From the upcoming Nov. 10 issue of
Fortune MagazineIn fall 1996, Michael Eisner, the chairman and CEO of Walt Disney Co., decided he had made a big mistake. Just a year earlier he had hired Hollywood power broker Michael Ovitz as Disney's president. Ovitz had flopped, badly. The men needed to find a way to disengage without unduly embarrassing either of them. So, they used money. Lots of money.
For 15 months of labor, [Ovitz] got $38 million in cash, plus stock options valued at $101 million. That package caused an uproar and triggered a lawsuit by Disney shareholders, who want their money back. And well they should - that was 10% of Disney's net income that year.
In a ruling issued in May that has become must-reading in corporate boardrooms, Delaware judge William B. Chandler III said that the suit can go to trial. His reason: The facts, as alleged, indicate that Disney's directors failed to make a good-faith effort to do their job when they approved Ovitz's contract and once again when they allowed him such a lucrative going-away present.Some of the facts here show just how bad the "good-faith" effort was.
According to the complaint, Eisner was advised by three directors, Stephen Bollenbach, Sanford Litvack, and Irwin Russell, not to hire his old friend Ovitz. He opted to do so anyway. And he hired Russell, his personal lawyer, to represent Disney in its negotiations with Ovitz. Russell was paid $250,000 for his work. Russell then sat on the compensation committee that approved Ovitz's hiring based on a summary of the deal.It's almost like that line in
Dave where Charles Grodin is incredulous at the way the federal government is run, that he'd be fired if he used their accounting tactics in the real world. Well, it looks like those tactics are actually used in the real world.
I don't remember reading about this in May; but it is potentially huge. The best way to cut
ridiculous executive compensation down to size is to hold the people who approve (or look the other way) them responsible. This is a first step in the right direction.