The striking thing about Roy Disney's letter of resignation is how studiously he ignores the real problem. This is not to say that the management issues he identifies are not genuine concerns, but merely to suggest that they are symptoms of the underlying root cause. This is not surprising, of course, because it would require Disney to acknowledge that he was part of the problem; namely, one of the worst boards of directors in the history of mankind (okay, maybe that's a little exaggerated).
You need proof? Let's go to the tape. In both 1999 and 2000, Business Week named the Disney board of directors the worst board in America. In May 2003, while deciding that a shareholder lawsuit challenging the $140 million payout to Michael Ovitz should go forward, Delaware Chancellor William Chandler noted a slew of governance failures by the Disney board, including:
- Allowing CEO Michael Eisner to unilaterally make the decision to hire Ovitz, who was a close personal friend of Eisner.
- Rubberstamping that decision. Chandler said the Board "simply passed off the details to Ovitz and his good friend, Eisner."
- Failing to exercise oversight of the process by which Ovitz was both hired and later terminated.
Chandler concluded that:
These facts, if true, do more than portray directors who, in a negligent or grossly negligent manner, merely failed to inform themselves or to deliberate adequately about an issue of material importance to their corporation. Instead, the facts alleged in the new complaint suggest that the defendant directors consciously and intentionally disregarded their responsibilities, adopting a "we don't care about the risks" attitude concerning a material corporate decision. ... Put differently, all of the alleged facts, if true, imply that the defendant directors knew that they were making material decisions without adequate information and without adequate deliberation, and that they simply did not care if the decisions caused the corporation and its stockholders to suffer injury or loss. In re The Walt Disney Company Derivative Litigation, 825 A.2d 275, 289 (Del. Ch. 2003) (emphasis in original).
Why were Disney's boards so bad? in large part, because CEO Eisner was so good at stocking the board with ceremonial directors and, even worse, personal cronies. According to the LA Times (reg. req'd):
At various times, the board has included Eisner's personal lawyer, his architect and the principal of the elementary school once attended by one of his children.
Granted, in 2002, Business Week opined that reforms at Disney, including changes to the board, had led to considerable corporate governance improvements at Disney. Yet, we now learn that Eisner has managed to turn those reforms to his own advantage. Roy Disney was forced out by a mandatory retirement provision, which exempts only former CEOs! The only other persistent Eisner critic on the board, Disney's ally Stanley Gold, was kept off key committees because his business dealings with the firm meant he did not qualify as an independent director under those reforms.
The core problem of corporate governance is reconciling the need to preserve the discretionary authority of the board of directors with the need to hold boards accountable for how they exercise that authority. The long-term problem at Disney has been that virtually every mechanism we have for holding boards accountable has failed. Director independence failed because the board has been comprised of nominally independent folks who in fact were cronies of Eisner or know-nothing ceremonial directors. Shareholder activism failed because it never made a serious dent in the board's complacency. Litigation failed because the board was willing to pay zillions to Ovitz, Katzenberg, etc.... SOX and the other post-Enron reforms failed because Eisner is so good at boardroom politics that he was able to use even those reforms to further entrench himself. We don't have a lot of tools left.
What's the solution? As a lawyer, I'm trained to find an answer to any legal problem. As a law professor, I'm trained to write articles that conclude with a proposed legal reform that solves some doctrinal or policy problem. As I get older, however, I've concluded that some problems have no answers and I'm ok with it.
As I tell my students, neither law nor governance is perfect. Unlike the classic Disney animation movies, this story may not have a happy ending. But don't let the tail wag the dog. Let's not have the regulators run around piling even more rules on all corporations just because we've got one more bad apple. Law, governance, and markets work well in most cases; Disney is just one of the exceptions that prove that rule.
