It took ISS just nine days to reach a decision, making it the first major independent shareholder services firm to weigh in on the Roy and Gold campaign. On February 11, the same day as the Comcast bid, ISS issued a stinging rebuke to Eisner’s leadership. The firm noted the stock price was where it had been in 1998, and questioned Disney’s “uncertain” prospects.
The recent announcement of the Pixar-Disney divorce and the failure of Disney’s retail operations lead one to ponder future growth and strategy at a company whose chairman and CEO has been distracted by boardroom drama….
Sadly, it has often appeared that reconstituting the board was aimed more at quieting healthy boardroom dissent rather than creating it…. Board ties to Disney management are omnipresent. The lines between management and board are blurred. The latest revelation of the SEC investigation and potential settlement over non-disclosure highlights the depths to which non-independence and nepotism were the norm at Disney….
At the end of the day, all roads lead back to Eisner. For 20 years Disney’s revolving door for board members and management has had one constant—Mr. Eisner. The boardroom battles and management departures, which pre-date the Disney/Gold campaign, are disappointing, expensive, distracting, and not in the best interest of shareholders. If there ever were a case of separating the roles of Chairman and CEO, this company is the poster child.
ISS recommended that shareholders vote “withhold” for Eisner, though it spared the other directors at least temporarily, saying shareholders could wait a year to see if reforms take hold, and if not, “Shareholders may be best served by boardroom change.”
Disney issued a statement saying it found ISS’s recommendation on Eisner to be “inexplicable and unjustified,” and hailed his “commitment to governance and transparency.” But even as the media all but ignored the recommendation in light of the Comcast bid, there was no hiding the gloom in Orlando. Because of ISS’s prominence, its independence, its conservative reputation, and its broad array of clients, the decision was a watershed for Roy and Gold, and a potentially devastating setback to Disney.
Although some Disney directors—Judith Estrin, in particular—seized on the language about separating the chairman and CEO to argue that the ISS verdict was more about the structure of corporate governance rather than Eisner personally, that seemed like grasping at straws. However the decision was construed, it was the first indication to Disney that Roy and Gold might have to be taken seriously.
Presentations to ISS and other shareholder advisory concerns are ordinarily closed to the public and the media, but many clients of the advisory firms like ISS participate via conference call, and in one of these sessions—to the Council of Institutional Investors—I am listening in.
After introductory remarks by Gold, Shamrock’s Michael McConnell outlines the three major prongs of the campaign: Disney’s poor financial performance, a loss of creative leadership, and board accountability. “We’re looking for new leadership with the strategic vision to restore shareholder value,” he says. “In other words, get rid of Michael Eisner.
“This company has had poor operating performance. We stand for a strong resumption of performance and growth. Creativity is a major issue. It surrounds the company, from the parks, to filmed entertainment, to animated art, to television product. Creativity is central to this company and needs to be restored. And there are serious issues regarding the board. There is not an effective board. We are looking for greater and increased accountability to shareholders. Executive compensation has always been an issue. There should be a clear linkage of pay and performance. There needs to be succession planning. We have to send a message to this board. That means voting no on Michael Eisner.”
Questions ensue, including whether the Disney board’s changes in corporate governance have had an impact. “They’ve paid lip service to corporate governance,” Gene Krieger, a Shamrock executive, replies, “but if you look at their first real test on Monday, they failed. Michael Eisner rejected in less than five minutes a $50 billion offer. He summarily rejected it without consulting with any board member. This shows they haven’t learned their lesson and that Michael Eisner in particular doesn’t understand. The board found out when the news crossed the tape.”
The Comcast bid has put Roy and Gold in an odd position, agreeing with Eisner and the Disney board that the offer is too low; at the same time agreeing with Comcast’s argument that Disney needs new management. Gold elaborates: “The Comcast offer has been rejected; it ought to have been at that price. That is not the entire story. It validates our campaign. We have described the deterioration in the business, a steady decline over a seven-, eight-year period. This is the same as the Comcast briefing book. It’s obvious to them, it’s obvious to us, and it should be obvious to every shareholder. Comcast is further evidence of why there should be a no vote.”
