Disney board exposed itself to activist intervention, but Peltz may be overreaching

Disney board exposed itself to activist intervention

Nelson Peltz, an activist investor, discussed his desire to join the Disney board in a wide-ranging conversation with CNBC’s Jim Cramer and David Faber for roughly 30 minutes on Thursday morning.

His best issue, Disney’s chronic lack of a strategy for the next CEO, was scarcely touched upon in his case.
For evidence of Disney’s mismanagement under Iger and Chapek, Peltz cited his firm’s slide presentation. His presentation, he added, will boil down to two main points: Disney’s disappointing stock performance and Trian’s proven ability to generate wealth for investors. Trian pointed out that Disney’s share price hit its all-time high in 2021 but is now trading at its eight-year low. On Thursday, the stock rose by around 3 percent.

However, Disney’s lackluster performance in 2022 reflected a market-wide drop caused by Netflix’s slowing expansion. Investors rushing into streaming services with high subscriber growth drove up Disney’s share price in 2021. Over the previous 12 months, both Disney and Netflix have lost around 38% of their value. Even more media companies’ stocks have dropped. The stock price of Paramount Global has dropped by 45%. Since AT&T’s April 8 merger of WarnerMedia with Discovery, shares of Warner Bros. Discovery have dropped by over 50%.

According to Peltz, Disney’s decision to suspend its payout during the pandemic was caused by Disney CEO Bob Iger and the board’s alleged overpayment for 21st Century Fox in 2019. However, based on Iger’s past purchase decision-making, he won’t win over many investors by asking for a seat on the board. Prior to Fox, Iger’s run of mergers as CEO included some of the finest acquisitions in the history of the media business, including Pixar, LucasFilm, and Marvel.
In a filing, Trian also criticized Disney’s direct-to-consumer strategy, stating that “despite attaining equal revenues as Netflix and having a huge IP edge, Disney’s approach is misguided.” Netflix’s streaming service began operations well before Disney’s 2019 introduction of Disney+. So it stands to reason that Netflix would generate more profit and free cash flow than Disney and any other streaming provider.

Peltz intends to launch a proxy battle, and he shouldn’t base his case against Iger as CEO on that issue alone. Instead, the board’s repeated inability to prepare for life after Iger ought to be front and center. During his first 15 years as CEO, Iger had a habit of driving away possible successors such as Jay Rasulo, Tom Staggs, and Kevin Mayer. His designated successor, Chapek, felt threatened by his presence for 18 months after he stepped down as CEO in 2020 but did not quit the firm entirely.

Now that he’s back, Iger has been given two years to pick a replacement for Disney’s current CEO by the board. If Iger’s past is any indication, succession planning is one of his weak spots.

Charles Elson, founding director of the Weinberg Center for Corporate Governance, stated, “Iger has historically controlled the succession process, but it shouldn’t be Iger’s selection, it’s the board’s pick.” Having governance concerns with succession for nearly 25 years, Disney has made itself vulnerable to activist intervention.

The succession problem is mentioned in Trian’s presentation to investors, but not until slide 27 of a total of 35 slides. Peltz bases most of his argument on Disney’s disappointing stock performance, the decision to cut the dividend, his allegation that the Fox transaction hasn’t worked, how a hypothetical deal for Sky wouldn’t have worked, and Trian’s history of increasing share value. He also suggested to CNBC that Disney “get out of the streaming industry” by not purchasing Comcast’s 33% interest in Hulu.

The recent decline in Disney stock has prompted the company to rehire Iger, a CEO who is widely held in high regard by both staff and shareholders. Additionally, Disney will shortly be introducing a new board chairman. Perhaps Peltz will have a hard time convincing investors that Iger needs Trian’s assistance with strategic decision-making so soon after returning to the helm.

It’s far simpler to argue that Iger and Disney’s board have botched succession planning time and time again. According to Trian’s presentation, Disney is “among the worst (if not the worst) of all the corporations we have engaged with” when it comes to shareholder participation.

Disney may be hesitant to have Peltz on the board because of the pressure he would put on the company to address the problem of a successor to Iger should he remain CEO for more than two years. Trian stated (on Slide 28) that between October 2011 and December 2017, the Disney board prolonged Iger’s retirement date five times.