The Hindu Business Line : Raising the curtain on Disney's top managers

THE court has proclaimed its judgment. Michael Eisner, Chief Executive Officer of Walt Disney Co., did not intend to harm the company. He was just a bad manager. The final decision has been long in coming.

The case, which began in 2004 in the Delaware Chancery Court, ended this January and the decision came just last month. Briefly, a group of shareholders filed a suit that the Board of Directors of Disney had been negligent in allowing Mr Michael Ovitz to receive a severance package worth about $140 million (Rs. 616 crore) eight years ago. The plaintiffs were seeking repayment, by the board, of the entire package plus interest, which would have amounted to about $200 million (Rs. 880 crore).

A bit of background first. In 1995, Mr Eisner hired Mr Ovitz as President on a five-year contract, with the intention that he would be the next CEO. Mr Ovitz came with an established reputation in the entertainment industry as a powerful agent and a deal maker. Just 14 months later, he was given a `no fault' termination and the lavish package. The plaintiffs' argument was that Mr Ovitz should have been fired `for cause' instead, in which case, he would not have been eligible for the severance. They charged that the board had failed to do its job in not adequately scrutinising Mr Ovitz's employment contract. By his contract, he could be fired for cause on grounds of negligence or malfeasance, which is what the plaintiffs' attorney tried to show.

The irony was that Mr Eisner and Mr Ovitz were good friends to begin with and the former had made earlier attempts to get Mr Ovitz to join the company. It was a friendship that rapidly deteriorated. As the case proceeded, it provided titillating testimony from current and former employees on the goings-on in the company. Both Eisner and Ovitz emerged with their reputations tarnished as a parade of witnesses, some as high-profile as actor Sidney Poitier, who was a Disney director, shared with the court their thoughts onthe individuals involved. The lawyers for the plaintiffs had to establish that Mr Ovitz was a misfit, so his hiring was wrong, and his firing should have been for cause, and thus the board did not do its job.

Mr Ovitz took the stand to establish his reputation as a brilliant manager so his firing was wrong and he deserved the severance. The third party — Mr Eisner and the directors — had to establish that Mr Ovitz was bad enough to require termination but not so bad that he could be fired `for cause'. All this made for great drama in the court.

Witnesses for the company, who were current or former directors stood up and said in open court that they thought Mr Ovitz was a `cancer' in the organisation, he was not getting along with the executives in the company, was trying to strike deals not in the interest of the company, and, therefore, had to be terminated. Mr Ovitz, on his part, claimed that he made several decisions that helped the company but was often thwarted by lack of support from Mr Eisner. Mr Eisner and others downplayed the significance of those decisions to establish their position that he was a misfit including calling him a `psychopath.'

The final decision of the court is expected to have some implications for corporate management. The judgment provides an inkling about what kind of company decisions board members cannot be held accountable for. Although the board is the ultimate decision-making body, it leaves several issues to the management. But if things go wrong, can the directors be held responsible? Some observers feel that if they had been held responsible in the Disney case, then it would have put a scare into boards all around for they would begin second-guessing management decisions, which can rapidly lead to paralysis.

I disagree. Directors have a fiduciary responsibility that they must discharge and for which they are handsomely compensated.

Moreover, in the Disney case, the directors were protected by insurance to cover any liabilities. Also, the money recovered by the plaintiffs would have come back to the company's coffers and not distributed to the shareholders. Thus, here was a golden, and no-risk opportunity for the court to make directors all around the country wake up from their slumber and earn their keep.

Instead, the judge made use of the `business judgment' rule that allows managers wide latitude to run the company as long as they do not misappropriate funds for personal benefit or act in bad faith. In this case, the only punitive justice the CEO and directors received was a bit of lecturing on not measuring up to standards of board conduct!

Come to think of it, it would have been surprising if the verdict had swung the other way. The tiny state of Delaware has a separate system called the Chancery Courts that deal with business issues and have built a long tradition of case law on business matters. In the process, they have also built a reputation of being a judiciary that is `management' friendly (as different from being `business' friendly). This reputation of the courts, apart from the ease of incorporation and reporting the State of Delaware allows, has made the State the preferred location for business registration. It is estimated that a majority of top US corporations are incorporated in Delaware even though they may have their head offices and principal businesses elsewhere in the country.

The Disney case provided an inside view to the workings of a major corporation and it was not a pretty sight.

Here were two top guys, hurling accusations and dragging each other's names through the mud in every conceivable way. One key skill of any CEO is to be able to hire the right people and leave them to do their job. In this, Mr Eisner failed publicly.

He is even believed to have paid a director $250,000 (Rs. 1.1 crore) for his help in negotiating with Mr Ovitz in the process of hiring him. But within days of hiring Ovitz, when two senior executives refused to report to him, Mr Eisner did nothing to resolve the issue.

Mr Eisner became CEO in 1984 and managed a brilliant turnaround of the company, got the stock price going up again, and engineered several acquisitions. But he overstayed his welcome.

In another episode not unlike the Ovitz affair, he settled a lawsuit with his erstwhile studio chief, Jeffrey Katzenberg, for $250 million (Rs 1,100 crore), in 1999.

In March 2004, shareholders dealt a blow to his ego with 45 per cent withholding support for his re-election to the board. The brother of founder Walt Disney and one other director of the company stepped down from the board in 2003 and have been challenging his authority at every turn. Finally, he seems to have got the message. He has decided to step down as CEO in 2006. The drama and intrigue of top management practice at Disney has all the ingredients of a Hollywood pot-boiler, although it is not the kind of fare that Disney is famous for.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is acgopinat@suffolk.edu)

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