$90 Million?

How the payout to Michael Ovitz colors Disney's labor talks - and why shareholders are shocked Well, Michael Eisner has finally done it: he's pissed off a nun. Sister Betsy Clark of Philadelphia's Sisters of St. Joseph says her "dialogue" with the Disney brass is proceeding along, "but it's not enough," she says. "We need this extreme measure." The extreme measure in question is a proposed shareholder resolution -- two, really, proposed in tandem to make sure the issue is heard. The one-page, softly-worded statements ask the mighty Disney company to take account of its poorest contract workers -- those in Haiti and China and Thailand earning sometimes less than 25 cents an hour making Pocahontas PJs and Hunchback plush toys. The resolution says Disney ought to pay more, and should allow outside groups -- church groups, say -- to monitor these workers' bosses. The nuns (and some Methodists and others) would also like Disney to link executives' compensation "more closely to financial performance and social and environmental criteria," according to one proposal. They would like to see Disney publish an annual comparison of its highest and lowest-paid workers. All Disney shareholders will vote on the two resolutions at the annual meeting Feb. 25. "Pissed off" is perhaps an overstatement in describing Sister Clark's state of mind. But as Disney cuts loose its short-term president, Michael Ovitz, with a $90 million (or $100 million or $130 million) consolation prize, company executives find themselves under pressure on several fronts to justify their lavish compensation in light of Ovitz's -- and, in some minds, the company's -- non performance. A shareholder lawsuit filed in California accuses Disney CEO Eisner of "waste and spoliation of the company's resources," while the nun-backed resolutions focus an ever brighter light on Disney's foreign contractors. The company claims the lawsuit is frivolous, and the board has advised a "no" vote on the shareholder resolutions. But the outrage surrounding both issues has already dented Disney's most valuable asset--its public image. The weirdness at Disney's Burbank headquarters seem to have had little impact here in Orlando. The company's 42,000 or so local cast members are paid for their performances mostly according to minimum wage rates and simple pay scales promulgated by their various unions. For example, the Service Trades Council's bakers, chemists, cowboys and dozens of other worker classifications start at $6.58 an hour for "labor grade 3" (custodian) and top out at $13.86 an hour (a big $2.39 an hour over the average national wage for all workers), after five years of service at "labor grade 22." They also get at least half an hour, non-paid, for lunch, and time and a half for working on their day off. Disney is currently negotiating with two unions locally -- Actors Equity, representing about 350 full-time and about 250 part-time stage personnel, and the Crafts Maintenance Council, which is an amalgamation of unions in the building trades, representing Disney carpenters, pipe fitters, electricians and the like. The Actors Equity contract has been extended through April 6, and negotiations were just beginning at press time, says Carol Waaser, the senior business representative. The union's full-time singers, dancers and actors earn a minimum of about $460 per week, close to the average pay for all workers in Central Florida. Waaser chooses her words carefully when assessing the potential impact of the Ovitz payout on upcoming negotiations. "It gives immediacy to the general trend of corporate executive salaries being way out of line with what the average worker is paid," she says. "Or executive compensation, I should say. `Eisner's` salary really isn't that much, $750,000 a year." Neither union's officials would talk on the record, but sources say key issues include workplace safety and "out sourcing," the practice of skirting unionized employees by hiring outside contractors on the cheap. Over the past five years Disney has worked to reduced its local full-time work force while expanding its part-time and contract ranks to save money. An internal document reported by The Orlando Sentinel in 1994 revealed that Disney World expects these measures to save $78 million in employee benefit expenses alone by 1998. Of course, company officials back then could not have foreseen that all those savings, and more, would go to a single California employee. Disney has a reputation as a good place to work, offering excellent benefits and an exciting "team" approach to work for the right applicants. As Disney's recruiting propaganda says, people dream about working for Disney. The company likes that. Creating and maintaining such a mystique helps keep wages down, which contributes to the company's enormous profits. The squandering of such a mystique -- through overt public greed from Burbank to Burma -- is the subject of both the lawsuit and the proxy resolutions. William Lerach filed a suit in California court last month against Disney on behalf of shareholders, claiming the Ovitz payout was motivated by insiders' self-dealing. Lerach is famous and feared in the business world for these kinds of suits; he's made millions suing Silicon Valley companies whose stocks dropped. He led an effort last year to make it easier to file such lawsuits in California, but the ballot measure, called Proposition 211, was soundly defeated after businesses outspent initiative supporters. Although Disney brass brushed off the suit as a nuisance, and it is doubtful Lerach's charges will stick given