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Magic kingdom dissisdents make their case

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   http://www.forbes.com/2003/12/02/cx_da_1202topnews.html

http://www.forbes.com/2003/12/02/cx_da_1202topnews.html

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Magic Kingdom Dissidents Make Their Case
Dan Ackman, 12.02.03, 9:15 AM ET

NEW YORK - Stanley Gold, a longtime board member of The Walt Disney Co., joined his confidante Roy Disney and left the company's board yesterday, adding to Mr. Disney's sentiments that Chairman and Chief Executive Michael Eisner should resign. The company has had little response to both resignations, except it issued a joint statement in the name of its independent directors calling Mr. Disney's and Gold's actions "destructive" and "a disservice to shareholders and to employees."

Gold's own letter to the board focused on the acquiescence of fellow board members to the misrule alleged by Mr. Disney yesterday. The CEO of Shamrock Holdings and a financial adviser to Mr. Disney called the board "an enabler of an entrenched management" and said it "squelch[ed] dissent by hiding behind the veil of 'good governance,'" with the company's move to force Mr. Disney's resignation as part of a disputed mandatory retirement policy the most recent example.

Most observers say that efforts by Mr. Disney and Gold to oust Eisner have little chance of success, especially when the company's fortunes have improved in the last year and their efforts while on the board went nowhere.

They insist the company has floundered ever since the 1994 death of Frank Wells, a former top executive, which came around the same time as the embittered resignation of Jeffrey Katzenberg as the Disney (nyse: DIS - news - people ) studio chief. While it's difficult to assess morale inside a company, even a rough look at the company's finances suggests they have a point.

In 1995, Disney recorded revenue of $12.2 billion on assets of $15 billion. Since then, as of the end of 2002, the company has more than tripled its asset base to $50 billion. But its revenue has hardly kept pace, growing by just 69% to $25.3 billion. Between 1997 and 2002, revenue did not outpace inflation, even though the asst base grew by 30%. Earnings per share fell consistently, except when they rebounded between 2001 and 2002. In 1997, Disney reported $5.1 billion in cash from operations. In 2002, it reported $2.2 billion. Disney was very good at growing in size, but did less with what it had. The terror attacks of Sept. 11, 2001, and the recession can take some of the blame, but not all, as the problems started years before.

The stock market was extremely forgiving during much of this period and Disney was a growth stock, even though its earnings didn't necessarily justify it.

But over the last five years, Disney's shares have trailed Viacom (nyse: VIA.B - news - people ), News Corp. (nyse: NWS - news - people ) and Sony (nyse: SNE - news - people ), though they have led Vivendi's (nyse: V - news - people ). Long-term holders have not done well.

But Eisner, 61, has done very well. The majority of his fortune derives from his cashing in nearly $600 million in options in a single year, 1998. In the past two years, the company's poor performance and his average compensation over the years, still reflecting the fat years of the late 1990s, earned his a grade of 'F' on Forbes' Pay For Performance rankings.

Yesterday, a company spokesman insisted Eisner is the largest individual holder of Walt Disney shares. He may or may not be, depending on how one counts. (Last year, Mr. Disney, who had been the largest individual owner, sold some shares in a complex transaction that allowed him to retain voting rights and some upside potential). But it's a safe bet that nearly all of Eisner's holdings came from options, not any personal investment on his part. (The same is true, of course, of Roy Disney, whose holdings come from inheritance.)

It's also clear that none of the principals in the current board own more than 1% of shares outstanding and that any battle for control would be decided by institutions that control 65% of the stock. It's unlikely these investors will be moved by the fury of ousted board members who have been around long enough to share some of the blame.

One of the knocks on Eisner is that he has failed to identify a successor. But for all of Disney's problems, it does not seem he needs one.



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