CBS and the Need to Hold Directors Accountable

Date : 09/16/2018 @ 11:29AM
Source : Dow Jones News
Stock : Cbs Corp. (CBS.WD)
Quote : 60.75  0.0 (0.00%) @ 2:06AM

CBS and the Need to Hold Directors Accountable

Cbs Corp. (NYSE:CBS.WD)
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By Ronald Barusch 

Here is a view you won't hear from many practicing corporate lawyers, as they are always on the prowl for their next client: Our corporate-governance system is in serious need of reform. Directors need to be held more accountable when they fail to set the proper tone at the top, and right now there is almost no consequence for most governance failures. There may be no better argument for re-examining the system than the problems at CBS Corp.

Set aside for the moment the unacceptable harassment that three of CBS's most prominent personalities -- all now former employees -- have been accused of. Television host Charlie Rose, former CEO Les Moonves and "60 Minutes" Executive Producer Jeff Fager have denied these allegations, and the board's investigations continue. Beyond that, the reports Wednesday about how Mr. Moonves and Mr. Fager tried to deal with the allegations are devastating reflections of what seems to me to be a culture problem at CBS.

The New York Times reported Wednesday that Mr. Moonves tried to find one of his accusers a job at CBS when she threatened to go public with the allegations, and Mr. Moonves did this without reporting the situation to the board. His departure from the company was announced Sunday.

Also Wednesday, Mr. Fager's employment with CBS was terminated. CBS said it wasn't directly related to the sexual-harassment allegations against him. Mr. Fager had sent a text message to a CBS News reporter who was reporting on those allegations, which apparently threatened her by saying that "there are people who lost their jobs trying to harm me..."

Even more bizarrely, before the language had been reported, Mr. Fager characterized the text message merely as "harsh language" and pointed out that "journalists receive harsh demands for fairness all the time." This may be true, but such "demands" wouldn't generally come from a subject of the reporting who has the potential power to influence a reporter's firing. And the fact that this happened in the leadership of a news organization -- at the most senior levels of "60 Minutes," no less -- is gravely concerning. CBS and a representative for Mr. Moonves declined to comment. Attempts to reach Mr. Fager were unsuccessful.

The right response for any employee who learns of allegations against him -- no matter how untrue they may be -- is to report them to a supervisor (or if you are the CEO or a director, to the board). So how did the culture develop that seems to have empowered these two executives to allegedly use self-help and take action that could even just be perceived as keeping information from the board? Especially when they (and the world) knew the board had already commissioned investigations of the harassment allegations against them? The board must bear some responsibility for that culture. A major restructuring of the board was announced Sunday along with Mr. Moonves's departure, but will there be other consequences?

From a legal perspective, it is extremely unlikely current or former directors will have any liability. The leading case in Delaware -- where CBS is incorporated -- says that "only a sustained or systematic failure of the board to exercise oversight" will create liability. That is a pretty weak standard to measure the conduct of directors of our most prominent corporations.

But from a corporate lawyer's perspective it makes sense, at least under our current system. The only way to hold directors accountable for their failure to fulfill their duties (other than voting them out of office) is through class action-type lawsuits where, if the directors lose, they would be responsible for enormous levels of damages. So, the logic goes, if we want quality people to serve as directors, we need to severely limit such a draconian remedy to situations in which directors are only nailed if they affirmatively do something beyond the pale.

But that is a false dichotomy created over the years by legislators, judges and practicing corporate lawyers. It arises from a legal structure where the only enforcement of fiduciary duties is through class action-type litigation, which can result in jury trials and where the damages are measured against the harm to multibillion-dollar companies.

A better approach, which one finds in other countries, is that statutes and regulations set out a more aspirational standard for conduct expected for directors (which I would hope would be something more demanding than avoiding a "sustained or systematic failure") and an administrative remedy when directors are found to have breached that standard that is based on the nature of the failure. Such remedies could include censure, reasonable levels of fines or barring directors who failed the test from holding a fiduciary relationship -- all only after accused directors have an opportunity to contest the allegations.

We don't know all the facts. And there was an extended internecine war over control at CBS which may have had an impact. But from my perspective as an outsider with imperfect information, between Wednesday's revelations and the multitude of harassment allegations, it looks like something went wrong with the leadership by the CBS directors who were, after all, responsible for governance.

And there should be consequences for this type of failure: Not cataclysmic liability for anyone who operated in good faith, but if in the future a board of a public company fails to live up to an appropriate standard of leadership and governance, there should be some rational remedy.


(END) Dow Jones Newswires

September 16, 2018 11:14 ET (15:14 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.

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