Elizabeth Warren Isn’t Happy With Disney’s CEO Pay and Billions of Buybacks
In a letter, the senator highlights a fundamental conflict between two of Disney’s key stakeholders -- its employees and investors.
Welcome to The Pay Letter by me, Anders Melin. I write about executive compensation and wealth for Bloomberg News. If you read all the way to the bottom, you'll be rewarded with a funny GIF.
Last week Senator Elizabeth Warren scorned Walt Disney’s decision to fire 28,000 employees as a result of the pandemic.
For years Disney has spent tens of billions of dollars on share buybacks, dividends and executive compensation, Warren wrote in a letter addressed to CEO Bob Chapek and executive chairman Bob Iger. She asked: Had these expenditures eroded its ability and willingness to do right by its employees?
That Warren, the Democrat from Massachusetts, is no fan of buybacks and high CEO pay is old news. What’s more interesting is how her letter highlights a fundamental conflict between two of Disney’s key stakeholders -- its employees and investors.
This underscores the inherent weakness of the much-touted idea of “stakeholder capitalism”, which says the interests of workers, investors, customers, suppliers and society at large all should be priority No. 1. Because what happens when you can’t square one with the other?
First, some background. On Sept. 29 Disney announced it would fire 28,000 people employed in places like its theme parks and cruise line. Needless to say, people aren’t really flocking to either right now. Many of the workers had been furloughed since the spring, meaning they’d been getting benefits but no paychecks. Disney’s chief of the parks division called the layoffs “heartbreaking” but said it was the only feasible option.
Enter Warren. In an Oct. 13 letter addressed to Chapek and Iger, she pointed out that Disney for years had “prioritized the enrichment of executives and stockholders” and thereby weakened its “financial cushion and ability to retain and pay its front-line workers amid the pandemic.”
What is she talking about? Well, three things.
1. Over the past decade, Disney spent roughly $48 billion -- more than half its adjusted net profits -- on buying back its own stock. Buybacks are good, the theory goes, if the company’s stock is trading for less than it’s really worth. These are popular among investors because they tend to give the stock price a temporary boost (even though you learned in Finance 101 that shouldn’t happen), which also benefits executives who get most of their pay in stock. (Another side note: Corporate America’s executives are notoriously bad at timing their buybacks.)
2. For the past few years Disney has spent around $2.5 billion on dividends -- money that also ends up benefiting any employee or executive who owns a lot of stock.
3. Disney has spent hundreds of millions of dollars in recent years on paying its top bosses. Iger has for years been among America’s highest-paid executives.
So how is it, Warren asks, that Disney’s top bosses and directors thought it was prudent to throw tens of billions on these three items but somehow can’t stand by its workers so soon after the company hit a difficult stretch?
(After I published my story on Warren’s letter, Disney sent me a statement saying the letter contained inaccuracies. It did not specify which those were, or address the senator’s main point. I asked them to do so, but did not hear back.)
This question ultimately comes down to which duty, if any, a company has to its workers relative to its investors. The workers obviously would prefer to keep their jobs, but investors are likely better off, at least in the short term, with them gone. With her letter, Warren raises questions about capital allocation and, more fundamentally, which kind of duty, if any, a company has to its workers, who helped build it over time.
Of course you could argue that Disney might have in fact done right by most of its workers -- it could have laid off more! -- and that it balanced that with the desires of shareholders -- it could have spent all of its net income on buybacks, not just half. But on the other hand, what if the company had kept some of that money on hand to weather this downturn?
There’s one more thing worth noting: Iger has a lot of money riding on Disney’s stock price staying relatively buoyant for the next year. Back in 2017, when he signed a contract to stay at Disney through 2021, he received a massive grant of stock tied to the company’s stock return relative to other S&P 500 firms. As of Friday, Disney is roughly in the middle of the pack with a total return of about 18% since the contract rejigger. That would put him in line for equity worth somewhere around $70 million. That’s on top of his $3 million salary, $12 million annual bonus opportunity and another $20 million a year in other equity awards.
By now, defenders of stakeholder capitalism will be jumping up and down in fury, exclaiming that “companies that prioritize one stakeholder above all the others won’t generate sustainable long-term returns!” And fair, perhaps they won’t. But that argument simplifies reality by portraying it as a binary choice -- either do well for all five, or founder. Reality is a spectrum. Lots of companies do spectacularly well for long stretches of time even as they push the limits of what could be considered “fair.” And large-public-company CEOs keep their jobs for only five years on average.
So while the chickens may eventually come home to roost for Disney or others, it will be of little consolation to the workers who were laid off and lost their health insurance in the middle of a pandemic.
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Thank you, as always, for giving my missives a glance.
Anders