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Doubts about Viacom's new chairman

Philippe Dauman, president and chief executive officer Viacom Inc.
Scott Eells | Bloomberg | Getty Images
Philippe Dauman, president and chief executive officer Viacom Inc.

Viacom is facing big questions about whether it made the right decision in selecting CEO Philippe Dauman as successor to ailing 92-year-old Executive Chairman Sumner Redstone.

After the media company's board announced the move, the stock gave up most of its gains that came on expectations of a change at the top. It had been as much as 6 percent higher Thursday morning. The stock drop and the executive move left investors and analysts wondering whether the appointment was really in the best interest of shareholders.

"We're really disappointed and we're not the only shareholders who feel that way," said activist investor Eric Jackson, who issued a 99-page report last month about how to fix Viacom, including replacing Dauman as CEO and overhauling the management.

"We don't think that Dauman has done a great job over the past decade, positioning the company for success. There's been no investment in digital, no hit shows … and he's been egregiously paid all the while," Jackson said.

Jackson agrees with Redstone's daughter, Shari, who came out again Thursday in opposition to Dauman's elevation to executive chairman. She issued a statement saying she will "continue to advocate for what she believes to be in the best interests of Viacom shareholders."

A day earlier, she issued a statement explaining why she did not want to take the role of nonexecutive chairwoman at CBS and Viacom, despite the fact that her father's trust states she should take the jobs.

She said Wednesday that whoever succeeds her father as chair should be "someone who is not a Trustee of my father's trust or otherwise intertwined in Redstone family matters, but rather a leader with an independent voice." That ruled out Dauman, who is a trustee as well as Redstone's health-care proxy.

Viacom declined to comment, but pointed to the board's comments in the press release:

"Philippe has been instrumental with Sumner in every aspect of Viacom's success for nearly 30 years and most recently as CEO has taken on the tough task of navigating our future in a time of unprecedented innovation and disruption," said attorney William Schwartz, speaking on behalf of the board. "We have complete confidence that his dedication to Viacom, his global experience and his determination to further our culture of creativity and innovation will continue to serve the interests of all shareholders and build long-term value."

Under Dauman's contract, if he did not get the chairman role his contract would be considered in breach, entitling him to a payout of about $88 million, a fact that Shari Redstone, as a board member, would be aware of.

Guggenheim analyst Michael Morris said it was inevitable Dauman would get the chairman role because the board has supported him — and given him pay raises — even though the company has been underperforming its media peers. Viacom shares are down 32 percent over the past year, down 43 percent over the past two years, and up only 3 percent in the past five years.

"You have a board of directors that hasn't changed, they've approved him as CEO for the last decade, now it's hard for the same board to say he's not approved," said Morris.

But Morris takes issue with the decision to give Dauman more power: "Expanding the responsibility of that leadership is vastly inconsistent with what the investing public is telling you they want to see from the company."

Morris said the company should be looking for leadership that has vision of how to use technology and a strong reputation within the tech community to enable it to attract top talent. "I could not overstate that Viacom has underperformed its peers with respect to staying in front of their target demographic with new technology. Netflix and Facebook have captured massive amounts of market share from Viacom's core business and the company doesn't have anything that even resembles a competitive solution to those core businesses," he said.

Pivotal analyst Brian Wieser attributes Viacom shares' ability to hold on to some gains to the hope of any change in Viacom's management. "We're making a move towards the day where Redstone's trust will oversee both companies," said Wieser. "The fact that Shari Redstone has declined the chairmanship of these companies indicates she is less likely to have an interest in running an empire on her own. That can be interpreted positively in the sense that if the trust is operating only in financial interests, it would be more likely rather than less that Viacom would be more receptive to takeover offers."

The closer Viacom is to being broken up or sold off, Wieser said, the more potential upside for investors. "This is a significant transition that could lead to a better outcome for shareholders."

And for now, the battle over Viacom's leadership is far from over, as Jackson joins Shari Redstone in opposition to Dauman's appointment, and many raise questions about the independence — or lack thereof — of Viacom's board. "The performance of the company is there for all to see including CEO compensation and yet the board doesn't seem to act. They seem to be cultivated not to act," wrote Jason Hirschhorn, a media entrepreneur and former digital chief of Viacom's MTV Networks.