Facts of the Case

Michael Ovitz was hired by Disney Company on contract to serve for five years. His contract was, however, terminated fourteen months later. Ovitz’s termination cost the company $130 million in compensation. According to the case, the past professional and social friendships between Ovitz and Eisner motivated the hiring of Ovitz to the firm. The two had been long-term friendships before Eisner became the CEO of Disney Company. However, after he had joined Disney Company, Eisner realized that he could not get along with Ovitz. Eisner made a phone call to other members of the board explaining that he had decided to terminate Ovitz’s contract without cause. Even though the court ruled that the main problem with Disney case was from the composition of the case study, other issues revolving around Eisner’s role as the CEO of the company contributed to wrongful hiring and termination of Ovitz’s contract at the company. Corporations have to learn from the mistakes of Eisner and Disney’s case.

Analysis

            The success of corporations depends on the form of ownership, the type of management in place, and how the role of shareholders in the decision-making process. For publicly owned corporations, the board of directors with the help of firm managers plays a significant role in matters of governance. Applying this reasoning to the case of Disney Corporation, one finds that the problem started at the governance level. According to the case study, Eisner ran the operations of the firm as personal property, in spite of his awareness of the fact that Disney Corporation was public property. According to the lecture notes (n.d.), members of the board are supposed to act independently. This was not the case at Disney Corporation. Eisner had claimed ownership of the firm and was making decisions on behalf of the firm, even though he appeared to act in good interests of the firm.

While the form of ownership of the firm impacted decision-making and management of Disney Corporation, Eisner had vested interests that made it impossible for the board to execute its responsibilities independently. According to the case, Eisner hired people depending on professional or social relationships they had with him. The members of the board had been nominated based on the relationship they had with Eisner. In public ownership, the manager should make calculated decisions that seek to magnify shareholder value (Institutional Ownership, n.d.). Disney Corporation operated as a public entity. The chief executive officer was supposed to respect the rights of shareholders by taking into consideration shareholder value. Instead, he concentrated on safeguarding his selfish interests at the expense of the firm, making him attract incompetent members to the board.

The theory of stakeholder identification and salience could have guided Eisner in decision making and his responsibilities as the CEO of Disney Corporation. This theory defines stakeholders as anyone that has interests in the firm or is likely to be impacted by the firm’s operational activities. In this case, Eisner could have understood the role of the directors of the firm, shareholders, and other managers. However, it is evident in the case study that Eisner did not bother consulting other directors when making decisions. For instance, the hiring and termination of Ovitz’s contract was a phony process where Eisner sought to have his long-term friend work directly under him. When terminating Ovitz’s agreement “with no cause,” Eisner called other directors one after another informing them of the decision. He did not bother to call for a meeting where members could vote and reach a unanimous decision.

Eisner did not have corporate governance skills that could have helped the firm avoid the $130 million and other litigations from the termination of Ovitz’s contract. There is little doubt that other directors had little knowledge of the terms of employment of Ovitz and the consequences of termination of his contract. The fact that Eisner had assumed overall decision-making responsibilities makes it nearly impossible for members of the board to have challenged his decision. Even though the court ruled in his favor because he acted in the best interest of the firm when making decisions, it would have been better if the court took into consideration the welfare of shareholders and the value of the firm (Theories of Corporate Governance II, n.d.). Disney was an international institution by the time Ovitz was joining it. An individual seeking personal interests and benefits could not have decided on behalf of the entire firm.

            Agency theory of corporate governance could explain the circumstances under which Eisner assumed corporate responsibility and misused his powers. An agency is a person that is hired by another person or a group to make decisions on behalf of the later (Theories of Corporate Governance I, n.d.). For the case of Disney Company, Eisner acted as an agent. Shareholders expected and hoped that Eisner could work in the best interest of the firm and maximize their value. The problem with this assumption is that it limits the powers of stakeholders. The agent is likely to abuse power like the case of Disney and transfer the costs to shareholders of the public entity.

Lessons from the Case

            Disney’s case study has significant lessons for directors on matters of governance and decision making. The theory of stewardship views managers as stewards of the corporation, but they may ruin the organization. Eisner failed to become a steward of Disney Corporation. He used his position to transform the organization into personal property. Firms should review managers before giving them a managerial role in the firm. In cases were managers have conflicts of interests in the firm, strict measures should be enacted to limit abuse of power.

Corporate governance should involve the division of labor. If a manager makes decisions without consulting other directors, the decision should be declared null. Decisions on hiring and termination of contracts should only be made in a meeting where all directors are involved. The court ruled in favor of Ovitz because the firm had not restricted the powers of the manager. It was assumed that the manager was acting in the best interest of the firm even when he was hurting the shareholders. Directors should also make sure that managers do not make decisions on matters where there are conflicts of interests involved. For the case of Disney, directors were aware of Eisner’s behavior but did not take reasonable actions against him.

Conclusion

The case of Disney Corporation shows how corporate governance may harm a reputable corporation. Shareholders were forced to pay $130 Million to Ovitz who had served the firm for fourteen months. The issue stemmed from the top manager who had vested interests in hiring his friends. While the composition of the board contributed to issues affecting hiring and termination of Ovitz, the manager had conflicts of interest that he wanted to safeguard. This case serves a lesson to directors of corporations and shareholders. Managers are assumed to be stewards, but unless their powers are tamed, they may harm shareholders.

References

The composition and duties of Walt Disney Co.’s board of directors (n.d.). Dalhousie University.

Dalhousie University (n.d.). Forms of business ownership.

Dalhousie University (n.d.). Theories of corporate governance II. Stakeholder theory and theory of corporate citizenship.

Dalhousie University (n.d.).  Theories of corporate governance I. Agency theory and stewardship theory.

Dalhousie University (n.d.). Institutional ownership.

Dalhousie University (n.d.). Corporations and corporate governance.

Dalhousie University (n.d.).  Mechanisms of corporate governance.