ALL BUSINESS: Disney Trial Produces Change
By RACHEL BECK
NEW YORK (AP) - Warning shots are generally loud and jarring, and that's just the effect that months of testimony in the Walt Disney Co. fiduciary responsibility trial has had on the behavior of directors in corporate boardrooms all around.
This case provided an insightful and ugly view of Disney, its dysfunctional board and tyrannical CEO. And numerous bad moves by the board were highlighted to show a complete lack of independence by directors.
<TABLE cellSpacing=0 cellPadding=0 width=146 align=right border=0><TBODY><TR><TD>
</TD></TR></TBODY></TABLE>So even though a Delaware judge ultimately didn't find the Disney directors negligent in their hiring and firing of former president Michael Ovitz, that ruling almost doesn't matter. This case is already changing how boardrooms around the country do business, from evaluating executive compensation to handling financial oversight.
``No director anywhere from this point on would want to put themselves through this kind of ordeal that the directors at Disney just went through for eight years,'' said Charles Elson, who heads the Weinberg Center for Corporate Governance at the University of Delaware. ``Now boards realize they must be more independent and circumspect.''
This case has attracted big attention because it went to trial after all the corporate scandals that have put boards under greater scrutiny. Corporate counsels also were watching and worrying that the potential outcome would set a precedent by allowing shareholders to hold directors personally liable for their decisions.
The lawsuit, which was filed in 1997 by Disney shareholders but just went to trial last year, claimed that current and former members of Disney's board did not properly scrutinize Ovitz's employment contract after chairman and CEO Michael Eisner tapped him as president in 1995, then wrongly granted Ovitz a non-fault termination entitling him to a $140 million severance package just over a year later.
Lawyers for the shareholders alleged that Ovitz's performance was so poor that he should have been fired for cause and not paid the remainder of his contract. The defendants, including Eisner and Ovitz, said Ovitz's contract was carefully considered.
In rejecting the plaintiffs' claims in a ruling announced Tuesday, Chancellor William Chandler III said board members did not violate their duties. But while relieving the directors of legal liability, he still took them to task for their behavior. He was especially critical of Eisner's role, saying he had a ``Machiavellian (and imperial) nature as CEO.''
``Are there many aspects of Ovitz's hiring that reflect the absence of ideal corporate governance? Certainly, and I hope that this case will serve to inform stockholders, directors and officers of how the company's fiduciaries underperformed,'' Chandler said in his 174-page ruling.
Still, Elson points out that the ``fact that liability wasn't imposed doesn't really matter.'' He said that Chandler's decision to even allow the case to go to trial has opened doors for similar shareholder lawsuits to find their way to the courts.
And the courts might be willing to take a tougher stance on a more current cases than this one, given that the issues at Disney happened long before the recent push to shore up corporate governance practices. As Chandler noted in his ruling, it would be ``misplaced'' to apply today's standards to past conduct.
In addition, the embarrassing nature of everything that was disclosed at the Disney trial - from descriptions of secret meetings and corporate maneuvering to testimony detailing the unraveling of the close personal relationship between Eisner and Ovitz - should be unnerving to directors throughout corporate America who now must understand that their dealings behind doors might eventually reach the public view.
With this case in mind, ``I see directors who are trying to do a better job at evaluating their information, figuring out what processes they have in place,'' said Eleanor Bloxham, president of the Corporate Governance Alliance, a consulting firm in Westerville, Ohio. ``They are putting new procedures in place, especially when it comes to executive compensation.''
The real verdict in this case might ultimately have little to do with what the court came up with, but how boards are applying some valuable lessons learned.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
By RACHEL BECK
NEW YORK (AP) - Warning shots are generally loud and jarring, and that's just the effect that months of testimony in the Walt Disney Co. fiduciary responsibility trial has had on the behavior of directors in corporate boardrooms all around.
This case provided an insightful and ugly view of Disney, its dysfunctional board and tyrannical CEO. And numerous bad moves by the board were highlighted to show a complete lack of independence by directors.
<TABLE cellSpacing=0 cellPadding=0 width=146 align=right border=0><TBODY><TR><TD>
</TD></TR></TBODY></TABLE>So even though a Delaware judge ultimately didn't find the Disney directors negligent in their hiring and firing of former president Michael Ovitz, that ruling almost doesn't matter. This case is already changing how boardrooms around the country do business, from evaluating executive compensation to handling financial oversight.
``No director anywhere from this point on would want to put themselves through this kind of ordeal that the directors at Disney just went through for eight years,'' said Charles Elson, who heads the Weinberg Center for Corporate Governance at the University of Delaware. ``Now boards realize they must be more independent and circumspect.''
This case has attracted big attention because it went to trial after all the corporate scandals that have put boards under greater scrutiny. Corporate counsels also were watching and worrying that the potential outcome would set a precedent by allowing shareholders to hold directors personally liable for their decisions.
The lawsuit, which was filed in 1997 by Disney shareholders but just went to trial last year, claimed that current and former members of Disney's board did not properly scrutinize Ovitz's employment contract after chairman and CEO Michael Eisner tapped him as president in 1995, then wrongly granted Ovitz a non-fault termination entitling him to a $140 million severance package just over a year later.
Lawyers for the shareholders alleged that Ovitz's performance was so poor that he should have been fired for cause and not paid the remainder of his contract. The defendants, including Eisner and Ovitz, said Ovitz's contract was carefully considered.
In rejecting the plaintiffs' claims in a ruling announced Tuesday, Chancellor William Chandler III said board members did not violate their duties. But while relieving the directors of legal liability, he still took them to task for their behavior. He was especially critical of Eisner's role, saying he had a ``Machiavellian (and imperial) nature as CEO.''
``Are there many aspects of Ovitz's hiring that reflect the absence of ideal corporate governance? Certainly, and I hope that this case will serve to inform stockholders, directors and officers of how the company's fiduciaries underperformed,'' Chandler said in his 174-page ruling.
Still, Elson points out that the ``fact that liability wasn't imposed doesn't really matter.'' He said that Chandler's decision to even allow the case to go to trial has opened doors for similar shareholder lawsuits to find their way to the courts.
And the courts might be willing to take a tougher stance on a more current cases than this one, given that the issues at Disney happened long before the recent push to shore up corporate governance practices. As Chandler noted in his ruling, it would be ``misplaced'' to apply today's standards to past conduct.
In addition, the embarrassing nature of everything that was disclosed at the Disney trial - from descriptions of secret meetings and corporate maneuvering to testimony detailing the unraveling of the close personal relationship between Eisner and Ovitz - should be unnerving to directors throughout corporate America who now must understand that their dealings behind doors might eventually reach the public view.
With this case in mind, ``I see directors who are trying to do a better job at evaluating their information, figuring out what processes they have in place,'' said Eleanor Bloxham, president of the Corporate Governance Alliance, a consulting firm in Westerville, Ohio. ``They are putting new procedures in place, especially when it comes to executive compensation.''
The real verdict in this case might ultimately have little to do with what the court came up with, but how boards are applying some valuable lessons learned.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org