Take the time to read this....from Roy Disney....

[Goofyposter]

Roy Disney Discusses with Council of Institutional Investors Ongoing Situation at Walt Disney Company; Relationship Between 'Owners' of Public Companies and Their Stewards



WASHINGTON, Mar 26, 2004 Roy E. Disney today gave the following speech to the Council of Institutional Investors on the ongoing situation at The Walt Disney Company and the relationship between the owners of public companies and their stewards—management and the Board of Directors:



Effecting Change: "What Does It Take?"

Good morning, ladies and gentlemen. I deeply appreciate this opportunity to appear today before one of the nation's most respected shareholder organizations—the Council of Institutional Investors. Two of my colleagues are here with me today: Gene Krieger and Michael McConnell.

Each of you in this room is playing an integral role in the reforms that are presently—and hopefully—taking place in our capital markets—and I say this regardless of whether or not you supported our withhold campaign at the recent Walt Disney Company shareholder's meeting. During the last sixty days, without exception, every CII member with whom we met took the time to listen, consider, and evaluate the situation fully as it was presented to them ... you all admirably fulfilled your fiduciary duties and for that you should be proud, and your beneficiaries satisfied. In addition, I personally deeply appreciate your support.

I hope my remarks this morning will provide further insight and context to not only the ongoing situation at The Walt Disney Company, but also to the critical dialogue regarding the relationship between the "owners" of public companies and their stewards—Boards of Directors and management teams.

Before I go any further, I should probably give you a disclaimer ... I am anything but a dispassionate observer in all this ... to say that the Disney Company is any less than a part of my blood would be an understatement. I do, however, understand that this is a roomful of dispassionate observers, so that's the last you'll hear from me on the subject.

The Walt Disney Company—What happened on March 3 in Philadelphia? What was the process that led to our decision to create SaveDisney.com and initiate the withhold campaign? Was the vote effective, and how might this event impact corporate democracy?

Perhaps, in a curious way, more than other high-profile stories of the past few years, more than Enron, Tyco, or WorldCom, the Disney situation encapsulates the many and varied challenges confronting Boards and shareholders alike in today's very public corporate environment ... and this is why:

In the absence of outright fraud or severe financial distress, the critical question is "What does it take" for a Board of Directors to act? Most companies don't have a scandal or a fraud to shock their Boards into action ... though most would agree that if those Boards had been doing their jobs, those scandals would never have happened. It is also true, however, that Boards must act long before a crisis for long-term shareholders to be best served.

One of the most fundamental and important duties of a board is to monitor—and hold the chief executive officer accountable—for the long-term performance and strategy of a company. To do this, a board needs basic knowledge of the company's businesses, complete facts, an understanding of the kind of leadership required by a company at any point in time and, most importantly, the courage to act "independently" and without fear of reprisal or dismissal. The power of the "incumbent" creates significant inertia for most Boards.

About three years ago my long-time business partner, friend and fellow Board member, Stanley Gold, and I began to believe that fundamental change was necessary at Disney. Financial performance had been declining for more than five years—certainly more than enough time to evaluate performance and strategy. To be sure, having been presented with optimistic projections that later often failed to materialize, Stanley and I had supported many of management's initiatives. But these shortfalls had, to us, become too significant to continue to ignore and accept. We believe that a Board has an oversight function that, on the one hand, requires latitude be given to senior management ... and on the other hand, when significant strategies regularly fail on execution, requires the same Board to re-evaluate management and possibly replace it. Thus, the key question we faced by 2001 was, "What should we do now?"

Our choices were pretty limited ... we could do nothing, resign, or try to effect change from within the Board room. We chose the latter, and we spent more than two years trying to persuade other Directors that the Company was in decline—both creatively and financially. We wrote letters and position papers, we analyzed historical financial performance; we made constructive suggestions to improve Board information and advocated substantive governance reform. Unfortunately, we faced a Board that simply deferred to management, or was unwilling or uninterested in a dialogue on the critical issues. They sought consensus and were frankly intolerant of constructive dissent. This conduct appears to be all too common within the boardrooms of corporate America.

Then, on Thanksgiving weekend of 2003, John Bryson—Chairman of the Nominating Committee—informed me that I would not be on the slate of Directors for the March 2004 shareholder meeting. At that point, my family and I had another decision to make.

I suppose I could have gone quietly into the night, to enjoy my 4 children, 16 grandchildren, and to savor the memories of nearly 70 years of contributions to a great American Company. But I couldn't bring myself to just walk away and abandon the talented people—many of them good friends—who dedicate their lives to making The Walt Disney company an American icon, as well as a profitable business. Of course, I also have an obligation to my family's long-term investment which creates a strong mutuality of interest with many of you in this room.

