Our Letter to Disney

September 19, 2022

Robert Chapek
Chief Executive Officer
The Walt Disney Company

Via email, U.S. mail, and Strive.com

RE: Strive Engagement with Disney

Dear Mr. Chapek,

Over the last year, the Walt Disney Company’s public approval rating plummeted from 77% to 33%, an unprecedented collapse following Disney’s public embrace of controversial political positions in deference to social activists.

Strive Asset Management recently became a shareholder of Disney. On behalf of our clients, we write to ask your board a fundamental question: how do Disney’s politicized behaviors advance the economic interests of Disney’s stockholders? We believe they do not, and we respectfully suggest that Disney rectify its missteps ahead of next spring’s proxy voting season.

Disney Is A Beloved American Brand

There is perhaps no more iconic and beloved American company than the Walt Disney Company. Today, Disney’s mission is “to entertain, inform and inspire people around the globe through the power of unparalleled storytelling, reflecting the iconic brands, creative minds and innovative technologies that make ours the world’s premier entertainment company.” It was once much shorter: “Make people happy.” And until recently, Disney has largely stayed true to both.

If Disney can avoid being conscripted into political warfare, we believe the company is well positioned for growth. Post-COVID demand for Disney’s parks and entertainment remains strong. In the third quarter, Disney reported that Disney+ subscriptions rose to 152.1 million, adding 14.4 million new subscribers and beating its 147 million forecast. Sales at the parks similarly rose to $7.4 billion for the quarter, up 70% from this time last year. Overall, Disney beat its earnings estimate by $496 million. Investors have taken note: last month, activist investor Dan Loeb’s Third Point LLC bought a substantial new stake in the company, suggesting he believes Disney is undervalued.

Over the past year, Disney has become embroiled in political controversies that have unquestionably damaged Disney’s brand. We ask a simple question: what risk-reward calculus justifies taking controversial political positions that risk derailing Disney’s otherwise strong economic prospects by alienating a majority of your customer base?

Case Study: Disney’s Response to Florida’s Parental Rights In Education Bill

Disney’s recent response to Florida’s Parental Rights in Education Bill provides an instructive example of how your politicized behaviors have harmed the company’s business interests.

Earlier this year, the Florida legislature introduced a bill to “reinforce the fundamental rights of parents” by, among other things, disallowing “classroom instruction on sexual orientation or gender identity in kindergarten through grade 3.” Over two-thirds of Americans support such a bill, including majorities of both Republicans and Democrats.

A small but vocal minority of Disney employees opposed the bill and asked their employer to do the same, as is their right. Disney’s leadership wisely declined, explaining in a company-wide email:

As we have seen time and again, corporate statements do very little to change outcomes or minds. Instead, they are often weaponized by one side or the other to further divide and inflame. Simply put, they can be counterproductive and undermine more effective ways to achieve change.

We applaud Disney’s initial business decision to remain neutral. As commentators have explained, “a CEO’s decision [to wade into politics] can easily break down civility within a company, alienate a customer base, and generate concerns from shareholders whose ownership stake is being used to trample on their core values.” Likewise, polling shows that while 29% of investors believe it is a “good thing” for companies to leverage their financial power for political or social means, twice as many – 58% – say it is not.

Yet two days later, Disney inexplicably reversed course. The company made a sharp public statement: “We were opposed to the bill from the outset, but we chose not to take a public position on it because we thought we could be more effective working behind-the-scenes.” To that end, you claimed you had “called DeSantis th[at] morning to express our disappointment and concern that if the legislation becomes law, it could be used to unfairly target gay, lesbian, nonbinary and transgender kids and families.” The company further attempted to make a $5 million donation to the Human Rights Campaign – which, to Disney’s public embarrassment, the organization rejected. (We respectfully remind you that while you are free to use your own vast personal resources to advance social causes that you favor – Disney shareholders rewarded you this year with a $20 million annual bonus on top of a $2.5 million base salary – your sole purpose in making a corporate donation must be to advance the financial interests of Disney’s stockholders).

That wasn’t the end of it. Disney went further by committing not only to fighting the passage of the Florida bill, but to “increasing our support for advocacy groups to combat similar legislation in other states” as well. You vowed to “use our influence to . . . stand[] up for the rights of all” and “be an outspoken champion for the protection, visibility and opportunity you deserve.” After the bill was signed, Disney made good on these promises, issuing a new press release stating: “[o]ur goal as a company is for this law to be repealed by the legislature or struck down in the courts.”

