Musk Courts Retail Investors as Proxy Firms Recommend Against His Tesla Pay Package
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Tesla CEO Elon Musk is reaching out to shareholders, predominantly retail investors who own roughly 30% stake in the company, as leading proxy firms have recommended a vote against his massive 2018 pay package that was voided by a Delaware judge earlier this year.
In its report, proxy firm Institutional Shareholder Services (ISS) termed Musk’s pay package as “outsized from the start.” ISS said that the package “failed to accomplish certain of the board’s stated objectives” including requiring that Musk “more closely on the Tesla organization, as opposed to his other businesses.”
According to ISS, “Some investors may find the board’s argument compelling, that it would be unfair for CEO Musk not to receive the award.” It added, “However, the concerns raised, both back in 2018 and in the interim, have not been sufficiently mitigated.”
Proxy Firms Recommend Voting Against Musk’s Pay Package
Another proxy firm Glass Lewis which had advised shareholders to vote against Musk’s package in 2018 also, has yet again called upon investors to vote against the proposal. Among others, it listed Musk’s association with other companies as a “slate of extraordinarily time-consuming projects”
It added, “The excessive size of the award, both on a pure dollar basis and in terms of the dilutive effect upon exercise, remains very much top of mind.” According to Glass Lewis, “The company’s provided rationale does little to combat these concerns given their proportionate magnitude.”
Musk Threatened to Build AI Products Elsewhere
Notably, Musk is also associated with several other companies like SpaceX and more recently X (formerly Twitter). He has also started his artificial intelligence (AI) company x.AI. Incidentally, Musk has threatened that he won’t be comfortable building AI products at Tesla unless he has 25% voting rights at the company.
Currently, Musk owns around 13% stake in Tesla and his ownership fell after he sold shares to fund his Twitter acquisition. In his Twitter thread, Musk said, “If I have 25%, it means I am influential, but can be overridden if twice as many shareholders vote against me vs for me. At 15% or lower, the for/against ratio to override me makes a takeover by dubious interests too easy. I would be fine with a dual class voting structure to achieve this, but am told it is impossible to achieve post-IPO in Delaware.”
AI Products Are Key to Tesla’s Valuation
AI products are key to Tesla’s valuation. Musk is particularly bullish on Tesla’s Optimus humanoid and during the Q1 earnings call he said, it “will be more valuable than everything else combined.” He added, “We do think we will have Optimus in limited production in the natural factory itself, doing useful tasks before the end of this year. And then I think we may be able to sell it externally by the end of next year.” Musk however termed these timelines as “guesses.”
Tesla Lashes Out at Proxy Firms
As expected, both Musk and Tesla have lashed out at proxy firms that are recommending that shareholders don’t approve the billionaire’s pay package. In a letter titled “What Glass Lewis Got Wrong About Tesla,” Tesla said the company “omits key considerations, uses faulty logic, and relies on speculation and hypotheticals.”
According to the EV company, “Tesla created over $735 billion of market value for stockholders from 2018 to 2023 because Elon helped Tesla achieve performance targets that were regarded by many as extremely difficult or impossible.”
To be sure, Tesla stock has created immense wealth for investors over the year, and despite having shed over half of its market cap since the 2021 peak it is still the world’s most valuable automaker.
According to Tesla, “Stockholders should care enormously about value creation…and not about whether Elon’s perceived ‘focus’ was strong enough.”
Musk on His Involvement with Tesla
During the Q1 earnings call, in response to an analyst’s question on whether he intends to reduce his involvement with Tesla considering his association with multiple other companies, Musk provided a vague answer. He said, he spends most of his time at work and added, “I’m going to make sure Tesla is quite prosperous. And it is — like it is prosperous, and it will be very much so in the future.”
Delaware Judge Voided Musk’s Pay Package
Meanwhile, Delaware judge Kathaleen McCormick termed Tesla board’s approval of Musk’s 2018 pay package as “deeply flawed.” ‘In addition to his 21.9% equity stake, Musk was the paradigmatic “Superstar CEO,” who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan. At least as to this transaction, Musk controlled Tesla,” she said in her judgment.
Tesla Investor Lashed Out at Musk
Meanwhile, it’s not only proxy firms that have rallied against Musk’s pay package. KoGuan Leo who is the largest retail shareholder in Tesla and holds an estimated 0.8% stake in the company has also lashed out at Tesla over Musk’s pay package.
“The Magician was only for money and power? He threatened walking away with 13% shares gifted by SH, Tesla’s AI knowledge and AI team, but SH and BOD (board of directors) are lying flat and kowtowing to him? Ungrateful? And his mission “to accelerate the world’s transition to sustainable energy” was a ruse to suck in naĩve investors and engineers to join in?”
Tesla’s annual meeting on June 13 would be crucial for markets as we’ll get to know whether shareholders approve his pay package.
