Netflix Board Too Comfortable in Seats, Investors Say

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By Andrea Vittorio

Netflix Inc.’s directors are getting too comfortable in their seats, according to investors who want to change the way its board gets elected.

Fifty of the streaming service’s largest shareholders are being urged in a May 24 letter to vote for a proposal to amend its bylaws so that board nominees must get more “for” than “against” votes from investors to win or keep their seats in uncontested elections.

This kind of majority voting standard is common practice among just over 91 percent of S&P 500 companies, according to ISS Analytics, the data arm of Institutional Shareholder Services Inc.

It’s one of several corporate governance reforms, including yearly director elections instead of staggered ones, that Netflix shareholders have supported in recent years but the board has failed to follow up on. Investors, including the nation’s largest public pension funds, have also been trying to get the right to nominate their own directors on management’s ballot.

The combined effect is that “the board is fairly insulated from accountability,” Bill Dempsey, chief financial officer at the Service Employees International Union, told Bloomberg BNA. The union, which filed the proposal, has more than 2 million public and private sector members in the U.S. and Canada, many of whom invest in Netflix through their retirement plans.

“It’s easier for the board to get stale and out of touch,” Dempsey said. Half of Netflix’s independent directors have tenures of at least 12 years and the board lacks diversity, SEIU wrote with the proposal’s co-filer, the California State Teachers’ Retirement System (CalSTRS).

‘Grown-up Governance’

Netflix’s nine-member board told shareholders to vote against the proposal at its annual meeting June 6 because its plurality voting standard “has served the company well” and switching to majority voting would introduce “uncertainty” into director elections. It’s also “unnecessary” since shareholders can withhold votes to express their disapproval of corporate policies, strategy or director candidates, the board said in a proxy filing.

Similar non-binding proposals seeking a majority vote standard have received upwards of 80 percent support from Netflix shareholders in the past. Netflix didn’t return a request for comment on why the company hasn’t acted on them. This time, the proposal is binding.

“We congratulate Netflix on their superior performance,” said Aeisha Mastagni, a portfolio manager in corporate governance at CalSTRS, which co-filed the proposal. “But they’re not the same company they were when they went public.”

As original content helps drive Netflix’s growth, “they’re a different type of company and they need to have grown-up governance now,” she told Bloomberg BNA.

CalSTRS was one of the founding members of the Investor Stewardship Group, which brought together major fund managers to set corporate governance principles in January. The principles say directors who fail to receive a majority of the votes cast in an uncontested election should resign.

Netflix directors Richard Barton and Leslie Kilgore have kept their seats despite getting less than majority support in two of the past four elections. Three other directors also got relatively low support in their most recent elections.

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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