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Disney Board Splits Leadership, Makes Mitchell Chairman

4 Mar, 2004 By: Kathleen A. Marla R.

Following a stunning shareholder rebuke of Walt Disney Co. chief Michael Eisner at the company's annual meeting Wednesday, the board of directors said it was immediately separating the positions of chairman and CEO.

Former Sen. George Mitchell, who has held the title of presiding director, was unanimously elected by the board as chairman. Some 43% of Disney shareholders withheld their votes for Eisner's re-election as chairman; Mitchell faced the second-highest percentage of shareholder discontent, with 24% of shareholders withholding.

"While making this change in governance, the board remains unanimous in its support of the company's management team and of Michael Eisner, who will continue to serve as chief executive officer," the Disney board said in a statement. "Following recent detailed reviews of each major business and with an ongoing, in-depth knowledge of our operations, the board has confidence in the strategic direction of the company. Our belief in the company's strategy, financial results over the last several quarters and the level of earnings and improved returns we expect going forward make us confident that results will validate our judgment on the quality of our management team."

The man who led a dramatic turnaround of Disney in the late 1980s and early '90s found himself defending his record and his job Wednesday at Philadelphia's Pennsylvania Convention Center. A packed room of 4,000 shareholders greeted the Disney board, with many more would-be attendees unable to gain entrance because of the huge interest in the event. Eisner launched the meeting with a defense of the company's performance under his leadership, but a large number of shareholders was apparently unconvinced.

Guzman and Co. senior equity analyst David Joyce said splitting the CEO and chairman roles is "not going to be enough for some critics."

"The withhold vote is quite large, and for the meeting to get so contentious in the first place is quite rare," Joyce said. He noted that Steve Case ended up stepping down from his role as chairman of AOL Time Warner two years ago after 22% of shareholders withheld their votes against him.

In its statement, the board said: "We are aware that some voted for an immediate change in management and in the board. However, taking all of these factors into account, we believe the action we have taken today is in the best long-term interest of the shareholders of the company."

David Mantell, cable and media analyst at Loop Capital Markets, said the separation of the titles "may settle the nerves of investors, and I think that would at least be a positive step."

Analysts attributed the vast majority of the withheld votes to the anti-Eisner recommendation made three weeks ago by Institutional Shareholder Services, an investment advisory organization that holds a powerful influence over the decisions of the major pension funds. More than a half-dozen funds followed the lead of the California Public Employees' Retirement System in the past week in saying they would withhold their votes for Eisner.

After the announcement of preliminary voting results at the meeting Wednesday afternoon, CalPERS released a statement saying the "enormity" of the withheld votes against Eisner means that he must leave Disney sooner rather than later.

"This discontent is too wide and way too deep in the marketplace, and it has led us to believe that Eisner should go and the board should get quickly to work on planning for an orderly transition," Sean Harrigan, president of the CalPERS board of administration, said in a statement. "We urge the board to be thoughtful in their process but exercise the courage to do the right thing for the long-term future of the company and its shareholders."

CalPERS controls more than 9.9 million shares of Disney stock valued at about $235 million. Other state pension funds that joined it in withholding votes for Eisner include the California State Teachers' Retirement System (with about 8 million shares) as well as teachers' funds in New York (8.7 million) and New Jersey (8 million).

Although the sheer size and power of the state pension funds is credited with the majority of the anti-Eisner vote, former board members Roy E. Disney and Stanley Gold also are credited with highlighting the issue to smaller investors and the media. The two were granted about 15 minutes to make remarks at the shareholders meeting and were greeted with a standing ovation from many in attendance.

Each scored strong applause for anti-Eisner comments like Gold's: "While we believe the shareholders watch the value decline, Eisner has never had a bad year." Roy Disney spoke against the company name becoming a "commodity" that is associated more with bottom-line concerns than creativity.

On the company's current brand strategy, Roy Disney said: "(Branding) makes sense if you're a cow. Branding is what you do when there's nothing original about your product."

Afterward, the pair released a statement hailing the vote as a sign that "Eisner must go."

"The resounding no-confidence vote cast by shareholders/owners of the Walt Disney Co. has sent a clear and undeniable message that dramatic change is needed now and that Michael Eisner must go," Roy Disney and Gold said in a joint statement. "We have said from the start that we believed anything north of a 20% withhold vote would send a strong message to the board that shareholders were demanding a change. ... The no-confidence vote received by Mr. Eisner is unprecedented in American corporate history."

Also on the hot seat to a lesser degree after Wednesday's shareholder vote are directors Judith Estrin and John Bryson. Each had more than 20% of votes withheld against them after being targeted by the Roy Disney/Gold camp and other investor groups.

The board has been solidly behind Eisner, issuing several letters of support leading up to Wednesday's vote. Critics have charged that they are too much in Eisner's pocket, making the board not truly independent.

Disney shares remained virtually unchanged Wednesday, closing at 26.65.

Kathleen Anderson reported from Philadelphia; Marla Matzer Rose reported from Los Angeles.

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