The Walt Disney Co.'s performance has hit rough seas - from a lagging stock price to low attendance and upkeep at its theme parks to fewer viewers of its TV networks. At the company's annual meeting this week, questions about CEO Michael Eisner's future - and his successor - are sure to come up.
By MARK ALBRIGHT
Published March 1, 2004
[Times art: Rossie Newson]
Walt Disney Co. shareholder Luke Piacente needed only a letter from Walt's nephew, Roy Disney, to cast his votes against Michael Eisner as head mouse.
"I've been in the theme parks since they opened, and I can tell you there's no more pixie dust, especially among the workers," said the one-time heavy equipment operator who retired in St. Cloud to live near Walt Disney World. "Eisner has got to go."
Widely held Disney has more than 600,000 shareholders. But it's not the Luke Piacentes of the world who are at the epicenter of a brutal proxy battle being waged by Roy Disney to end Eisner's tenure.
Big institutional investors - mutual funds and pension funds such as the Florida state employee pension fund, which owns 7.3-million shares of Disney stock - control the voting power. And they have gotten an earful in an escalating barrage of letters, e-mails and conference calls leading up to what promises to be the noisiest Disney shareholder meeting in years Wednesday in Philadelphia.
"So much new information has been coming in from both sides that we don't expect to decide how we will vote until just before the meeting," said Michael McCauley, director of investor services for the state employee pension fund.
Last week, Eisner lost support from public employee pension funds in nine states with more than $600-billion in assets for his re-election as chairman. Pension plans in New York, New Jersey, Connecticut, Massachusetts, North Carolina, Ohio and Virginia, as well as two in California, said they have lost faith in Eisner's leadership. These funds hold 43-million Disney shares, about 2 percent of the company's stock.
The setting Wednesday will be the Pennsylvania Convention Center. It's a coincidence and a cruel irony that the headquarters of Comcast Corp. is only five blocks away. The cable giant won't attend, but its shadow will loom large over the showdown after its recent unsolicited $66-billion bid in stock and assumed debt to acquire Disney was rejected. Comcast interest offers Disney's institutional shareholders a new option to increase the value of their investments. It's also crystalized the notion that after 20 years at the helm, Eisner will need all his survival skills to keep his job. And subsequent boardroom intrigue about how the Comcast bid was tossed aside by Disney have offered fresh ammunition to critics who claim Eisner bullies the board he serves.
It's not an up or down vote. Eisner is running unopposed for a board seat. Proxy battles usually end up backing the management. Opponents such as Roy Disney and former board member Stanley Gold hope to muster 15 to 20 percent of the vote against Eisner.
"If they get anything more than 20 percent, that would be too huge for any board to ignore," said Charles Elson, a University of Delaware corporate governance expert. "That would probably expedite discussions about succession that have been put off until Eisner's employment contract expires in 2006."
Rarely a dull meeting
Disney annual meetings are rarely dull. The company and its products are such icons of the national psyche that just about any subject on the national agenda is considered fair game.
In recent years, shareholders debated health insurance for same-sex couples, working conditions in Chinese factories where Disney toys and T-shirts are made, corporate greed and Miramax films that portray the Catholic Church in a bad light.
Disney tries to make the meetings entertaining. A Dixieland band from Main Street USA plays at the door while Mickey Mouse cuddles with kids and poses for photos. Autograph hounds seek out one-time board member Sidney Poitier and celebrity investors such as Warren Buffett and Sid Bass.
Even the 6-foot-3 Eisner shows up wearing a standard Disney cast member badge that identifies him only as "Michael."
This year Disney also shipped in 75 700-pound, 6-foot-tall Mickey Mouse statues from Disney World's Magic Kingdom in honor of the mouse's 75th birthday. They were designed by artists and celebrities ranging from Annette Funicello to Tony Hawk and Tom Hanks.
The annual meetings draw thousands when they are at theme parks, but proved just as popular in places such as Denver and Chicago.
