Battle of wills

Stefan Stern reports on the internal strife threatening the legendary company that brought us Mickey Mouse and many a magical fairytale. Surely Walt hadn�t intended things to turn out this way

In the wonderful world of cartoons, it usually takes some time for a character to realise he�s in trouble - running in mid-air past the edge of a cliff - before he looks down and starts plummeting to inevitable disaster below. The Walt Disney corporation is acting a bit like one of those cartoon characters right now, trying to deny the reality of its problems by vigorously peddling its little feet in the hope that catastrophe can be averted.

The board will be happy just to get to the end of 2004. It has been one hell of a year. After weeks of uncertainty this spring, Disney just managed to fend off the hostile takeover bid launched by US cable company Comcast, which had valued the company at $60bn. Meanwhile former Disney directors Stanley Gold and Roy Disney (nephew of the company founder Walt) have kept up a campaign launched last November against Mike Eisner and what they see as his incompetent leadership of the business.

At the annual general meeting in March as many as 43% of shareholders declared that they had no confidence in Eisner�s continued tenure of the joint chairman and CEO role. He was replaced as chairman by former senator and fellow Disney director George Mitchell, who was previously better known for attempting to bring peace to troubled regions of the world, such as the Middle East and Northern Ireland. The war in the extended Disney family seems likely to test all his famous peace-keeping skills.

In September Eisner committed his latest and perhaps most infuriating act of defiance yet: he declared that, yes indeed, aged 62 and after 20 years at the top, it would eventually be time for him for to move on� but not for another two years, in September 2006. In the meantime the firm would begin the task of finding his replacement, although Eisner himself recommended that his favoured deputy, company president and chief operating officer, Bob Iger, should get the job. As a cool and calculated snub to the shareholders this latest move could hardly have been bettered.

The chuntering and mumbling of complaint has not abated weeks later. Robert Monks, the distinguished shareholder activist, principal of Lens Governance Advisers and vice chairman of Hermes Focus Asset Management, wrote a blistering attack on Eisner in the Financial Times newspaper at the end of September.

�It is nothing short of astonishing,� he wrote �that any CEO - still less one whose leadership was repudiated by a majority of the voting stockholders in his company�s most recent election of directors - should feel free to issue diktats to his board about how long he should serve and who should replace him. Then again, Mr Eisner has never made any secret of his contempt for the notion that a corporate board should be anything more than a rubber stamp.�

Monks wasn�t finished. �Are shareholders well-served if the company continues to function under a lame duck management team that has produced below-par results for a decade (the recent and unsustainable surge in earnings from depressed prior levels notwithstanding)? Fiduciary responsibilities argue to the contrary,� he wrote. �Is it a good idea for an unsuccessful, unpopular and unwelcome CEO to continue to hang around in any role after a successor has been named? Best management practices unequivocally say otherwise.�

Perhaps Monks is being too harsh. In the nine months to the end of June, the company had sales of over $23bn, up by 16% on the previous year. And the company has come out fighting against the sort of criticisms levelled by shareholder activists. Zenia Mucha, Senior Vice President in Disney�s corporate communications department, has chapter and verse evidence of superior financial performance. �Disney has a strong, seasoned and talented management team led by Mr Eisner and Mr Iger that is on track to increase earnings per share by more than 50% for the fiscal year ending 30 September, all with record cashflow and increased return on capital,� she says.

�Over the past three years, since just after 9/11, Disney shares have generated a total return to shareholders of more than 35% (a compounded annual return of 10.7%), more than any other leading media/entertainment peer company and also better than the S&P 500�s total return for the same period.�

That said, the firm faces big problems on a number of fronts. Its TV network ABC, bought for $16bn 10 years ago, continues to come in fourth behind CBS, NBC and Fox. It is loss-making, failing to bring in either the audiences or advertising revenues of its rivals.

The performance of the famous Disney theme parks continues to disappoint. Attendance figures are way down from pre-11 September levels, perhaps for understandable reasons. EuroDisney near Paris has suffered particularly. Undaunted, the firm plans to go ahead with its new Hong Kong site.

Most worryingly, Disney�s creative partnerships remain unhappy. The 10-year relationship with Steve Jobs� Pixar animation business - the people who brought you Toy Story and Finding Nemo - looks likely to come to an end. Just when the market for these ultra-sophisticated computer-generated animations seems to be exploding (Shrek 3 and 4, anyone?), Disney and Pixar are growing apart.

And equally calamitous is the breakdown of relations between Disney and its Miramax subsidiary, run by co-chairmen Bob and Harvey Weinstein. When Disney refused earlier this year to distribute the Michael Moore shockumentary Fahrenheit 9/11 - a Miramax production - the already sour atmosphere between Disney and Miramax deteriorated further. Miramax bought out the rights to the film, which has subsequently made $200m for them. But Disney�s $700m annual support for Miramax looks likely to be cut, and in early October the two firms moved even closer to a split after it emerged that Miramax�s requests to address Disney�s board over their bitter contract negotiations had been rejected.

Truly there is no business like show business, and in the fantasy world that is Hollywood, the unrestrained egos of the entertainment industry can do untold damage to each other. Eisner himself has come back from a heart attack and major heart surgery five years ago, and is still up for a fight when lesser spirits would be looking to spend more time with their money and, possibly, family.

But former friends and collaborators have long since left him behind, and he must be quietly reflecting that, as David Lloyd George said of the political world, there are �no friendships at the top�. Eisner himself seems to have many more critics than admirers these days. As one recently put it: �We are all sick and tired of seeing Mickey Mouse ears on Eisner for the purposes of illustration. That�s like putting a clown nose on Attila the Hun.�

The firm has come a long way since Uncle Walt first boarded the train to Hollywood in the mid-1920s. Disney is still a premier league player, a global force and a phenomenon, by no means deserving the cynical British label of a �Mickey Mouse operation� - in the US, for example, no-one would ever dream of using that phrase pejoratively.

But some tough decisions, on future strategy and direction, have to be taken soon, and if not by the current leadership, then by the new CEO, who may be in place as early as next summer. As far as �iron� Mike Eisner is concerned, this is one Disney story that seems unlikely to have a happy ending.

Stefan Stern is a regular contributor to the specialist press and writer on work, management and industrial issues.