by Chris Kirkham
LOS ANGELES (Reuters) – Tesla’s board of directors gave all its power to Elon Musk. Now investors must decide whether to back the biggest bet in the company’s history.
Shareholders will vote on Thursday on the stark choice presented by the board: Pay Musk up to $878 billion for company shares or take the risk that he will leave (potentially sending the company’s shares lower). Experts say the decision amounts to a referendum on whether traditional corporate governance rules apply to the world’s richest man.
The board and many investors argue that only Musk can follow through on his promise to turn Tesla into a company. artificial intelligence juggernaut that has delivered millions of autonomous robotaxis and humanoid robots. If Musk achieves all of the board’s performance goals within a decade, Tesla’s market value will reach $8.5 trillion and Musk will own about a quarter of the shares.
That’s significantly more pay than other CEOs, and Musk will still collect record payouts (tens of billions of dollars) if he misses most of his performance targets. Many investors do not bat an eyelid at the eye-watering sums.
“If the stock is going to go up sixfold — which is a requirement here — then I’m going to make a lot of money,” said Nancy Tengler, CEO and chief investment officer of Tesla investor Laffer Tengler Investments. “Why should I care what kind of money he makes if he affects change and vision?”
Other major shareholders and executive compensation experts warn that the proposal poses too great a risk for investors. Experts said the package flouted governance principles not only because of its size, but also because the board tied Tesla’s future to a single leader who, along with numerous conflicts of interest, would consolidate his unchecked power over the company. They argue that responsible governance requires that boards remain open to a competitive market for the best CEO available at any given time.
Musk did not respond to requests for comment. A spokesman for Tesla’s board of directors declined to comment.
Musk told board members during negotiations that if no agreement is reached, he could prioritize several of his other ventures, including rocket firm SpaceX, artificial intelligence startup xAI and brain implant firm Neuralink. And board chair Robyn Denholm has repeatedly emphasized the risk of Musk losing out on selling compensation to shareholders.
Charles Elson, founding director of the University of Delaware’s Weinberg Center for Corporate Governance, said Tesla’s board was “controlled by a ‘superstar CEO’.”
“To me, the most appropriate response is ‘Have a nice day,'” Elson said.
Major shareholders, including the largest U.S. public pension fund, the California Public Employees Retirement System (CalPERS), and Norway’s sovereign wealth fund, have echoed these concerns, publicly opposing Musk’s compensation. Norges Bank Investment Management said on Tuesday that the pay offer could reduce shareholders’ value and fail to reduce “key person risk” in tying Tesla’s future to Musk.
The board has sought to ensure Musk’s longevity as leader of the company with provisions including stock vesting periods.
Krishna Palepu, a professor at Harvard Business School who focuses on corporate governance, said the offer is in the best interests of shareholders by tying Musk’s compensation to large increases in stock value and requiring him to hold the shares he earns for five years.
He said Musk has a track record of delivering extraordinary growth in stock prices and will only get the biggest gains if he repeats that.
“The numbers are big because the targets are big,” Palepu said.
USING BRAVE WORDS
Musk’s influence with the board and shareholders lies largely in Tesla’s current stock market value, which far exceeds the current financial fundamentals of its declining electric car business. Tesla’s $1.5 trillion market cap is based almost entirely on Musk’s long-time promises that Tesla will dominate the future of autonomous vehicles and humanoid robots.
Some corporate governance experts say Musk’s threat to leave now, which has led to a collapse in Tesla’s shares, gives him enormous power to make unprecedented claims for damages. “Without Elon, Tesla could lose significant value as our company may no longer be valued in the way we intend,” Denholm, the chairman, suggested in an Oct. 27 letter to shareholders.
From a purely economic perspective, the board’s stance on retaining Musk is understandable, said David Larcker, director of the Corporate Governance Research Initiative at Stanford University business school.
“If you think Musk is potentially leaving and Tesla stock is going to crash, that’s not something you want to happen on your watch,” he said.
Gautam Mukunda, a lecturer at the Yale School of Management, said Musk already owns enough Tesla shares to make him the world’s first trillionaire if he meets the board’s performance targets and has little need for the “second trillion” in stimulus from the company’s investors. He said the board should not be intimidated by threats to leave the person who stands to lose the most if Tesla’s shares fall: its largest shareholder.
“This is a man who put a gun to his own head and said, ‘Give me a trillion dollars,'” Mukunda said. “It’s not the board’s job to nod like a doll when the CEO asks them for something.”
VOTES ON HAND
Musk will face Thursday’s vote with a potentially decisive voting bloc at his disposal – his own 15% stake.
Musk had not voted on his shares in previous pay packages involving Tesla in Delaware. But on the current pay offer, the board said the CEO could do so under the law in Texas, where Tesla was reincorporated after Musk’s last pay package was rejected by a judge in response to a shareholder lawsuit.
The Delaware judge called Musk’s 2018 severance package (originally worth $56 billion and now worth $128 billion) an “incomprehensible sum” resulting from negotiations with conflicting directors over their close ties to Musk and their own excessive compensation.
Tesla appealed and agreed to give Musk shares now worth $40 billion as a “first step” toward fulfilling the 2018 package. This award will be forfeited if the Delaware courts reinstate the payment plan.
Texas law makes it harder for shareholders to sue under a provision passed in May that allows companies to demand that investors who sue directors or executives own a collective 3% stake, as Tesla has done.
The biggest threat to Tesla’s board of directors comes from Musk himself; threat to leave the company. Charles Whitehead, a Cornell University business law professor, said Tesla’s board faces “classic obstructionism.” The burning question the board hasn’t addressed, he said, is: “Who is on the bench to support this CEO if he leaves or God forbid something happens to him?”
(Reporting by Chris Kirkham in Los Angeles. Additional reporting by Rachael Levy in Washington, Ross Kerber in Boston and Tom Hals in Wilmington, Delaware; Editing by Brian Thevenot and Matthew Lewis)
