By BRUCE ORWALL
Staff Reporter of THE WALL STREET JOURNAL
November 23, 2004; Page A1
When Michael Eisner took the helm at Walt Disney Co. in 1984, he was so unschooled in boardroom etiquette that he sought out a copy of "Robert's Rules of Order," the guide to parliamentary procedure.
But no rule book taught Mr. Eisner the moves he displayed at a Nov. 25, 1996, board meeting.
The Disney chief executive planned to inform directors that he wanted to fire
company President Michael Ovitz -- without Mr. Ovitz, who was also a board
member, in the room. At the regular board meeting, Mr. Ovitz was nominated
to a new three-year term as a director. Then the whole group moved into a second
room where it listened to a presentation about Disney's theme-park operations.
Finally, Disney's non-management directors, plus Mr. Eisner, slipped into a
third room to talk about Mr. Ovitz's pending ouster in an unscheduled executive
"That's how we kept Michael Ovitz out of the room and moved it on," Mr. Eisner said last week in court. The maneuver wasn't entirely painless. The executive session was held in a glass-walled conference room. Outside, Mr. Ovitz hovered and watched. Just over two weeks later, he was fired.
That scene was depicted in detail during a month of testimony in the trial of a shareholder suit against Disney directors under way in a Delaware court. The trial, plus interviews from depositions, provides an unusual behind-the-scenes peek into the brutal sport of corporate boardroom politics. In particular, the case shows how Mr. Eisner wielded power during his controversial 20-year run at Disney and clung to that power even as the company's performance sagged.
Time and again, testimony in the Ovitz case -- including Mr. Eisner's own account -- illustrates how he operated with little regard for conventional rules of corporate play. He allowed rivalries to fester until they become irreparable, lied publicly when it was convenient, and once hatched a plot with a director to report details of a private conversation with Mr. Ovitz.
Mr. Eisner's standard operating procedure involved lavishing attention on individual board members. He fired off stream-of-consciousness memos that effectively routed debate through him. He curried favor with other influential players in the Disney orbit, including the widows of former executives, members of the Disney family and big investors including Sid Bass and Warren Buffett.
Mr. Eisner was also in the habit of copying his wife, Jane Eisner, on board-level communications. "It was easier than going home and having her say 'what happened at the office today?' " he testified. A 1995 Eisner memo outlining the company's strategic vision was addressed to "Board Members, Bass Family and Jane."
The high-profile shareholder lawsuit, currently being tried in the Delaware Court of Chancery, alleges that Disney's directors did not give adequate scrutiny to Mr. Ovitz's 1995 hiring and his 1996 "no-fault" termination. After a stormy stint at the company, Mr. Ovitz walked away from Disney with an exit package that at the time was valued at $140 million. Disney's mid-1990s directors, including Messrs. Eisner and Ovitz, are defendants in the case.
The glimpse into Mr. Eisner's boardroom strategy comes as he is beginning to fade from power. Mr. Ovitz's departure opened the door to outside criticism that never let up. The 2003 resignation of two key board members, Roy E. Disney and Stanley Gold, lit the fuse of a shareholder revolt that resulted in a humbling 45% no-confidence vote against Mr. Eisner at the company's annual meeting in March. The board stripped Mr. Eisner of his chairman's title that same month and in September, Mr. Eisner announced plans to leave as CEO when his contract expires in 2006.
Disney says its corporate governance has been overhauled in recent years. It has put in place stricter definitions of who counts as an independent director and has appointed new independent members to replace those criticized for being beholden to Mr. Eisner. Disney says non-management directors now meet regularly outside the presence of the company's executives.
In a written statement, Disney noted that its revenues and profits have increased markedly under Mr. Eisner's leadership and that "the quality of his management style would need to be evaluated in the context of those results."
Mr. Eisner has long denied he was an overly dominant presence on the Disney board. But during the trial -- which turns on how much the board knew about the hiring and firing of Mr. Ovitz -- he has been forced to spell out the once-private details of how he ran his company.
Learning the Ropes
A top film and TV executive before joining Disney, Mr. Eisner had never attended a corporate board meeting, much less presided over one. While learning the ropes, he recalled during testimony, Mr. Eisner asked whether or not he would use a gavel.
His street smarts soon kicked in and Mr. Eisner learned to manage board members by constantly providing them with information. "I knew if I filled them in, made them my partner, if things didn't go so well, the likelihood of, 'I told you so' and those kind of reactions would not exist," he told the court. He also noted he had an "obligation to fill them in."
