Eisner Crimping His Own Style

Few companies have answered to the wishes and whims of a chief executive the way Walt Disney Co. has during Michael Eisner’s 18-year tenure.

Disney’s $1.4-billion California Adventure theme park sprouted from notes he scratched on a legal pad. It was Eisner who chose to duke it out in court with former Disney studio chief Jeffrey Katzenberg, costing the company a $270-million settlement. And “Pomp and Circumstance” made its way into the movie “Fantasia 2000” after Eisner heard it played at his son’s high school graduation.

But now the unfettered, freewheeling management style Eisner has enjoyed for nearly two decades appears likely to end, partly from his own doing. Eisner promised that an ongoing revamping of the company’s 16-member board of directors will make it a first-rate independent body.

The changes come at a delicate time for Eisner, who in the last two weeks has been under intense criticism from two key board members, Vice Chairman Roy E. Disney and his chief lieutenant, Stanley P. Gold, over the firm’s lagging performance.

Disney’s board has long been criticized by institutional investors as an undemanding group unwilling to challenge him. Business Week named Disney’s board the worst in America in 1999 and 2000. Critics have cited Eisner’s numerous personal ties to directors, including his personal lawyer, his architect, the president of the college one of his sons attended and the principal of the elementary school once attended by his kids.

“A lot of big institutional investors are upset with the lack of performance and what has been felt to be too cozy a board,” said Richard Koppes, a lawyer who advises companies on corporate governance.

Underscoring those criticisms again was Disney’s disclosure Friday that four of its independent board members had relatives who were employed by Disney or a related company in the last year. The practice might not be allowed under rules proposed by the New York Stock Exchange for independent directors.

“These latest revelations don’t come as a shock to me given the company’s history in this area,” said Charles Elson, director ofthe Center for Corporate Governance at the University of Delaware.

Eisner appears in no immediate danger of losing his job, sources close to both sides agree, in part because there is a dearth of executives who could do the job. But with ABC’s critical fall season launching next month and the company’s stock hovering at an eight-year low--it closed Tuesday at $13.77 a share, down 46 cents on the NYSE--Eisner is under particular pressure.

“Eisner is going to be on a shorter leash,” said corporate governance expert Nell Minow, editor of the Corporate Library. “The era of the imperial CEO is over. That means he, like every other CEO in America, works for shareholders and that the board is their representative.”

The prospect of a more activist board comes amid heightened concerns after a wave of corporate scandals at Enron Corp., WorldCom Inc. and other firms laying blame on lax directors.The escalating pressure from Roy Disney and Gold is a result of Disney’s sagging stock price, Eisner’s failure to stem losses at ABC and a bleak forecast issued last week for Disney’s pivotal theme park business.

Neither side is talking about the other publicly, but both sides are privately sniping at each other.

Sources close to Gold and Roy Disney suggest that other members of the board, such as Andrea L. Van de Kamp, a chairman of Sotheby’s West Coast, have been asking pointed questions of Eisner. Van de Kamp did not return a phone call seeking comment. Disney sources counter by painting Gold in particular as an isolated malcontent whose views don’t reflect the majority of the board.

Roy Disney, nephew of Walt Disney, is the company’s largest individual shareholder. He and Gold engineered the coup that brought Eisner in to lead what became one of the biggest corporate turnarounds in U.S. history. A spokesman for the two men declined to comment.

Eisner would not comment. Disney spokeswoman Zenia Mucha said: “Michael has throughout the years worked very closely with the board and will continue to do so.... He has and will continue to operate in ways that grow our assets and benefit our shareholders.”

Eisner has successfully taken steps to transform the image of Disney’s board over the last two years, corporate governance experts say.

Last week, Eisner disclosed that Disney will shrink its board, reduce the size of its committees and strengthen its independence. Sources say at least three board members could step down because of their age, including actor Sidney Poitier; the longest-serving board member, Ray Watson; and former Capital Cities/ABC Chief Executive Thomas S. Murphy. A smaller board would be expected to give independent directors more clout in decision making.

Other reforms have included requiring directors to own at least $100,000 in company stock, having outside directors hold meetings away from management and prohibiting business relationships with board members. That included $2.2 million Disney has paid the law firm of former Sen. George Mitchell and $1.2 million in consulting fees paid to architect Robert A.M. Stern’s firm.

Eisner also tapped respected corporate governance guru Ira Millstein to evaluate the company’s board structure.

Although calling him a “reluctant reformer,” Business Week lauded Eisner this year, saying he “is now showing other CEOs how to clean up their governance messes while restoring investor trust in the process.”

Still, Disney observers note that changing Disney’s board is only the half of it. Eisner will have to adapt as well, they add, to a job that may not afford the kind of unwavering board support and independence he has come to enjoy.

“That’s up to him,” Minow said. “He has what it takes to do the job right, but he has to make some changes.”