As new Disney shareholders, we respectfully ask: Why was it Disney’s “goal” as a California headquartered entertainment company to repeal legislation in Florida and other states that had nothing to do with its products or operations? More specifically: why do you believe that these behaviors would increase value for Disney stockholders?

Subsequent events suggest that these decisions have damaged Disney’s business interests. 61% of Disney consumers disagreed with Disney’s final position against the Florida bill, and Disney’s public approval rating cratered from 77% in 2021 to 33% in 2022. Protests erupted outside of Disney theme park gates. Everyday citizens called for boycotts, and hundreds of families followed through. These results should shock no one: 87% of people are either very or somewhat likely to “stop using a product or service of a company that advocates for a political agenda” that contradicts their beliefs. And, notably, these losses are not outweighed by additional purchases – or “buycotts” – by customers who agree.

Disney’s activism sowed further discontent even amongst its employees – the very “stakeholder” whom Disney was supposedly attempting to appease. “The Walt Disney Company has become an increasingly uncomfortable place to work for those of us whose political and religious views are not explicitly progressive,” employees wrote in an open letter. Other employees, including gay ones, penned articles and gave interviews speaking out against Disney’s decision to denounce the Florida law.

Proper Board Governance Could Have Prevented Measurable Economic Damage

Your decision to wade into political controversy has inflicted measurable economic damage upon Disney – above and beyond the foregoing subjective factors.

We note that the state of Florida revoked Disney’s special tax district status under Florida law. That change alone is estimated to cost Disney’s stockholders $10.6 million per year. More importantly, Florida’s decision also means that Disney will lose its ability to self-govern. Upon Florida’s announcement, Disney’s stock plunged 2.3%, representing an approximate $5.2 billion loss in market value. A prominent Wall Street analyst stated the obvious at the time: “[P]olitical theater is never great for stock sentiment.” Disney’s job as a company may be to produce theatrical content for its customers, but it is not the job of Disney’s CEO to play the starring role.

Indeed this was only one of among many direct losses suffered by Disney at the hands of Florida’s government. In 2021, Florida also enacted a political antidiscrimination statute that penalized internet companies for engaging in certain kinds of viewpoint-based content moderation. The original version of the law would have included companies like Disney who own internet properties and streaming services such as Disney+. Yet the final text of the statute conspicuously exempted companies in the state that “own a theme park or entertainment venue larger than 25 acres.” In other words, Disney’s internet properties and streaming services were exempted from a statute that otherwise would have covered them.

There is little doubt that Disney lobbied expressly in favor of that amendment because the company saw a business benefit to being exempted–unsurprisingly, the Florida senator who introduced the last-minute exemption, Senator Ray Rodrigues, received campaign donations from various Disney entities in the last election cycle. Clearly, Disney thought the benefit of being exempted from the bill—which carries fines as high as $250,000 per day for violations—was worth the investment. Yet following Disney’s opposition to Florida’s Parental Rights in Education bill, the Florida legislature voted to rescind Disney’s exemption, meaning the statute will now apply to Disney.

It is axiomatic that companies must take public policy into account when making business decisions. For example, on environmental questions, certain of Disney’s largest “shareholders” regularly and vehemently argue that “climate risk is investment risk” – speculating that policymakers will eventually adopt policies in the future that should influence business decisions today. Disney appears to have heeded this call, regularly taking pains to issue “[e]nvironmental sustainability” reports that are not yet required by law. For a company so forward-thinking as to anticipate and prognosticate what future laws may be passed to fight climate change, we find it puzzling that Disney’s leadership failed to anticipate a much more predictable policy reaction to its own behaviors. If “climate risk is investment risk,” then wading into political controversy is an investment risk too – in Disney’s case, one that harmed its business interests today.

We note that certain of your largest “shareholders” promote ESG (Environmental-Social-Governance) factors in their shareholder engagements with large public companies. We recognize that your decisions may be viewed by certain of your shareholders as consistent with advancing certain favored “Social” factors. Given the significance of these issue, and the severity of the business consequences that predictably followed, as shareholders we respectfully demand transparent public answers to the following questions:

(1) Was Disney’s public advocacy relating to the Parental Rights in Education Act discussed at any point in time with your large ESG-promoting shareholders, including but not limited to BlackRock, State Street, or Vanguard?

