Walt Disney survived one pandemic before Mickey Mouse was even drawn. The year was 1918 and Walt, aged just 17, succumbed to Spanish influenza. He pulled through, and eventually built an entertainment empire the world has come to know by name.
His company endured some big knocks too; the Great Depression, a world war, Walt’s hapless business decisions. At times during the 1940s, staff would be paid from the studio’s available cash, laid out by Walt on a card table.
But there was perhaps no blow as sudden or debilitating for Walt’s empire as coronavirus. Disney is an almost peerless family entertainment group, but its parks are empty, its blockbusters shelved. More than half its workforce are on unpaid leave. Security guards still keep the Victorian lamp alight in Walt’s Disneyland apartment in California, but Mickey is literally on furlough.
At the eye of the storm is Bob Iger, Disney’s all-powerful leader for close to 15 years, who moved to the role of executive chairman in February. For his sharp business instincts and clean-cut style, Iger has been lauded as one of corporate America’s superheroes (with a bionic pay packet to match). The question is whether he can ride out this financial tempest — and its ethical traps — while staying true to Walt’s vision, and Disney’s wholesome family brand.
So far the reaction to the first round of decisions by Iger and the new chief executive Bob Chapek have been mixed, to say the least. “What the actual f—?” wailed Walt’s great-niece Abigail Disney on Twitter last week.
WHAT THE ACTUAL F***????? Look, dividends aren’t ALL bad, given the number of fixed income folks who rely on them. But still 80% of shares are owned by the wealthiest 10%. So that excuse only goes so far. But the REAL outrage is, of course, those bonuses…2/ — Abigail Disney (@abigaildisney) April 21, 2020
Quoting an FT story about Disney furloughing more than 100,000 workers while keeping its executive bonus programme in place, Disney declared that as an heir it is “very difficult for me to sit by when I see abuses taking place with that name attached to them”.
Bernie Sanders, the Democratic socialist Vermont senator, agreed. “This is outrageous”, he wrote on Twitter, citing the FT article. “Endless corporate greed is destroying the fabric of this country and it must be stopped.”
Some in the investment community have welcomed Disney’s April 2 announcement that it had “no choice” but to stop paying its staff. Alexia Quadrani, an equity analyst at JPMorgan, says Disney’s furloughs were “the right thing to do”.
“If you are able to take 35 to 40 per cent of your costs out by furloughing them, it makes a big difference,” she says.
For its part, Disney has dismissed criticism of its response to the crisis. “Your premise — that the company should be criticised for furloughing employees, who are now collecting government benefits entitled to them — is completely misguided and unfair,” a Disney spokesperson told the FT.
Disney’s dilemma captures the starkly unequal reality of America in 2020. The beloved brand is run by a handful of handsomely remunerated executives, who preside over a legion of modestly paid staff who now have no jobs left to go to.
As the coronavirus pandemic renders hundreds of millions of people jobless and with few savings to fall back on during the crisis, the role of corporations in society is being redrawn.
Whether to tap state aid has become a fraught question: asking for taxpayer funds risks turning once internal matters, such as executive pay or dividend policy, into questions of intense public debate.
Very difficult for me to sit by when I see abuses taking place with that name attached to them
Disney is not lacking in resources. Three of its four profit engines are being battered, but its sterling reputation has allowed the entertainment giant to raise more than US$20 billion over the past few months to help weather the storm.
Across its parks in California, Florida and France, Disney staff will draw at least US$400 million in state benefits every month, according to FT calculations based on average weekly rates. That would exceed US$1 billion of direct and indirect government support for Disney if, as expected, its sites stay closed until July. Disney said the number was incorrect, but provided no alternative figure.
One reason Disney is coming under scrutiny is its record of providing lavish rewards for its top brass, such as Iger, who before the crisis had earned about US$716 million in cash, stock and option gains since becoming chief executive in 2005, according to S&P Global data. Iger has given up the remainder of his US$3 million base salary for 2020. But his performance-related incentives, worth more than US$40 million for Iger last year, remain in place — even if many of those criteria will now be harder to achieve.
Unlike some other big multinationals, Disney has yet to comment on plans for its dividend, which it has paid regularly for the best part of six decades. The 2019 payments totalled around US$3 billion — which covers almost six months of salaries for park employees. The next semi-annual dividend would usually be paid in July.
