Disney Takes a Step Backward in Corporate Governance – Combines Conflicting Roles

The Economist Magazine Columnist Call This “Mickey Mouse Governance”

Despite what Mitt Romney has said, corporations are not people.  They are organizations.  In most cases they are organizations created for the purpose of operating and capitalizing a business.  The Corporate Model, when it is operated correctly, is a very efficient mechanism for operating a business.

A Corporation is owned by its shareholders.  In small corporations these shareholders can control, manage and operate the corporation just fine.  But with large corporations comes large numbers of shareholders.  To manage the company in these cases we have created a Corporate Democracy.  It works like this.

1. Shareholders retain the right to vote on major issues, like acquisitions and divestitures.

2. For most decisions involving the Corporation, the shareholders elect a Board of Directors to represent them.  The Board selects one person to act as Chairman of the Board.

3. The Board votes on major actions of the Corporation.  For day to day operations the Board authorizes the Corporation to hire officers, including the Chief Executive Officer, the person who is in charge of operating the company.

4. The CEO then hires other person to work in the management team.

Now note that there is a clear conflict between the interests of the shareholders and the interests of the officers, including the CEO.  The shareholders want to operate the company in a way that maximizes profits.  The officers want to operate the company in a way that maximizes total compensation to the officers.  Although the officers have day to day control, the Board acts as a check on their power, and in fact sets the compensation of officers.

There is obviously a conflict of interest if the CEO is also the Chairman of the Board.  The CEO’s interests are in conflict with the shareholder’s interests.  The CEO cannot serve his own interests and shareholder interests, and should not even be on the Board.  Yet that is not the way in the U. S.; officers are usually Board members and many times the President of the company is Chairman of the Board.

The columnist Schumpeter writes of this in The Economist.

Disney’s decision to combine the posts of chairman and chief executive infuriates corporate-governance activists. They see this merging of the two roles as a step backwards, allowing the possibility of a return to the lousy governance for which Disney was notorious under Michael Eisner, Mr Iger’s over-mighty predecessor. Back then, Disney’s board might easily have been mistaken for a pair of Snow White’s dwarf pals (specifically, Sleepy and Dopey). At one point, its directors included an architect friend of Mr Eisner and a local schoolteacher.

One can see other companies where there is a problem.  For the News Corp, controlled by Rupert Murdoch, the company has had a catastrophic problem with cell phone hacking in Britain, and the company recently purchased a corporation owned by Mr. Murdoch’s daughter at a very high price.

Corporations are legal entities allowed to exist by the actions of Government.  Government can and should regulate corporations.  It would be entirely reasonable for government to require that no corporate officer serve on the Board of Directors due to the inherent conflict of interest.  Among other things it would help move corporate compensation into a more reasonable realm.  For that reason alone, though, don’t expect it to happen.