Founders of major companies are sometimes pushed out by their boards. It is quite another thing for an outsider to do the same. Netflix Inc.'s (NASDAQ: NFLX) Reed Hastings has lost much of his reputation as the CEO of the company he started, which has undermined his once sterling credentials with Wall St. Now, Hastings finds that raider Carl Icahn owns 10% of the company in which he holds only 4.4%. And, according to the Netflix proxy, T. Rowe Price and Vanguard own together 13%. Hasting has become surrounded by outside shareholders.

The portion of Netflix shares that Hastings owned was almost inconsequential when its stock soared because the firm's business model undermined the operations of large movie rental firms - particularly Blockbuster. As Netflix's streaming media model has come under pressure from companies such as Google Inc.'s (NASDAQ: GOOG) YouTube, Hulu and Amazon.com Inc. (NASDAQ: AMZN), Hastings may regret that when he took Netflix public he did not put into place the provisions for voting shares that have been used by founders and founders' families at a slew of companies, from The New York Times Co. (NYSE: NYT) to Facebook Inc. (NASDAQ: FB). No matter how these companies have performed, other shareholders have been unable to dislodge them because of share structures put in place when each went public.

Hastings own board may expel him from the CEO's job if the pressure from Icahn and other institutional shareholders becomes too great. He would join men like Best Buy Co. Inc.'s (NYSE: BBY) founder Richard M. Schulze ,who may take his company private and dislodge the current board, or Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) founder Robert P. Stiller, who was knocked out of his office because of both poor performance and corporate governance issues. The boards of the firms had leverage. Performance of the two companies, and their stock prices had disintegrated. The founder's advantages have disappeared.

Hastings most significant problem is that like Schulze and Stiller, he has not been able to chart an acceptable course away from his company's trouble. Icahn may not have a plan that would do more to turn Netfilx around, but he does have the leverage of Netflix's falling stock price. If he can convince investors that he has an even plausible way to improve the value of Netflix shares, he may get the support of enough investors and the board to take the video rental firm out of Hastings' hands. And he has the advantage that he can say he has risked as much as anyone with his 10% investment in Netflix.

The irony of Hastings' position is that Icahn tried to turnaround Blockbuster. He installed his supporters on the Blockbuster board. His plans failed badly, to some extent because of Hastings. Hastings' troubles will give Icahn another bite at the video rental business, partly because he had made an investment that is more than twice Hastings' own.

Douglas A. McIntyre


Filed under: 24/7 Wall St. Wire, Corporate Governance, Management Change, Media, Mergers & Acquisitions Tagged: AMZN, BBY, FB, featured, GMCR, GOOG, NFLX, NYT

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