“The state is scrambling, the U.S. president would rather badger than lead, and you have these big companies that do have a lot of resources,” says Robert Eccles, visiting professor at Oxford’s Saïd Business School and a former Harvard professor. “It’s not their responsibility to come up with a vaccine, but isn’t it their responsibility to support their employees the best they can?”
Estefania Villadiego moved from Colombia to Florida four years ago with her husband and young daughter. Ms Villadiego found a job at Disney World in Orlando where, for US$13 an hour, she dresses in a folksy elven costume and greets visitors to Cinderella’s castle. She says her wage is so low that she has to work overtime just to “have food on the table and survive”.
The castle closed last month and Villadiego stopped receiving pay from Disney last week. She now spends her days homeschooling her daughter while awaiting a response from Florida’s overloaded state unemployment system. The system is “completely broken”, according to Jeremy Haicken, president of the union Unite Here Local 737, which represents many workers at Disney; only a fraction of post-crisis claimants have received cheques.
“It’s an unthinkable disaster,” he says. “There are vegetables rotting in the fields of Florida because the restaurants are shut. Meanwhile, laid-off hospitality workers are starving.”
When announcing its decision this month, Disney said it was forced to furlough staff. Asked whether there was an alternative, a Disney spokesperson said: “I suggest you look up the definitions of ‘publicly traded company’ and ‘fiduciary duty’.”
The move, which Disney said was “not made lightly”, helped the company preserve its credit rating. Disney’s internal forecasts for staff savings were shared with Moody’s in near-daily conversations, and factored into the agency’s decision to maintain the company’s A rating.
Reserves, recent fundraising efforts and its revolving credit facility give Disney about US$30 billion in cash, while it has some US$12.5 billion in debt obligations over the next two years. “That leaves them with net liquidity somewhere in the neighbourhood of US$17.5 billion,” says Neil Begley, a senior analyst at Moody’s. “It is a lot.”
Even before the coronavirus crisis, Disney’s executive compensation policies had been a source of dispute with many shareholders. Controversy over remuneration has bedevilled the company since the days of Michael Eisner in the 1990s, when he topped the tables of America’s best-paid bosses.
For the past three years, at least 40 per cent of Disney shareholders have voted against Iger’s remuneration package, which was reduced on three separate occasions last year to placate investors. Those investors who raised concerns included the five biggest U.S. pension funds.
“There is an underlying problem pay culture at Disney, with a huge gap between executives and the workforce,” says Yo Takatsuki of AXA Investment Managers, a shareholder in Disney. “But compounding that is this crisis. The social purpose of the company is being questioned but that’s not unique to Disney. Companies need to be careful about putting such high pay practices in place because when crises like this happen the scrutiny becomes far more intense.”
The two executives brought Disney into a different era. Eisner shook up a languid corporate culture. In his book DisneyWar: Battle For the Magic Kingdom, James B Stewart recounts how Disney’s top brass usually knocked off after lunch for card games and afterwards “often had massages from Bob Hope’s masseur, who was kept on staff”.
For his part, Iger delivered spectacular returns for shareholders. His transformative dealmaking — buying Lucas Film, Marvel, Pixar and Twenty-First Century Fox — has helped drive up Disney’s share price since he was named chief executive by around 250 per cent, even including the sharp crisis-related drop since February.
But, like many of America’s most successful companies, a culture of perks still prevails. Iger’s US$47 million pay package last year was worth 911 times that of Disney’s “median worker”. The executive is also “required” by the security-conscious board to use the corporate jet for all personal travel. Those trips cost the company US$367,000 last year. Iger’s terms entitle him to US$1,000 for “wellness related services such as fitness and nutrition management”.
Disney said it was “premature and irresponsible to speculate about bonus compensation for 2020 — especially in April, during an unprecedented global pandemic”.
More than 90 per cent of Mr Iger’s compensation is performance based, tied to benchmarks such as adjusted earnings and shareholder return relative to the S&P 500.
Although relatively trivial to the bookkeeping of a US$180 billion public company, executive perks may be seen in a new light in these straitened times, especially at companies turning to the taxpayer for help. The same goes for companies that continue to pay dividends to shareholders, even as they benefit from public support.
