Disney's New Thriller: Eisner on Ice?

A giant California retirement fund's decision not to support the CEO means the upcoming annual meeting will be quite a show

By Ronald Grover

Will Michael Eisner win the battle, but lose the war? That's what the embattled Walt Disney CEO may well learn on Mar. 3, when he stands for reelection as chairman at Disney's (DIS ) annual meeting in Philadelphia. By all accounts, he's losing votes at a rapid clip. It doesn't look as if he has dropped enough to be toppled outright -- but the erosion could force the board to reconsider whether the 61-year-old honcho should continue to lead the strife-torn outfit, according to sources close to the board.

The biggest blow to Eisner's prospects came Feb. 25, when the powerful $235 billion California Public Employees' Retirement System (CalPERS) announced that it wouldn't be putting the votes of its 9 million-plus shares behind Eisner's reelection bid. CalPERS, Disney's 29th-largest shareholder, traditionally carries immense weight with large investors, including other state retirement funds. The California State Teachers' Retirement System (CalTRS), with nearly 8 million shares to vote, also may follow the lead of the larger fund and decline to support Eisner, according to one source with knowledge of the latter fund's thinking.


  On top of that, proxy adviser Glass Lewis, which counts both California funds among its large institutional clients, said Feb. 25 that it was recommending that all clients withhold votes for Eisner and two other board members. "The Disney board has been notoriously insular, famously gullible, and blindly loyal to Mr. Eisner," says Greg Taxin, CEO of Glass Lewis. The move by CalPERS comes a week after the influential Institutional Shareholder Services, a proxy-advising group that offers guidance to more than 700 funds, also issued a no-Eisner recommendation. Says Taxin: "It's starting to look like a snowball effect."

Says Disney spokesperson Zenia Mucha: "The Disney board does not agree with CalPERs' statement on management, as it believes the company has well laid out its key long-term strategies for achieving double-digit earnings growth, which is reinforced by the strong recent performance of Disney's shares." And she says Glass Lewis is "an upstart company that's trying to grab publicity."

The CalPERS decision to withhold its votes could add further fuel to the fire that has been growing since late last year, when former board members Roy Disney and Stanley Gold urged Disney stockholders to vote against Eisner (see BW Online, 2/9/04, "2004's Other Election Battle: At Disney"). Now, the pair say the Glass Lewis recommendation against Eisner's reelection "provides another important validation to our position that significant change is needed at the Walt Disney Co."


  In a recent interview, Gold said he believes that fewer than 85% of Disney shareholders will vote for Eisner. (In 1997, following Disney's acquisition of CapCities ABC, four board members standing for reelection -- including Roy Disney -- all polled in the mid-80% range.)

The way the Disney ballot is worded, shareholders have only two choices: They can vote for a board member or withhold their votes. But a showing for Eisner of 80% or less could be a devastating blow to the Disney chairman, says University of Delaware professor Charles M. Elson, a governance expert. He believes that if 15% to 20% of shareholders don't vote for Eisner, the Disney board would be forced to assess whether Eisner should at least split his jobs of chairman and CEO.

"The board," says Elson, "should be listening when the number against its CEO gets up that high." Agrees Taxin: "A 20% withhold level sends a strong message that instructional investors say he's doing a bad job. I think a big withhold vote will be a wake-up call to [the board], and you might see some real independent action."


  Eisner has been on the hustings around the country of late, extolling the stock's renewed performance and citing first-quarter results that blew past analysts' expectations. Indeed, Eisner made his case to CalPERS the day before it voted to withhold its support. He sat in a Sacramento conference room with Disney board member Judith Estrin (presiding board member George Mitchell was on the phone, as was CFO Tom Staggs) and outlined a strengthening rebound in theme-park operations, consumer products, and at ABC.

The performance wasn't enough to persuade CalPERS. "We have lost complete confidence in Mr. Eisner's strategic vision and leadership in creating shareholder value," says Sean Harrigan, president of the CalPERS board of administration. Harrigan pointed out that Disney has lost more than 23% of its value in the last five years -- nearly five times the losses in the Standard & Poor's 500, he notes.

A CalPERS source says the pension fund believes Eisner has allowed Disney to spend too much time "building its brand" while diluting management talent "by chasing too many things at once," including building a new theme park in Hong Kong and launching additional cable channels. Says the source: "They should have worked harder to fix the things that were broken."


  At a recent two-day retreat for Disney investors, Eisner and his management team laid out a strategic vision that they claimed would result in 30% earnings growth this year and double-digit earnings increases through 2007. Moreover, Disney has stressed that it has outperformed many other large media outfits in the last six months, with its stock up by more than 30%.

Good numbers without a doubt. But will that will be enough to save Eisner from a nasty reception -- and maybe even worse consequences -- in the City of Brotherly Love? That will depend on the final tally and what Disney's board decides to do about it.

Grover is BusinessWeek's Los Angeles bureau chief

Edited by Patricia O'Connell

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