COPENHAGEN BUSINESS SCHOOL
Corporate Governance & Finance (CFSAO1006E +
CFSMO1115E)
A Corporate Governance Review of
Walt Disney Co
48-hour home assignment (UC)
Summer 2024 – ordinary exam
M.Sc. Finance & Strategic Management
Student number: S145818
Date of submission: 15/05-2024
Number of characters incl. spaces: 11.365
Number of standard pages: 5
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Company analysis
The Walt Disney Company (henceforth Disney) is a diversified global entertainment company,
operating in three major segments: Entertainment, Sport, and Experiences (Yahoo! Finance, 2024a).
With a focus on unparalleled storytelling, Disney creates value through linear cable TV, alongside
managing theme parks, streaming services, merchandise, and intellectual property licensing (Yahoo!
Finance, 2024a). Positioned as an industry leader, Disney focuses on sustaining growth by
diversifying into new realms, notably streaming (The Walt Disney Company, 2024a). Despite
encountering market stagnation, Disney pursues long-term profitability through aggressive costcutting and bolstering direct-to-consumer revenue (The Walt Disney Company, 2024a). Competing
with giants like Netflix, as well as major studios, e.g. Warner Bros. and Comcast, and theme park
operators, Disney faces significant challenges, particularly in streaming profitability and operational
efficiency (Brown, 2023; Guttmann, 2023). While maintaining a strong capital structure, Disney's
television business confronts revenue stagnation and declining profits due to industry shifts (Brumley,
2023).
Company performance
Comparatively, Disney's stock performance against market indexes (S&P 500, Dow Jones Industrial
Average, NASDAQ Composite) indicates consistent underperformance (Appendix 1.1). Its stock
price movements have become stagnant, indicating a lack of significant growth. Comparing Disney's
stock price to industry peers such as Netflix, Warner Bros., and Comcast shows that while all follow
a similar trajectory, Netflix outperforms the others, suggesting that Disney faces stiff competition
within the streaming industry (Appendix 1.2). Despite increasing revenue, Disney's operating income
is slowly deteriorating (Appendix 1.3; Appendix 1.4). Additionally, Return on Investment (ROI) has
remained relatively steady but recently shows a downward trajectory, indicating decreasing
profitability due to escalating expenses (Appendix 1.6). The decline in Earnings per Share (EPS), in
comparison to industry peers, raises concerns about Disney's earnings potential and governance
mechanisms, signaling subpar performance against expectations (Appendix 1.7). However, in terms
of ESG metrics, Disney's ratings depict average performance compared to peers, with notable focus
on social initiatives such as employee education and Science-Based Target Initiative (STBi)
commitment (Appendix 1.8; The Walt Disney Company, 2024b).
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Corporate Governance mechanisms
Corporate governance comprises a collection of mechanisms designed to address agency issues
(Thomsen & Conyon, 2019).
Ownership structure
The ownership of Disney is mainly institutional (Appendix 2.0). Institutional investors typically
follow passive investment strategies and adhere to regulatory demands for voting, often guided by
proxy advisers; they prioritize shareholder value creation, and rarely partake in shareholder activism
(Thomsen & Conyon, 2019). When identifying the largest owners of Disney, it is prominent that there
is no controlling stakeholder (Appendix 2.0). According to La Porta at al. (1999) the 10% level has
been broadly used as a cut point to test the difference between dispersed and concentrated ownership
structures because it provides a significant stake. Furthermore, market-based systems are
characterized by low ownership concentration, which is also the case of Disney (Thomsen & Conyon,
2019; Appendix 2.0).
Board composition
Disney's corporate governance structure primarily resembles a one-tier system, with a 12-member
board elected by shareholders (The Walt Disney Company, 2024a). The board comprises mainly US
nationalities, averaging 61 years old, with approximately 42% being women and possessing diverse
backgrounds ranging from engineering to law (Appendix 2.1). While Disney asserts that 11 board
members are independent, the UK Governance Code would deem three of the directors dependent
(Thomsen & Conyon, 2019); the fact that Everson and Lagomasino serve on the Coca Cola board
implies cross-directorships or significant connections with other directors, and Gorman’s substantial
ownership of Disney shares imply that a personal financial interest in the company may influence his
decision-making as a board member to a larger extent (Lin, 2024; The Coca-Cola Company, n.d.).
Board independence is argued to be a central driver of CEO turnover (Thomsen & Conyon, 2019). In
the case of Disney, where CEO tenures have been unusually long, lasting from 2005 to 2020 and
resuming in 2022 after the replacement of Chapek, it is plausible that a lack of board independence
may have contributed to these prolonged tenures. (The Walt Disney Company, 2024c). In the board
of Disney, there is no duality, i.e. the CEO is not the chairman of the board (The Walt Disney
Company, 2024c).
Incentive structures
The Compensation Committee strongly advocates for a pay-for-performance model (The Walt Disney
Company, 2024a). In the fiscal year 2023, 96% of Iger's targeted total annual compensation was
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variable based on company and stock price performance, while non-executive management's portion
was 85% risk based (Appendix 2.3). Incentive structures aim to align shareholder and managerial
interest as they address both of the moral hazard and the adverse selection variety (Thomsen &
Conyon, 2019). The annual compensation comprises of a fiscal performance target where actual
performance payout is determined as a percentage of the target (Appendix 2.4).
Corporate Governance Issues
This section applies extended agency theory which broadens the scope of traditional agency theory
to encompass various agency relationships within an organization (Thomsen & Conyon, 2019).
Agency problem type 1
The type 1 agency problem arises from the divergence of interests between shareholders and
managers in corporations with a separation of ownership and control (Thomsen & Conyon, 2019).
