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Criticism Mounting as Disney's Leader Faces Crucial Vote
By LAURA M. HOLSON
Published: February 27, 2004
OS ANGELES, Feb. 26 — What began as a trickle of discontent over Michael D. Eisner's leadership of the Walt Disney Company has become far broader as a growing number of large investors have expressed a lack of confidence in the company's management.
As many as one of every three Disney shares are expected to be withheld from voting on Mr. Eisner in next week's annual board election, according to two people close to Disney who have talked to companies tallying the early votes. That is a much higher percentage than dissident shareholders can usually muster in such votes.
On Thursday, state pension funds in New York, Connecticut, Massachusetts and New Jersey said they would not support Mr. Eisner in the board election, one day after California's two largest pension funds announced their votes of no confidence.
Equally as striking, some mutual fund companies like T. Rowe Price have also decided to voice their displeasure.
The critics' decisions do not immediately jeopardize Mr. Eisner's position, as he will still have plenty of votes to be re-elected to the board; he is running unopposed. But a sizable vote of no-confidence at the meeting next Wednesday would add to mounting pressure on the board to address investor discontent. And there is precedent in corporate America of symbolic actions leading to executive change. Stephen M. Case, the former chairman of AOL Time Warner, stepped down soon after investors withheld 22 percent of the votes for him.
"There have been issues for a long time that not everything is great in the Magic Kingdom," said Brian Rogers, chief investment officer for T. Rowe Price, Disney's 14th-largest shareholder, with 19 million shares. "I think a good outcome is to have the board hold Michael Eisner's feet to the fire and be more willing to question his strategy."
The increasingly vitriolic criticism comes nearly 20 years into Mr. Eisner's tenure as the leader of Disney, one in which he restored the company's profits and glory only to have both falter in recent years.
Disney's ABC network has struggled in third or fourth place. The movie division has struggled, relying for more than half of its profits some years on the movies from its soon-to-be-former partner, Pixar Animation Studios. The theme parks were hard hit by the terrorist attacks on Sept. 11, 2001. And critics have said that Mr. Eisner micromanages and has driven away talented executives.
To assuage investors, Mr. Eisner is conducting a charm offensive, visiting investors from San Francisco to Sacramento this week to counter the campaign against him being waged by two former board members: Roy E. Disney, Walt Disney's nephew, and Stanley P. Gold.
Earlier this month, Mr. Eisner's situation became more difficult when the Comcast Corporation, the largest cable operator in the country, made an unsolicited bid that Disney's board rejected.
The Disney fight also comes at a time when the Securities and Exchange Commission is reviewing a proposal to give activist — and often disgruntled — shareholders a greater voice in the selection of corporate boards. Although the proposal may not be considered in time to affect the outcome of the Disney battle, it is seen as an indication of changing sentiment in Washington toward giving shareholders a greater say in picking corporate directors.
But even before the S.E.C. has a chance to act, the withholding of a sizable number of Disney shares is a powerful tactic, according to Charles M. Elson, a corporate governance expert at the University of Delaware.
"The greater the withholding of votes," Mr. Elson said, "the more the directors have to pay attention. Anything over 20 percent is significant. That's the key. The board will have to look at it. There's a real pro-shareholders slant that's taking place."
The estimates, though preliminary, as shareholders can vote up until the annual meeting in Philadelphia on Wednesday, puts Disney's board in an awkward position. The board has expressed utmost confidence in Mr. Eisner's management, but at the same time, after rejecting the $54 billion bid from Comcast for being too low, has left the door open to an offer from any bidder willing to pay a rich price. Still, the public outcry about management and the board's oversight may be too loud for them to ignore.
That is particularly so given that Disney's board is now operating in a post- Enron environment, where every action is measured by investors who are more apt to fault directors for not properly overseeing management. Some disillusioned Disney investors say Mr. Eisner is not able to get along with corporate partners, exerts too much control over Disney's board and has not managed the company's assets as well as he could have over the last five years.
