The Walt Disney Company - Has Disney lost the Magic?

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Authors: Sanjib Dutta,
Senior Faculty Member,
ICMR (IBS Center for Management Research).

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The Governance Eyewash?

By the early 2000s, the Disney board came to be generally acknowledged as one of the worst boards in the US. In 1999 and 2000, Disney featured in Business Week's annual survey as one of the worst boards in corporate America. Analysts believed that the board was not powerful enough to oppose Eisner on any matter and that it allowed him to bulldoze all the decisions. To improve its credibility, the Disney board spent 2002 trying to develop new norms to improve the governance of the company. The board even hired Ira Millstein (Millstein), a leading corporate governance attorney as a consultant in implementing the new norms.

Several of Millstein's recommendations were accepted, and Disney grandly announced its new governance norms in late 2002. By early 2003, Disney had stopped using its auditor PricewaterhouseCoopers, for non-auditing consulting work. Disney adopted a policy that two-thirds of the directors be independent, and that all of them hold at least $100,000 in company stock. The size of the board was reduced and the company began making moves towards cutting all business relationships between board members and the company.

However, the resignations of Roy and Gold in protest against bad governance raised doubts in the minds of observers about whether the moves towards good governance at the company were just eyewash. (Refer Exhibit-II for attributes of a good board)

The Trouble at Disney

Governance norms or no governance norms, the fact remained that Eisner had always exercised too much control over the board. In fact, the new governance norms gave him ammunition to vanquish what little opposition remained on the board. He used criteria like advanced age and non-independence to get rid of people who did not support him. "Michael has used the shield of corporate governance to get rid of people who were not in his pocket," said Andrea Van de Kamp, an ex-director of Disney.⁸

The trouble at Disney was not a recent phenomenon. From the time Wells died in the mid-1990s, Eisner's autocracy had been on the rise. Soon after the death of Wells, when Disney was looking for a replacement President, Eisner suggested Ovitz for the post. It was said that at least three members on the Disney board were against the appointment. Eisner however, chose to ignore their objections. He got his personal lawyer (who was also a board member), to negotiate the contract with Ovitz and got the board to approve of a very generous compensation package. It was said that the negotiator did not try to obtain better terms for the company in the contract but simply agreed to Ovitz's demands.

By 1996, it was clear to everyone, including Ovitz, that it was a bad appointment. Ovitz requested Eisner to relive him. Eisner wanted his friend to leave the company on good terms and got the board to approve of a large severance package of $38 million in cash and stock options valued at $101 million. This represented 10 percent of Disney's revenues in 1996 and was estimated to be far more than what Ovitz would have made, had he continued to work at Disney for the five-year period of his contract. For their pains, Eisner and the Disney board soon became the target of a law suit filed by Disney shareholders, against the unduly high severance package.

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8] Marc Gunther "Disney's loss is Eisner's gain", Fortune, December 22, 2003