DisneyWar

by James B. Stewart

  Eisner was convinced that Gold had planted the story. He fired off a stream of emails to Gold accusing him of leaking the story. Gold hotly denied the accusation, but agreed in an email to keep his differences with Eisner “in house.”

  Gold was furious that Eisner had obviously given Ray Watson permission to present Eisner’s side to the press, even as he tried to silence him. “Disney director Ray Watson said the board as a whole supports Eisner,” the story read, quoting Watson: “We have no interest in going out and bringing an unknown into this company and this difficult industry when we believe we already have the best CEO in the business.”

  Gold was particularly upset given Watson’s remarks to the contrary during their lunch, when Watson had criticized Eisner. He quickly fired off a sharply worded letter to Watson:

  Dear Ray:

  I was surprised to see you quoted in the Los Angeles Times on Thursday.…While you are certainly entitled to your opinion, and I respect that, I am mystified as to how you arrived at that conclusion since our lunch just six months ago. At that time, I shared with you my doubts about the Company’s performance and the current leadership’s ability to improve that performance. At that lunch, you said that the Company was in chaos and that Michael and the senior management had no sensible plan to extract us from this chaos.

  I respect your right to change your mind; you did so in 1984 before supporting the Eisner/Wells team. What I would like better to understand is how your position changed so as to permit you to conclude that Michael is the best CEO in the business? Certainly, it can’t be the quantitative performance of the Company during those six months….

  But there is plenty of blame to go around. We, the Directors, are guilty of not discussing the real issues affecting the Company. We have not fully and critically addressed the failed plans of our executives or the broken promises that management has made to the Board and the shareholders over the last five years. We are too polite, too concerned with hurting each other’s feelings, when our real job is (a) to protect the shareholders and (b) to coalesce around a management team and a plan that we believe will get us out of our current malaise….

  I hope you will receive my comments in the spirit in which they are offered…serious concern by a Director who believes that we, the Disney Directors, have long been too compliant and uncritical of management’s failures. We can no longer accept as fact that all of the bad things that happen to Disney are out of management’s control and all of the good things are a result of having “the best CEO in the business.”

  Kindest personal regards,

  Stanley P. Gold

  Gold sent copies to Eisner and each member of the board.

  Andrea Van de Kamp, for one, was startled by the tone of Gold’s letter. She knew he was concerned, but thought the letter was harsh and would likely prove ineffective with other board members. She called Bob Iger to discuss it. “We’re really upset,” he told her. “Michael is frantic.”

  Eisner’s counterattack was swift. The day Gold sent his letter, Disney disclosed that Gold’s daughter, Jennifer, worked in Disney’s consumer products division. Disney also disclosed that Ray Watson’s son, Ray Jr., worked at the Disney channel, and that Reveta Bowers’s son, Craig, had previously worked in Disney’s Internet group. The most startling disclosure was that John Bryson’s wife earned $1.35 million a year as an executive at the Disney co-owned Lifetime channel. Under the guidelines being developed by Ira Millstein, Gold would be forced to step down as co-chairman of the governance and compensation committees.

  These developments were especially unsettling to Reveta Bowers, who had long endured criticism that she was only on the board because Eisner’s sons had attended her school. Informed that she would no longer be considered independent (even though her son was no longer at Disney), and therefore that she could no longer serve on the nominating or compensation committees, she told Eisner she wanted to resign. Instead, he persuaded her to wait until the end of the year, when she wouldn’t stand for reelection.

  A week later, on August 16, 2002, Eisner and Gold met for lunch at the Lakeside Golf Club, the scene of the celebratory lunch on the day Eisner and Wells were named chairman and president. Eisner began by again accusing Gold of leaking to the press, which Gold hotly denied. “Bruce Orwall told me he spoke to you,” Eisner insisted. Orwall covered Disney for The Wall Street Journal.

