The Keys to the Kingdom (52 page)

By the fall of 1996, there were reports that Disney had become so hostile to Ovitz that chief financial officer Richard Nanula was investigating who paid for an Ovitz family party—his daughter's bat mitzvah—at the House of Blues. A Disney executive said the company was merely checking to see
if the club, partially owned by Disney, was giving improper discounts to company employees. (Nothing was found to be amiss.)

The Eisners and Ovitzes discussed the growing impossibility of the situation at a Saturday-night wedding reception for oilman Marvin Davis's daughter in December. The two men agreed that Ovitz would have to leave soon, but they hoped to postpone an announcement until after the holidays. But that week, Ovitz took a business trip to New York. He escorted director Penny Marshall to a premiere of
The Preacher's Wife,
spoke to the Council on Foreign Relations, and met with Viacom executives about the possible sale of the company's radio operations. But his presence in Manhattan set off another round of job rumors—this time that he was in discussions to take over Sony's entertainment operations or that he was seeking a job at Viacom. Eisner was said to be furious.

Certainly Eisner was fed up with the constant media scrutiny and the stream of negative stories. That Thursday night, Ovitz and Eisner met for four hours at Eisner's New York apartment. Eisner told Ovitz that his departure could not be delayed. And so a couple of days before Ovitz's fiftieth birthday on December 14, 1996, the news came that he and the Disney company were parting ways. He had been in the job a mere fourteen months.

“After ruling the movie industry as a super-agent for more than a decade,” the
Los Angeles Times
reported on its front page, “Ovitz suddenly is not even a player.” Long anticipated, Ovitz's fall had been so precipitous that it still had the power to shock.

Initially, Disney announced that Ovitz was departing “by mutual agreement.” But Ovitz implied that he was acting on his own initiative. “I hope that my decision to leave will eliminate any unnecessary distraction for a great company,” he said in a statement. Disney underscored Ovitz's super-fluousness at the company by noting that no successor would be appointed and no changes in the company's operations were anticipated. But both Ovitz and Eisner vowed publicly that their friendship would survive this breach. “We have been doing business together while being friends for many years and I know that both our personal and professional relationships will continue,” Eisner said. In fact, their friendship was ruptured and Ovitz would later describe his doomed tenure at Disney as one of the most traumatic events of his life.

Immediately, word leaked out that Ovitz was walking away with a stunning severance package worth at least $90 million, including cash to settle
his contract and three million shares of stock options then worth $40 million. The sum was astonishing—and it turned out that those initial estimates were far lower than the real number. Even the man who helped design Ovitz's deal at Disney, executive compensation expert Graef Crystal, acknowledged: “It's a lot of money for what was apparently a mistake.” At Disney, executives who were getting holiday bonuses—which in some cases were lower than the previous year's—began to feel that their stocking had been stuffed with lumps of coal.

The leaks about the payment appeared to come from the Ovitz camp, and Disney was blindsided. Initially, some company executives unofficially suggested that the number was far too high and that Ovitz's payoff was closer to $30 million. The inflated figures, they said, were just Ovitz being Ovitz. There were reports about a letter of understanding outlining the real deal, and studio chief Joe Roth implored Eisner to release it. After all, if Ovitz's take was really $90 million, it equaled 7.5 percent of the company's fiscal 1996 net income.

Finally, in a January filing with the Securities and Exchange Commission, Disney disclosed that the $90 million figure was, in fact, conservative. Upon his hiring, Ovitz had been promised $1 million per year in salary and options on three million shares of stock. He would receive options on another two million shares unless his deal was not renewed after five years. In that event, he would get $10 million in cash. His final settlement gave him a total cash payment of nearly $40 million: about $3.5 million in salary, $10 million for the options he would have been granted had his contract been renewed, and about $25 million in bonuses. He also kept the options on the three million shares, which most Disney executives had to give up when they left the company. The stock had a history of appreciating, so the final value of Ovitz's payoff was a moving target that quickly surged far north of $90 million.

