Should You Care if Netflix Separates the Chairman and CEO Roles?

Netflix voted down the separation of powers between CEO and Chairman. Should you care?

Jun 25, 2014 at 5:30PM

Recently, shareholders of Netflix (NASDAQ:NFLX), the fast-growing video streaming service, voted against a proposal to split the roles of Chairman and CEO with a non-binding resolution at its annual shareholder meeting. In a close race, shareholders voted down the proposal with 53% voting against the resolution . Will this help or hinder Netflix going forward?

Not the board's top priority
If this had been high on the board's agenda, Hastings would have been replaced over the last year. At last year's board meeting, a non-binding resolution to separate the two was passed with 73% of the votes. However, because the resolution was not binding, it gave the board the flexibility but not the requirement to make the change.

Why bother?
Reed Hastings co-founded the company with Marc Randolph in Scotts Valley, CA back in 1997 and has held the role of chairman since 2002. Over this time, he has made bold decisions. Some were revolutionary and some were borderline disastrous.

Would innovation be stifled?
Would Netflix have been the source for such dramatic innovation if the CEO could not make dramatic decisions quickly?  DVDs by mail, without late fees, streamlined the video-rental business to the point of forcing Blockbuster to close its doors. Personalized recommendations for movies at Netflix were replicated at online shopping hubs for cross-selling items. Video streaming is revolutionizing the entertainment industry with Amazon and Google's Youtube following Netflix's success. If Netflix didn't originate these ideas, it was at the cutting edge of their development.

Netflix's disastrous pricing change
However, in order to cover the rising costs of postage and streaming content, Hastings spun out the DVD rental service and separated the company into two businesses: Qwikster , the DVD by mail service, and Netflix, the content streaming business. In doing so, he raised the prices for existing customers by 60% as the single $9.99 per month service was split into two $7.99 per month services. This sparked a tremendous backlash and caused the company to reverse the decision, issue debt in order to fund content acquisition, and apologize, something you rarely hear from a CEO .  It is possible that the company might not have implemented this plan if Hastings was more accountable to a board.

Is separation more appropriate for a mature company?
Hastings is on the board of Microsoft (NASDAQ:MSFT) which separated church and state in January 2000. At that time, Bill Gates turned over the CEO role to Steve Ballmer but retained the Chairman's position . This may have been an admission that the company was mature and Gates had simply had enough of being CEO. Over the next 14 years, Microsoft's share price hasn't come close to the $58.69 level that Ballmer inherited.

Success dictates policy
Perhaps the reason Hastings kept his dual role was the dramatic increase in shareholder value as the company fended off an attack from Carl Icahn. Back on Halloween in 2012 , Icahn Enterprises LP (NASDAQ:IEP), the holding company controlled by the very pubic activist investor, announced that it owned 10% of Netflix stock. At the time, Icahn wanted to sell the company if it could fetch a reasonable premium.  Hastings, however, had other plans.  He was able to demonstrate that the company could increase its value without external intervention and this showed up in the share price. On the first day of November 2012, shares were trading at $77.85 and they closed at $436.36 yesterday.  Hastings successfully fended off the attack and even though the company was never sold, Icahn pocketed more than a billion dollar profit .  

Shareholders clearly benefited from Hasting's ability to follow through on his long term plan.  If he had to fight with a Chairman over short term safety, perhaps shareholders would have suffered from a lower share price or an acquisition price that was less than a 460% return.  In situations where decisive CEO decisions can dramatically increase shareholder value, even if it isn't academically popular it could make sense to keep the roles combined.  After all, as Mark Twain said, "keep all your eggs in one basket...and watch the basket".

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David Eller has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (C shares), and Netflix. The Motley Fool owns shares of Amazon.com, Google (C shares), Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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