Yesterday, news struck that billionaire investor William Ackman liquidated a $1.1 billion investment on Netflix stock on Wednesday, locking in a loss of more than $400 million, as the company’s stock plunged following news that it lost subscribers for the first time in a decade.
Ackman’s hedge fund Pershing Square Capital Management sold the 3.1 million shares it had bought in January of this year, as Netflix’ shares tumbled by 35% to $226.19.
According to an article in Reuters, Ackman states “while Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty.”
While some accounts on Twitter seem to relish the concept of an infamous hedge fund manager losing a substantial of money on an investment, I was not so elated. I found it to be unfortunate and just a sad reality check on the status of stock investing in America.
What is that actual reality? Well, for decades, the proper valuation of stocks has been to simply evaluate what the company does, how it does it, and if they are profitable by examining profit margins, working capital management, debt leverage management, and return on investment. This is no longer the case.
Since middle of last decade, and the advent of the executive compensation and board of director sections buried within Dodd Frank Act, Board appointments have been based much more on who you know instead of what you know. Most hedge funds do not heavily scrutinize the talents that Board members claim that they have. Data Governance is a missing data point in the investment strategy.
Being a certain age, having a certain skin color, being a particular gender, having attended a certain college… none of these are corporate governance skills. None of them.
Yet these have been what Board appointments have been about ever since the Securities and Exchange Commission was tasked with reigning in the two buried Dodd Frank sections since 2010. Something they have failed to do, and instead overstepped their authority in crypto and clamped down on SPACs.
This is all water under the bridge. The SEC has done something, however, that could be effective.
The SEC recently proposed new rules that would require U.S. public company boardroom disclosure of corporate directors with cybersecurity expertise. This is currently a rare skillset within the ranks of most corporate boards, not just in the U.S. but worldwide.
Right now, by examining closely the profiles of all Directors in the corporate Proxy statements and then comparing them to the members actual experience, one may deduce a disconnect. Embellishment is not truth. But, with the CISO experience and expertise, one cannot misrepresent that skillset. It is black and white. Night and day. Wet or dry. No lie.
Netflix business model, one that Ackerman lost substantial money on, is somewhere that having a qualified security professional on its Board may have helped. The company’s management may have been able to see that member subscription passwords were being shared with non-members. They could have nipped losses in the bud before they escalated substantially. This is just one example though.
Going forward, hedge funds should examine Board governance as a critical component of stock investing. The good news for them is in my book “Re-Generation X” I’ve already done it for you.
Always check the proxy statements and compare what current Board members claimed to be skilled at versus what their actual experience is. You will uncover a ton about the company.