With Tesla in trouble, some investors think it’s time to shake up the board of directors.
Shareholders will vote Tuesday whether to dump three directors and replace Elon Musk as board chairman.
Few, if any, expect the votes to pass. In past years, shareholders have overwhelmingly supported the company against activists. And Musk owns 21.9% of Tesla voting shares.
But some advocates — concerned about a lack of independent voices on the board — expect the number of “dump” votes will be big enough to make waves and force Musk and Tesla to pay more attention to investor concerns.
“I don’t know if anyone will be voted out of office,” said Kern McPherson, senior director of North American research at corporate governance advisory group Glass Lewis. “But I think there’s a very good chance that Tesla will have to respond to elevated ‘vote against’ levels.”
Glass Lewis is advising shareholders to vote no for three Tesla board members up for reelection: 21st Century Fox Chief Executive James Murdoch; venture capitalist Antonio Gracias; and Musk’s younger brother, Kimbal.
The firm also backs a nonbinding resolution to appoint an independent board chairman to replace Musk, with Musk keeping his job as chief executive.
Tesla declined to comment or make board members available. Extensive company comments can be found in the proxy statement covering the issue.
The campaign to reform the board was spearheaded by CtW Investment Group, a specialist in managing union-sponsored pension funds. In a written argument to shareholders, CtW said Tesla’s “strategic and operational challenges” and “deteriorating financial performance” warrant a major change on the board of directors, and the board has been “unduly deferential” toward Musk.
The company’s financial position “has deteriorated along every dimension,” CtW said. Indeed, the company has posted only two profitable quarters in its 14-year history, and lately losses have deepened.
Model 3 production problems are the prime cause of Tesla’s current financial distress. Musk himself regards the all-electric sedan, which first went on sale in July 2017, as crucial to the company’s success or failure.
Musk had forecast an annual production level of about 400,000 Model 3s by now, but Tesla is struggling to achieve a quarter of that. Capital spending was set to support 400,000 cars, but revenues have fallen far short of projections, so the company’s cash-burn rate is rising with no earnings available for replenishment.
Musk promises profits in the year’s second half, and he rejects the notion that Tesla will need to raise new equity or debt in 2018. Tesla has said in government filings that the board is focused on the company’s “long-term” performance.
The concerns raised by CtW and shareholder advisors boil down to two main issues: whether the board's independent directors are truly independent, and whether Murdoch and Chief Executive Musk are so busy with other matters that they can’t devote sufficient time and energy to Tesla at a crucial stage in the company’s history.
“It is important that the board of directors take steps to ensure that management remains focused on resolving the manufacturing challenges, and that the CEO and other executives do not get distracted by outside business interests or Twitter fights,” said shareholder advisor Institutional Shareholder Services in a report to clients.
Institutional Shareholder Services opposes reelection of Murdoch and Gracias but supports Kimbal Musk. The firm recommends a yes vote on removing Elon Musk as chairman. That proposal was put forth by shareholder activist Jing Zhao, who told The Times, “I believe a big company cannot depend totally and so heavily on one person.”
Musk is a longtime tweeter; his Twitter account serves as Tesla’s main marketing channel. His tweet volume has increased dramatically — quadrupling over the last month, according to an analysis by the Quartz website — and his tweets have become more vituperative as he battles with critics over allegations about worker safety at his factory, the safety of his Autopilot software and other issues.
Add to that his launch or proposal of new businesses offering everything from flamethrowers to journalism ratings, and CtW accused the board of failing to contain Musk’s “peripatetic focus.” (Merriam-Webster defines peripatetic as someone who “journeys hither and thither.”)
Musk’s existing roles include chairman and chief executive at Tesla; chairman and chief executive of rocket-maker SpaceX; chief executive of Neuralink, a developer of brain-computer interfaces; and founder of Boring Co., a tunnel transportation company (which also sells the flamethrowers to raise money).
Supporters point out that the Musk mystique is a primary driver of investor enthusiasm and a big reason why Tesla’s stock market value is nearly $50 billion.
The Tesla board issued a joint statement defending Musk’s dual role, saying in part: “The board believes that the company’s success to date would not have been possible if the board was led by another director lacking Elon Musk’s day-to-day exposure to the company’s business."
Fox CEO Murdoch also is accused of spreading himself too thin, to Tesla’s detriment. ISS said it considers three boards the most anyone can sit on and sufficiently contribute to the company. Murdoch sits on four: Tesla, Fox, News Corp. and Sky. Murdoch also is Fox’s chief executive.
“A CEO cannot reasonably be expected to balance the responsibilities of serving on more than three public boards while also fulfilling full-time executive duties,” ISS told clients.
Tesla’s directors got paid an average of $1.5 million last year, Bloomberg reported, about three times the typical pay of comparable companies.
Murdoch, who joined the board in July 2017, serves on none of Tesla’s board committees and so far has been compensated with stock options that are valued at $1.91 million and that fully vest on June 18, according to ISS. Linda Johnson Rice, a women’s cosmetics executive who also joined the board in July 2017 and also serves on no board committees, received an options package nearly identical to Murdoch’s.
Director independence is the other major issue in the board reform campaign. Of its nine board members, Tesla considers everyone but the Musk brothers to be independent.
CtW and the shareholder advisor firms disagree. ISS said Gracias and another board member, Brad Buss, should not be considered independent.
Independent directors make up the majority of directors on corporate boards in the U.S., according to several studies. They’re intended to bring a fresh, outside point of view to directors who work at the company or do business with it.
Buss, who is not up for reelection this year, served as chief financial officer for SolarCity, a company run by Musk’s cousins that was bought by Tesla in 2016. CtW cites numerous Gracias ties to the Musk brothers. His venture capital firm, Valor Management, invested in Tesla, SolarCity, SpaceX and PayPal, where Musk was a co-founder. The Musk brothers have sunk money into Valor, CtW said.
The main reason ISS is opposing Gracias, however, is consulting work he and Valor did for Tesla at its Nevada battery factory last year. Tesla paid Valor $34,347 for travel, equipment and lodging.
The firm also has criticized Tesla for executive pay packages that are time-based, not performance-based. And it maintains that an independent director should head the pay committee, which is now led by Gracias. Gracias also serves as the board’s “lead independent director.”
“What the board needs is not a leader who moves in lockstep with Musk but rather an independent leader who can hold management’s feet to the fire when necessary,” ISS advised its clients.
Tesla said its independent directors fit the definition as defined by Nasdaq stock exchange rules. Glass Lewis’ McPherson said his firm sets a higher bar, though, based on “best standards” at highly regarded companies.
“We look for companies to be adhering to best practices, not just minimum requirements,” he said.