Notice of Exempt Solicitation. Definitive Material. (px14a6g)
May 10 2016 - 4:45PM
Edgar (US Regulatory)
Please
WITHHOLD support from directors Haley, Kilgore and Mather at Netflix Inc.’s
(NASDAQ:NFLX) annual shareholder meeting on June 9, 2016.
Dear
Netflix Shareholder:
We believe
there is an urgent need for a robust refreshment of Netflix’s board:
·
The board
continues to ignore its investors
,
with this the fifth year the board has steadfastly refused to implement
majority-supported governance reforms; and
·
The board
suffers from entrenched insularity
that is more befitting of a tech start-up than a $40 billion global
entertainment company.
Accordingly,
we not only urge withhold votes against the nominees (Timothy Haley, Leslie Kilgore
and Ann Mather) up for re-election, but demand the board begin a wide-ranging and
robust recruitment process
.
Considering
Netflix’s prodigious growth and increasingly international aspirations, this
process should foster a greater breadth of corporate governance experience, as
well as greater diversity of geography and ethnicity to the company’s all-white
board.
The CtW
Investment Group works with pension funds sponsored by unions affiliated with
Change to Win, a federation of unions representing nearly 5.5 million members,
to enhance long-term shareholder value through active ownership. These funds
invest over $250 billion in the global capital markets and are substantial
investors in Netflix.
The
board continues to ignore its investors
Since
2011, the board has repeatedly repudiated the will of shareholders by failing
to heed thirteen majority votes for shareholder proposals seeking to implement
what we consider basic principles of good governance (see Table 1). Four of
these proposals, including proxy access, are on this year’s ballot and are again
being opposed by the board.
While we appreciate
that boards can have legitimate worries that some governance reforms could
leave the company
vulnerable to potentially abusive
takeover tactics,
these concerns must be balanced against the overriding
need to ensure the board remains accountable to its shareholders. In addition,
most of the proposed reforms are well-known to investors and already in place
at Netflix’s peers in the S&P 500. Moreover, as Table 1 documents, these
majority votes have involved overwhelming support.
Adding to
our concern is the fact that accountability is in short supply; two board
members, including nominee Kilgore, were last re-elected with less than 50
percent of the vote, while five other incumbents have suffered withhold votes
in the 50-40% range in the past three years; however, all remain on the board.
Table 1: Majority-Supported
Shareholder Proposals 2011 - Present
|
Declassify
Board
|
Majority
Vote for Election
|
Submit
Poison Pill for Approval
|
Independent
Chairman
|
Eliminate
Supermajority
Provisions
|
Allow
Shareholders to Call Special Mtgs
|
Proxy
Access
|
2016
|
On
ballot
|
On
ballot
|
|
|
On
ballot
|
|
On
ballot
|
2015
|
79.8%
|
|
|
|
80.6%
|
|
71.0%
|
2014
|
82.3%
|
82.5%
|
80.4%
|
|
|
|
|
2013
|
89.0%
|
81.2%
|
|
73.4%
|
81.8%
|
|
|
2012
|
74.9%
|
|
|
|
|
53.4%
|
|
2011
|
|
|
|
|
|
72.7%
|
|
At
this point, the persistent failure to act on these votes throws into question
the board’s ability to represent shareholders. It is also exceedingly
short-sighted, pragmatically speaking, on the part of the board. Without
question Netflix’s performance over the past few years has been impressive, but
this is precisely the time to build the loyalty and goodwill of long-term
investors, not to erode it. Speed bumps, or missteps such as the heavily criticized
2011 plan to split the company’s DVD and streaming services, are almost
inevitable no matter how successful the business.
The
board suffers from insularity, a broken nomination process
The
board’s indifference to the will of shareholder speaks to its insular
composition. Despite the company’s expansion,
the board remains essentially
trapped within its tech-startup origins; it is dominated by Silicon-Valley and/or
California-related directors, suffers from a litany of board interlocks, and
fails to recruit widely enough. Critically, the two-person Nominating and
Governance Committee exemplifies these compositional shortcomings.
Netflix is
one of only eleven companies in the S&P500 where a key board committee has
just two members, according to a recent Wall Street Journal study.
1
The inherent
risk of such a small committee—that it will lack perspective—is reinforced by
having two of the company’s longest serving directors run the committee since
it was established in 2004. Member Jay Hoag has sat on the board since 1999 and
Richard Barton since 2002.
