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Eisner vs Ovitz: this time in court
Bitter dispute over $140M exit package to eye board oversight, exec pay; and a broken friendship.
October 18, 2004: 9:38 AM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - A different Michael is about to take center stage at Walt Disney Co.

On Wednesday a nasty and grueling battle between Disney shareholders and the company over its ill-fated hiring of former star Hollywood agent Michael Ovitz is set to kick off in a Delaware courtroom. At issue: a pay package valued at $140 million that Disney's board of directors handed Ovitz eight years ago for about 15 months of work.

Given all the mudslinging, including charges of cronyism, greed and ineptitude by Disney overseers, the trial and its parade of high-profile witnesses -- featuring Ovitz, CEO Michael Eisner and Disney directors -- promises to be the blockbuster that has eluded the company this year.

Aside from the airing of dirty laundry, the trial is worth watching in part because the charges of gross mismanagement come at an awkward time for Disney's board.

Company directors are searching for a successor to embattled CEO Eisner, who plans to step down in 2006 after a tumultuous 22 years at the helm.

Given the charges at the heart of the Delaware lawsuit -- that an earlier Disney board kowtowed to Eisner, to the detriment of investors -- directors are under intense pressure to demonstrate their independence.

That could mean bad news for Eisner's hand-picked successor, current Disney president Robert Iger.

"Disney directors would have to be deaf and dumb not to understand they're under a microscope," said Greg Taxin, the CEO of Glass, Lewis & Co., a San Francisco-based firm that advises institutional investors. "The shareholders of Disney will examine this process very carefully to understand whether the Disney board has learned anything from the Ovitz matter."

A classic Hollywood marriage

The trouble started in 1995 when Eisner recruited longtime pal Ovitz to fill the No. 2 spot at Disney. Ovitz, co-founder of Creative Arts Agency and at the time the most powerful talent agent in Hollywood, didn't last 15 months at the House of Mouse.

The two men fell quickly into a bitter power struggle. And in late 1996 Eisner forced Ovitz out with a severance deal that gave Ovitz about $38 million in cash and roughly $100 million in stock.

Shareholders, using their power under law to sue on behalf of Disney (unchanged at $24.91, Research), promptly dragged Eisner, Ovitz and the board into Delaware state court. The crux of their case centered on what they claimed was an egregious abuse of power by Eisner and Ovitz and an inexcusable lack of oversight by directors handing Ovitz such a hefty parting gift.

Since it was filed in 1997, the case has lumbered through the courts, bogged down by legal procedure. Through it all, defense lawyers have argued that Ovitz and Eisner & Co. broke no laws.

Feeling the heat

On a broad level, the litigation has become a test case for shareholder groups looking to hold directors accountable -- a mostly unsuccessful campaign that pre-dates the mismanagement at Enron and other corporate implosions.

Nell Minow, co-founder of investor advocate The Corporate Library, said courts in Delaware, where 58 percent of Fortune 500 companies are incorporated and are often sued for wrongdoing, have long shied away from holding directors liable for their decisions. In fact, she said, it's been 25 years since a significant decision against directors has come down from Delaware.

"In the post-Enron era, we have seen reforms from just about everybody -- from the Congress, from the (Securities and Exchange Commission) and from the stock exchanges," said Minow. "Everybody has stepped up to the plate except for the Delaware courts."

That the Ovitz case has made it to the eve of trial is remarkable considering most other cases are settled or thrown out of court. Should Disney's directors from late 1996 -- only two of whom currently sit on the board -- lose this case, the impact would be "seismic," predicted Minow.

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A study earlier this year by law professors at Stanford University, the University of Texas and the University of Cambridge found that certain directors do bad jobs, "sometimes spectacularly," but rarely face personal liability.

To be fair, directors have started to get roughed up a bit. Judges, in Delaware and elsewhere, have ruled against board members in a series of recent cases, including ones against directors of Oracle, (unchanged at $12.24, Research) Martha Stewart Living Omnimedia (unchanged at $16.55, Research), and eBay (unchanged at $93.76, Research).

Though none of the cases so far have resulted in fines, the rising threat of monetary penalties is one reason insurance rates for company officials have skyrocketed.

"It's getting ridiculously expensive to insure directors and officers," said Charles King, who specializes in recruiting directors as head of global board services for Korn/Ferry International, the executive search firm.

Spotlight on pay

The Disney-Ovitz dustup highlights, too, the mounting controversy over executive pay. Studies by compensation experts have shown that salaries for CEOs and other corporate execs have ballooned even as company performance has lagged.

Although the issue has come up in a number of cases -- including an ongoing bitter brawl between ex-NYSE Chairman Richard Grasso and New York Attorney General Eliot Spitzer over a $187 million pay package -- investors groups so far have fought a losing battle.

Michael Eisner
Michael Ovitz
Disney, Walt, Co
Accounting and Audits

There are no laws restricting CEO compensation. Instead, corporate watchdogs, including Disney shareholders, are calling for a bigger voice in appointing directors. They haven't had much success so far.

Shareholder activists also hope to rein in CEO pay by forcing public companies to count employee stock options -- huge drivers of executive comp in recent years -- against profits.

Those efforts suffered a setback Wednesday when the Financial Accounting Standards Board, which sets U.S. accounting rules, delayed enacting a stock option expense requirement until mid-2005.  Top of page

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