A Blunder Haunts the Magic Kingdom

Disney's court battle with ex-President Michael Ovitz underscores the outfit's challenge now: Finding a new CEO with internal support

By Ronald Grover

Drama is abundant at the Disney (DIS ) shareholder suit over Michael Ovitz' short tenure as president of the entertainment giant. The one-time Hollywood uberagent's four days on the witness stand made for tabloid-like headlines, with charges of backstabbing by top Disney execs and stories of deals that could have transformed the outfit -- if not for CEO Michael Eisner. Ovitz even testified that he was "cut out like a cancer" by Eisner, a man Ovitz said he once considered as close as his brother.

The stars in the Georgetown (Del.) courtroom are lawyers, witnesses, and angry shareholders upset about the $140 million Ovitz got when he left Disney in 1996. And at first glance, the plot is about whether Disney's former board behaved responsibly. The board denies the charges. But the subtext isn't the $140 million -- $10 million for each month Ovitz was on the job. No, this case is really about a company's failure to ensure that it would be run by competent folks well-versed in its culture and operations.


  For whatever reason, back in 1995, Eisner plucked a personal friend -- albeit one who was then known as "The Most Powerful Man in Hollywood" -- to run Disney, a group teeming with personality conflicts and bruised egos. Ovitz was relatively unschooled in corporate life and certainly unfamiliar with the ways of the Mouse House.

In the end, Ovitz doesn't deserve all the blame for his failure as Disney president. He was a bad match -- and the board and Disney are partly to blame. They either didn't ask enough questions or didn't ask the right ones. (Ironically, Frank Wells, the Disney president whose 1994 death left the position open, once told Eisner he would take the vice-chairman job if Eisner wanted to train Ovitz. In his deposition, Eisner said he declined the offer.)

This case -- which after all, involves a series of events that started 10 years ago -- is all the more interesting because it's being played out against the context of Disney's current succession dilemma. The board, in the midst of a search for Eisner's successor when the CEO retires in 2006, has decided that current President Robert Iger is the lone internal candidate.


  Iger certainly has the right pedigree. Hired in 1974 as a weatherman at ABC's New York affiliate, the 53-year-old New York native rose through the ranks at ABC to become president in 1994 and Disney's No. 2 six years later. (Disney bought ABC in 1995.)

As Eisner's second-in-command, Iger has helped with such hot-button issues as keeping Orpah Winfrey from bolting, overhauling Disney's wobbly consumer-products unit, and spearheading its overseas efforts. Disney insiders also credit him for the current turnaround at ABC, where ratings are up on the strength of hit shows Lost and Desperate Housewives. He's "the logical choice" to run the Mouse House, writes Timothy Wallace, an analyst with UBS Securities. He points to Iger's "deep knowledge of operations, unpretentious style, and internal support."

Iger clearly has a "deep knowledge of operations." But does he have "internal support"? That, as much as anything, is what Disney's board has to think about when picking its next CEO, whether it's the homegrown Iger or a big-name mogul like News Corp. (NWS ) President Peter Chernin or CBS (VIA ) honcho Leslie Moonves. It has become clear, through the depositions and testimony, that Ovitz never had that support. He and the Disney top brass clashed almost immediately, according to depositions given by both Eisner and Ovitz.


  In his deposition, Ovitz said when he joined the company, then-Vice-Chairman Roy Disney, who headed the animation unit, wrote a memo to his 1,400 animators saying Ovitz wasn't to be involved with them. And when Disney studio chief Joe Roth first learned that Ovitz was coming aboard, he made a special trip to Colorado to see Eisner because he "just wanted to make sure that Michael Ovitz wasn't going to run the movie business," Eisner said in his deposition.

The Ovitz trial has had its share of tawdry details. Eisner, in an e-mail the shareholders' lawyers released, called Ovitz a "psychopath," while audits from PricewaterhouseCoopers say the short-term Disney president racked up $4.8 million in expenses, including $2 million to renovate his office and $68,000 for a home screening room.

More potentially juicy testimony is yet to come. Eisner hasn't yet taken the stand, nor have former board members Roy Disney and Stanley Gold. The two have recently been trying to push Eisner out but were among board members who supported Ovitz's hiring.


  You can bet that Disney's current board is paying close attention to the drama, details, and depositions. It has said in June, 2005, it will announce Eisner's successor. Will it go outside, as it did in 1984 when it brought in Eisner from Paramount and Wells from Warner Bros.? Thanks to their previous successes, Eisner and Wells immediately commanded respect from dispirited Disney execs looking for leadership.

This time around, however, the executives are a stronger, more capable bunch. The board has to get their support -- whether it goes for Iger or an outsider. Otherwise, Disney could someday be writing a whole new drama about one of its top executives.

Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online

Edited by Patricia O'Connell

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