  “Let’s take a fucking lie detector test,” Gold said. “I have not spoken to Bruce Orwall. So either he’s lying or you’re lying. Which one is it?”

  (Orwall told me he never told Eisner that Gold had spoken to him. “I never said anything of the sort,” Orwall said.)

  Eisner dropped the matter, and turned to the real reason for the lunch. He asked Gold to resign as chairman of the powerful governance and nominating committee. Gold refused. He said the person who should be resigning was Eisner. He reminded Eisner of his repeated promise to step down if he lost Gold’s and Roy’s confidence.

  “I never said that,” Eisner said.

  Gold was incredulous. Eisner had said it many times over the years, to him, to Roy, to their wives, and to others as well. “Let me ask you, Michael,” he said. “Are you going to go out as a gentleman, or are you going to be carried out on your shield?”

  “Let me assure you, I’ll be here long after you’re gone,” Eisner retorted, before angrily walking out.

  Gold followed up with a letter to the board the following Monday, in which he refused to relinquish his position on the committee. He quoted the New York Stock Exchange guidelines to the effect that employment of a relative “does not preclude the board from determining that a director is independent. Such employment arrangements are common and do not present a categorical threat to director independence. I think that when the Board considers this, it will conclude that the Company’s employment of my daughter has not and will not compromise my independence. Furthermore, as demonstrated by the current disagreements between us, questions about my independence from management cannot be of real concern to any director…. I have stated my views directly to you and to other Board members about the Company’s lack of performance, its lack of accountability and its poor allocation of capital resources. While I do not expect that everybody will agree with that point of view, I think that management’s attempt to muzzle me for holding or articulating independent views flies in the face of the new rules on independence. A hallmark of independence is the willingness to speak up.”

  Word of a split within the board coupled with Disney’s “reform” measures, clearly aimed at Gold, triggered press coverage. With Eisner’s permission, Gold invited New York Times reporter Laura Holson to his Beverly Hills home, where he sidestepped questions about his relationship with Eisner, saying only that the Disney family “owes a great debt of gratitude to Michael for what he has done. But my goal is to try to get the Disney Company to perform at a level of efficiency it hasn’t seen for a number of years.” He went to some length to deflect Eisner’s suggestions that he was pressuring him in a desperate effort to boost Disney’s stock price because Shamrock had suffered reversals in the stock market. While he acknowledged losses in investments in L.A. Gear and Grand Union (both had gone bankrupt), he cited other gains, and said Shamrock had $1.7 billion in assets with a “manageable” amount of leverage.

  The day after the article appeared, Sid Bass weighed in, writing Gold a letter, copied to all the directors, expressing his outrage that Gold was pursuing his campaign in the press. After the sale of so much of his Disney stake, Bass no longer had the power he once wielded. Still, he had a long history as an investor in Disney, and he had influence with directors, most of whom wouldn’t have been on the board had Bass objected.

  “You as a board member have the right and the privilege to your opinion about the management,” Bass said to Gold.

  By the same token, it has been my opinion that every board member has a fiduciary duty not to make statements to investors, investment bankers, and the press
which will damage the company…. Your public behavior has become a counterproductive distraction at a time when everybody’s energy should be focused toward thoughtful and candid dialogue and analysis.

  I too am disappointed in the performance of the company in the last few years. Some of that disappointment comes from outside events, a recession and terrorist attacks. Some of that disappointment comes from unwise decisions of management. I measure managements according to what I think I could reasonably expect from myself. Some of the decisions I could have made better, and some poor decisions I spoke against before they were made. I also remember speaking against making Beauty and Lion King into Broadway productions, to name only two very poor opinions of mine that were fortunately ignored by management.

  I am not addressing the merits of either side of a debate, but how a debate is properly waged. While I may argue against your summary opinion of management, I respect your opinion. I do not respect or tolerate your current public behavior while you remain an important member of the board of directors. Here you must play by the rules or step down and play by any rules you choose. Not to make that choice is below the high principles that I have seen in your behavior over all these years.