This will be a difficult PR circle to square
In Europe, Volkswagen, BMW and Daimler have come under fire for leaning on government furlough schemes while continuing plans to pay dividends — with one senior German politician describing the decisions of the carmakers as “the ugly face of capitalism”.
LVMH and Gucci-owner Kering, the two biggest luxury goods groups in the world, both initially told employees they would be put on a French government assistance programme but backtracked after rivals invoked national solidarity while making pledges to avoid government support.
In the U.S. burger chain Shake Shack was shamed into returning a US$10 million federal loan that was expected to help mom-and-pop small businesses.
“There is a sense of solidarity that we’ve not seen since world war two,” says Brian Cheffins, a professor of corporate law at the University of Cambridge. “This will be a difficult PR circle to square. Any perception that Disney is doing something that is rampantly self-serving could be a big blow to their carefully cultivated image.”
While large corporations such as Walmart have been besieged by consumer criticism over their treatment of workers, Disney has maintained a magical amount of goodwill. The company ranked as the fifth most reputable US company last year in a poll by Axios Harris — trailing “do-gooder” brands such as Patagonia and LLBean.
Even the unions and furloughed workers praise some of the steps Disney has taken. Haicken points to Disney’s choice to keep paying employees for five weeks after the parks closed, and its commitment to covering their health insurance for up to a year. Disney last year agreed to increase its minimum hourly wage to US$15 by 2022, more than double the wage required by the U.S. government. (Many states have higher minimum wages than the federal government.)
At the other end of the scale, SeaWorld Entertainment abruptly stopped paying more than 90 per cent of its parks staff in late March, with no company safety net at all. Barely two weeks later it granted five executives special bonuses of about US$1 million each for “extraordinary contributions” during the crisis. In the context of the hospitality industry, Haicken describes Disney’s conduct as “remarkable”. However, Ms Disney remained unimpressed by the $15-an-hour offer that “PR folks touted as incredible magnanimity”, noting the gulf with executive pay. “What kind of person is comfortable with this???,” she asked.
Few of Disney’s peers in the entertainment industry have been hit as hard by coronavirus. Netflix is enjoying a boom in streaming, a trend that has also helped Disney’s new streaming service reach an eye-watering 50 million subscribers in only five months.
However, Disney’s streaming unit is still not expected to become profitable for years. In the meantime, Disney is grappling with half of its business halted to a virtual standstill. The question for everyone, from Iger down to workers like Villadiego, is when Disney parks will unlock their gates. And when they do, will the land of Mickey Mouse look different?
Temperature checks, masks and a smaller guest count could become permanent fixtures of the parks, just as heightened security was introduced after the September 11 attacks. JPMorgan’s Quadrani is optimistic that some theme parks can reopen as soon as this summer, but she warns that they will probably operate on a much smaller scale than before. Some furloughs could end up becoming permanent job losses, as Disney would need to rehire fewer employees.
Asked if Disney would help if the lockdown extends beyond the point where staff are eligible for unemployment benefits, a spokesperson for the company said: “If you know when this pandemic will end or what actions the government might take, please enlighten me. Otherwise, I am not going to engage in your speculation.”
As Disney shares have plunged since the outbreak, Iger has already suffered paper losses of more than US$50 million in stock and at least as much in exercisable options this year, according to FT calculations. He also faces less tangible losses. Only 9 weeks ago, the 69-year-old’s legacy seemed cemented, on the back of a triumphant book detailing his leadership prowess.
In late February Iger handed over the day-to-day running of the company to Chapek, a longtime Disney deputy who has managed the theme parks business, so that he could focus on creative endeavours. Now, Iger has been roused from reading scripts to steer Disney through a plague and economic depression.
For Lacey Gamble though, the stakes are graver. Gamble, a 34-year-old single mother, has served food at the Canadian steakhouse at Disney’s Epcot park in Florida for 14 years. She had been saving up for a downpayment to buy a house, but is now using those savings for survival. She tries not to look too far ahead because “it’s too overwhelming” and gives her anxiety.
But if the unemployment benefits run dry, she expects Disney will help. “Disney knows the workers are magic,” she says. “They need us, like we need them.”
© 2020 The Financial Times Ltd.