The louse is still in the Mouse House. Eighteen months ago, we detailed how Michael Eisner, the longtime chief executive officer of Disney, had managed to retain his job even though he had committed virtually every executive sin. In the past year, Disney's stock has recovered along with the market and the economy, and earnings have grown modestly. Yet there has also been a run of news that reflects poorly on Eisner and highlights his manifold failings. Guess what? Eisner remains more entrenched than ever. After nearly 20 years at the helm, he refuses to discuss succession. And ironically, the climate of corporate governance reform has allowed him to strengthen his hand.
Michael Eisner's Disney has been a case study in poor corporate governance. Over the years, the board was disproportionately stocked with insiders, professionals who had dealings with the company, people whose children or relatives worked at the company, and others who were ill-equipped to exercise oversight over Eisner. In 2003, the Securities and Exchange Commission began investigating whether Disney failed adequately to disclose payments made by the company to directors and their family members in 2001. (The probe is described on Page 10 of Disney's recently issued proxy statement.)
One of Eisner's main deficiencies has been an inability to manage key relationships and heed advice. And he hasn't improved much on that score, either. On the board, only two directors challenged Eisner directly: Roy Disney, the nephew of company founder Walt Disney, who also served as chairman of Disney's feature animation division; and Stanley Gold, Roy Disney's investment manager. Both had repeatedly pushed Eisner to name a successor. But last November, Disney left the board and the company, angered that he had not been renominated for board membership. His nasty resignation letter indicts Eisner for a host of management failings. The next day, Gold resigned, firing off a just-as-nasty resignation letter. By replacing the two longtime insiders with two new independent directors—Aylwin Lewis, president of YUM! Brands, and Sybase Inc. CEO John Chen—Eisner has managed to make it appear as if the board is more independent while banishing the two truly independent voices from the boardroom.
In the end, Eisner may reconsider whether it was better to have Roy Disney and Stanley Gold plotting his demise from within, instead of from without. Rather than sell their shares and move on, Disney and Gold have set up a Web site, www.savedisney.com, that is half tribute-site, half anti-Eisner blog. The site chronicles Eisner's continuing misadventures in comprehensive detail and invites loyal Disney cast members to air gripes on its bulletin board. The two are leading a campaign to have investors vote against Disney's slate of directors at its March annual meeting.
A main topic of discussion at savedisney.com has been Eisner's recent failure to renew the lucrative deal it had with Steve Jobs and Pixar. Since 1991, Pixar has made fabulously successful computed-generated animation movies—Toy Story, A Bug's Life, Monsters Inc., Finding Nemo—and Disney has distributed them. The deal, inked before Pixar had grown into a powerhouse, rendered unto Disney the rights to make sequels and to imprint the likeness of Buzz Lightyear and Marlin on merchandise.
The arrangement was enormously advantageous to Disney and was slated to expire in 2005. But with Disney's own animated films having been a mixture of modest hits (Lilo & Stitch)and expensive flops (Treasure Planet),the dynamics of the negotiations had plainly tilted in favor of Pixar, which could presumably find a new distributor with ease. But Eisner wasn't in the mood to make concessions that would benefit Pixar at Disney's expense. So, Jobs and Pixar walked away. "After 10 months of trying to strike a deal with Disney, we're moving on," Jobs said. (Pixar still owes Disney two movies.)
Disney grew into a powerhouse in part because Walt Disney insisted that his company create, own, and control the company's animated creatures. But under Eisner, Disney partially outsourced the expensive (but potentially lucrative) process of creating new characters—to Pixar, for example. Today, Disney seems to take an accountant's approach to the creative process. In a presentation to investors in January, Eisner accentuated the positive—an improvement in the stock price, good box-office numbers, and the continuing dominance of ESPN. But the message investors took away was that Disney would seek excellent entertainment on the cheap. He spoke of "creative cost-consciousness" in the television businesses, and "shrinking the financial box" for series."A hit live action series like That's So Raven is produced at half the price of a network series, resulting in very good returns," he boasted. (That's so C-level entertainment.)
"Across the company, we are pushing creativity," Eisner continued. In some cases, he's pushing creativity right out the door. In January, Disney shuttered its Orlando animation studio, which employed 260 people. This provided more fodder for Disney and Gold. "The drain of talent over the past several years from the company's feature animation department in Orlando, Burbank, Paris and Tokyo has been absolutely gut-wrenching," Roy Disney blogged.
Increasingly, Eisner looks like a miserly bean-counter intent on putting out entertainment that is derivative, cheap, and easily digestible. And as Eisner extols That's So Raven, Roy Disney's artistic aura grows. He was just nominated for an Academy Award for Destino,a short film his uncle began working on with Salvador Dalí in 1946, which Roy Disney recently completed. * The film isn't the only surreal aspect to the Disney story. As the annual meeting approaches, we will be treated to the spectacle of Walt Disney's nephew leading a guerrilla campaign to unseat the longtime CEO of his family's company.
Correction, Feb. 4, 2004: The original version of the piece stated that Roy Disney made Destino with Salvador Dalí in 1946. In fact, it was Roy Disney's uncle, Walt Disney, who began collaborating with Dali on the film in 1946.