Man Without Qualities

Wednesday, August 21, 2002

The Fall of the House of Eisner?

Michael Eisner's position at Disney bears an increasing resemblance to Edgar Allen Poe's House of Usher:

No portion of the masonry had fallen; and there appeared to be a wild inconsistency between its still perfect adaptation of parts, and the crumbling condition of the individual stones. In this there was much that reminded me of the specious totality of old woodwork which has rotted for years in some neglected vault, with no disturbance from the breath of the external air. Beyond this indication of extensive decay, however, the fabric gave little token of instability.

Similarly, the stories about Michael Eisner's Disney mostly seem to suggest the silent, serious, internal decay of the individual building blocks of the corporation, even as assurances are offered from various quarters that Mr. Eisner on the whole is "well entrenched," while Mr. Eisner is predicting a quick turnaround for Disney. Only a thin zigzag fissure seems to run through Mr. Eisner's position.

One of the odder things about Mr. Eisner is the apparent disparity between his once-undisputed acuity and what has for many years been an increasingly obvious detachment from the creative and management core of his position. It's difficult to point to where this apparent detachment first emerged. One of the key features of a company such as Disney is that so many of its projects require rather long lead times - parks, movies, television shows. Also, the company's assets (film library, licensing deals, and parks) tend to generate revenue in ways that normally change trends rather slowly (at least absent dramatic developments such as the event of September 11). So if something big did change irreparably at Disney in 1994, one would likely expect to see the trends in corporate performance not shift for at least a few years. So it is at least suggestive that under Eisner-led management Disney's stock way outperformed the market from 1985 to the mid-1990's, but after 1997 Disney stock has not performed over the market. Specifically, the stock's performance is consistent with what one would expect to find if something critical - and negative - happened in about 1994. It is also notable that the stock price is now actually about where it was in 1995. And, by many measures of actual performance (as contrasted with the stock price), Disney has not been much better than the market since 1995 - although such results did not go into an immediate decline.

Of course, Disney lost both Wells and Katzenberg in 1994 - events quite independent of Mr. Eisner. Wells was killed in a crash and Katzenberg left in a huff. Eisner was left running Disney more or less by himself.

But also in 1994, Mr. Eisner underwent emergency heart bypass surgery. His survival was uncertain. It was so uncertain that he put the name of his successor in a sealed envelope whose contents were only to be revealed should if he did not survive.

Why bring this up? Because the cause of Mr. Eisner's decline may be that he is -or has - what cardiologists call "a pump head."

A Duke University study appearing in the New England Journal of Medicine in February, 2001, found that a substantial proportion of patients after coronary artery bypass surgery experience measurable impairment in their mental capabilities. Surgeons privately know this effect as "pump head." In the study, patients were tested for their cognitive capacity (i.e. mental ability) before surgery, six weeks, six months, and five years after bypass surgery. Patients were deemed to have significant impairment if they had a 20% decrease in test scores.

This study had three major findings

1) Cognitive impairment occurs after bypass surgery.

2) 42% of patients became impaired.

3) The impairment was not temporary.

Also, the decline in mental capacity in those who had bypass surgery was 2 -3 times higher over five years than in patients who did not have surgery. "Pump head' is not the same thing as depression - although the symptoms are similar. Earlier studies had indicated that cardiac bypass surgery does not cause true depression.

Similarly, experts such as Guy McKhann, M.D., director of the Mind-Brain Institute, say that "Research has shown that anywhere from 25 to 80 percent of cardiac surgery patients experience postoperative declines in their mental abilities--problems with memory, verbal skills or physical coordination."

While Mr. Eisner does not exhibit effects as serious as those noted by Dr. McKhann, it seems reasonable to ask whether Mr. Eisner's increasingly obvious detachment may be attributable to the effects of, and associated with, his surgery - and therefore not easily amenable to correction by application of financial incentives or otherwise. And such a physiological explanation would help explain the increasing common reports from people who know Mr. Eisner that he seems at bottom uninterested in really engaging with Disney's mounting difficulties - preferring pseudo-solutions of an essentially cosmetic nature.

Things seem to be coming to a head at Disney with a distinct accelerando. The quiet but formidable Roy Disney and his business partner, the also formidable if somewhat less quiet Mr. Gold, seem feisty and willing to fight. Mr. Eisner has made himself the company's second or third largest individual shareholder, and struck out against Mr. Gold by a rather nasty filing with the Securities and Exchange Commissison. The New York Times says Mr. Eisner has at least until November to show he has begun to address the problems - but Mr. Eisner will surely try to serve up Mr. Iger as the sacrificial victim for the likely disastrous fall ABC season.

Similarly, while the opening of Poe's story is on the slow, monumental, brooding side, its ending is more rather dynamic:

The radiance was that of the full, setting, and blood-red moon, which now shone vividly through that once barely discernible fissure, of which I have before spoken as extending from the roof of the building, in a zigzag direction, to the base. While I gazed, this fissure rapidly widened—there came a fierce breath of the whirlwind—the entire orb of the satellite burst at once upon my sight—my brain reeled as I saw the mighty walls rushing asunder—there was a long tumultuous shouting sound like the voice of a thousand waters—and the deep and dank tarn at my feet closed sullenly and silently over the fragments of the “House of Usher.”

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