(2) Was your decision to adopt a political position on Florida’s Parental Rights in Education Act openly discussed with, and approved by, your board of directors? We believe that proper board oversight and governance could have mitigated the damage to Disney’s business interests resulting from this decision and wish to understand the board’s level of engagement on this question.

Disney’s Behaviors Reveal A Concerning Pattern Of Harmful Political Missteps

Unfortunately, Disney’s self-inflicted wounds neither started nor ended with the Florida bill. Last year, Disney drew ire for firing actress Gina Carano over political statements notwithstanding its inaction in response to other talents with different political persuasions who have made similarly charged public comments. In recent years, Disney threatened to stop filming in Georgia over its abortion laws. More recently, Disney has come under attack for taking a perceived political stance on the Supreme Court’s decision overturning Roe v. Wade. We note that many other public companies who serve a similar customer base – including Walmart, McDonald’s, PepsiCo, CocaCola, General Motors, Tyson, Marriott, and others – declined to take this course.

There is no evidence to suggest that these positions have benefited Disney’s stockholders, and a growing body of evidence to suggest that they have harmed Disney’s stockholders. A 2021 poll showed that 73% of Americans, including most Democrats, thought Disney was wrong to fire Ms. Carano. More than half disagreed with Disney’s opposition to Georgia’s abortion law. After learning of these events, 60% of Americans said they viewed Disney less favorably, and 58% said they are less likely to watch Disney programming.

Overall, 65% of Americans believe Disney has taken its vision of “political correctness” too far. And while the financial impact of Disney’s actions is difficult to quantify, investment analysts have noted that “the internet firestorm with calls for a boycott of Disney products . . . . explain[s] some of the poor sentiment towards the stock as an additional layer of volatility.”

As shareholders, we are sympathetic to the fact that no executive makes the right business decision every time and that hindsight offers a useful basis for learning and improvement. Yet you appear to be taking the opposite approach: Disney still has not shied away from political controversy. To the contrary, just last week, you praised Disney for “[standing] our ground.” We find these comments deeply troubling for Disney’s future.

Disney Board Owes a Fiduciary Duty to Its Actual Owners

We remind Disney’s board it owes a fiduciary duty solely to Disney’s actual owners, not to a minority of its employees, activist organizations, or to large financial institutions who promote one-sided political agendas.

We understand that you are in a challenging position when Disney’s top “shareholders” promote social and political activism that is not in Disney’s best interests. BlackRock, for example, has been Disney’s second largest shareholder for the past eight years, and has implored its portfolio companies to act to “benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.” It has further touted DEI initiatives and imposed racial quotas on corporate boards. Based on these efforts, we understand why you may believe that such “shareholders” might approve of your politicized behaviors.

But here is the reality: these purported “shareholders” are not the actual owners of your company.

Today the three largest passive asset managers in the world – BlackRock, State Street, and Vanguard – manage over $20 trillion, approximately equal to the total U.S. gross domestic product. In 2022, these firms were Disney’s top 3 shareholders. By contrast, the actual owners of Disney are not BlackRock, State Street, Vanguard – or, for that matter, Strive. Disney’s actual owners are the clients of these institutions: everyday citizens whose capital is invested in passively managed index funds.

You owe a fiduciary duty to the actual owners of Disney, not to the institutions who claim to represent them. There is strong reason to believe that these large asset managers are not acting with their clients’ best interests in mind. Indeed, nineteen state Attorneys General have explicitly accused BlackRock of as much. Last month, they alleged that the company “use[s] the hard earned money of our states’ citizens to circumvent the best possible return on investment . . . . regardless of client wishes.”

And many, if not most, of Disney’s real shareholders disagree with the political statements Disney has made. Disney’s shareholders include both Democrats and Republicans, Californians and Texans, doctors with 401(k)s and steelworkers with pensions. Like Disney’s customers and Americans more generally, Disney’s shareholders are not monolithically progressive. Thus even if these investors wanted their capital to be used for political purposes – and most do not – not all of them would agree with the positions Disney chose to adopt.

