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The Disney brand was built on fairy tales: princesses who suffer unimaginable hardships, princes who save them and cartoon characters who inhabit strange, wonderful worlds. When Walt Disney came to Hollywood in 1923, his pilot film was called Alice’s Wonderland.

The Walt Disney Company’s latest fantasy is the plan to reawaken its film business by paying $7bn (€5.7bn) for Pixar, a 775-employee company that has made six computer-animated films since its founding 20 years ago. Robert Iger, Disney’s new chief executive, says animation is the key to his company’s future, and Pixar is the top digital animation studio: it has 18 Academy Awards and its films have grossed more than $3bn.

Most reports have portrayed the
Disney-Pixar negotiations as a personality play, between Mr Iger and Steven Jobs, Pixar’s head. Both have much to gain from a deal. Mr Iger could secure top animation talent, which his predecessor, Michael Eisner, could not do; and Mr Jobs would become Disney’s largest shareholder, at 7 per cent, with a platform for cross-selling products from Apple, the other group he leads.

But like a classic Disney feature, this deal, if it comes off, would be about much more than the main characters. It is an allegory of what is right and wrong with large companies, particularly in media and technology.

Disney has become a pathologically dysfunctional organisation. Like IBM of the 1970s or AT&T in the 1980s, Disney grew fat and bureaucratic in the 1990s, long after cementing its lucrative entertainment franchise. Some of Disney’s problems are endemic to large corporations. When a company has 133,000 employees, it cannot be governed by human beings. Instead, it must rely on a culture to preserve its earlier entrepreneurialism, while focusing workers on the continuing mission.

Unfortunately, Disney’s culture, like that of IBM and AT&T, encouraged inefficiency and stifled creativity. Over the past five years, Disney’s shares have lost a third of their value and the company has became a corporate governance pariah. Many thought the low point was the fiasco surrounding Michael Ovitz, who left Disney with $140m after just 14 months. But more troubling was the release of the abysmal Treasure Planet, a film that cost about as much as Mr Ovitz and avoided universal ignominy only because so few people saw it.

To survive and prosper, large organisations must be divided into manageable pods, whose workers have independence and incentive. In contrast to Disney, Pixar was just such a freestanding, free-spirited group with a relaxed, open-plan office and no signs of managerial hierarchy. John Lasseter, Pixar’s creative leader, wore Hawaiian shirts and rode a scooter inside. When Pixar won Oscars, employees displayed the statues proudly but dressed them in Barbie doll clothing. Whereas Disney executives micromanaged films, including those with Pixar, Mr Lasseter let his crew run free and encouraged ideas.

In many ways, Pixar was an old-fashioned, entrepreneurial company, built on the foundational incentives that Frank Knight, the early 20th century economist, had described as the linchpin of successful corporate activity. Mr Knight argued that companies would be best managed when a single human being held a large stake. This view makes especially good sense for today’s technology companies, where production is driven by small groups of
entrepreneurs with the incentives and skills to innovate. Mr Jobs owns
more than half of Pixar’s shares and has been the driving force to maximise share value. He is a proven risk-
taker, a quintessential Knightian
entrepreneur. Unlike Disney’s top executives, who were handsomely rewarded with salary, bonus and stock options, Mr Jobs has earned a total salary at Pixar over three years of just $157, not even enough to buy a new iPod,
and he did not receive stock options.

Even if the deal is concluded, no one, including Mr Jobs, will have a large enough stake in the game at Disney to play entrepreneur. Besides, Mr Jobs is more likely to focus on running Apple. In general, companies without an entrepreneur suffer when they grow. Examples abound today. Large technology groups do defensive patenting, building thickets of intellectual property, not because they have good ideas but because they want protection from smaller rivals who might. Big drug companies do not invent new drugs; they buy companies that do. And so on.

The key question for a possible
Disney-Pixar deal is, which company’s culture would survive: large or small? Would Pixar become “Disneyfied”? Or would Disney apply Pixar’s model and unshackle its other business units? In its formative years, Disney was a creative hotbed, led by a handful of brilliant minds. Over time, the leaders lost sight of their mission and product. Mr Iger’s challenge is to remake Disney with a small-company culture that rewards experimentation and encourages innovation. As a Pixar employee noted: “What you need to create is the most trusting environment possible where people can screw up.” And, one might add, live happily ever after.

The writer is professor of law at the University of San Diego and author of Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Times Books/Profile Books)

Copyright The Financial Times Limited 2019. All rights reserved.

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