Disney Faces Proxy-Voting Challenges on Directors, Lagging Stock, and Political Spending

The Magic Kingdom is facing a revolt. On April 3, Walt Disney DIS faces two separate challenges from activists seeking to reshuffle the board of the leisure and entertainment behemoth, frustrated by the stock’s underperformance.

It’s a critical time for one of the world’s most relatable companies, where small investors own as much as 40% of the stock.

Disney’s recent struggles center on the shift from cable TV to streaming. Trian Partners, in a 133-page critique of Disney, criticizes Disney’s “belated” entrance into the streaming business, Disney’s decision to buy assets from Fox in 2019, and the laggard performance of Disney shares.

Trian proposed two new directors: Trian founding partner Nelson Peltz and Jay Rasulo, Disney’s former chief financial officer and former chair of Disney’s Parks and Resorts Worldwide.

In a statement, Peltz said, “Instead of having a boardroom that would include directors with an ‘ownership mentality’ that can bring fresh perspectives to the Company’s challenges, Disney is resisting change and asking shareholders to endorse a board comprised mainly of legacy directors (and their hand-picked successors) who have repeatedly failed to properly plan for CEO succession, misaligned the incentives of management, and failed to oversee or drive a strategy to get the streaming business to profitability or the studios to produce good content.”

Trian has support from proxy advisor Institutional Shareholder Services, several current and former Disney directors, and the California Public Employees’ Retirement System. You can find the Trian thesis and other material here.

A rival campaign by Blackwells Capital, a smaller activist, criticizes Peltz and has proposed its own director nominees, including real estate investor Craig Hatkoff; Jessica Schell, a former media investment banker and executive at Universal Pictures; and venture capitalist and TaskRabbit founder Leah Solivan. According to the campaign, “Blackwells believes [the underperformance of Disney stock] is the result of falling behind in the areas of content, media, technology, and governance best practices.”

Blackwells maintains that Disney suffers from “a conglomerate discount” and could unlock value by spinning its owned real estate out into a REIT or separating out ownership and operations for better tax and expense planning.

Disney’s streaming business—Disney+, ESPN+, and Hulu—has grown swiftly but still lost money in the December quarter. Disney CEO Robert Iger has pledged profitability for the unit this year.

Disney shares have lost 38% of their value since their March 2021 high, as the company recovers from the pandemic closure of theme parks, cruise lines, and theatrical business.

Disney has also struggled with succession planning: Longtime CEO Iger delayed his retirement a number of times, stepped down in 2021, and returned a year later after his replacement was fired by the board. “Unlike Elsa in Frozen, Bob Iger found it hard to let it go,” says Morningstar Sustainalytics analyst Andrew Spurr.

“Iger has become almost as iconic to the Disney brand as Mickey Mouse,” Spurr continues. “The proxy fight will be a test of how shareholders view the progress that Iger and the board have made so far, and whether his past glories are enough to buy them more time.” Notably, proxy advisor Glass Lewis recommends investors support the incumbent board.

In early voting, Disney seemed to be ahead of the activists.

Disney’s Wide Moat

Morningstar analyst Matthew Dolgin reckons Disney has substantial competitive advantages.

“Ultimately, we believe the firm’s ownership of timeless characters and franchises and its ability to continue creating and attracting top-tier content outweigh the near-term challenges it faces related to an evolving media industry. Although we think it’s likely that a media industry not built upon the traditional cable television bundle will keep Disney from returning to the level of economic profitability it routinely achieved in years past, we still expect the firm’s returns on invested capital to comfortably exceed its cost of capital over the next 20 years,” Dolgin wrote recently.

Disney Faces Vote on Political Spending

Separately, investors are pushing Disney to report on whether its political spending last year matches its “publicly stated company values and policies.” The resolution was made by Educational Foundation of America. Morningstar Sustainalytics, which also provides proxy voting advice, recommends investors support the proposal. Disney says to vote no. You can see the full Disney proxy here.

The proposal is just one of 23 political influence transparency resolutions at other companies, says Matteo Felleca, analyst at Sustainalytics. As the US gears up for the 2024 November election, these “proposals regarding political spending have taken on heightened importance.”

Last year, Felleca notes, a similar proposal won 36% of the vote. In 2023, across the US, these proposals received average support of 24%.

“By enhancing transparency around political spending, companies can build trust with stakeholders, prevent potential reputational and financial consequences, uphold ethical standards, and ensure their actions reflect societal expectations,” Felleca says. Such actions “bolster shareholder confidence and contribute to a more transparent and accountable corporate environment.”

Finally, the AFL-CIO Equity Index Funds withdrew a proposal for Disney to report on its use of artificial intelligence and its ethical guidelines regarding AI use. Disney has vowed to improve reporting around its use, oversight, and governance of AI.

According to Sustainalytics analyst Ignacio Garcia Giner, AFL-CIO withdrew similar proposals at Comcast CMCSA and UnitedHealth Group UNH. “Reporting on the ethical use of AI has emerged as a key issue this proxy season, and we expect proposals addressing this issue to receive significant shareholder support,” says Giner. “So far, Apple’s AAPL proposal received support from 37.5% nonaffiliated shareholders. Similar proposals [are] to come at Netflix NFLX, Paramount Global PARA, and Warner Bros Discovery WBD later in the proxy voting season.”

At Keysight Technologies and TD Synnex, Investors Support Calls for Simple Majority Vote

The calls for simple majority vote are gaining support. Some companies require large majority approval or supermajority votes.

At TD Synnex’s SNX annual meeting, 41.4% of investors favored adopting a simple majority vote. That means 72.7% of independent shareholders supported the measure.

At Keysight Technologies KEYS, 68% of investors endorsed a similar proposal.

“As expected, these received significant support,” says Spurr. “Supermajority vote provisions are a suboptimal governance practice that can serve to entrench other poor practices and impede the ability of shareholders to enact reform.”