  Gold promptly responded to Bass with another letter of his own, also copied to board members:

  I have not talked to the press at all, with the exception of Laura Holson at the New York Times. I cleared that discussion with Michael prior to speaking with Ms. Holson. I know that you and Michael find it difficult to believe that I have not spoken with the press, but that is the truth. He has accused me on several occasions of talking to the press, including Bruce Orwall of The Wall Street Journal. He told me that Orwall had told him that I had spoken with him. I denied it, because it is not true….

  With respect to employees, investors and fund managers, let me set the record straight. You cannot go anywhere in this town—or any other city for that matter—without someone approaching you to complain about Disney’s performance and management’s inability to address the problems. I have had fund managers tell me they won’t buy a share of stock in the Company while Michael Eisner is CEO. I have had employees (senior executives) tell me the company would be much better off with a new management team. Morale at the company is at an all-time low. I have not leaked this information—it is common knowledge. I have not made it public and I have not even encouraged it.

  Sid, it is a fact that everyone in the financial community is well aware of the depths to which the Company has fallen. Financial performance has been stagnant for at least five years, capital has been squandered on numerous investments and projects, and lastly, perhaps more importantly, the creative side of the Walt Disney Company has been lost or abandoned. Rather than taking responsibility for the factual realities, the answer of management is to attack anyone in sight, including me. I am afraid that when you, of all people, join in this chorus you are merely acting as Torquemada’s adjutant.

  The problem at the Walt Disney Company is not Stanley Gold, it is not leaks (real or imagined) or unprofessional conduct, but instead it is poor performance, lack of credibility and accountability and poor capital allocation. When anyone, much less a Director simply trying to professionally discharge his fiduciary duties, raises these issues, the Company’s defense is character assassination. Today they are focused on me; in the past they have used this tactic on others; and there will be new victims in the future. Is it no wonder that many directors are afraid to speak up lest they find themselves the focus of Michael’s wrath?

  Sid, I value our long friendship and would be pleased to discuss this with you at greater length at your convenience.

  In the midst of these mounting tensions, Eisner sought to reassure the board. By email to all board members dated August 22, he wrote,

  “Dear All,

  “I just got back from my second movie today from our upcoming slate. I am really pumped as my kids would say. It makes the press flack and answering questions about executive longevity seem not so important because it is the exhilaration of the product that puts things in perspective….”

  Eisner lauded the upcoming The Santa Clause 2 starring Tim Allen in a reprise of his successful 1994 role, and director Spike Lee’s 25th Hour, which Eisner stressed was made for a modest $14 million. But his most revealing comments were reserved for Pixar:

  “Yesterday we saw for the second time the new Pixar movie ‘Finding Nemo’ that comes out next May. This will be a reality check for those guys. It’s okay, but nowhere near as good as their previous films. Of course they think it is great. Trust me, it’s not, but it will open.”*

  With Eisner increasingly irritated by Steve Jobs’s refusal to extend the agreement with Disney on terms Eisner considered even remotely reasonable, and jealous and resentful of Pixar’s admiring press, it was almost as though Eisner wanted Nemo to fail, however irrational, considering that Disney would reap 50 percent of the profits on top of its marketing and distribution costs. Eisner also went out of his way to stress the success of ABC Family:

  “As for ABC Family, we have a meeting next week during which the head of the network, Angela Shapiro, will present her revamped vision. Specifically, Angela will take us through the programming mix (original as well as re-purposed material from ABC), the schedule, and the marketing that will help define the network. Angela is doing a great job as ABC Family starts to really perform.”

  A showdown loomed at the Disney board meeting set for September 24, where directors would be asked to vote on various reforms, on the independence of directors, on committee membership, and on a new “action” plan that was being submitted for approval by Eisner. Gold knew he lacked a majority on the board that would support him, and without it, directors were unwilling to risk alienating Eisner. Even Tom Murphy, who had decided to support Eisner despite praising Gold for speaking his mind, said it was pointless to vote with him as long as he remained in the minority. Though he continued to meet privately with other directors, Gold’s campaign had stalled after his meeting with Watson, now that Eisner knew what he was doing.

