Netflix: Proxy Score 11

NetflixNetflix, Inc. (NFLX), an Internet television network, engages in the Internet delivery of TV shows and movies directly on TVs, computers, and mobile devices in the United States and internationally. It is one of the stocks in my portfolio. Their annual meeting is coming up on 6/9/2015. had the vote of two funds when I checked and voted on 6/3/2015.  I voted with management 11% of the time and assigned Netflix a proxy score of 11.

View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Netflix 2015 proxy in order to enhance corporate governance and long-term value.

Netflix: ISS Rating 

From Yahoo! Finance: Netflix, Inc.’s ISS Governance QuickScore as of Jun 1, 2015 is 10. The pillar scores are Audit: 2; Board: 10; Shareholder Rights: 10; Compensation: 9. 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. That gives us a quick idea of where to focus… Board, Shareholder Rights, and Compensation.

Netflix: Compensation

Netflix Summary Compensation Table (under “Summary Executive Compensation”) shows the highest paid named executive officer (NEO) was CEO, President, and Chairman of the Board Reed Hastings, at about $11.1M in 2014.  I’m using Yahoo! Finance to determine market cap ($37.69B) and Wikipedia’s rule of thumb regarding classification.

Netflix is a large-cap company.  According to Equilar (page 6), the median CEO compensation at large-cap corporations was $10.1 million in 2013, so Netflix’s pay is above that number. To its credit, Netflix shares out-performed the NASDAQ over the most recent one, two, five, and ten year periods.

The GMIAnalyst report I reviewed gave Netflix an overall grade of ‘D.’ According to the report:MSCI GMIAnalyst

  •  Unvested equity awards partially or fully accelerate upon the CEO’s termination. Accelerated equity vesting allows executives to realize pay opportunities without necessarily having earned them through strong performance.
  • The company has not disclosed specific, quantifiable performance target objectives for the CEO. Disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.
  •  The CEO’s total summary pay for the last reported period was more than three times the median pay for the company’s other named executive officers. Such disparity in pay raises concerns regarding the company’s succession planning process and the distribution of responsibilities among the executive management team.
  • A decline has occurred in the CEO’s equity holdings in the company over last year. Diminished executive exposure to company stock may work to reduce the alignment between the CEO’s interests and those of shareholders.
  • The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its directors may weaken the ability of equity awards to align directors’ interests with long-term value creation.

With above median relative pay and the above issues, I voted against the pay package and stock plan.

Netflix: Board of Directors and Board Proposals

Generally, when I vote against the pay package I also vote against the compensation committee, since they recommended the pay package to the full board: Messrs. Battle, Haley (Chair) and Hoag. Because of the classified board, I couldn’t vote against any of them, so I voted against those I could. Neither Smith nor Sweeney own any shares in our company. I like directors to have ‘skin’ in the game.

I voted against the increase in common stock as too dilutive.

Netflix: Accounting

I voted to ratify Netflix’s auditor, since more less that 25 percent of total audit fees paid are attributable to non-audit work.

Shareholder Proposals at Netflix

With regard to shareholder proposals, I voted in favor of the NYC Comptroller’s proposal for proxy access, which is just like many of the proposals I have submitted at many companies. This is the most important item up for a vote.

Of course I voted for my wife’s (Myra K. Young) proposal to move to simple majority requirements. Currently, it takes a supermajority vote requirement (66.67%) to amend certain charter and certain bylaw provisions.

I also voted FOR Mr. John Chevedden’s proposal to declassify the board, elect all directors annually. We need to be able to hold them accountable every years.

CorpGov Recommendations for Netflix – Votes Against Board Position in Bold

1.1Elect Director Richard N. BartonWithholdWithholdWithhold
Calvert Social Index Fund: The board does not include at least one minority director after the election.The nominee is an incumbent and the board failed to act on a shareholder proposal that received approval by a majority of the shares outstanding the previous year.
1.2Elect Director Bradford L. SmithWithholdWithholdWithhold
Calvert Social Index Fund: The board does not include at least one minority director after the election.
1.3Elect Director Anne M. SweeneyWithholdWithholdWithhold
Calvert Social Index Fund: The board does not include at least one minority director after the election.
2Ratify Ernst & Young LLP as AuditorsForForAgainst
Calvert Social Index Fund: Less than 25 percent of total audit fees paid to the auditor were attributable to non-audit work.
3Advisory Vote to Ratify Named Executive Officers’ CompensationAgainstAgainstAgainst
Calvert Social Index Fund: A vote AGAINST this proposal is warranted due to the following reasons: Equity awards to the CEO that lack any performance-contingent pay elements; Legacy single-trigger provisions in change-in-control agreements; and A lack of all of the following risk-mitigating features: a clawback policy, stock ownership guidelines, and stock holding requirements.The magnitude of CEO pay exceeds the 75th percentile of the company’s peer group.
4Increase Authorized Common StockAgainstAgainstAgainst
Calvert Social Index Fund: The increase in common stock is greater than 100 percent.
5Adopt Proxy Access RightForForFor
Calvert Social Index Fund: A vote FOR this item is warranted because the proposed proxy access right offers a valuable right to shareholders with appropriate safeguards.
6Adopt Simple Majority VoteForForFor
Calvert Social Index Fund: A vote FOR this proposal is warranted given that elimination of the supermajority vote requirement enhances shareholder rights.
7Declassify the Board of DirectorsForForFor
Calvert Social Index Fund: Calvert supports shareholder proposals seeking to declassify the board of directors.

SharkRepellentGovernance Issues at Netflix

Looking at for provisions unfriendly to shareowners:

  • Classified board with staggered terms.
  • Plurality vote standard to elect directors with no resignation policy.
  • No action can be taken without a meeting by written consent.
  • Shareholders cannot call special meetings.
  • Supermajority vote requirement (67%) to amend certain charter and all bylaw provisions.

Netflix Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

Proposals of stockholders that are intended to be presented at our 2016 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 at Netflix, Inc., 100 Winchester Circle, Los Gatos, California 95032, Attention: Secretary, no later than December 29, 2015 in order to be included in the Proxy Statement and proxy materials relating to our 2016 Annual Meeting of Stockholders.


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 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 % 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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