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Elon Musk’s pay package has been the topic of much conversation and controversy in the lead-up to the 2024 Tesla Annual Shareholders Meeting on June 13. To learn more about the issue, I sat in on a webinar titled, “Investor Briefing – Time for Change at Tesla: Vote Against Directors and 2018 Pay.” The SOC Investment Group co-hosted the event with Amalgamated Bank to discuss what’s shaping up to be a highly consequential annual shareholder meeting for Tesla.
Advanced PR for the webinar outlined how shareholders “have been given a unique opportunity to opine on a granted pay package for a second time, with the full benefit of hindsight in determining if the award was closely aligned with shareholders’ interests and if it accomplished the goals the board set out to achieve.”
The webinar gave investors and shareholders the opportunity to consider whether or not to vote against the proposed ratification of Musk’s $56 billion 2018 pay package. Also on the agenda was a discussion whether or not to reject the re-election of Tesla directors Kimbal Musk and James Murdoch.
Comments during the webinar focused considerably on concerns about risk oversight at Tesla. The magnitude of the pay award “raises alarm bells,” according to moderator Renaye Manley. She introduced the idea that Musk’s “extravagant” pay package proposal was “jeopardizing long term value” at Tesla.
Four main speakers and a research director offered insights into the two controversial upcoming topics at the June Tesla meeting.
Brad Lander, New York City comptroller: An investor advisor and custodian for the state’s retirement securities, Lander began by revealing that New York has $270 million in investments, or 3.4 million shares, in Tesla. “We share the long-term concerns” of many others, Lander said. “We signed onto the public letter … against the ratification of the extremely large and insufficiently monitored pay package.” Lander compared other pay packages for CEOs at comparably sized companies, which are “in the millions of dollars.” Many investors had “urged the board to add independent directors … things went in the opposite direction.”
Lander then referred to the “quite extraordinary” results on January 30, 2024, when the Chancellor of the Delaware Court of Chancery struck down the $55.8 billion compensation plan that Tesla, Inc.’s board of directors had granted to Tesla CEO Elon Musk, finding that the directors breached their fiduciary duties (Tornetta v. Musk). Tesla is “run like a family business,” Lander mused. “Rather than take it seriously, the board has conducted even more governance failures.” Assuring the audience that a vote to refuse to endorse Musk’s pay package is “not a referendum on Musk, as he is a visionary,” Lander refuted the board’s claim about motivating Musk, saying that “Musk’s interests are already aligned with a stake in the company.”
“What Tesla needs is a full time CEO who is focused on the company,” Lander offered. He described situations in which “billionaires are allowed to flout the rules” and the consequence thereof in which “the shareholders suffer.” Unlike other companies in which CEOs don’t get to choose “having your brother and your besties” on the board, Tesla has developed an unacceptable and “critical set of issues involving the way that individual shareholders” are treated. By rejecting the 2018 revisited Musk’s pay package, shareholders will “be protected just as other shareholders.”
Brooke Lierman, Maryland, comptroller: Of the many qualities a board should possess, Lierman included the following: “vigorous, due diligence process … prepared, informed … being good stewards.” In contrast, Lierman focused specific attention on a section of the investment letter sent by Amalgamated Bank and SOC in which Tesla was charged with “mismanaging their own workforce” and a “failure of Tesla’s board to resolve human capital practices.” Such oversights “can lead to many downfalls.” After reading some headlines involving labor lawsuits pending against Tesla, Lierman explained that such lawsuits pose “a risk” and “represent huge challenges within the company itself, and represent risk within the company.”
Instead, Lierman envisioned Tesla with “an independent board” and described how an “effective board member must stand up to the CEO when necessary.” Agreeing with Lander’s conclusions, Lierman cited “ample evidence that the board is overly indebted to the CEO.” As a result, “reports of poor working conditions continue to emerge.”
