Disney’s Board: Looking Good on Corporate Governance

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by: Patricia Lenkov

The Walt Disney Company (NYSE:DIS) is a giant in today’s media and entertainment industry. It is known globally for its amusement parks, cartoons, movies, television series and a very lucrative toys business. Looking back over its glorious past, it seems that Disney was created to be successful eternally. But it hasn’t always been this way. Disney has seldom been in the red but still the company has seen its fair share of turmoil and boardroom (as well as courtroom) drama.

It was during the tenure of the effective yet controversial Michael Eisner that “super-agent” Michael Ovitz was recruited to be the president of Disney. The fact that Eisner recruited one of his “best friends" to be his number two at the company and then fired him after 14 months with a huge severance pay is the subject of corporate governance lore, speculation and of course a very famous lawsuit.

Michael Eisner’s Board of Directors was a powerful bunch but it appears that they failed to properly discuss or speak up in the mid-to late 90s when the whole Ovitz hiring and firing fiasco was going on. This inaction resulted in Michael Ovitz being paid $140 million in severance after his tenure of only 14 months. Subsequently there was a violent outcry by Disney shareholders and this resulted in an unprecedented lawsuit for the company. Quite simply, Disney investors wanted their money back. In hindsight this looked like the beginning of the vocal shareholders we now seem to take for granted.

The shareholder lawsuit was settled in 2006 with the Delaware Supreme Court deciding that the directors ultimately acted in good faith and as such Disney could not be held liable for the cost of the Ovitz debacle. The Chancery Court judge did say however that Michael Eisner stacked his board with friends and other acquaintances and this handicapped the board‘s objectivity and decision making ability.

Today we assume that a board of directors needs to be a diverse group of people with a broad range of skills. We also assume that they need to be aware of their responsibilities and always act in the interest of the shareholders at large. At the time of the Ovitz event, the Disney board consisted of directors who probably would not make the cut these days for such a large, complex and highly visible company. A head of schools at the Center for Early Education in Los Angeles, an actor, an architect and an executive at the West Coast unit of the Sotheby's auction house are not popular choices for corporate directors of large companies these days.

So with all this history, did Disney improve its corporate governance? A decade and a half later, Disney’s Board of Directors seems a lot stronger and better organized than the previous one.

It currently has 13 directors and is an impressive group with many well regarded senior business executives. Steve Jobs has been a director since 2006, and Facebook’s Chief Operating Officer Sheryl Sandberg joined the board this year. All directors are either current or recently retired operating executives of large, complex and well-established companies. There are four women on the board and no director appears to be over-committed with too many other outside boards (“over-boarded” as we say). There is strong consumer products representation with two Procter and Gamble (NYSE:PG) alums, Clorox (NYSE:CLX), Seagram, Estee Lauder (NYSE:EL), Starbucks (NASDAQ:SBUX) and of course Apple (NASDAQ:AAPL) executives or a former executive on the board. Technology and media are also evidenced.

The only two glaring gaps in the skills of the Disney board are in the areas of international experience and hospitality expertise. While the U.S. and Canada currently account for 76% of Disney’s revenues surely the company has plans to expand globally. In fact, the Chinese government has given approval for a Disney theme park. Additional on the ground international experience is certainly a skill set that the Disney board should look to increase upon in the future. Parks and resorts currently account for 29% of Disney’s revenues and as such adding hospitality industry experience could certainly benefit the company as well.

Overall the current composition of the Disney board shows the company’s commitment to corporate governance is going strong. So far the company seems to be keeping up with all the demands of today’s stringent corporate governance requirements. For now, the corporate responsibility standards have been authenticated by inclusion in the FTSE4Good Index Series, which is designed to identify and facilitate investment in companies that meet globally recognized corporate responsibility standards. So, while it has a colorful and interesting past, for now the Disney board seems very well suited to guide the company into the future.

Disclosure: No positions.