Netflix Inc $NFLX., one of the stocks in my portfolio, an Internet television network, which engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. Their annual meeting is coming up on June 9, 2016.
ProxyDemocracy.org had collected the votes of one fund family when I checked. Vote AGAINST directors, pay, auditor; FOR all shareholder proposals. I voted with the Board’s recommendations 0% of the time. View Proxy Statement via iiWisdom.
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
Netflix Inc: ISS Rating
From Yahoo! Finance: Netflix, Inc’s ISS Governance QuickScore as of May 1, 2016 is 10. The pillar scores are Audit: 2; Board: 10; Shareholder Rights: 10; Compensation: 9. Brought to us 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 Inc: Compensation
Netflix Inc’s Summary Compensation Table (p. 35) shows the highest paid named executive officer (NEO) was CEO, President, and Chair Reed Hastings, at $16.6M. I’m using Yahoo! Finance to determine market cap ($43.9B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Netflix is a large-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at large-cap corporations was $10.3M in 2014, so pay was considerably above that amount. Netflix’s shares outperformed the NASDAQ over the most recent one, two, five and ten year periods.
The MSCI GMIAnalyst report I reviewed gave Netflix an overall grade of ‘D.’ According to the report:
- 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, 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.
Similarly, Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures wealth creation in comparison to other widely held issuers. “Superior” is the rating given. On the actual compensation advisory vote, Egan-Jones concludes:
We believe that the Company’s compensation policies and procedures are centered on a competitive pay-for-performance culture, strongly aligned with the long-term interest of its shareholders and necessary to attract and retain experienced, highly qualified executives critical to the Company’s long-term success and the enhancement of shareholder value. Therefore, we recommend a vote “FOR” this Proposal.
Despite strong performance and the recommendation from Egan-Jones, I voted ‘AGAINST the pay package, primarily because I believe even median CEO pay needs to come down. However, I am also in overall agreement with Calvert:
The company’s long term incentive compensation is not sufficiently tied to financial performance.A vote AGAINST this proposal is warranted due to the following reasons:- Equity awards to the CEO lack any performance-contingent pay elements;- Single trigger provisions in legacy 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.
As is my usual practice, I also voted against members of the compensation committee up for reelection: Timothy M. Haley.
Netflix Inc: Accounting
Egan-Jones recommended ‘FOR but I see more than 25% of total audit fees were attributable to non-audit work. — so I voted ‘AGAINST’ because of a possible conflict of interest.
Netflix Inc: Board Proposals
As mentioned above, I voted against the pay package and Mr. Haley, who also sits on too many boards to give sufficient attention to Netflix Inc. I voted against Ann Mather for the same reason. Both sit on five boards. I am also concerned that, according to GMI Analyst, neither of these directors appear to own any stock. Each may have restricted stock granted by Netflix for their service but I would prefer to see them invest some of their own funds. Additionally, I see that although shareholders have previously voted a majority of shares in favor of every shareholder proposal in this proxy in prior years by as high as 83%, the Board has not implemented any of them. This is unacceptable. I would vote against the entire Board if provided the opportunity. Egan-Jones recommended in favor of all directors. I voted ‘WITHHOLD’ for Mr. Haley Ms. Kilgore, and Ms. Mather.
Netflix Inc: Shareholder Proposals
#4 Require a Majority Vote for the Election of Directors. The proposal by the Southwest Regional Council of Carpenters Pension Fund won 83% of the vote in 2014, when sponsored by the United Brotherhood of Carpenters Pension Fund, and deserves continued support. Majority vote requirements at least allow directors to be turned out by shareholders; the current plurality standard provides no opportunity for accountability. Vote FOR #4.
#5 Proxy Access. Won 71% vote last year and is again sponsored by the New York City Employees’ Retirement System. Proxy access is the most important shareholder right that has to be won through a proxy vote. I’ve been working on this issue since before filing a petition with the SEC in the summer of 2002, which the Council of Institutional Investors said reinvigorated the debate. If you vote only one item on the proxy, let it be FOR #5, proxy access.
#6 Reduce Supermajority Vote Requirement. My wife (Myra Young) reintroduced this proposal after winning 81% of the vote last year and 81% in 2013 when proposed by John Chevedden. Vote FOR #6.
#7 Declassify the Board of Directors won 80% of the vote last year and is again proposed by John Chevedden. It won 89% of the vote in 2013 when proposed by Florida SBA and 83% in 2014.
How can Netflix get away with so consistently ignoring the wishes of its shareholders? As you can see, the Board has been very unresponsive. Hopefully, that will change.
Netflix Inc: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported by ProxyDemocracy.org, Proxy Insight had reported votes of the Canada Pension Plan Investment Board (CPPIB) and the Unitarian Universalist Common Endowment Fund (UU).
|1.1||Elect Director Timothy M. Haley||Withhold||Withhold|
|1.2||Elect Director Leslie Kilgore||Withhold||Withhold|
|1.3||Elect Director Ann Mather||Withhold||Withhold|
|2||Ratify Ernst & Young LLP as Auditors||Against||For|
|3||Advisory Vote to Ratify Named Executive Officers’ Compensation||Against||For|
|4||Require a Majority Vote for the Election of Directors||For||For|
|6||Reduce Supermajority Vote Requirement||For||For|
|7||Declassify the Board of Directors||For||For|
Netflix Inc: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Classified board with staggered terms.
- 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.
- No proxy access.
Netflix Inc: Mark Your Calendar
Proposals of stockholders that are intended to be presented at our 2017 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 28, 2016 in order to be included in the Proxy Statement and proxy materials relating to our 2017 Annual Meeting of Stockholders.
Proposals and nominations should be mailed to: Netflix, Inc., 100 Winchester Circle, Los Gatos, California 95032, Attention: Secretary.
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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