Advisory Firm Backs Disney

For Walt Disney Co., it was a welcome about-face.

In early 2004, the influential Institutional Shareholder Services advisory firm joined Disney dissidents in recommending that Chief Executive Michael Eisner be given the thumbs down in his bid for reelection as a director. The group’s report fortified a protest movement that saw Eisner rebuked with a 45% no-confidence vote, leading to his being stripped of the chairman’s title by the board of the Burbank entertainment company.

But on Tuesday ISS praised Disney, releasing a report saying that the company was for the most part doing the right things. With the annual shareholders meeting a little more than two weeks away, ISS is recommending a favorable vote for all 12 Disney directors, including Eisner.

“Overall, Disney has taken some positive steps in the past year,” the Rockville, Md.-based group said. Its report was prepared for institutional investors as they are about to cast votes for the Feb. 11 annual meeting in Minneapolis. An ISS recommendation carries significant weight with large institutional shareholders, such as pension funds.

And it’s a significant boost for the Disney board, which still carries scars from last March’s battle with dissidents led by former directors Roy E. Disney and Stanley P. Gold.

Back then, citing management problems and historically low returns, ISS sided with Gold and Disney on the Eisner issue, giving much-needed credibility to a group that had been portrayed as a bunch of gadflies.

The change of heart by ISS came after Disney’s board made the separation of chairman and CEO roles permanent -- addressing a fundamental concern shared by ISS and several investors.

Beyond that, ISS said it welcomed changes aimed at linking executive pay more closely with performance and acknowledged Disney’s “strong financial performance” in 2004, when it outperformed other media companies with earnings per share rising 72%.

ISS qualified its endorsement by saying it was based on good faith that Disney’s turnaround would continue and that its board would abide by good corporate governance.

“Can Disney sustain its strong performance? Can this board continue to act independently of its departing CEO?” ISS asked in its report.

The report warned that ISS could penalize Disney next year if Eisner remained a director in retirement. Former U.S. Senate Majority Leader George Mitchell, who replaced Eisner as chairman, has previously discounted the possibility that Eisner would keep his board seat after leaving his executive position.

The advisory firm also raised questions over when Eisner, who has been Disney’s chief for nearly 21 years, would leave the company altogether. Although the board has said it will name a successor by June, Eisner plans to resign at the end of his contract in September 2006.

“The long shadow of Eisner ... could serve to discourage the best candidates from seeking to replace him unless and until the cloud of his considerable influence is lifted,” ISS wrote.

Disney declined to comment on the report, as did dissidents Gold and Disney.

Disney stock rose to a 3 1/2 -year closing high Tuesday, gaining 85 cents to $28.80 on the New York Stock Exchange. The shares were boosted in part by an upbeat business outlook from brokerage Smith Barney.