Netflix: A Candidate for Proxy Access

Netflix Inc. (NFLX),  which has lost half its value in the last two years, adopted an antitakeover plan (poison pill) intended to block activist investor Carl Icahn from expanding his nearly 10% stake. They did so without seeking shareowner approval and the pill may make it harder to find a buyer. Writing for the WSJ, Miriam Gottfried notes, Netflix Pill Should Give Shareholders Pause. Let’s hope shareowners do more than just pause; let’s take action!

Netflix has long been a corporate governance laggard. In my judgement, Reed Hastings, CEO/Chair was paid about twice what he should be. His pay wasn’t even tied to performance. (Netflix: How I Voted – Proxy Score 20%)  Hastings, as chairman of the board, is not in a good position to independently judge the performance of the CEO, since he also occupies that position.

As Gottfried reported, at the last annual meeting 75% of shares were voted in favor of a shareowner proposal to declassify the board (allow annual election of all directors). She left out the fact that 53% of shares were also voted in favor of a proposal by John Chevedden to allow shareowners representing 10% of the voting power of the company to call a special meeting. With that right, we could call a meeting and repeal the pill.

So far, Netflix has ignored the will of shareowners in both cases.  The following is a brief list of corporate governance failings at Netflix:

  • As mentioned, NFLX has a classified board.  Only 18% of S&P 500 and less than half of mid-caps have classified boards.
  • 81% of S&P 500 have majority vote requirements for directors. Netflix doesn’t.
  • The Board is authorized to increase or decrease the size of the board without shareholder approval.
  • Directors may only be removed for cause and only by the vote of 66.67% of the shares entitled to vote.

Additionally, two of the directors serve on more than three other boards. How can they devote the time necessary to be mindful directors at NFLX? They can’t. Two of the directors don’t even own any stock. That shows a lack of confidence in our company. NFLX is ripe for proxy access with the following features:

1. The Company proxy statement, form of proxy, and voting instruction forms shall include, listed with the board’s nominees, alphabetically by last name, nominees of:

a. Any party of one or more shareowners that has collectively held, continuously for two years, at least one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, and/or

b.  Any party of shareowners of whom 50 or more have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000 and collectively at least one half of one percent but less than five percent of the Company’s securities eligible to vote for the election of directors.

2. For any board election, no shareowner may be a member of more than one such nominating party. Board members and officers of the Company may not be members of any such party.

3. Parties nominating under 1(a) may collectively, and parties nominating under 1(b) may collectively, make nominations numbering up to 24% of the company’s board of directors. If either group should exceed its 24% limit, opportunities to nominate shall be distributed among parties in that group as evenly as possible.

4. If necessary, preference among 1(a) nominators will be shown to those holding the greatest number of the Company’s shares for at least two years, and preference among 1(b) nominators will be shown to those with the greatest number who have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000.

5. Nominees may include in the proxy statement a 500 word supporting statement.

6. Each proxy statement or special meeting notice to elect board members shall include instructions for nominating under these provisions, fully explaining all legal requirements for nominators and nominees under federal law, state law and the company’s governing documents.

For more on this type of proposal, see Proxy Access: A New Version for 2013. Such a proposal, if implemented, wouldn’t allow Ichan or any other challenger to take NFLX over. However, it would allow us to nominate two out of seven directors and would give us a chance to inject some new ideas. Maybe we could turn the company around; maybe we could sell it. At least we’d be making some progress.
Of course, I also hope Dale Johnson of the Los Angeles County Employees Retirement Association reintroduces his proposal to declassify the board and that John Chevedden puts forth his proposal to allow shareowners representing 10% of the voting power of the company to call a special meeting.  In fact, maybe Johnson should submit his as binding bylaw resolution.

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