Mr. Eisner operated in this manner when Disney made a headline-grabbing deal in August 1995 to hire Mr. Ovitz, then a top agent known in the media as "the most powerful man in Hollywood." One Disney director -- Irwin Russell, who was also Mr. Eisner's personal attorney -- conducted the negotiations for the company in exchange for a $250,000 fee. Mr. Eisner solicited the views of key directors such as Stanley Gold, Roy Disney's business partner. Mr. Eisner testified that shareholder Mr. Bass was also supportive. In a deposition taken last year, Mr. Bass said: "Relented might be a better word...I was never terribly pleased with Mr. Ovitz being the choice."
Even before the Ovitz deal was announced, it had gone sour. In testimony, Mr. Ovitz said he thought his new job would be structured like that of Frank Wells, the Eisner confident who served as Disney president until his death in a 1994 helicopter accident. But the night before the planned announcement, over dinner at Mr. Eisner's house, Mr. Ovitz received a shock. Disney Chief Financial Officer Steve Bollenbach and corporate operations chief Sanford M. Litvack were also in attendance.
Mr. Eisner recalled: "We sat down and Steve Bollenbach looked right at Michael Ovitz and said -- first words out of his mouth -- 'this is great for the Walt Disney Company. I'm thrilled to be a shareholder. The stock is going to go up. Congratulations. And by the way, I'm not reporting to you, I'm reporting to Michael Eisner'...Then Sandy said, 'Me, too.' "
Mr. Eisner conceded that he "hadn't really thought it through." Mr. Ovitz said in court that Mr. Eisner did little to back up his new hire. They ducked into a bedroom but all Mr. Eisner said was: "There's nothing I can do about it," Mr. Ovitz testified. Mr. Ovitz said he felt it was too late to back out on the deal.
Mr. Ovitz started work at Disney in October 1995. Ten days later, Mr. Eisner sent him a letter stressing that Disney needed to focus on operations after its big acquisition of Capital Cities/ABC Inc. He also stressed the importance of business ethics. "We both know many, many leaders of industry who forget either their positions or their mortality," he wrote.
It was soon apparent the men were going in different directions. Mr. Ovitz testified he tried to acquire record companies, sign big-name talent and look for new investments outside Disney -- precisely the activities Mr. Eisner counseled against. By the end of the year, the enthusiasm that marked the beginning of the Eisner/Ovitz era was starting to wear thin. In a Christmas Eve end-of-year note to Mr. Ovitz, Mr. Eisner wrote: "1996 is going to be a great year. We are going to be a great team. We every day are working better together. Time will be on our side."
Early in the new year, Mr. Eisner selectively put out the word that he thought Mr. Ovitz was stumbling. Mr. Gold testified that Mr. Eisner invited him to lunch at Lakeside Country Club, near Disney's Burbank, Calif., headquarters early, in 1996 to tell him that "the Ovitz situation was not working out...he didn't understand the Disney culture; he was alienating other executives." Mr. Gold testified he told Mr. Eisner to "double your efforts to make this work." Mr. Gold said Mr. Ovitz nonetheless seemed enthusiastic at a March lunch between the two men, promising to "bust his hump to add value to the company."
Mr. Ovitz knew he faced problems. For example in his testimony, Mr. Ovitz said Mr. Litvack, the Disney operations chief, took "every chance that he got to make me look stupid."
When Mr. Bollenbach quit as chief financial officer early in 1996, Mr. Ovitz testified that he "begged" Mr. Eisner to have the new finance chief, Richard Nanula, report to him. Instead, Mr. Ovitz said, Mr. Eisner "put in the press release that Nanula would report to him, and it created just a worse situation for me than I had before." Mr. Eisner reasoned that a company's chief financial officer should always report to its chief executive.
A trickle of negative press coverage about the company's executive problems turned into a torrent by the late summer. Mr. Eisner fretted that other executives would leave if the Ovitz situation got any worse. In an e-mail to shareholder Mr. Bass, Mr. Eisner complained that Mr. Ovitz was complicating rather than helping solve problems. Rather than help Disney lower the cost of moviemaking, for example, Mr. Eisner wrote that Mr. Ovitz "still looks at the studios the same as he look [sic] at them as an agent. BIG POCKETS!!"
A late-summer incident at the funeral of Mr. Eisner's mother was a "final straw," the chief executive testified. The problem stemmed from "a giant scene" Mr. Ovitz made involving a car that was blocking the hearse. Furious, Mr. Eisner started scribbling an intemperate memo to board members Mr. Russell, an attorney, and Ray Watson, a former Disney executive. He completed the memo, in a calmer frame of mind, a few weeks later.