Disney also disclosed that Ovitz had been terminated. Had he left voluntarily, he might have had to sacrifice some of the bounty. Board member Ray Watson answered queries about the package by saying that the deal was similar to the one offered to Frank Wells or any executive in a similar position. “The only circumstances that arose here is that it didn't last very long,” he said. “It's like doing a movie with Sylvester Stallone where you pay him $20 million and the movie loses money. It's unfortunate.”

For the analysts and investors who tracked Disney, Ovitz's departure in itself was not troubling. But it once again put the focus on Eisner's lack of
a successor. Beyond that, the excess of it all had made national news. Under the headline
BEAVIS AND BUTT-HEAD DO THE DISNEY SHAREHOLDERS
, columnist Holman W. Jenkins Jr. deplored the agreement on the editorial pages of the
Wall Street Journal
. “Nobody in the real world, not even in the far-out precincts of Hollywood, gets that kind of money for flubbing up after a year on the job,” he wrote. In the
New York Times,
A. M. Rosenthal inveighed: “Why should a board responsible to the stockholders allow its chairman to pay so much to push out [Ovitz]?” he asked. “Everybody knows that a board of directors is responsible for the well-being of the stockholders, not executives.”

Eisner apparently was not abashed by the complaints. In fact, even as the details of the Ovitz payment were disclosed, Disney announced that Eisner had signed a record-breaking seven-year extension of his employment contract. Although its total value could not be determined because it depended on stock performance, the package was estimated to be worth at least a minimum of $300 million. Compensation experts believed that Eisner had received the largest options grant ever given to a chief executive—eight million options that could be exercised between the years 2003 and 2006. Disney assigned a hypothetical value of $196 million to the options. (Consultant Graef Crystal, who helped design Eisner's package, estimated the ultimate value of the options to be $770.9 million.) Eisner already had options he could exercise at once that were worth more than $300 million, and another batch exercisable in the future that were valued at more than $60 million. The board also altered the formula for calculating Eisner's bonuses in a manner that favored Eisner. (For fiscal 1996, he had received a bonus of $7.9 million.)

“We wouldn't have done this if we believed he wasn't going to live out this contract,” said board member Watson in an effort to dispel concerns about Eisner's health. “I had lunch with him today and he ordered a fat-free salad and fat-free pasta.”

Compensation expert Crystal acknowledged that Eisner had received “a monstrous contract,” but pointed out that Eisner's base salary of $750,000 had remained unchanged since he was hired. “I don't know anyone who has gone that long without a raise,” he said.

That observation evoked little sympathy from columnist Robert J. Samuelson, who suggested in the pages of the
Washington Post
that Eisner should pay Ovitz's severance package out of his own pocket.
Time
's Calvin Trillin seconded the proposal (in an essay accompanied by a most unflat
tering caricature), urging that Disney “could just subtract $90 million from Eisner's paycheck, with the notation, ‘turkey hiring.'”

 

IN HIS
1996 annual report, Eisner focused on all that Disney had accomplished, not only in the past year but since he took the helm. Sitting in the living room of his family's farmhouse in Saxtons River, Vermont, over the Thanksgiving holidays, he noted that he was constantly distracted from drafting his yearly letter. A football game was on Disney's ABC in the background, and every time a McDonald's ad came on promoting Disney's upcoming film
101 Dalmatians,
Eisner said, he was distracted again. Then he heard a rave review for
The English Patient,
from Disney's Miramax unit. He got a call from Florida reporting excellent attendance at Walt Disney World. Europe called to say
The Hunchback of Notre Dame
had opened well in twelve foreign territories. He made some more calls and found out that Disney's summer film
The Rock
was on track to become the biggest home video rental of all time, while
Toy Story
was also selling briskly. Finally came the call that
101 Dalmatians
had just had a record-breaking opening weekend. “Now,” he wrote, “as soon as the Mighty Ducks hockey game…at the [Disney-owned] Pond in Anaheim on [Disney-owned] ESPN was over, I would finally begin to work.”