This risk is
even more acute given Hoag and Barton’s long business history together in
venture capital and tech start-ups. Besides being an early investor in Netflix,
Hoag’s Silicon-Valley-based Technology Crossover Ventures provided early-stage
funding to Zillow and Expedia, two companies founded by Barton. The men served
together as directors on those company’s boards. Hoag and Barton also sit on the
board of Avvo Inc. Hoag’s Technology Crossover and Benchmark Capital—a VC where
Barton serves as a venture partner—have provided capital to that privately-held
company.
Similar
interconnections permeate the rest of the board. Kilgore and George Battle serve
together on the LinkedIn Corp. board; Ann Mather and Anne Sweeney were both
executives at The Walt Disney Co. at the same time; Brad Smith is the Chief
Legal Officer at Microsoft, where Netflix founder and CEO Reed Hastings served
as a director between 2007 and 2012; and Timothy Haley’s Redpoint Ventures,
another Silicon-Valley venture fund and an early investor in Netflix, has
provided funding to Arista Networks, where Mather serves as a director, and to
Ask Jeeves, where Battle previously served as CEO. In fact, with the exception
of Smith, board members share common ties to California, if not Silicon Valley,
currently or having previously worked for companies based in the state.
2
We also note
that the last three directors appointed to the board, Kilgore (Netflix’s former
CMO), Smith and Sweeney were all initially identified by executives.
While it
is not uncommon for existing board members or management to recommend new
nominees, Netflix’s board appears drawn almost entirely from local or personal
networks. Such a level of insularity and regional bias suggests a recruitment process
that is casting its net far too narrowly, especially
considering
Netflix’s rapid growth and expansion. The lack of racial and international
diversity – particularly for an aspiring global media company – is striking.
These compositional dynamics risk impairing the ability of directors to
objectively assess the performance and ongoing contributions of fellow
directors, as well as contribute to the broader risk of group think.
1
Lublin, J., “Two-Person Board
Committees Exist at Some Big Firms,”
Wall Street Journal
, Jan. 27, 2016.
2
Haley, Hoag and Barton are associated with Silicon Valley-based Venture Capital
firms – Redpoint Ventures,
Technology Crossover, and Benchmark Capital, respectively; Kilgore is
the former Chief Marketing Officer of Netflix, which is based in Silicon-Valley;
Mather is a former CFO of Pixar, which is based in Emeryville, CA ,and a former
executive of Disney, which is based in Burbank, CA; Sweeney is a current
executive at Disney; Battle is a former CEO of Ask Jeeves, which was based in
Emeryville, CA.
Robust
refreshment vital to fostering appropriate balance of skills and diversity
The board
is in urgent need of renewal. It needs to recruit new members, ones that can better
equip the board to confront Netflix’s critical challenges going forward.
The most
obvious challenge is corporate governance itself. It is no surprise, given
Netflix’s hostile stance to basic principles of good governance, that the bulk
of its independent directors’ outside board experience stems from companies
that have significant insider ownership and/or dual class voting stock. It is
critical that Netflix recruits independent directors with a better appreciation
of the corporate governance practices at widely-held publicly-traded companies.
This is particularly pressing because of the inherent challenges Netflix will face:
the eventual need to transition away from a growth company to one that
generates reliable cash flows and the need for the board to provide critical
guidance to ensure a CEO-founder keeps his eye on long-term value creation.
Closely
following this is the need to expand the board’s geographic diversity. While Mather
and Sweeney both have some experience in international media from their
respective positions at Disney, with 42% of Netflix’s subscriber base now overseas
and aggressive overseas expansion planned (in January, the company announced
it was live in 130 countries), greater international presence on the board is
required, in our opinion. While we recognize the logistical challenges of
integrating directors located overseas, many other companies have been able to
successfully bring on international directors.
Finally,
we believe a robust recruitment process should work to foster greater racial
diversity on the board. Although since 2010, the board’s recruitment policy has
included language that it may consider race (as well as national origin) in
identifying prospective candidates, the board’s composition remains all white.
This marks the company as an outlier; according to ISS, 79% of S&P 500
companies had at least one non-Caucasian board member at the end of 2015. We,
like many investors, believe that diversity in the boardroom leads to healthier
debates, better decision making, and greater adaptability to change.
For more
information please contact Michael Pryce-Jones at 202-721-6079 or
michael.pryce-jones@changetowin.org.
Sincerely,
Dieter
Waizenegger
Executive
Director, CtW Investment Group
This
is not a solicitation of authority to vote your proxy. Please DO NOT send us
your proxy card as it will not be accepted.
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