Did Disney's Board Get What It Wanted?

| About: The Walt (DIS)
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DIS recently announced the departure of the assumed heir apparent to the CEO throne.

Although most industry watchers were surprised by the move, it may not be as bad as it looks.

Leaks from the company suggest the board had already wanted to look at alternatives.

Image Source: Disney

There's no question that succession planning is important for companies, that's doubly true as a successful CEO like Disney's (NYSE:DIS) Bob Iger nears retirement. So what does it say when the man most assumed was the heir apparent decides to step down? Perhaps not as much as it seems and, yet, even more than you would expect.

Two year count down
Disney's Iger has roughly two years left on his current contract. That means that Disney's board has been thinking about his replacement a lot lately, particularly since the CEO has extended his stay at the company once already. The first obvious steps along that process took place last year when Tom Staggs was promoted to chief operating officer. He was instantly the assumed heir apparent.

However, after a year in that position, it seems the board wasn't convinced he was ready to be CEO. According to The Wall Street Journal, people with "knowledge of the matter" explained that the board couldn't give Mr. Staggs any assurances that he would get the top job. And, as a result, he chose to step down from his COO post. He will remain a consultant until early October or so.

Industry watchers used terms like "disarray," "surprise," and "blemish" to describe the highly public life event that's playing out right now. But that's overkill. If the board wasn't ready to name Mr. Staggs to the top post, the decision to leave was appropriate. In fact, it might even be a noble gesture to clear the way for another person who has broader board support. Either way, I'd say the board got exactly what it wanted - a clean slate.

Reading too much into this move at this point is a mistake. Things like this happen all the time at every level of the corporate ladder. It's just that it's Disney and the position is CEO. The end result is that Disney's board has two years to find and "train" a successor to Iger.

The bigger issue
What I find more distressing than Mr. Staggs' decision to step aside is that Disney's board appears to be looking outside the company for CEO talent. On the one hand, that's a due diligence issue and should clearly be a part of the process. On the other, going with an outsider brings with it risks that wouldn't be expected with an insider.

For example, every company has a culture. Disney is no different. A new CEO who hasn't been steeped in the culture could find that he or she clashes with internal processes and expectations. If an outside CEO has trouble doing things "the Disney way" their tenure could end up damaging the company's morale. That could lead to a drop off in execution, or worse.

If Disney were a struggling company, an outsider might be a good call. But it isn't, so bringing in an outsider presents notable risks. That said, Disney is facing a changing landscape in the television/cable space. ESPN has been soft lately and more and more people are "cutting the cord" completely, let alone looking for so-called skinny cable bundles that eliminate channels they don't want but have historically been forced to buy. This could end up being a huge issue for the next leader at Disney and it might make sense to bring someone in who has a firm handle on this piece of the puzzle.

Interestingly enough, television is one of the areas where Staggs lacked experience, movies was another, since he had spent a lot of time at the company's amusement parks business. According to the Journal most of the company's other top executives haven't spent enough time in their current positions to be viable candidates. That may or may not play out to be true as the CEO search process moves forward. But, in the end, looking outside might be the best option, despite the potential risk.

A replay of the past?
Disney, after a decade of Iger at the helm, is a well oiled machine with plenty of growth opportunities built into some of its core businesses. That's thanks to astute acquisitions like the Star Wars franchise and Marvel. These brands span several aspects of the company's business and the benefits of the purchases are far from over.

That said, there are big challenges ahead in the key television business and those will have to be addressed. The day-to-day operations of running Disney, however, should be in the hands of very capable employees with very clear mandates. Disney, after all, has an enviable collection of iconic "brands" in house, even beyond the newer additions. It would take CEO mistakes of huge proportions to irreparably diminish that strength. So, it may be just fine to have an outsider who's not up to speed on some aspects of the business so long as he or she is on top of the real trouble spots.

The longer-term issue goes back to Iger's former boss, Michael Eisner. Eisner was basically pushed out of the top spot after it became pretty clear he wasn't ready to give up the reigns. If the current event ushers in another difficult period like that, investors have something to worry about. But it is too soon to suggest this is the case.

Keeping an eye on this one
As a Disney shareholder (and huge Disney fan), I'm going to be watching the CEO search with great interest. I obviously want the best person possible running "my" company. A great CEO can lead a company to impressive heights. And sometimes that person is found outside of where you would expect.

Many would put Iger in the great CEO category, which means that the next CEO will come in facing high expectations. Perhaps too high. And if they are from the outside, a potentially difficult transition period, too. There are, indeed, risks in this process - but they are really no different at Disney than at any other company, just more public.

While I don't think there's too much for investors to make of the current events, despite the media attention, there are potentially bigger implications down the line. And in the not too distant future, since Iger only has two years left on his contract. So watch this, but don't get too concerned yet.

Disclosure: I am/we are long DIS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.