that Ovitz had already absconded with the money before the suit was filed, the charges carry a political resonance. Ovitz was "terminated" by Disney three weeks ago after frankly acknowledging that, despite his title of president, he didn't actually do anything. "Michael Eisner has been my good friend for more than 25 years and that will not change," Ovitz said in a statement announcing his departure (then characterized as "mutual") on Dec. 11. "But it is important to recognize when something is not working. I hope that my decision to leave will eliminate an unnecessary distraction for a great company." The dynamic executive, founder and former High Epopt of Creative Artists Agency, the Hollywood talent house that changed the face of the industry, was said to be bored and frustrated. He really wanted to work. He had even spoken to people at the Sony Corporation in search of greater challenge. But Ovitz is a much smaller fish than that, and arguably much smaller than his severance package suggests. Ovitz's one duty was to open China to more Disney influence, and his ineptness is perhaps best illustrated by the Kundun conundrum of two months ago, in which Disney backed a Martin Scorsese film about the Dalai Lama in defiance of Chinese threats to ice the company's Far East ambitions. It is likely that Ovitz stood up for Truth, Justice & etc., in this incident and equally likely that the hard-nosed, bottom-line man Eisner resented the public outcry about the flap. Much easier to drop or alter the film quietly in deference to the dictators; maintain image, increase profits. The Lerach suit presents a derisive rendering of Ovitz's vitae. CAA, the company through which Ovitz became the legendary "most powerful man in Hollywood," was a tiny shop compared to Disney, one which Ovitz ruled as a capricious dictator. "Despite Ovitz's status as a relative neophyte in the corporate world," the suit says, "Disney signed Ovitz to an ill-conceived, long-term Employ-ment Agreement, which ... permitted Ovitz, an untested executive used to being the unquestioned leader of a much smaller, less diversified business, to leave Disney after only a brief tenure at the Company with a severance package equal to or greater than the benefits to which he would have been entitled had he served out the full term of the Employ-ment Agreement, which was scheduled to run through Sept. 30, 2000." (Emphasis in original). Ovitz's salary was $1 million a year, and he was given the option to purchase 3 million shares of Disney stock at the price it had just before he was hired in October 1995 -- about $57 a share. Ovitz's shares would "vest" -- allowing him to cash them in -- in 1998, 1999 and 2000; a million shares per year. In agreeing to give Ovitz all his stock options now, the Employment Agreement "gave him no real incentive to provide Disney with long-term services or to create significant value for the company," the suit says. But there's more. Ovitz got all his base salary up front through the year 2000, plus a presumed annual bonus, for each of the next three years, of $7.5 million, plus a bonus for last year, despite the total lack of any duties. All told, the cash value of Ovitz's severance was $38 million -- not including the stock options, currently worth another $39 million. But if he holds onto the stock, and it increases in value, which is likely, Ovitz' options alone could be worth more than $90 million, boosting the total deal to something over $120 million. To put this in perspective, consider: Ovitz was employed by Disney for 428 days. Now, presume that they work virtually every day (as high flying executives often do), most days for 10 hours or more. On that basis Ovitz's wage for the past year, if he cashes in immediately, figures to $17,990.70 an hour. Disney's response: Lerach should have filed his suit last year, when the employment agreement was filed with the Securities Exchange Commission, where anyone could read it. How could such a contract come into being? It helps if you are pals with the boss, and the boss controls the board of directors. In the corporate world, a chief executive officer, like Eisner, is charged with running the company's day-to-day operations, while the board is supposed to watch out for the shareholders, who actually own the company. But in recent years, some powerful chief executives have "captured" their boards, stacking them with cronies or controlling them by means of employment and bonuses. Although most observers don't believe the Disney board is so conflicted, the suit offers evidence that it is. For example, Disney paid Irwin Russell $250,000 to negotiate Ovitz's contract. He also serves on the board and, according to the suit, "has long served as Eisner's personal attorney." Roy Disney, a board member and the late Walt's brother, earns $350,000 a year as head of Disney animation. But his 1995 bonus, as decreed by Eisner, was $550,000. His stock options for the year -- again, awarded at Eisner's discretion -- are worth between $6 million and $15 million. Stanley P. Gold sits on the board and appears to be an "outside" director, with no ties to the company. He is president and CEO of Shamrock Holdings, a real estate development company. But that company is actually owned by the Disney family, according to the suit. Sandford Litvack, an attorney for Disney and current senior vice president and chief of corporate operations, has served as a subordinate to Eisner since 1991; his $1.6 million 1995 bonus is contingent on Eisner's good will. Another board member, Robert A.M. Stern, is better known as architect to