Institutional Shareholder Services (ISS), a proxy advisory firm, is encouraging Tesla shareholders to dismiss the €51.2 billion (£44.5 billion) remuneration deal proposed for CEO Elon Musk, which poses an additional challenge for Tesla’s board. ISS has stated that the robust compensation scheme, which was approved by shareholders in 2018 in the first instance, didn’t attain the board’s identified goals, and was overly generous to begin with. This criticism closely follows similar advice from another influential proxy advisor, Glass Lewis, which also advised against accepting Musk’s payment plan.
ISS noted that while some shareholders might consider it unreasonable for Musk not to receive the award, concerns from 2018 and those raised thereafter have not been adequately addressed. The board failed to provide anything beyond a binary option of ‘yes or no’ for shareholders regarding this vote.
Musk’s pay arrangement has stirred heated debates in 2021. A judge in Delaware declared the package invalid in January, criticising Tesla’s board for lack of transparency. A reassessment of shareholder support is being sought by the board through a second vote on Musk’s remuneration in the upcoming annual meeting on June 13. This could potentially aid an appeal against the court decision.
Proxy advisors like ISS often exert influence on shareholders, particularly those who invest in passive funds. Notably, in the 2018 vote, both Glass Lewis and ISS advised against Musk’s pay deal. Yet, three-fourths of voting shareholders backed the package.
In response to Glass Lewis’s recent report, Tesla claimed that important factors were overlooked and that the logic used was flawed, based on speculation and hypothetical scenarios.
While the vote’s outcome is merely advisory, a negative result would embarrass Tesla’s board and its primary executive. Musk has further warned that he will begin manufacturing products outside of Tesla if he is unable to increase his equity ownership in the company, something that the remuneration plan allows.
In efforts to win over shareholders, Tesla’s board members, including Chairwoman Robyn Denholm, have been reaching out to large investors. The company has also advertised on X, formerly Twitter, and appointed a strategic advisor to develop a ‘Vote Tesla’ website that argues in favour of the controversial pay package by endorsing shareholders rights.
The website encourages stakeholders to support a proposal about shifting Tesla’s incorporation articles from Delaware to Texas, reflecting the relocation of the corporate headquarters to Texas in the last year.
In IOS’s findings, it advised that the move deserves tentative support, since there is no obvious indication that shareholders’ rights will be significantly affected by the move. However, they noted that the proposal is rather unconventional and the method employed by the board is somewhat lacking. They also recognized potential risks associated with the uncertainty noted in Texas’s business court practices.
It should be noted that Tesla’s board has confirmed their intention to maintain any ongoing lawsuit currently allocated to a Delaware court, including Elon Musk’s salary case, irrespective of the potential results of reincorporation.
The proxy firm advocates for the reappointment of Kimbal Musk to the Tesla board, Elon Musk’s sibling. But they oppose James Murdoch. Murdoch is part of Tesla’s audit board, and the ISS expressed apprehension about the substantial number of allotted shares, and the board’s inability to “effectively oversee risk.”
This analysis was followed by a public letter penned by a consortium of shareholders holding a minor share of Tesla’s company stock, arguing against the pay deal.