Credit: Travis Gergen| Unsplash
After a chaotic two-year stint as CEO of the Walt Disney Company, Disney directors decided in November 2022 to fire Bob Chapek and rehire previous Disney CEO, Bob Iger. The move to oust Chapek left him with a $24 Million "golden parachute" payout as his severance. While this may sound like an exorbitant payment for a corporate executive ousted from their position, an examination of Disney’s hallowed history of head honchos sheds light on the relationship between high-level compensation and their accomplishments.
A History of Disney Leadership
From its humble beginnings in Kansas City, MO as an animation studio founded by the Disney brothers in 1923, within 100 years, the Walt Disney Company moved to Burbank, CA and grew into the most admired media and entertainment company in the world in no small part thanks to its executives at the helm. While not every head of Disney can claim the company’s most significant successes or be remembered for its corporate setbacks, a brief examination of the history of Disney leadership can illuminate how a small two-man team grew into an entertainment conglomerate worldwide wonder. Here we will analyze how executive compensation remains a key factor in the recent success of Disney.
Walt & Roy Disney
Credited by his brother Roy as the imaginative soul of the company, Walt Disney is widely known as the namesake creative founder of this media empire. Walt’s artistic vision coupled with Roy’s business acumen propelled the company to its early success. Despite the brothers’ leadership differences, their shared vision and decades of collaboration brought Walt’s dreams to reality, and created over $1billion in inflation-adjusted wealth for the Disney family at the time of his death in 1966. While Roy took over the management after the death of his brother, becoming the first CEO of the company, each subsequent Disney CEO brought something new to the table that pushed the corporation further into the spotlight.
Michael Eisner
Following the death of Roy Disney in 1971, the corporation went through a tumultuous decade of executives who achieved varying levels of commercial success, but it wasn’t until 1984 that the Walt Disney Corporation regained a visionary leader that pushed the company to new heights. Joining Disney from his previous eight-year role as president of rival Paramount Pictures, Michael Eisner ushered in the “Disney Renaissance” period which was marked by a strong return to Disney’s first role as an animation studio. Eisner’s tenure lasted for 21 years and featured many new projects that are well-remembered as the heart of Disney animation. He capitalized on critically acclaimed animation titles such as The Little Mermaid (1989), The Lion King (1994), and Tarzan (1999), through other efforts like the construction of new theme parks, launching of a cruise line, and opening of the Disney Store. This return to animation embodied the corporation’s central Disney brand; to foster happiness in its audience through the creation of magical experiences. Despite his many successes, Eisner’s exit from the company in 2005 was under less than ideal circumstances. Two of the biggest hits to Eisner’s credibility at Disney surrounded his treatment of other top Disney executives, their questionable departure compensation packages, and ensuing litigation.
Following a public dispute with Eisner, Jeffrey Katzenberg, the decade-long chairman of Walt Disney Studios, resigned from the company in 1994 and was refused his contractual bonus despite Katzenberg’s (significantly undervalued) settlement offer of $60 million. Deciding to take the issue to court, Katzenberg won a final settlement of about $280 million which he used to found rival animation studio Dreamworks SKG. But Katzenberg’s exit was not the most contentious executive drama to plague Eisner’s tenure at Disney.
Hoping to recover quickly from the Katzenberg dispute, Eisner recruited his friend, Michael Ovitz, a founder of the Creative Artists Agency, to fill the role of President. Leaving a highly lucrative position with future windfalls of nearly $200 million to come work at Disney, Ovitz was able to negotiate an employment agreement with the Disney Board of Directors compensation committee that included a no-fault termination provision where he would receive a significant severance package. After a mere 14 months (rather than his planned 5 year term), Ovitz left Disney due to lack of support by Eisner and hostility from other board members. His severance package, worth over $130 million, precipitated a derivative suit (In re The Walt Disney Company Derivative Litigation) by several Disney shareholders who claimed Michael Eisner and Disney’s board of directors breached their fiduciary duties by agreeing to honor the full severance package. Ending nearly 10 years, the Delaware Chancery Court found that Disney’s directors did not breach their fiduciary duty of care in approving the agreement and that the compensation committee was protected under the business judgment rule because it had not acted in bad faith and determined that the severance payment did not constitute waste. While Eisner was cleared of wrongdoing, the suit soured his reputation with Disney shareholders.
