Disney lawsuit lifts curtain on real-life Hollywood drama

This week CEO Michael Eisner tells a court his version of how Walt Disney Co. paid a severance package of $140 million - yes, that's for not working - to a former close friend after only 14 months at work.

From the testimony so far, it's a tale as packed with drama as any movie minted in the Magic Kingdom. The lawsuit by Disney shareholders has so far cast the company as a bastion of interpersonal subterfuge that would make Mickey Mouse blush.

Beyond the severance payout itself, some eight years ago, are very current concerns about Mr. Eisner's tenure. And the story goes beyond the the roller-coaster fortunes of Disney and its boss. The trial is also helping to settle some questions about the "reality" behind Hollywood dream factories and the balance of power between CEOs and the boards who hire them.

"This trial is telling us about the culture of decisionmaking" at Disney at a time when scandals have heightened concerns about corporate governance, says Georg Szalai, business editor of the Hollywood Reporter.

So far, the picture doesn't look pretty. Michael Ovitz, the former company president who got the $140 million payout, testified of Disney colleagues: "They're not particularly sensitive to human beings." He recounted projects where chief executive Eisner belittled his ideas from the top and jealous Disney executives undermined him from the bottom. Eventually, Mr. Ovitz said, "I guess you could say I got pushed out the sixth-floor window."

Mr. Eisner is telling his side of the story this week. But both, along with other Disney officials, are on the same side in the trial.

At issue is investors' allegation that the Ovitz payout deal was excessive and that his hiring was not properly scrutinized by Disney's board of directors. Also: whether Mr. Ovitz should have been fired "for cause" - averting a severance payout altogether.

Eisner told the Delaware court Monday that in 1995, the loss of a key executive and other challenges made it imperative to hire a strong deputy. Ovitz, then a talent agent whom many called "the most powerful man in Hollywood," was his choice.

But Ovitz, Eisner, and other Disney insiders never meshed. Eisner's view is that hiring Ovitz turned out to be a mistake that needed to be corrected quickly. And he said he kept fellow Disney directors fully informed of major issues such as Ovitz's hiring.

Hollywood has long been portrayed as a place where movie-set egos clash. But Ovitz painted a similarly harsh view of corner-office dealings.

In five theatrical days on the stand, he gave details of working life within Hollywood and Disney in which backbiting, infighting, and manipulation were rampant. "From the time I started in the entertainment business, every network and every studio threatened to sue every other company on a daily basis," he said.

Other witnesses had said the typical media pay package for company presidents was then $540,000. Ovitz said he took a $1 million annual salary, which "in this country is a lot of money [but] in the entertainment business it's not even a base salary for anybody."

He is not the first high-profile Disney executive to be cast aside under Eisner. Boardroom infighting in 1994 led to the departure of studio head Jeffrey Katzenberg, who won a settlement of as high as $250 million.

Eisner himself has long had publicity as one of America's best-paid, CEOs. But his decisions - from buying ABC News in 1995 to rejecting of a bid from Comcast this year to buy Disney for $47 billion - have also long been controversial. And as Disney's stock has underperformed in recent years, he has faced mounting shareholder criticism. Under pressure, he recently he set 2006 as his own departure date.

Another former Disney executive Stanley Gold testified last week that the soured relationship between Eisner and Ovitz stemmed from differences in management style. Ovitz spent money more extravagantly and sought to use more established stars for Disney movies, while Eisner was more frugal and preferred using less expensive in-house talent.

If the trial is offering glimpses behind often-closed corporate doors, it is also framing an increasingly important legal question: how to delineate and enforce lines of responsibility between boards and CEOs.

About 200 similar lawsuits are filed each year, questioning the decisionmaking of boards and managers over actions that have sent company stock prices plummeting.

One specific issue that Mr. Szalai and others say will come under scrutiny is the definition of the so-called "business judgment rule" - a widely accepted standard of corporate decisionmaking. The rule states that board members have the fiduciary responsibility to act with the shareholders' best interests - generating wealth without compromising the integrity of the company. Business experts say the rule's notions of right and wrong are hard to define. Also unclear is how boards should oversee CEOs, who are often both board members and employees paid to manage.

"This trial will likely become famous in helping to define and articulate this standard," says Daniel Posin, a law professor at Tulane University. "How careful is 'careful enough?' "

Key to assessing the answer are how Disney has expressly delineated its own oversight process between CEO Eisner and board members. Much has already been made of Eisner's alleged failure to consult with board members before offering Ovitz his hefty severance package. Whether he was obligated to, how, and when will be answers the court will likely seek.

While shareholder lawyers claim Ovitz did not deserve $140 million for so little time served, defendant lawyers can hold that making sure one of Hollywood's most powerful men does not leave your company with ill will could be seen as foresight.

"Sometimes it might be seen as good judgment to legally cut your losses and realize that sometimes putting money up front would save you in the long run in courts," says David Allan, a marketing professor at St. Joseph's University in Philadelphia who follows the industry.

Keeping other future decisions out of the hands of courts could be another reason for the court to decline to say directors acted in error. "Do we really want courts deciding what went wrong every time a company makes a decision that some shareholder thinks is questionable?" asks Mr. Allan.

If court proceedings get too detailed for comfort, or too ugly, Disney officials may decide to settle out of court.

"Disney is in a legal court at the same time it is in the court of public opinion, at a time when distrust of big American corporations is growing," says Ted Birkhahn, senior partner at Peppercom, a strategic communications agency that advises large corporations. "The company needs to do something to reassure shareholders."