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On September 9, Michael Eisner submitted a letter of resignation to the Board of Directors of the Walt Disney Company. There was much rejoicing in the Disney fan community. And yet, this wasn't exactly as many expected it to be.


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For starters, Eisner's resignation was not immediate. It is effective at the end of his current employment contract, which expires on September 30, 2006. Yes, his resignation won't take place for two more years. In addition, the question of succession isn't so easily answered. There was also a concern that, upon his retirement, Eisner will become Chairman of the Board of Directors and Disney President Robert Iger would become CEO, resulting in the continuation of the same management team. However, this possibility has receded into the background as Eisner told Fortune Magazine that he does not expect to continue on the board or as chairman in an excerpt from an interview released on Monday.

So let's start by looking at the resignation itself, its implications, and its timing.

Eisner started the week with a story the Los Angeles Times that Robert Iger was his “preferred choice” to be his successor in an article published on Sunday. On Thursday, he submitted his resignation to the Board, which was reported in Friday's Wall Street Journal. The resignation was announced at a time when Eisner knew that his foe Roy E. Disney was participating in a yacht race in Sardinia, Italy (winning the Maxi Yacht Rolex Cup racing division, by the way). In timing it this way, Eisner made sure that Disney would be unable to comment immediately, and perhaps the news stories would even report that he was unavailable because he was out of the country participating in a yacht race, which would perpetuate Eisner's attempts to paint Disney as a dilettante who was so out of touch that he had no business participating in the company's governance.

Eisner really doesn't have to worry too much about Roy Disney these days, as the Save Disney efforts have been out of sight for so long that they were truly out of mind for most people. The ruckus caused by Save Disney at a pre-shareholder meeting rally (link) and the shareholder meeting itself (link) are long in the past for many people's memory. However, the large pension funds that Disney and Stanley Gold lined up against Eisner at the annual shareholder meeting are another matter.

In a statement issued the day Eisner's resignation was reported, Sean Harrigan, President of the California Public Employees' Retirement System (CalPERS), said:

“Eisner's resignation as CEO is the right move for shareowners. We believe he should resign from the board as well. It is not clear to us how a two-year lame duck CEO will benefit shareowners, and his continued presence on the board would prevent the company from the clean break that is needed to restore investor confidence. On behalf of CalPERS, I want to renew our call for the Disney Board to reveal as soon as possible their CEO succession plan. Working with the coalition of public pension funds on Disney issues, we intend to closely monitor further developments and will continue to engage constructively with the Board of Disney on all the issues related to long-term performance.”

Other pension fund heads expressed similar sentiments.

By stating that he will make a clean break of it, Eisner is hoping to take enough wind out of the sails of those calling for his head to allow him to complete his contract and retire in just under 740 days now. What is so important about him leaving in 24-plus months instead of earlier?

For one, there is the ability to try to write history so that he leaves, if possible, a bright, shining legacy. Second, he can try to pump up his bonus compensation for the next two years to enlarge his kiss-off package when he finally does leave. This means that Eisner is guaranteed a bonus of at least $6 million per year for two years after his retirement. That will rise if the average of the three highest bonuses earned in his last four years is higher than that. If he can pump up his bonus now, he could end up with a larger retirement bonus.

In addition, if he retires at the end of his contract, he is also guaranteed to serve as a consultant to company, “at a fee to be mutually agreed upon which shall be at least $1.00 per year plus continuation of the same benefits and/or perquisites provided to Executive during his term as Chief Executive Officer of Company.”

Let's leave aside the question of how much more than $1 it might possibly be. But how long would he serve as a consultant? How about until Eisner accepts a job with another company, provides any services to a competitor of Disney, or becomes disabled and unable to provide services to the company for at least six months. Pretty sweet deal, huh? No wonder he doesn't want to give it up.

So now he's trying to run out the clock and make it to September 2006 while pumping up his bonus—and perhaps make it so the company will do poorly once he leaves so that he will appear to have left an even greater legacy.

What is he doing? Well, he did recommend Bob Iger. In an interview with the Los Angeles Times, Eisner said, “[Iger] would be an excellent guardian of the Disney assets. There's nobody who has a better education and training to do that job.” Yet in a 1996 letter to the Board of Directors, Eisner was less than enthusiastic about Iger. He said that he might recommend Iger as a successor if he were “hit by a truck.” Eisner said, “He will not get the company into trouble. He is not an enlightened or brilliantly creative man, but with a strong board he absolutely could do the job.”

