View Full Version : Board Review

03-19-2003, 11:40 AM
From USA Today: NEW YORK — If you'd told investors before 2002 that Disney wanted to bill itself as a paragon of corporate governance, they'd have said that you'd eaten too much cotton candy in Fantasyland.

The Magic Kingdom hasn't been a model of corporate democracy in the 19 years CEO Michael Eisner has sat on the throne. It twice topped BusinessWeek's list of companies with the worst boards of directors.

That's why a lot of shareholders are looking with great interest and, for some, great skepticism at "perhaps the most sweeping changes that any company has made" to become more accountable, Disney President Bob Iger says.

When shareholders meet Wednesday, they'll elect a board of 13 members, pared from an unwieldy 17. The board also gave outside directors more power and forced Eisner to solidify a succession plan.

But don't cue Tinker Bell just yet.

Critics say Eisner has cleverly used the new rules to eliminate one of his three toughest adversaries on the board and to neutralize another. That has solidified his power even as shareholders have seen Disney's stock price fall 30% in the past 12 months and key operations sputter, including network ABC, theme parks and the animation unit.

The dumped board dissident, Sotheby's West Coast chief Andrea Van de Kamp, said in an explosive memo to other directors in January that her ouster "gives the appearance that rubber-stamping Michael's decisions is an unwritten prerequisite for continued board membership."

Some critics agree though it's hard to find many willing to risk publicly antagonizing Big Media's most image-conscious CEO.

"There are good people on that board, but they tend to go along with Michael," says lawyer Bert Field who has opposed Disney in several high-profile cases. "I don't know that anything has changed with the new rules."

One thing adversaries and advocates agree on is that Disney needs a strong board more than ever. Besides operational problems:

* Disney could lose its lucrative alliance with computer animation power Pixar, which made blockbusters Toy Story and Monsters, Inc. Pixar will soon be free to forge a distribution deal with another studio. Even if it stays with Disney, the renewal terms are bound to take a big swing in Pixar's favor.

* It's involved in a contract dispute over its Miramax unit, the independent studio bought by Disney in 1993 but still run by founders Harvey and Bob Weinstein. The brothers have offered to buy back the studio, which led the industry with 40 Oscar nominations this year, to settle disagreements over control and budgets. (Field is representing the Weinsteins, but declined to comment.)

* The owners of rights for the Winnie the Pooh franchise are suing Disney and threatening to yank the lucrative licensing. They say the company shortchanged their royalty payments, a charge Disney disputes.

Investor rights activists say Eisner been lobbying hard to win their blessing. But he has a lot of history to overcome to convince them that he's a born-again believer in corporate accountability.

For years, he turned a deaf ear when they blasted his choices for the board. The governing body included a lot of people with little experience in high finance and who seemed beholden to Eisner, including his lawyer, his architect and the principal of an elementary school his sons had attended.

"He's an old-school CEO: 'It's my company and board,' " says Directors & Boards editor James Kristie.

That left an impression that the cozy arrangement and not Eisner's performance accounted for both his extraordinary longevity and pay, estimated at more than $1 billion over his tenure.

Investor unease boiled into outrage after 1996. He enabled his former best friend, Michael Ovitz, to collect $140 million when the one-time Hollywood "superagent" left Disney after serving just 15 months as its president.

The board's willingness to follow Eisner's lead in giving Ovitz the largest payout his contract allowed "pushes the envelope of judicial respect for the business judgment of directors in making compensation decisions," the Delaware Supreme Court said in 2000 when it reviewed a procedural question in a shareholder lawsuit about Ovitz's pay. Disney executives are just now being deposed in that case.

Still, Eisner fought reformers.

In 2001, Disney asked the Securities and Exchange Commission for permission to scrap a shareholder resolution that called on the company to stop giving consulting work to auditors PricewaterhouseCoopers. After Disney lost at the SEC but before last year's annual meeting where the resolution was to be voted on Eisner said he would stop the practice. Still, 41% voted in favor of the motion.

"That was pretty remarkable for a first vote on a new proposal particularly since management had already agreed to some of it," says Carol Bowie, director of governance research for the Investor Responsibility Research Center.

Since then, "Disney's been working very hard to earn the respect of the investor community," says activist Nell Minow of The Corporate Library.

She was particularly impressed that Disney hired noted governance expert Ira Millstein of Weil Gotshal & Manges to advise it on reforms. "He's the single most credible guy in the country to help them," Minow says.

Eisner's governance reform efforts did a lot to calm a potential revolt among institutional investors last fall, after ABC suffered the worst single-year network ratings decline ever. But after the crisis seemed to pass, some wondered whether the CEO remained committed to the goals of reform particularly if they meant putting his job in jeopardy.

Van de Kamp's recent memo threw gasoline on those embers of suspicion. She accused Eisner of "threatening and bullying" her in the Jan. 20 meeting at which he told her that she was out. She says he indicated that "he had a file on me" documenting how she had "demonstrated inappropriate behavior" on the board.

