Roy E. Disney
Stanley P. Gold
4444 Lakeside Drive
Burbank, CA 91505
March 10, 2005
Open Letter to The Walt Disney Company Board of Directors:
In September 2004, following Michael Eisner's public announcement that he intended to step down as CEO of The Walt Disney Company, we urged you to hire an outside independent recruiting firm to conduct a search for the best possible replacement based on a process in which candidates were selected and reviewed openly and fairly. When you voted to conduct such a search, we commended the decision and expressed our cautious optimism that the Disney Board finally seemed ready and willing to make real progress with regard to succession planning.
Your actions since then have seriously eroded whatever faith we may have had in the way you are conducting the search. Accordingly, we are asking you to reconsider two of your recent decisions affecting the search for the new CEO.
1. We are advised by credible sources that all of the CEO candidates will be interviewed in the presence of Michael Eisner. If this is true, the practice would make a mockery of the idea that candidates should have meaningful interchanges with the non-management members of the Board. Quite honestly, it would subvert the entire search process.
As we have chronicled in numerous letters to you --as early as August and September of 2002 and again in March and April of 2003 --no meaningful discussion about the Company and its strategy as well as its prospects, opportunities and mistakes can be discussed forthrightly in the presence of Michael Eisner. In our view, Michael Eisner is incapable of honest self-evaluation without seeking to blame or vilify others. Indeed, based on our experience on the Board, what kept most of our fellow Board members from challenging him was the combination of his overbearing nature, the Board's reticence for confrontation, and the fear that any director who did speak his or her mind would be shown the door (e.g., Andrea Van de Kamp and Roy).
The list of missed opportunities is catalogued in James Stewart's DisneyWar and it is not an admirable record for current senior management. It is inconceivable how you can expect a real candidate for the CEO position to come in and discuss in a thoughtful and meaningful way strategic issues, the decisions made by senior management over the last ten years, and how the candidate would approach the important issues now facing Disney, with Michael Eisner sitting in the room. As Board members, many of you were unable to do it (although privately with us you expressed your concerns) and it is unrealistic to expect a potential CEO candidate to do so.
Moreover, Michael Eisner has already publicly announced that his selected candidate to succeed him is Robert Iger and, at the Company's expense, has conducted a campaign for Mr. Iger's selection in both the media and on Wall Street. His choice of Bob Iger is nothing more than a ploy to hang onto power in some capacity and preserve his legacy. He has acknowledged as much in the Stewart book. His presence in the interview room is an obstacle to an open discussion and we urge you to exclude him (as well as all other non-independent directors) from this process if you want to conduct a careful, reasoned and meaningful search process.
This Board has an obligation to properly fulfill its corporate governance responsibilities, including its paramount task, the search for a CEO. This is not a decision that should be abdicated to Michael Eisner. Although management's recommendations should be considered, it is not appropriate for a CEO with a reputation for quelling opposing views and who has already decided who his successor should be to participate in the candidate reviews. Your fiduciary duties require the Board to make an informed, independent decision -- one that is not blindly predicated on the dictates of a CEO who received a 45% withhold vote just a year ago.
2. You should reconsider your decision not to investigate the facts surrounding senior management's withholding of information from the Board regarding the Fox Family acquisition and its unsuccessful operations.
We were dismayed to see Chairman George Mitchell quoted in the February 11, 2005 edition of the New York Post to the effect that he had personally spoken with each and every Director and that not one of you was interested in investigating the allegations in DisneyWar regarding the Fox Family cable channel.
Mr. Stewart's book indicates that senior executives at Disney in 2002 and 2003 withheld materials from Board members in an attempt to cover up their mistakes in acquiring Fox Family and prevented the Board from considering a plan (initially proposed by the Company's CFO) that reportedly could have resulted in approximately $400 million in tax savings. Did the senior executives who withheld this information do so because they wanted to preserve their millions of dollars of annual bonuses? Did they want to avoid embarrassment and escape criticism by the Board? In effect, senior management apparently manipulated the information flow in order to prevent a fair inquiry into what was happening. Whether this manipulation cost the Company money is difficult to fully assess from the materials in the Stewart book, but it clearly raises an integrity issue with respect to these senior managers, including Bob Iger, a candidate for the CEO position that Chairman Mitchell embraces as an "outstanding candidate."
The undisputed facts in the Stewart book are:
A. Disney's senior management (Eisner and Iger) proposed the acquisition of Fox Family for $5.3 billion, provided that Disney did not have to assume Fox Family's Major League Baseball contract, which would have cost Disney at least an additional $700 million in losses.
B. Eisner agreed to buy Fox Family for $5.3 billion, plus he agreed to assume the baseball contract, for a total cost of at least $6 billion.
