Why Netflix's Reed Hastings Should Voluntarily Give Up His Role as Chairman
Chalk up another win for Reed Hastings.
On the one hand, Hastings deserves a hearty slap on the back for preventing shareholders from asking him to give up either his chairman or his CEO roles. On the other, CEOs of public companies are supposed to take the broadest possible view of what's good for their company -- not just themselves. And that's not bad advice for private company CEOs, either.
On Monday, a shareholder resolution requiring Netflix to split its chairman and CEO roles failed to pass. Both posts have long been held by Netflix co-founder Reed Hastings. It's true that these shareholder resolutions rarely pass, and when they do, they’re generally not binding.
But it's still quite an achievement by Hastings. This is the fourth year in a row that shareholders have expressed their dissatisfaction with Netflix' corporate structure through various shareholder resolutions. And this year, three lower-profile resolutions did pass. But only 47 percent of shareholders supported splitting the roles of chairman and CEO. Seventy-five percent of shareholders voted to keep Hastings on the board. That's actually a low number, given that Hastings' spot was uncontested and the company's stock is up 17 percent so far this year.
In corporate governance circles, it's considered best practice to have the posts of board chair and CEO held by two different people. Given that the board chair is supposed to oversee the development and implementation of strategy by the CEO, that only makes sense. It's also considered best practice for board members to stand for re-election each year, rather than staggering their terms. Netflix doesn't do that, either.
Ghosts of scandals past
If the names Enron, Tyco, and Adelphia don't ring a bell with you, you may not understand why anyone cares about this. Beginning at the tail end of the last dot-com boom, each of these companies were brought down by massive accounting and fraud scandals. Investors lost billions, employees lost their retirement funds, and bankruptcy lawyers made millions. ImClone, a drug development company, and HealthSouth, an owner of patient rehabilitations facilities, suffered financial scandals at about the same time. The companies survived even though the founders were jailed.
In each case, the chairman and the CEO were one and the same. Ever since, corporate governance experts have been urging companies to split the CEO and chairman of the board positions between two different people. Yet Netflix has refused.
Maybe it's because Netflix is doing very well for its shareholders. Maybe it's because, as a Netflix founder, Hastings has acquired a certain aura as the company's rightful leader. If that's the case, we should remember that John Rigas, Samuel Waksal, and Richard Scrushy, the chairmen/CEOs of Adelphia, Imclone, and HealthSouth, respectively, were also those companies' founders. And they were popular.3
As a mostly rational person who doesn't own Netflix stock, I can see why it's best to separate the chair and CEO roles. Public companies have different responsibilities than private ones, and require different oversight. When a founder takes a company public, he or she is agreeing not only to accept a decent-sized infusion of capital from both institutional and retail investors, but also to run his or her company in a somewhat different way, and to live with certain checks and balances. That's part of the bargain.
Founders, of course, don't always see it that way, especially if the company is doing well. Certainly not Mark Zuckerberg, who is chairman and CEO of Facebook, or Jeff Bezos, who is chairman, CEO, and just for good measure, president, of Amazon. For Hastings to voluntarily give up one of his roles--as the Google co-founders did--is extremely unlikely. It would, however, indicate a rare maturity and seriousness of purpose. That's only one of the reasons he should do it. And now Hastings has a chance to do it on his own--not because his shareholders pushed him into it.