By Roger Lowenstein
Historians are already savoring the delicious irony in Comcast's shotgun bid to acquire Walt Disney Co.
Exactly 20 years ago, Disney was a onetime corporate gem that had lost its luster. To fend off a pair of corporate raiders, the Disney family installed a new chief executive, a baby-faced former studio head named Michael Eisner. Then a 41-year-old corporate reformer, Eisner symbolized the rebirth of corporate America as it emerged from an era of stagnation. Today, as he and his lawyers try to marshal a defense against Comcast, a cable television giant, Eisner resembles an aging caudillo hanging on to power long past the flower of his youth.
What went wrong? How did Eisner, a onetime champion of shareholders, become the entrenched CEO at the barricades who in the name of protecting his personal magic kingdom petulantly rejected a bid that would enrich Disney's stockholders?
In large part, the story of Eisner's rise and undoing is a microcosm of corporate America's tumultuous last two decades. In the 1980s and '90s, corporate America was galvanized by a new breed of CEOs who made stock price their top priority. Their urgency had a simple explanation: Throughout the 1970s, corporate America had languished. Big American companies in particular, such as the automakers, IBM, Coca-Cola and, yes, Walt Disney, seemed to have lost their way. With share prices languishing, corporate raiders appeared on the scene. CEOs realized that to protect their jobs they had to raise their stock prices.
When the raiders Saul Steinberg and Irwin Jacobs tried to waylay Mickey Mouse in 1984, the Bass brothers of Texas, who were big investors in Disney, fended off the raid. It was a sign of the company's fall from grace that animation accounted for only 1% of its revenue. Aiming to recapture Disney's lost sparkle, the Basses lured Roy E. Disney, the founder's nephew, back to the board. Then Disney hired Eisner, a protege of Barry Diller, who had racked up impressive results at ABC and Paramount, as CEO.
Whereas CEOs of the '70s had been criticized as bureaucrats, indifferent to their shareholders, the new executives were committed to raising their share price. And in his first decade or so, few chief executives delivered on this as well as Eisner. He not only re-energized the theme parks, he revived Disney's movie business and restored the magic in the Disney brand. Over his first 10 years, Disney stock rose by a phenomenal factor of 47.
Academics, analysts and consultants praised this new breed of CEO for being committed to "shareholder value." To enhance these executives' dedication even further, boards ladled out stock options, first by the barrel, then by the truckload.
Chief executives with enough stock options could make tens of millions of dollars even for a small advance in the stock. What was worse, executives who got stock options in one year and then saw their stock price fall would get subsequent options at lower prices. Executives thus could reap a fortune just by getting the stock back to where it had been.
Though the system was designed to reward CEOs for performance, such excesses meant that CEOs were in fact paid for mediocrity. What was worse, the scale of option grants was so big that many CEOs were tempted to cheat — to fudge on their disclosures or earnings reports. That would drive the stock up — temporarily — by which time the CEO could have cashed out. Enron executives are only the most prominent examples.
By the late '90s, the practical meaning of "shareholder value" had been thoroughly corrupted. Instead of building enduring value, CEOs were doing whatever it took — laying off workers, engaging in creative accounting — to jack up the stock in the short term.
The natural question is: Why did boards go along? The answer, in almost all cases, is that the boards were controlled by the very CEOs they were supposed to monitor.
Eisner was a perfect example. He stacked his board with his kid's elementary school principal, his architect, his lawyer, and the president of Georgetown University — to which Eisner had donated more than $1 million — each of whom owed his loyalty to Eisner personally, rather than to the company.
Meanwhile, his leadership began to falter. He made a questionable deal to acquire ABC, at a time when the prominence of networks was in seemingly permanent decline. He repeatedly demonstrated an inability to groom a successor. More recently, Eisner got caught up in a failed Internet venture and fell out with Pixar and Steve Jobs, raising anew the question of whether Eisner's ego gets in the way of his work. Despite a rebound last year, Disney's perpetually sagging net income remained well under its total of 1998.
But as his shareholders suffered, Eisner's fortune swelled. From 1990 to 2002, Disney's investors earned a lower rate than they would have on a Treasury bond, while Eisner, over that span, pocketed more than $800 million — an astonishing payoff for failure.
Even if one includes Disney's recent rebound, Eisner's record over the second half of his career is distinctly lackluster. Through Tuesday, Disney stock had gained just 60% in a decade, which is less than half the 140% return of the Standard & Poor's 500.
In response to criticism, Disney finally adopted boardroom reforms. The school principal is gone and, as mandated by recent statutory changes, independents run the important committees. It also named a presiding director, former Sen. George Mitchell — a longtime Eisner loyalist.
But Disney has not made the one change that would ensure all others: naming someone independent of Michael Eisner to chair its board.
If the disastrous scandals of the last few years have proved anything, it is that American CEOs are no more fit than presidents or generals to supervise themselves. And until Eisner and his ilk grasp that fact, they will be apt targets on Wall Street.
Disney was already in the reformers' sights before the Comcast bid. Roy Disney and a fellow director, Stanley Gold, had resigned from the board and were leading an insurgency to unseat the CEO they once had championed. They have planned a mass shareholder rally, sort of an anti-Eisner teach-in, for the day before the company's March 3 annual meeting in Philadelphia. By then, it may all be moot. The story of Michael Eisner, onetime corporate savior, has come full circle. Sounds like a Hollywood picture.