Friday, September 17, 2010

Checks and Balances: Eisner and Disney

I just read about a forthcoming book, written by Michael Eisner, ex-Disney CEO, titled "Working Together: Why great partnerships succeed". My first reaction was incredulity.. What next? Madonna on "The Importance of Celibacy" and Bernie Madoff on "Investing Wisely"...

As some of you may know, I have used Disney as my laboratory case study in my applied corporate finance book through three editions and fifteen years. I love the company and its products but have not always cared for its management. In fact, I have been particularly harsh about Eisner, who I think did serious damage to the company, especially in the last decade of his tenure.

While I have not had a chance to read Eisner's book yet, I was interested to read that he used his partnership with Frank Wells as one of the great partnerships that succeeded. On that count, I completely agree. When Eisner came to Disney as CEO, from Paramount, the company was moribund; its theme parks were getting old, its animated movies lacked pizzazz and the ghost of Walt Disney wandered through the halls. Eisner, with his then side-kick Jeff Katzenberg, brought a fresh energy to the company that was complimented by the operating savvy of Frank Wells, Disney's Chief Operating Officer. Wells operated as a check on Eisner, channeling his visions to practical success. By 1994, the two men had turned Disney around and put it on the path to being an entertainment powerhouse.

In 1994, Wells died in a helicopter crash and the only person in the company capable of reining in Eisner was gone. Eisner packed the Disney board with me-too directors, far too eager to rubber stamp whatever he did, and he let his manias and paranoia run rampant. Disney made investments it should not have made (buying Capital Cities was a mistake; it is revisionist history to claim, as Eisner does, that he bought ABC to get ESPN, since he could have bought just ESPN for a fraction of the $ 18 billion he paid for the entire company) and did not make investments it should have (buying Pixar early in the game for millions rather than wait a decade and pay billions), fired people who should not have been fired and did not fire people it should have. By 2003, stockholders in Disney were in full revolt and deservedly so; the company's earnings had plateaued and its stock under performed the market.

My larger point, though, is not about Disney, but about why we needs checks and balances in positions of power. Even the smartest, best-intentioned individuals have weaknesses. At some point in time, without constraints, these weaknesses rise to the surface and subsume the successes. When we push for stronger, more independent boards of directors, it is not because we operate under the illusion that such boards will make bad managers into good ones, but that they will keep good managers from going over to the dark side. We will never know how much good Eisner could have continued to do in Disney, if he had a strong board of directors to guide him, confront him and sometimes stop him or slow him down.


Matt said...

Nice opening paragraph. I'm guessing you could do an entire post on book titles.

An implication of your post is that human capital can be a significant part of the value of a company. I wonder if the importance of management and even corporate governance varies by industry. Perhaps it is not as important in heavily regulated industries.

I also wonder if it is possible to properly value the contribution of management currently, or if it is only possible in hindsight. The conventional wisdom is that Warren Buffet and Steve Jobs are uniquely important to their firms. In Apple's case, Steve Jobs left the firm and then returned, so that may provide a unique opportunity for analysis, although one may argue that a different Steve Jobs returned to the company.

Aswath Damodaran said...

Absolutely. In some firms,such as consulting or services, human capital may be the entire value of the company.


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