Netflix (NFLX), is one of the stocks in my portfolio. Their annual meeting is June 9, 2014. ProxyDemocracy.org had collected the votes of three funds when I checked and voted on 6/4/2014. I voted with management 27% of the time. View Proxy Statement (why no linked Table of Contents?) Read Warnings below. What follows are my recommendations on how to vote the NFLX proxy in order to enhance corporate governance and long-term value.
Compensation
NFLX’s Summary Compensation Table shows CEO/Chair Reed Hastings was the highest paid named executive officer (NEO) at about $7.7M in 2013. I’m using Yahoo! Finance to determine market cap ($25.3B) and Wikipedia’s rule of thumb regarding classification. WMT is a large-cap company. According to Equilar (page 6), the median CEO compensation at large-cap corporations was $9.7 million in 2012, so NFLX is under that. NFLX shares outperformed the NASDAQ substantially over the one, two, and five periods.
The GMIAnalyst report I reviewed gave NFLX an overall grade of ‘C.’ According to the report:
- The board has not established a formal clawback policy regarding its executive incentive pay. Such policies allow boards to recoup incentive payouts that may have been the undeserved result of erroneous or fraudulent financial reporting.
- The company has not disclosed specific, quantifiable performance target objectives for the CEO, in contrast to 73.9% of companies in its home market that have provided such metrics. Disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.
- The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO and directors may weaken the ability of equity awards to align executives’ interests with long-term value creation.
Because pay was below median and performance has been good, and despite the problems noted by GMIAnalyst, I voted in favor of the pay package.
Board Issues
The GMIAnalyst report listed several possible issues, including:
- Entrenched Board
- Overboarded Directors
- Expense Recognition
- Asset-Liability Valuation
NFLX has a classified board, entrenching takeover defenses, which together with the high number of long-tenured directors raises concerns about whether the board is able to provide an effective counterbalance to management. We note that only 21.9% in United States have been flagged for having an entrenched board.
Of those up for reelection, Battle sits on 6 boards, Mather sits on 5. That’s too many for both to do a good job at NFLX. Additionally, Mather and Haley hold no actual shares in our company despite serving on the board for 4 years and 16 years respectively. Four out of seven directors have served on the board for twelve years or longer. While I value experience, I also view fresh insights. I think the board needs a refresh, so I voted against Battle and Mather.
After reviewing the shareowner proposals and the failure of the Board to implement proposals that passed by 96%, 88%, and 81%, I decided to also vote against Hastings. I would have voted against the entire Board, if given the opportunity.
Broken
Shareowner Proposals
- Declassify the Board, submitted by Florida SBA. I voted in favor of this so that we can hold each member of the Board accountable each year. Actually, I see Florida SBA submitted a similar proposal last year and it won 96% support. Yet, the Board did nothing to implement it.
- Require majority voting for unopposed election of directors, submitted by the Carpenters Pension Fund. I voted in favor of this measure. Right now an unopposed director can be elected by the vote of a single share. That is ridiculous. If they can’t win a majority vote when unopposed, the Board needs to nominate a better candidate. I see a similar proposal by CalSTRS last year won 88% support but the Board ignored it.
- Require vote by shareowners to install a poison pill, submitted by John Chevedden. The Board shouldn’t be able to put in a pill unless the conditions of it are voted on by shareowners. I voted in favor.
- Require enhanced confidential voting, as submitted by my wife, Myra Young. Of course I voted in favor of it. The Board should not have the advantage of seeing votes as they come in while shareowners do not. I don’t want my investment money used to solicit votes against proposals that would otherwise pass with 96% of the vote. Voting isn’t fair when one side sees the votes as they come in and the other does not.
Additionally, last year a proposal by Chevedden to repeal supermajority requirements won 81% of the vote. Again, the Board took no action.
CorpGov Recommendations Below – Votes Against Board Position in Bold
| NUM. | PROPOSAL TEXT | CorpGov | DOMINI | CALVERT | CBIS |
|---|---|---|---|---|---|
| 1.1 | Elect Director Reed Hastings | Withhold | Withhold | Withhold | Withhold |
| 1.2 | Elect Director Jay C. Hoag | Withhold | Withhold | Withhold | Withhold |
| 1.3 | Elect Director A. George (Skip) Battle | Withhold | Withhold | Withhold | Withhold |
| 2 | Ratify Auditors | For | For | For | Against |
| 3 | Ratify NEO Compensation | For | Against | Against | Against |
| 4 | Approve Exec Bonus Plan | For | Against | For | For |
| 5 | Declassify the Board of Directors | For | Against | For | For |
| 6 | Majority Vote to Elect Directors | For | For | For | For |
| 7 | Approve Poison Pill | For | For | For | For |
| 8 | Proxy Voting Confidentiality | For | For | For | For |
| 9 | Require Independent Chairman | For | For | For | For |
Mark your Calendar
Proposals of stockholders that are intended to be presented at our 2015 Annual Meeting of Stockholders in the proxy materials for such meeting must comply with the requirements of SEC Rule 14a-8 and must be received by our Secretary no later than December 29, 2014 in order to be included in the Proxy Statement and proxy materials relating to our 2015 Annual Meeting of Stockholders.
Issues for Future Proposals
Looking at SharkRepellent.net
- Classified board with staggered terms.
- Plurality vote standard to elect directors with no resignation policy.
- 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.
- No action can be taken without a meeting by written consent.
- Shareholders cannot call special meetings.
- Supermajority vote requirement (66.67%) to amend certain charter and certain bylaw provisions.
From Yahoo! Finance: Netflix, Inc.’s ISS Governance QuickScore as of May 1, 2014 is 10. The pillar scores are Audit: 10; Board: 10; Shareholder Rights: 10; Compensation: 8. Brought to you by Institutional Shareholder Services (ISS). Scores range from “1” (low governance risk) to “10” (higher governance risk). Each of the pillar scores for Audit, Board, Shareholder Rights and Compensation, are based on specific company disclosures.
Warnings
Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime).I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003.
Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs.
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