In December 2004, the SEC and The Walt Disney Company settled charges that Disney had failed to disclose timely relationships between Disney and certain of its directors or their adult children or spouses. SEC rules require the disclosure of material relationships between the company and directors, officers, significant shareholders, or members of their immediate families. In 2003, the NYSE and the Nasdaq adopted stricter definitions of independence for directors, required that a majority of the directors be independent, and mandated the role of independent directors in various areas, including the audit, compensation and nominating committees.

Item 404 of Regulation S-K requires disclosure of transactions and relationships in which directors, officers, significant shareholders or members of their immediate families have a direct or indirect material interest. It is intended to shed light on relationships that may present actual or potential conflicts of interest that may affect the execution of their duties by officers or directors.

Section 303A of the NYSE Listed Company Manual and Rules 4200(a)(15) and 4350(c) of the Nasdaq Marketplace Rules contain detailed standards to ensure the independence of directors. Alan L. Beller, the Director of the Division of Corporation Finance, recently stated that “as the Commission noted in approving these standards, directors that are independent of management are more likely to evaluate the performance of the CEO and other officers impartially and to award compensation on an objective basis.”

The SEC charged that the failure to disclose the following relationships in a timely manner violated Disney’s disclosure obligations under Item 404:

  • From 1999 through 2001, the company employed the adult children of three of its directors in non-executive positions for annual compensation of between $60,000 and $150,000;
  • In 2000 and 2001, the wife of another director was employed by a 50% owned subsidiary of Disney (starting one year before her husband became a director) for annual compensation of more than $1 million;
  • From 1984 through 2003, Roy E. Disney, a director, the Vice Chairman and an officer, used aircraft owned by his wholly-owned corporation, for Disney-related business. Disney paid fixed hourly amounts and expenses when Mr. Disney used his corporation’s aircraft for Disney business; and
  • When Disney acquired Capital Cities/ABC, Inc., it agreed to provide the former Chairman, who became a director of Disney, with an office, secretarial services, a leased car, and a driver.

In April 2002, Disney announced that it had revised its Corporate Governance Guidelines as part of its voluntary program to enhance its corporate governance. The revised guidelines included a stricter definition of director independence than was required by either the SEC or the NYSE. The SEC charged that this announcement, which was made in a press release and not in an SEC filing, incorrectly stated that Disney’s key board committees were now restricted to independent directors, when each committee had at least one member who was not independent under the new guidelines as a result of the employment of the director’s adult child, and that Disney had 13 independent directors, when the correct number was ten under the new guidelines.

Disney first disclosed the employment of the directors’ family members in an amendment to its 2001 Form 10-K filed in August 2002, more than eight months after filing the Form 10-K. Disney first disclosed the payments for Mr. Disney’s travel costs, and the provision of an office, secretarial services, a leased car, and a driver to another director, in its 2002 Form 10-K filed in December 2002. These disclosures were made by Disney voluntarily, and not at the urging of the SEC or the NYSE.

In settling the charges, Disney, without admitting or denying the charges, consented to the entry of an order that it cease and desist from violating the periodic reporting and proxy solicitation requirements of the Securities Exchange Act of 1934.

Director independence is crucial to the objective oversight of management and the protection of shareholder interests. This administrative proceeding serves as a reminder that companies should carefully review all relationships between the company and its directors, officers and significant shareholders, including members of their immediate families, and ensure that all appropriate disclosures are made.

For further information on the SEC, NYSE or Nasdaq rules for determining director independence, please contact Peter M. Menard at (213) 617-5483.