Commentary: Now It's Time To Say Goodbye

How Disney's board can move beyond the Eisner era

The message at Walt Disney Co.'s (DIS ) annual meeting in Philadelphia was delivered so loud and clear that you could almost hear it echo through the sprawling Pennsylvania Convention Center: It's time for CEO Michael D. Eisner to go. Never before in Corporate America have shareholders expressed such an enormous, public loss of confidence in a chief executive.

Before a raucous, overflow crowd of more than 3,000 investors -- some wearing Disney costumes and handing out anti-Eisner pamphlets -- the company announced that an astounding 43% of the nearly 2 billion votes cast by investors withheld support for Eisner in his post as Disney chairman. It was an unambiguous message of unhappiness with the 61-year-old chief executive. "This is the acid test for the Disney board," says University of Delaware professor Charles M. Elson, a governance expert. "If it doesn't get rid of him now, they're open to all kinds of lawsuits."

Yet it appears Disney's board, long criticized for its lack of independence, is just beginning to come to terms with the deep blow both it and Eisner have been dealt. In an effort to placate angry shareholders and strip some power from Eisner, the board voted to keep Eisner on as CEO while naming presiding director George Mitchell, the former Maine Senator, as chairman. In a statement released shortly after a five-hour board meeting in the wake of the vote, the board said it "remains unanimous in its support of the company's management and of Michael Eisner."

But given the magnitude of the vote against him, such a move is no longer enough. Eisner needs to step aside, and the sooner the better. "The fact is, we have just lost confidence in Michael Eisner," says Christianna Wood, chief investment officer of the giant California Public Employees' Retirement System, a top Disney shareholder that holds 9.9 million shares. Just hours after the vote tally was publicly revealed, CalPERS called for Eisner to step aside by the end of the year. Adds media consultant Peter Kreisky: "This is emergency surgery, for sure. You have to believe the writing is on the wall for Mr. Eisner. Mitchell will need to bend over backwards to be his own person."

No one would deny Eisner his place in history. Recruited to Disney from Paramount in 1984, he guided the entertainment giant back from the precipice by revamping its theme parks and rejuvenating its movie studio. Throughout the 1980s and well into the 1990s, Disney was the darling of Wall Street, often praised for its marketing savvy and shrewd leadership. But Eisner, and Disney, have long ago lost their way. In the past 10 years, his obsessive micro-management has driven away top execs such as former studio chief Jeffrey Katzenberg, as well as two other studio chiefs and several unit chiefs. He has been criticized for overbidding for such assets as the ABC Family Channel and running a ship that for most of the past decade that has underperformed other media companies. Ratings at the ABC network continue to plummet, margins at the parks have been falling for years, and its return on investment has lagged the overall media industry over the past five years, according to proxy group Institutional Shareholder Services Inc. Meanwhile, Eisner's gargantuan compensation has made him the scorn of many investors, particularly since Disney shares -- even after gaining 27% in the past six months -- are still trading at 1997 levels.

All those problems have come home to roost for Eisner and the Disney board. The massive shareholder vote against him in Philadelphia has dealt the onetime media star a enormous setback. And Mitchell is in deep trouble as well. With 24% of voting shareholders withholding support from him, investors clearly see him as too closely aligned with Eisner. The Disney board needs to make far more sweeping changes if it wants to restore investor confidence. Here's what it should do:

FIND A SUCCESSOR -- FAST. The board's first priority should be to set a suitable deadline for Eisner to leave -- six months tops -- and get to work recruiting the strongest possible successor as CEO. Leading potential candidates include current Disney President Robert Iger, News Corp. (NWS ) President Peter Chernin, and Time Warner (TWX ) Entertainment & Networks Group Chairman Jeffrey L. Bewkes. None will come if Eisner lingers for a longer transition period, say those who know them, so the board must step up and ensure Eisner's exit. Clearly, the board should be looking for a CEO who is a sharp marketer and who can lure top creative talent, allow strong division chiefs to do their jobs, and maneuver the changing landscape as entertainment goes digital.

Getting the right person in the job will be key, since nobody is overly bullish about the company, given its challenges and the possibility that it could be sold. True, the numbers lately look better. Disney handily beat Wall Street estimates in its most recent quarter, earning $688 million on $8.5 billion in revenues. The company is projecting a 30% rise in earnings for the year -- although even that would still mean getting profits back only to where they were in 1997. And that could be about as good as it gets for a while. "We remain unconvinced that the earnings improvement at Disney is sustainable," wrote SG Cowen Securities Corp. analyst Lowell J. Singer, citing smaller profits from theme parks and ABC's ratings woes.

CONTINUE THE BOARD SHAKEUP. Ending Eisner's tenure would be only the first step in needed changes. Disney's board clearly needs to keep reforming itself, too -- starting at the top. It is right in recognizing the need to split the top roles and bring in a new chairman. But the high percentage of investors who withdrew their support for Mitchell is clear evidence that he's not the man for the job. A former legal adviser to Disney when he joined the board in 1995, Mitchell has served as one of the board's "independent" directors since he stopped taking fees from the company several years ago. But as presiding director, he has rarely stood up to Eisner and has remained loyal to the Disney chief even in recent days. Many investors have lost faith in him.

That's why Disney needs a more forceful head who can run a more accountable board. Newly named director and former Seagram (V ) Vice-Chairman Robert W. Matschullat, 56, would be a far better choice. And whoever it is, the board also needs to tighten up the lax procedures that allowed Eisner to dismiss the Comcast (CMCSK ) overture without any serious board discussion or even any knowledge of what Comcast was willing to pay. "How do you say no before there is even an offer?" asks Institutional Shareholder Services Inc. Vice-President Patrick McGurn.

TAKE COMCAST SERIOUSLY. As the board sorts through its options in the coming days and weeks, it also has a duty to take a much more careful look at the bid by Comcast Corp. On Mar. 3, Comcast said it wants to meet with Disney independent board members. Investors also expect it to sweeten its offer above the $26 that Disney shares were trading for. Close scrutiny is the only way to determine if the deal makes sense, particularly given that Disney's competitive landscape has been changed drastically by Rupert Murdoch's purchase of the DirecTV satellite business.

If, after due consideration, the board rejects a higher Comcast bid, it then needs to articulate clearly an alternative strategy that promises to give shareholders the return on their investments that they demand. And, frankly, that could be tough. Disney is facing a series of risky bets on upcoming movie releases as well as the continuing problem of shaky financials and slow growth in its theme park division. If the board can't persuade investors to stick with the company on its merits, then why shouldn't Disney sell?

The hard truth for Eisner and his board is that times have changed. In a new era of shareholder democracy and open corporate governance, a 43% vote against a CEO has to be reckoned with. It's never easy for a proud executive to know when his time is up. That's why the Disney board must step up, and do everyone a favor by setting a clear course for the future -- one that doesn't include Michael Eisner or George Mitchell at the helm.

By Ronald Grover and Tom Lowry

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