Should Disney Leader Whose Hand-Picked Successor Failed Choose Again?

A Stanford study concluded that most hand-picked leaders of major companies chosen primarily by their predecessors underperformed the S&P. 

Disney is no exception. The problem is that while boards can be influenced by charismatic leaders, the CEO annointing his or her successor may be more concerned about their legacy, pet initiatives or personal relationships, clouding their judgement about what is best for the future. The prudent process may be to consult current or former leaders about succession, but not to give them a deciding vote. JL

Ben Cohen reports in the Wall Street Journal:

Succession was the failure of Mr. Iger’s first reign. He delayed his retirement four times. Then he anointed Bob Chapek and watched him flop. Now he’s back to clean up a mess of his own making. Are internal candidates ready, or will it be an external hire? Is it better to have CEO experience or Disney experience? The bigger question is how much involvement any CEO should have in this process. CEOs have too many competing interests and conflicting incentives. A study of the largest companies run by handpicked successors found that most underperformed the S&P 500 between 2000 and 2011. “The guy who gets you lost in the woods isn’t the right guy to find your way out.”

The most recent Emmy winners for best drama were TV shows about the same irresistible premise: Succession is what binds “Game of Thrones,” “The Crown” and, of course, “Succession.” It’s now the subject of another Hollywood saga, and this one stars neither the royals nor the Roys.

The latest epic tale began when Disney DIS 0.85%increase; green up pointing triangle made the surprising move to lure Robert Iger out of retirement as chief executive last week and give Mr. Iger two years to help find the next Mr. Iger. 

But succession was the failure of Mr. Iger’s first reign. He famously delayed his retirement four times while driving around town with a license-plate frame asking if there was life after Disney. Then he anointed Bob Chapek and watched him flop. Now he’s back to clean up a mess of his own making. 

Mr. Iger, who is 71 years old, has put himself in a peculiar situation where nearly everything he does can be viewed through the lens of who comes after him. Almost never has a CEO’s success been so clearly tied to the fate of the CEO’s successor.

 

There are many familiar questions about who that person might be. Are internal candidates ready, or will it have to be an external hire? Is it better to have CEO experience or Disney experience? How much say will Mr. Iger really get this time, and does he already have the heir apparent in mind? 

But the bigger question about Mr. Iger’s role at Disney is how much involvement any CEO should have in this process. 

Success and succession are fundamentally different objectives for CEOs. Someone in Mr. Iger’s seat has too many competing interests and conflicting incentives to handle both, said Charles Elson, the founding director of the University of Delaware’s Weinberg Center for Corporate Governance. He believes that boards alone should be responsible for hiring decisions.

The problem is that boards consist of humans, and humans are subject to all sorts of biases that impair our judgment and make us behave irrationally, as Disney’s proved when it renewed Mr. Chapek’s contract four months before ousting him. In practice, independent directors can also behave deferentially toward CEOs. The market was thrilled when Disney brought Mr. Iger back, but others were stunned that he received a mandate “to work closely with the board in developing a successor,” despite bungling the process before. 

“The guy who gets you lost in the woods isn’t the right guy to find your way out,” Mr. Elson said. 

A Disney spokesman declined to comment.

But even boards struggle with hiring because they don’t get much practice, said David Larcker, the director of Stanford University’s Corporate Governance Research Initiative. If their primary duties are CEO compensation and vetting, they do one every year and they might never do the other. When I called him last week, he happened to be watching football, a useful reminder that hiring a CEO is like drafting a quarterback: It’s the most valuable position and the most difficult to predict.

CEOs seem like they should be more qualified to select CEOs. They’re not. Mr. Larcker’s study of the largest companies run by handpicked successors found that most underperformed the S&P 500 between 2000 and 2011, including General Electric after Jeff Immelt took Jack Welch‘s place and Microsoft after Steve Ballmer followed Bill Gates. The emergency succession that elevated Tim Cook at Apple in the final weeks of Steve Jobs‘s life made the world’s most valuable company a notable exception.

It’s a paradox of succession planning that the better the CEO, the harder it is to imagine anyone else in the job. But visionaries only seem irreplaceable until they’re replaced. Mr. Jobs passed the iPhone to Mr. Cook. Jeff Bezos delivered the Amazon.com job to Andy Jassy. Warren Buffett won’t be in charge of Berkshire Hathaway forever, Mark Zuckerberg will find a retirement home in his metaverse and Elon Musk said under oath that he expects someone else to run Twitter eventually. Not even Chief Twit is a permanent appointment. 

