In today’s Finshots, we talk about the lengthy proxy battle at Disney and tell you why its shareholders had been in a tug of war over who should be on the Board (of Directors).
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The Story
Disney just won a Board battle against its critic Nelson Peltz.
Wait… Who’s Nelson Peltz?
Well, he’s Hollywood actress Nicola Peltz’s dad. But at Disney, he’s an activist investor.
No, he’s not fighting for the rights of Disney employees, if that’s what you thought. Rather, he's a minority shareholder who has been campaigning against the management to pressure them into changing how the company is run. That’s where the term ‘activist’ comes from.
And Nelson Peltz has been raising his voice against Disney for over a year. He has been upset about its financial performance.
See, Disney pumped big money into streaming over the years. It was competing with the might of Netflix and needed to keep churning out content. And since it’s also in the movie production business, it needed to keep churning hits on that front too. But the grouse is also that it overpaid for 21st Century Fox (Fox). And its costs and debt skyrocketed since 2018.
Obviously, that took a toll on earnings at Disney. For context, their earnings per share dropped by as much as 50% between 2018 and 2022.
And Peltz was also furious with Disney’s succession planning. He believed the question of “Who next after the current CEO?” wasn’t being answered satisfactorily. You see, its now-CEO Robert Iger (popularly known as Bob Iger) has been at the helm of the company for nearly two decades. In fact, as of today, Iger has delayed his retirement 5 times, when he was originally supposed to retire in 2015!
Even his brief exit as CEO in 2020 didn’t work out, as his successor Robert Chapek (or Bob Chapek) pleased neither Iger nor the shareholders. And with the share price under pressure, Iger stepped back into his CEO chair two years later.
So you can see why Peltz was screaming about the lack of a succession plan.
And to shake things up at Disney, he picked up a stake in the entertainment firm through his hedge fund Trian Fund Management.
And Trian made a simple demand ― give Peltz and a former CFO of Disney a place on the Board of Directors so that they can salvage Disney’s disastrous destiny.
Now these demands sort of rattled Disney’s shareholders. Maybe because Peltz had done similar things at biggies like P&G (Procter & Gamble) and PepsiCo earlier.
So Disney decided to put its own plan in motion to convince shareholders not to back Peltz. It reinstated dividend payouts. It began a full reorganisation of its movies and television studios in such a way that content decisions and financial performance would go hand in hand. It began to cut losses in streaming. And the big one — it decided to slash 7,000 jobs and reduce its bills by a whopping $5.5 billion.
And with all these changes, Peltz decided to back off a bit.
But it didn’t matter. 2023 was Disney's worst year at the Box Office. It was the first time since 2014 (excluding the pandemic) that none of its movies made it to the billion-dollar club. Maybe viewers were tired of the same old superhero wine being served in a new bottle.
In the meantime, the top three global hits Barbie, The Super Mario Bros Movie, and Oppenheimer, were all made by Disney’s rivals.
Disney’s stock price crashed to an 8-year low too.
And if you haven’t guessed what happened next, Peltz was back with his activism at Disney. This time with more power, because here’s the twist.
Remember we told you that Disney fired some employees to cut costs?
Well, one of them was Isaac Perlmutter. He was Marvel Entertainment’s chairman and one of Disney’s biggest shareholders. You can imagine he wasn’t pleased at being laid off. So he probably decided to become an Avenger for real. Because the next thing you know, he entrusted Trian with the voting rights of his Disney shares. He'd gotten this big stake when he sold Marvel to Disney for $4 billion in 2009.
And this only made Peltz’s campaign stronger.
Armed with these voting rights, his hedge fund went after Disney’s management. And that culminated into a lengthy proxy battle or a fight that happens when shareholders use their proxy votes to challenge a company’s management or elect someone new to the Board.
Peltz wanted a proper succession plan freeing Disney from Iger. He wanted Netflix-like margins of 15-20% by 2027 by improving customer engagement and experience. And he wanted to improve Disney’s theme park business by addressing competition from others like Universal Studios.
That would ensure that Disney's flywheel would actually keep going.
Sidebar: The Flywheel effect is a concept developed in the book Good to Great (2001) by business legend Jim Collins. A flywheel is a massive wheel that takes a lot of effort to start spinning. But once it does, it picks up momentum almost by itself. In business, once a sales cycle or Flywheel starts to take effect, each element increases, taking on a life of its own.
And this is how Walt Disney had imagined that Disney would make money way back in 1957. Simply put, Disney thinks beyond the Box Office while creating content. If this content becomes a hit, it takes the form of merchandise, comics and even a place in Disney’s theme parks through franchisees, creating a sustainable vicious circle of revenue generation.
But Disney’s Board didn’t think that Peltz and his team had the experience that the entertainment industry required. And that meant that they fought tooth and nail against Peltz, spending billions of dollars in the process to convince shareholders to vote in favour of Disney.
And last week, Disney tasted sweet success. Peltz was defeated.
But the battle is only half won. Disney now needs to prove to its shareholders that its incumbent management and Board are capable of turning around the House of Mouse. If not, it could be asking for another proxy drama from activist investors like Peltz. And you bet Disney can’t afford to squander billions of dollars more on boardroom battle again.
Until then…
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