The Philadelphia fete, however, harkens back to the company's nastiest corporate governance fight of 1997 in Anaheim, Calif. That's when Eisner won a compensation package that would have made him a billionaire had Disney's stock price not been a laggard the past few years. Many of Eisner's lucrative stock grants remain priced too high to be cashed in. Yet Forbes estimates that Eisner's net worth had grown to about $600-million in 2003, up from $252-million in 1997. Eisner's pay in 2003 was $1-million plus a $6.5-million performance bonus.
About 10,000 jammed a hockey arena in 1997 for the five-hour debate over Eisner's pay and a $140-million severance package he negotiated to get former Disney president Michael Ovitz to quit after 14 months on the job.
Eisner's patient handling of the crowd that day exemplified how Disney manages the show to its advantage. All opponents could sound off. But shareholders first sat through three hours of high energy, promanagement multimedia presentations. The meeting rolled through lunch as shareholders, who were offered free admission to Disneyland, began checking their watches by mid afternoon. Disneyland closed at 6 p.m. By the time Eisner's harshest critics got to the microphone, only a sparse crowd was left to hear them.
Eisner himself joked recently at how long the Philadelphia meeting might last.
"Morning into the early afternoon," he said. "And then through the evening to breakfast the next day."
Dismal performance
Shareholders can be amazingly tolerant when stocks soar. But under Eisner, Disney's stock has lagged well behind its peer group for the past eight years. Before a recent run-up, $10,000 invested in Disney stock in 1996 would have been worth $11,497 at the end of 2003.
The company's performance has been dismal. Three years after the terrorist attacks of 2001, Disney's theme parks are still recovering and discounting prices to stay full. The $5.2-billion purchase of Fox Family Channel in 2001, now ABC Family, has been a dud. During the recession when advertisers tightened belts, its ABC network stumbled to last place among in ratings among the big four broadcast networks. While Disney films generated a record $3-billion at the box office last year, the star performer, Finding Nemo, was co-produced by Pixar Inc., which is pulling out of the partnership. Critics say the fabled Disney theme parks are suffering from deferred maintenance and off-the-shelf rides.
The knocks against Eisner's survival tactics are plentiful. He is accused of arrogantly chasing off talented young executives who may have challenged his tenure. He has undermined the company's creativity by dismembering much of its vaunted feature film animation unit. They say he has manipulated a board that constantly has been shuffled to be beholden to him.
There's more. In Roy Disney's resignation from the board last year, he blamed Eisner for creating among employees, shareholders and customers a "perception that the company is rapacious, soulless, always looking for a quick buck rather than (creating) long term value, which is leading to a loss of public trust."
Eisner turns 62 the week after the shareholders meeting but has resisted identifying a successor. He downplays the critics. He publicly calls the dispute "a series of disagreements" that will "go away."
The six domestic theme parks, each of which draws twice as many visitors as the most popular competitors, are poised to perform better as the economy improves, he says. ABC is building a new audience with 10 new sitcoms. Pixar wanted to go it alone but the partnership with Disney still has two feature films in the pipeline. ABC Family ratings are rising.
At the same time, the Disney board's PR machine stepped up the attack on Roy Disney and Stanley Gold, another board member forced out, questioning their motives and noting that the two are criticizing company decisions they supported as board members.
"Do not be distracted by the self-interests of Stanley and Roy," said one letter to shareholders. "You should be wanting your board and management devoting all their energy and resources to forwarding the company's momentum."
Replied Roy Disney: "I find that rather insulting."
Walt's nephew
Roy E. Disney, 72, is perhaps known best as the Disney family member who looks like his Uncle Walt.
Deeply tanned like the ocean yacht racer he is, Roy Disney claims to have been a model for the cartoon character Goofy. Roy's father, Roy O., was Walt's brother and partner who kept the studio's books, mortgaged their homes to finance Snow White and oversaw the building of Walt Disney World after Walt's death.
A billionaire in his own right, Roy E. Disney played a major role in more recent company history. He supervised the True Life Adventure films, headed the revival of the animation department and was instrumental in picking Eisner as chairman and CEO after hostile corporate raiders were repelled in 1984.
Now he and business partner Gold are leading the charge to force Eisner out.
Their proxy battle, however, draws its strength from institutional investors who have railed against Disney's incestuous corporate structure for years.
