This Is the One Thing Netflix Should Do Better

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Streaming video veteran Netflix (NASDAQ: NFLX) held its annual shareholder meeting on June 6. At the meeting, investors gave the four Class II directors who were up for reelection a wake-up call and also approved a shareholder-friendly governance amendment by an overwhelming majority.” data-reactid=”11″>Streaming video veteran Netflix (NASDAQ: NFLX) held its annual shareholder meeting on June 6. At the meeting, investors gave the four Class II directors who were up for reelection a wake-up call and also approved a shareholder-friendly governance amendment by an overwhelming majority.

None of these vote counts is likely to make a lick of difference to how Netflix runs its business.

That statement tastes disgusting in my mouth. I hate Netflix’s lack of respect for shareholder opinions.

Low-quality governance

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="I'm not alone in this assessment, of course. Corporate governance watchdog Institutional Shareholder Services, for example, gives Netflix the worst possible governance-quality score of 10, on a scale from 1 to 10 where lower numbers point to lower governance risk and higher numbers are bad news. The audit committee gets high marks with a score of 2, but Netflix scores a terrible 10 regarding compensation practices, shareholder rights, and board quality.” data-reactid=”15″>I’m not alone in this assessment, of course. Corporate governance watchdog Institutional Shareholder Services, for example, gives Netflix the worst possible governance-quality score of 10, on a scale from 1 to 10 where lower numbers point to lower governance risk and higher numbers are bad news. The audit committee gets high marks with a score of 2, but Netflix scores a terrible 10 regarding compensation practices, shareholder rights, and board quality.

And, as I pointed out above, shareholders made it known that they don’t like Netflix’s board of directors very much.

Results of the vote

The approval ratings for reelected directors were dismal:

Voters also gave a 40% approval rating to Netflix’s CEO compensation, balanced against a 40% “against” bloc and 20% abstentions. The board of directors recommended that shareholders approve all of these items, so it’s not comforting to see the actual approval tallies stopping short of 50% in each case.

The board did get its way in a couple of votes, though. An independent suggestion to expand the company’s political disclosures stopped at 33% thumbs-up ballots, in line with Netflix’s official recommendation. And auditing firm Ernst & Young was kept on board with a massive 96% yes vote. That’s no surprise, given E&Y’s status as one of the Big Four global accounting firms.

Shareholders also gave massive support to a familiar proposal. Once again, the California State Teachers’ Retirement System requested an amendment to Netflix’s bylaws that would give shareholders a more direct say on how the company should be managed. By removing the current requirement of supermajority shareholder approval for making significant changes to Netflix’s bylaws and board structure, the board and management would have a tighter shareholder leash around their necks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This proposal gathered a 69% yea rating, up from 67% in last year's shareholder meeting and 52% in 2017. The same amendment has been proposed many times in the past, collecting as much as 80% support from the voters in 2016 and 2015. This year’s approval ratings landed well ahead of the 67% supermajority required for making such changes — yes, the exact thing under consideration here.” data-reactid=”24″>This proposal gathered a 69% yea rating, up from 67% in last year’s shareholder meeting and 52% in 2017. The same amendment has been proposed many times in the past, collecting as much as 80% support from the voters in 2016 and 2015. This year’s approval ratings landed well ahead of the 67% supermajority required for making such changes — yes, the exact thing under consideration here.

Wham, bam — time to change those bylaws!

Right?

More

Image source: Getty Images.

Not so fast…

Well, no. Here’s the key detail from the proxy statement that lets Netflix simply ignore even the overwhelming level of support here:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=""The proposal is precatory and, accordingly, is not binding on the Board or the Company." (emphasis added)” data-reactid=”41″>”The proposal is precatory and, accordingly, is not binding on the Board or the Company.” (emphasis added)

That’s business as usual for shareholder proposals. A precatory proposal translates into a wish stated by an outsider, rarely coupled with legally binding force. As for the directors receiving limited shareholder support, that’s a forcing vote, but the company would simply adopt the four nominees with the highest number of affirmative votes. With only four nominees to choose among, the outcome is a given. Apart from this, every single item under consideration at Netflix’s annual meeting was either precatory or advisory in nature.

Read More