After these executive struggles and other growing issues (including alleged micromanagement by the studio, a series of lackluster performances in the box office, and a distribution dispute with Pixar Animation Studios), Eisner’s 21 years at the helm came to a sudden end in March 2004 as 43% of Disney shareholders withheld their votes to re-elect the longstanding CEO to the board. The following year, he voluntarily stepped down a year prior to the end of his contract to permit Bob Iger, then President and COO, to step into the role and Eisner later resigned from Disney altogether. Michael Eisner did, however, accrue well over $1 billion over his time at Disney in various cash and securities options, and ultimately was responsible for “transform[ing] it from a film and theme park company with $1.8 billion in enterprise value into a global media empire valued at $80 billion.”
Bob Iger
Widely regarded as the most successful Disney executive in history, Bob Iger stepped into the role in 2005 and spent the next 15 years pushing the Disney brand to new heights. Learning lessons from his predecessors, Iger focused on IP. Unlike the early Disney IP fumble that lost Oswald the Rabbit, one of Disney’s first characters, to Universal Studios in 1927, Iger’s approach is most notable for the purchase of and capitalization on new corporate and IP assets (including the 2003 acquisition of Oswald as well). Unlike his predecessors he brought Pixar, Marvel, LucasFilm, and 20th Century Fox under the Disney umbrella through amicable acquisition. Iger seemed interested in repairing many of the relationships that had been stressed over Eisner's leadership (such as with Dreamworks’ Katzenberg, and Pixar’s Steve Jobs). Through this focus on securing well-known IP assets with great entertainment potential (like Toy Story, the Avengers, Star Wars, Avatar and more), and nurturing them into successful franchises, he fortified the foundation of Disney with a myriad of new characters and stories. Finally, he relinquished his position in 2020 on a high note with the release of Disney+, a subscription-based video streaming service, where Disney fans could watch all the classic Disney films along with the ever-growing lineup of new content. Iger’s many achievements are credited with growing Disney’s market capitalization from $48B to $257B. While his net worth is up for debate, it is said to be as much as $700 million as of his 2020 departure.
Bob Chapek
Stepping into the role as the handpicked successor of Bob Iger from his previous role as head of Disney Parks, Experience, and Products, Chapek’s short-lived run (less than three years) as CEO starting in early 2020 was in large part due to the effects of the COVID-19 pandemic. While in his previous role, Chapek was largely responsible for the expansion of Disney’s parks and cruise line, the first quarter of 2020 brought the shutdown of all major Disney experiences, the layoff of thousands of Disney workers, and growing competition in the streaming industry. Chapek’s successful navigation of the post-COVID reopening and reinvigorated focus on Disney+ garnered him enough goodwill for shareholders to extend a three-year extension to his CEO contract in June 2022, however growing tensions between Chapek and different Disney groups signaled the end. Dealing with pandemic-related closures, price increases, and reduced attendance, Disney park passholders grew tired of COVID-19 regulations and Chapek’s changes to the Disney pass system. LGBTQ+ organizations and Disney creative talent criticized his lack of initial opposition to the Florida Parental Rights in Education Act (also known as the “Don’t Say Gay'' law) as well as the company’s financial support for legislators sponsoring the bill as it directly conflicted with the company’s pro-LGBTQ+ public image. Lastly, and potentially most damning, Disney investors called for his ouster following a highly unfavorable Q4 earnings report in November 2022. Following his unexpected release in late November in favor of his predecessor, Chapek left the Disney empire with a $23 million exit package, which includes the remainder of his salary, and his accumulated 30-year pension.
Iger’s Return
Disney’s prodigal son, Bob Iger returned in late 2022 to thunderous applause and a $27 million-a-year compensation package to get the corporation back on track. Prior to the pandemic, Iger was an expensive hire, bringing in $47.5 million (in salary, bonus, stock awards, and options) in 2019 as Disney chairman and CEO, however his post-Chapek return will only be two years, giving him barely enough time to course correct the Disney conglomerate and select a better-suited successor.