But few corporations can match the history of succession mishegas at Disney. Mr. Iger is risking his legacy at a company that has always had a hard time getting to happily ever after. 

His own coronation was the result of a vicious battle that dethroned Michael Eisner. The climactic moment of that brawl was the board resignation of Roy E. Disney, Walt’s nephew, whose list of Mr. Eisner’s faults culminated with one that resonates today: the “consistent refusal to establish a clear succession plan.”

Mr. Iger had such an extraordinary run atop Disney that the fight to get him there faded into little more than a career footnote. He turned into the model CEO, a weatherman who became maybe the greatest business leader of his generation, and his string of deals over 15 years for Pixar, Marvel, Lucasfilm and 21st Century Fox solidified Disney as “the most successful entertainment company in modern history,” as The Wall Street Journal put it.

But he also fostered palace intrigue by holding the keys of the magic kingdom longer than anyone expected, delaying retirement from 2015 to 2016—and then again to 2018, 2019 and 2021—while generally treating the reality that he wouldn’t run the company forever more like a suggestion. 

“Succession,” Mr. Iger said five years ago, “is a complicated thing.”

It was so complicated that he mangled succession even after it happened. When he abruptly stepped down in February 2020, Mr. Iger didn’t exactly disappear. As executive chairman until last December, he was still a presence at Disney, as if a former president of the United States moved out of the Oval Office, but not the White House. 

Mr. Iger and Disney’s board had perfectly good reasons for postponing his retirement, as the company’s market capitalization grew by more than $180 billion under his management. By sidelining some potential successors, he made himself indispensable, as if he were the only person who could run Disney. The dithering meant there were few suitable candidates for Mr. Iger’s job when he left and none when he came back.

 

It’s the reason he once again finds himself in this position. Mr. Chapek was his choice for CEO, but the two Bobs clashed almost immediately, as his successor couldn’t escape Mr. Iger’s shadow.  

An executive who specialized in theme parks may never have been the right person to steer Disney through a pandemic and the entertainment disruptions of the past three years. It didn’t help that Mr. Chapek’s stumbles in a political crisis provided a natural contrast to Mr. Iger’s savvy—or that the company’s stock price during his tenure was down as much as the broader market was up. In recent months, as Mr. Iger privately complained about Mr. Chapek, he publicly dismissed a possible return. Then came the brutal earnings call when Mr. Chapek reported that Disney’s streaming business last quarter lost another $1.47 billion, which is roughly the price of a week at Disney World these days.

Mr. Iger soon did what he insisted he never would. It was a fitting twist for someone who stayed at Disney almost every time he claimed to be serious about leaving.    

In the days since Mr. Iger’s boomerang, as Disney fans and Wall Street cheered his comeback, I decided to open a copy of his 2019 memoir “The Ride of a Lifetime.”

One part that already reads differently is the story of his first big deal. The task of mending Disney’s frayed relationships was such a priority for him that Mr. Jobs, the CEO of both Apple and Pixar, was the first person that Mr. Iger called after his family and mentors when he got the job. It paid off. Months later, when Mr. Iger pitched the crazy idea of buying Pixar, Mr. Jobs told him it wasn’t so crazy, and they negotiated the massive deal that revitalized Disney’s animation business.

 

But as Mr. Iger was campaigning for the board’s approval of the Pixar acquisition, he learned that Mr. Eisner was lobbying against it. He’d only recently left the company, and he later admitted that he was wrong about Pixar, Mr. Iger wrote. But that was almost beside the point. It was the interference that he found inappropriate. 

“I was offended by his meddling,” Mr. Iger wrote. “It was something he would never have tolerated when he was CEO.” 

Those words now look rich after Mr. Iger’s whispers about Mr. Chapek became so loud around Hollywood that he might as well have bought a billboard on Sunset Boulevard.  

But as Disney once again plots life after Mr. Iger, there is one more line from his book that’s newly relevant. It’s whether he believes there is life after Disney. 

“The answer is yes,” he wrote. “Of course.”