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Big Funds Urge Netflix Shareholders to Vote to Open Board of Directors Nominations

Two large pension funds are trying to rally Netflix shareholders to vote in favor of a proposal that would let investors nominate board members — a change Netflix’s current board opposes.

In a May 10 letter to company shareholders, the California Public Employees’ Retirement System (CalPERS) and the New York City Pension Funds recommended that Netflix investors vote for a proposal to give shareowners access to the director nomination process. The two funds are long-term Netflix shareholders that own approximately 1.79 million shares in the company (representing about 0.4% of shares outstanding).

The vote on the proposal, along with other measures, is scheduled to take place at Netflix’s June 6 shareholders meeting. The funds didn’t detail any specific gripe about the current nine board members — who include CEO Reed Hastings — but argued that sound corporate-governance practices should allow qualified shareholders to have a voice in the board’s makeup.

“We believe providing access to a company’s proxy by giving shareowners the ability to nominate directors to the board is one of the most important rights for owners of a company,” CalPERS investment manager Simiso Nzima and NYC comptroller Scott Stringer wrote in their letter to Netflix shareholders. “Without effective proxy access, the director-election process simply offers little more than a ratification of management’s slate of nominees.”

In its proxy statement filed last month, Netflix’s board unanimously urged a “no” vote on the proposal.

Here’s its explanation: The board’s existing nominating and governance committee has “a fiduciary duty to act in the best interests of all stockholders,” whereas other stockholders “could nominate directors who advance their own specific agenda without regard to the best interest of the company and its stockholders or to the overall composition of the board, including independence, expertise and diversity considerations.” In addition, Netflix said, shareholders already may recommend director candidates for consideration by the nominating and governance committee.

But CalPERS and the NYC Pension Funds noted that there’s certainly interest in opening up the board-nomination process. In 2015 and 2016, similar non-binding proposals received more than 70% of shareholder votes cast “but have yet to prompt board action.” According to the proposal, in order to nominate candidates representing up to 25% of Netflix’s board, shareholders would need to own at least 3% of outstanding stock and have a minimum of three years of continuous ownership.

In addition, the funds pointed out that more than 400 public companies now allow such proxy access, including Apple, Microsoft, Amazon, GE, AT&T, Coca-Cola, Pfizer, Exxon Mobil, Chevron and Wells Fargo. “These companies are adopting the governance best practice, thereby rejecting the assertion that proxy access is costly, distracting and favored mainly by special interest groups,” the funds’ reps wrote in their letter.

CalPERS and New York City Pension Funds also recommended stockholders vote in favor of a proposal requesting Netflix amend its bylaws to institute a majority-vote standard in uncontested director elections. Currently, Netflix uses a plurality voting standard, which allows nominees to be elected even if a majority of shareholders oppose him or her.

“Shareholder support for current directors has been low at Netflix,” says the supporting statement for the proposal, submitted by the Services Employees International Union. SEIU noted that director Richard Barton failed to receive majority support in last year’s election, while three others — Ann Mather, A. George (Skip) Battle, and Jay Hoag — were elected with less than 60% of shareholder votes in their last elections. “The lower-than-average support in past elections signals some shareholder discontent with the current slate of directors,” the union said, adding that Netflix’s board lacks racial diversity and that it has shown a “poor level of responsiveness” to majority-shareholder votes.

The company’s board opposes this measure because it believes that “adopting such a majority-voting standard introduces unnecessary legal uncertainty into the company’s corporate governance.”

Three other stockholder proposals are on the table for the June 6 meeting, including one that directors be limited to one-year terms, and the Netflix board opposes those, too.

With the exception of Hastings, Netflix’s current board members are each independent directors:
  • Anne Sweeney, former president of Disney-ABC Television Group
  • Richard Barton, executive chairman of Zillow Group and founder of Expedia
  • A. George (Skip) Battle, former executive chairman of Ask Jeeves and executive at Andersen Consulting
  • Timothy Haley, managing director at Redpoint Ventures
  • Jay Hoag, general partner at Technology Crossover Ventures
  • Leslie Kilgore, former Netflix chief marketing officer
  • Ann Mather, ex-CFO of Pixar and Village Roadshow Pictures, former Disney exec
  • Brad Smith, president and chief legal officer, Microsoft
  • Reed Hastings, Netflix chairman, president and CEO

Hastings, Hoag and Battle are up for re-election to the board at the June 6 shareholders meeting, to be held at the company’s Los Gatos, Calif., headquarters.

On another corporate-governance issue, Netflix has regularly defended Hastings’ combined role of chairman and CEO. “While the board reassesses maintaining the combined role from time to time, the board believes that the chief executive officer is best situated to serve as chairman because he is the director most familiar with the company’s business and industry and is therefore best able to identify the strategic priorities to be discussed by the board,” the company said in the April 24 proxy statement.

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