Jewish World Review March 9, 2004 / 16 Adar, 5764

Jeff Brown

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Disney vote the first whimper of shareholder power | (KRT) For many candidates, winning 57 percent of the vote would be a landslide. But Disney chief executive Michael Eisner's re-election to the company's board last week with that percentage was widely seen as a humiliation.

It was, indeed - and by rights, Eisner should be off the board.

That he could survive when so many shareholders are infuriated by his poor performance in recent years clearly demonstrates that shareholder rights have made little progress despite the post-Enron reforms.

The chief problem: The only choice for Disney shareholders was to vote for Eisner or withhold their votes. That was a leap into the unknown, as there was no telling who would have replaced him on the board. Many shareholders must have voted for Eisner while holding their noses.

This, of course, is nothing unusual. In corporate elections, incumbents always hold the upper hand: The board nominates the candidates for its own openings.

With few exceptions, those are the only candidates to appear on the company-distributed ballot. It's practically impossible, and extraordinarily expensive, for unhappy shareholders to field competing slates.

The board of directors is supposed to oversee the chief executive - but board membership is often heavily influenced by the CEO. It's a mutual back-scratching society, not the system of checks and balances it ought to be.

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Because corporate democracy is such a sham, directors are typically elected with more than 99 percent of the vote. If dissident shareholders manage to withhold as much as 5 percent, it's a big embarrassment for the candidate.

That's why the loss of support from 43 percent of shareholders made Eisner look so bad. If he truly cared about his shareholders, he'd now step down in favor of someone less divisive. Of course, a CEO putting his own interests ahead of shareholders' is nothing unusual.

Fortunately, there is some chance the situation will change. The Securities and Exchange Commission will hold a public meeting Wednesday to discuss its proposal to allow competing candidates to be listed on corporate ballots.

Under the proposal, issued last fall, competing candidates could be placed on the ballot if one of two "triggering events" occurred: at least 35 percent of shareholders withhold their votes from one or more of the board's nominees, or a majority of shareholders approve a proposal to have a contested election.

In these cases, the contested election would be held the following year.

It's a step in the right direction - but one that's much too tentative. It would be better to allow any candidate on the ballot who had the support of, say, 5 percent of the shareholders. That would be a tough enough threshold to keep kooks off the ballot.

Also, the SEC would allow only a small fraction of the board's seats to be contested in a single election, so it could take years to replace the entire board. Every director should stand for election every year.

The commission's modest proposal has drawn an extraordinary amount of fire from groups representing executives and their boards. They warn that opening up the nominating process could lead to boardroom chaos, destroying the collegiality they prize.

But the Disney case shows how today's closed system serves not to avert corporate problems but to aggravate them. Had there been a real, contested election last week, Eisner and others on the 11-member board might have been replaced - and the company might now be on the mend.

Instead, he remains on the board and continues to serve as CEO.

So the civil war at Disney continues, with no end in sight. How many talented employees and executives will leave rather than put up with more uncertainty? That's clearly a problem already.

To mollify the dissidents, the Disney board did strip Eisner of his role as chairman of the board. He was replaced by George J. Mitchell, the former U.S. senator who was already a director.

As an olive branch, the move looks like a failure, since the dissidents view Mitchell as an Eisner ally. Indeed, shareholders withheld 24 percent of their votes in Mitchell's re-election.

Still, dividing the CEO and chairman's jobs between separate people is a good idea that's catching on at more and more companies.

Critics say that makes managing a company more cumbersome. And they point out that academic research doesn't show that splitting the posts improves returns to shareholders.

Unfortunately, a board that does split the jobs may still be mired in the buddy system, making the benefits of the split invisible.

That's what needs to change. Passive, unquestioning, go-along directors were the enablers in all the recent corporate scandals. Disney, despite its problems, is not one of those scandal-ridden companies.

Thus, it demonstrates how the problem of bad boards is not an aberration at a few outlaw corporations. It's a problem of the mainstream.

If there's a good side to the Disney fiasco, it's that it may encourage unhappy shareholders at other companies to withhold votes.

A wave of shareholder activism could push the SEC to adopt the modest reforms it will discuss on Wednesday - and to follow up with something stronger: a way to give shareholders the power to control who runs the companies they own.

Jeff Brown is a business columnist for The Philadelphia Inquirer. Comment by clicking here.


© 2004, The Philadelphia Inquirer. Distributed by Knight Ridder/Tribune Information Services.