updated 11/30/2004 9:28:37 AM ET 2004-11-30T14:28:37

A former Walt Disney Co. director testified Monday that retaining ex-Disney president Michael Ovitz in another position at the entertainment giant, instead of firing him as its president in late 1996, would have had a "detrimental" effect on the company and its stock price.

Richard A. Nunis, the ex-chairman of Disney's parks and resorts and a former Disney director, said he told chief executive Michael Eisner that he fully supported the decision to fire Ovitz in a phone conversation a few days before it was announced publicly in mid-December 1996. Nunis said that phone conversation was the first time Eisner told him that Ovitz was being terminated.

Eisner previously told him that summer in a telephone conversation that Ovitz was having trouble fitting in at Disney and he was thinking about making a change, Nunis said. Rumors were rampant at the company at the time that Ovitz was having personality problems with other executives at the company, he said.

"When you have turmoil at the top of a company, it permeates down the entire organization," said Nunis, who worked 44 years at Disney before retiring in 1999.

Ovitz, Eisner and several current or former directors are being sued in the Delaware Court of Chancery over a $140 million severance package paid to Ovitz when he left Burbank, Calif.-based Disney, after 14 months as the company's president.

The shareholder derivative lawsuit, which has been in progress for more than seven years, claims Disney's board failed in its fiscal responsibilities by not properly scrutinizing Ovitz's employment contract when he joined the company in 1995 and then granting him a nonfault termination that entitled him to the massive severance package when he left in December 1996.

The shareholders claim Ovitz was ineffective in his job at Disney and could have been fired for cause for his excessive spending and habitual lying while at the company.

Reveta F. Bowers, a Disney director during Ovitz's tenure, is expected to take the stand Monday afternoon. She will be followed by Sanford M. Litvack, Disney's former chief of corporate operations and chief legal officer, on Tuesday.

On Monday, Nunis testified that he remembered the board discussing Ovitz and Barry Diller, the ex-chairman of Paramount Pictures, as possible candidates to replace former Disney president and chief operating officer Frank Wells, who died in a helicopter crash in 1994.

Nunis said he was pleased to learn from Eisner in the summer of 1995 that Disney planned to hire Ovitz as its president. Eisner telephoned him a few days before the hiring was announced publicly, Nunis said.

He believed Eisner and Ovitz _ because they were close friends _ would craft a business partnership similar to those of company founders Walt Disney and Roy Disney, and Eisner and Wells. He also believed Ovitz, as a former top talent agent, would attract more star power to Disney's studio operations.

Nunis said he was aware that Ovitz's compensation package was substantial when the board named Ovitz as president at a board meeting in September 1996, but didn't recall a specific discussion of Ovitz's compensation at that meeting. He said he was aware Ovitz's package included a salary, a bonus and stock options and no signing bonus.

He didn't attend an executive session where several directors have testified that Ovitz's compensation package was reviewed in detail. Nunis also didn't attend an executive session in November 1996 in which Eisner told board members that he was asking Gary Wilson, another Disney director, to speak to Ovitz about leaving the company.

Nunis said he believed it was the responsibility of Disney's compensation committee to approve Ovitz's pay package and then report those results to the full board.

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