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Keeping The Keys To The Kingdom


It was a boardroom revolt that could have been drawn on the storyboards of a studio made famous by evil stepmothers. In unusually blunt terms, Roy E. Disney left the company started by his Uncle Walt 80 years ago, blasting the man he helped put in charge back in 1984. Walt Disney Co. Chairman Michael D. Eisner is "rapacious, soulless, and always looking for the quick buck," Disney wrote in his resignation letter. A day later, Disney's longtime financial adviser, Stanley P. Gold, also resigned from the board, claiming the 61-year old Eisner is no longer capable of leading the $27 billion-a-year entertainment giant. "He just ran out of gas," Gold said of Eisner.

The duo will take their complaints to Wall Street, arguing that Eisner has frittered away the Disney franchise, alienated hot talent, and backed bombs at ABC. For now, that could be a tough sell: After seven years of mostly flat earnings, recent hits like Pirates of the Caribbean: The Curse of the Black Pearl and a ratings boost at sports channel ESPN Inc. have lifted Disney's stock 30% this year. "Stanley Gold and Roy Disney aren't going to be an immediate catalyst," says Anthony Valencia, whose TCW Group Inc. owns 1.19 million shares. "But if something happens next quarter, they'll come out of the woodwork again."

Eisner can hardly relax. More needs to be done if he hopes to quiet his critics. Despite his well-publicized moves to improve Disney's weak corporate governance, for example, investors complain he still holds sway over the board. Moreover, two members of the board, whom Disney says are independent, have ties to the company. Those two, presiding director ex-Senator George J. Mitchell and Edison International Chairman John E. Bryson, who heads the governance committee, hold key posts. Bryson's wife draws a big salary at Disney's 50%-controlled Lifetime cable channel, and Mitchell was a consultant until a year before being named to his committee post. Bryson didn't return calls, and Mitchell has said he "has always felt completely free to express [his] views." That's not enough for most governance gurus. "This is still a bad board," says Patrick McGurn of Institutional Shareholder Services Inc., which advises large clients.

Nothing would dispel that notion quicker than if the Disney board moved to address complaints that Eisner has no clear successor, and controls the selection. While Eisner has hinted he would tap Robert A. Iger, the Disney president isn't uniformly backed by the board. Worse, Gold says, directors have never seriously discussed succession; instead, Eisner keeps the name of his choice in a sealed envelope in his desk. Critics of Eisner are unlikely to be satisfied until the board makes clear that it will choose the next CEO, not Eisner.

LOSING NEMO?

Of course, the corporate governance flap would hardly matter if the company's earnings and stock price were better. Investors demand that Eisner make good on his long-promised turnaround plan. So far, despite modest improvements at ABC and ESPN, progress has been slow. Critics say Disney needs to beef up its holdings in local TV stations to boost distribution for its movies and TV shows. Says Merrill Lynch & Co. analyst Jessica Reif Cohen: "We believe it's a strategic imperative."

Holding on to Disney's creative spark will be harder but no less essential. That's why outsiders are closely watching attempts to patch its troubled alliance with Pixar Animation Studios, which teamed with Disney to make such hits as Monsters, Inc. and Finding Nemo. Doing so will likely force Disney to give up some of its current 60% share of the profits. But with its own animators producing only more modest hits, such as the Brother Bear, the costs of losing Pixar would be greater.

Roy Disney and Stanley Gold won't push out Michael Eisner. But until he addresses their underlying complaints, neither he nor investors can rest easy. By Ronald Grover in Los Angeles, with Tom Lowry and Louis Lavelle in New York


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