Governing the House of the Mouse:

Corporate Governance at Disney from 1984-2006

CASE ASSIGNMENT
At the departure of Eisner, Chairman George Mitchell and new CEO Robert Iger are preparing to
move the company forward. They have invited your consulting firm to meet with the new Board
of Directors and discuss the situation at Disney. To familiarize yourself with the client, your first
task is to prepare a background report which analyzes Disney's business environment and
strategy.
1.
What external forces and industry conditions have had an impact on Disney's
performance over the years?
2.
How did the internal organization and culture at Disney influence its performance?
3.
How has Disney strategically responded to its competitive environment and internal
capabilities?
You have been asked to present a five-minute overview of the root causes of Disney's
governance issues. The content of this brief presentation should achieve the following goals.
4.
Identify the causes and consequences of the Board of Directors' ineffectiveness.
5.
Highlight other governance weaknesses that have made Disney vulnerable to managerial
opportunism.
To be prepared for the ensuing discussion, you'll also need to be familiar with the following
items.
6.
How have governance mechanisms at Disney been used in the past, and what was their
effect?
7.
What unprecedented maneuvers were made by Disney stakeholders to overcome internal
governance weaknesses?
During the discussion, you should be able to demonstrate an insightful look at Disney's situation,
make recommendations for establishing effective governance practices, and support the need for
governance mechanisms despite the appearance of performance success.
STRATEGIC MANAGEMENT INPUTS AND ACTIONS
1. What external forces and industry conditions have had an impact on Disney's performance
over the years?
The prevalence of television viewing and at-home viewing devices has reduced movie
attendance and ticket sales revenues dramatically over the years. Additional distribution
channels, including cable and subscription-based services, have also increased competition for
motion picture industry participants. To replace lost revenues and respond to industry changes,
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movie studios have shifted their primary focus from show quality and content to distribution,
licensing, marketing, and merchandising arrangements. Seeking alternative sources of revenue
and taking advantage of emerging technological opportunities, traditional studios have extended
their reach more broadly into other forms of entertainment. Diversification and integration have
not only helped participants survive the industry's transformation, but strategic actions by major
industry players have caused some of the changes in the industry.
Disney's core business has always centered on its reputation as the premier producer of animated
films. However, new competitors have emerged with the advent of digital technology. Pixar, in
particular, is emerging as a highly profitable new giant of animation. DreamWorks has also
released successful animated blockbusters and is becoming a potent rival for Disney.
2. How did the internal organization and culture at Disney influence its performance?
Despite the evolution of the American culture, Disney had essentially remained unchanged since
the death of Walt Disney in 1966. Directors had been with the company for an extended time
and were advanced in age, suggesting possible distance from the changing external environment.
While tradition and culture within an organization can be a strength, a stagnant internal
environment that is not responsive to industry changes can threaten the company's survival.
At the time Eisner joined Disney, poor stock performance, few movie releases, and an
unsolicited takeover attempt were indicators of a struggling company whose independence was
at risk. Failure to hire first class talent in film and television production was responsible for poor
management and financial results.
The heart of the company remained Disneys animated film unit, which again, could prove to be
both an advantage and a limitation.
While the early 1980s saw rapid changes in the film industry, for Disney, it was a time of crisis.
Defensive maneuvers resulted in deals that shuffled ownership interests and gave voice to new
shareholders with enough power to exert influence in the company's decisions.
3. How has Disney strategically responded to its competitive environment and internal
capabilities?
Prior to his departure, Miller had wisely begun making moves to develop entertainment content
beyond animation, targeting a broader audience.
Bringing creative experience and Hollywood insight (and insiders) with him to Disney, Eisner is
credited for revitalizing the company with a corporate strategy of related diversification. During
his first decade at Disney, movie production remained at the heart of the company, with major
animated films still contributing to success. The film business was reporting record operating
profits and competing with even the biggest Hollywood studios. Once representing only 5% of
income, films had grown to generate 40% of Disney's earnings.
Expanding its studios, hotel/resort operations, theme parks, and entertainment divisions, Disney
achieved remarkable growth and transformation during a period of rapid industry change.
Managing release windows, home video pricing, software development, and home viewing
distribution was increasingly complex in this fast-cycle market.
Diversification and complexity increased further with the merger of Capital Cities/ABC with
Disney, doubling the size of the company, making it the second largest entertainment company in
the U.S. This merger of highly complimentary companies triggered an era of integration in the
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industry, combining studio libraries with broadcast and publishing distribution systems. The
company combined film, television, artistic, production, distribution, and broadcast under a
single studio entity, positioning Disney for substantial growth worldwide.
Disney also partnered with Pixar to finance and distribute films produced with new digital
technology. Despite the unraveling of this Pixar relationship and Pixar's success at
outperforming Disney animation films, Iger reiterates that animation is at the core of the Disney
brand as he takes over the company. While Disneys top managers focused on strategic
operations, much outside attention focused on the company's governance system.
STRATEGIC MANAGEMENT IMPLEMENTATION CORPORATE GOVERNANCE
4. Identify the causes and consequences of the Board of Directors' ineffectiveness.
At the root of the company's governance issues is the ineffectiveness of Disney's Board of
Directors. Its poor oversight is based on two primary causes: Eisner's success at maximizing
shareholder value and Eisner's accumulation of power.
Eisner's Success
Eisner may have had a questionable management style and may have been difficult to work with,
but one could not argue against his success. Eisner took decisive action at an underperforming
company and showed immediate results. Under his direction, stock appreciated 1600% and
revenues grew from $1.5 billion to over $30 billion. With this type of success, any board of
directors is going to be reluctant to question the CEO. As Disney's revenues and stock price
increased, so did the board's deference to his decisions and actions. The board, representing the
principals of the company, relinquished additional managerial freedom as Eisner's achievements
continued. Judgment was tempered by success in the stock market.
Eisner's Power
While building a successful record and board reliance, Eisner was also building an indisputable
position of power. A look back at his actions gives the appearance of a calculated power play.
Outlined below is a comprehensive detailing of his power-building moves:

