Hastings owns a relatively small part of the company, at least as founders go. The Netflix proxy shows his ownership at 4.4%. Two other institutions have higher stakes –Vanguard at 5.1% and T. Rowe Price at 8.9%. Hastings’ leverage, whatever it might have been, has been eroded.
Most often, founders are left to run the companies they start, even when results falter. This has been so with corporations as diverse as Best Buy Co. Inc. (NYSE: BBY) and Zynga Inc. (NASDAQ: ZNGA). In both cases, though, management or founders have larger stakes than Hastings does in Netflix. Nevertheless, because Hastings’ long run of success has ended, the management and board of the company he started might find themselves challenged for operating control of Netflix.
The disintegration story of Netflix is hardly worth mentioning because it has been analyzed so often. Hastings challenged Blockbuster for the lead in the movie rental business. As he destroyed the fortunes of the bricks-and-mortar company, Netflix stock rose to $300 in July 2011. The shares now trade at $55. Programming costs and missteps in customer pricing cost Netflix its momentum.
Capital Research, T. Rowe Price and Vanguard own 25% of Netflix among them. That may give them enough leverage to force Hastings to change his company’s strategy. The circumstances could even cost him his job.
The Netflix example begs the question of whether institutions may confront other public corporations with founder CEOs. Some would seem unassailable. Groupon Inc. (NASDAQ: GRPN) and Facebook Inc. (NASDAQ: FB) are among these. The founders of each have voting control, something Hastings does not. Yet that may not keep large investors from publicly challenging the CEOs or even shaming them.
The period in which powerful founders appeared invulnerable may be ending. Investors could find that CEOs they cannot displace, or would have difficulty replacing, may respond to relentless pressure.
Douglas A. McIntyre
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