On November 20, 2022, Bob Iger returned to the CEO role at Disney after retiring from the company as CEO and chairman on December 31, 2021.
He started his Disney journey in 1974 when he joined ABC. Titles he accumulated along the way include head of ABC Entertainment, president of ABC Television Group, senior vice president at Capital Cities/ABC, and later executive vice president, president/chief operating officer, and chairman of the ABC parent corporation.
With the sale of ABC to Disney in 1995, Iger’s role became more focused on Big Mouse with positions as president of Walt Disney International. Promoted again, he became the president/chief operating officer for Disney, working as Michael Eisner’s right-hand man.
Following the board turmoil that led to Eisner’s ouster, Iger assumed the top role of CEO at Disney in 2005, a role he held for sixteen years until his retirement during the Pandemic lockdown when it seemed as if everyone was stuck at home watching movies.
One year later, in 2022, the Board pushed out Iger’s hand-selected replacement, Bob Chapek, and reinstated Iger. The story was that Iger would be a transitional leader to fix the mess that Chapek putatively had created in less than twelve months. Iger’s current contract extends to the end of 2026.
He has been associated with Disney for fifty years. He is a company man. He is a septuagenarian.
Responsibility brings with it power: the ability to allocate resources, to confer favors, and to enjoy the benefits of office. Rank has its privileges. It’s easy to understand why he wants the seat.
But how is it that an organization as large and successful as Disney is so dependent on one man?
The Weberian ideal assumes that the functionary is an expert with a singular nobility, dedicated to the advancement of the general welfare and indifferent to personal status or benefit. This is often (but not always) a fiction. Iger doesn’t strike me as a creature of Weberian selfless duty.
Is Iger really the only one who can manage the turnaround? Are we to believe that there is nobody else?
After all there are massive problems, many of Iger’s design.
‘Disney is facing multiple challenges. The transition of ESPN from traditional TV to digital platforms is costly, especially with high sports rights fees. A strategic shift focuses on reducing content volume to improve quality, particularly within the Marvel franchise. The advertising market is competitive, and ESPN+ has seen subscriber declines, prompting Disney to address password sharing on Disney+. The company is working to manage costs and achieve streaming profitability by fiscal 2024, while also dealing with cost pressures in its parks and planning significant investments to expand capacity globally.
‘In addition, Disney's focus on "wokeness," which includes promoting diversity, equity, and inclusion (DEI) in its content and workplace, has significantly impacted its operations and financial performance. Films like "Strange World" and "Lightyear" faced backlash and underperformed at the box office due to their progressive themes, leading to financial losses. ‘Additionally, Disney acknowledged that its engagement in culture wars and alignment with DEI initiatives have presented risks to its reputation and brand, affecting revenue across various sectors. Despite efforts to reduce content production costs and streamline operations, Disney continues to face financial pressures, partly due to its DEI goals.’
It was Iger who had driven the adoption of these strategic choices before retiring in 2021, abetted by a deferential board. Once it was clear that the Pandemic tailwinds for media were ending, Iger left Chapek to bear responsibility for the consequences of the flawed plan Iger himself had put into place.
The ease with which Iger returned is as if Iger left to take a sabbatical to do some sightseeing with his wife, confident that the CEO seat would be warm on his return.
Chapek didn’t resemble the head of a Hollywood company; he looked more like the Treasurer of a mid-sized industrial manufacturing company. The creative elite rejected him as a mushy bean counter for his efforts. He might as well have walked around with a target painted on his face.
‘Iger chose Chapek, now 64, as his successor because of Chapek’s integrity and business acumen, not his interest in Hollywood socialization. Chapek has the outward corporate demeanor of a Midwestern businessman — or, as one colleague jokingly put it, “a tuna salad sandwich who sits in front of spreadsheets.” He’s a risk-taker who’s not afraid to upend the status quo, but he’s not a schmoozer by nature. Whereas Iger holds court around his Brentwood mansion — a short stroll from celebrities, producers, super-agents and other Disney executives — Chapek lives about an hour’s drive from downtown Los Angeles, in Westlake Village. Iger enjoys yachting; Chapek is more of a power-boating and kayaking kind of guy. ‘
Iger was one of the beautiful people, even married to a former model and journalist. Since he had failed to develop a deep management bench while he was CEO, when Disney’s struggles came to the fore, it was his trusted acolytes on the board who called for change, proclaiming that he was the only option to fix the mess for which Chapek would get the blame. Every failure demands a scapegoat. If the plan didn’t work, Chapek would hold the bag. If, by some miracle, things succeeded, Iger could claim the credit.