  Still, Gold pressed ahead, sending a detailed, eight-page letter to directors in early September analyzing Disney’s disappointing results, the failure to meet goals of previous five-year plans, and stressing the need for greater diligence by directors in light of Enron and other scandals. “Management shares tidbits, rumors and feel-good messages regarding new movie releases and television pilots rather than factual comparisons to summary targets,” Gold wrote. “This Board needs to carefully consider past performance, measure management against its promises and projections, and get independent assessments and data about strategic issues. We can no longer make decisions predicated solely on management’s ‘trust me’ attitude and ad hoc conclusions.”

  Gold asked for the appointment of a special committee of the Board (with himself as a member) to commission a “diagnostic review” of Disney by outside consultants. Though cloaked in different terminology, it was essentially the same thing as the “management review” that had preceded Ron Miller’s ouster in 1984, and the implications for Eisner of adopting such a proposal were obvious. Gold asked that the proposal be placed on the agenda and asked for time to make a presentation to the board.

  As Gold’s letter-writing campaign continued, Eisner met with each of the board members individually, shoring up his support. When he met Van de Kamp for lunch, he warned her that there was no middle ground. “If you vote for that side,” he said, referring to Gold and Roy, “you’re off the board.”

  “Don’t be like that,” Van de Kamp said. “You’re just upset. Stanley is not your enemy. He’s worried about performance. Present a plan. Give the board a strategy. Tell us what you’re going to do to bring us out of this mess. Don’t divide us.”

  On September 23, Gold took an 8:00 A.M. flight from Paris, where he was racing in an amateur Formula 1 Grand Prix race (he took first place), to be at the Disney boardroom by 5:00 P.M. the same day, when the critical meeting w
as scheduled to begin. Roy had also made it a point to attend. On the agenda that evening was a motion to remove Gold as chairman of the powerful governance and nominating committee and replace him with George Mitchell. But despite Eisner’s warning to Van de Kamp that support for Roy and Gold could cost her her board seat, she resisted. A compromise was reached in which Gold stayed, at least for the time being, as co-chairman with George Mitchell. But Gold’s influence was effectively diluted by the addition to the five-member committee of Judith Estrin and Monica Lozano, two of Eisner’s staunchest backers on the board. Along with John Bryson, another Eisner loyalist, and Mitchell, they constituted a four-person majority loyal to Eisner.

  Gold’s presentation was first on the agenda when the meeting resumed at 9:00 the next morning. He and his colleagues at Shamrock had prepared carefully, hoping to get directors to confront the reality of Disney’s recent financial performance. But Gold wanted to get the facts on the record. As long as Eisner and his executives controlled the flow of information, the board couldn’t be expected to hold them accountable. And Gold thought the facts were glaring, which would be obvious even to the less financially sophisticated directors.

  Gold emphasized that by every standard economic measure of performance since 1995—return on invested capital, return on equity, return on assets, and the price/book value ratio—Disney was at a seven-year low. “In all respects,” he maintained, “the financial results of the company have been declining for a sustained period of time and currently sit at the lowest levels in years.” He noted that with the acquisitions of Cap Cities/ABC and Fox Family as well as other investments, Disney had deployed an additional $24 billion in capital. Yet operating income was now lower than it had been before the acquisitions. Since 1995, the compounded annual return of Disney stock was 1.9 percent, lower than Treasury bonds and significantly behind major stock indices as well as media and entertainment sector indices. “The conclusion is inescapable. Our company has steadily and increasingly underperformed for a sustained period of time (not just the last 12–24 months as management would suggest) and the market is correctly punishing our stock price.” He called for “decisive action now” to reverse these trends.