Disney Analysis - Case Study Example

Individual Case Study Analysis- Disney Name Instructor’s Name Course Name and Code Date Table of Contents Table of Contents 2 Executive Summary 3 Disney Case 4 Details of the Negotiation 5 The Allegations 6 The Delaware Supreme Court’s Decision 8 Recommendations 8 Conclusion 9 References 10 Executive Summary Disney leads the pack on cases regarding executive compensation because it took a period of 10 years for litigation and six individuals decisions before the case was adjudicated. The major issue in the case was about the hiring and almost immediate firing of the Walt Disney‘s Company President Michael Ovitz which led to him acquiring a total of over $130 million after spending only 14 months on the position. This was a decision, which led Walt Disney’s treasury depleted and left the organization with no talented successor and President to Michael Ovitz. The organization was therefore left in a more deplorable situation than ever before as a result of the President’s sacking. The limitations regarding judicial review in matters regarding executive compensation was well exhibited by the decision taken by the “Delaware Supreme Court” which alluded to the fact that the amount of money awarded as compensation for any given Executive was business question that best rested with the Board rather than in the Court’s purview. The Supreme Court in Delaware acknowledged the fact that despite the amount awarded being too huge through ordinary standards, there was nothing extraordinary as Disney’s internal business matter. Disney Case The Disney Case was brought up and decided in the courts basing on various issues regarding Disney procedure in both the compensation and contractual agreements or arrangements with its Executives. In its decision, the court based on the examination of the Disney Board’s application of the process and the way the organization approved Ovitz’s terms of contract and compensation arrangements. It is clear from the Disney Case that a failure of imagination by the plaintiff due to the neglect of issues regarding succession or replacement of the Company’s Chief Executive Officer highly contributed to their failure to overturn the decision of the Court. In addition to that, Disney is both vital for the decision that it makes and for the decisions that it does not make. According to their definition of due care, the liability of the Director in the organization is a rare event which despite of media condemnations about pay abuses, sensitive issues and irate stockholders. The Supreme Court correctly ascertained that the Disney Board actually acted in good faith and with due care in its decision in the both hiring and firing of Ovitz. However, the Courts did not effectively address the issue regarding succession, which was the major reason for the hiring, and firing of Ovitz. The issue of succession is crucial in the life of each and very corporation in the world since this was a missed opportunity not only for the plaintiffs who allowed it to lapse but also for the Disney Corporation as a whole (Moore, 2011). Failure to address effectively the issue of succession by organizations is bound to lead definitely to failures in future as well. According to this case study, it can be ascertained that indeed Michael, just like many of other Chief Executive Officers was highly concerned about power retention rather than installation of his imminent successor. The firing of Ovitz led to Eisner doubling his tenure after the firing of Ovitz for another nine good years (Ferracone, 2010). Eisner’s concern with power retention and control over the process of succession possibly resulted in the hiring of Ovitz in bad faith and definitely resulted in the dismissal of Ovitz and the subsequent heavy payout. The Courts did not consider the succession issue because if it had realized or discovered that a negative impact should have been created as a result of Eisner’s self interest in power retention and the independence of the Disney Board which was dominated by Eisner. Just like other cases, which are not litigated extensively due to the amounts in question, the Disney case also wound up by obliquely because the underlying issues were distracted by the available monetary stakes thus the case only concentrated with boardroom issues (Black, 2011). The reality in the Disney case is that the Courts never actually addressed the succession problems during both the inherent hiring or recruitment and firing of Ovitz. The copious fact finding process coupled with extensive allegations arising from Disney’s lengthy trial can actual be used as a case study in both the succession of CEO’s and in general Corporate governance (Siegel, 2011). Details of the Negotiation From the financial negotiations, it was proved that Ovitz made it clear that he was in ownership of 55% of CAA which earned him about $ 20 to 25$ millions per year and that he could not relinquish the control and position in his company business without an upside that was at least comparable to his downside protection and current earnings. The contract was therefore fixed to meet the given requirements for a period of 5 years with a variety of stock option arrangements, which provided for both downside protection and upside opportunities (De Young, 2010). From the negotiation, Russell informed both Ovitz and Eisner that the terms that were negotiated symbolized “…an extraordinary level of executive compensation…” which would eventually make Ovitz’s salary to exceed that of Eisner’s and that it would be a top –level salary for a CEO. From the numerous negotiations held by different people, there is no doubt that all the people in these discussions actually understood the ramifications regarding Ovitz’s employment contract which included the costs that could arise from early termination and even severance arrangements. Even if there could have emerged any doubts during the discussion, such doubts could have been assuaged easily because even before the adoption of the agreement, it has to be recast as a matter of tax reasons and thus all the economical aspects had to be reserved through full comprehension of the ramifications and terms. The final deal saw Ovitz being given the position of President and denied the COO post that was once held by the Late Wells and later on adopted by Eisner. The Allegations Despite signing and accepting the position, Ovitz faced challenges since some of the directors in the Corporation refused reporting to him and rather opted to report to Eisner without his objection. As a result, Ovitz’s position was eventually diminished while Eisner’s power was reaffirmed and assured. From this case study, it can be ascertained that Eisner was acting in his own capacity as a man and not on behalf of the company. The Court’s decision to award Ovitz the said damages was based on the fact that despite the fact that the plaintiffs had argued that Ovitz had refused to follow the directives as issues by Eisner and that he was insubordinate, the Courts did not find any tangible evidence to prove these allegations. Indeed, Ovitz