One of Eisner's first steps at Disney was to approach the Bass Brothers to secure their
support for long-term changes at the company. He received a five-year commitment
from this large-block shareholder for his management team. (The Bass Brothers
owned 24% of outstanding Disney shares at this time.)
Eisner's role allowed him to influence the choice of new directors and eventually
establish full control of the company. By placing allies on the Nominating and
Governance Committee, he was able to assign directorships at will.
As part of his power building, Eisner appointed directors with limited experience
(such as Poitier and O'Donovan) and directors with personal connections to him (such
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as Van De Kamp) who would be more likely to approve of his actions and plans.
Eisners desire to surround himself with "yes men" would result in collective
kowtowing.
He was able to bring in his personal attorney as a board member and the eventual
head of the board's Compensation Committee.
Upon the death of Wells, Eisner initially divided Wells responsibilities among
Disneys existing executives and assumed the position of president himself on an
interim basis. Just weeks later, he decided to continue indefinitely in the position,
arguing that this would provide more direct access to his management team.
Katzenberg's departure left Eisner alone at the head of Disney. He did not act to fully
develop a strong top management team beneath him. Instead, he appeared ready to
eliminate anyone who could possibility step into his shoes or whose development
could pose a threat to his authority or position.
When Ovitz finally replaced Wells, he took responsibility for Disney's three operating
divisions, but the legal and finance departments did not report to him. The structural
arrangement resulted in a less powerful president, with Ovitz reporting to the CEO
(Eisner) rather than to the board. In practice, he had far less discretion and authority
than Wells had, and his role in the company was never fully defined or delegated by
Eisner. Instead of shifting responsibilities to Ovitz, Eisner had actually increased his
own level of involvement in making decisions that were to be under Ovitzs purview.
With Ovitz's limited discretion and Disneys management philosophy, this placement
was doomed.
Sidestepping Disney's corporate by-laws and the board's role in hiring the President,
Eisner and his attorney Russell (not corporate counsel Litvak) approached Ovitz and
roughed out contract conditions and a compensation agreement over one weekend.
Neither the Board of Directors nor the Compensation Committee was involved with
the details of the deal or the analysis of its potential costs. Additionally, the move that
finally removed Ovitz came directly from Eisner. Board involvement was highly
limited. While Ovitzs exit may have reduced internal turmoil, it also reduced
Disneys cash balance. The final cost for his fourteen months with Disney was
approximately $140 million in cash and stock options.
Through the issuance of stock options in his compensation package, Eisner's
accumulated holdings in the company became significant. By 1995, Eisner held
around two million shares of Disney stock, and his options were worth roughly $600
million. His 1997 employment contract guaranteed him access to 16 million shares,
giving him more than 2% interest in the company based on 670 million outstanding
shares reported in the 1997 Consolidated Statement of Shareholders' Equity.
This ten-year contract solidified Eisners power and reduced the board's ability to
force changes in management. Immediate vesting of all stock options and the cash
value of future salaries and bonuses would cost Disney hundreds of millions of
dollars and seriously impact the company's cash flow.
Chiding Eisner for acting independently from the board oversight and for his failure
to seek consent or authorization from the board, Chancellor Chandler adequately
described Eisner's role in disabling the board's oversight ability:

"By virtue of his Machiavellian (and imperial) nature as CEO, and his control over
Ovitz's hiring in particular, Eisner to a large extent is responsible for the failings in
process that infected and handicapped the board's decision making abilities. Eisner
stacked his (and I intentionally write "his" as opposed to "the Company's") board of
directors with friends and other acquaintances who, though not necessarily beholden
to him in a legal sense, were certainly more willing to accede to his wishes and
support him unconditionally than truly independent directors. . . As a general rule, a
CEO has no obligation to continuously inform the board of his actions as CEO, or to
receive prior authorization for those actions. Nevertheless, a reasonably prudent CEO
(that is to say, a reasonably prudent CEO with a board willing to think for itself and
assert itself against the CEO when necessary) would not have acted in as unilateral a
manner as did Eisner when essentially committing the corporation to hire a second-incommand, appoint that person to the board, and provide him with one of the largest
and richest employment contracts ever enjoyed by a non-CEO. I write, "essentially
committing," because although I conclude that legally, Ovitz's hiring was not a "done
deal" as of the [original labor agreement], it was clear to Eisner, Ovitz, and the
directors who were informed, that as a practical matter, it certainly was a "done deal".

In the wake of Eisner's rise to power and amidst rumblings of investor discontent, another
takeover threat emerged. Comcast made an unsolicited bid of $54 billion bid to purchase Disney.
The proposal was intended to benefit shareholders by combining Disneys content assets with
Comcasts distribution pipelines: a strategy of vertical integration. Despite the apparent
strategic value to the two parties, Disney's ineffective board was in no position to evaluate the
benefits to shareholders, and neither Eisner nor the board gave the bid any serious consideration.
5. Highlight other governance weaknesses that have made Disney vulnerable to managerial
opportunism.
Succession Planning
The choice of top executives, especially CEOs, is a critical decision with important performance
implications. Succession plans make the transition between CEOs easier, but they can be
opposed by CEOs who fear diminished job security when a replacement is selected and
developed to take over.
Not only did Eisner fail to develop a strong slate of managers, he avoided succession planning
when the vulnerability of leadership at Disney was clearly demonstrated by the unexpected loss
of Wells and Eisner's subsequent heart surgery. Fearful of relinquishing any of his control, he
used the loss of key executives to prevent the accumulation of power beneath him rather than to
promote new talent in the interests of the company. The ineffectiveness of the board is illustrated
by its inability to force the issue of succession planning even as the Disney's vulnerability was so
apparent and public.
CEO Duality
The practice of CEO duality ascribes to the stewardship theory that effectiveness is increased
(and agency costs are decreased) when one person holds both the CEO and chairman of the
board positions. At the time that Eisner was given these two titles, Wells was placed in the
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President and COO positions. A balance of power was maintained as both men reported directly
to the board. When Wells passed, Eisner maneuvered for full control.
As the case states, "[I]f there ever were a case for separating the roles of Chairman and CEO, this
company is the poster child." An independent board leadership structure, in which the same
person does not hold the positions of CEO and board chair, enhances the board's ability to
monitor top-level managers' decisions and actions, particularly in terms of firm performance.
This was clearly not the case at Disney during Eisner's reign.
Director Independence
The effectiveness of boards in today's corporations is considered to be heavily influenced by the
use of outside directors. Eisner's ability to appoint insiders and related outsiders to board
positions had a big impact on the ineffectiveness of the board in its oversight role. Eisner crafted
a board that would "rubber-stamp" his strategic and operating actions.
Andrea Van De Kamp's experience demonstrates Eisner's intentions in "stacking" the board.
Previously in charge of the Performing Arts Center of Los Angeles, Eisner brought her to the
Disney Board a year after he pledged $25 million for the construction of the Walt Disney Concert
Hall. Although initially labeled an independent member of the board, the relationship was
eventually disclosed. Despite her relationship with Eisner, Van De Kamp was ultimately driven
off the board when she attempted to act independently by voting opposite Eisner on multiple
issues.
The case material points to all of the relationships between Eisner and individual directors (even
some of Eisner's active and vocal critics had conflicts of interest) and highlights concerns about
reduced governance effectiveness. One quoted statement accurately describes that even the
smartest CEO needs skeptics on the board of directors to prevent healthy ego from becoming
destructive hubris." CREFs Corporate Assessment Program raised concerns about the level of
independence of directors on Disneys board and in 1998 proposed new criteria for assessing
director independence, requiring no present or former employment by the company, or any
significant financial or personal ties to the company or its management." Additionally, the
proposal required the firm to reconfigure their board, including assurances that all board
committees were comprised exclusively of independent directors.
6. How have governance mechanisms at Disney been used in the past and what was their effect?
Ownership Concentration
Decisions about issuing company stock determine the amount of control that a company retains.
Ownership at Disney, with hundreds of millions of outstanding common shares, is diffused
across a large number of shareholders. None-the-less, large blocks of shares are also held closely
within the current management team, family of owners, and significant investors. In fact, the
juggling of powerful shareholders (Steinberg, Jacobs, Roy Disney, Bass Brothers) has both
influenced the direction of the company and at times threatened the independence of the
company. Once issued to the public, the company has limited control of individuals, companies,
or institutions who buy up large blocks of shares to gain an active voice in the direction and
ultimate performance of the firm. For example, the Bass Brothers' ownership block was able to
quell the potential for a hostile takeover, but represented a significant change in ownership
