Plans question Disney’s pick for new CEO

BURBANK, Calif. — Pension executives see little magic in Walt Disney Co.'s appointment of Robert A. Iger as chief executive officer of the entertainment giant.

Officials at several pension plans had wanted Michael Eisner to resign from both the CEO post and the Disney board of directors since the middle of last year, shortly after the Burbank company's profitable distribution deal with animator Pixar, Emeryville, Calif., blew up because of a dispute between Mr. Eisner and Steven P. Jobs, Pixar's well-known CEO.

And that wasn't the only reason Mr. Eisner faced dissent from shareholders. The price of Disney shares dropped 20% between 1999 and 2004; the profitability of the company's trademark theme parks declined steadily in those years; and Mr. Eisner still had egg on his face when he hired Michael Ovitz in 1995 as the company's president, only to fire him a little more than a year later. Disney took criticism when it agreed to pay Mr. Ovitz $300,000 per day for his 454 days as president.

Pension officials at the $186.9 billion California Public Employees' Retirement System, Sacramento, and the $60 billion North Carolina Retirement Systems, Raleigh, argue that Mr. Iger — who is president and chief operating officer of Disney and chairman of Disney subsidiary ABC Inc. — was Mr. Eisner's hand-picked replacement and the two are too closely associated.

They also claim that Disney's board of directors did not do enough to consider candidates from outside the company, despite the fact that Meg Whitman, CEO of eBay Inc., San Jose, was one of the candidates interviewed. Mr. Eisner announced his departure March 13 after months of shareholder dissent led by former board member Roy Disney, who rallied public pension systems to call for Mr. Eisner's resignation. Mr. Eisner will officially step down as CEO on Sept. 30, when Disney's 2005 fiscal year officially ends. He will remain a member of the board of directors until Sept. 30, 2006.

"The bottom line is that we're disappointed with this news," said Christianna Wood, CalPERS' senior investment officer of global equities. "(Mr.) Iger seemed to be hand picked by (Mr.) Eisner, and our concern is that there will be more of the same. The only hope we have is that we can judge (Mr.) Iger on his performance. The good news, however, is that (Mr.) Eisner is out."

"Disney has done more than appoint a new CEO since the shareholder revolt of 2004," said Richard Moore, North Carolina state treasurer and the administrator of the state plans. "New corporate governance policies are in place and the company seems to moving in the right direction. (Mr.) Eisner's involvement in the CEO search process, however, illustrates that though changes have been made, we've still got a long way to go."

At the American Federation of State, County and Municipal Employees, Washington, which was active in seeking Mr. Eisner's resignation, Richard C. Ferlauto, director-pension and benefit investment policy, said Mr. Iger's selection "raises red flags for public (pension) funds engaged with Disney over the nomination process … I was hoping the (CEO search) process would be more open" to outside candidates. The $600 million AFSCME pension fund sought unsuccessfully to permit shareholders to nominate some directors of Disney.

Both Mr. Moore and Ms. Wood said they will take a wait-and-see approach to Mr. Iger's appointment and are not seeking to exert further pressure on Disney to oust Mr. Eisner immediately.

The $117 billion New York State Common Retirement Fund, Albany; the $64.5 billion Ohio Public Employees' Retirement System, Columbus; and the $20 billion Connecticut Retirement Plans & Trust Funds, Hartford, also pushed for Mr. Eisner's resignation. Spokesmen for all three systems declined to comment. Combined, the three systems own about 2% of the roughly 2 billion outstanding shares of Disney stock.

Michelle Bergman, a Disney spokeswoman, pointed out that North Carolina and CalPERS combined own about one-half of 1% of all Disney's shares. Beyond that, she referred to a March 16 statement from Disney Chairman George Mitchell, who said: "After an extensive and thorough search, the board decided Mr. Iger was the best possible candidate."

Dump Disneyland?

One Disney official who did not wish to be identified, said, "Put it this way: when we met with CalPERS last quarter, Christy Wood's suggestion was to have us sell Disneyland (in Anaheim, Calif.)," the company's first theme park, opened in 1955.

Ms. Wood neither confirmed nor denied that she made the suggestion, but said she did suggest ways the company could be more profitable.

"Disney did not seem to have a proper discipline and process during the last five to 10 years of reallocating capital from low-returning businesses to higher-returning businesses," said Ms. Wood, although she declined to identify any of Disney's low-returning businesses. "We believed that they were not taking an objective view of all their assets and related businesses in order to realize shareowner value within a reasonable time frame."

Brad Pacheco, a CalPERS spokesman, added that Ms. Wood "made the comment about Disney's theme parks as an example of part of their business and questioned if Mr. Eisner had lost objectivity."

Despite the investor reaction, proxy service firms, are taking took a more positive view of Mr. Iger's appointment. Kent Hughes, managing director, Egan-Jones Proxy Services, Haverford, Pa., said, "(Mr.) Iger's taking over is the fruit of a lot of attention investors have been paying to the succession issue. It's easy from the sidelines to complain they didn't get someone from the outside. I don't think necessarily a superior candidate would come from the outside. Indications are he is an excellent choice."

Disney has taken a number of positive steps in the past year, including separation of the chairman and CEO positions, Mr. Hughes added.

"I think the jury is still out in terms of (Mr.) Iger," said Shirley Westcott, associate managing director for policy at PROXY Governance Inc., Vienna, Va. "I think shareholders should be pleased about the naming of a successor to Michael Eisner."

Ms. Westcott said shareholders influenced the process, starting with withholding votes for Mr. Eisner and some other directors in 2004. Approximately 45% of Disney's shareholders withheld their votes last year.