So which one is it? Perhaps Eisner wants to pad his reputation a bit. After all, Iger's chief charge over the last few years has been to improve the fortunes of ABC and ABC Family, which have continued to drop despite his close attention.

So what will the Board do? After all, this is the same board that kept him in power even after the embarrassing 45 percent vote of no confidence at the annual shareholder meeting held earlier this spring. The board members may be a bit more worried for their own jobs this time around, though. After all, they've got the specter of a shareholder lawsuit—over Michael Ovitz' hiring and firing that accused the board of merely rubber-stamping Michael Eisner's decisions—hanging over their heads. In addition, Roy Disney and Stanley Gold have threatened to field an alternate slate of directors to run against the incumbents at next year's annual shareholder meeting. And with the pension fund directors still watching carefully, they just might support the alternate slate. “Our primary concern continues to be the independence of the Disney board of directors,” the funds from New York State, Ohio, North Carolina and Connecticut said in a statement.

And the board won't just be searching for a new CEO, either. George Mitchell will hit the mandatory retirement age for Disney directors next August when he turns 72. If he finishes that term, he will need to be replaced on the board at the 2006 annual meeting, though he may also step down earlier. The pension fund representatives, following up on the meeting that they held with Disney board members back in April have proposed several names to fill a vacant seat for an independent member of the board. Names mentioned include former SEC chairman Richard Breeden and Haim Saban, who (along with Fox) sold Disney the Fox Family channel.

Another possible candidate for board chairman is Bob Daly, former co-chairman of Warner Brothers. Daly has said that he's interested in the position. He was approached by Disney and Gold to possibly head their slate of alternative candidates, but he turned them down because he didn't want to take a job as a hostile candidate. Another interesting fact about Daly is that his co-chairman at Warner Brothers is Terry Semel, currently chairman and CEO of Yahoo, who is considered one of the leading candidates to follow Eisner.

So who are the front-runners in the Disney CEO derby? Obviously, with Eisner's annointing him as the chosen one, Bob Iger has to be considered the front-runner. However, the favorite often does not win the race. Others considered leading candidates include:

Mel Karmazin, who resigned as president and chief operating officer of Viacom in June – While he is available, he might prefer to stay with a company that is entirely in the broadcast arena.

Peter Chernin, president and chief operating officer of News Corp. – In order for this strong candidate to take the position, he would have to break a new five-year contract that he just signed in July with a total pay package of over $20 million this year.

Terry Semel, chairman and CEO of Yahoo and former co-chairman of Warner Brothers – An intriguing choice, especially if Bob Daly is brought in as chairman.

Meg Whitman, CEO of eBay – Whitman was senior VP of marketing at the Walt Disney Company for three years before leaving in 1992. She spent time at Stride Rite, FTD, and Hasbro before landing at eBay.

Steve Jobs, CEO of Pixar and Apple Computer – An interesting candidate, described by some as a “charismatic visionary.” His possible candidacy would possibly help to resolve the current contract squabbles between Disney and Pixar.

Paul Pressler, CEO of the Gap – The man that Disney fans love to hate, Pressler is reviled by many as the man who turned the Disney theme parks into mini-malls. Wall Street sees him as the man who cut costs and increased profitability at the parks after dramatically growing the Disney Stores into a behemoth moneymaker, and who drove the Gap into a new era of profitability. However, the expert sales chief has seen some of the luster disappear as Gap profits have started dropping again.

Other intriguing candidates round out the mix, including Viacom co-president Tom Freston, Time Warner entertainment and networks group chairman Jeff Bewkes, Comcast chief operating officer Steve Burke and Pixar creative genius John Lasseter.

Who do I think has the inside track if the board rejects Iger? Possibly Karmazin, Chernin, or Semel. What do I think the board members should do? Primarily, I think that they need to change their search paradigm. Everyone is focused on finding a new CEO, but they forget that Disney's greatest successes have been when there is a strong team at the top: Two people who counterbalance each other and make sure that decisions make sense both in a creative and a financial way.

Back in the beginning, and for almost 40 years, it was Walt and Roy O. Disney. After the company foundered for a number of years following the deaths of the brothers, a new resurgence began when Eisner and Frank Wells were brought in by Roy E. Disney and Stanley Gold to run the company in 1994. The company prospered, and grew both creatively and financially for the next 10 years, until Wells' death in 1994 in a heli-skiing accident. The company proceeded upward for the next couple of years on momentum, as projects begun while Wells was alive came to fruition. Then things began a downward spiral as Eisner tried to direct both the creative and the financial.