“How are you doing?” someone asks Gold.
“It’s early,” Gold replies. “We’re getting a fair amount of traction. Lots of people are listening. The biggest validation was ISS. They’re absolutely independent. It’s the first time they’ve ever recommended a withhold vote on a Dow component.” (Disney is one of the thirty stocks in the Dow Jones Industrial Average.)
A pension fund manager asks, “Other than getting rid of Michael Eisner, I don’t see the strategic direction in your materials. I mean, they’re nice words, but how would you take the company in a different direction? How would you execute?”
“Restoring creativity is the core business of this company,” Gold replies. “Two hundred fifty executives, senior creative types have left, from films, television, parks, stuffed animals…. If you can restore creativity, you will get a much greater yield out of these assets. As for the future direction, we’d hire a CEO with strategic vision who understands the industry. We want to get the right person rather than preordain this…. We have in mind five to ten individuals who could run this company. It would be foolish to put these names on the table now. But we’re not trying to be king makers—we want the board to have a real debate about who should run this company. Michael Eisner is arrogant. We don’t want to fall into the same trap.”
Roy steps in at this point. Though he still prefers to let others do the talking, he has overcome some of his aversion to public speaking as the campaign has progressed. His reticence coupled with the Disney name seem to lend a certain gravitas to his words when he does speak, and the room falls silent as he begins. “Thank you,” he says. “I’m glad to talk about the creative part. We are a company whose roots are completely in the creative end of the world. We were a little studio that just made animated films. There was nothing there but creative people. I grew up in this atmosphere. The company needs to trust its creative employees. An obvious and egregious example of what’s gone wrong is the Pixar relationship. Steve Jobs finally said, ‘I can’t deal with this man any more.’ The party line is: The company was amazed. But in fact the relationship has been going sour the last six or seven years…. It should never have gotten to the point where Steve Jobs says, ‘I will not deal with this company as long as Michael Eisner is chief executive.’
“Another area,” Roy continues, “is our parks. If you’ve been there in recent years, you will have noticed the lack of maintenance, the fewer number of characters on the streets. The cast members…have been pared back unmercifully. Their hours have been cut, benefits taken away. That gets reflected in their attitude toward the guests…. That’s just a couple of examples of the way the company is being run. You start fixing this right away.”
“How do you respond to the Wall Street Journal article?” someone asks, referring to an article headlined “Disney Dissidents Didn’t Block Moves They Now Criticize.”
Gold answers. “It’s totally unfair. It is an attempt to demean us. This company has a history, when pressed about its performance, to call people names. Jeffrey Katzenberg was a ‘midget.’ Steve Jobs is a ‘Shiite Muslim.’ Now it’s Stanley Gold and his ‘client.�
�� Yes, we were a party to some of the decisions,” Gold concedes. “We tried to give management the benefit of the doubt. We didn’t want to cause a ruckus in the boardroom. Fox Family is the best example. Roy and I voted on this based on management’s projections. Three months into the deal, we asked, and they said they were behind. We said, ‘Hold on, you failed to execute.’ We tried to make them accountable. We said, ‘Michael Eisner and Bob Iger should not get a bonus.’ When you have this kind of mistake, there should be no bonus. Eisner got $5 million, Bob Iger $4 million. Yes, we voted for things, but we did it on management’s projections, and when they failed, we tried to make them accountable. I’m proud of our approach.”