"We are in a new era where board directors are coming under increasing scrutiny," said Gregory P. Taxin, chief executive of Glass, Lewis & Company, a proxy firm that advised shareholders to withhold votes for Mr. Eisner. (Its clients represent more than 15 percent of the outstanding shares of Disney.) "The `vote no' campaign is a sign of the times and of this company in particular."
The timing of the outcry against Mr. Eisner is peculiar given the recent run-up in the stock price — a 60 percent gain in the last 12 months — and signs that the entertainment giant is on the verge of a corporate turnaround. Corporate governance experts also say that the board has been taking steps to become more independent.
One Disney board member, Judith L. Estrin, said in an interview Thursday that Mr. Eisner was the right executive to lead Disney at this time, a view shared by other directors. "We are not going to make a decision based on what I see is a ground swell of a mix of illusion and fact," she said, noting the spate of recent articles critical of Mr. Eisner.
When asked, though, what percentage of shareholders needed to withhold votes for the board to react, she said: "How do you know what number to pick? It's more complicated than that."
Mr. Gold and Mr. Disney want Mr. Eisner replaced, she said. Others want to separate the chairman and chief executive jobs. "We are going to have to take a look at the vote next week and understand what the shareholders are thinking and act accordingly," she said.
But just separating the jobs may not be enough to mollify shareholders who have been disaffected for years. The board could have several options to explore besides splitting the jobs, including finding a new chief executive or promoting an executive from within. And it still has the option of doing nothing at all until Mr. Eisner's contract ends on Sept. 30, 2006.
To be sure, though, any message being sent by investors will be heard loud and clear. As Alan G. Hevesi, New York State's comptroller and the sole trustee of the New York State Common Retirement Fund, which owns 8.7 million shares and is withholding its vote for Mr. Eisner, said on Thursday, "I call on Disney directors to separate the positions of chairman and chief executive and to replace Mr. Eisner as soon as possible."
Link to article
Criticism Mounting as Disney's Leader Faces Crucial Vote
By LAURA M. HOLSON
Published: February 27, 2004
OS ANGELES, Feb. 26 — What began as a trickle of discontent over Michael D. Eisner's leadership of the Walt Disney Company has become far broader as a growing number of large investors have expressed a lack of confidence in the company's management.
As many as one of every three Disney shares are expected to be withheld from voting on Mr. Eisner in next week's annual board election, according to two people close to Disney who have talked to companies tallying the early votes. That is a much higher percentage than dissident shareholders can usually muster in such votes.
On Thursday, state pension funds in New York, Connecticut, Massachusetts and New Jersey said they would not support Mr. Eisner in the board election, one day after California's two largest pension funds announced their votes of no confidence.
Equally as striking, some mutual fund companies like T. Rowe Price have also decided to voice their displeasure.
The critics' decisions do not immediately jeopardize Mr. Eisner's position, as he will still have plenty of votes to be re-elected to the board; he is running unopposed. But a sizable vote of no-confidence at the meeting next Wednesday would add to mounting pressure on the board to address investor discontent. And there is precedent in corporate America of symbolic actions leading to executive change. Stephen M. Case, the former chairman of AOL Time Warner, stepped down soon after investors withheld 22 percent of the votes for him.
"There have been issues for a long time that not everything is great in the Magic Kingdom," said Brian Rogers, chief investment officer for T. Rowe Price, Disney's 14th-largest shareholder, with 19 million shares. "I think a good outcome is to have the board hold Michael Eisner's feet to the fire and be more willing to question his strategy."
The increasingly vitriolic criticism comes nearly 20 years into Mr. Eisner's tenure as the leader of Disney, one in which he restored the company's profits and glory only to have both falter in recent years.
Disney's ABC network has struggled in third or fourth place. The movie division has struggled, relying for more than half of its profits some years on the movies from its soon-to-be-former partner, Pixar Animation Studios. The theme parks were hard hit by the terrorist attacks on Sept. 11, 2001. And critics have said that Mr. Eisner micromanages and has driven away talented executives.
