IBD on the CREF:
Corporate Cronyism Or Competence?
Date: 3/4/98
Some shareholders were crowing that a resolution urging Walt Disney Co. to make its board more independent got 35% of holders' votes. But independent boards don't ensure better corporate performance.
Better management does.
Three thousand five hundred sixty-seven percent.
That's the gain in the split-adjusted value of Disney's stock since CEO Michael Eisner took over in 1984. In dollar terms, a $1,000 investment in 1984 would be worth $36,670 today.
And this was accomplished with a board of directors that ''lacks requisite independence,'' said the resolution's author, the equity arm of the $215 billion Teachers Insurance & Annuity Association- College Retirement Equities Fund.
CREF's complaint stems from two concerns: Eisner's compensation and the Michael Ovitz affair. The massive pension fund believes that an independent board would have prevented these ''problems.''
But are they problems? Not according to the market.
Eisner's compensation includes options pegged to stock performance. If Disney stock increased 5% a year over the term of a 10-year contract, Eisner's options would be worth $230 million. If annual 10% gains were
realized, the option package would jump to more than $700 million.
CREF's view is that such compensation hurts shareholders, that it is somehow excessive.
But a little common sense shows that such a package helps shareholders. If Eisner's pay weren't tied to company performance, what incentive would he have to boost shareholder returns? By 3,567%?
As for the Ovitz matter, Eisner certainly blundered when he brought Ovitz in as president. The company ended up paying Ovitz more than $100 million after 14 months on the job. Would an independent board have prevented such a blunder? Perhaps.
Could an independent board make a bad choice as well? Sure. Apple Computer Corp.'s choice of Gilbert Amelio as CEO comes to mind. Amelio presided over the further deterioriation of Apple and was finally
booted.
Since Ovitz left in December 1996, Disney's stock has almost doubled. And CREF has benefited. It owns 6.9 million shares worth three-quarters of a billion dollars.
With such a gain, it seems as if CREF is barking up the wrong tree by going after Disney. Plenty of laggards out there could benefit from better corporate governance and CREF's scrutiny, not to mention more
managerial competence.
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