DisneyWar

by James B. Stewart

  Though it had actually been negotiated months earlier, Disney unveiled a new, ten-year contract for Eisner soon after Ovitz was fired. His base salary remained $750,000, but his bonus formula, tied to an increase in earnings per share, was potentially more generous. (Eisner had earned a bonus of $8 million in 1996.) But the key element was a grant of stock options for eight million shares that Eisner could exercise between 2003 and 2006, when the contract expired. Disney had hired corporate compensation expert Graef Crystal to advise the company on both Eisner’s and Ovitz’s contracts, and he valued the Eisner options at the time they were granted at an astonishing $770.9 million. (Placing a value on options is inherently difficult, since no one knows what the stock will be worth when the options are exercised. Disney itself later valued the options at a far more conservative but still enormous $195 million.) Executive Compensation Report cited it as the richest option grant ever given a chief executive. Moreover, the contract made it difficult for the board to dismiss Eisner, since the cost of doing so would be so high. Specifically, the contract provided that if the title of chairman or chief executive were taken from Eisner, he was entitled to terminate the contract for “good reason.” In that event, he would be entitled to “a cash payment equal to the present value of the remainder of the salary and to the bonus payments” and the stock options would vest immediately.

  The combination of the Ovitz payment and Eisner’s new contract triggered a storm of criticism. To the outside world, a contract settlement valued at $140 million to Ovitz for a failed year as president seemed incomprehensible. To Ovitz, it didn’t compensate for having relinquished his talent agency to endure a year of frustration and humiliation that ruined his reputation.

  In a column in The Washington Post, economist Robert Samuelson wrote that Ovitz’s contract “transcended wretched excess” and that Eisner should pay the settlement out of his own pocket. Both The New York Times and The Wall Street Journal chastised Disney and expressed disbelief. “Nobody in the real world, not even in the far-out precincts of Hollywood, gets that kind of money for flubbing up after a year on the job,” Holman Jenkins wrote in the Journal. In The New York Times, A. M. Rosenthal zeroed in on Disney’s acquiescent board: “Why should a board responsible to the shareholders allow its chairman to pay so much to push out [Ovitz]? Everybody knows that a board of directors is responsible for the well-being of the stockholders, not executives.”

  In corporate America, in 1997, it wasn’t at all clear that board members at major corporations typically gave the shareholders much thought, unless the shareholders happened to be Sid Bass, or Warren Buffett, or other billionaires holding such large blocks of shares that they couldn’t be ignored. The long-running bull market, interrupted only briefly by the 1991 recession, had lulled shareholders into complacency and masked a steady erosion of shareholder democracy. Entrenched executives who managed their companies for their benefit rather than for shareholders had helped bring on the takeover wave of the 1980s, when many of them were thrown out by new owners, but the lofty stock prices of the mid- and late 1990s discouraged hostile takeover bids. Corporate governance experts had urged companies to align the interests of management and shareholders by using stock options rather than cash as compensation. The theory, enthusiastically embraced by Eisner and many other CEOs, was that executives would focus their efforts on raising the stock price, which would benefit all shareholders at the same time it lifted their compensation. In practice, few recognized that the interests of someone who owns millions of shares in a company are far different from someone who owns several hundred or thousands.

  Nowhere was this more evident than at Disney. From the beginning, Eisner had embraced stock options as his primary means of compensation, and in some years they had made him the highest-paid executive in the country. Eisner often pointed out that he only became wealthy by making shareholders rich. By the time Ovitz was fired, stock options had made Eisner the company’s second largest individual shareholder, eclipsing even Roy and other members of the Disney family. Only the Basses held a bigger stake. At the same time that his ownership was growing, Eisner had consolidated power by isolating board members, compromising their independence, and stripping them of any real oversight function. The Disney board had become a travesty of independent governance.

