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 Trouble at Disney Contd...

Most of the board appointments from time to time were also made from amongst Eisner's personal friends. His personal lawyer, his architect and the headmistress of an elementary school attended by one of his children, had all sat on the Disney board at one time or another. He also experienced no compunctions about appointing people who had business links with the company, and hence did not qualify as independent. Because of the power he exercised over appointments, Eisner was in a position to make most of the board members dance to his tune.

Eisner's compensation package was another pet peeve of analysts. When Eisner first joined Disney in 1984, he received a base salary of $75,000 per year and the some stock options. The deal was thought to be quite fair. However, when he renegotiated his contract in 1996, things were very different. He was granted 24 million options at the then-current price of $21.10, so that, if Disney's stock climbed $1 a year, or less than 5%, for seven years until they vested, Eisner would be richer by $105 million. Of the 24 million options granted, 19 million were not indexed either.⁹

During the mid-1990s, when Disney shares were trading at around $40 Eisner had cashed in more than $750 million worth of options, which was one of the highest payments ever made in American corporate history.

The compensation would not have seemed so bad if the company's performance had lived up to it. But after the outstanding profits of 1997, the performance had been sliding down. Earnings per share fell from 92 cents in 1997 to about 55 cents in 2003. Operating income also fell from $4.3 billion in 1997 to $2.7 billion in 2003. Although Eisner did not receive any bonus in 2002 (because of the loss in 2001), he still held a large number of options which he could encash. Besides, the compensation committee of the board was made up largely of Eisner's friends, who fell in with his interests.

In violation of another principle of good governance, Eisner showed a distinct lack of interest in identifying a successor. His attitude towards succession planning was so lackadaisical that, when he underwent a particularly risky bypass surgery in 1994, he called his family members to his hospital bed to the names of possible successors if something happened to him. Once he recovered, things were back to normal, with him holding all power and courting no threat to his supremacy at the company.

It was said that Eisner had the name of a possible successor in a closed envelope in his desk. This was to be opened in case something happened to prevent him from continuing with his duty. But analysts felt that this was not a good method and did not constitute succession planning. "This is not an Oscar Award winner. This is the next leader of the company. It's not supposed to be a surprise to the board" said Nell Minnow a corporate governance expert based in the US. This was in sharp contrast to GE, where long standing CEO Jack Welch identified three possible successors much before he was due to retire and encouraged the board to interact with them so that it could choose the best one.

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9] Indexed options are those which are linked to performance. They reward only those executives who outperform their peers. For instance, if a company's stock goes up by 10%, when the rest of the stocks in the industry go up by 12%, the options are not paid. They are usually linked to an industry index.