It was indeed an impressive kingdom to survey. But Eisner went on. Only in passing did he mention the death of his mother that summer—an event that must have marked some sort of emotional watershed for him. He also noted that his mother-in-law had died. He acknowledged that these changes put him “in a more reflective mood than usual.”

And he reflected about Disney's phenomenal growth since he and Frank Wells had taken over the company. Eisner could rattle off eighteen new businesses that the company had entered since 1984, including more than 550 Disney Stores in eleven countries, ownership of professional sports teams, broadcasting, television-and radio-station ownership, live theatrical shows such as the Broadway hit
Beauty and the Beast
. (The critically acclaimed stage version of
The Lion King
was in the works.)

When he joined the company, Eisner pointed out, Walt Disney World had two theme parks and 6,373 rooms on the property. By the end of 1996, there were three theme parks, 23,421 rooms, as well as two nighttime entertainment centers and two vacation-club complexes. There were also 234,000 square feet of convention space, compared with 26,000 square feet in 1984.
There were six championship golf courses and an Indy car racetrack. In the year to come, the company would add 2,000 new rooms, a 95,000-square-foot convention center, and a giant new sports complex. As if that weren't enough, 1998 would bring the opening of the company's largest theme park ever, Disney's Animal Kingdom, and the launch of the Disney cruise line.

But there were some dark patches. Disneyland Paris was drawing more visitors than the Eiffel Tower and was the most visited paid tourist site in France, but that didn't mean its financial problems were over. Eisner merely noted attendance figures without addressing the looming need for another restructuring. The animated films released since
The Lion King—Pocahontas
and
The Hunchback of Notre Dame
—were not disasters, but they had not performed as well as the studio might have hoped. Accentuating the positive, Eisner simply commented that “the specific success outside the United States of
Hunchback
is particularly gratifying.”

And the ABC network, which had been number one when Eisner made the deal to acquire it, with such leading shows as
Roseanne, Home Improvement, Family Matters,
and
NYPD Blue,
had started slipping in the ratings in the months before the merger was completed. The network's strongest shows were aging and no new hits had come along to replace them. (Indeed, some thought ABC had not invested heavily enough to develop new programming before the sale. “Do plenty of people think Tom [Murphy] and Dan [Burke] were fattening up the company and making it look fabulous?” says one former network executive. “Sure.”)

Disney's stock showed some weakness after the merger closed and the company had repurchased 8.2 million shares for $462 million. But Eisner reported that the company was “making slow but steady progress toward better ratings.” The progress was certainly slow but hardly steady. In the months ahead, ABC would set record ratings lows for a major broadcast network.

Still, Eisner had an impressive list of accomplishments to discuss before he finally and briefly turned to the debacle that had tarnished the end of the year. In two short paragraphs, he said that “we and Michael Ovitz have come to an agreement that he will leave his position as president but continue in a role as an adviser to the company and its Board of Directors.” He reiterated that no successor would be named.

 

DESPITE DISNEY'S DAZZLING
accomplishments, a number of shareholders seemed to agree with Calvin Trillin when it came to the Ovitz payout. In fact, the Ovitz issue and Eisner's compensation package brought new scrutiny and harsh criticism to the Disney board. According to standards recommended by the Council of Institutional Investors, directors could not be considered independent if they were former employees or had any professional or consulting relationship with the company. Although Disney considered twelve of its sixteen directors to be independent, most of the twelve had ties to Eisner. Among them were Irwin Russell, his personal lawyer; Reveta Bowers, the principal of the elementary school that his children had attended; Reverend Leo J. O'Donovan, president of Georgetown University, where one of Eisner's children was enrolled; architect Robert A. M. Stern, who did extensive work for Disney and designed Eisner's Aspen home; former senator George Mitchell, who acted as a paid consultant to Disney; former chief financial officer Gary Wilson; former chairman Ray Watson; and the eighty-year-old Card Walker, also a former chairman and chief executive. (Eisner, Roy Disney, Sandy Litvack, and theme-park chief Dick Nunis were the insiders on the board.)