Stanley & Roy: still trying to tame Disney; The latest act in their long-running governance show bears watching.

WHAT IS SOLELY WITHIN the purview of the board and therefore not an appropriate matter for stockholders? What is solely within the purview of operating management and therefore not an appropriate matter for directors?

Not too long ago (say, the mid-1970s), we used to know, or profess to know, the answers to these rather basic questions of corporate law. If an unhappy stockholder sought access to the proxy statement so he could present a resolution about the CEO's compensation, he never got far. He was swatted away by young corporate lawyers, who would obtain from SEC staff an acknowledgment that the proposal was properly "excludable" from the company's proxy statement under one (or even two) of the provisions of Rule 14a-8. The stockholder was left in the dust. A corporate officer's remuneration was simply not a proper issue for stockholders; it was for the board.

Today's corporate governance world is a tad more complicated. How about CEO succession? In 1975, was there any question that that was quintessentially a matter for the board? For a stockholder to try to insinuate himself into that process was preposterous. In public corporations, the CEO is designated by the board, not by the stockholders; and it is, of course, (only) the board that chooses the process through which that selection is made.

Veteran readers of this column may recall my analyses of the then-states of play concerning (a) Roy E. Disney and Stanley P. Gold ("Stanley & Roy"), former directors of the Walt Disney Co. and vocal opponents of its CEO, Michael Eisner, and (b) the Disney board. (See "High Noon at the Magic Kingdom," Winter 2004, and "Power of Suggestion," Spring 2004.) Basically, Stanley & Roy resigned from the Disney board, criticized Eisner for having numerous shortcomings to the detriment of the Disney stock price, and successfully engineered a campaign pursuant to which, at the spring 2004 annual meeting, 45% of the votes for Eisner's re-election as a director were withheld.

Shortly thereafter, Eisner promised he would retire as CEO, the board trumpeted its commencement of a CEO search, but--lo and behold--at the end of that search Robert Iger, currently the Disney No. 2 and purportedly Eisner's fair-haired boy, was selected as CEO-designate.

To the Delaware Chancery Court come now Stanley & Roy, complaining. In a suit filed in early May, Stanley & Roy assert that the company's (that is, the board's) CEO search was a sham because, although the board created the impression that outside candidates would be fairly considered, in reality the process was wired so that Iger had the only real shot. And, say Stanley & Roy, had they in late September 2004 not been misled by the board's false representations--e.g., promising a "thorough, careful, and reasoned process" and "full consideration of external candidates"--in early 2005 they would have run a slate in a proxy contest.

The chancellor is being asked to void the 2005 election of directors and to require Disney to hold a new one. Should he do so, Stanley & Roy intend, this time, to run an opposition slate.

The Delaware courts have long emphasized that they will not brook interferences with, or manipulation of, corporate elections or electoral machinery. If improper impediments are placed in the path of an insurgent slate of director-nominees, Delaware judges do not hesitate to act. Nor does Delaware take lightly the making of materially false statements in a proxy statement for the purpose of influencing shareholders' votes; such conduct fouls the waters of the shareholder franchise.

But Stanley & Roy do not assert that, in the last election, their slate of opposing candidates was interfered with. There was no such slate. Nor do they assert that the electoral process was compromised by voting irregularity or like infirmity; there was no election contest, either in 2004 or in 2005. No, their claim is that they would have run an opposing slate of directors in 2005 but for the Disney directors' earlier statements about the search (not the electoral) process being used by the board.

But those choices--the type of search process used to select, and the identity of, a new CEO--have always been considered matters for the directors.

I write, on deadline, in early June (having read Stanley & Roy's complaint but not the defendants' answering papers). By the time you receive this edition of DIRECTORS & BOARDS, the chancellor very likely will have ruled whether the complaint is sufficient, and the loser very likely will have appealed.

The case bears watching. It may become an important one regarding the boundaries of corporate governance.

Hoffer Kaback is president of Gloucester Capital Corp. and has served on several boards.

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The author can be contacted at [e-mail].