June 10, 2006
More on the Disney Case
One reading the 89 page opinion from the Delaware Supreme Court on the Disney shareholders litigation over the severance payment for Michael Orvitz has to be struck by what is missing. There is no guidance in the opinion on compensation limits. Shoddy compensation practice is accepted with a note that it is "not best practice" and we do not know how shoddy it can be before it is out of bounds. Moreover, after labeling the Disney procedures as less than satisfying, the court goes to great lengths to justify its result on the facts. In essence, a promised severance payment of $130 million is in the ballpark of what is reasonable we are told because Disney needed to match a $200 million position Orvitz held and would forfeit at the company he would have to leave for Disney. There is more: Orvitz wanted a salary of $25 million a year and a guarantee of $50 million from options; they could not guarantee the $50 million for tax reasons so a vesting plan than netted him $90 million from options on severance is reasonable. The compensation committee accepted the severance pay because, even though some of its members never physically made a single meeting (they got phone calls) and its chief consultant missed the critical meeting (he was close to a phone for questions) and there were no spread sheets on severance results and no good minutes on what the committee did, the committee understood the Orvitz severance plan because it knew of the severance plans of the CEO, Disney, and Orvitz's plan was not to fair from Disney's. and my favorit: A footnote explaining the Orvitz did a few good things for the company (he got Tim Allen to return to the set) and therefore deserved his money??? Folks we are talking about $130 million for 14 months time in which he did very limited work. $130 million. He would be 184 on the list of countries', countries', total GDP for 2004, ahead of 30 countries.
The court is working very hard here to set out the facts in their very best light to support the decision of the Disney compensation committee to accept such a severance plan. We would have been better served by a simple remark: "We will not let this go again....A compensation committee in the future, to approve a complex severance package, will need to have one, three, and five year scenarios on the table for their consideration." Pity.
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