C. Eisner and Iger told the Board that, notwithstanding this increased purchase price, Fox Family was a good deal because they could put better programming on the Channel at little or no additional cost. They said they would "repurpose" programming from the ABC Network (i.e., do a "second run" of ABC Network programs on the Fox Family Cable Channel with very minimal additional costs). From the Stewart book, it would now appear that they made these representations to the Board without first checking with the producers of the programs, Disney executives with operational responsibilities in this area or the Company's lawyers. In fact, their repurposing scheme was dead- on- arrival; the Company didn't have rights to do repurposing; and it couldn't acquire those rights at a cost that would have justified the purchase price for Fox Family.
So far, a lot of very bad and very expensive business judgments, but nothing evidencing a lack of integrity. But then comes the cover-up.
D. As soon as Fox Family is acquired, its operating results grossly under-perform the projections presented to the Board at the time it was considering the acquisition. As some Board members began to question the acquisition and the inability to achieve projected results, the Company's CFO apparently devised a plan to write-down the acquisition by some $2 billion, the difference between the purchase price and fair market value of the Fox Family assets. That plan, while embarrassing to senior management, purportedly had the advantage of saving the Company and its shareholders $400 million in taxes, not a trivial matter.
E. According to DisneyWar, when the $400 million tax saving plan is presented by the CFO to Peter Murphy and other executives, the CFO is instructed to terminate the outside consultants he hired to work on the project and to make sure their report is not finalized. Moreover, Mr. Stewart indicates that certain members of senior management are admonished not to inform the Board members of the plan in an effort to conceal management's mistakes.
F. Finally, in order to avoid disclosing the sorry state of affairs at Fox Family at the Board's next strategy session, Bob Iger reportedly instructed Company personnel to increase the projected performance of the renamed ABC Family Channel; even though those managers charged with the operation of the Channel believed these newly revised projections were unrealistic.
G. It is unclear from the Stewart book how much of this cover-up was directed by Eisner or Iger, but there is clearly an implication that they were involved.
For the last three years, the Disney Board has put its collective head in the sand and refused to address, or even discuss, the serious issues of Michael Eisner's management. Those of you who were around in 2002-2003 will undoubtedly recall the series of letters we wrote to you trying to stimulate such a discussion. We are afraid that your failure to investigate and understand Michael Eisner and Bob Iger's involvement in the Fox Family matter is another example of your avoiding the real issues. Failure to investigate these matters in the current post-Enron era is impossible to fathom.
The two issues discussed above pose a litmus test for the Disney Board. If the shareholders and cast members of The Walt Disney Company are ever again to have confidence in the Company's leadership, they need to know that their new CEO was chosen in circumstances that were open and candid, and that the Board fully investigated and considered the allegations made against Bob Iger in DisneyWar. You have only to consider what Boeing's board of directors did earlier this week to see how a responsible board responds to even the appearance of unethical or inappropriate behavior on the part of the CEO. Similarly, Hewlett-Packard's board sets a worthy benchmark for how a board should deal with a CEO whose multi-billion-dollar acquisition strategy fails to come close to delivering projected results. In selecting a new CEO, the Disney Board should be no less demanding.
Unfortunately, when it comes to selecting a new CEO, high standards don't seem to be on the Board's agenda. Indeed, between last September (when it announced it would select a new CEO by June of this year) and the annual shareholders meeting in early February, the Disney Board did not interview a single outside candidate for the job. Nonetheless, during much of this time (i) Eisner and Iger have utilized the Company's extensive public relations operations to promote Iger for the job, (ii) the Board itself has publicly proclaimed Iger a leading candidate to succeed Eisner, and (iii) at least three Board members are reported to have already committed their votes to Iger's candidacy.
Given all this, is it any wonder that some potential candidates have said both publicly and privately that they believe "the fix is in"?
If the facts are even close to those presented in the Stewart book and there was a cover-up, this Board ought to at least demand a return of the very large bonuses from 2002, 2003 and 2004 from the senior executives involved (the bonuses for Eisner, Iger and Peter Murphy were more than $38 million in the aggregate for those years). Other remedies should be considered once the facts are uncovered. And you ought to do that before some plaintiff's lawyer or regulatory official makes that demand. It is time to clear the air at The Walt Disney Company and begin a new era. That cannot be done by avoiding problems because you think they will embarrass Messrs. Eisner and Iger.
We urge you to accept these recommendations and make a clean break from the sordid practices that have typified Disney's leadership these last few years. Good governance involves more than filling in questionnaires and adopting nice-sounding policies. It is about doing the right thing.
Sincerely,
Roy E. Disney Stanley P. Gold
