Walt Disney CFO, Others, Brought Concerns to Board Over Bob Chapek

Then came Nov. 8, and Disney’s calamitous fiscal-fourth-quarter earnings report.

On Sunday evening, Disney said Mr. Iger would be returning as chief executive after a prior 15-year stint in the role, and that Mr. Chapek was out after less than three years in the job.

On Monday, the company said that

Kareem Daniel,

a top lieutenant to Mr. Chapek whose job entailed deciding how Disney’s movies and TV shows would be shown—in theaters, on streaming platforms or on television—was leaving the company and that his division would be overhauled.

“Over the coming weeks, we will begin implementing organizational and operating changes within the company. It is my intention to restructure things in a way that honors and respects creativity as the heart and soul of who we are,” Mr. Iger said in a memo.

Shares closed Monday at $97.58, up 6.3%, marking the stock’s largest increase since Dec. 11, 2020. They are down 37% so far this year.

The board of directors earlier this year credited Mr. Chapek with steering the company through the worst of the coronavirus pandemic. Under his watch, Disney’s theme parks division has posted record quarterly revenue and profit.

Mr. Chapek’s position at the top of the company had been shaky for months, according to people familiar with the matter, despite Disney’s board deciding unanimously in June to renew his contract through the end of 2024.

The company has been under pressure from two prominent activist investors to cut costs and make major strategy changes.

The trouble came to a head Nov. 8, when Mr. Chapek hosted a conference call with analysts following Disney’s weaker-than-expected quarterly report. Disney had just reported a loss of $1.47 billion in its streaming business, more than twice the loss reported in the prior year quarter and had underperformed analysts’ expectations in revenue and income.

Profit margins at the theme parks—Disney’s best-performing division over the past year—were shrinking, the company said, and the streaming segment’s goal of profitability by September 2024 could be in danger if the economy worsened. Despite the gloomy report, Mr. Chapek’s tone on the call was upbeat and his outlook positive.

“We believe we are on a path to profitable streaming business that generates shareholder value long into the future,” he said.

Investors didn’t buy it. Disney’s share price fell by 13.2% the following day to close at $86.75. Analysts began publishing negative reports about the company’s prospects, and

Jim Cramer,

who hosts a show about financial markets on CNBC, called for Mr. Chapek to be fired.

Ms. McCarthy, the CFO, told board members that she wasn’t happy with the way Mr. Chapek had communicated with investors during the conference call, people familiar with the matter said.

On Friday, according to people familiar with the matter, Mr. Iger received a call from

Susan Arnold,

the chairman of the board of Walt Disney, the company that he led as chief executive for 15 years. Ms. Arnold, who hadn’t spoken to Mr. Iger in months, asked: Would Mr. Iger consider coming back to run Disney again?

Over the next two days, a fevered negotiation unfolded, culminating Sunday night, just as many of the company’s top executives were on their way to an Elton John concert in Los Angeles being streamed on Disney+, with the surprise announcement that Mr. Chapek had stepped down and Mr. Iger would be returning as CEO.

Meanwhile, Nelson Peltz’s Trian Fund Management LP built a sizable stake in the company earlier this month and is seeking a board seat as it pushes for other operational changes, according to people familiar with the matter.

Trian’s view is that Mr. Iger shouldn’t be back in control of the company, the people said. Executives at Trian—which was founded by Mr. Peltz,

Ed Garden

and Peter May—have also initiated a dialogue with Disney leadership about having Mr. Peltz serve on the company’s board, according to the people.

Mr. Iger had long expressed displeasure with the organizational structure Mr. Chapek put in place to handle content distribution, according to people familiar with the matter.

Shortly after taking the reins of the entertainment giant, Mr. Chapek had restructured the company’s television and film operations and created a distribution arm to determine the best platform for any given content, whether that is a streaming service, a TV network or movie theaters. As part of that change, content executives no longer had control over their budgets.

Mr. Chapek said at the time that the moves were a recognition of changing consumer habits and were meant to give priority to its streaming-video services. Mr. Iger has told people close to him that he didn’t think the new regime made sense, said the people, noting that it took away freedom from the creative side of the business.

The company’s primary streaming service, Disney+, was Mr. Iger’s brainchild. Launched in the fall of 2019, it grew at a frenetic pace, thanks in part to a competitive pricing strategy—at launch, it cost about half of

Netflix Inc.’s

most-popular plan. It has also offered numerous deals with commercial partners from

Verizon Communications Inc.

to

Delta Air Lines Inc.

that offered the service at a discount or no additional cost.

In the three years since its inception, Disney+ amassed over 164 million subscribers, about three quarters of Netflix’s current subscriber base of 223.1 million. Overall, Disney—which also owns the ESPN+ streaming platform and controls the majority of Hulu—boasts more streaming subscribers globally than any other company.

But the streaming division, which Mr. Chapek has said he expected to be profitable by the company’s 2024 fiscal year, has lost more than $8.5 billion since Disney+ launched and has posted bigger operating losses in each of the past four quarters. Under Mr. Chapek, Disney+ has increased its content spending dramatically—to around $30 billion this year alone.

Like many of its rivals, Disney is now trying to shift from a growth-oriented streaming strategy to profitability, but is doing so in a difficult economic environment and an intensely competitive market.

Disney is moving some shows that were supposed to be Disney+ originals and air them first on other networks including the Disney Channel, people familiar with the matter said. By doing so, the costs of production and marketing of the shows—which included mystery show “The Mysterious Benedict Society” and medical drama “Doogie Kameāloha, M.D.”—would be shifted away from the streaming service, making its financial performance look better, they said.

Ms. McCarthy was concerned about this strategy, the people said.

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In another attempt to improve the profitability of its streaming unit, Disney is about to raise the price of Disney+ and launch an ad-supported tier of service. The company also raised the monthly price of ESPN+ in August to $9.99, a 43% increase.

J.P. Morgan analysts on Monday said they expected few changes in Disney’s streaming strategy, but said Mr. Iger may try to speed up the process of buying

Comcast Corp.’s

Hulu stake. The cable giant retains a 33% stake in the streaming service, which Disney can decide to acquire in early 2024.

Mr. Chapek faced other challenges than the unprofitable streaming business during his two-year tenure.

Mr. Chapek had alienated people at the animation units of Disney including Pixar, people familiar with the situation said. Mr. Chapek recently suggested in an interview at a Wall Street Journal conference that adults didn’t watch the company’s animation. Some in the animation team felt the remark demeaned the value of their content, which has been a staple of the company since its founding.

Since he stepped down as Disney’s executive chairman at the end of last year, Mr. Iger has kept busy by mentoring founders of tech startups and by joining the board of the venture-capital firm Thrive Capital.

He has also told people close to him that retirement is not as enjoyable as he thought it would be, in part because he is not getting to spend enough time with his wife, the journalist Willow Bay, who in March signed a new five-year contract to continue her role as dean of the University of Southern California’s Annenberg School of Communication and Journalism.

—Sarah Krouse and Lauren Thomas contributed to this article.

Write to Robbie Whelan at [email protected], Emily Glazer at [email protected], Joe Flint at [email protected] and Jessica Toonkel at [email protected]