Disney Must Commit To Political Neutrality

In your latest interview, you stated that Disney “want[s] to represent a brighter tomorrow for families of all types.” “All types,” of course, includes not only progressive LGBT+ families, but conservative lesbian and gay families, Christian families, Orthodox Jewish families, Republican families, moderate Democrat families, and the like. And the only way to represent a brighter tomorrow for all of these customers – to be, in your words, “everything to everybody” – is for Disney to focus on delivering an excellent customer experience without repeating the mistakes of its recent past.

Disney must make clear that it will no longer take political stances on issues unrelated to its core business operations. The company must make clear that it will hold firm to this promise, and that it will not waver no matter how important a particular social cause is to Disney’s employees or its followers on Twitter.

While we defer to management on the best way to achieve this goal, our view is that such change will only be possible if Disney formally updates its corporate policy to adopt a position of neutrality ex ante. Such corporate policy would appropriately immunize Disney from criticism either from its liberal constituents or its conservative ones.

Disney must act now. If Disney continues speaking out on political issues that do not affect its business, it will face even greater pressure to act when they do. And the sides Disney will be expected to take won’t be the ones that are favorable to its business. Disney may be pressured to stop operating its cruise line in the name of environmental concerns – even though its cruise business generates an estimated $1.6 billion per year. The company may be pressured to stop using certain companies in its supply chain based on social issues, even if those suppliers are the best suited to meet Disney’s business needs. The possibilities are endless, yet real. Indeed, Disney’s initial decision to remain silent on the Florida bill was reportedly motivated precisely by a concern about “setting precedent.”

It is true that the policy may be ill-received by those who want Disney to support their own pet causes. Advocates often claim that silence is not an option, that failure to speak is itself “hate speech,” and that there will be walkouts, boycotts and repercussions to Disney’s business if it does not speak out. These concerns are largely overblown. Notably, none of the other five largest companies in Florida – Publix, Jabil, Darden, Bloomin Brands, or Royal Caribbean – spoke out about the Florida bill. There is no evidence to suggest that they suffered any adverse business consequence as a result, as compared to the adverse effects on Disney from its public advocacy. Indeed, some have persuasively argued that Disney’s initial misstep with respect to the Florida bill wasn’t remaining silent, it was its attempt to publicly defend its decision to remain silent.

Adopting a formal written policy may attract mixed attention now, but we believe it will be redound to Disney’s long-run benefit. Once Disney makes clear that it will no longer wade into political controversies, and it abides by that commitment, the company’s failure to speak out in any specific instance will eventually be a non-event – just as it is when Disney meets the financial guidance that it sets for Wall Street analysts meeting its own financial guidance that it sets for analysts. Would-be protestors will learn that their efforts would be better directed elsewhere.

This strategy has proven successful in the past. The first time Berkshire Hathaway faced pressure to fight climate change, the company issued a lengthy, thoughtful response on why it won’t do so; six years later, it refers activists back to its original response. In May, Netflix set a firm policy refusing to engage with employees who objected to its content: “if you’d find it hard to support our content breadth, Netflix may not be the best place for you.” There haven’t been any reported employee walkouts or significant media attention since.

Critics may argue that companies need to do things that allow them to realize their higher purpose, and that they win in the long run by doing so. We agree wholeheartedly. But the curious thing about Disney’s recent actions is that there’s nothing suggesting that Disney was advancing its core mission or purpose, rather than someone else’s. Disney does not further its mission to “make ours the world’s premier entertainment company” when it takes sides on heated partisan issues ranging from abortion to transgender education to young children. Instead, as you aptly stated at the outset of the Florida controversy, wading into the political fray serves only to “further divide and inflame.”

Strive’s Request

Speaking as a shareholder on behalf of our clients, we respectfully urge the company to:

  • Adopt a formal corporate policy that Disney does not take public positions on political controversies that are unrelated to the company’s core business operations;
  •  Publicly commit to political nondiscrimination amongst its employees and customers, including human resources policies which make clear that employees or customers will not be subject to punishment for expressing political views; and
  • Commit to making all decisions based on long-term profitability of Disney alone, without regard to social, cultural, or political pressure from employees, activist groups, or other stakeholders.

We are invested in Disney’s future and look forward to continued engagement ahead of next spring’s proxy voting season.

With best regards,
Vivek Ramaswamy
Executive Chairman, Strive Asset Management