They want independent board members who will ride herd over the excesses of autocratic Hollywood moguls. Disney's board has been loaded with directors beholden to Eisner. That's supposedly why Eisner forced off Roy Disney, Gold and Andrea Van de Kamp, a Sotheby's auction house director who charged that Eisner offered to set her up in a prestigious Los Angeles charity if she would step aside.
At one point, the Disney board included a school teacher who taught one of Eisner's children and prominent architect Robert A.M. Stern, who received several jobs from Disney.
In response to the criticism, Disney's board has adopted new corporate governance guidelines, shrunk the 17-member board to a more focused 13 and set a goal of having a majority of its members independent.
"For 20 years, Disney's revolving door for board members and management has had one constant - Mr. Eisner," wrote Institutional Shareholders Services, an influential research company that makes proxy voting recommendations. "The board room battles and management departures, which predate the Disney/Gold campaign, are disappointing, expensive, distracting and not in the best interest of shareholders. If there were ever a case for separating the roles of chairman and CEO, this company is the poster child."
The board now includes as an independent director the CEO of a California public utility whose wife is a top executive at Lifetime, a cable network half-owned by Disney. Two others, critics say, were picked because their contacts in China helped smooth the deal for Hong Kong Disneyland that opens in 2006. Former U.S. Sen. George Mitchell was a paid Disney consultant before he became a board member, and his Washington law firm billed Disney about $440,000 in 2003.
The Disney board reacted to calls for reform by naming Mitchell its "presiding officer." But the board put off a decision on Eisner's role as chairman of the board until his employment contract expires in September 2006.
While Roy Disney and Gold campaign for shareholders to vote against Eisner and three other board members, ISS is recommending that its clients make their point only by voting against Eisner.
"They won't get enough votes to get Eisner ousted," said David Joyce, an analyst with Guzman & Co. "But it will be a wake-up call that shakes up the organization and gets the board to address succession."
That plus the Comcast bid have expedited the board's moves to consider defenses and nail down a succession plan for who takes Eisner's place. Among the rumored possibilities: Peter Chernin, Rupert Murdoch's chief operating officer at News Corp.; Terry Samel, a one-time Warner Bros. studio head who is now chief executive at Yahoo Inc.; or the long-shot Barry Diller, an old Eisner pal who insists he has no interest beyond running his e-commerce conglomerate InterActiveCorp. Eisner has suggested board member Robert Iger, the one-time ABC executive and Disney's current chief operating officer.
Many observers think a strong anti-Eisner vote will prod the board to act faster on a succession plan, but others suggest both sides will try to spin whatever the results are to their advantage.
"All this is happening at the same time Disney is very likely to be subject to persistent outside suitors," said Albert Turner, a debt analyst with Fitch Inc. "Disney will find Comcast a patient and powerful suitor."
Indeed, questions have been raised about who, when and how Disney rejected the Comcast offer. Initially, Comcast chief executive Brian Roberts said Eisner "blew him off" in a short phone call two days before the board formally rejected the offer. Subsequently, some Disney board members said Eisner had consulted them about the likelihood of an offer and they had approved Eisner's response before the call.
Disney was hit the next day with a shareholder class action claiming investors were cheated out of fair consideration for a Comcast overture that was rejected before it was made, then not made public for two days.
Comcast is none too pleased either: "How can it be in the best interest of Disney shareholders for (Eisner) to not even talk to us?" Roberts told the New York Times.
The cable giant, however, may not be panacea for all the dissident shareholder groups. Comcast, which is tightly controlled by the Roberts family, has an even worse rating for corporate governance from Institutional Shareholders Service than Disney.
In an appearance on Larry King Live a week ago, Eisner was confident he would survive Roy Disney's attack.
"I think I have the complete support" of the board, he said.
When asked whether he thought he personally would prevail in the face of the unsolicited bid from Comcast, Eisner replied: "I am confident in the end of this: I will still have three great children, a great wife, and the Disney company will prevail. Whether I will be running the Disney company or not is up to our board, up to my health and up to my continuing enthusiasm, all of which, as of this moment, are there."