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within a company that, for most of its existence, had been a family enterprise. The Disney case
material highlights several strategic moves which were influenced by ownership interests in the
company.
An open critical ownership issue exists with the proposed purchase of Pixar. The transaction
would make Steve Jobs a 50.65% owner in Disney, giving full control of the business to
someone with a conflict of interest.
Board of Directors
The fundamental responsibility of the board of directors is to promote the best interests of the
company and its shareholders by overseeing the management of the company's business and
affairs. The ineffectiveness of Disney's board in this role is discussed above.
Board dynamics at Disney have included boardroom battles and management departures which
are expensive, distracting, and not in the best interest of shareholders. So dysfunctional, it did
not consider the potential shareholder benefits of a valid offer by Comcast.
Board Structure: A classified board structure was initially adopted to thwart a takeover attempt.
Directors were elected to three year terms, and appointments were staggered to limit the
reelection of directors to only one-third of the board each year.
To respond to governance criticisms, Disney phased out its three-class directorship system,
making all directors stand for election each year. This increased Disneys susceptibility to
another hostile takeover, but was considered effective governance. However, the unclassified
board structure allowed Eisner to put into effect his own agenda, filling directorship positions to
garner support for his management actions through annual board appointments.
Executive Compensation
Upon the hiring of Eisner, compensation contracts at Disney came under a great deal of scrutiny
because of the size of the packages. In addition to a hiring bonus (compensating new executives
for lost earnings/benefits from previous employers,) the main components of these deals
included salary, bonuses (tied to income and stockholder equity), and stock options. With his
early successes, Eisner's compensation package made him the highest paid U.S. executive in
1988. With the exercise of options, Wells was able to top Eisner in 1989.
Katzenberg's compensation contract took a new turn into offering a bonus based on a percentage
of all profits, which became an unintended, but significant feature when merchandising revenues
became a larger part of studio proceeds.
Stock Options: The company continued to award options for more shares in its contract
agreements, drawing attention and criticism from the business press. The criticism was tempered
because of the firm's strong financial performance, but did not go away.
In 1990, Disney adopted a stock option plan for top company executives and increased its stock
repurchase program in order to pay executives in a tax-friendly manner. This move put Disney
on the hook for the cash cost of shares repurchased at market value and drew the attention of the
business press, investors, and Congress when compensation reached multimillion-dollar levels.
(Stock options had been awarded favorable tax treatment by Congress.)
At the time of Ovitz's hiring, the case material accurately describes the compensation for
Disney's top executives as "gross excess, indicative of the excesses of corporate Americas
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leaders." The value of Ovitz's options was beyond any others at Disney or in corporate America.
However, the system was considered ideal for its alignment of leadership objectives with
shareholder interests and wealth, which governance advocates encourage.
Overboard: Eisner's final ten-year employment contract represented excess to the point of the
board giving up power. The agreement (to immediately vest all stock options and pay Eisner the
cash value of the entire contract if he were to lose either the Chairman or CEO title) secured his
solo grip on power and would cost Disney hundreds of millions of dollars to take that power
from him.
CREFs Corporate Assessment Program called out Eisner's compensation as "so generous as to
be completely out of line," asking, "How much incentive does someone need? However, it was
Ovitz's compensation settlement that invited a reaction from the investor community, who did
"not see how it was in the companys best interest to sign an employment agreement awarding
Ovitz a vast sum of money in the event of his premature departure what is the benefit for
shareholders in such an agreement?"
7. What unprecedented maneuvers were made by Disney stakeholders to overcome internal
governance weaknesses?
The market for corporate control is an external governance mechanism that becomes active when
a firm's internal controls fail. Hostile takeover attempts, like Disney faced in 1984, occur when
ownership position is acquired to take over an undervalued and underperforming company to
turn it around or sell its parts for greater value than the whole.
The external governance mechanisms required to loosen Eisner's grip on Disney and overcome
an ineffective board were unique and unprecedented in corporate America.
An initiative to protest the firms handling of Ovitzs compensation, Eisners pay, and overall
governance laxities by withholding votes for the firms slate of directors was urged by several
parties, including Institutional Shareholder Services (ISS), the College Retirement Equities Fund
(CREF), and other major investor groups. Thirteen percent of shareholders withheld their
support for five directors up for election, making the move the most sizable just say no vote in
years. Despite the vote of no confidence, all five directors returned to the board. In corporate
democracy, where directors are rarely challenged on the ballot, it is embarrassing to have even
five percent of the votes withheld. By that standard, Eisner suffered a great humiliation. Never
before in Corporate America [have] shareholders expressed such an enormous, public loss of
confidence in a chief executive." The votes were a "shot in the arm for improved corporate
governance." Subsequent vote withholdings would be even more successful, but never to the
point of generating a majority. Again, reluctance to interfere with Eisner stemmed from the
company's continued performance, particularly the appreciation of its stock's value.
Additionally, an extended lawsuit marked a turning point is U.S. corporate governance.
Shareholders sued to recover compensation paid to Ovitz by defining his termination as for
cause and the action of Disneys directors as "a failure of fiduciary duty of due care." The case
rested not on managerial fraud, but complacency. [Allowing a lawsuit to proceed, Chancellor
William Chandler III signaled a time of change in corporate governance practices.]