What Disney's board needs to do is to find a pair that works well together, respects each other, and will be able to create dynamic tension between the creative and the financial, as Walt and Roy did, and as Michael and Frank did.

My dark-horse picks? Steve Burke and John Lasseter. Burke has run a few divisions of Disney to positive results, knows the business, and did a great deal of preparation as part of Comcast's failed bid to buy Disney. Lasseter brings a creative spark, and is a great storyteller; storytelling is the core of Disney's success. Back in March (link), I noted this possibility with interest, and I still think that it has a tremendous upside potential.

So is it that easy? I don't think so. For all of the rancor surrounding Michael Eisner, one has to admit that it's a pretty difficult job to manage. Movie studios (animation and live action), theme parks, hotels, a cruise line, television studios, television networks, theatrical productions, book publishing, retail stores, and the list goes on and on.

Eisner has been criticized as being a micromanager. The tag probably fits. But Walt Disney was a micromanager, too. What's the difference? To my mind, Walt almost invariably knew what the public wanted, and he knew what the “Disney” name meant to the public. When he did make a mistake (he once offended his audience by putting a minor reference to a certain adult theme into a live-action movie), he knew that he would not try that again, because that wasn't “Disney,” and the audience wanted Disney products to be consistent. But his commitment to quality, storytelling and general respect for his audience earned the loyalty of America and the world at large.

While Eisner has a good knack for creative ideas, he frequently lost sight of what made Disney “Disney.” Wells was able to keep Michael focused on keeping to Disney standards. But after Wells' death, ill-advised decisions lost customers, diminished loyalty and decayed the company's good will. Eisner became more focused on making Wall Street happy than on making paying customers happy.

Walt knew that if the product was good and people were satisfied, the profits would come. By trying to make Disney a Wall Street darling and enhance his personal reputation, Michael cut costs, reduced services and lost focus on entertaining the paying customer. The now-legendary, “If it's good enough for Six Flags” presentation during the planning stage of Disney's California Adventure pretty much sums up the loss of respect for the general public.

By no longer shooting to be the best, Disney has lost its way. Perhaps the next leadership team will return the shine.

Addendum

As this article was going to press, Disney's Board of Directors released a statement regarding the proceedings at their meetings that concluded yesterday. In addition to supporting Michael Eisner and Bob Iger, the statement indicates that the Compensation Committee will be changing the formula by which the executive management team's bonuses are calculated, that George Mitchell will not stand for reelection to the Board in 2006 after reaching the mandatory retirement age and, most notably, that the board plans to engage an executive search firm to assist in selecting a new CEO to be in place by June 2005.

The support for Eisner and Iger was expected, as was the plan for Mitchell to step down. The change to the bonus structure appears to be a large step in the right direction, as the bonus criteria is now based on firm metrics that are known to the shareholders, and are likely not subject to shadowy manipulation as has been charged in the past.

The decision on selecting a new CEO was a pleasant surprise, and indicates that—whether due to threats from Roy Disney, Stanley Gold, and the major pension fund trustees or just confidence that they should do the right thing—“the succession process will not be a slam-dunk for Iger, Eisner's anointed choice.”

The board said that while internal and external candidates would be considered, Iger would be the sole internal candidate. This will silence all of those who were hoping for a dark-horse candidacy by Matt Ouimet or Jay Rasulo. With the statement that they plan to complete the process and announce a successor with an expected completion date of next June, it seems likely that Eisner will not last through September 2006 to receive his guaranteed consultancy, but it also does not rule out a deal that will grant him those perks, anyway. It just means that he'll end up shy of collecting his final bonus or two. (He's guaranteed his salary through the end of the contract.)

Now that the process is underway, we'll be keeping an eye on what happens next as we wait for further developments.



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(Send an email to Mark Goldhaber)

Mark (@MPMark) is a veteran of dozens of trips to Walt Disney World starting in 1972, with a few Disneyland trips thrown in for good measure. As a Disney stockholder and a Disney Vacation Club member, Mark is always in touch with what's going on with The Mouse. Mark serves as MousePlanet's Walt Disney World content coordinator. Mark is a senior information technology manager working for the State of New York. He lives in the suburbs outside Albany, New York, with his wife and son.