Given that the papal conclave nominating him as Eisner’s successor originally came during the mayhem of Eisner’s last years, is it any wonder that Iger secured his place in the corner office by ensuring that any succession plan was feeble?
In a bureaucracy, a weak leader surrounds himself with a weak number two and radiating, concentric circles of mediocrity. A captive board enables the Great Man with pro forma governance. This is especially true for companies with a prodigious ability to generate cash based on the success of prior investments.
It works until it doesn’t. And now it isn’t working.
When turnarounds succeed, it’s a beautiful thing for shareholders, employees, and customers. But restructuring is difficult. It requires a ruthless independence from the sunk costs of prior mistakes.
Iger may be precisely the wrong person for the job.
‘But the terrain of the entertainment business has changed, and new difficulties now abound. ESPN's move from conventional TV to digital channels has been expensive and complicated, with hefty sports rights costs driving financial resources. This, combined with the deliberate change to cut content amount and emphasize quality, has produced mixed results. The higher expenses and the necessity to fit digital trends have tested Iger's strategic agility.
‘Furthermore, under examination is Iger's leadership over the significant stock-based compensation (SBC) for Disney executives, therefore compromising shareholder value and skewing free cash flow estimates. SBC has been criticized for its effect on financial transparency and stock value, even though it is meant to match executive interests with those of shareholders.
‘Among Iger's difficulties are maintaining the Disney brand’s quality in face of fast content creation and controlling theme park and experience costs. Although strategically important, the purchase of 21st Century Fox brought a large financial burden and integration difficulties, hence underscoring the dangers of overextension.’
Economists talk of the principal-agent problem.
‘The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the "principal"). The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The deviation from the principal's interest by the agent is called "agency costs".‘
We should say, “when the principal lacks the means or the will to punish the agent.”
Corporations are subject to shareholder democracy. The shareholders, after all, are in toto the principals, with the elected board acting ostensibly on their behalf. A recently attempted intervention by a subset of dissatisfied (and sophisticated) shareholders including activist investor Nelson Peltz and former Marvel chairman Ike Perlmutter died. It was a casualty of shareholder inertia.
The quality and engagement of the shareholder base was insufficient to push back on management. The activists would have sought significant strategy and management changes. They didn’t buy into the twin shibboleths that Iger had clean strategic hands and that Iger was the only one capable of fixing the mess. But none of it would matter to a passive shareholder base, including some asset managers who appear to be effectively incapable of voting against management. Perhaps the shareholder vote was an endorsement of historic success, like driving a car using only the rearview mirror.
In some dysfunctional bureaucracies, there is no principal-agent problem. The agent subverts the dichotomy by making the principals entirely captive to the agent’s preferences. The principals are nothing more than dumb money. There is no independent governance. The nominal overseers are just along for the ride. A disengaged, passive principal constituency is the necessary condition for this perversion of the system. The ambition of the agent combines to make it sufficient. We get the bureaucracy we are willing to tolerate.
Sometimes, things need to get really insufferable before real change can happen.
The only meaningful shift that happens in these circumstances takes place when things become so pear-shaped that the masses rise up. At some point, the persistent weakness in the share price is too difficult to deny. It is impossible to defer responsibility by blaming it on market conditions, or macro this, or unforeseeable that. The excuses work until they don’t. Faced with poor governance and bad performance, more and more investors will take what’s left of their money and put it into something that is moving up and to the right.
In the worst case, the company needs to file for insolvency protection from its creditors. This forces complete replacement of the principals, which, in turn, often leads to a turnover in agents (i.e., management).
In a sense, we can see publicly listed corporations as independent countries. in which shareholders are the citizens. Good polities have engaged, educated, activist voters.
In publicly traded companies, you can always vote with your feet.
This is what Peltz did. With the failure of his activist campaign, Peltz moved on from Big Mouse to a pest-control company called Rentokil. Presumably, other smart investors bailed out with him.
Which means, in turn, that Iger has even more security in his position. The adverse selection problem of the investor base worsened, arguably.
For Iger, this will work until it doesn’t. If Disney turns around, he will take credit. If it doesn’t, he’ll find someone else to take the blame. You don’t thrive for fifty years in a political, bureaucratic culture like Disney without sharp elbows.
Stakeholders deserve competent execution. But, in a poorly governed bureaucracy characterized by feckless, enervated oversight, even when the organization fails, the clerk can find a way to advance his own self-interest.
This is not investment advice. I do not have a position in Disney securities at the time of publication of this note.