Is Disney the Happiest Place on Earth?

Last week it was announced by The Walt Disney Co. that former CEO Bob Chapek earned $24.2 million in total compensation during the company’s fiscal 2022 year (ending September 30), his final full year as CEO. In addition, Disney revealed that Chapek should receive a severance package valued at $20.4 million, though the exact number will depend on Disney’s share price over time. That severance package includes Disney stock currently valued at $12.6 million, with the rest in cash.

Chapek was named CEO in February 2020. He was terminated by the Disney board after Disney’s last fiscal year ended. One of the main reasons he was fired in 2022 was the disappointing financial performance of the company over the last two years.

Excessive Executive Compensation Packages

Chapek’s combined compensation and severance package of about $44.6 million is a nice payday for someone who lasted less than three years as the CEO. This raises the question whether the board of directors is acting in the best interests of the shareholders in approving executive compensation and severance packages for CEOs. They owe a fiduciary duty to the shareholders with the expectation that they will make decisions in the best interests of the shareholders, including on financial matters, and that their decisions will maximize share value.

Meanwhile, current Disney CEO Bob Iger, who stepped down from the company at the end of 2021, earned $15 million in compensation during Disney’s last fiscal year (he worked for the company as executive chairman of the board of directors for part of that period).

Chapek was paid $32 million in fiscal 2021, while Iger received $46 million, during which time he was the executive chairman. Iger re-joined Disney last November, with a pay package valued at about $27 million in annual target compensation, including a $1 million salary, a $1 million target bonus, and the rest in equity.

It is hard to imagine that Chapek will walk away with such an excessive compensation/severance package while the share price of Disney stock declined 44 percent in 2022, although it is projected to rise in 2023.

Shareholder Model of Corporate Governance

The shareholder model of corporate governance is founded on classic economic precepts, including maximizing wealth for investors and creditors. In a public corporation, firm decisions should be oriented toward serving the best interests of investors. Underlying these decisions is a classic agency problem, in which ownership (investors) and control (managers) are separate.

Managers act as the agents of the investors (principals), who expect those decisions to increase the value of the stock they own. However, managers may have motivations beyond stockholder value such as increasing market share or more personal ones including maximizing executive compensation. In these instances, decisions may be based on an egoist approach to ethical decision making that ignores the interests of others.

The principal-agent relationship involves a transfer of trust and duty to the agent, while also assuming that the agent is opportunistic and will pursue interests that are in conflict with those of the principal, thereby creating an “agency problem.” Because of these potential differences, corporate governance mechanisms are needed to align investor and management interests.

One of the most common approaches to the agency problem is to link managerial compensation to the financial performance of the corporation in general and the performance of the company’s shares. Typically, this occurs by creating long-term compensation packages and stock option plans that tie executive wealth to an increase in the corporation’s stock price. These incentives aim to encourage managers to maximize the market value of shares. Since much of their compensation comes in share value, there is an incentive to do whatever it takes to increase the shareholder price, and this is why the financial frauds of the early 2000s occurred (e.g., Enron and WorldCom).

Does Disney Need an Activist Shareholder?

The Disney preliminary proxy filing comes as the company prepares to fight activist investor Nelson Peltz, who is seeking a seat on Disney’s board of directors. Peltz is asking Disney shareholders to vote for him in lieu of one of Disney’s existing directors. The company laid out its reasoning last Tuesday for why that it believes that is not a good idea.

Nelson Peltz co-founded Trian Fund Management, L.P. in 2005. He is an activist investor who seeks to own a significant stake in publicly traded companies. Peltz has sat on the boards of Proctor & Gamble, Ingersoll-Rand, and the Heinz Company. Perhaps he can bring a stronger sense of responsible decision making when it comes to executive compensation. The record of Disney management has not been good in that regard, as discussed below.

Another Firing of a CEO

This isn’t the first time that Disney has been challenged on its severance packages. On August 9, 2005, Chancellor William B. Handler of the Delaware Chancery Court ruled that the directors of Disney acted in good faith when Michael Ovitz was hired in 1995 to be the CEO of Disney and then allowed to walk away 15 months later after being fired by Michael Eisner, the chair of Disney’s board of directors, with a severance package valued at $130 million. That decision was hard for me to believe. It seems as though the Chancery Court has a different definition than I do of corporate social responsibility.

You would think that the board learned its lesson in approving such excessive severance packages. The argument is that the company needs to offer such large packages to entice top executives to serve as CEO of Disney. That may be the case, but the board does not appear to be doing its due diligence when two CEOs walk away with extremely large severance packages in less than 20 years. It’s interesting that the list of CEOs of Disney on its website includes neither Ovitz nor Chapek. What ever happened to transparency?

On a personal note, I recently read that the one-day ticket for Disneyland in Anaheim, CA ranges between $119-$164. This would be $656 for a family of four, not to mention the additional $30 to park for the day. You can see where it wouldn’t be so unusual for a family of four to pay $1,000 for a full day’s visit including food, special charges for rides, and souvenirs.  

Is this the best use of company resources? Perhaps the board should consider lowering the costs so going to the theme park is available to those who currently are priced out. Top executives can survive on one million less in executive compensation to help society on a broader scale. It seems the responsible thing to do in this age of equity in dealing with others.

Blog posted by Dr. Steven Mintz, The Ethics Sage, on January 23, 2023. You can sign up for Steve’s newsletter and learn more about his activities on his website  (https://www.stevenmintzethics.com/) and by following him on Facebook at: https://www.facebook.com/StevenMintzEthics and on Twitter at: https://twitter.com/ethicssage.