Rogue Missives
Thursday, January 9, 1997

Stopping the Buyout?
by Jim Surowiecki (Surowiecki)

Michael Ovitz was once among the most powerful men in Hollywood. As head of the Creative Artists Agency, he became a dealmaker with enough influence to structure entire films around his client list. Yet, for all that, Ovitz seems never to have gotten over the idea that he was just an agent. He always had higher ambitions.

A little more than a year ago, those ambitions seemed to have been realized, when, in a decision that surprised many within the Hollywood community, Ovitz was named to the No. 2 spot at Walt Disney. Though Ovitz had no real management experience, and though Disney was in the process of becoming one of the strongest corporate entities in America with its merger with Cap Cities-ABC, Disney CEO Michael Eisner insisted that Ovitz's deal-making skills would translate well into the new environment, and that Ovitz had the kind of vision the company needed as it expanded its reach into television, news, and new media.

Eisner, though, was wrong. And his mistake has made Disney the subject of a shareholder lawsuit that has the potential to break new ground in the burgeoning field of shareholder rights.

Less than a month ago, Disney announced that Ovitz would be stepping down as president of the company, and although it was left unclear whether Ovitz was leaving on his own initiative, it seemed obvious that both sides were happy to be rid of each other. Disney said that Ovitz would remain as president until January 31, and that he would receive a hefty severance package. The company announced no details, but the information that was leaked pointed to something like $38 million in cash and a remarkable three million stock options at $57. With Disney stock currently trading at $68 1/2, that meant the deal was worth a minimum of $76 million and could more realistically be valued at somewhere between $90 million and $115 million.

What had Disney received in exchange for this compensation? It's difficult to say. Ovitz never carved out a real place for himself at the company, and his departure was motivated, in no small part, by his inability to find a real role. In retrospect, it seems obvious that Eisner's personality and ability were such that anyone immediately beneath him would have a difficult time establishing a presence as a leader, but sources within Disney also suggest that Ovitz was less well-suited to running a major media company than he might have imagined himself to be. One of the few projects he took under his wing, Tele-TV, was recently aborted. Further, Ovitz did not become a strong presence in Disney's movie business, as his de facto predecessor Jeffrey Katzenberg had been.

A nice idea, then, that just didn't work and ended in an amicable divorce? Perhaps. But for a group of Disney shareholders who filed suit in a California court on January 3, Ovitz's severance package represents instead the kind of sweetheart deal that makes corporate talk about competitiveness and holding down costs ring especially hollow. In a world in which companies lay off productive workers every day, giving $100 million to a seemingly unproductive worker strikes these shareholders as the kind of management decision that should be up for review.

Specifically, the suit calls for an injunction against the payment of the severance package. It terms Ovitz's tenure "undistinguished and unproductive," and says the size of the settlement -- which it pegs at $130 million -- "so egregiously excessive as to constitute waste and spoliation of Disney's resources.'' And it alleges that completion of the payment to Ovitz will do "severe and irreparable injury" to the company's prospects.

The lawyer representing the plaintiffs is William Lerach, who has made a name for himself suing companies for misleading shareholders. Lerach was one of the leading figures behind the effort to pass Proposition 211, the California initiative that would have made it easier to pursue claims of securities fraud through the courts. Lerach's involvement makes this particular case dubious to some, and Disney's management has in fact assailed the lawsuit as "trivial" and as emblematic of the kinds of cases that would have flooded the courts had Prop 211 not been defeated.

But Lerach's involvement is not, in and of itself, enough to call the lawsuit into question. Disney's actions in response to the suit have been enough to raise serious doubts about how serious the company's board and its top executives have been about shareholder interests. On Monday, for example, Disney was scheduled to issue its annual proxy statement, which will contain information about the severance package. Instead, Disney announced Monday that it had no plans to issue that statement in the near future.

More curiously, the company said that any lawsuit seeking injunctive relief should have been filed a month ago, when Ovitz's departure was announced. (Given the relative novelty of this kind of suit, it seems unlikely that a group of shareholders could have been found immediately to lend their names to the effort.) And it said that the suit was, in any case, moot, because Ovitz had actually left the company on December 27 -- though he was scheduled to leave on January 31 -- and had received his severance payment then.

If Ovitz did, in fact, receive the $38 million in cash and the options on December 27, then the case will almost certainly be dismissed as irrelevant, since there's no way the company could force Ovitz to return the money. On the other hand, if that is the case, it's not clear why Disney is attacking the lawsuit on so many different fronts. The company's statement Monday, in that sense, had the feel of a public-relations salvo more than anything else.

It may very well be that this is yet another attempt by Lerach to win his clients an out-of-court settlement by filing a kind of nuisance suit. But Lerach's past record should not cloud the importance of the issues the case raises. Disney is, after all, a public company owned by its shareholders. As such, its management has a responsibility to conduct its business not in a secretive or closed-door fashion, but in as open a manner as possible. If Disney shareholders, who are the company's legal owners, are not to be given access to information about a $100 million severance package, then what does ownership mean in this particular case?

There are, of course, situations in which too much public disclosure is bad for business, particularly when it comes to product development or even, perhaps, strategy. And that tension between the public and private nature of the corporation is engraved in the heart of American capitalism. Shareholders are owners who are not allowed to know everything they want to know about the companies they own. But in this case it's hard to see what the justification for Disney's coyness is. And it's difficult not to reach the conclusion that Ovitz's severance package represents more Hollywood business as usual than it does sound management. And the fact that Eisner and Ovitz are close friends (or were close friends) casts the decision in yet another shadowy light.

As for the attempt to stop the payments to Ovitz, this may very well represent an unjustified intrusion into the purview of management and the board of directors. And there are some who would suggest that shareholders dissatisfied with management's performance should just sell the stock rather than attempt to take an active role. But the trend in American capitalism is toward a greater and greater involvement of investors with the corporations they own. Managers and, especially, boards of directors are discovering that they are accountable to investors in a newly direct way. Instead of finding investors' judgment reflected in the share price alone, they're finding that judgment reflected in proxy challenges and lawsuits.

In some cases, those lawsuits will be frivolous, and in others they may seek to take on responsibilities that would better be performed by management. But ultimately what's at stake here is the public nature of the corporation and the degree to which democracy will be allowed to flourish in the boardroom. Michael Eisner, after all, is not Disney. And the more accountable he feels to the shareholders who ultimately constitute the company, the better.