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A Desperation Move for Disney?
Michael Eisner is relinquishing some responsibility. But it may not be enough to appease angry shareholders

Jacqueline Larma / AP
Eisner addresses shareholders at the company's annual meeting in Philadelphia on Wednesday

WEB EXCLUSIVE
By Jonathan Darman
Newsweek
Updated: 7:21 p.m. ET March 04, 2004March 4 - When CEO Michael Eisner stood before a crowded room of Walt Disney Co. shareholders in Philadelphia on Wednesday, he knew that many of them wanted his head. After years of poor performance, an unhappy divorce from animation studio Pixar and unrelenting cries of mismanagement from former directors Roy Disney and Stanley Gold, plenty of Disney stock owners were literally shouting in dismay. That day, a shocking 43 percent of them had withheld their support from Eisner, who was running for re-election to the company’s board. The message wasn’t hard to parse: Disney’s investors wanted the big guy to go.


Eisner heard them, sort of. In a late-day deal with the board, Eisner agreed to relinquish his role as chairman but stay on as the company’s CEO. In a certain sense, this was a dramatic step. For years, Eisner had been Mr. Disney, ruling over every inch of the House that Walt Built with an iron fist. But some observers said the new arrangement wasn’t really addressing the core problem, pointing out that Eisner’s replacement as chairman would be former Senate majority leader George Mitchell, an Eisner pal. That day, 24 percent of shareholders had withheld their support from Mitchell. NEWSWEEK’s Jonathan Darman asked Nell Minow, editor of the Corporate Library, an investment research firm, whether Disney’s new leadership structure will mean real change.
Excerpts:

NEWSWEEK: What did you think you think of yesterday’s events?
Nell Minow: I was stunned by the vote. In a way it was kind of a perfect storm of everything that’s going on in the wacky world of corporate governance right now because not only did you have the whole Roy and Stanley thing … but I think that there was also a huge impact that was underestimated that this was the first time that mutual funds—money managers—have had to disclose how they vote. And for that reason, many more of them are feeling pressure to take a stand against management.

Forty-three percent of shareholders voting to withhold support is pretty unprecedented, right?
It’s stunning but it’s not completely unprecedented. I think there was a no vote in the forties at Federated last year. But certainly at a company of this level of visibility, yes.

Will He Survive?
Angry investors are pressuring Disney directors to replace Michael Eisner. A crucial vote this week may force the board to act


And do leadership teams with that kind of disapproval level ever survive?


No. But there’s nothing that’s happening right now that has any precedent. Everything is different. In 1997, when Disney got a 13 percent withhold vote, that was considered seismic and yet the company ignored it. I think if they’d gotten a 43 percent withhold vote back then they would have ignored it, too—that was the era when [Eisner’s] architect and his kids’ principal was on the board. So, in a way, it’s the very steps that they took to strengthen the board that made them capable of responding in the way that they did to this.

But is this solution of installing Mitchell as a non-executive chairman really a strong response to the shareholder discontent?

That’s a definite time-will-tell situation. We rate boards on the decisions they make, not on the nameplates that they move around from title to title. We will be looking for Disney to add some additional, very strong new directors; for them to be very clear in their disclosures about CEO succession planning … to talk more about what they’ve done. And, of course, they need to counter the reputation that the company has right now of not being creative enough, producing, yet another "Daughter of Cinderella" video.

Symbolically, though, does it make enough of a statement about the company’s willingness to change to install as chairman a director who had previously been quite closely linked to the old regime?

If it were me, I would not have made the new chairman somebody who got a 25 percent withhold. My choice would have been [Disney board member Robert] Matschullat. Appointing him would have sent a stronger sentiment … Matschullat does not have that history of ties with Eisner. And I’ve talked with him and he seemed to have a very clear understanding of governance and he seems to be someone who could communicate effectively with investors … George Mitchell’s a really good guy and an American hero and all that, but Bob Matschullat speaks fluent Wall Street.

What does Mitchell have going for him?

