A Close Look at Eisner’s Stewardship of Disney Shows Many Weaknesses

Increasingly isolated in his corporate redoubt, Michael Eisner must be contemplating the strategy to pursue when you’ve got a reputation as a cold, imperious leader with an uneven track record, a host of alienated ex-associates and a well-financed opponent determined to place your management style and fiscal stewardship under the microscope.

He could seek advice from the last Californian who waged a survival battle from the same position. Then again, things didn’t turn out too well for Gray Davis.

To say that the Walt Disney Co. chairman faces a political problem as daunting as Davis’ is perhaps to be unfair to Davis. The former governor was arguably the victim of external economic forces, compounded by his unappealing personality. But Eisner’s personality defects have been a major contributor to the long-term ailments that have now made his company the target of a takeover bid from Comcast Corp.

Most of these defects have been endlessly masticated by observers in the film industry and the press. Eisner’s reluctance to delegate authority, much less to set a date for his own retirement after two decades at the helm and to groom a successor, has driven off enough talented executives to fill the corporate dining rooms at entertainment conglomerates all over town. His taste for adolescent infighting has led him into a series of embarrassing public feuds, and it doesn’t say much for his judgment that he seems to lose most of them -- at a huge cost to the company.

In recent years, Eisner’s Disney has ceded its domination of its core businesses to others. Children’s entertainment is now identified as much with Viacom Inc.’s Nickelodeon as with Disney. The company has kept its position atop the filmed animation business largely by renting the creativity of its soon-to-be ex-partner Pixar Animation Studios. Its theme parks have lost their reputation as spotless and safe family havens. (On Wednesday, a Disney employee at its Orlando, Fla., theme park was killed when he was run over by a float.)

In an ideal world, a responsible board of directors would have long since hooked a leash to a chief executive who performed this way. But rather than function as a useful counterweight, the Disney board has generally behaved like the House of Peers in the Gilbert & Sullivan song, which “did nothing in particular, and did it very well.” (Except that the Disney board hasn’t even done nothing very well.)

The board granted Eisner lavish bonuses in years when Disney stock rose, and withheld them when it fell, but it seemed to devote scant consideration to whether he was building long-term value for the company. Add up the numbers, and you find that Eisner collected a total of $30 million in cash bonuses from 1996 through 2002, a period in which the stock rose an average of 2% a year.

A Willful Despot

If the board seems cowed, that might be because Eisner has ruled it like a willful despot, evicting those who challenged his authority and often, according to some sources, seeing them out the door with a foul-mouthed valedictory.

The latest to depart were Roy E. Disney, Walt’s nephew, and his business partner Stanley P. Gold. They were more or less forced off the board this year, they contend, because they had begun to challenge Eisner on everything from his meddling in creative matters to his outsized compensation. Rather than go quietly, they promptly set about trying to attract enough institutional and private backers to unseat Eisner over the next year or so. Comcast has stolen a march on Roy Disney and Gold, but its spotlight on Eisner is sure to get investors’ attention a lot faster than they could have by themselves.

Eisner’s defense is almost certain to revolve around the recent surge in Disney’s fortunes. The company’s performance lately has been gratifying, as far as it goes. In the 18-month period through the end of 2003, the stock advanced by about 25% (bringing it to the point where it traded seven years earlier). On Wednesday, just as the toner was drying on Comcast’s press releases, Disney announced a $688-million profit for its first quarter, well ahead of the most generous Wall Street estimates.

But no one delving beneath the surface of the recent results can be too sanguine about Disney’s future prospects. The earnings of its film studio tripled in the last quarter compared with a year earlier, largely on the strength of record sales of the DVDs for “Finding Nemo,” “The Lion King” and “Pirates of the Caribbean.” The first two of these were monster hits that will be hard to replicate under even the best circumstances, and the last a very solid hit. Without commensurate successes, the financial figures for the same quarter a year from now could look ugly by comparison.

Investors might feel a further twinge at the results for “Nemo,” given that it’s the most successful product thus far of the majestically profitable partnership between Disney and Pixar -- a partnership that Eisner has now queered by his inability to reach a renewal deal with Pixar’s chairman, the equally obstreperous Steve Jobs.

Jobs broke off talks two weeks ago, exiting the relationship with a snarl at Disney’s lack of creativity and hinting strongly that he might return to the negotiating table -- if Eisner were gone. If Pixar’s “The Incredibles,” the penultimate product of the original partnership, opens strongly in November, pangs of grief at the impending separation will be only the greater.