  Obviously Eisner controlled the Disney executives who reported to him and who were also members of the board, such as Litvack. Disney maintained that the other twelve directors were “independent,” in the sense that they didn’t work for the company. But that was defining “independent” so narrowly as to be meaningless. The most egregious example was Irwin Russell, Eisner’s personal lawyer, who negotiated Eisner’s lucrative contract and who had a professional duty of loyalty to Eisner simultaneous to his duty to shareholders. Yet Russell was also the chairman of Disney’s compensation committee. (Incredibly, during the Eisner contract negotiations, Russell represented Eisner, and Ray Watson stepped in for Disney.) Everyone on the board seemed to think that Russell was an inherently fair-minded and decent person, and so no one appears to have raised any questions about such a blatant conflict of interest.

  While less egregious, others had obvious conflicts. Director Robert Stern was Eisner’s personal architect and was beholden to Eisner for an immense amount of work from Disney, including designing the new animation building. Reveta Bowers was the principal of the prestigious Center for Early Education in West Hollywood, a school attended by Eisner’s sons and the children of other Disney executives, who also gave the school donations. Eisner had named Leo O’Donovan, a Jesuit priest and president of Georgetown University, to the board after Eisner’s son Breck graduated from Georgetown. He gave Georgetown $1 million and his foundation financed a scholarship. George Mitchell earned a $50,000 consulting fee in addition to his board stipend, and his law firm earned hundreds of thousands in legal fees representing Disney on various matters. Gary Wilson, Ray Watson, and Card Walker (now eighty years old) were all former Disney officers, although, to their credit, Wilson and Watson at least occasionally asked questions, such as Watson’s request for information about Eisner’s successor.

  Even normally passive institutional investors were aroused by the appearance of conflicts on the Disney board. The Council of Institutional Investors urged shareholders to withhold approval of Eisner’s new contract and for the five directors up for reelection at Disney’s annual meeting in February (Bowers, Roy Disney, Lozano, Mitchell, and Wilson). Eisner was dismissive of the critics, even contemptuous. He referred to “the Wisconsin pension whatever,” saying that if the California Public Employees’ Retirement System (CalPERS) and the Wisconsin State Board of Investments didn’t like the way he managed Disney, he’d personally buy back their shares and added, “I don’t have any great desire to have an old-boy crony network of CEOs that just share the same old war stories. Most CEOs don’t understand the entertainment business. They don’t understand our problems. If they have so much time to spend on our company, what are they doing at their company? I don’t see that as an asset. I’d rather have my kindergarten school teacher who taught my kids telling me about our products.”

  Eisner could afford to be defiant: With the support of the Basses and Roy, and with his own large stake, corporate governance advocates seemed a paper threat. In the end, they mustered just 12 percent of the votes to withhold approval of directors up for reelection and only 11 percent voted against Eisner’s contract. Later that year, Eisner exercised Disney stock options, then worth $565 million before taxes, once again earning the title of America’s highest paid executive.

  When Los Angeles philanthropist Caroline Ahmanson announced she was stepping down from the Disney board, Eisner discussed the vacancy with his wife, and then proposed that Ahmanson be replaced by Andrea Van de Kamp, another influential figure in Los Angeles social and charitable circles. It was a typically impulsive Eisner personnel decision. He’d been impressed earlier that year when Van de Kamp had called on him to raise m
oney for the troubled Walt Disney Concert Hall project, which had been funded by a $50 million bequest from Lillian Disney in 1987 to honor Walt’s love of music. Van de Kamp was the new chairperson of the Los Angeles Music Center, which was building the Frank Gehry–designed concert hall, and was head of the West Coast office of Sotheby’s, the prominent art auction house.

  Vivacious, energetic, and attractive, with shrewd instincts for the role of power and money in Los Angeles society, Van de Kamp had come to her concert hall position with an impressive résumé and an array of influential contacts developed over years of charitable endeavors and marriage to a prominent Los Angeles attorney, John Van de Kamp, former Los Angeles district attorney and two-term California attorney general. She knew she had a crisis on her hands when, in her absence, her fellow board members of the Los Angeles Music Center elected her chairperson in 1996. The Dorothy Chandler Pavilion, home to the Los Angeles Philharmonic, had never been designed as a concert hall; the downtown Music Center was in debt, losing money, and losing its aging audience. But progress on the Walt Disney Concert Hall had ground to a halt. All but $31.4 million of Lillian’s gift had been spent, and all that had been built was a parking garage. Architect Frank Gehry, selected by a committee after an international competition, was increasingly pessimistic that his visionary design would ever get built.

