Netflix 2019

Netflix 2019: Ignore Shareholders Again?

Netflix 2019 annual meeting June 6. Netflix has adopted the paternalistic culture of Mad Men, ignoring shareholders. To enhance long-term value, WITHHOLD vote from ALL directors. Vote AGAINST Pay & Auditor. Vote FOR Disclose Political Contributions & Adopt Simple Majority Vote. 

Netflix, Inc. (NFLX) provides Internet entertainment services. Most shareholders do not vote.  Reading through 53+ pages of the proxy takes too much time. Your vote could be crucial. Below, how I voted and why.

If you have read these posts related to my portfolio and proxy proposals for the last 24 years and trust my judgment, skip the 8 minute read. Go directly to my ballot choices. Voting will take you only a minute or two. Every vote counts.

I voted with the Board’s recommendations 0% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A).

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 2019: ISS & Sustainalytics Ratings

From the Yahoo Finance profile:

Netflix, Inc.’s ISS Governance QualityScore as of April 1, 2019 is 10. The pillar scores are Audit: 2; Board: 10; Shareholder Rights: 10; Compensation: 10.

Corporate governance scores courtesy of Institutional Shareholder Services (ISS). Scores indicate decile rank relative to index or region. A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk. We need to pay close attention to members of the Board, Shareholder Rights, and Compensation issues.
Sustainalytics’ ESG Ratings measure how well companies proactively manage and mitigate material environmental, social and governance (ESG) risks. The ESG Rating is a quantitative score on a scale of 1-100. Netflix underperforms its peers. Environmental and Social risks are improving slightly since 2014, whereas as Governance risks are rising.
Netflix 2019 ESG

Netflix 2019 Proxy Voting Guide: Board Proposals

1. Netflix 2019: Directors

Egan-Jones Proxy Services recommends a vote FOR Kilgore, Mather and Ambassador Rice but not Timothy M. Haley, whose independence is compromised after more than 10 years of service.

I voted Withhold on all directors. Shareholders have repeatedly voted in favor of shareholder proposals to provide for special meetings, allow for written consent, adopt simple majority vote and require a majority vote for election of directors. The Board repeatedly ignored the will of shareholders. See below under “Netflix: Paternalism Toward Shareholders.”

Vote WITHHOLD on all directors.

2. Ratification of Independent Auditor

I have no reason to believe the auditor engaged in poor accounting practices or has a conflict of interest. Egan-Jones recommends voting against the auditor if they served for seven years. Independence becomes compromised by that time. Ernst & Young, LLP has served more than seven years. No other issues appear significant.

Vote AGAINST.

3. Executive Compensation

Netflix’s Summary Compensation Table (p. 34) shows the highest paid named executive officer (NEO) was CEO, President, and Chairman of the Board Reed Hastings at $36.1M. I’m using Yahoo! Finance to determine market cap ($150.1B) and I define 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. Netflix shares outperformed the NASDAQ over the most recent two and fimylogiq_logove year time periods, but underperformed during the most recent one year time period. The ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 178 to 1.

According to MyLogIQ, mean CEO compensation in the S&P 500 was $14.2M, median was $12.4M last year. Pay at Netflix puts them in the top 90% of CEOs in the S&P 500, which starts at $22.3.

Egan-Jones Proxy Services uses a proprietary rating compensation system to measures wealth creation in comparison to other companies. They believe the company’s compensation policies and procedures are centered on a competitive pay-for-performance culture, aligned with the long-term interest of its shareholders and necessary to attract and retain experienced, qualified executives critical to the Company’s long-term success and the enhancement of shareholder value.  Egan-Jones

Given above median pay, mixed performance and my concern for growing wealth inequality, I voted Against. I would have voted withhold on compensation committee members Messrs. Belmer, Haley (Chair), and Hoag and Ms. Sweeney. However, because of the classified board, they were not up for reelection.

Vote AGAINST.

Netflix 2019 Shareholder Proposals

4. Disclosure of Political Contributions

This good governance proposal comes from me, James McRitchie on behalf of my wife Myra Young, so of course I voted FOR. Egan-Jones disagrees. The Company argues they comply with the laws. However, the laws allow dark money contributions. Anyone concerned with our ability to ensure Netflix’s political contributions are in the best interests of shareholders should vote FOR this proposal.

Vote: FOR

5. Adopt Simple Majority Vote

This good governance proposal is from John Chevedden. Shareholders voted 85% of shares in favor; 15% opposed. As noted by Egan-Jones, “a simple majority standard will give the shareholders equal and fair representation in the Company by limiting the power of shareholders who own a large stake in the entity, therefore, paving way for a more meaningful voting outcome.”

Vote: FOR

Netflix 2019 CorpGov RecommendationsProxy Insight

Proxy Insight had reported votes for Calvert and Domini as of when I last checked. They may have updated by the time I post this. Both funds voted the same as we did. 

In looking up a few funds in our Shareowner Action Handbook, I see the NYC Comptroller voted the same as us, except he voted for the auditor. Praxis voted the same as us.


CorpGov Votes:

  1. Directors: WITHHOLD all
  2. Executive Pay: AGAINST
  3. Auditor: AGAINST
  4. Disclose Political Contributions: FOR
  5. Adopt Simple Majority Vote: FOR

Netflix 2020: Issues for Future Proposals

SharkRepellentLooking at SharkRepellent.net for anti-shareholder provisions:

  • Classified board with staggered terms.
  • Plurality vote standard to elect directors with no resignation policy.
  • 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.

Netflix 2020: Mark Your Calendar

Stockholder proposals that are intended to be presented at our 2020 Annual Meeting of Stockholders in our 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 25, 2019 in order to be included in our Proxy Statement and proxy materials relating to our 2020 Annual Meeting of Stockholders.

Proposals and nominations should be mailed to: Netflix, Inc., 100 Winchester Circle, Los Gatos, California 95032, Attention: Secretary. Our bylaws have been filed with the SEC and are available at www.sec.gov.

Netflix: Record of Paternalism Toward Shareholders

NFLX 2018

NFLX 2017

NFLX 2016

NFLX 2015

NFLX 2014

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,” chosen by aspiration. 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. For more on the subject, see CEO Pay Machine Destroying America.

   

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