Corporate Governance

Executive Compensation, Disney and Delaware Law (Part 1)

By J. Robert Brown

We couldn't help but notice that Robert Iger, the CEO and President of Walt Disney Corporation, recently received a five year contract.   According to Disney's Current Report on Form 8-K filed on Friday, the contract replaced an existing one that would expire in 2010.  The new agreement provides for a $2 million base salary with a bonus of "no less than" $10 million, an increase from $7.25 million in the prior agreement.  He also receives the right to 3 million opitions, with an exercise price of $29.505, the average of the high and low trading prices of the Company’s common stock on January 31, 2008.  The options have a five year vesting schedule, with 500,000 vesting ech of the next four years and the final million vesting on the 5th anniversary of the grant date.  The contract itself can be foundhere.

Essentially, Iger gets these benefits, including the unvested stock options, if he quits for "good reason."  Good reason is defined in the agreement and includes some standard, reasonable provisions such as a reduction in any of his compensation rights,  a material reduction in his duties and responsibilities, the assignment of duties inconsistent with his position, or the relocation of his principal office more than 50 miles from Manhattan. 

There are, however, two provisions of particular interest.  Good reason includes "the removal of Executive from the position of President of the Company other than in connection with the appointment of another person who is acceptable to Executive to serve as President of the Company".  In other words, if the board hires a president, Iger can resign and be paid the compensation under the agreement. 

The dynamics of a board of directors already makes it unlikely that a board would ever designate an executive officer over the objections of the CEO.  Given that this was unlikely to occur, the veto for Iger was more about having a right to veto the search process.  In other words, the board will essentially need his consent to begin searching for a president.  Since the president will likely be a possible successor, this effectively allows Iger (without any standards other than his own determination of acceptable) to stop the search for a possible successor, at least one that will serve as the second in command.

How could such a provision be in the best interests of shareholders?  Indeed, this is nothing new for Disney.  Michael Eisner served as president and CEO, no doubt in part to avoid having to designate a successor.  It again shows the lack of standards in the executive compensation area and the weakness in relying on independent director rather than substantive review to protect shareholders.  We will pick this topic up tomorrow. 

Full post as published by The Race to the Bottom on February 04, 2008 (boomark / email).