Mickey Mouse board misses ethical point

In 1995, Disney’s CEO Michael Eisner hired his one-time close friend, Michael Ovitz, as Disney’s No. 2 executive. Eisner hired Ovitz, previously a top Hollywood agent, to revitalize Disney. Eisner, behaving as Ovitz’s “Prince Charming,” gave Ovitz a no-fault termination package worth $140 million.

Only 14 months after being hired, Ovitz was fired. Although he was not fired for cause, Eisner characterized Ovitz as a liar, prima donna, psychopath and inept during the trial. Eisner’s testimony leaves one wondering what qualifies as “firing for cause” at Disney.

Eisner also came off as something of a “Pinocchio.” Eisner admitted to lying on television when he labeled as “baloney” earlier reports of trouble at Disney with Ovitz.

In the 1990s, Eisner’s friends and cronies dominated Disney’s board of directors. In approving Ovitz’s contract and excessive severance terms, Disney’s board collectively behaved as famed Disney dwarf “Dopey,” except the board failed to work in reviewing Ovitz’s contract. Board members did become “Grumpy” when angry shareholders sued the directors for $260 million in damages for approving Ovitz’s “sweetheart” deal. Many shareholders resented Ovitz’s contract and believed he should have been fired for nonperformance.

Disney’s board, however, found its own “fairy godmother” in Chancellor William B. Chandler. The chancellor criticized the board for not following corporate governance best practices. He noted the board’s compensation committee hastily approved Ovitz’s deal with scant information on the contract’s financial implications. Chandler also criticized Eisner’s domination of the Disney board. He wrote that Eisner “enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom.”

Most board members rarely questioned anything Eisner did. Chandler, however, could not bring himself to impose personal liability on Disney’s directors.

Chandler decided it would be unfair to judge the board members by today’s tougher corporate governance standards for something done 10 years earlier. The chancellor praised Disney’s recent corporate governance reforms, such as splitting the roles of board chairperson and CEO. Eisner held both positions when he hired Ovitz.

Chandler’s ruling inexplicably ignores that fiduciary duties have not changed in 10 years. Today’s directors owe shareholders the same duties of loyalty and due care that they have owed them for decades.

The Sarbanes-Oxley Act of 2002 and other governance reform measures only increase the penalties for violating long-recognized fiduciary duties. Also, although Disney’s board now governs more effectively, that does not excuse the board’s previous governance failures. No doubt, the losing shareholders consider Chandler’s ruling a little “Goofy.”

Attorneys for Eisner and Ovitz performed the final feats of magic in the case. Eisner’s attorney stated the ruling makes it clear that you don’t violate the law “because you hire someone who doesn’t turn out to be what you expected.” Ovitz’s attorney found the ruling consistent with his client’s position that the case lacked merit and “a deal is a deal.”

Both attorneys ignored the real issue of whether Disney’s directors performed their fiduciary duties. Unconscionable “deals” are not enforceable. Gross negligence by directors is not acceptable.

Neither attorney declared the deal fair to shareholders or ethical. Chancellor Chandler did not exonerate Eisner, Ovitz or Disney’s board of directors. He only found them not liable to Disney’s shareholders because of the old, more lax corporate governance rules in existence when Disney’s board unquestioningly approved Ovitz’s contract.

Chandler implied that today’s tougher governance standards do not allow similar board conduct.

The magical escape of Disney’s board of directors does not restore the Magic Kingdom’s lost luster from the Eisner-Ovitz fiasco. It also does little to renew investor confidence in Disney. Other corporate boards should not misread the Disney decision. Today, investors expect better corporate governance, and “fairy godmothers” are rare, especially among judges and jurors.

John D. Copeland, J.D., LL.M., Ed.D., is an executive in residence at the Donald G. Soderquist Center for Business Leadership and Ethics and Professor of Business at John Brown University in Arkansas.