Is the Tesla board in charge of a public company or the Elon Musk fan club?
One reasonable view of the great Elon Musk pay affair says Tesla shareholders should stick to their guns and approve the astronomic $56bn award for a second time, thereby sending a message to the interfering Delaware judge who cancelled the 2018 scheme that they’re quite capable of making up their own minds, thanks very much.
That, roughly speaking, is the stance of Baillie Gifford, a big investor in the electric vehicle company since the early days. “We agreed the remuneration package with Tesla back in 2018 because it introduced extremely stretching targets that would make a huge amount of money for shareholders if they were reached,” Tom Slater, manager of the FTSE 100 Scottish Mortgage Investment Trust, told the Financial Times last month. “Having agreed to that, we believe that it should be paid out.” Fair enough, the line has the virtue of consistency: we understood what we were voting for, and a deal’s a deal.
Equally, nobody can grumble that Norway’s sovereign wealth fund, coming from the opposite direction, will also vote on Thursday as it did in 2018. It opposed the scheme then, and sees no reason to change its view just because Tesla’s share price subsequently headed towards the moon, thereby triggering a maximum payout for Musk before the Delaware court stepped in.
Thus the re-ratification vote will probably deliver an outcome similar to the original 73% majority in favour. The shareholder register will have evolved over the years but not markedly. If anything, retail investors, who account for almost 40% of the stock, sound even more infatuated with Musk these days. And, if a majority is indeed secured, that should be the end of the matter; there should be no need for another trip to court.
But before this saga slips out of the headlines, there is the small matter of what the Delaware judge, Kathaleen McCormick, actually said in her 200page judgment in January. Read the whole thing and the board of Tesla in
2018 comes across as a collection of patsies who were so in thrall to the boss that they were incapable of running even a semi-robust process for setting his incentives.
Nobody disputes that Tesla’s share price had to perform a minor miracle to deliver Musk’s prize in full: from a valuation of $50bn-ish, the requirement was to get above $650bn by 2028 (which actually happened in just three years). Rather, the problem was the people Tesla put in charge of negotiating with Musk to determine a fair jackpot.
As the judge noted, Ira Ehrenpreis, the lead director, had a 15-year business relationship with Musk. Another member of the working group, Antonio Gracias, went on holiday with Musk’s family. A third was Todd Maron, Musk’s former divorce attorney and the company’s general counsel, “whose admiration for Musk moved him to tears during his deposition”. McCormick concluded that the process behind the award was “deeply flawed” and the terms “not entirely fair” to all shareholders: in essence, Musk said what he wanted and received minimal pushback.
In theory, Tesla’s board had a few strong cards to play. At the time, Musk owned just over a fifth of Tesla shares (this was before he sold a chunk to fund his Twitter folly) and so should not have lacked motivation to pursue the goal of “transformative” growth. Every $50bn increase in Tesla’s market value would still be worth $10bn to him even without the scheme. That negotiating point seems to have been ignored.
None of the judge’s criticisms about the process have been adequately addressed by the company. Chair Robyn Denholm, who took the reins in late-2018, says the board “stands behind this package” and feels vindicated by events. For good measure, it has adopted Musk’s idea of shifting Tesla’s state of incorporation to Texas.
Would the supposedly independent directors roll over so meekly if Musk were to ask for another big slug of shares to keep him concentrated on Tesla rather than his privately controlled companies? One suspects they would.
It is why, even as one can accept that deals should be honoured, including obviously excessive ones, the lack of self-reflection in Tesla’s boardroom is astonishing. Learn the lesson of this saga: this is a listed company and the job involves more than being a cheerleader in the Elon Musk fan club.