Because I knew Michael Eisner, I knew he would use the resources of the Company to protect himself. I knew the difficulties that this Board would have in challenging and confronting him. Recent reports unfortunately confirm my instincts. The board needs to ask itself the value to shareholders of the millions being spent on political lobbyists and consultants across the country. These efforts and expenditures are shameful, have little to do with inspiring creativity and the board remains quietly acquiescent at best. Michael Eisner is behaving like a third world dictator of a once great country utilizing political carrots and sticks to manipulate the electorate. ... and his "cabinet" sits mute for fear of beheading.

But if change was what we wanted, fundamental change, we were right back to the original question ... what would it take???

Of course, we chose to fight ... and as you know, the results of the vote were unprecedented in the annals of American business history.

The process was an uphill fight. Without our own very significant financial commitment, the dedication and hard work of Shamrock's employees, an enormous number of volunteers, the advice of our lawyers, press relations team and proxy solicitor, our high stakes gamble would have quickly fizzled. I've never run for political office, but I can imagine that what our team experienced over the last 90 days came close.

Since March 4, I've thought a lot about what led to the result, and arrived at what I think are the primary reasons:

First, our passion and our tenacity; second, our message rang true ... the simple story of very poor long-term performance and a weak and disengaged Board were compelling ... and third, even though I promised not to mention it again, there truly was a high emotional content to the vote ... a deep feeling, especially among individual shareholders, that the Disney "ideal," however they defined that, had been somehow betrayed.

Here are the results:

43% withhold against Michael Eisner
24% withhold against George Mitchell
22% withhold against Judith Estrin
22% withhold against John Bryson

All these results, of course, include so-called broker non-votes, without which the numbers are even more startling.

Notwithstanding these stunning statistics, the Board took only the lame step of separating the Chairman and CEO roles. This was very nearly a non- event ... a move to mollify the shareholders by interpreting the vote as "just a governance matter."

Let's look at it this way: broker non-votes aside, over 50% of the votes ACTUALLY CAST were against Mister Eisner's incumbency ... nearly 30% of the votes ACTUALLY CAST were against Mister Mitchell ... and absolutely nothing changed except that Mister Mitchell was PROMOTED to the post of Chairman.

So, once again ... What does it take? The numbers suggest a clear message was delivered, but limited action was taken. What will it take for the Board of The Walt Disney Company to listen and to act?

There is very little doubt that change is necessary. We have heard that over 70% of the participants in the Company's 401K plan voted against their leader. These figures confirm my long held concern that the morale among the company's 125,000 employees, many of whom touch our guests every day, sits at an all time low. Only through dedicated, committed, and creatively inspired cast members does a company like Disney thrive over the long term. Without the support of its employees, how can this CEO get the Company back on track? The board cannot underestimate the impact of Michael Eisner being a "lame duck" CEO.

Common sense would tell you—especially at Disney—that employees are the greatest assets of a company—when they are abused or exploited it is the shareholders who suffer—not insolated management.

Is the power of incumbency that strong? Incumbency clearly gives control of the process (such as the tabulation of the votes), control of critical information, access to human resources, and of course, access to corporate funds. I know what we spent ... I have to only imagine the millions of dollars of shareholder funds that this management team has spent and continues to spend to defend themselves against the will of their owners.

Nevertheless, we believe it is inevitable that we will see a new leader at Disney. The key questions and issues between now and then are:

First, timing—when will the Board find the courage to do what is right?

Second, how? Will the Board go through a thorough, professional, and dispassionate process to select the next leader of this American treasure called The Walt Disney Company? Or will they meekly take instructions yet again?

Third, Short term versus long term. What will be the longer term cost of any short-term business decisions management takes this year as they chase every penny of earnings? It is my belief that the CEO will aggressively seek to protect his position. These costs are real and who will bear them is the real point that the Board must consider.

And fourth, Board Transparency—will the Board begin to fully confront the series of legitimate questions to which shareholders seek answers ... or will they continue to allow management to "spin" half truths and incomplete facts to the Company's owners?

As I said earlier, we are firmly convinced that at some point soon, the Board must act. It must acknowledge the vote, it must acknowledge the outcry from shareholders such as Calpers, NY State, Ohio State, Wisconsin, CalSTRS, TIAA-Cref, T Rowe Price, Fidelity, not to mention both sides of the Disney Family, it must acknowledge the comments of respected governance experts such as Robert Monks and Peter Clapman, it must acknowledge the reports from the proxy advisory firms ISS and Glass Lewis ... so I must ask again—What does it take?

