A masked family walks past the Magic Kingdom’s Cinderella Castle at Walt Disney World in Lake Buena Vista, Florida.
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Activist investor Nelson Peltz plans a proxy fight for a seat on Disney’s board.
Disney offered Peltz, co-founder of Trian Fund Management, a board observer role and asked him to sign a standstill agreement, which Peltz refused. Here are our thoughts on the situation.
Council observer position offer
At times, the board’s observer position can be beneficial, especially for investors who do not have much board experience and are unlikely to regularly participate in board discussions. But offering Peltz a board observer position is like telling Whitney Houston, “You can join the band, but you’re not allowed to sing.” There is no way that Disney thought for a second that Peltz would accept this offer, and he should have.
Why does this happen?
I wonder why Peltz started this proxy fight in the first place and why Disney is resisting it. Peltz got the position when Bob Chapek was CEO, and there was likely a plan to replace him with someone Peltz had already identified. It would have been a great activist plan, but it fell through a week later when Disney announced it was replacing him with former CEO Bob Iger. Knowing Tria’s history and process, the firm must have been working on this plan for months, waiting for the perfect time to make its position. Unfortunately, all of Tria’s hard work to develop its plan was somewhat wasted, but then the firm had to regroup and develop a different approach in light of the new circumstances. This plan should not have included opposition to Iger. Although Trian now says he’s not opposed to Iger as CEO, the firm opposed him at first, making it very difficult for the board to agree on a deal for Peltz for the board. After that, a strong board with a strong CEO—admittedly a short-term CEO—shouldn’t have a problem with an experienced shareholder who might have an unpopular opinion in the room. In fact, the board should welcome it.
Trian made a presentation making his case. In proxy fight presentations, each side uses facts and data to paint a picture that benefits them, and often these claims do not stand up to scrutiny. For example, Trian argues with Disney’s total shareholder return under Iger: 270% vs. 330% S&P 500 at the same time. Not sure how this compares to industry, but if industry revenues were more favorable to Trian, they would use them. As British economist Ronald Coase said: “If you torture data long enough, it will admit anything.” In this case, it can be said that Bob Iger is a bad CEO for Disney. Trian also disputes Iger’s decision to buy Fox, which in retrospect was a terrible decision. But he must also include in that analysis Iger’s decisions to buy Pixar, Marvel and Lucasfilm, which have brought Disney more than $33.8 billion in global box office revenue, and billions more from merchandise and theme park expansions.
Nelson Peltz as director
All of these criticisms of proxy-fighting tactics and strategy aside, and no matter how we torture the information that Peltz records as a director, he should certainly be on Disney’s board. He is a major shareholder with a strong track record of creating value through operational, strategic and capital allocation decisions. No, Peltz won’t be the most valuable director when it comes to deciding who will star in the next blockbuster Disney movie or what attractions to build at the theme parks—boards depend on management for those ideas. But he will be the most prepared and valuable board member when it comes to conducting financial analysis of the various strategic and capital allocation opportunities available to Disney and advising the board on what decisions are best for shareholders. Peltz also proved to be a valuable director in helping management teams reduce operating costs and improve margins, which Disney could leverage. And if his past is any indication, he’ll probably be good friends with Bob Iger by the end of his term.
Chance to win
Unfortunately, I think the deck is stacked against Peltz here. Getting large institutional investors to vote against the board of a well-known company like Disney is an enormous effort. This task becomes even more difficult when the company has just removed the CEO and replaced him with a respected previous CEO and replaced the chairman. In addition, Disney recently settled with another high-profile activist, Third Point, who made the same proposals as Tria. I believe Institutional Shareholder Services and large institutional shareholders will want to give this new team at least a year to work on their plans before supporting more changes at the company. And I don’t think a universal proxy would make that much of a difference in a proxy fight for one director on a single board. However, while I don’t have Disney stock in my fund, my 10 and 12-year-old have a small amount of stock, and when their ballots arrive in the mail, we will be voting for Nelson.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving the ESG practices of portfolio companies.