We all know that Netflix (NASDAQ:NFLX) pays a ton of attention to its users' choices. Every click of the remote, every swipe of the mouse, seemingly every thought of a favorite movie star while viewing a Netflix property leads to changes in your video recommendations.
However, the company is a lot less likely to pay attention to the wishes of its shareholders. You'll see that happening again in June, when Netflix brushes off the latest round of suggestions from its owners. Anything else would be a sharp break with company history.
Shareholder voting 101
Every year, shareholders of publicly traded companies get to vote on a number of important issues. Standard polling topics include selecting members for the board of directors, approving the company's choice of public accountants, and approval of executive compensation. Then, shareholders have ways to invoke votes on properly prepared questions of their own choice.
Voting in the annual shareholder meeting is what sets stock ownership apart from speculation. These referendums are a big deal, especially to investors of a Foolish mind.
This is where shareholders large and small get to speak their mind directly to the company's directors and executives. This is where boardrooms are repopulated, occasionally kicking off hostile takeover attempts. It's also where your precious votes get to make a mark on the company's deepest core, as amendments to the bylaws.
Netflix is gearing up for its next shareholder meeting on June 9, and shareholders of record as of April 11 can cast their votes in a couple of different ways. I know I've sent in my ballot after careful consideration.
Unfortunately, there's very little evidence that the company will actually listen to what we shareholders are saying.
Got any evidence to back that up, kid?
Think I'm joking? Unfortunately, I'm not. Let's have a look at Netflix's recent history of ignoring shareholder demands.
Over the last four years, Netflix shareholders have submitted a grand total of 16 independent proposals. Each of these was recorded as an "advisory" vote, requiring a simple majority of the votes cast in order to become an official recommendation. But, as the company would be quick to tell you, these recommendations are not binding.
Netflix's board of directors unanimously recommended "against" every single one of these shareholder proposals. Thirteen of them still passed, with approval rates ranging from 53% (for the idea of allowing large shareholders to call special meetings in 2012) to a staggering 88% (for the 2013 take on collapsing Netflix's three-tiered board structure to a single tier, with each member up for reelection every year).
In every single case, Netflix calmly noted that these shareholder proposals were "duly approved." None of these 13 approved proposals received any further action.
The single-tier board has been proposed and overwhelmingly approved in each of the last four shareholder votes, for example. It's on the ballot again this year. I predict an approval rating of at least 75%, and then stone-faced silence.
Shareholders have also proposed a "simple majority vote" standard in each of the last three annual meetings. This idea would make it easier for share owners to push future proposals through to a final implementation. It has received at least 80% shareholder approval each time, and is on the 2016 ballot as well. Yes, it will pass. No, it won't actually take effect.
Long story short, Netflix's bylaws don't contain a process for turning shareholder proposals into real-world action. Investors keep asking for some of that, but the board doesn't have to listen. So, the requested changes just aren't happening despite overwhelming investor support.
Beyond the shareholder proposals, nine directors have been up for reelection over the last three years. Five of them got less than 60% "yea" votes, and two fell below 50%. In 2013, none of the directors under the microscope got more than 52% investor approval. That class -- Ann Mather, Leslie Kilgore, and Tim Haley -- are back on the ballot again this year. But Netflix simply selects the three candidates with the highest number of votes cast in favor, so it only takes a single vote to approve any of these prospects. There are no other candidates on this year's slate, and it's too late to add another. So no matter how low their approval ratings may fall, these are the directors we're getting.
Investors are taking a deeper interest in voting their Netflix shares lately. In 2012, 22% of the potential votes were never cast and thus counted as "broker non-votes." That ratio of voters shrugging their shoulders and saying "meh" fell to 18% in 2013 and 14% the next year. In 2015, 87% of all possible ballots were submitted, leaving just 13% uncounted.
But again, that hasn't made Netflix take any more notice of the final voting results.
Why should investors worry about this?
In my view, this is a critical flaw in Netflix's shareholder governance. And since this stock happens to be the single largest holding in my own retirement portfolio, I really do care about this stuff.
I'm not a lone nutcase, shaking my fist against an indifferent universe. If the rebellious shareholder vote counts weren't enough to convince you, let me point to an independent expert instead. Proxy advisory firm Institutional Shareholder Services rates governance policies on a scale from 1 to 10, where low scores are great and high ones should bring out a posse with pitchforks and torches. Netflix scores a 10.
The company's audit processes are seen as near-perfect. But according to ISS, Netflix executives are overpaid and the board is not in the habit of listening to shareholder requests. The bylaws are packed to the gills with takeover defenses, and not overly concerned with shareholder rights.
I'm not likely to sell my Netflix shares anytime soon, regardless of how the board mismanages this year's shareholder voting. None of this is news, as the company has been ignoring proposals for many years. But the whole affair does make me a little queasy, and I wish the board would slide its list of priorities away from hard-nosed takeover defense tactics and a bit closer to shareholder rights.
It's only fair, and the list of companies that can afford a buyout attack is growing mighty short anyhow.
Come on, Netflix. Listen to your shareholders. What's the worst that can happen?