Turmoil in the Magic Kingdom - Assignment Example

? Turmoil in the Magic Kingdom Contents Contents 2 3 Answer 4 Answer 2 6 Answer 3 7 Answer 4 8 References 10 Appendices 11 Walt Disney was undergoing severe problems regarding its corporate governance practices. The reasons behind this were the presence of dishonest and unfaithful people at the top positions of the organization. In form of unfair practices these people were able to churn out a lot of money from the investors. This essay looks in to the different aspect of the issue and the steps that the institutional investors took to curb the problem and to renew a phase of fair and just corporate governance policy. Answer 1 Any organization should abide by the principles of corporate governance on which the company would run. A company under all circumstances should adhere to these principles. The set up in which proper governance should be run should include the proper allocation and distribution of rights and duties among the top executives and the chief decision makers of the organization. The method of corporate governance would affect all the stakeholders of the organization that include the customers, the shareholders, investors, the employees, the management and the regulatory bodies (Goergen, 2012). Any kind of wrong decision making or framing of policies for selfish motives would affect the stakeholders. Through a proper structure of corporate governance the mission and the objectives of the companies can be framed and the company can move in a specified direction accordingly. First of all a company should have policies that provide for equal rights and treatments towards the shareholders. It is necessary for all the organizations that go to the public for funds to know that since the general public are the true owners of the company, the management has a responsibility towards them. In case of any specific circumstances the shareholders should be able to express their opinion and may demand for their rights. Thus situations of information asymmetry should be avoided and irrespective of the amount of stake in the organization they should be welcomed to take part in the decision making process in the annual meetings. In the case of Disney, it is clear that the shareholders were deprived of their right to select the right candidate as member of the board. The CEO has displayed favoritism towards a particular individual who would support him in his selfish endeavors. Thus the composition of the board was mainly controlled by the Michael Eisner’s favorite people who would agree to what the CEO would decide for the company. Those who did not approve of this kind of governance methods were either sidelined by the board or they were thrown out of the nomination by the board members in support of Eisner. Secondly, apart from the people who have financial stake in the company the others including the customers, suppliers and the employees also have a right to have access to correct information about the various aspects of the business including the rules and policies and the financial position (Low, 2008). In Disney the shareholders demanded for a justification of the high pay out that CEO and the top executives were drawing. Along with that the fluctuations in the prices of the shares had an effect on the financial markets and the mutual fund managers because they questioned the integrity of the financial information of the company. Thirdly, the board of directors being a very significant part of the company should take responsibility for the management practices that they undertake. A company in its journey towards excellence would face several challenges. These challenges have to be met by the board in the most ethical and justified way as possible. Only those people who are capable enough to handle these problems should be included in the board. The members of the board should also have a lot of autonomy and liberty in any decision making process. In this case of Disney, it can be seen that the CEO, Eisner had an autocratic attitude and he forcibly included those people in the board who would dance according to his tunes. The nominations were made in such a way that those who lobbied against him would be voted out in their subsequent meetings by those who were on Eisner’s side. The people who were included in the board were of the same mindset as that of Eisner. Fourthly, a company should choose their top executives and their chief decision makers in a cautious way. Integrity and honesty should be the fundamental grounds for choosing a person over the other in the management and the boards. The members should be such that they provide their opinion in the most honest way possible for the various issues. In case of divergence from the fair practices by any member of the board, the other members should stand up against the misdeeds of their colleagues. In this case the board was composed of people who were extremely dishonest and lacked integrity. This is a widely observed phenomenon that corruption comes down from top to bottom. The CEO, Michael Eisner who was at the highest level in the corporate hierarchy was extremely dishonest. The method that he had adopted to force the board to support his stand was not appropriate. The salary that he took from the company was more than what he deserved to get and in the name of his remuneration he siphoned off a lot of public money. Finally, all organizations that operate in a particular country have to conduct their operations under the strict vigilance of the regulatory bodies. The companies are supposed to work in the interest of the investors and the shareholders. Therefore it is mandatory for the companies to disclose