Disney and the problems of corporate governance

This W$J overview of the Disney case puts the Eisner/Ovitz affair into perspective: a strong CEO rendered his board practically irrelevant. Left on his own, he fumbled badly.  Shareholders suffered.

There are many interesting aspects of this case, including the limits of judicial supervision under the business judgment rule, as I recently wrote, and whether this case signals a new Delaware approach to governance post-Enron.

But I wonder whether something more basic is at stake -- the future of the corporate enterprise as we know it.  After all that we have seen in the last few years, can we really be optimistic that things are changing?  Consider:

--Boards will continue to be supine in the face of strong and apparently successful CEO's, who control the agenda and the information flow. 

--Judicial supervision is, at best, a blunt instrument.  This case is only now being tried, 8 years after Ovitz was fired.

--Disgruntled shareholders can sell -- but at a price determined by defective governance.

--Takeovers happen -- when all-powerful executives let them.

Is there a better way?  I've argued in Why Corporations? for the dismantling of the corporate entity and the greater use of partnership-type forms for publicly held business. This could be spurred by a change in the tax laws that puts more emphasis on distribution rather than retention of earnings.

Think about this in the Disney context.  Why do we need this Disney behemoth?  The brand?  Synergy? Michael Powell recently wondered "if Walt Disney would be proud," speculating on the disastrous cross-promotion of Disney's Desperate Housewives on Disney's Monday night football. Does this sort of thing make people want to go into Disney's family-oriented amusement parks?  Even the film business has gotten away from the Disney brand -- Pixar was providing the meat until Eisner chased it away.

How about spinning the amusement parks into a real estate limited partnership, divesting the television properties, and focusing on the movie business?  Aside from giving Eisner less to play with over his remaining two years, what would be lost?

Of course, we need a takeover market to engineer these changes. But possibly over time the market will see the light, particularly if encouraged by the tax code.

Comments

[Robert Schwartz]

The alternative to governance is purchase. The pattern deal is the venture capital/private capital deal where the money buys convertable preferred with numerous restrictive covenants and rights including anti-dilution. The money gets paid before management does upside or down. Example Google.

There is an article, IIRC, "Corporate Law in Search of Its Future" by Warner or Werner? (My copy is some place in the basement) Which proposes the VC deal as a patern for public companies.

I also believe that, before the Great Depression, the predominate form of corporate security was the preferred share. It was killed by the ability of the common using the reorganization tactics of the era to squeeze the value out of the preferred.

After WWII common was the instrument of choice because of the tax advantage of capital gains over dividends. Also in the good economic times of the 50s and 60s reoganization was less of a factor.

Can preferred come back. Tax law is becomming more favorble. If CBIT is enacted it will be very favorable. The other big problem is Chapter 11. Common holds too many cards in the current Chapter 11 structure.

[Quacky1]

The bottom line is that the Board is responsible, and needs to take back the responsibility. The CEO is just an employee, and needs to be treated the same way as anyone else, using performance reviews, peer reviews, employee reviews, etc. to monitor performance. The other problem at Disney is that Human Resources is a joke.

Come on by Duckau.com. We employees have had enough and are speaking out about what they are doing to us. In detail.