A battle between Disney and activist Peltz brews. Here’s how the situation may unfold

Activist investor Nelson Peltz plans to mount a proxy fight for a seat on the Disney Board.

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

Sometimes a board observer position can be useful, especially for investors who do not have much board experience and are less likely to be regular contributors to board discussions. But Peltz offered a position as a board observer as he said to Whitney Houston, “You can join the band, but you are not allowed to sing.” There’s no way Disney thought for a second that Peltz would accept this offer, and there’s no way he should have.

I wonder why Peltz started this proxy fight in the first place and why Disney resisted. Peltz got the position when Bob Chapek became CEO and likely had plans to replace him with someone Peltz already knew. This would have been a great activist plan, but it went wrong a week later when Disney announced that they had replaced him with former CEO Bob Iger. Knowing Trian’s history and process, the company has probably been working on the plan for months and waiting for the right time to build the position. Unfortunately, all of Trian’s hard work developing the plan was in vain, but at that point the company had to regroup and develop a different approach to the new situation. The plan was supposed to include no opposition to Iger. While Trian said it was not opposed to Iger as CEO now, the company initially opposed him and made it difficult for the board to agree to a board settlement for Peltz. Having said that, a strong board with a strong CEO – admittedly a short-term CEO – shouldn’t have a problem with experienced shareholders in the room who may have unpopular opinions. In fact, the council should welcome it.

Trian made a presentation that made the case. In proxy fight presentations, each side uses facts and data to paint a picture of their own benefit and often these claims don’t stand up to scrutiny. For example, Trian takes issue with Disney’s total shareholder return according to Iger: 270% versus 330% for S&P 500 over the same period. I’m not sure how it compares to the industry, but I expect that if the industry produces better for Trian, they will use it. As the British economist Ronald Coase said: “If you abuse the data long enough, it will admit something.” In this case, we can say that Bob Iger is a bad CEO for Disney. Trian also took issue with Iger’s decision to acquire Fox, and he should have – it was a terrible decision in retrospect. But they should also include in the analysis, Iger’s decision to acquire Pixar, Marvel and Lucasfilm, which brought Disney more than $ 33.8 billion in the global box office, and billions more in merchandise and theme park extensions.

All these criticisms of proxy war tactics and strategy aside, and regardless of how we torture the record data Peltz as a director, of course he should be on the Disney Board. They are large shareholders with a strong track record of creating value through operational, strategic and capital allocation decisions. No, Peltz won’t be the most valuable director when it comes to deciding who should star in the next blockbuster Disney movie or which rides to build at the theme park — the board relies on management for that insight. But he will be the most prepared and valuable member of the board when conducting financial analysis of the various strategic and capital allocation opportunities available to Disney and advising the board on the best decisions for shareholders. Peltz has also proven to be a valuable director in helping the management team reduce operating costs and increase profits, which Disney can use. And if the past is any indication, by the end of the season he’ll be good friends with Bob Iger.

Unfortunately, I think the deck is stacked against Peltz here. This is a huge effort to get big institutional investors to vote against the board of a good company like Disney. The task became more difficult when the company recently fired its CEO and replaced it with a respected previous CEO and replaced the chairman. Additionally, Disney recently settled with another top-tier activist, Third Point, which has many of the same suggestions as Trian. I believe that Institutional Shareholder Services and large institutional shareholders want to give this new team at least a year to work on the plan before supporting other changes in the company. And I don’t think universal proxies will make any difference in a proxy fight for one director on a union board. However, having said that, while I don’t have Disney shares in the fund, my 10 and 12 year olds have small shares and when the ballots are sent out, we will vote 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 13D activist investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving the ESG practices of portfolio companies.