ohOne reasonable view of Elon Musk’s big pay issue says that Tesla shareholders should stand firm and approve the astronomical $56 billion payout a second time, sending a message to the meddlesome Delaware judge who canceled the 2018 plan for him to pay. They are quite capable. to make your own decisions, thank you very much.
That is, broadly speaking, the position of Baillie Gifford, a major investor in the electric vehicle company since its inception. “We agreed the remuneration package with Tesla in 2018 because it introduced extremely challenging targets which, if achieved, would generate a huge amount of money for shareholders,” said Tom Slater, manager of the FTSE 100 Scottish Mortgage Investment Trust, told the Financial Times last month. “Having agreed to this, we believe it should be paid.” It is true that the line has the virtue of coherence: we understood why we were voting and an agreement is an agreement.
Nor can anyone complain that Norway’s sovereign wealth fund, which is coming from the opposite direction, will also vote on Thursday as it did in 2018. It opposed the plan then and sees no reason to change its mind simply because the share price of Tesla subsequently headed for the moon, triggering a maximum payout for Musk before the Delaware court intervened.
Therefore, the re-ratification vote will likely yield a result similar to the original majority of 73% in favor. The shareholder registry will have evolved over the years, but not markedly. If anything, retail investors, who account for nearly 40% of the stock, seem even more enamored with Musk these days. And, if a majority is indeed achieved, that should be the end of the matter; There should be no need to go to court again.
But before this saga fades from the headlines, there remains the small question of what Delaware Judge Kathaleen McCormick actually said in his 200 page sentence in January. Read the whole thing and Tesla’s board of directors in 2018 comes across as a bunch of scapegoats who were so in thrall to the boss that they were incapable of executing even a semi-robust process to set their incentives.
No one disputes that Tesla’s share price had to perform a minor miracle to deliver the full prize to Musk: from a valuation of around $50 billion, the requirement was to exceed $650 billion by 2028 (which actually happened in just three years). Rather, the problem was the people Tesla tasked with 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 task force, Antonio Gracias, went on vacation with Musk’s family. A third was Todd Maron, Musk’s former divorce lawyer and the company’s general counsel, “whose admiration for Musk brought 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: Essentially, Musk said what he wanted and received minimal pushback.
In theory, Tesla’s board had some strong cards to play. At the time, Musk owned just over a fifth of Tesla’s shares (this was before he sold some to finance his Twitter madness) and therefore should not have lacked motivation to pursue the goal of a “transformative” growth. Every $50 billion increase in Tesla’s market value would still be worth $10 billion to him, even without the plan. That negotiating point appears to have been ignored.
None of the judge’s criticisms of the process have been adequately addressed by the company. President Robyn Denholm, who took the reins at the end of 2018, says the board “supports this package” and feels vindicated by events. Just in case, he has adopted Musk’s idea of moving Tesla’s incorporation status to Texas.
Would the supposedly independent directors give in so meekly if Musk asked for another large chunk of stock to stay focused on Tesla rather than his privately held companies? One suspects they would.
So while one can accept that agreements, including obviously excessive ones, must be respected, the lack of self-reflection in the Tesla boardroom is surprising. Learn the lesson from this saga: this is a publicly traded company and the job involves more than being a cheerleader for Elon Musk’s fan club.