Additional Historical Examples
This Disney drama is not unprecedented in American business. For reference, in 2015, United Airlines CEO, Jeff Smisek, was ousted from the company and consequently received a separation payment of close to $37 million. FOX News Chairman Roger Ailes was ousted amidst sexual harassment claims and still received an exit package worth $40 million. UnitedHealth’s Bill McGuire had acted in an executive capacity for fifteen years before it was revealed that he had improperly handled UnitedHealth’s stock options. After getting fired, relinquishing $620 million in pay, and being fined $7 million by the SEC, McGuire nevertheless exited with over $285 million. His pension alone was valued at roughly $103 million. Neither scandals nor the infrequently applied clawback provisions of such deals are enough to derail the provision of these payouts. Moreover, executives who lose their companies large sums of money are seemingly equally insulated on their way out. Hank McKinnell, former CEO of Pfizer, lost the multinational pharmaceutical company $140 billion over his five year reign. He was rewarded with over $188 million upon severance.
But how did these executive exit packages reach such astronomical heights amidst increasingly strained economic periods here in the United States? Perhaps a bit of background on the history of US Federal oversight on executive compensation will shed some light on this phenomenon.
Federal Oversight of Executive Compensation
Scrutiny of executive compensation in the United States can be traced back to the Great Depression. Before this era in American history, corporations concealed information concerning business practices and executive pay levels, consequently keeping the general public and stockholders ignorant of the size of executive compensation packages. Politicians sought to make executive compensation disclosure a condition of companies receiving bailout loans through New Deal programs. The Interstate Commerce Commission, for example, demanded that all railroads disclose executives making more than $10,000 per year and further required that these companies receiving government assistance reduce executive pay by 60%. Other U.S. regulatory institutions followed this trend, with the Federal Trade Commission demanding disclosure of salaries and bonuses paid by all corporations with capital and assets over $1 million. Periods of widespread unemployment and economic turmoil incited serious public criticism of excessive executive pay, which ultimately triggered regulatory legislation. Such measures reflected the prevailing theory among American policymakers, that corporate pay transparency would serve as a natural restraint to executive compensation.
The most significant and enduring disclosure legislation of the decade was the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934, through which Congress created the Securities and Exchange Commission (SEC). The Commission issued rules requiring all publicly traded corporations to disclose all compensation, including salaries, bonuses, stock, and stock options, received by the three highest-paid executives. Since the SEC’s formation, the disclosure requirement rules have been routinely expanded, reflecting Congressional response to perceived corporate misconduct.
In more recent times, government regulation of executive pay disclosure has sought to amplify the voice of public company shareholders and increase transparency surrounding specific corporate transactions and executive compensation. New rules about shareholder votes on “Golden Parachute Disclosures” were created under the Dodd-Frank Wall Street Reform and Consumer Protection Act and adopted by the SEC in 2011. The term “golden parachute” generally refers to compensation arrangements made with executive officers concerning any type of compensation “that is based on or relates to an acquisition, merger, or similar transaction.”
Large American companies adopted golden parachutes starting in the 1980s to help encourage incumbent executives to accept takeover bids by promising them additional compensation. Golden parachutes assured that, for a period following a change in management, the acquiring company will pay current officers enhanced severance if they were terminated under certain circumstances. “Certain circumstances” usually involve a termination by the company without cause or a resignation by the CEO for “good reason.” A golden parachute usually consists of a cash payment, calculated as a multiple of an executive’s salary and bonus as well as enhanced contributions to retirement plans. The equity compensation arrangement under which stock awards have been made will generally propose an automatic vesting of this equity upon the change in management.