Having left the board, Roy and Gold then went on the offensive in another new manner. They
created an online website, called savedisney.com," with an open letter urging shareholders to
withhold votes for Disneys management. They then began a road show urging institutional
investors to do the same.
Finally, the board was able to separate the positions of Chairman and CEO, which was the
beginning of the end of Eisner's reign. But, Disney and Golds success in fighting Eisner did
have a downside. The company was once again vulnerable to a takeover bid, which promptly
came from Comcast.
DISCUSSION AND RECOMMENDATIONS
An agency relationship requires oversight to minimize managerial opportunism and to prevent
potential conflicts of interest and questionable business practices that may develop. In addition,
regulatory requirements that are established to protect investors and maintain public confidence
in the stock market must be met.
To manage the relationships among stakeholders who will determine and control the strategic
direction and performance of the organization, each of the governance mechanisms used to
monitor and control managerial decisions must be effective.
Ownership Concentration
The board should not proceed with the proposal that would make Steve Job a majority
stakeholder in the company. Not only would control of the company be lost to an outsider, it is
one with a conflict of interest.
Executive Compensation
Executive compensation, such as salaries, bonuses, and long-term incentive pay, should be used
to merge the different interests of managers and owners. Decisions to compensate in stock are
based on the belief that the practice motivates managers to drive the stock price up and aligns
manager interests with shareholder interests. Tax and accounting benefits of these packages also
make them appealing. However, it is the unintended consequences from this practice that makes
its effectiveness as a governance mechanism suspect. When managers own a significant block of
shares, when stock options are awarded that do not relate to the firm's performance, and when
stock option re-pricing is employed to "reset the bar", this practice becomes controversial.
Decisions to compensate with stock issues and options should be well-considered to best achieve
their intended effect. The Board needs to analyze industry salaries to establish strong, but
reasonable, executive incentives and to be sure that the company can pay for them without
risking cash flow or the viability of the company. CEO and executive pay should be tied in an
indirect but tangible way to the fundamental governance processes established by the new board
to maximize the effectiveness of this oversight tool.
Board of Directors