"He offered me a position on the board of the Disney Foundation, and he wanted this to be my idea feeling it would save me and him embarrassment," she wrote.

Van de Kamp, who's said to be talking to federal officials about board matters, didn't return calls.

But Millstein says there was no hidden agenda in the decision to drop her. The independent Governance and Nominating Committee made its choices after it had directors fill out a confidential questionnaire assessing each other's effectiveness.

"No one ever likes to leave," says Holly Gregory, who works with Millstein at Weil Gotshal & Manges. "It's a natural, human thing."

The other directors who aren't returning are Reveta Bowers (the school principal), Robert A.M. Stern (Eisner's architect) and actor Sidney Poitier.

Skeptics might have been willing to give Disney the benefit of the doubt on Van de Kamp's ouster if it hadn't followed another board decision to reclassify Eisner's most outspoken critic, Shamrock Holdings CEO Stanley Gold, as an insider. That cost him his position as chairman of the powerful Governance and Nominating Committee.

The board decided that the New York Stock Exchange's new guidelines defining an "insider" applied to him because Shamrock is the Disney family's investment company. Shamrock Chairman Roy Disney, Walt's nephew, is also vice chairman of Disney as well as Eisner's other leading critic on the board. Gold's daughter also works for Disney. Some company-watchers say that the logic behind the change looks thin.

"The real question is, is a director independent of management?" says Providence Capital President Bert Denton who organized a meeting of institutional investors last fall to discuss Disney's governance. "And Stanley Gold is probably the most independent member of the board."

Others wonder why Gold is considered an insider when other board members who have financial or family ties to Disney are deemed independent. Examples:

* Disney spent close to $270,000 last year on an office, secretary, car and driver for former Capital Cities/ABC CEO Thomas Murphy.

* Edison International CEO John Bryson's wife is an executive at Lifetime, half owned by Disney.

* Public Policy Institute of California Chairman Raymond Watson's son is executive director of a Disney new media company.

Gregory says there's a lot of room for interpretation when directors look at someone's company ties. "The board has to determine: Is it material?" she says.

And the board had a tough time making that judgment for Gold. "It was a difficult decision over a couple of meetings," Millstein says.

Gold declined to comment.

Disney's handling of the who's-an-insider question has caught the SEC's eye. The company said in December that it's cooperating with an investigation related to a filing last August that described some directors' relationships with company employees.

Iger wouldn't describe the nature or status of the investigation.

Despite all these concerns, investors and shareholder rights advocates say they're encouraged that Disney has begun to address their fears. Enough that last year BusinessWeek deemed the board one of the "most improved."

Millstein says he likes what he sees. "This board is now acting the way a board should," he says. "They're debating, arguing and getting the information."

The company won nearly universal praise for its most recent appointment to the board. Former Seagram vice chairman Robert Matschullat, who has a strong background in finance and no apparent ties to Eisner, is seen as a strong choice to join the board and chair its Audit Committee. Investors also like the choice of former senator George Mitchell for the new position of presiding director. He'll run sessions where directors meet without management.

Do all these changes mean that Eisner and his team will face tougher scrutiny from the board?

Iger, who discussed the governance changes for Disney, Eisner was not available, demurs as company spokeswoman Zenia Mucha jumps in, "All the changes that we've made, it speaks volumes and that's our answer."

But reform still appears to be a work in progress.

"I'm sure there'll be some tinkering," Millstein says. He'd like the company to end the practice of having one executive serve as CEO and chairman, although he wouldn't make Eisner change.

"That's disruptive and looks like a demotion. It should be done at succession time," he says. Having a presiding director is a good compromise for now.

Denton also would like Disney to change the rule that a proposal to change the bylaws must be endorsed by owners of 67% of all shares not just those of those voting. "Only 80% show up to vote, so it's virtually not possible."

Iger says he's "not suggesting that we're finished" but adds that he'd "rather not comment on any specific suggestion."

At this point, the key seems to be new people not necessarily new rules.

"I want to see some strong, new, take-no-prisoners, green-eyeshade guys this year," Minow says. "We'll know in the next year or so whether there's any substance behind what they're doing."They also ran this sidebar:Among changes Disney's board has made in the last year or so to make directors more accountable to shareholders: Streamlined the board to 13 members from 17.

Tightened the definition of who's an "inside" director — and therefore ineligible to vote on some key matters involving management.

Created a position of "presiding director" who'll run meetings when management can't participate.

Required the board to hold at least two sessions a year without management present.

Required independent directors to own at least $100,000 in Disney stock.

Required Eisner to meet at least once a year with independent directors to discuss potential successors. He also has to have "a confidential written procedure" for transferring power if something happens to him.Anyone want to guess how effective these changes will be?

Another Voice
03-19-2003, 01:13 PM
Well, the Reedy Creek Improvement District has all kinds of rules to establish its independence – and we all know how that one really works…

Bob O
03-19-2003, 02:32 PM
What are your thoughts???

03-19-2003, 03:37 PM
Bob's link goes to the article.