Activist investor Nelson Peltz plans to mount a proxy fight for a seat on Disney’s board.

Disney offered Peltz, founding partner of Trian Fund Management, a role as a board observer and asked him to sign a standstill agreement, which Peltz declined. Here are our thoughts on the situation.

Sometimes a board observer position can be beneficial, particularly for investors who do not have a lot of board experience and are less likely to be a regular contributor to board discussions. But offering Peltz a position as a board observer is like saying to Whitney Houston, “You can join the band, but you are not allowed to sing.” There is no way that Disney thought for a second that Peltz would accept this offer, and there is no way he should have accepted it.

It is curious as to why Peltz started this proxy fight in the first place and why Disney is resisting it. Peltz acquired his position when Bob Chapek was CEO and likely had a plan to replace him with someone Peltz had already identified. That would have been a great activist plan, but it went awry a week later when Disney announced that it had replaced him with former CEO Bob Iger. Knowing Trian’s history and process, the firm had probably been working on that plan for many months and was waiting for the perfect time to build its position. It is unfortunate that all of Trian’s hard work developing its plan somewhat went to naught, but at that time the firm should have regrouped and developed a different approach taking into account the new circumstances. That plan should not have included opposition to Iger. While Trian says it is not opposing Iger as CEO now, the firm initially opposed him and that made it very hard for the board to agree to a settlement for a board seat for Peltz. Having said that, a strong board with a strong CEO – who is admittedly a short-term CEO – should not have a problem with an experienced shareholder in the room who might have an unpopular opinion. In fact, the board should welcome it.

Trian put out a presentation making its case. In proxy fight presentations, each side uses the facts and data to paint a picture that benefits them and often those claims do not withstand scrutiny. For example, Trian takes issue with Disney’s total shareholder return under Iger: 270% versus 330% for the S&P 500 over the same time. I am not sure how that compares to the industry, but I expect if the industry returns were more favorable to Trian, they would have used those. As the British economist Ronald Coase had said: “If you torture the data long enough, it will confess to anything.” In this case, we can get it to say that Bob Iger was a bad CEO for Disney. Trian also takes issue with Iger’s decision to acquire Fox, and he should – it was a terrible decision in retrospect. But he should also include in that analysis, Iger’s decisions to acquire Pixar, Marvel and Lucasfilm, which have grossed Disney more than $33.8 billion at the global box office, and billions more in merchandise and theme park extensions.

All this criticism of proxy fight tactics and strategy aside, and regardless of how we torture the data of Peltz’s record as a director, of course he should be on the board of Disney. He is a large shareholder with a strong track record of creating value through operational, strategic and capital allocation decisions. No, Peltz is not going to be the most valuable director when it comes to deciding who should star in the next blockbuster Disney movie or which rides should be built at the entertainment parks – the board relies on management for those insights. But he will be the most prepared and valuable board member when it comes to doing the financial analysis on the various strategic and capital allocation opportunities available to Disney and advising the board on which decisions would be best for shareholders. Peltz also has proven to be a valuable director in helping management teams cut operating costs and improve margins, something Disney could use. And if his past is any indication, at the end of his term he will probably be good friends with Bob Iger.

Unfortunately, I think the deck is stacked against Peltz here. It is a herculean effort to get large institutional investors to vote against the board of an iconic company like Disney. That task becomes even harder when the company has just removed its CEO and replaced him with a respected prior CEO and replaced its chairperson. Adding to that, Disney recently settled with another top-tier activist, Third Point, which had a lot of the same suggestions Trian is making. I believe that Institutional Shareholder Services and large institutional shareholders are going to want to give this new team at least a year to work on their plan before supporting more change at the company. And I do not think the universal proxy is going to make that much of a difference in a proxy fight for one director on a unitary board. However, having said that, while I do not own any Disney shares in my fund, my 10 year old and 12 year old have a small amount of shares and when their ballots come in the mail, we will be voting for Nelson.    

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.