Corporate Governance

Executive Compensation, Disney and Delaware Law (Part 2)

By J. Robert Brown

We are discussing the decision by Disney to give Michael Iger, the CEO and president a new five year contract. The terms themselves ($2 million in compensation, a minimum $10 million in bonus and 3 million stock options, vesting over five years) do not in themselves seem unreasonable.  The agreement provides, however, that if Iger leaves for "good reason," he will receive among other things all 3 million options.  The agreement can be foundhere.

The agreement provides that "good reason" includes "the failure to elect or reelect Executive as a member of the Board of Directors".  Disney was, of course, the target of the first serious effort to get shareholders to withhold votes from a director as a form of protest. Elections held in 2004 saw about 43% of the votes for Eisner as director withheld.  Perhaps in response, Disney put in place abylaw that requires directors to receive a majority of the votes cast.  Under Iger's employment agreement, however, any effort by shareholders to oust him from the board, something only likely to occur following serious shareholder dissatisfaction with his leadership, must take into account the financial costs to the Company if he resigns.  

As we have noted, majority vote provisions are ineffective.  Only one director so far has, under this standard, failed to obtain a majority vote and her resignation was not accepted by the board.  Agreements like the one with Iger make these provisions even more meaningless since their exercise may impose financial costs on the company.  

Majority vote provisions, something common in international markets, have been widely touted as an alternative to shareholder access to the proxy statement.  They are not.  And, in any event, compensation decisions that impose costs on the company when shareholders opt to vote against directors undermine their use and significance.      

Full post as published by The Race to the Bottom on February 05, 2008 (boomark / email).