Ivan Frishberg, Amalgamated Bank, chief sustainability officer: Amalgamated Bank “serves the garment industry” and holds “600,000 shares of Tesla stock,” Frishberg began. As “longtime investors,” Amalgamated has watched Tesla for many years, but, “over the last 3 years Tesla has faced more challenging external and internal environments, slow and chaotic product delays, labor disputes, and a distracted CEO.” Frishberg described the independence of the Tesla board as “its greatest value,” but “over the last 5 years 2 board members have left the board over CEO behavior.” Largely, Frishberg said this was due to the board’s overall failure to stand up to Musk, which has expanded into a “problematic culture within the board and its nominating committee … three directors are his friends and one is his brother.”
Additionally, Frishberg referred to published reports about the board’s many “personal relationships,” several which were cited in the Delaware decision. “With evidence that the nominating committee is not clear on establishing independence” as a result of their “close relationships (that) also extend to their business dealings with the CEO and with each other,” Amalgamated Bank cannot support board members such as James Murdoch, who “has invested in SpaceX.”
The “board has overseen the decline of public confidence in the company,” Frishberg continued, with “knowledge of drug use.” The board “should be accountable to investors,” specifically the “long-term interests of investors, and it is failing in that regard.” With the backdrop of “all manner of workplace issues,” action is needed “by the board to address the issues raised by shareholders.”
Tejal Patel, executive director at SOC Investment Group: Patel reviewed the 2018 options pay package, which “at that time was seen as unprecedented.” Now it’s obvious that the structure of Musk’s pay package has had a “dilutive impact.” The Delaware case, Patel shared, “identified 3 deficiencies: directors not independent; facts of pay plan as presented to investors was misleading; and,the board failed to negotiate the pay package with Musk.”
“We’re being asked to think of this as a new look,” Patel analyzed, yet “we are also being asked to evaluate the same pay package” that’s part of “a rushed process that doesn’t address the original concerns, nor the concerns laid out by the Delaware court.” Calling the board’s decision to support Musk’s pay package a “breach of fiduciary responsibility,” Patel suggested that “investors are being presented with a false choice: investors aren’t being presented with a forward package” due to the current proposal’s likely inability to meet Musk’s financial demands, even if supported by shareholders in June. “They’re going to have to come back with another shareholder vote to ask for more.” Instead, Patel outlined that “what needs to happen is to take a step back and look at the purpose of the pay package … his multiple commitments” so that Tesla’s interests and “his interests should be aligned.”
“With the benefit of hindsight, the pay package did nothing to focus Musk on Tesla,” Patel concluded. “Unfortunately, it allowed him to use his Tesla stock to invest in other ventures.” That opened up a question: “Can you even have a ratification about a breach of fiduciary responsibility?” Perhaps, but only “if it had been vetted appropriately.”
Rich Clayton, research director at SOC Investment Group: Clayton answered a couple of audience questions as the webinar neared its end. One described a perceived conflict between rejecting Musk’s pay package and democratic action. “Democracy is fundamentally about accountability: straightforward, honest, not directed toward a particular outcome,” Clayton explained. “Shareholders were not being given the full information,” and, instead, represented a “desire to align Musk with shareholders going forward.”
“In retrospect, this doesn’t seem to have had the effect of him focusing single-mindedly on Tesla any more,” Clayton stated. “He has been at least as distracted as ever before.” Labeling such a shareholder democracy argument as “a canard,” Clayton reminded the audience that true “shareholder democracy was being upheld in the Delaware decision.” Investing is a compromise, Clayton noted, as “you want to learn the long-term growth, but you want also to look at what is happening today.” Clayton suggested that Tesla may be in the middle of “a turning point. It’s not growing at 50–80% anymore.” Nonetheless, the goal of Tesla investors now is to “ensure that it is able to grow at a much lower rate but incrementally.”
Unfortunately, “nothing that the board has presented points to that growth.”
Instead, the board has been “focused on the past” in a manner that is “much too petty.”
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