"The mistake was mine, totally and completely," Mr. Eisner wrote about the Ovitz hire. "Maybe I suspected it [at] the time, but my desire to bring in a strong number two executive, my desire to satisfy my wife's honest request that I get help, my desire to appear not threatened by strong executives, my desire to seek experienced help to run ABC, and my desire to do what was right for Disney, all clouded my basic instinct that I was making a mistake. I was really the only one who knew it."
These private complaints were getting back to Mr. Ovitz. Mr. Eisner testified he was in Anaheim helping the company's baseball team, the Angels, court a young player when he received an "emergency phone call" from Mr. Ovitz, who "was really upset. He was hearing that I was telling the directors he wasn't doing a good job."
At a September board meeting in Orlando, Fla., Mr. Eisner pulled board members aside, individually or in small groups, to alert them to the escalating problem. He avoided an executive session because "it would be so difficult to get Michael Ovitz out of the room," Mr. Eisner testified. He said he told some board members of an unorthodox plan he had hatched to convince Sony Corp. to talk to Mr. Ovitz about running its entertainment operations. If the talks were successful, and Mr. Ovitz joined Sony, Disney might receive in return an asset, such as a record label.
Mr. Eisner was willing to lie to carry out his plan. He and Mr. Ovitz had agreed to be interviewed by Larry King on CNN, to improve the company's image, and Mr. Eisner didn't want to blow the Sony negotiations by revealing the discord. At about the same time that Mr. Eisner told individual board members he might fire Mr. Ovitz, the Disney chief told Larry King he would hire Mr. Ovitz again given a second chance. Press accounts of Disney's problems, he said, were "baloney."
Mr. Eisner's attempt to trade Mr. Ovitz to Sony in return for some kind of asset, such as a record company, didn't work out. After a trip to Japan, Mr. Ovitz sent Mr. Eisner a letter stating: "Instead of pursuing that alternative further, I have decided to end the discussions and re-commit myself to you and to Disney."
This result further frustrated Mr. Eisner. According to his courtroom testimony, he and other people at the company had been trying to make it clear to Mr. Ovitz he was about to be fired, but their approaches fell on deaf ears.
Instead, Mr. Eisner devised a plan with longtime Disney board member Gary Wilson, a former Disney finance chief, who planned to vacation with Mr. Ovitz over Thanksgiving on a yacht, named Illusion, the two men owned. He and Mr. Ovitz were longtime friends. Mr. Wilson planned to persuade Mr. Ovitz to leave the company and then secretly phone Mr. Eisner with the results. Disney's non-management directors were apprised of the plans in the session of Nov. 25, 1996, board meeting that didn't include Mr. Ovitz.
Mr. Eisner took handwritten notes from his phone conversation with Mr. Wilson: "Attitude in general, wounded animal, in a corner...afraid he will get s-wed." The notes say an emotional Mr. Ovitz blamed Mr. Eisner and other executives for his problems but suggested there may be a possible solution. Mr. Ovitz "wants to stay but will be available to discuss settlement. I must be magnanimous," Mr. Eisner wrote.
Mr. Ovitz, for his part, testified he wanted to use the trip to work on a business plan and try to "figure out some new angle that would save my situation." He figured his job could be rescued if he could make it to the Christmas holiday when he would see Mr. Eisner in Aspen, Col. They both owned homes there.
When Mr. Ovitz was shown Mr. Eisner's notes during a deposition last year, he expressed annoyance. "I take great umbrage with two guys I'm incredibly close to communicating behind my back when I'm having a personal conversation on a boat I co-own with Gary Wilson and he is taking every God-blessed thing I say to him that's personal...[and] transmitting it to Michael Eisner, who is then taking notes." According to people close to both sides, Messrs. Ovitz and Wilson remain friends.
Negotiations for Mr. Ovitz's exit began in early December. At the same time, Disney's executive-performance plan committee awarded Mr. Ovitz a $7.5 million bonus for his work in fiscal year 1996; it was later rescinded.
On Dec. 11, 1996, Mr. Eisner and his onetime successor met late at night in a New York apartment that had belonged to Mr. Eisner's mother to finalize the details. In a written statement released the next day, the separation was described as being "by mutual agreement." Mr. Eisner said he would "miss Michael's energy, creativity and leadership at Disney."
A few days later, upset at what he described as Mr. Ovitz's efforts to spin the press, Mr. Eisner sent an e-mail to then-Disney public-relations chief John Dreyer complaining that Mr. Ovitz was a "psychopath" who was "untrustworthy to everybody" and "totally incompetent." In testimony last week, the Disney chief said he was exaggerating.
Write to Bruce Orwall at email@example.com