To assuage investors, Mr. Eisner is conducting a charm offensive, visiting investors from San Francisco to Sacramento this week to counter the campaign against him being waged by two former board members: Roy E. Disney, Walt Disney's nephew, and Stanley P. Gold.
Earlier this month, Mr. Eisner's situation became more difficult when the Comcast Corporation, the largest cable operator in the country, made an unsolicited bid that Disney's board rejected.
The Disney fight also comes at a time when the Securities and Exchange Commission is reviewing a proposal to give activist — and often disgruntled — shareholders a greater voice in the selection of corporate boards. Although the proposal may not be considered in time to affect the outcome of the Disney battle, it is seen as an indication of changing sentiment in Washington toward giving shareholders a greater say in picking corporate directors.
But even before the S.E.C. has a chance to act, the withholding of a sizable number of Disney shares is a powerful tactic, according to Charles M. Elson, a corporate governance expert at the University of Delaware.
"The greater the withholding of votes," Mr. Elson said, "the more the directors have to pay attention. Anything over 20 percent is significant. That's the key. The board will have to look at it. There's a real pro-shareholders slant that's taking place."
The estimates, though preliminary, as shareholders can vote up until the annual meeting in Philadelphia on Wednesday, puts Disney's board in an awkward position. The board has expressed utmost confidence in Mr. Eisner's management, but at the same time, after rejecting the $54 billion bid from Comcast for being too low, has left the door open to an offer from any bidder willing to pay a rich price. Still, the public outcry about management and the board's oversight may be too loud for them to ignore.
That is particularly so given that Disney's board is now operating in a post- Enron environment, where every action is measured by investors who are more apt to fault directors for not properly overseeing management. Some disillusioned Disney investors say Mr. Eisner is not able to get along with corporate partners, exerts too much control over Disney's board and has not managed the company's assets as well as he could have over the last five years.
"We are in a new era where board directors are coming under increasing scrutiny," said Gregory P. Taxin, chief executive of Glass, Lewis & Company, a proxy firm that advised shareholders to withhold votes for Mr. Eisner. (Its clients represent more than 15 percent of the outstanding shares of Disney.) "The `vote no' campaign is a sign of the times and of this company in particular."
The timing of the outcry against Mr. Eisner is peculiar given the recent run-up in the stock price — a 60 percent gain in the last 12 months — and signs that the entertainment giant is on the verge of a corporate turnaround. Corporate governance experts also say that the board has been taking steps to become more independent.
One Disney board member, Judith L. Estrin, said in an interview Thursday that Mr. Eisner was the right executive to lead Disney at this time, a view shared by other directors. "We are not going to make a decision based on what I see is a ground swell of a mix of illusion and fact," she said, noting the spate of recent articles critical of Mr. Eisner.
When asked, though, what percentage of shareholders needed to withhold votes for the board to react, she said: "How do you know what number to pick? It's more complicated than that."
Mr. Gold and Mr. Disney want Mr. Eisner replaced, she said. Others want to separate the chairman and chief executive jobs. "We are going to have to take a look at the vote next week and understand what the shareholders are thinking and act accordingly," she said.
But just separating the jobs may not be enough to mollify shareholders who have been disaffected for years. The board could have several options to explore besides splitting the jobs, including finding a new chief executive or promoting an executive from within. And it still has the option of doing nothing at all until Mr. Eisner's contract ends on Sept. 30, 2006.
To be sure, though, any message being sent by investors will be heard loud and clear. As Alan G. Hevesi, New York State's comptroller and the sole trustee of the New York State Common Retirement Fund, which owns 8.7 million shares and is withholding its vote for Mr. Eisner, said on Thursday, "I call on Disney directors to separate the positions of chairman and chief executive and to replace Mr. Eisner as soon as possible."