Well, let’s look at what Mitchell’s last job was: what better preparation could you have than negotiating peace in northern Ireland? … He’s a consensus builder, he’s going to make sure everyone feels listened to. And that’s not a bad thing.

You’re a big advocate of dividing chairman and CEO responsibilities? What’s the virtue of that kind of arrangement?

If you have the chairman and CEO in the same job, then the CEO controls the agenda and he controls the quantity, quality and timing of the information that’s provided to the directors. That’s just deadly. That’s exactly what the problem was at Enron. That’s what leads otherwise intelligent people to say, "Oh yeah, we’ll wave the company’s conflict-of-interest rules." It’s all in the way the information is presented.

How does an outside chairman fix that problem?

The reason you want to have an outside chairman is to make sure that that project you haven’t heard about for the last three board meetings, it’s not because it’s doing badly. It’s the agenda, the control of the agenda that’s the big, big issue.…

Does today’s announcement from Dell that the founder Michael Dell is going to be relinquishing the CEO title and becoming chairman meet that standard?

That’s the other end of the scale … It doesn’t accomplish this one goal that I just mentioned. What it does is free Michael Dell so that he doesn’t have to worry about operational stuff any more, which is fine, but he’s still a full-time employee and he’s still going to keep doing the same stuff he’s been doing.

So this Disney arrangement is acceptable on that score. Mitchell’s not an employee of the company.

The question is … is George Mitchell going to set the agenda or is he going to get a memo from Michael [Eisner] and send it around?

Might Mitchell’s stature help with that? He’s got enough accomplishments under his belt, he doesn’t need to stay friends with Michael Eisner.

Except that he’s been running for office for a long time, he’s a guy who gets along with people … He’s a guy who knows how to put coalitions together, and that’s a fabulous skill to have. But that doesn’t mean he’s the right guy for this job.

What’s in it for Mitchell? He’s got plenty of money, he’s got enough lines on his resume, why associate himself with this troubled media company?

I think he is a genuine statesman. This is really public service for him. Disney is as much a national treasure as Yosemite Park. I think he’s doing it for all the right reasons, and I hope he has what it takes. We’ll know soon, we’ll either see some different things happening or we won’t.

What should Mitchell do to show that he’s serious about making those changes?

Mitchell has got to go talk to shareholders. They have got to be able to ask him that question themselves. Certainly the indicators that we’ll be looking at are things like CEO pay, transparency of their various disclosures and who they add to the board next. They’ve got one empty board seat and they could buy themselves a lot of credibility by adding somebody with a great record of speaking out on behalf of shareholders.

What’s the trend been recently in terms of the role of corporate boards and the expectations that are put on directors?

It’s really transformed. It used to be that the culture of the boardroom was that it was somehow not sportsmanlike to ask a question. Now it’s competitive to see who can ask the best question.

Was it Enron that turned the tide?

Enron would have been seen as an anomaly if not for the cascading dominoes that came afterward: Global Crossing, Tyco, Adelphia … Every corporate director has said, “There but for the grace go I.” The late Tom Horton used to say that the single most important attribute of a corporate director was to yawn with your mouth closed. That’s completely changed.

That makes this Mitchell appointment seem kind of anomalous. Former government officials aren’t known for being worker bees.

Yeah, our records show that former cabinet officials in particular do a poor job and former senators do a poor job, but there are some significant exceptions to that. I think George Mitchell is a man of genuine integrity and ability, and I think that Michael Eisner is a man of integrity and ability and if they really want this to work, they can make it work. But it’s going to take a lot of persuading. They’re digging themselves out of a hole.

© 2004 Newsweek, Inc.

 

[mitros]

Mitchell and Eisner are practicaly two peas in a pod. Does anyone really think Eisner is actually going to give up what he has been doing for 20 years?. He still has a lot of friends on the board. They made it LOOK like they were doing something. IMHO. Eisner will be doing the same thing he has always done. Let's just hope that the 43% and Roy and Stanley do not take this lying down.