the details of the information about the legal, financial and other activities of the company. This was not followed in Disney. There were irregularities noted in the accounting procedures and the way the selection of the decision making body was done. There was too much power in the hands of one man which led to this kind of discrepancies in the activities. Answer 2 Michael Eisner was claimed to be the wealthiest man in America by the Forbes Magazine. The reason behind this was the massive salary that he drew from the company for rendering his work as the CEO. Eisner had managed to get $ 1 billion over the two decades in which he worked. This kind of a pay package was not offered to any other CEO or top executive of his time. He made most of this money by accumulating stock options for himself. The CEO made several policies that boosted up the prices of the stock which in turn increased his net-worth. The drastic rise in the stock prices was less attributable to the general increase in the market indices. The reason was also not the outstanding performance of Disney. It was the extent to which the CEO was awarded the stock options. This was not fair from the point of view of the investors because none of the CEO of his time or his peers received a salary to this level. It was a way in which Eisner sucked out money from the company. Therefore the high pay scale was not justified on any ground (Hodgson, 2004). Along with this the package of Michael Ovitz as the president of the company was also not justified. Eisner had argued for his stand saying that Ovitz was forgoing his talent agency business for entering into the company. But the CEO and the new president had differences in opinion which finally led to the termination of Ovitz. This wrong step on part of Eisner had cost the company about $140 million. The company could have retained a much larger amount of money as their profit if they had employed someone from within the company to carry out these duties. Answer 3 Any publicly listed and traded company is answerable to the shareholders for any of the inappropriate actions or issues that come up. The CEO, Eisner had tried to make the institutional investors understand that the company had rightly hired Michael Ovitz and that the compensation paid to him for his 14 month of tenor in the organization was justified. But the institutional investors did not accept it and sued the entire board of directors. The investors were of the opinion that it was a part of the duties and responsibility of the board to take wise and correct decision. Thus in the first hand they should not have appointed Ovitz under the contract of such a huge compensation. The investors also demanded that each of the members of the board who were responsible for such a faulty decision for their own selfish interests should reimburse the entire amount of the money on the company’s account. This had been rightly demanded by the investors because if the money had not been used for compensating Ovitz, it could have been used for other productive purposes. The investors could have got it back in form of dividends. The investor with the support of the resigning directors also demanded the company to show a justified link between the pay that the CEO and the president got and their individual performances (Lawrence and Weber, 2008). The investors also claimed that the financial performance of the company had suffered because of the improper methods in which the corporate governance was carried out in the organization. The steps that the investors had taken were appropriate. However, they could have demanded for some power in the formulation in the corporate governance strategies and in the major decisions about the functioning of the organization. Along with that they could have demanded for the disclosure of the important information and facts about the organization. Answer 4 The occurrence of this incident forced Disney to change the existing principles in the corporate governance procedure. This was an absolute necessity for the proper working of the organization. The restructuring of the election process of the director would make the process fair and thus people who were honest and were most acknowledged by the other employees and the institutional share holders could be included in the board of director. This would help in the decision making process as the decisions that would be taken would not be biased. The shareholders were given a lot of power in deciding the fate of the directors. The one who the investors would not consider to be fit for the position would be asked to step down by their majority votes. The acceptance of the resignation would be done by the entire board and the newly formed nominating committee. The steps that were taken under the new management were quite appropriate which would lead the company to success at the later stages. Though the right steps had been taken, the formulation of a better succession plan in a concrete manner would have helped the company to move towards its desired goals (Bowen, 1998). References Hodgson, P. (2004). Incentivizing Michael Eisner. Forbes. Retrieved from: http://www.forbes.com/2004/04/01/cz_ph_0401opiniondisney.html Goergen, M. (2012). International Corporate Governance. London: Prentice Hall Bowen, W. (1998). The Board Book: An Insider's Guide for Directors and Trustees. New York : W.W. Norton and Company. Low, A. (2008). Conflict and Creativity at Work: Human Roots of Corporate Life. Sussex: Sussex Academic Press. Lawrence, A. & Weber, J. (2008). Business and Society; Stakeholders, Ethics, Public Policy. Ashford University. 12th edition. Appendices Source: Forbes Magazine Read More