At some point the Board must acknowledge 10 years of declining performance, it must acknowledge the failing "strategy" of current management, it must acknowledge the lack of seasoned depth among the executive team, and it must acknowledge the declining working conditions and poor employee morale. Most importantly, it must acknowledge the major failures of:

The ABC Network ... operating income losses of approximately $1.0 billion over the last six years.
Go.com ... write off in excess of $1.0 billion
Fox Family ... our best estimate is that today this property is worth $4.0 billion less than that paid when purchased
The Disney Stores ... our best estimate is that the division will have lost approximately $100mm the last several years
Disney California Adventure ... Cost in excess of $1.0 billion and contributed to a decline in operating income at Disneyland of approximately $100mm ... a true lose- lose, and, lastly,
It must acknowledge the long term "cost" of the failed partnership with Pixar.
In total, these mistakes of the last five years alone have cost shareholders over $7.0 billion. And yet, somehow, the shareholders are expected, as Ms. Estrin suggested yesterday, to simply look past these indisputable facts.

The Board cannot allow management to HIDE behind years of significant failures because of two good movies and an accounting change that is driving 2004 growth. Here again, what does it take? How many years of significant failures and how much capital must be squandered before a board acknowledges that new management is necessary?

Additionally, and perhaps more troubling, is the recent change in management's public comments regarding growth in 2004. In early to mid- February, management began to insert the words "continuing operations" into its growth forecast language. Moreover, we heard Ms. Estrin talk yesterday about earnings growth of 25% in 2003 ... after non-recurring items. I contend GAAP earnings growth of 8% is what matters, it is what the company puts on its web-site, and those "non-recurring" items happened to be real "costs" to the shareholders that simply cannot be routinely ignored.

This rhetoric of continuing operations sounds eerily familiar to the pro- forma language of internet CEO's in the late 1990's. Has it been that long ago that we forget the danger in looking at anything but GAAP earnings? I hope not.

Perhaps the current SEC proposal regarding shareholder access to the proxy will put real "teeth" into this message, but, today, shareholders only have the goodwill and integrity of the Board of Directors to rely upon ... have faith in.

Now, I'd like to turn for a few moments to some of the key issues currently being discussed regarding improvements to the shareholder/Board relationship. It is my belief that, sadly for the shareholders, the proverbial "pendulum" remains off center in our capital markets—the costs of business embarrassments, scandals and frauds have been much too high ... and too frequent.

Fortunately, reform is possible.

First, I support open access to the proxy—whether it is the current proposal or a more liberal one—the "costs" to the shareholders of access are simply too high without reform in this crucial area. To us, this is more important than all of the other reforms—being discussed, underway or already implemented—combined.

Second, we agree with Ann Yerger of CII who stated, "Broker non-votes have no place in a modern voting system."

Third, the requirements that ensure that Boards of mutual funds recognize for whom they work is critical. I recently read about one individual who sat on the Board of 287 mutual funds ... and we wonder why investors are concerned and unhappy?

Fourth, communication between Boards and their owners is vital. This is communication long before serious problems arise. In other parts of our lives, we would call it "teamwork." I understand—and hope—that reforms in this area are underway.

Let me conclude by applauding those of you who have joined together to take your concerns directly to a meeting of the full Board of Directors. I'd strongly encourage you not to retreat from the specific request in your letter for a meeting with ALL members of the Board; otherwise you will have a discussion with only the Eisner loyalists who will "filter" your concerns back to the whole Board. The entire Board needs to be fully engaged in this important dialogue.

I further urge you to probe deeply and specifically in your questions and their answers; to get beyond the usual cliches and generalities—their message should not and cannot be simply a replay of what you were told prior to—and at—the March 3 shareholder meeting. Ask for the substance on the critical issues of performance, and I mean long-term performance, accountability and succession.

Since you all serve varied constituents, I further urge you to be mindful of your principle role as "investors". The Walt Disney Company is using shareholder resources with their government relations staff and lobbyists in a full court press to "push the political buttons".

We would be happy to help you in preparing for this meeting by sharing ideas and information we have learned from other shareholders during our campaign. It is our hope that each of these attendees would find these materials helpful as they embark on the very important task of making sure shareholders are heard, making sure the board listens, and, most importantly, making sure the board and management are held accountable for long- term performance.

And so again ... as I asked at the beginning ... what does it take—to convince the good people who compose Boards to do the right thing—to understand that they are caretakers of a public trust, not of a private fiefdom—to focus on their fiduciary duties to all the shareholders. Indeed, the question is, WHAT SHOULD IT TAKE??

Once again, thanks to CII and each of you for your time and the opportunity to speak with you today.

I believe we have time for a few questions. My colleagues, Gene Krieger and Michael McConnell, and I are available as well. Again, thank you.

 

[Peter Pirate]

It was only "about three years ago" that Roy & Stanley "began to believe" that there were problems in the mouse house...Is this telling?

 

[YoHo]

It tewlls me that they trusted the man they had put their. We all love Disney, but our emotional investment to Disney and in fact to Eisner is completely different to Roy.

 

[Peter Pirate]

It tells me that Roy was asleep at the wheel...I'm happy he woke up but was it too late?