  Van de Kamp quickly concluded that either she or the board had to raise the money to match Lillian’s gift, or return the $50 million.

  For Van de Kamp, the deciding moment was a trip to Bilbao, Spain, where Gehry’s new building for the Museo Guggenheim Bilbao was about halfway completed. The beauty of the building and how it was transforming the sleepy capital of the Basque region astonished her.

  From a fund-raising standpoint, the problem was straightforward: The Walt Disney Company had refused to contribute. Eisner had been critical of the project and said that Lillian hadn’t really liked the Gehry design. Nor was Roy Disney involved in a project initiated by the Walt side of the family. When Van de Kamp approached other major corporate donors, their first question was always: How much is Disney giving? They didn’t really draw any distinction between the family of Walt Disney, which had initiated the project, and the Disney company. In the end, it would be Disney Hall, which to most people meant both the family and the company.

  Van de Kamp began exploring approaches to Eisner. She was warned repeatedly that he was inhospitable to fund-raising. She enlisted the chairman and president of CalArts, who were interested in developing a theater in downtown Los Angeles, and where both Roy and Walt’s daughter Diane had served on the board. She contacted Stanley Gold, who invited them to breakfast at his home. “What are you doing here?” Gold began. “I thought that project was dead.” Van de Kamp briefed him on the fund-raising problems posed by Disney’s lack of support. She knew that the issue of Roy and Diane’s relationship remained a tricky one, but she pointed out the hall would bear Roy’s last name, too. “I’m not sure I can help,” Gold said. “Michael is not interested.” Still, he promised to see if he could get them a meeting with him.

  It took eight months, but finally Gold called in September 1997 to say that Eisner would see them. As Van de Kamp and the CalArts administrators sat down in his office, Eisner said, “Are we here to talk about a movie? Because I’m against the Walt Disney Concert Hall.”

  “Should I leave now?” Van de Kamp asked. “Or can I finish my coffee?”

  Eisner laughed, and Van de Kamp seized the opportunity to talk about Gehry’s Bilbao project, tapping into Eisner’s interest in architecture. She seemed to have gotten his attention. She thought he asked good questions, about whether the budget was realistic, how the space would be used, who would cover the operating costs. But then he said, “Why should Disney care about downtown Los Angeles? We’re not even located in Los Angeles.”

  “If this fails,” Van de Kamp said, “it has the Disney name on it, like it or not.”

  Eisner seemed to be wavering. “Well, for any substantial gift, I’ll have to go to the board,” he said. He said he’d bring the subject up at a board retreat in December. “I’ll be biting my nails,” Van de Kamp said.

  On the way out, Eisner complimented her. “You’re a good salesman,” he said. “Maybe you should work here.” Van de Kamp laughed off the comment. “I’m not looking for a job.”

  Afterward, Van de Kamp bumped into Roy in the hallway. Encouraged by Gold, he personally pledged $5 million toward a CalArts theater that would also be housed in the building. Diane Disney Miller was delighted that Roy gave the money, though she would have preferred that the RedCat theater be housed in a separate facility. Diane contributed another $25 million from her mother’s foundation, and she and her late sister Sharon’s children also gave additional gifts. (Sharon died of cancer in 1993.) Then, after the board retreat, and with Eisner’s support, Disney came through with $25 million. Still, it irked Diane that Eisner, who had become so wealthy from Walt’s legacy, gave nothing personally. Van de Kamp arranged a press conference to announce the Disney corporate grant, and suddenly other corporate coffers opened. Within six weeks, she obtained another $45 million in commitments. Suddenly the new concert hall was a viable project.

  The following summer, when Eisner called Van de Kamp, she had a moment of anxiety that he’d changed his mind, and that Disney was canceling the commitment. Instead, she was surprised when he suggested that Van de Kamp join the Disney board. “Jane and I were talking,” he said. “You’d be a wonderful representative for culture in Los Angeles on the board,” he said. “Jane and I think you’d be perfect.” Van de Kamp was flattered by the suggestion. It didn’t occur to her that, as the chairman of an institution that benefited from Disney largesse, she might be seen as anything less than independent. Indeed, she found it jarring when Eisner added, “Of course, don’t come back to me for more money if you’re on the board.”

