Expert answer:Governing the House of the Mouse
Solved by verified expert:Case: “Governing the House of the Mouse” How have the external environments impacted Disney’s performance over the years? How did the internal organization and culture at Disney influence its performance? How would you evaluate the effectiveness of the Board of Directors at Disney? Explain your answer. Evaluate the executive compensation policy used by Disney as a governance mechanism. Has it incentivized the executives to maximize shareholder value? Has there been any risk of using stock options or awards? Papers are to be 3 pages in length, single-spaced with one-inch margins all around and 12 point Times New Roman font.
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Case 9
Governing the House of the Mouse: Corporate Governance at Disney, 1984–2006
Steve Gove
University of Dayton
Michael Eisner joined the Walt Disney company in 1984,
just after the venerated icon of American animation
thwarted a hostile takeover attempt. Over the next 20 years,
Eisner would lead the company through a remarkable
transformation during a period of rapid industry change.
Disney’s revenues would grow from $1.5 billion to more
than $30 billion, the number of employees from 28,000 to
more than 125,000, and the firm’s stock would appreciate
some 1,600 percent. At the heart of the company remained
Disney’s animated film unit. Under Eisner’s revitalization, Disney churned out such hits as The Lion King and
Aladdin, fell into decline, and then partnered with Pixar to
transition animated film making into the digital age with
Toy Story and Finding Nemo among the hits. How could
this remarkable performance occur in a company whose
corporate governance practices were repeatedly labeled
as among the worst in corporate America?
© Don Hammond/Design Pics/Corbis
Overview of the Motion Picture
Industry
In 1946, the average person in the United States went to
28 films a year, with 4 billion tickets sold.1 The industry’s
primary rival was radio. Motion picture revenues and
profits came exclusively from ticket sales in theaters.
By the 1950s, widespread adoption of television meant
movie theaters had competition for America’s eyeballs.
On a Friday night in 1956, a Los Angeles television station aired the film Thirty Seconds Over Tokyo and local
theaters experienced a 25 percent drop in ticket sales.2 It
was a sign of things to come. By 1960, television was in
more than 80 percent of U.S. homes and theater attendance in steady decline.
In 1973, the motion picture industry hit rock bottom:
A mere 865 million tickets sold, just 4 per person. The industry aggressively sought alternative sources of revenue.
In 1980, home video was a nascent business. Films on
videocassettes, then the cutting-edge technology, were
typically priced from $70 to $90. By 1983, video rentals
reached $625 million annually3 and VCR penetration
would soon reach 18 percent.4 Other distribution channels, which captured revenue for studios and further
increased competition for the local theater, were also
growing. Launched in 1972, HBO/Cinemax, the leading
player in the subscription-based, at-home syndication
market, rode the growth of cable television and had
16.2 million viewers by 1984.5
During the 1980s the motion picture industry shifted
from one focused on the quality and content of shows,
to one fixated on distribution, licensing, and marketing arrangements.6 A young executive, Michael Eisner of
Paramount, noted “90 percent of our meetings used to
dwell on what our movies were going to be about,” but now
were increasingly about release windows, pricing of home
videos, software, and release for home viewing.7 The pace of
change would only increase. By 1996, Disney, for example,
would delve into its film archive and re-release Snow White
ten times, making it their most profitable feature.8 In 2003,
Finding Nemo would be a blockbuster with $340 million
in U.S. ticket sales. Within the industry it would become
famous for a different reason: Its $485 million in VCR and
DVD sales eclipsed revenues from its theatrical release.9
The industry also started to focus attention beyond
the film, targeting merchandise and licensing for revenues.
The 1977 hit Star Wars ushered in this era of filmlicensed merchandise. Films developed as “blockbusters”
or “event films” had budgets exceeding $100 million and
would involve equally large merchandising deals. Disney’s
The Lion King, for example, involved some 2,500 licensed
products.10 In the late 1990s and beyond, motion picture
studios would expand their reach, becoming diversified
entertainment behemoths embedded in the broader
“entertainment” business. No firm represented this transformation more than Disney.
The author developed this case for the purpose of class discussion rather than to illustrate either effective or ineffective handling of the situation. Contact person:
Steve Gove, Management / Marketing Department, University of Dayton, MH 713, 300 College Park, Dayton, OH 45469-2271, (937) 229-2239, gove@udayton.edu.
99
Eisner Enters the Magic Kingdom: 1984
Michael Eisner was hired away from Disney’s rival
Paramount Studios, having been passed over for advancement from president to chairperson. At the time,
Paramount was considered among the leaders of the
movement to capitalize on merchandising and alternative sources to supplement ticket sales revenue. Many
who interacted with Eisner during his Paramount tenure
complained he was difficult to work with, but his critics
could not argue about his success.11 Eisner was credited as
a creative force in Paramount’s rise to one of Hollywood’s
most successful studios with his contribution to the development of hit films such as Raiders of the Lost Ark,
Grease, and Terms of Endearment and hit TV shows such
as Happy Days, Laverne and Shirley, Taxi, and Cheers.
