Eisner Loses Backing of Big Pension Funds

The campaign to oust Michael Eisner as chairman of Walt Disney Co. got another boost Wednesday as two of the nation’s largest pension funds and a major shareholder advisory firm recommended that investors oppose his reelection at next week’s annual meeting.

The California Public Employees’ Retirement System and the California State Teachers’ Retirement System, two of Disney’s largest shareholders, blamed Eisner for the company’s poor financial performance in recent years.

“We have lost complete confidence in Mr. Eisner’s strategic vision and leadership in creating shareholder value in the company,” CalPERS President Sean Harrigan said.

Glass Lewis & Co., an influential advisory firm whose clients own more than 15% of Disney’s shares, also recommended that its clients withhold their votes for two other company directors: former U.S. Sen. George J. Mitchell and Northwest Airlines Chairman Gary Wilson.

“In our view the Disney board has come a long way, but not far enough.... The Disney board has been notoriously insular, famously gullible and blindly loyal to Mr. Eisner,” Glass Lewis said in a 23-page report.

The pension funds carry plenty of clout, but the Glass Lewis recommendation is particularly significant. In the wake of scandals such as the collapse of Enron Corp., institutions that once could be counted on to back management are taking their votes more seriously.

And many increasingly rely on proxy services such as Glass Lewis and Institutional Shareholder Services, or ISS, to guide their votes. Earlier this month, ISS, whose clients own an estimated 30% of Disney’s shares, recommended that shareholders withhold their votes from Eisner.

CalPERS and CalSTRS, as they are known, together own 17.9 million shares, or about a 1% stake in Disney, worth nearly half a billion dollars.

All told, the recommendations increase the possibility of a sizable vote of no confidence in Eisner at the March 3 meeting. Although some shareholders have already cast their votes, they can be changed via e-mail, fax, telephone and in writing right up until the meeting.

Eisner’s reelection is a foregone conclusion because he is running unopposed. But some believe that a large enough pool of dissenters, perhaps as much as 20%, would wound Eisner and force him from the board.

While the company’s directors have publicly rallied behind Eisner, some privately are contemplating contingency plans should Eisner face a substantial no vote. One possibility, said a source close to the board, is for Eisner to give up one of his two jobs, chairman or chief executive -- a move that could placate critics of Disney’s corporate governance.

The question now is how many no votes it will take before the board would ask Eisner to resign, said Tom Wolzien, a media analyst with investment firm Sanford C. Bernstein & Co.

“This is clearly an expression of frustration with the actions over the last decade, but it’s unclear whether it will have a practical effect,” he said. “This is not a form of representative government where you have a no-confidence vote and the government falls.”

Disney spokeswoman Zenia Mucha said the company was “dismayed” by CalPERS’ comments and dismissed the Glass Lewis report as “laced with one-sided allegations and opinions.”

The Disney board “believes the company has well laid out its key long-term strategies,” she said. The report “diverts attention from the fact that Disney’s record of building value is indisputable and that it is a well-managed company with world-class governance and a laser focus on building shareholder value that is on track for earnings growth from continuing operations in excess of 30% this year and double-digit growth through 2007.”

Despite such improvements, Eisner is facing the toughest challenge yet to his 20-year tenure.

On Feb. 11, cable giant Comcast Corp. launched an unsolicited bid to buy Disney, blaming Eisner for the entertainment giant’s sluggish performance during the last several years. Disney’s board rejected the Comcast offer.

In addition, two former directors -- Stanley P. Gold and Roy E. Disney, the nephew of Walt Disney -- are leading the charge to oust the chairman. They accuse Eisner of poor management, strategic blunders, high turnover and presiding over a board that has been unwilling to challenge him.

The dueling camps have spent the last several weeks trying to woo investors and analysts to their sides.

Earlier this month, Glass Lewis met with Gold and Disney. Earlier this week, it held a conference call for its clients, giving Eisner and three Disney directors a chance to state their case: that Disney is rebounding from a slump that had more to do with the economy than management.

In an interview Wednesday, Glass Lewis CEO Greg Taxin stood by his firm’s decision, which followed several days of intense internal debate.

“It’s fair to say that this is the hardest recommendation that we’ve had to make in years,” Taxin said. “There was a lot of debate and discussion here.”

Among other things, Glass Lewis executives debated to what extent the recommendation would ultimately hurt shareholders by weakening Eisner and his ability to extract a good deal from Comcast, should it come back with a higher offer.

One of Glass Lewis’ chief complaints was Eisner’s role in the hiring of his friend and then-entertainment mogul Michael Ovitz, who was fired after slightly more than a year on the job.

Ovitz received a cash and stock payout then valued at about $100 million, outraging shareholders. They sued in Delaware Chancery Court, accusing Eisner of putting his friendship with Ovitz ahead of his fiduciary responsibility to the company.

Earlier this week, the judge hearing the case unsealed documents relating to Ovitz’s departure. Glass Lewis said the documents allegedly indicate that Eisner “insisted on hiring Michael Ovitz as an executive officer of the company despite strong opposition from key board members,” and that he negotiated the controversial severance package “without much input or oversight of the board.” Eisner and Disney deny any wrongdoing.

In unsealing the documents, the judge sharply rebuked Disney for seeking to keep them from public view until next Tuesday, which some critics labeled an attempt to avoid as much scrutiny as possible before Wednesday’s annual meeting.

In a letter to Disney, Chancery Court Justice William Chandler wrote: “It appears to me that you seek to sanitize the public record, effectively maintaining a cloak of secrecy” about the conduct of Eisner and others in the Ovitz matter. The company’s desire to keep the documents sealed “heightens my suspicion about your motive.”

Although Ovitz’s severance package was controversial, Glass Lewis said Eisner’s role in the matter wasn’t fully revealed until this week.

“We think it is still relevant to the manner in which Mr. Eisner runs the company and the board,” the report said.

It also cited a continuing Securities and Exchange Commission investigation into Disney’s failure to disclose information on a timely basis about business relationships between the company and the relatives of board members. Disney recently said it was negotiating a settlement with the SEC.

Glass Lewis also accused Eisner of exercising too much power over the board, including setting board agendas, determining the time and length of meetings, and recommending which directors would head the board’s various committees.

Although focusing on his relations with the board, the report also criticized Eisner for pursuing what it called “questionable deals that proved costly to shareholders,” including spending $1.6 billion on Web ventures such as the ill-fated Go.com and the $5.2-billion acquisition of Fox Family World, now the ABC Family channel, “which has slumped miserably in the ratings.”

In recommending to withhold votes from Mitchell and Wilson, Glass Lewis said the directors “failed to take any action” to block Eisner’s handling of Ovitz’s hiring and firing. The report also questioned Mitchell’s independence, given that both he and his law firm have done work for Disney in the past.

Disney shares rose 34 cents to $26.30 on the New York Stock Exchange on Wednesday.

Times staff writers Marc Lifsher, James Bates and Tom Petruno contributed to this report.