laws or no laws, stockholders will vote with their feet and take their assets elsewhere. Unless …
Unless publicly traded family companies find a more ingenious way to eat their cake and have it too. Which is certainly possible.
The latest family to try is the Wrigleys of Chicago’s Wm. Wrigley Jr. Co., the famous maker of chewing gum. Last May the Wrigley Co. awarded shareholders a special dividend consisting of one of the company’s super-voting Class B shares for every Class A common share held. (Wrigley Co.’s Class B shares are worth ten votes each, Class A shares only one.) In effect, this distribution diluted the Wrigley family’s voting power from 41% to a mere 28%.
What’s the catch? Well, anyone wanting to sell those B shares will see them converted into Class A common shares for purposes of that transaction. So every time a Class B share is sold, the voting power of other Class B shareholders (mostly the Wrigley family) grows a little stronger. If one-third of those new Class B shares are converted and sold, the Wrigley family’s voting stake would jump back up to about 40%.
What’s the point? First, this arrangement mollifies dissident shareholders (like Hassan Elmasry of the Times Co.) who want votes for their equity. Second, it provides a disincentive to sell those B shares, thus helping to support the company’s stock price. Third, it puts power into the hands of the Wrigley Co.’s long-term shareholders.
In effect, Wrigley’s new share structure acts as a barrier against a hostile takeover, by giving outside Class B shareholders a stake in the status quo along with the Wrigley family.
“This is a fairly clever way of reinstating family control for the long haul,” suggests Kenneth Henderson, a partner with the New York law firm Bryan Cave LLP.
I tend to agree. You may wonder: What could go wrong with such a scheme? Well, those new Class B shareholders could flex their new voting muscles by joining hands, say, with a dissident Wrigley family bloc to dump the current management. But there’s no such thing as a foolproof plan. At a time when two-tier stock structures seem an endangered species, Wrigley Co.’s plan may be the most palatable for insiders and outsiders alike.
The Wallenberg secret
They’ve flourished for 150 years by suppressing the profit motive.
Only 30% of family firms make it to the second generation; barely 10% survive to the third. Sweden’s Wallenberg dynasty, by contrast, has flourished for 150 years. Their diverse interests include Ericsson, a leading telecommunications firm; the London-based pharmaceutical company Astra Zeneca; and the global engineering giant ABB. Investor AB, the family’s publicly traded parent company, will soon be handed to a sixth generation of Wallenbergs.
What’s their secret? From a recent special report in The Economist (Oct. 14, 2006), I gleaned a few hints:
• The family employs professional managers, as opposed to relatives.
• The family isn’t afraid of change. When the late Marcus Wallenberg Sr. shifted the family’s capital from trains to planes in the 1940s, he wrote to his brother that this meant “a shift from the past to the future, which has been the family motto in previous generations, and is the only tradition worth keeping.”
• Each generation of Wallenbergs has done something to reinvent the family business—not merely to keep the business healthy, but to recharge their individual batteries. (Although they deny it, Investor’s next reincarnation could be as a private company.)
• Especially intriguing (to me, at least): Most of the family’s wealth is tied up in the Wallenberg foundations, which have combined assets of about $6.2 billion. These foundations hold 22% of Investor’s assets and 46% of its votes. In effect, “No one owns it,” says Investor chairman Jacob Wallenberg, “which means that we cannot consume it, though we can certainly destroy it.”
To be sure, that explains how the Wallenbergs keep their enterprise together, even if it doesn’t quite explain how they keep their entrepreneurial blades sharp. But thanks to their foundation’s primacy, individual Wallenbergs don’t squabble over how to divide the spoils, because there are no spoils to divide. Greedy and self-centered family members presumably take their energies elsewhere.
The Wallenberg formula may not encourage entrepreneurial thinking as we usually think of that term. But it may promote a different kind of entrepreneurship: Instead of generating vast (and probably unhealthy) wealth for individual Wallenbergs, the family foundation and investment company provide a platform that enables the Wallenbergs to perform work that brings meaning to their lives. They generate dividends for their outside shareholders as well as grants for Swedish arts, science and research. What could be more psychologically rewarding? What better glue to hold a family together over the long haul?
(Note: Don’t expect to try such an experiment in the U.S. With an eye to foundations’ stability, Internal Revenue Service rules restrict foundations from owning control of public companies.)
Contrarian follow-up
Catching up on items from my previous columns.
A CEO’s egregious secret compensation. When Richard Grasso’s pay package as chief executive of the New York Stock Exchange—$39 million, plus $139 million in deferred benefits—was publicly disclosed in September 2003, the resulting public outcry forced him to resign, leaving many observers to wonder just what he’d done to deserve his fate. I offered a few suggestions (FB, Winter 2004), including this one:
“At a time when the NYSE was imposing extra fees on its members to cope with rising expenses, he failed to see that one of the best solutions to cutting expenses was right in the mirror.”
Follow-up: Grasso has been ordered to repay tens of millions in retirement pay. And the continuing litigation has shed more light on the relationship between Grasso’s pay and the Big Board’s profits. In 2000 the NYSE netted about $70 million and Grasso received about $25 million. In 2001 the NYSE netted $31.8 million and Grasso was paid $30.6 million. That is, Grasso made almost as much as the institution he was paid to run.
Granted, figures for both those years included a $5 million special payment to Grasso. But in 2002—a “normal” year—Grasso took in about $10 million while the NYSE netted about $25 million. However you spin it, the biggest beneficiary of Grasso’s latter years at the NYSE was Grasso himself.
Let me repeat what I wrote in our Winter 2004 issue about salary negotiation: “If you’re a family business CEO, ask yourself: What would my customers (or stockholders, suppliers, relatives or neighbors) say if they knew my salary? And negotiate accordingly.”