An appropriately-structured and effective board of directors protects the firm's owners from
managerial opportunism. Some suggestions for improving the effectiveness of Disney's board
include:

The level of CEO control over board actions and decisions should be continually
evaluated.

The CEO's ability to appoint board members who are insiders (from the
management team) or sympathetic outsiders should be limited.

An independent board leadership structure, in which the same person does not
hold the positions of CEO and board chair, will also enhance the board's ability to
monitor top-level managers' decisions and actions, particularly in terms of firm
performance. Keep separate the roles of CEO and Chairman of the Board.

Guidelines for selecting and managing the Board of Directors must be established.

Ensure an appropriate level of diversity across board members. The board of

directors should consist of a balance in:

insiders, active top-level managers in the corporation who are elected to the board
because they are a source of information about the firm's day-to-day operations,

outsiders who can provide independent counsel to the firm, and

related outsiders who have some relationship with the firm, (that may create
questions about their independence), but are not involved with the corporation's
day-to-day activities.

Use formal processes to evaluate board performance to ensure greater

accountability for improved performance.

Maintain independent Audit, Compensation, and Nomination Committees made

up of outside directors.

Non-employee director candidates should be independent as defined under the

applicable rules and regulations of the stock market or exchange on which the
Company's shares are listed, any other applicable laws, rules, and regulations
governing independence (including the Sarbanes-Oxley Act of 2002), and the
Company's corporate governance guidelines.

Criteria for director candidates should include:

All director candidates should be committed to the company's basic beliefs as set
forth in the company's Code of Ethical Conduct and shall be individuals of
integrity, intelligence, and strength of character and should support and enhance
the company's core values, culture, and operating model.

Director candidates should maintain the independence necessary for an unbiased

evaluation of management performance.

Director candidates should be able to effectively carry out responsibilities of

oversight of the company's strategy.

Director candidates should have a working knowledge of corporate governance

issues and the changing role of boards, and a firm commitment to participate in
board activities.

Director candidates should have demonstrated management and/or business skills

or experience that will contribute substantially to the management of the
company.
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Director candidates should ideally have either public company experience, a

