Disney Faces Heated Battle From Shareholder Activists [Image]

By BRUCE ORWALL and JOANN S. LUBLIN Staff Reporters of THE WALL STREET JOURNAL

A shareholder battle at Walt Disney Co. is shaping up as the opening round of a bigger fight between investor activists and corporate America over the issue of independent directors, according to institutional investors. Disney's shareholders convene next Tuesday in Kansas City, Mo., away from the big media centers, a year after the company's most contentious annual meeting in memory. And once again, some holders are preparing to press the question of whether Disney's board is suitably detached from the entertainment company and its chairman and chief executive officer, Michael Eisner. The Disney board includes Irwin Russell, Mr. Eisner's personal attorney; architect Robert A.M. Stern, who has designed many buildings for both Disney and Mr. Eisner; Reveta F. Bowers, the elementary-school principal of Mr. Eisner's now-grown children; and E. Cardon Walker and Raymond L. Watson, who are both former Disney chairmen. Observers say that significant support is developing for a shareholder resolution that would force a reconfiguration of the company's board to meet a new definition of what constitutes an independent director. The proxy-advisory firm Institutional Shareholder Services Inc. predicts that the proposal by College Retirement Equities Fund could attract more than 20% of the votes cast next week. The CREF resolution defines an independent director as someone with "no present or former employment by the company, or any significant financial or personal ties to the company or its management." It urges Disney to reconfigure its board so a majority have no management ties, and key panels consist entirely of independent directors. ISS, which came out in favor of the measure on Feb. 9, argues that only six of Disney's 16 board members are independent outsiders. Besides CREF, which owns 6.9 million of Disney's 688 million shares outstanding, institutional investors that say they will back the resolution include the giant California Public Employees' Retirement System, or Calpers; New York City's five pension funds; and the New York State and Local Retirement System. Those groups collectively own 16.75 million shares. A vote of 20% or more would send a strong message of investor unrest. In 1997, shareholder proposals requiring at least a majority of independent directors received an average of 16.9% of the votes cast at 13 companies, up from a 13.5% average for three such resolutions the prior year, according to the nonprofit Investor Responsibility Research Center in Washington. The biggest vote getter was a union-backed measure at Dillard's Inc. that won 45.8% of votes cast last year. The continued attacks on Disney come despite the company's recent robust stock-market performance -- up 45% since this time last year -- and some recent attempts by top Disney managers to mend fences with their critics. Disney's senior executive vice president and director, Sanford M. Litvack, met last year with CREF's parent organization, the massive pension fund TIAA-CREF, as well as with Calpers. "I thought it went well," Mr. Litvack said of the TIAA-CREF meeting. "Obviously, not well enough." Mr. Litvack believes Disney will escape next week's skirmish unscathed, adding that he wouldn't consider very successful a resolution opposed by 75% of voters. But the investor groups hammering at companies on this issue may feel otherwise. Patrick McGurn, director of corporate programs for ISS, says that if the CREF resolution gets substantial support, "it will become a real focal point for the proxy season going forward." He adds that "we are going to see more and more of these conflicts" between investors and companies over an acceptable definition of board independence. Peter Clapman, CREF's chief investment counsel, says the resolution will resonate with institutional holders because it "fits very well into [their] corporate-governance pronouncements." The issue was certainly at the core of shareholder discontent that roiled Disney last year, when the company's normally placid annual meeting erupted into a 6 1/2 hour bashing of Disney and Mr. Eisner. The criticism focused on the close personal and professional ties many board members have to Mr. Eisner, as well as on the rich exit package given to Disney's former president, Michael Ovitz, and the lucrative new contract that had just been awarded to Mr. Eisner. Nearly 13% of holders voting withheld votes for five directors who were up for re-election. Since then, Disney has quietly angled for conciliation. After meetings with TIAA-CREF and Calpers, Disney agreed to propose a resolution of its own that would result in Disney directors being elected annually, rather than in staggered three-year groups -- a move seen as increasing shareholder accountability. Lately, Disney has even put out the word to some shareholders that, when retirements occur on the Disney board next year, the directors named by the company as successors will be more satisfactory to those concerned about the board's independence. At the same time, the company opposes the CREF resolution, feeling that it is far too restrictive in defining director independence. Mr. Watson, who chairs the Disney board's executive committee, argues that the Disney board members who have been depicted as too beholden to Mr. Eisner display great fortitude in practice. "What we don't want to have is some kind of regulation -- by shareholders, the government or the [Securities and Exchange Commission] -- that says, 'This is the only way to define [director independence],' " Mr. Watson says. Mr. Eisner has the luxury of dealing with critics from a position of strength. He has consistently had the backing of such influential Disney holders as the Bass brothers and Warren Buffett's Berkshire Hathaway Inc., which owns 24 million shares. At last year's meeting, Mr. Eisner even called Mr. Buffett to the stage, where the legendary investor told the crowd, "I advise you to keep your stock." Still, Mr. McGurn says many of ISS's 269 clients "are likely to vote for the proposal. These proposals have performed well elsewhere. And there's a compelling case that could be made at Disney." People familiar with the situation report that some other big Disney holders, such as Capital Research & Management, which owns 13.9 million shares, are also considering the CREF resolution and may back it. If Disney does experience a repeat of last year's dissent, it should at least be a little quieter. After last year's meeting drew 10,000 shareholders to an Anaheim, Calif., hockey arena, the company's session this year will take place in a much smaller convention center in Kansas City. Disney says that history, not harmony, is the reason: A young Walt Disney made his first cartoons in Kansas City.