Many criticisms have been made of golden parachutes, specifically regarding their impact on shareholders and company value. It has been asserted that, by making terminations less painful, use of golden parachutes might create performance disincentives for CEOs. In addition, golden parachutes may divert more of the benefits of a merger or acquisition away from shareholders. Accordingly, the “Golden Parachute Disclosure and Votes” rules require companies to disclose the total of all compensation that may be paid or become payable to executive officers in connection with an acquisition or merger. In addition, when companies seek shareholder approval of a takeover, they will be required to conduct a shareholder vote to approve the golden parachute compensation arrangements between the target company and the current executives. While golden parachutes are largely viewed as an expected component of many current executive pay packages, shareholders and the American public remain wary of these payouts and continue to view them as largely disproportionate and unwarranted. To that end, there is often a fine line that companies walk when deciding what will attract good management and whether or not they are being over compensated.
Dichotomy Between Attracting Good Management and Not Over-Compensating
If someone is being offered a position, they are presumably coming from somewhere else; from doing something else. Whether they’re coming out of retirement or, in the case of Michael Ovitz, earning over $20 million annually at the company they helped create, excellent management is often hard to find and even harder to acquire. Bainbridge, Stephen M. Bainbridge’s Business Associations, Cases and Materials on Agency, Partnerships, LLCs, and Corporations, 11th. 296. How is a company, especially a well established empire like Disney, expected to balance the company’s efforts to attract top notch executives in highly competitive industries with stakeholder expectations?
While research suggests that golden parachutes were originally designed to ensure shareholders wouldn’t lose out on beneficial M&A deals and to protect executives from potential firing during hostile takeovers, stakeholders and regulators alike frequently question the grounds for such handsome packages. The original intention appeals to the sensibility of both shareholders and executives. When faced with a takeover, a situation in which management is often let go, a robust parachute prevents the executives from contesting offers purely out of a sense of self-preservation if those offers may otherwise benefit the firm’s shareholders. However, this theory is counterbalanced by the notion that CEOs being offered these golden parachutes may be incentivized to take short-sighted risks with millions in shareholder capital on the table. These CEOs may be encouraged to arrange a merger simply because their walk-away package means that they could earn more through selling the company than trying to make it a success.
How should the shareholders of large companies like Disney feel when executives like Michael Ovitz are enticed at great expense only to get pushed out of the corporate jet after being handed golden parachutes valued at over 3,500x the contemporary median household income? It certainly appears that the larger the golden parachute, the more likely a company is to attract high-level corporate talent. So if disgruntled shareholders and the Court feel differently, how are we to mitigate disagreement between interests without jeopardizing successful management in the interim?
If we are to evaluate the soundness of the practice of awarding golden parachutes, we may first want to ask, “is the Dodd-Frank act enough?” Section 951 of Dodd-Frank creates a so-called “say on pay” mandate, requiring periodic shareholder advisory votes on executive compensation. This section also creates a new § 14A of the Securities Exchange Act, pursuant to which reporting companies must conduct a shareholder advisory vote on specified executive compensation not less frequently than every three years. Section 952 mandates that the compensation committees of the board of directors of public companies not only be fully independent, but also that those committees be given responsibility for setting CEO pay. Do these and other regulations go far enough? As public and corporate interests diverge entirely in answering this question, a final, more decisive query silently drives executive compensation limits in corporate America.
Are shareholder interests adequately represented? Are their share values increased? Are their rights protected?
These are the questions that CEOs prioritize in order to ensure confidence in ever-rising golden parachute payouts. Top executives are the main catalyst behind business operations. They are responsible for ensuring shareholders representation, driving profitability, and managing the company organizational structure. Juggling these competing interests successfully is the hallmark of the most successful CEOs, and failure to do so, like in the case of Michael Eisner, is often fatal. However, the tough high-level decisions made often have the most impact on the livelihoods of employees, rather than the compensation of executives.
On March 27, 2023, in an immediate announcement after returning to Disney, Bob Iger released a memo declaring three rounds of upcoming layoffs, totaling around 7,000 workers. Iger’s drastic first step, taken after the company’s valuation dropped dramatically, attempts to cut costs in hopes of stabilizing the company and appeasing shareholders. Such a step may have been taken in effort to elevate one stakeholder group, albeit at the expense of another, but in corporate enterprise it is never certain which party will make it big next and which party will be on the chopping block.
*The views expressed in this article do not represent the views of Santa Clara University.