financial background, or experience in the distribution (or a related) industry.
Effective monitoring activities within the firm require a corporate governance
strategy along with these new managerial mechanisms to ensure that agents make
strategic decisions that best serve the interests of the organization's stakeholders.
Disney's Board needs to adopt corporate governance guidelines to promote
effective governance of company business and affairs for the long-term benefit of
shareholders. Some general conditions that positively influence board success
include the following:
Involvement with strategic decision-making. Establishing procedures to facilitate
the strategic management process.
Forcefulness in its oversight (monitoring) role to forestall inappropriate top
executives' actions. Boards can be an effective deterrent to these behaviors.
Use of its power to influence manager actions and company direction.
Strong internal management and accounting control systems.
Existence of reporting systems and organizational structure designed to prevent
breaches in responsibility.
Provision of resources to the organization, including knowledge and expertise.
The challenge, but support, of company executives as they make complex and
non-routine operating decisions.
Non-management directors occasionally meeting without management directors.
To provide a foundation for structuring Disney's new board (in addition to
assuring director independence and establishing criteria for director candidates)
the board needs to limit the number of directorships that board members hold,
establish an appropriate board size, and determine director tenure, retirement,
succession, and development policies.

Additional Board of Director responsibilities include:

Oversee CEO succession planning. (The CEO should not be responsible for conducting his
own succession planning.) Develop leadership screening systems to identify managerial and
strategic leadership potential. Based on individual assessments of the internal managerial labor
market, provide training and development programs for current managers to per-select and shape
skills of managers who may become future leaders. When possible, tap into the internal
managerial labor market to keep turnover down and utilize firm-specific knowledge needed to
sustain high performance. However, keep abreast of changes in the competitive landscape, and
draw from the external managerial labor market when new knowledge and innovative strategies
are required for success.
Establish and communicate a Code of Ethical Conduct. In the absence of explicit ethical
requirements, managers may act opportunistically, making decisions in their own best interests.
Set boundaries for business ethics and values. Establish and communicate specific goals to
describe the firm's ethical standards. [See website for the "Codes of Conduct for Directors"
adopted by Disney subsequent to the case. It defines Conflicts of Interest, Business
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Relationships with Directors, Use of Corporate Information, Opportunities, and Assets,

Confidentiality, Compliance, Fair Dealings, and Accountability.]
Build a balanced set of strategic and financial controls (a balanced scorecard) to ensure that
decision-makers focus on both short-term financial outcomes and the longer-term content of
strategic actions, while accepting reasonable levels of market risk. The board's over-reliance on
stock value and income as sole indicators of success made it vulnerable to poor decisions and
managerial opportunism in the past. To balance its view of performance, the board must include
strategic perspectives (such as customer, internal business processes, and learning and growth) in
measuring results. As the board well knows, the lack of oversight can lead to poor management
decisions. The board needs to build effective relationships with the top management team to
strengthen the firm.
Results v. Governance Health
How could this remarkable performance occur in a company whose corporate governance
practices were repeatedly labeled as among the worst in corporate America? Even with Disneys
considerable financial success, the company was criticized for its governance practices.
Have the students discuss this question: If shareholder value is being maximized, why is do
governance issues matter?
At some point, the students need to be able to support the position that, despite the appearance of
success through financial performance results, the need for governance mechanisms is critical.
In most firms, the complexity of challenges and the need for substantial amounts of information
and knowledge require strategic leadership by a team of executives. Use of a team to make
strategic decisions also helps to avoid a serious potential problem when these decisions are made
by the CEO alone - managerial hubris. Research shows that when CEO's receive positive
feedback, they become overconfident in their decision- making. The belief that they are invisible
to errors in judgment, they are more likely to make poor strategic decisions. Top executives need
self-confidence, but must guard against allowing it to become arrogance and a false belief in
their own invincibility.
Governance mechanisms serve to promote strategic decisions which consider the interests of all
of a firm's stakeholders, incorporating product market and organizational stakeholder interests
into the goals of shareholders to maximize the competitiveness and long-term viability of the
company.
Today, the Disney Board of Directors consists of a strong, balanced blend of skills and
experience, from which to guide the company in areas that are important to Disney.
Susan Arnold

Robert A. Iger

Monica C. Lozano

Director since 2007

Director since 2000

Director since 2000

John E. Bryson

Steve Jobs

Robert W. Matschullat

Director since 2000

Director since 2006

Director since 2002

John S. Chen

Fred H. Langhammer

John E. Pepper, Jr.

Director since 2004

Director since 2005

Chairman of the Board since

Judith L. Estrin

Aylwin B. Lewis

January 2007

Director since 1998

Director since 2004

Orin C. Smith
Director since 2006

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