had countered the plaintiffs by correctly ascertaining that Eisner had micromanaged the Corporation by preventing him from having the relevant authority to manage the changes. Having realized the impact of Ovitz compensation plans, Eisner tried all means to eject him from the organization without success. Such attempts included Eisner’s trial to have Ovitz join Sony without success. Having failed in all ways, Eisner opted to terminate Ovitz contract without cause despite being advised by Livtrack that there was no evidence for cause and that it was imprudent since it would lead to spoiled Disney reputation and costly payments. Ovitz finally capitulated and opted to negotiate his severance package, which was based on the termination of his services without cause. As a derivative action, the case filed against the Disney Corporation arose because the corporation did not file a case against its Directors. Demands in such a case could have been excused especially in circumstances where the facts are pleaded to portray or prove that the Corporation’s directors did not exercise effective business judgment in good faith or the directors were not independent or the Directors’ actions comprised corporate waste. In most circumstances, it is difficulty to bring successfully out derivative actions since the Plaintiff ought to plead and prove the claim’s factual basis and overcome any presumptions of the “business judgment rule “in which the company’s Directors could have presumably acted in the best interest of the firm (Kolb, 2012). Unless the burden of proving the lack of independence by the Directors, or acting in their self-interest or wastefully is ascertained, the Directors will always prevail. Waste is always a very difficult standard to ascertain since corporate assets must have been given away literally in order to constitute a waste. The Delaware Supreme Court’s Decision The Delaware Court based its decision of retaining the Ovitz award on information that Eisner had in the past demonstrated either or totally no capacity of working with any known subordinate executives who aspired to succeed him like for instance the departures of experienced executives like Stephen Bollenbach, Richard Frank and Jeffrey Katzenbach from the Disney Corporation. The Delaware Supreme Court also noted that the Disney Corporation was well aware of the fact that it had to be precautious in its endeavour to hire or recruit Disney’s new President in order to increase the organization’s long-term success. According to the available information from the case, it can well be ascertained that the recruitment of Ovitz as a Disney successor and the eventual establishment to review the process of succession, was not plainly stated as was supposed to be and the decision by Eisner that the Disney Corporation should recruit Ovitz as its new president was actually not well received in entirety (Geraldine et al, 2007). In considering whether due care was exercised by Disney, the Delaware Supreme Court appeared to have answered this suspense well through stating or observing that there 3 objections by important board members whose objections, if considered during the process of Ovitz’s hiring could have overcome the current scenario. The Supreme Court also noted that the there was deficiency in the Corporation’s complaint since it failed to allege through particularized facts that indeed, the 3 objecting Directors altered their earlier reactions by anything other than through contemplation and discussion. Recommendations The world over, the Disney case has become a leading case example regarding the process that is involved when designing executive compensation in organizations. However, this case is not just about setting the real compensation amount. The setting of the both the severance and compensation amount is a puzzle for the business and thus the only genuine issues that need to be addressed is whether the Disney board was actually informed and independent as well. In addition to that, the Disney case has also become a leading case regarding succession cases in organizations. It is through the Disney case that other organizations that learn that succession is not a simple issue since it involves more processes of complex decision making unlike in the hiring process. This is attributed to the fact that the succession issue is bound to affect the future of any given corporation since it requires the corporations’ boards to exercise clear judgment as to whether the CEO should be involved and to what extent. The role of the board also involves the monitoring of arrangement after the recruitment process to ensure that the process of succession, which will still be ongoing until the final succession happens, is not derailed. In this case, it obvious that the jurisprudence of entrenchment is quite applicable and just like the necessary oversight, the process of succession must be free and open towards review by the Courts in order to ensure proper transition and implementation. It should also be noted that any change in an organization’s CEO implies a change in the organization’s control and thus a change in the board’s composition. Conclusion The Delaware Supreme Court based its decisions on the case’s major allegation being “excessiveness in payout”. This major allegation was expressed by the Plaintiff as being the failure by the Board to make itself aware regarding the contrast’s total cost especially regarding severance in which it was permitted that Ovitz could earn more through exiting rather than staying in the organization to fulfil his contract (Beasley, 2012). The Supreme Court’s view regarding the independence of the Board is reflected in the interest of Eisner to retain both the CEO and COO posts. On the other hand, the corporate jurisprudence of Delaware is made through 2 Disney contributions one being that it differentiates between the principles of corporate law and aspiration or desirable practices and the second one being that it defines the good faith (Jean-Paul, 2003). References Beasley, J. (2012). Research handbook on executive pay. New York: Edward Elgar Publishing Black, K. (2011). Business statistics: For contemporary decision-making. London: John Wiley & Sons De Young, R. (2010). Executive compensation and business policy choices at U. S. Commercial Banks. London: Diane Publishing Ferracone, R. (2010). Fair pay, fair play: Aligning executive performance and pay. London: John Wiley & Sons Jean-Paul, L. (2003). The Philosophy of Jean Paul Sarte 137–66 (Robert Denoon Cumminged., Vintage Books ed. 2003) (1965) Kolb, R. (2012). Too much is not enough: Incentives in executive compensation. Oxford: Oxford University Press Lawrence, L. (20070. Disney examined: A case study in corporate governance and CEO Succession. New York: N.Y. TIMES, Moore, R. (2011). Selecting the right manufacturing improvement tools: What tool? When? London: Butterworth-Heinemann Richard, S., & Geraldine, F. (2007). Family feud at CBS and Viacom. New York: N.Y. TIMES. Siegel, A. (2011). Practical business statistics, 6th Ed. New York: Academic Press Read More