The debate over Disney's acquisition of 21st Century Fox in 2019 reflects differing views on its value
creation versus empire building. While some see strategic positioning in the streaming landscape,
others criticize potential overpayment and diversion from core objectives, especially considering its
impact on Disney's financial health, and its contribution to a larger portfolio of declining linear cable
TV channels (James, 2023). Additionally, the proxy fight signals shareholder dissatisfaction with
company performance (Spangler, 2024b). Despite investors voting to reelect all 12 company-backed
board members, Peltz's ability to gather 31% of the votes indicates significant shareholder
dissatisfaction and underscores broader pressure for improved performance (Spangler, 2024b). This
shareholder activism demonstrates the influence shareholders can exert despite their limited
ownership stakes (Thomsen & Conyon, 2019).
In 2023, Iger's compensation amounted to $31.6 million, which appears excessive when compared to
industry peers such as Netflix and Comcast (Spangler, 2024a). CEOs of Netflix and Comcast each
earn $40 million and $35.47 million, respectively (Spangler, 2023; Spangler, 2024c). However,
Disney's net profit margin as of December 31, 2023, is significantly lower at 1,9%, compared to
Netflix's 18,42% and Comcast's 12,64% (MacroTrends, 2024b). This contrast suggests that Iger's
compensation is disproportionately high relative to Disney's financial performance vis-à-vis its
competitors – a criticism also pointed out by Peltz (Trian Partners, 2024). Moreover, with a significant
portion of Iger's compensation tied to performance and his contract set to expire in 2026 (Spangler,
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2024b), there's a valid argument that he may prioritize risk aversion over potentially value-creating
strategies, favoring a higher stock price upon retirement.
Agency problems type 2
The agency problem 2 occur from conflicts of interest between majority and minority investors,
reflecting divergent powers within the company (Thomsen & Conyon, 2019). While the absence of a
majority investor may suggest a lack of this agency problem, the case of activist investor ValueAct
and Blackwells emphasizes its relevance (Spangler, 2024b; Spangler & Yossman, 2024). ValueAct's
dual role, supporting Disney's board while engaging in an "information sharing" agreement and
maintaining financial ties to Disney through fee collection, presents a clear conflict of interest beyond
standard shareholder relations (Spangler, 2024b). This conflict involving ValueAct, Disney, and
Blackwells illustrates the divergence of interests among investors, as Blackwells seeks to steer the
company towards enhanced shareholder value creation, only to find its efforts blocked by ValueAct's
board support, fueled by financial entanglements (Spangler, 2024b).
Shareholder-stakeholder agency problems (type 3)
Type 3 agency problems arise when shareholders prioritize their own interests over the welfare of
stakeholders (Thomsen & Conyon, 2019). As an example, the decision to cut costs and eliminate jobs,
following the aftermath of the Fox deal, prioritizes shareholder interests at the expense of stakeholder
welfare (James, 2023). Similarly, the conflict between Disney and its stakeholders regarding the
“Don't Say Gay” bill exemplifies type 3 agency issues. This demonstrates the tension between
shareholder interests, such as maintaining political neutrality to protect financial interests, and
stakeholder welfare, including advocating for social justice issues that align with the values of Disney
employees and consumers (Blair, 2022).
Succession planning
As represented in the 4S model, succession planning is an essential task of the board (Thomsen &
Conyon, 2019). Iger’s, unusually long, tenure carries the risk of fostering status quo bias and
overconfidence bias (Thomsen & Conyon, 2019; Kahneman, 2013). The unanticipated dismissal of
Iger's successor, Chapek, stemming from a political discord, led to Iger’s reinstatement as CEO,
indicating a lack of foresight (Allen, 2024; Bernstein, 2022). Peltz's criticism of the board's succession
management, coupled with concerns regarding Iger's impending departure in 2026, underscores the
board's failure in this fundamental duty (Spangler, 2024a; Trian Partners, 2024). This instance of
board inertia does not only expose a deficiency in current succession strategies but also casts doubt
on the board's capacity to effectively manage future transitions.
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Recommendation
It is evident that Disney is facing several challenges that may impact its long-term performance and
shareholder value creation. The underperformance of Disney's stock compared to market indexes and
industry peers, coupled with stagnant stock price movements, indicates a lack of significant growth
potential. Additionally, declining operating income and a recent downward trend ROI signal
decreasing profitability despite aggressive cost-cutting measures. Additionally, concerns arise
regarding the independence of certain directors and the effectiveness of succession planning,
highlighted by the unusually long tenure of former CEO Iger and his reinstatement following the
dismissal of his successor causing for uncertainty about board competencies. Considering these
challenges and opportunity costs, EPF should divest its Disney shares and consider investing in
market index funds instead.
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Appendix
1 Company performance
1.1 Disney stock price compared to market index
(Yahoo! Finance, 2024b)
1.2 Disney stock price compared to industry peers
(Yahoo! Finance, 2024b)
1.3 Revenue compared to industry peers
(MacroTrends, 2024)
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1.4 Operating income compared to industry peers per
(MacroTrends, 2024)
1.6 Return on investment compared to industry peers
(MacroTrends, 2024)
1.7 Earnings per share compared to industry peers
(MacroTrends, 2024)
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1.8 ESG performance overview
KnowESG (2024)
2 Corporate governance mechanisms
2.0 Ownership structure
(Yahoo! Finance, 2024c)
2.1 Board composition
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(The Walt Disney Company, 2024a)
*holds cross-directorships or has significant links with other directors through involvement in other
companies or bodies - Everson and Lagomasino both service on Coca Cola board (The Coca-Cola
Company, n.d.).
** Owns a great amount of shares in Disney (Lin, 2024).
2.3 Compensation at risk
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(The Walt Disney Company, 2024a)
2.4 Incentive targets and compensation
(The Walt Disney Company, 2024a)
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