The film industry experienced rapid changes during
the early 1980s, but for Disney, it was a time of crisis. The
firm’s stock had languished (see Figure 1). The studio released only three films in 1983. By June 1984, the situation was so bad the firm was the target of a hostile takeover attempt by investor Saul Steinberg. Disney thwarted
the takeover through a series of defensive maneuvers,
including the acquisition of Arvida Corporation, a property development company, principally owned by Bass
Brothers Enterprises.12 The deal provided Disney with
20,000 acres of Florida land and the Bass Brothers with
$200 million in Disney stock, enough to exert influence
in the company. Facing strong opposition, Steinberg’s
11.1 percent interest in the company was sold back to
Disney in a practice labeled “greenmail.” Disney purchased the shares at $70.83 per share for a total of $325
million, a premium of some $60 million, or nearly 23
percent over market value.13 Disney also announced an
additional defensive maneuver, the acquisition of Gibson
Greetings, but later abandoned the deal as the threat of
Figure 1 Performance of Disney for Five Years Prior to
Eisner’s Arrival, September 1979–September 1984
100%
75%
50%
25%
0%
–25%
September,
1979
Case 9 • Governing the House of the Mouse: Corporate Governance at Disney, 1984–2006
100
1980
1981
1982
DJIA
1983
Disney
1984
Steinberg subsided and after investor Irwin Jacobs, another possible suitor, disclosed ownership of 6 percent
of Disney and threatened a proxy fight unless the plans
were cancelled for a purchase he berated as “flagrantly”
overpriced.14
Dissatisfied with the company’s performance and
subjected to the humiliation of hostile takeover attempts,
outside directors met to discuss the possible ouster of
president and CEO Ronald Miller.15 The son-in-law of
company founder Walt Disney by marriage to Walt’s
daughter Diane, Miller had been with Disney for 30 years,
president since 1980 and CEO since 1983.16 Despite his
rise within the company, Miller was considered to be
symbolic of undermanagement of the company.17 In a
private meeting of Disney’s eight outside directors, a coalition formed and agreed to bring the subject of Miller’s
tenure to discussion and a vote of the full board.
The next day, in a meeting of the full board, all 14
of the firms directors voted for Miller’s resignation.18
The revolt was led by director Philip Hawley19 and Roy
Disney, the nephew of company founder Walt Disney.20
Roy Disney had resigned from the board in March 1984
following disagreements with Miller and other top managers regarding his role in the company and the firm’s
failure to hire first-class talent in film and television production.21 Philip Hawley, co-chair of Disney’s outside director’s committee, had recently defended his own firm
from a hostile acquisition. Hawley had approved Disney’s
buyout of Saul Steinberg’s share to prevent overthrow of
the company’s management, but had admonished management to significantly improve earnings.22
The search for a new CEO was undertaken while under
the threat of another takeover. Jacobs, by then controlling 7.7 percent of the company, considered launching his
own unsolicited tender offer for control of the company.23
A spokesperson for Roy Disney, whose interests controlled approximately 5 percent of the company, spurned
the offer, stating “one major shareholder—whose name
happens to be Disney—is firmly committed to the independence of this company.”24
Possible CEO candidates included many Hollywood
insiders, including Eisner, Frank Wells, then vice chairperson of rival Warner Bros., Dennis Stanfill, former
chairman of 20th Century-Fox Film, and Fox Studios
chairman Alan Hirschfield.25 The search ended on
September 23, 1984, when the board voted to hire Eisner
as CEO and chairperson of the board and Frank Wells
as president and chief operating officer.26 Disney’s existing chairperson, Raymond Watson, would resign as
board chair but remain on as a director. At least two factions had emerged during the search. One side, including director Philip Hawley, favored the hiring of Stanfill.
Another faction wanted Eisner, including members
of the Disney family—Roy, Walt’s widow Lillian, and
Table 1 Disney’s Board Composition, 1980–2006
Unclassified Board
Last Name
Anderson
Morrow
Hawley
Miller
Tatum
Ahmanson
Disney Lund
Baldwin
Wells
Cobb
Williams
Walker
Nunis
Lozano
Russell
Disney
Watson
Gold
Eisner
Wilson
Stern
Bowers
Poitier
Litvack
Mitchell
Ovitz
Murphy
O’Donovan
Van de Kamp
Estrin
Bryson
Iger
Lozano
Matschullat
Chen
Lewis
Langhammer
Pepper
Smith
Jobs
First Name
William H.
Richard T.
Phillip M.
Ronald
Donn B.
