George Mannes

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Disney Settlement Doubles as Flashback

George Mannes

On Monday, Disney settled a Securities and Exchange Commission enforcement action arising from charges that Disney failed to disclose certain related-party transactions between the company and its directors, and didn't disclose certain compensation paid to a director.

The settlement carries no fine or other penalty. Disney agreed to cease and desist from violating federal securities laws pertaining to proxy solicitation and periodic reporting.

Nearly all the directors at issue are no longer on the company's board, and Disney has spent much of the year tightening its corporate governance standards. Still, the settlement serves to remind investors of the accusations of clubbiness and worse that for many years nipped at the heels of CEO Michael Eisner.

A Disney spokesman declined to comment on the settlement Monday.

Disney's shares, which have climbed steadily from an August low of $20.88, dropped 3 cents Monday to trade at $27.34.

Along with the Delaware trial revolving around agent Mike Ovitz's ill-fated employment by Disney in the mid-1990s, Monday's news serves as one more sign that Disney's presidency and board of directors isn't quite as imperial as it used to be.

At issue in the settlement were Disney's previously publicized failures to disclose certain financial ties to directors -- ties that in some cases cast doubt on certain board members' status as independent directors.

From 1999 through 2001, the adult children of three Disney board members -- Stanley Gold, Reveta Bowers and Raymond Watson -- were employed by Disney, receiving compensation in excess of $60,000, the threshold amount under securities law requiring Disney to disclose employment. Disney didn't disclose employment until August 2002.

The wife of another director, John Bryson, earned more than $1 million annually working for a company 50% owned by Disney. Bryson joined Disney's board in September 2000, but his wife's employment wasn't disclosed until August 2002.

Disney also didn't disclose its relationship with Air Shamrock, a business owned by onetime director (and vice chairman) Roy Disney, and managed by Gold. Roy Disney regularly traveled on Air Shamrock planes for Disney corporate business, with Air Shamrock billing Disney for those flights. Disney didn't disclose the payments to Air Shamrock until December 2002.

Finally, Disney didn't disclose until December 2002 that for years it had provided director Thomas Murphy office space, secretarial services, a leased care and a driver, based on an oral agreement between Murphy and Eisner when Disney in the 1990s acquired Capital Cities/ABC, of which Murphy was chairman. Disney valued these services at $200,000 a year, according to the SEC.

In a sign of how tangled Disney's board has been over the years, former directors Disney and Gold -- whose related party transactions weren't disclosed by the company -- subsequently attacked Eisner for the chumminess he cultivated with other board members, and attacked Disney for its weak oversight of Eisner.

The failure to disclose the employment of the children took on added significance, says the SEC, because Disney represented that these were independent directors on Disney's board. In April 2002, Disney publicly revised the guidelines for independent directors, announcing that directors with immediate family members employed by Disney would not be considered independent.

But it took more than three months for Disney to disclose the employment of these directors' children -- a disclosure that under Disney's guidelines at the time rendered them nonindependent. (Under subsequent guidelines Disney adopted in December of that year, employment of children, except as executive officers, was eliminated as a criterion for determining directors' independence.)