TMF: James, your book is Disney Wars. Simply put, who is at war?
James Stewart: Roy Disney, the nephew of Walt Disney, the founder of the company, and until recently a board member and chairman of the animation division, is at war with Michael Eisner, now nearing a 20-year tenure as the chief executive of Disney (NYSE: DIS ) .
TMF: And let's back up just a minute. Take us back then to when Michael Eisner first arrived at Disney back in 1984. What was the state of Disney when Eisner took over?
James Stewart: It was pretty remarkable. One of the ironies of the story is it was Roy Disney who was on the board then, as well, who insisted that there be a change at the top, and who helped bring Eisner into the company. I was sort of amused and amazed to discover that Disney, in 1984, was really moribund. It was a classic case of a company that could not get over the death of its founder. All anybody would say is, "Well, what would Walt have done?" And since nobody quite knew what Walt would have done, not very much was happening.
Disney was not changing with the times, so (the) then-chairman, after the failure of a big-budget project called Tron, said if the audiences don't want this sort of wholesome family fare that we are producing, then we are not going to make movies. And they only made three films in that year.
The workday there was so leisurely that the top producers in the studio and top executives would play cards after lunch every day. They had a full-time masseur, a steam shower, and they would relax in the gym and the steam room before calling it a day.
TMF: And what was the relationship like between Walt and his nephew Roy?
James Stewart: Well, it was complicated, but in many ways it was very close. Walt Disney and his brother, Roy Disney -- Roy's father -- were the brothers who built Disney into what it was, and the families were close for many years until Roy and Walt had a big falling-out. But Roy loves to tell the story about how when he was a young kid that Walt told him the story of Pinocchio at his bedside. In fact, when the animated Pinocchio actually came out, Roy was a little disappointed because it had been a more exciting story when Walt simply narrated it to him.
At the same time, Roy worked up through the company. He made some nature documentaries, and after Walt died, for some reason, the then-top executives dubbed Roy "the idiot nephew." Now Roy is rather shy and unassuming. He is not that outspoken, but that is not really a fair characterization, and really throughout his life he has been underestimated. That regime was thrown out in large part because Roy decided the company needed a change, and now Eisner has been forced to resign as chairman because he, too, underestimated the determination and the persistence and the energy of Roy Disney.
TMF: You write that Michael Eisner has earned his place among Hollywood's creative and business legends in the 21 years since. What stands out as his greatest contributions?
James Stewart: Well, it was an amazing era in those first 10 years when he was at the helm. First of all, needless to say, those card games ended. He brought in Jeffrey Katzenberg, with whom he had worked very closely at Paramount and, within a couple of years, they were producing 40 films a year. Amazingly successful.
But I think the greatest legacy will be the animated classics that came out of the rebirth of the studio, starting with The Little Mermaid, which really fused the Broadway musical, the movie musical, and animation into one product and then followed with Beauty and the Beast and The Lion King. I think you can argue that The Lion King was the creative pinnacle of the Eisner era.
TMF: From an investor standpoint, Eisner is memorable for another reason. His 21 years have led to amazing value creation, when you take them all in all. Certainly a lot of that happening in the first two-thirds, and Disney not having great years over the last 10, at least not in relative terms, but I went back and looked at the numbers, and if you split adjust where Disney's stock price was back in 1984, in today's terms it would have been trading somewhere around 15-20 cents per share back in 1984. Today, up around $29. We are talking about 20 years of annualized returns, in excess of 25%. A truly amazing accomplishment. What do you say to somebody who says, "Why would anybody criticize a CEO who creates that much value over that long a time?"
James Stewart: Well, the problem, simply put, is that the stock reached a peak of about $42 as recently as the year 2000 and is now at $28 or $29. If you look at those numbers, it is a remarkable record, and he deserves tremendous credit for that, but it almost all occurred during the first 10 to 12 years of his reign, when he did not wield absolute power at the company.
To me it is fascinating that Disney, as many corporations are today, they kind of are the equivalent of medieval kingdoms. The problems at Disney really came when the people who acted as checks on Eisner's power, the president, Frank Wells; the head of the studio, Jeffrey Katzenberg; and head of animation, Roy Disney, one by one were dispatched until Eisner had consolidated absolute power in his own hands, and you can watch the stock begin to go down as a result.
Now part of that was not Disney's fault or Eisner's fault. The problems of Sept. 11, the theme parks; it is bouncing back from some of those cyclical issues and one-time events, but you still see a real creative drain at the company. It is sad to see that animation has been entirely eclipsed these days by competitors that Eisner has largely created. First in Pixar (Nasdaq: PIXR ) , which has now broken off its relationship with Disney, and in Dreamworks (NYSE: DWA ) , which was founded by Katzenberg after he was exiled from Disney by Eisner.
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