Caroline Leonetti
Sharon
Robert
Frank G.
Charles E., Jr.
Samuel L.
E. Cardon
Richard A.
Ignacio E., Jr.
Irwin E.
Roy E.
Raymond L.
Stanley P.
Michael D.
Gary L.
Robert A.M.
Reveta F.
Sidney
Sanford M.
George J.
Michael
Thomas S.
Leo J., S. J.
Andrea
Judith L.
John E.
Robert A.
Monica C.
Robert W.
John S.
Aylwin B.
Fred H.
John E., Jr.
Orin C.
Steve
Director
Beginning
1960
1971
1975
1966
1964
1975
1984
1983
1984
1984
1983
1960
1981
1981
1987
1967
1974
1987
1984
1985
1992
1993
1994
1995
1995
1995
1996
1996
1998
1998
2000
2000
2000
2002
2004
2004
2005
2006
2006
2006
Classified Board Structure
Return to Unclassified Board
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Note:
Proxies not available for all years. Directors join and depart the board at various points during the year. Missing years and inexact dates filled in with case writer’s estimates.
White cell borders indicate reelection, multiple cells joined without border indicates continued multiple year term.
101
101
Case 9 • Governing the House of the Mouse: Corporate Governance at Disney, 1984–2006
102
Table 2 Bios of Select Disney Directors
Director
Director
Beginning
Brief Bio (parenthetical year indicates Disney
proxy statement from which bio was adapted)
Ahmanson,
Caroline Leonetti
1975
Mrs. Ahmanson has been chair of the board of Caroline Leonetti Ltd. (a women’s
center for self-improvement) since 1945 and has, for more than the past 20 years,
been engaged in numerous civic, philanthropic, and charitable affairs. From 1982
to 1984 she was chairperson of the Federal Reserve Bank of San Francisco, of
which she is currently chair emeritus, and now serves as a member of the board of
directors of Flour Corporation and of Carter Hawley Hale Stores, Inc. (1988)
Bowers, Reveta F.
1993
Mrs. Bowers was elected to the board of directors on April 26, 1993, to fill the
vacancy created by the death of Sharon Disney Lund. Since 1976, Mrs. Bowers,
45, has been the head of school for the Center for Early Education, an independent
school for preschool through sixth grade located in Los Angeles. Mrs. Bowers is a
member of the board of directors of several not-for-profit educational organizations,
including the National Association of Independent Schools and Educational Records
Bureau, Inc. She is also a trustee of Harvard-Westlake School, an independent high
school located in Los Angeles. (1993)
Bryson, John E.
2000
Mr. Bryson served as chair of the board, president, and chief executive officer of
Edison International, the parent company of Southern California Edison, since 1990.
He is also a director of The Boeing Company; Pacific American Income Shares, Inc.;
LM Institutional Fund Advisors, Inc.; and the Council on Foreign Relations, and a
trustee of Stanford University. (2000)
Chen, John S.
2004
Mr. Chen has been chairperson, chief executive officer, and president of Sybase,
Inc., a software developer, since November 1998. From February 1998 through
November 1998, he served as co-CEO. Mr. Chen joined Sybase in August 1997 as
chief operating officer and served in that capacity until February 1998. From March
1995 to July 1997, Mr. Chen was president of the Open Enterprise Computing
Division, Siemens Nixdorf, a computer and electronics company, and chief executive
officer and chairperson of Siemens Pyramid, a subsidiary of Siemens Nixdorf. (2004)
Disney Lund, Sharon
1984
Mrs. Lund, daughter of the late Walt Disney, served for more than the past five
years as an officer of Retlaw Enterprises, Inc., a successor to the corporation that
was originally organized by the late Walt Disney in 1952 to carry on certain of his
personal business ventures. Retlaw is owned by members of his family, including
Mrs. Lund. She also served as a trustee of the California Institute of the Arts, the
Marianne Frostig Center of Educational Therapy, and the Curtis School Foundation.
(1988)
Disney, Roy E.
1967
Mr. Disney has been vice chairperson of the board of directors of the company
since 1984, and since November 1985 has also served as head of the company’s
animation department. In addition, Mr. Disney is chairperson of the board of
Shamrock Holdings, Inc., which, through its subsidiaries, is engaged in real estate
development and other investments. Mr. Disney is a nephew of the late Walt
Disney. Mr. Disney’s service as a director of the company began in 1967, but was
interrupted in 1984. (1984)
Eisner, Michael D.
1984
Mr. Eisner is chairperson of the board of directors and chief executive officer of
the company. Prior to joining the company in September 1984, Mr. Eisner was
president and chief operating officer of Paramount Pictures Corp., a wholly owned
subsidiary of Gulf-Western Industries, Inc. Prior to joining Paramount in 1976,
Mr. Eisner was senior vice president of prime time production and development
for ABC Entertainment, a division of the American Broadcasting Company, Inc.,
with responsibility for the development and supervision of all prime-time series
programming, limited-series movies made for television, and the acquisition of
talent. (1988)
Estrin, Judith L.
