Corporate governance campaigns by large institutional investors, pension funds in particular, can work to the benefit of all investors, forcing reluctant boards to make necessary changes. That's the message of the replacement of Michael D. Eisner as chief executive officer of Walt Disney Co., by Robert Iger.
Mr. Eisner clearly had overstayed his welcome. Brilliant early in his tenure, Mr. Eisner had begun to believe his own publicity at the same time he seemed to run out of ideas. Yet, despite obvious weaknesses and fissures within the company's management, and stumbling corporate earnings and stock price performance, the largely tame Disney board failed to rein in Mr. Eisner, or seek to replace him, until the activist funds became involved.
The success of the campaign by the funds also showed that corporate governance activism belies criticism that it's driven by irresponsible pursuit of political or union agendas.
The replacement of Mr. Eisner by Mr. Iger showed also that success sometimes can come relatively quickly after years of fruitless, frustrating campaigning by investors. The funds had been urging changes for many years. Though the pension funds last year staged an unsuccessful, but vigorous, campaign opposing re-election to the board of Mr. Eisner, Mr. Iger, George J. Mitchell and other directors, they succeeded in having former Senator Mitchell named non-executive chairman replacing Mr. Eisner. They also succeeded in setting in motion a search for Mr. Eisner's successor.
That search ended with Mr. Iger's appointment last week, a year ahead of schedule.
While Mr. Iger's selection did not satisfy all of the institutional investors, at least Mr. Eisner will be gone, removing a source of distraction and discontent from the company. Mr. Iger might be able to restore focus in the company and repair relationships fractured by Mr. Eisner's imperious manner.
In this case, pension fund shareholders reaped rewards from their mixture of confrontation and compromise.
Also as a result of last year's campaign, the Disney board agreed to a series of meeting with major public pension fund officials, and the fund executives kept the board's collective feet to the fire. Among important corporate governance changes, the Disney board has more independent directors and enshrined into its bylaws the split of the chairman and CEO roles.
Some pension fund investors complained about the CEO search process, saying it was too slow, Mr. Eisner was too involved and not enough outsiders were considered. But shareholders don't hire CEOs. Mr. Iger and the board know shareholders will be watching their actions closely. Mr. Iger will have to move swiftly to improve performance and shareholder value.
The Disney campaign shows that, to be successful, the funds must select targets carefully, focus on performance issues, persist in their campaigns beyond a one-time withholding effort, and remain engaged with the board. All this takes time and wherewithal, resources dear to institutional investors singling out one or two investments in a portfolio of thousands.
The funds must make sure the possible results of the campaign — the potential beneficial effect on their portfolios — offset the costs of the campaigns, otherwise they will be seen as purely political. But if targeted campaigns are successful, other companies will get the message.
Corporate governance has become another aspect of portfolio management, requiring continued monitoring — and engagement sometimes — to be effective. But it can only be a supplement to effective portfolio management.
In the end, the market will discipline companies failing in performance, providing companies with the ultimate incentive to improve.