The 'hypothetical conflict' that may be at the root of Disney's woes
By Stefan Padfield
Disney is not doing well. As of July 22, the stock price has fallen 15 percent over the last year, while the S&P 500 is up almost 15 percent. That means Disney is down 30 percent compared to the broader market over that period.
Myriad explanations have been offered for this decline. It is arguably difficult to overstate the backlash generated by Disney's decision to "wage war on democracy" and parental rights by coming out publicly against Florida's parental rights bill in 2022. (I say "wage war on democracy" because Florida's governor Ron DeSantis presumably acted in accordance with his election platform when he signed the bill into law.)
Effectively, Disney decided to spit in the face of at least half its customer base — and perhaps more than half, given that it wasn't that long ago that people still thought of Disney as a "family friendly" company. From a shareholder perspective, it becomes critical to understand whether the corporation's leaders acted dutifully when making this decision.
To understand Disney's decision to dive into politics by opposing "parental rights," we must briefly discuss an organization called the Human Rights Campaign. HRC is "one of the world's leading LGBTQ+ civil rights organizations." Meanwhile, the Catholic League has described it as "a radical homosexual organization" that "often disrespects the human rights of those with whom it disagrees."
In his 2021 book The Dictatorship of Woke Capital, Stephen Soukup describes HRC as one of the activist groups that started targeting businesses in the early 1990s because the activists' social agendas "were 'too important' to leave to the democratic process." He further describes HRC as influencing businesses by employing a "soothsayer's trick" that defenders of Marxism had to employ in the face of Marxism's repeated failures — simply keep moving the goalposts.
Specifically, Soukup argues that HRC "tells companies that corporate policies x, y, and z will produce powerful progress for the LGBTQ community but changes its expectations the next year, saying that policies a, b, and c are the real keys."
Ultimately, Soukup notes that HRC's Corporate Equality Index "has become an enormous concern for companies that desperately want to avoid the label 'homophobic' and thus do everything they can to appease and ally with HRC."
I suspect many people would consider a corporate board made up of HRC supporters to be severely limited in its ability to act in an unbiased manner — as they are duty-bound to do — when it came time to decide whether to oppose a law derisively and deceitfully called the "Don't Say Gay" law. And yet, a judge ruling on a related shareholder's books and records request in the case of Simeone v. Disney concluded that this was a "hypothetical conflict," and denied the shareholder's inspection request.
To be sure, not all of the directors on the Disney board were identified as HRC supporters, but the burden of proof on shareholders seeking access to the books and records of a corporation they own is, as the judge acknowledged, "the lowest standard of proof" in Delaware law.
Further, while the alleged conflict is not the sort of financial conflict typically understood to constitute a breach of the duty of loyalty, it seems reasonable to worry that it is the sort of conflict that could undermine a board's responsibility to act on a fully informed basis in good faith. Even if less than a majority of the board is identified as being ideologically biased, shareholders should be allowed to review corporate minutes and other related documents to assess how much the conflicted directors contaminated the overall process. While I am unaware of any pending appeal, we should all hope this judge's decision is not the final word on the issue.
Allowing HRC membership to create an actionable conflict for corporate directors may materially undermine the ability of corporate boards to govern. My response is that it's simply too costly to ignore these conflicts, given the extent to which we are politically divided as a nation and the extent to which people are consequently prioritizing their ideological commitments.
Further, acknowledging the problems these conflicts can create should incentivize corporations to improve the viewpoint diversity of their boards. In fact, one can envision courts or legislatures creating a safe harbor from such claims for boards with demonstrable viewpoint diversity. Watching activists twist themselves into knots trying to argue against viewpoint diversity would be an added bonus.