1998
Ms. Estrin currently serves as chief technology officer and senior vice president
of Cisco Systems Inc. She was formerly president and chief executive officer of
Precept Software, Inc., a developer of networking software of which she was
co-founder until its acquisition by Cisco in April 1998. Ms. Estrin was a computer
industry consultant from September 1994 to March 1995, and served Network
Computer Devices as president and chief executive officer from October 1993 to
September 1994 and as executive vice president from July 1988 to October 1993.
She also serves as a director of FDX Corporation and Sun Microsystems. (1998)
103
Director
Beginning
Brief Bio (parenthetical year indicates Disney
proxy statement from which bio was adapted)
Gold, Stanley P.
1984
Mr. Gold has served as president and chief executive officer of Shamrock Holdings,
Inc., a company engaged in ranching, real estate, agricultural processing, and
energy, and of Shamrock Broadcasting, Inc., a company engaged in the operation
of radio and television stations. During this period, Mr. Gold was also vice president
of the Hollywood entertainment law firm of Gang, Tyre, Ramer & Brown, Inc.,
and president and chief executive officer, director, and chairperson of the board of
directors of Central Soya Company, Inc., an international agribusiness operation.
Mr. Gold is also chairperson of the board of directors of Enterra Corporation, an
energy equipment company. (1988)
Iger, Robert A.
2000
Mr. Iger has served as president and chief operating officer of the company
since January 2000, having served as president of Walt Disney International
and chairperson of the ABC Group. From 1974 to 1998, Mr. Iger held a series of
increasingly responsible positions at ABC, Inc., and its predecessor Capital Cities/
ABC, Inc., culminating in service as president of the ABC Network Television Group
and president and chief operating officer of ABC, Inc. He is a member of the board
of directors of Lincoln Center for the Performing Arts in New York City and a trustee
of Ithaca College. (2000)
Jobs, Steve
2006
Mr. Jobs is chief executive officer and a member of the board of directors of Apple
Computer, Inc. Prior to Pixar’s merger with the company, he was chairperson and chief
executive officer of Pixar since 1986. (2006)
Langhammer,
Fred H.
2005
Mr. Langhammer is chairperson of Global Affairs for The Estée Lauder Companies
Inc., a manufacturer and marketer of cosmetics products. Prior to being named
chairperson, Global Affairs, Mr. Langhammer was chief executive officer of
The Estée Lauder Companies Inc., president, and chief operating officer.
Mr. Langhammer joined The Estée Lauder Companies in 1975 as president of its
operations in Japan. In 1982, he was appointed managing director of its operations
in Germany. He is also a director of The Gillette Company and Inditex S.A., an
apparel manufacturer and retailer. (2005)
Lewis, Aylwin B.
2004
Mr. Lewis is president, chief multibranding and operating officer of YUM! Brands,
Inc., a franchisor and licensor of quick service restaurants including KFC, Long
John Silvers, Pizza Hut, Taco Bell, and A&W. Prior to being named president, chief
multibranding and operating officer in 2003, he was chief operating officer of YUM!
Brands since 2000 and chief operating officer of Pizza Hut since 1996. Mr. Lewis is
also a director of Halliburton Co. (2004)
Litvack, Sanford M.
1995
Mr. Litvack is senior executive vice president and chief of corporate operations
of the company, having served as senior vice president, general counsel, from
April 1991 through June 1992 and as executive vice president for law and human
resources from June 1992 to August 1994. Mr. Litvack was a litigation partner
with the law firm of Dewey Ballantine from 1987 until joining the company in 1991.
(1997)
Lozano,
Ignacio E., Jr.
1981
Mr. Lozano is chairperson and chief executive officer of Lozano Enterprises, which
publishes La Opinion, the largest Spanish-language newspaper in the Los Angeles
metropolitan area. Mr. Lozano was publisher and editor of La Opinion from 1953
to 1986, except for the period from 1976 through 1977 when he was the U.S.
Ambassador to El Salvador. He continues to serve as the editor-in-chief of La
Opinion. Mr. Lozano is also a member of the board of directors of BankAmerica
Corp., Pacific Lighting Corporation, and a number of public service and charitable
organizations. (1988)
Lozano, Monica C.
2000
Ms. Lozano is president and chief operating officer of La Opinion, the largest
Spanish-language newspaper in the Los Angeles metropolitan area, and vice
president of its parent company, Lozano Communications, Inc. She also serves
as president of the California State Board of Education. In addition, Ms. Lozano
is a trustee of SunAmerica Asset Management Corporation and the University
of So …
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