Shareholder democracy at public companies is mostly democracy in name only. Stockholders vote for directors, but in nearly all cases they have just one candidate to choose from. It's not unusual for directors to skip the one time a year they're supposed to show their faces to the shareholders who own the company. Few stockholders even show up to these annual meetings, and they're often drawn there less by democratic urges than by the sausage buffets.
We like democracy in America even if it never measures up to the ideal. Netflix, on the other hand, is among the companies that don't even bother to pay it lip service.
Since 2011, Netflix has ignored a total of 17 proposals for board changes that were approved by shareholders. Netflix investors have started to turn against the directors, but it hardly seems to matter. A Netflix board member has the ignominious distinction of being among the 1.3 percent of corporate directors who kept their jobs despite losing shareholder elections rigged in their favor.
If the U.S. presidential election functioned as Netflix does, every ballot cast in November would be tossed into the Potomac River and Washington would carry on as if 2016 never happened.
At Netflix's shareholder election last week, small stockholders suggested four proposals to change how the company's board or shareholder votes should be structured. Most of these were knee-jerk "good governance" recommendations such as requiring directors to win re-election each year instead of every three years and establishing an easier path for big investors to nominate board candidates on equal footing with management's preferred directors.
Companies typically oppose these measures, and shareholders tend to go along. Netflix did recommend its investors vote against these proposals, but they passed anyway with overwhelming majorities of all votes cast.
These stockholder votes aren't binding, and Netflix has been happy to ignore similar shareholder votes for years. In 2011, a stockholder-proposed ballot measure sought to prevent directors from being elected unless they received a majority of all votes cast . The vast majority of shareholder votes were in favor of the proposal, but Netflix did nothing.
In 2012, shareholders proposed making each of the Netflix board members stand for election each year. Again, the ballot measure passed over management's objections, and Netflix did nothing. In 2013 through last year, several similar proposals passed, including a recommendation for a chairman who is unaffiliated with management. Again, no changes. In 2015, a Netflix director couldn't muster a majority of all shareholder votes, even though he was the only candidate on the ballot. That director, Rich Barton, continues to represent shareholders.
In largely symbolic protests of Netflix's inaction, the company's directors have tepid stockholder approval. The three Netflix directors up for re-election last week had nearly as many "withhold" votes as "for" votes. A withhold vote is the closest stockholders can get to writing "no way" on their ballots.
Institutional Shareholder Services, which advises investment funds on corporate elections, gives Netflix its lowest score in a corporate governance ranking. No doubt some stockholders who withheld votes from Netflix directors were following the recommendation of ISS, which scolded the company ahead of last week's vote. "The board has failed to act on several majority-supported shareholder proposals, continuing a pattern of non-responsiveness," ISS said.
A company can generally get away with poor corporate governance as long as the share price keeps rising. On that score, Netflix shareholders have been well served. The company's market value has tripled since 2011. Stockholders continue to vote in favor of Netflix's CEO compensation, which shows they aren't engaged in automated opposition to every board action.
But what happens when the company hits a rough patch? How can Netflix investors trust management and their board representatives to look out for shareholders when they have ignored them during good times?
Netflix is not Facebook, Comcast, Google or other companies set up to empower founders over shareholders. In those companies, investors know they have very little say. Reed Hastings, the Netflix co-founder and CEO, owns less than 3 percent of the company's shares. Netflix is established as a stockholder republic but functions as a dictatorship.
Yes, there is too much pointless checking of corporate goverance boxes. Having high grades for shareholder democracy doesn't guarantee a functioning company. But a company that does the wrong thing repeatedly to shareholders also can't be trusted to do the right thing in its business. If the drama at Viacom teaches us nothing else, it should serve as a warning of what can go wrong when shareholders have no power over how their company is run.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
This is among companies included in the Russell 3000 stock index, according to the Council of Institutional Investors, which is an association of pension funds, foundations and other corporate shareholders.
Otherwise, a director in theory could be elected even if he or she receives just one affirmative vote.
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