After a detailed discussion of Disney’s recent improved earnings—dismissed by Shamrock’s Mike McConnell as “not sustainable given non-recurring events like Nemo and Pirates, the amortization of rights to sports events, as well as underinvestment in the theme parks”—Gold sums up:
“I’d like to make a final comment on corporate governance. The company acknowledged that in the near future, Michael Eisner will end up signing an acknowledgment that he violated the securities law and will enter into a cease-and-desist order. This is an enormously serious business when the CEO acknowledges violations of the securities laws. I go back to ISS—all roads lead back to Michael.*
“Who do you trust?” Gold asks. “They have failed to meet projections. They have failed on governance. They did not reform themselves when they got a bid. You can trust us. We will bring in management with a vision and a strategy who can operate these assets in a more efficient way.”
On February 23, the campaign moved to a potentially pivotal battleground, the offices of Glass, Lewis, another influential shareholder advisory service. The importance to Disney was underscored by the delegation that attended: Eisner, Mitchell (by phone), Judith Estrin, Ray Watson (also by phone), and Tom Staggs, the CFO. Roy and Gold had addressed the firm and its clients the prior week, repeating many of the same elements of their earlier presentations.
Greg Taxin, Glass, Lewis’s chief executive, led the questioning.*
After some preliminary discussion, Taxin asked why the board had chosen seventy-two as its mandatory retirement age, “which I note for the record is not a round number. So I guess I’m curious. I know, Senator Mitchell, you’re 70…Roy Disney at the time you adopted the 72 mandatory retirement age was 72. Why 72? Why not 70? Why not 75?”
Mitchell didn’t really have an answer: “Now some argue that 70 is a better age, some 75…72 in light of our own evaluation and in light of the experience of other companies around the country seemed to make the most sense,” he said.
Next, Taxin said he wanted to focus on Fox Family, a deal that Roy and Gold had criticized but also voted for as board members. “Was this their idea?” he asked.
After a long nonanswer from Judith Estrin, Eisner stepped in. “Fox Family is the last piece of beachfront property in the nationally distributed cable-basic universe and the company has been looking strategically at these kinds of things for years. The entire board was 100 percent unanimous in the acquisition of Fox Family. Certainly Mr. Gold was a giant advocate of it…. I wouldn’t say that he was more or less enthusiastic than the management and other members of the board…. One of his closest friends [Haim Saban] was the seller of Fox Family, so we analyzed it. We looked at it. He was helpful in being a conduit between management and the seller and we together made an acquisition….”
Taxin continued, “While we’re on the topic of Fox Family, Mr. Staggs, maybe you can tell us. I’ve heard Mr. Eisner say that maybe he paid too much…. The company has never taken a write-down of the goodwill associated with the Fox Family channel acquisition. Should you have? Might you in the future? Might this lead to a restatement of some past financial report?”
This, of course, was a question that took direct aim at one of Disney’s most vulnerable points, especially given the valuation study that Staggs himself had commissioned.
“Well, I hate to state the obvious,” Staggs answered, “but if the company believes it should take a write down, it would take a write down…as Michael said, at least over time, we’ve got quite a valuable asset there.”
Taxin turned to the Comcast bid. “Ms. Estrin, could you tell us when you, as a board member, first learned of the Comcast approach and then what the board did after learning?”
“I found out about it, I think, very soon after Michael got a call,” she answered, presumably referring to Brian Roberts’s call to Eisner on February 9.
Mitchell jumped in before Estrin could get very far in this potentially dangerous narrative. “Every member of the board was informed and made aware of the fact that a phone call might be made so that the call was not unexpected and all members were aware of, I guess, what I will call the interest. Mr. Eisner responded in accordance with the wishes of the board.”
Eisner elaborated: “There had been some indirect vague conversations that led us to believe that this phone call could happen. Every board member was made aware of those conversations either by Senator Mitchell or myself. Because we were led…had some sense they were going to come, we crafted the response before the telephone call was made. The response was vetted with three outside advisers. We discussed the response extensively and when I happened to be sitting at my desk when Mr. Roberts called and I put the response up on the computer and gave it word for word…and the subject was immediately changed by him, and that was the end of the call.”
