Peltz could be overdoing it with the Disney proxy battle

Bob Iger, CEO of The Walt Disney Co.

Patrick T Fallon | Bloomberg | Getty Images

Activist investor Nelson Peltz spent about 30 minutes Thursday morning chatting with CNBC’s Jim Cramer and David Faber about why he wants one in a wide-ranging interview Disney board seat.

But his argument barely touched on what should be his strongest point — Disney’s consistent failure to plan for CEO succession.

Peltz referenced his fund’s slide presentation of Disney’s failures led by former CEOs Bob Iger and Bob Chapek. He said if he had to boil the presentation down to its core, it would center around Disney’s poor stock performance and Trian’s track record of value creation. Trian noted that Disney’s stock price peaked in 2021 but is currently trading near its eight-year low. The stock was up about 3% on Thursday.

But Disney’s underperformance in 2022 reflected an industry-wide slump that he led Netflixthe stalled growth. Disney’s stock price surge in 2021 was caused by the same phenomenon — investors are jumping into streaming services with significant subscriber growth. Disney and Netflix are each down about 38% over the past 12 months. Other media stocks have fallen even more. Paramount Global Shares are down 45%. Warner Bros. Discovery Shares have fallen nearly 50% since AT&T WarnerMedia merged with Discovery on April 8.

Peltz said Disney chief executive Bob Iger and the board paid too much for 21st Century Fox in 2019, and he blamed that deal for the company’s decision to eliminate its dividend during the pandemic. But asking for a board seat based on Iger’s track record of making acquisition decisions won’t convince many investors. Iger’s series of deals during his tenure as CEO — acquiring Pixar, LucasFilm, and Marvel — before Fox, were among the best acquisitions in media industry history.

Trian also called Disney’s direct-to-consumer strategy “flawed” in a filing, “despite generating revenue similar to Netflix and having a significant IP advantage.” Netflix started its streaming business years before Disney debuted Disney+ in 2019. It’s natural that Netflix would be ahead of Disney and every other streaming service in terms of profitability and free cash flow generation.

Peltz is planning a proxy fight, and his biggest argument with shareholders shouldn’t be Iger’s performance as CEO. Rather, it should be about the board’s consistent failure to plan for a post-Iger world. Iger developed a history of chasing off potential successors, including Jay Rasulo, Tom Staggs and Kevin Mayer, during his initial 15-year tenure as CEO. When he left his job as CEO in 2020, he did not leave the company entirely, setting out for an 18-month period in which his handpicked successor, Chapek, felt undermined by his presence.

Now Iger is back, and the Disney board has tasked him with finding a successor over the next two years. Iger’s track record suggests that the one area where he’s really struggling is succession planning.

“Iger has historically dominated the succession process, but it shouldn’t be Iger’s choice, it’s the board’s choice,” said Charles Elson, founding director of the Weinberg Center for Corporate Governance. “Disney has been vulnerable to activist interference because it has had succession governance issues for nearly 25 years.”

Part of Trian’s pitch to investors is the succession question, but it doesn’t appear until slide 27 of a 35-slide presentation. Most of Peltz’s arguments are based on Disney’s overwhelming stock performance, its decision to scrap the dividend, its claim that the Fox deal didn’t work out how a hypothetical deal for Sky wouldn’t have worked, and Trian’s history of increasing stock value. He also told CNBC that Disney must either acquire Comcast’s 33% stake in Hulu or “get out of the streaming business.”

Disney is countering last year’s stock tumble by bringing back Iger, a CEO who is widely respected by both employees and investors. Disney will soon have a new CEO, too. Peltz’s argument that Iger needed Trian’s help with strategic decision-making just a few months after returning to the job could be hard to sell.

It’s a lot easier to argue that Disney’s and Iger’s board of directors have consistently botched succession planning. Trian said in his presentation that Disney’s shareholder retention process “is among the worst (if not the worst) of any company we’ve worked with.”

It’s possible that Disney doesn’t want Peltz on the board because he will push the issue of succession, limiting Iger’s ability to stay on as CEO for more than two years. As Trian noted in his presentation (on slide 28), the Disney board of directors extended Iger’s retirement date five times between October 2011 and December 2017.

Perhaps Peltz needs to refine his message to focus on that.

Disclosure: Comcast owns NBCUniversal, CNBC’s parent company.

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