CEOs Who Should Lose Their Jobs

On July 31, Disney reported that earnings rose 10% in the fiscal third quarter, a sign to some intrepid investors that the long- awaited turnaround may at last be at hand. The stock has recently been on a tear, up 35% this year on hit movies such as Finding Nemo, a joint project with Pixar Animation Studios. Yet the future of Disney's very profitable collaboration with Pixar is unclear, as Eisner and Pixar's Steve Jobs are locked in a bare-knuckled negotiation over a new agreement -- one that most observers think will be much more beneficial for Pixar. There is also ongoing litigation with a firm that owns many of the merchandising rights to Winnie the Pooh and asserts it is owed many millions by Disney. Not to worry, says Stan Dinsky, portfolio manager at Lord Abbett's Affiliated Fund and an owner of Disney's stock. "We got the guy doing the right thing now, and the company's moving in the right direction -- and Rome wasn't built in a day."

A company spokesman says that Disney's woes are mostly a re-sult of the economy and fallout from September 11 and that Eisner has decided to invest heavily in Disney properties, which also helped depress recent results. He also says that ABC is on the mend.

The Devil You Know

Something funny happens when a CEO (or an elected official) has been in his seat for a very long time: People get used to his being there. Often, he's a really nice guy with all the right intentions, not to mention all the right connections. And in a business atmosphere that's become more about avoiding risk than taking it, the incumbent has the advantage of being a known quantity. "One of the traps for boards is when you have a CEO who is a very good guy but not very bright, who just doesn't have a good strategy and isn't capable of creating one," says John Biggs, former head of pension fund TIAA-CREF. "Boards are slow to deal with that."

The dilemma for a board working with an underperforming CEO is a tough one. Is it better to bet the farm on an unknown or to stick with what you've got and hope he'll somehow come through in time? Says Darrell Rigby, a director at Bain & Co: "The question is always, 'If we replace the CEO, are we going to get someone who is better or worse than the incumbent?' "

That may well be what directors are asking themselves about Robert Waltrip, CEO for the past 41 years of what is now called Service Corporation International, the Houston-based company that is the largest provider of funeral, cremation, and cemetery services in North America. Waltrip is also a very active donor to the political campaigns of many prominent Texans, including the gubernatorial campaign of President George W. Bush. (He is a good friend of the Bush family.) A funeral director himself, Waltrip saw the scale advantages of buying up funeral homes in clusters and embarked on a stock-fueled acquisition frenzy that blew up in 1999. SCI eventually took several hundred million dollars in write-downs and retrenched, selling many of its recent purchases at deeply discounted prices to reduce a ballooning debt that nearly put the company six feet under.

The company also found itself in hot water for a variety of alleged irregularities. In 1998, the Texas Funeral Service Commission recommended a $450,000 fine for SCI's alleged use of unlicensed embalmers in Texas. SCI hasn't paid the fine and has asked for a hearing on the matter, which, five years later, has not been scheduled. In May 2003, it settled charges filed by the Florida attorney general (without any admissions of guilt) that an SCI-owned Jewish cemetery in West Palm Beach dumped human remains incorrectly, desecrating grave sites. The terms of the settlement have SCI paying $4 million to the Florida government and $2 million to set up a fund for individuals with claims. And in August, it took a $15 million charge against second-quarter earnings to pay the uninsured portion of an investor lawsuit that went through arbitration.

Waltrip has apparently faced few questions from his board, which boasts, among others, A.J. Foyt Jr., the race-car driver, and Waltrip's son, W. Blair Waltrip, a former executive at SCI whose noncompete agreement allows him to be paid until 2005 even though he resigned as executive vice president in 2000. Although SCI's stock now trades at just under $4 (down from a high of $47) and the company actually fell off the S&P 500 Index in 2000, only last year did the board bring up the issue of planning for a successor to its septuagenarian CEO. "I realize I am stating the obvious," responded James Shelger, SCI's general counsel, in a letter, "but executives hold their positions because the Boards of Directors . . . feel they are the most qualified."

At Disney, the emotional crosscurrents are even more complex. Eisner isn't just the devil the board knows -- he's a fallen angel it revered. In his tenure, after all, he turned a small, lagging studio that was producing increasingly unwatchable movies into an entertainment-industry titan. "If you know someone's doing a bad job and has never done a good job, it's easier to coalesce," says Mahoney, the hedge-fund manager who holds Disney stock. "If you've got someone who did a great job and now is not doing as good a job, you're not likely to get as activist about it."