It took Glass, Lewis only two days to issue its recommendation, and it was another rebuke to Eisner, as well as to George Mitchell. In unusually harsh language for a shareholder advisory service, its report stated that “The Disney board has been notoriously insular, famously gullible and blindly loyal to Mr. Eisner…. Given the control Mr. Eisner is accustomed to, we are troubled that he still wields tremendous power over the operation of this board…. Our concerns are substantial.” As for Mitchell, the firm concluded, “We do not believe he is independent in the true spirit of independence” and questioned his naming John Bryson as head of the governance committee, when Bryson’s wife was a senior executive of a Disney joint venture. Mitchell “should have known better,” the firm scolded.
The revelation in the Glass, Lewis proceeding that Eisner had consulted with directors prior to the February 9 phone call from Roberts, and had been reading from a script, created a furor, both within the Comcast camp and among institutional shareholders of Disney. Eisner’s reference to “indirect, vague conversations” all but confirmed that Mitchell had been talking to the intermediary, and that this was not a “complete fabrication,” as Disney had publicly maintained. Comcast executives and advisers were now more convinced than ever that Mitchell had panicked and run for cover. Perhaps there had indeed been some misunderstandings, and Comcast had interpreted Mitchell’s comments as more encouraging than he had intended, but they still believed the words had been spoken.
In any event, had such a possible Comcast bid been discussed with all the board members in advance of Roberts’s phone call, as Mitchell maintained? Judith Estrin’s answer in the Glass, Lewis presentation was certainly unpersuasive. As questions multiplied about what Disney’s directors knew and when, Disney had to issue a press release. “The board had a process in place in how to respond regarding any communication regarding an overture and what the proper procedure was for handling it. That procedure was followed.” Yet that statement left open the possibility that the “script” from which Eisner read was intended as a generalized response to vague, preliminary overtures, such as the one from Steve Case at AOL, and not a specific response crafted by the board to respond to a serious bid from Comcast. Fairly or not, the contretemps only reinforced the impression that Eisner had simply rejected the Comcast bid on his own initiative, and that Mitchell and the rest of the board had yet again fallen into line.
While the revelation seemed calculated to blunt Gold’s criticism that Eisner had unilaterally rebuffed Robert
s before consulting the Disney board, it deepened the mystery and begged the question of why the board would have told Eisner to reject a bid even before hearing a price or other terms of a proposed offer. As Roberts told The New York Times, “I purposefully raised the topic of a combination with Mr. Eisner in a way that I thought would lead to a discussion. How can it be in the best interest of Disney shareholders for him to not even talk to us?”
As the critical shareholder vote and Disney annual meeting neared, the campaign reached a fever pitch, with ads, a flurry of op-ed pieces in major newspapers followed by rebuttals, and television appearances—Gold on CNBC’s “Kudlow & Cramer,” Iger on CNBC, and Eisner in his preferred venue, CNN’s “Larry King Live.”
Among those watching the Larry King interview was Diane Disney Miller and her husband, Ron. In response to a caller asking whether Walt Disney had really been frozen, Eisner said that no, Walt had been buried in an unmarked grave in a secret location. “His wishes were that it was unmarked, and not available to anybody to ever find out,” he said. “But I went up there and talked my way into them showing me where he’s buried.”
Why would the grave be unmarked? King asked.
Walt “wanted his privacy forever,” Eisner replied. “It’s a beautiful little spot and nobody could ever find it, and I’m very proud that I talked myself into it.”
Diane didn’t know whether to laugh or cry. How could Eisner say this on national television? He knew perfectly well that Walt was not buried in an unmarked grave. Diane herself had told him that Walt had been cremated, after they had dinner all those years ago. There was a memorial in Forest Lawn cemetery containing Walt’s and Lillian’s ashes, and its location was no secret. There was no unmarked grave, and so of course Eisner couldn’t have either discovered or visited it. Diane was really tired of other people, especially Eisner, trying to lay claim to Walt’s legacy.
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