Tesla shareholders shouldn't be fooled again on Elon Musk's pay package

By Therese Poletti

Shareholders have a rare chance to send a message to Musk and Tesla's board

Tesla Inc. shareholders have the opportunity to send a message to Chief Executive Elon Musk and his compromised board of directors by voting against Musk's self-designed pay package.

Shareholders had previously approved Musk's pay package - once valued at $56 billion - but that compensation package was nullified by a Delaware court earlier this year after a lawsuit filed by a shareholder, Richard Tornetta. In her ruling, Delaware Chancery Court Chancellor Kathaleen McCormick described the whole compensation process as "a product of sham negotiations" by a board "controlled by Musk," at least in that instance.

Shareholders can also voice their concerns about Tesla's board by voting for a shareholder proposal, not backed by Tesla, that seeks to reduce directors' terms to one year, so they would have to be re-elected every year.

As part of its efforts to get Musk paid, Tesla (TSLA) appears to be giving its shareholders as much information as it possibly can about the process for a second time, ahead of the company's annual meeting on June 13. Tesla has prepared a lengthy proxy filing, with links to the Delaware ruling. In a first for the electric-vehicle maker, Tesla even created an informational website for the upcoming annual meeting, titled "Protecting Your Investment and Tesla's Future."

Tesla observed that "Elon delivered by hitting every jaw-dropping key milestone" on the company's roadmap and he deserves to be compensated for it. Musk and his brother, Kimball Musk, will abstain from the compensation vote and the company's proposal to reincorporate in Texas, the company said.

"This time they are dotting their i's and crossing their t's and presenting all the information to stockholders," said Brian Quinn, a professor at Boston College Law School, where he teaches corporate and M&A law. "They are doing exactly what she said they should do," he added, referring to McCormick's order earlier this year.

But as Tesla begins some serious, and seemingly unusual, promotion of its shareholder proposals, investors need to remember that nearly every board member was deemed to have a close relationship with Musk, and that the board's corporate governance remains extremely problematic. The board has allowed Musk to pursue ownership and involvement in several other companies, including Twitter, which Musk renamed X, and AI-market entry Grok AI.

Even Dan Ives, a Wedbush Securities analyst who has been a Tesla bull for years, has recently grown frustrated with Musk and Tesla amid a stream of bad news, including lower sales numbers, recent layoffs and changing strategies amid increased competition in the EV market.

"This is like every bit of bad governance and excessive executive compensation on steroids," said Brian Dunn, an executive-compensation expert who was also an expert witness for the plaintiffs in the Tornetta case. Dunn said he is currently teaching the case in one of his classes at Cornell University, where he is a visiting lecturer at Cornell's School of Industrial and Labor Relations, because he said it demonstrates all the extremes of really bad corporate governance.

Dunn believes that Musk should be well paid, he said, but that the proposed pay package - which he estimates is worth about $47 billion right now, accounting for a decline in Tesla's stock - is excessive for both the automotive and tech industries. Automotive CEOs on average make between $10 million and $15 million a year, while some tech CEOs make up to $100 million a year, including stock options or grants, he said.

"What Tesla accomplished is extraordinary, but he should be paid as a CEO, not being given 13% of the company out of the shareholders' pockets. At that point, it almost becomes a controlled company," Dunn said. "I find it hard to believe that a responsible institutional investor would just say, 'You know what, you can have it back,' because of all the flaws in it."

How investors actually vote, though, is another matter. It is rare for shareholders to vote against a company's proposals. And whatever ends up happening, it will likely become the subject of more shareholder litigation, Quinn predicts.

"This vote will have happened under Delaware law," Quinn said. "It's entirely possible they go through this, and they get sued, and they end up with the same judge. The judge could say the board went through a process, you disclosed the process to the shareholders, and she allows it to go forward."

Even if more courtroom wrangling lies ahead, it's entirely feasible that Musk will ultimately get that big payday. Shareholders should try to send a message to the company nonetheless.

-Therese Poletti

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04-18-24 0821ET

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