Outside the studio results, Disney’s earnings hint as much at the ebbing potency of its signature brand names as at their present prominence. Take ESPN, the basic cable sports juggernaut. In 2003, when Disney turned a companywide profit of $1.2 billion, $1.17 billion came from the company’s cable operations, and almost all of that from ESPN.

But for the last few years, the key to ESPN’s financial growth has been Disney’s ability to exact annual rate increases of up to 20% from cable system operators desperate to carry the popular channel. That era has now passed. Cox Communications Corp., whose ESPN contract expires in March, has refused to pay such an increase, and has mounted a public campaign blaming Disney for the rise in household cable bills. Other cable systems also are likely to push back when their deals expire.

Meanwhile, the televised sports ground is shifting beneath ESPN’s feet. Its NFL contract provides its biggest ratings draw, Sunday night football. But that deal expires in two years, amid signs that the league might then try to shift its live national telecasts to its own fledgling NFL Network. Eisner can’t be happy that the NFL Network’s president and CEO is Steve Bornstein, a former Disney wunderkind whom Eisner drove away, and whose greatest previous career success was in helping to build the cable powerhouse known as ESPN.

Then there’s the ABC television network, which Comcast executive Stephen B. Burke -- another disaffected former Disney executive -- derided Wednesday as a “weak fourth” in the broadcast ratings. In its nearly seven-year span of ownership, Disney has been unable to establish ABC as a persistent ratings leader. The cost of that failure has been huge: Burke estimated that the network and its Disney-owned local affiliates would produce $300 million to $500 million annually in additional cash flow if it even reached “halfway to third” place.

Cost-Benefit Equation

All Hollywood has been speculating for years about what it might take to dislodge Eisner from his perch. Instead, thanks to his supine board of directors, he has kept rolling along.

Comcast’s offer, however, places the board in an unfamiliar position. It has been handed a legal and fiduciary mandate to devote serious study to the bid, in part by examining to an unprecedented degree the cost-benefit equation of leaving Michael Eisner in control of Walt Disney Co.

History suggests that CEOs in his position rarely survive takeover attempts like Comcast’s. Indeed, although Comcast’s offer letter is addressed to Eisner personally, it treats him almost as a political corpse. (Comcast says it “would welcome directors from your board joining our board,” but it doesn’t say he’d be among them.) When the letter mentions the potential “improvements” in performance and opportunities Comcast hopes to produce from Disney and cites its own “stable and respected management team,” the implicit reproach rings loud and clear.

That’s not to say that Eisner lacks any ammunition to fight Comcast or any other suitor who might surface. He could discourage bidders by making an expensive acquisition of his own, for example. But it’s hard to think of what he might do that wouldn’t itself befoul Disney’s balance sheet or undermine its earnings.

Comcast executives have been canny in casting their offer in terms of reviving the luster of the Disney name. In formally announcing their bid, they talked pointedly of “restoring the creative spark” and “reigniting the world’s greatest entertainment business.”

That raises a provocative question: Can the Disney brand retain its value in the 21st century?

Eisner arrived at the company in 1984, when its great name was on the decline. He rescued it then, but the experience should have taught him that neglect and distraction can turn a great name into a relic. Fifty years ago, Disneyland was fresh and Disney artists ruled the animation world. But the nation’s most popular restaurant chain was Howard Johnson’s, millions of television sets bore the RCA nameplate and Pan American ruled the skies.

Comcast has made plain that it doesn’t believe Eisner is the best man to keep Disney from falling into oblivion, as those companies did. Over the next weeks or months, we’ll find out how many investors agree.

*

(BEGIN TEXT OF INFOBOX)

Biggest media deals

Comcast Corp.’s takeover offer for Walt Disney Co. would rank as the fourth-biggest U.S. media merger. The top seven deals:

*--* Date Deal value announced Acquirer Target (billions)* 01/10/2000 America Online Time Warner $181.6 07/08/2001 Comcast AT&T; Broadband $72.0 06/24/1998 AT&T; Tele-Communications $69.9 Wednesday Comcast Walt Disney $66.0 04/22/1999 AT&T; Media One $51.9 09/07/1999 Viacom CBS $40.8 10/04/1999 Clear Channel AMFM 22.7

*--*

* Totals include debt assumption.

Source: Thomson Financial

Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at latimes.com/hiltzik.