Disney, in which capacity his company has been paid millions in fees, essentially at Eisner's discretion. The Ovitz contract contained a clause, typical to these arrangements, that made him promise to use his talents on behalf of Disney exclusively. Another clause would void the lucrative severance arrangement if Ovitz were to be fired "for cause" -- meaning he did something to break the contract. The Lerach lawsuit says Ovitz did in fact abrogate the agreement by looking for a job with Sony, meaning he should have been fired and the terms of his departure should have been renegotiated sharply downward. Eisner did not do this, Lerach charges, because he wanted to save himself the embarrassment. Indeed, the idea that Eisner can be motivated by shame drives the two proxy resolutions, proposed and backed by religious groups including the United Methodist Church pension board. The one offered by Sister Clark would require Disney to fight against sweatshops by ensuring workers get adequate wages and work reasonable hours, promoting their right to organize and working with non-government groups to monitor wages, working conditions and rights. This is the plea made most vociferously by Charles Kernaghan, whose tiny National Labor Committee shines the spotlight on sweatshop abuses and tries to hold large corporations accountable for their use of them. On Dec. 17 "NBC Dateline" aired an investigation that substantiated Kernaghan's claims about Disney subcontractors in China and Indonesia, documenting that in those countries, most workers making Disney-licensed toys are teen-age girls working 12 hours and more per day, packed into dormitories and paid between 10 cents and 25 cents per hour. Disney said it recognizes the issue as important and that the company already imposes strict conditions on its licensees -- a claim that, if true, would make such exposés impossible. The other proposal, sponsored by the Sisters of Blessed Sacrament of Bensalem, PA., would require Disney to make a report that would among other things compare its executives' compensation with the pay of Disney contract workers domestically and in three low-wage countries including Haiti. No one expects either resolution to pass. The idea is to force the executives into recognizing their obligation to more than the bottom line. In order to be effective, the nuns need publicity. "I think the most critical issue is image with Disney," says Sister Clark of Sisters of St. Joseph, a 10-year veteran of corporate conscience campaigns. "The companies that depend so heavily on their public image are threatened by groups that are disappointed by their moral stand, and they do not want to have any desecration to their moral image." To be placed on the proxy ballot again next year, the amendment needs to draw the support of just 3 percent of the shareholders. "We `would` consider that a victory," says Sister Clark, whose order owns a minuscule 31,000 Disney shares. "The Ovitz scandal is going to upset people who don't even have an interest in social responsibility." Says Disney: The company's policy mixing base salaries, discretionary bonuses and stock options is the right one. This sort of flat response is typical of corporations questioned this way, says Conrad MacKerron, director of social research for Progressive Asset Management, the Oakland, Calif., brokerage house that manages about $600 million worth of stocks for "socially responsive" investors. MacKerron has taken the lead in the Disney negotiations, and says that while the company's public statements are mostly denials, Disney has begun a serious internal review of its foreign outsourcing program. "They pulled out of Burma," he notes (Disney spokesmen had denied that the move was a response to sweatshop criticism). "We filed `the shareholder resolutions` in September. They began a review in October, but it takes time. They told us they may have a recommendation in June." The nuns' shareholder resolutions note that Eisner has received $228 million in total compensation since 1993. Disney said nearly 89 percent of that was from stock options that were so valuable only because all shareholders had prospered during his management. Counting performance-based bonuses, nearly 98 percent of Eisner's compensation was related to growth in shareholder value, Disney said. The company's proxy statement, released last week, further states that comparing wages of its executives to manufacturing workers wouldn't be productive. Disney executives run the company in a highly competitive industry, have enormous responsibilities, and contribute greatly to growth of all the shareholders' value, Disney's spokesmen say. Its stock price slipping, Disney announced with fanfare on Jan. 9 that Eisner's contract has been extended through September 2006. His base salary, which has not changed since he was hired in 1984, remains at $750,000. Eisner's 1996 bonus was just $7.9 million, a 1.5 percent cut from his $8 million 1995 bonus. But the contract affords Eisner a rich new package of bonuses tied to growth, plus 8 million more stock options. With these, Eisner will hold unexercised options worth some $364.4 million. "The contract follows the pattern of his previous agreements by making rewards dependent on the company's future performance," said Ray Watson, chairman of the Disney board's compensation committee, in a statement. "We believe this type of arrangement will prove to be in the best interests of the stockholders in the future as it has been during the past 12 years of Michael's stewardship."
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