Corporate Governance Lessons Learned from Walt Disney Co.

As published in Nashville Business Journal .

Michael Ovitz worked a little over a year as president of Walt Disney Co. before the two parted ways.

He was paid $140 million to leave. Some shareholders had a problem with the amount of his severance package and sued the officers and directors.

In a decision instructive to anyone in Tennessee who serves as an officer or director of a corporation, the Delaware chancellor examining the actions of Disney's officers and directors ruled they were not liable for the mistakes made in the hiring and firing of Ovitz.

Ovitz officially became president of Disney on Oct. 1, 1995. Three months later, it was apparent the marriage was not working as hoped.

Ovitz seemed a poor fit for his fellow executives.

In June 1996, Ovitz was in France with CEO Michael Eisner when it became clear that there was a problem of Mr. Ovitz being accepted into the organization.

By Thanksgiving, Eisner was arranging for Ovitz to be informed of his impending termination.

He lessened the pain by arranging for this message to be delivered during a boat trip to the British Virgin Islands. Ovitz left at the end of 1996 with a monster severance package.

Disney shareholders sued the officers and directors of Disney alleging that they had made many mistakes in the hiring and firing of Ovitz.

Officers' actions excused

As the Delaware Chancery Court that heard the 37 days of trial testimony noted, "there are many aspects of defendants' conduct that fell significantly short of the best practices of ideal corporate governance." The court then detailed many of those instances:

• Eisner hired Ovitz without the consent or authorization of his board.
• A report critical of Ovitz's compensation package was never circulated to all of the members of the compensation committee; 
• The directors spent all of 25 minutes examining the pay package. 
• Ovitz was terminated by board action on Dec. 12, 1996, without the board considering whether he could have been terminated with cause.

Still, the court dismissed the case against the directors and officers, finding that their conduct was excused by the "business-judgment rule."

As this rule has been adopted in Tennessee, the court's analysis is not only fascinating reading, but also instructive to directors and officers in the performance of their duties.

The business-judgment rule establishes a presumption that a corporation's officers and directors, when making a business decision, acted on an informed basis, in good faith and with the honest belief that their decision was in the corporation's best interest.

The effect of this rule is that the courts generally will refuse to second-guess the decisions of directors and officers, regardless of how badly that decision might turn out.

The standards of the business-judgment rule are incorporated in Tennessee statutory law: "Tennessee Courts have consistently followed a non-interventionist policy, with regard to internal corporate matters ... (and) have recognized that directors have broad management discretion. ... The rule basically states that, if any rational business purpose exists for directors' or officers' decisions, they are not liable for errors in judgment when their decisions result in an unfavorable outcome for the corporation."

Unconditional application

The business-judgment rule applies to Tennessee corporations regardless of size, notoriety or ownership.

Although the rule is modified somewhat when applied to corporations without public ownership, the general rule that courts have no interest in taking on management remains true.

Directors and officers are protected from their mistakes so long as they comply with this rule.

Disney's crew made many mistakes in the hiring and firing of Ovitz, but the business-judgment rule protected them from the lawsuit brought by shareholders.