The Walt Disney entertainment group has restructured its leadership after a major revolt by its shareholders.
Mr Eisner has been under concerted pressure
It has split the roles of chairman and chief executive, reducing the power of Michael Eisner, who formerly held both positions.
Mr Eisner will remain chief executive, while the former United States senator, George Mitchell, will become chairman.
But 43% of shareholders withheld their votes during Mr Eisner's re-election to the board.
He had faced barbed comments from rebel shareholders at the company's annual meeting in Philadelphia on Wednesday.
The result is far worse than any other chief executive has had to face in a shareholder revolt.
But even Mr Eisner's demotion is not enough for some shareholders.
Calpers, the massive fund which controls the pension assets of California's public sector, called the vote "stunning".
"This discontent is too wide and way too deep in the marketplace, and it has led us to believe that Eisner should go," said Sean Harrigan, president of Calpers' board of administration.
Roy Disney, a former Disney director and nephew of founder Walt, had led the calls for Mr Eisner to quit.
Reports said US cable giant Comcast, which had put in a hostile takeover bid, wanted talks with "independent Disney directors".
Earlier Mr Disney had told shareholders "to install a new management team".
But Mr Eisner has replied by saying Disney was doing "great" at a "contentious time".
'On a mission'
Walt Disney shares closed in New York slightly lower, down 11 cents or 0.41% at $26.65.
Roy Disney has complained the company's share price has underperformed, leaving it open to hostile takeover bids, such as Comcast's.
His ally Stanley Gold, in his farewell as a board member, said: "Roy Disney and I have been on a mission... to save our company. Things will be different after today."
He said Mr Eisner gave the impression that Disney "never had a bad year".
Mr Gold also blamed the Disney board for not holding Mr Eisner accountable for the company's problems.
Mr Disney held a series of unofficial meetings this week in a bid to rally support for his three-month long campaign to oust Mr Eisner.
He and Mr Gold have argued that getting rid of Mr Eisner would boost the value of shares, making the company too expensive for predators to buy.
Mr Eisner is accused of poor strategic thinking and management.
According to the BBC's North American business correspondent Stephen Evans, the critics argue that Mr Eisner has failed to "produce enough blockbuster successes in the true Disney tradition".
That is why the failure to extend a highly profitable partnership with Pixar Animation, the creative force behind films such as Finding Nemo and Monsters Inc, was so keenly felt.