  Freed from his preoccupation with Ovitz, his own power now fully consolidated, Eisner showed little or no interest in finding another president. Despite the pleas of his wife and the advice of his doctors, he seemed even less interested in sharing power with a “partner.” As he indicated in his letter to Ray Watson, his chosen successor within the company was now Bob Iger, someone he barely knew, who had been with the company just over a year, and whom he had freely criticized, even in the letter to Watson when he suggested that he was naming Iger his heir apparent. Conspicuously absent from Eisner’s succession planning were both Sandy Litvack, who was continuing to function both as chief operating officer and Eisner’s main confidant, and studio head Joe Roth, whose duties had expanded to include both live-action film and the television studios. Litvack had outlasted all of his obvious challengers for the presidency: Katzenberg, Ovitz, Bollenbach. But Eisner resisted naming him president, later testifying that he never considered him a viable candidate. Litvack wasn’t physically imposing and lacked the polish that Wells had had. Eisner couldn’t see him representing Disney to the outside world. Perhaps, as so often happens in corporate suites, serving as Eisner’s hatchet man had earned Litvack Eisner’s contempt as much as his gratitude. Still, Litvack was generously paid; his options alone were valued at nearly $20 million in Disney’s 1997 SEC filing.

  To outsiders, Roth seemed the most obvious candidate. He was handsome, urbane, and articulate. Just about everyone liked him, both inside Disney and in Hollywood’s creative community. In the wake of Ovitz’s departure, Eisner and Roth had several conversations about Roth’s future at the company, and the possibility that he might succeed Ovitz as president. In one of these meetings, Roth nominated himself, volunteering that “I could be president. I could function as a kind of junior partner. We could be a creative team.” But Eisner made clear that he didn’t want a real partnership, least of all a creative one.

  “I want someone to take all the shit,” he said. “I need someone to make the trains run on time,” a job description that relegated a president to little more than a glorified admi
nistrative assistant. Roth readily agreed that he wasn’t the person for that kind of job.

  Of course Roth had no way of knowing that Eisner had begun criticizing him almost immediately after he became head of the studio, or that he’d asked Ovitz to line up a replacement. Eisner was suspicious and resentful of Roth’s popularity, which he attributed to his profligate spending. Indeed, Eisner had diagnosed Roth’s eagerness to be liked as a need to overcome the harassment and ostracism he’d experienced as a child after his father was one of the plaintiffs in a landmark 1962 Supreme Court case that banned organized prayer in the public schools.

  In the same email to Sid Bass in which Eisner lauded his meeting with Iger, Eisner compared Roth to Katzenberg: “Joe’s ego simply cannot deal with having a boss. Not only does he not come to me or anybody else, but he is more into ‘hiding the fact’ than Jeffrey ever was. As a result I am again frustrated. If he was succeeding I would be accepting of this arrangement….

  “Unfortunately, we lost $60M[illion] over the last three movies, we spent $90M more than what was prudent this year starting with ‘Nixon,’ and continuing with all our recent dogs. Not only has Joe not asked my opinion…about the current films (ideas, scripts or rough cuts) but I have not seen any of our summer releases. I am seeing them in the theaters on opening weekends…. ‘Spy Hard’ cost $18M I think with a marketing budget going from$20 to $27M—Wow!—with ‘The Rock’ costing $72M with $40+M on marketing etc. etc. Last year we were OK with Joe because he had no problem limiting marketing spending ($5M–$6M) on Jeffrey’s ‘dogs,’ but there are no ‘dogs’ in Joe’s mind on Joe’s films, and therefore he chases every film…. Anyway, down the road I am going to have to teach Joe the realities of life.”

  Eisner had strategic planning meticulously document Roth’s spending and gave hard scrutiny to the studio’s profit-and-loss statements. He found plenty of fodder for his theory that Roth was buying market share and personal popularity. Still, Eisner kept expanding Roth’s duties, consolidating under him the divisions he’d separated after Katzenberg’s departure, starting with television after Hightower was fired.