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Disney Shareholder Proposal on Separation of Chair and CEO Positions Cannot Be Omitted From Proxy

The SEC staff has rejected efforts by the Walt Disney Company to prevent shareholders from voting on whether the separation of the jobs of chairman of the board and CEO should be made permanent. In a reply to Disney's no-action letter, the staff said that Disney could not exclude a shareholder proposal urging the board to set a company policy that the chairman of the board of directors will always be independent, except in rare and explicitly spelled out extraordinary circumstances. Disney contended that the proposal could be omitted under three separate exclusions provided under rule 14a-8. All three reasons for exclusion were rejected by the SEC staff.

The proponent of the shareholder resolution is the Connecticut Retirement Plans and Trust Funds. Recently, in an extraordinary move, Connecticut Treasurer Denise L. Nappier, in a letter to Disney's board chairman George Mitchell, formally requested that the board direct management to withdraw its request to the SEC for a no-action letter on the shareholder resolution. In its no-action request, the company raised a number of objections to the resolution under the SEC's proxy rules.

First, Disney sought to omit the proposal by claiming a lack of power and authority to implement it within the scope of that exclusion provided by rule 14a-8. Since the shareholders ultimately determine who serves on the board, Disney reasoned that the corporation could not ensure that a sufficient number of independent directors would be elected to serve as chairman and on the various board committees required to be staffed with independent directors. Even if a sufficient number of independent directors willing to serve on the board were found, it did not necessarily follow that one of them would have the time, desire and qualifications to devote to the position of chairman, according to Disney.

In their letter to the SEC supporting the proposal, the pension funds contended that, under Delaware law, the board has the express authority to establish qualifications for the company's directors. This authority is not limited only to those qualifications which the company can guarantee will be met. The funds also said that Disney's assertion that it lacks authority is belied by the fact that its own corporate governance guidelines already reflect a policy requiring that certain members of the board be independent.

Rule 14a-8 also allows for the exclusion of a proposal that is contrary to any of the SEC's proxy rules. Disney asserted that the language in the proposal providing for an exception in rare and extraordinary circumstances is fatally vague and, therefore, the proposal is inherently misleading within the meaning of an SEC rule prohibiting misleading statements in proxy materials. Disney noted that the proposal does not specify who will determine whether the circumstances qualify as rare and extraordinary.

The pension funds pointed out that the purpose of providing for an exception in the proposal was to give the board the flexibility to craft limited exceptions to the policy requiring an independent chairman if it deemed such exceptions necessary in order to implement the proposal.

Disney also tried to exclude the proposal by arguing that it deals with a matter relating to the company's ordinary business operations within the meaning of rule 14a-8. The allocation of the duties of corporate officers involves ordinary business matters, Disney emphasized, and general statements about the importance of governance matters are irrelevant.

The pension funds argued that the importance of having an independent board chairman has become the subject of widespread public debate, and as such is an important policy issue that goes beyond the ordinary business operations of the company. Nappier maintained that the separation of board chair and CEO is a mainstream corporate governance issue. The Connecticut pension funds have formally adopted the position that the chairman of the board of every company should be an independent director.

Nappier reasoned that the company needs two strong leaders --one to lead the board and the other to lead the management team. In her letter to the board chairman, Nappier expressed incredulity that management would try to make certain that the board does not have an opportunity to hear from the shareholders on such a critical issue.