A Form PX14A6G has just been filed with the United States Securities and Exchange Commission
Worth a read. Raises a bunch of solid points, but laced with some hysterical oversimplifications and exaggerations.
EXCERPTS:
The Board continues to allow Musk to be overcommitted, not demanding that he devote his attention to his role as CEO and “Technoking” of Tesla. Musk commits significant amounts of time to his roles at X, SpaceX, Neuralink, the Boring Company and other companies. At the 2023 Wall Street Journal CEO Council Summit, Musk reportedly said he divides his time between these companies by focusing on “predominantly one company on one day.”11
The Board exposes shareholders to unnecessary risk by allowing Musk to pledge significant amounts of Tesla stock as collateral to fund his other pursuits.12 If Musk were ever forced to sell his pledged stock, it could lead to a massive drop in stock price to the detriment of shareholders.13
The lack of Board oversight has effectively enabled Musk to use Tesla as a coffer for himself and his other business endeavors, even if these actions come at Tesla’s expense. In 2022, Musk admitted to using Tesla engineers to work on issues at Twitter (now known as X), and defended the decision by saying that no Tesla Board member had stopped him from using Tesla staff for his other businesses.14 More recently, Musk has begun poaching top engineers from Tesla’s AI and autonomy team for his new company, xAI, including Ethan Knight, who was computer vision chief at Tesla.15
This is on the heels of Musk’s post on X that he is “uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control,” a move widely seen as a threat to push Tesla’s Board to grant him another mega pay package. 16
Additional evidence of Tesla Board dysfunction was reported in a series of articles in the
Wall Street Journal, which chronicled the departure of Directors who reportedly left amid frustration with the Board. Most recently, “Hiromichi Mizuno, a former chief investment officer of Japan’s Government Pension Investment Fund, left the Tesla Board in 2023 after three years in part because of the lack of ability he felt he had to work on improving the company’s governance-related practices.” The series also reported that former Board member Linda Johnson Rice left the Board after her concerns about Musk’s drug use were “brushed off” by other members of the Board, and some Board members felt an expectation to consume drugs with Musk or risk upsetting him.17
If Board members are unable to resist pressure to use illegal substances for fear of alienating the person they are obligated to supervise, one can hardly imagine they will stand up to Musk when corporate issues requiring Board input and oversight are at stake.
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Our concerns over Tesla’s governance, and in particular the many potential distracting initiatives the Board allows Musk to pursue, are reinforced by Tesla’s declining share price and operational performance over the past three years. While Tesla’s share price grew at an extraordinary rate between 2019 and 2021, since reaching a peak in November 2021, Tesla’s share price has declined substantially. From March 19, 2020 to November 4, 2021 Tesla’s share price rose from $28.51 to $409.71, an increase of $381.20 per share, but has since fallen to $172.63, a decline of $237.08 or 62% from its peak. Table 1 below compares Tesla’s share price performance to the S&P 500, GM, and Ford over the most recent 1, 3, and 5 year periods.
Similar to the pattern seen with Tesla’s share price, Tesla’s operating performance has declined since the early part of the pandemic. With respect to sales, this has taken the form of a “regression to the mean” where Tesla’s annual revenue growth has reverted to its 2019 rate, while Tesla’s profitability has actually gone in reverse, with both gross and operating profit falling in 2023 compared to 2022. Table 3 shows Tesla’s annual growth in these metrics for each year since 2018.
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Tesla’s revenue growth has been rather volatile, even as it has been positive in each full fiscal year. This volatility in sales growth has been matched with respect to gross profit (revenue minus externally purchased inputs), the growth rate of which has fluctuated even more. Because Tesla reported no EBIT prior to 2019, its 2020 growth rate is not a very meaningful indicator. It is, however, important to note that the year-to-year decline in the EBIT growth rate, which is much more severe than the decline in either sales or Gross Profit, suggests that operating issues have played an important role in Tesla’s share price decline, even if other factors – like declining growth in China or increased raw materials costs/bottlenecks – have also played a role.
Recently, Tesla has announced performance metrics for the first quarter of 2024, and the troubling trends continue: Tesla saw overall revenue drop 9%, automotive revenue drop 13%, and net income drop 55%, relative to the first quarter of 2023.
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The Board’s Failure to Curtail the CEO Jeopardizes Tesla’s Brand
Over the past few years, Elon Musk has dominated the headlines with his public fights with regulators, acquisition of Twitter, controversial statements on X, and his legal and personal troubles. Tesla’s reputation has been deeply intertwined with that of Elon Musk, and there are indications that the steady stream of negative Musk-related press coverage has led to a decline in the Company’s reputation among consumers which in turn is having a negative effect on Tesla’s bottom line.21
Caliber, a market intelligence firm, reported that Tesla’s “consideration score” had plummeted from 70% in 2021 to 31% in February of this year. The “consideration score” measures consumers’ level of trust in a brand, and whether or not they would consider buying its products. Caliber attributed, in part, the declining score to Musk’s personal reputation. According to Oppenheimer & Co. Senior Analyst, Colin Rusch, consumers who are reluctant to be associated with Elon Musk are starting to look to “spend their dollars elsewhere."
Further, Tesla dropped to 62nd place in the 2023 Axios Harris Poll 100, which gauges the reputations of the most visible brands in America. That’s 50 places below its 12th place ranking in 2022, which itself was a four-spot slip from its 8th place ranking in 2021. This recent drop was induced by declines in all nine categories the Axios Harris Poll 100 measures, but the largest declines were in the categories of character, trust, culture and ethics. Competitors Honda, Subaru, Toyota, BMW, Ford, GM and Volkswagen ranked higher than Tesla.23
These indicators of a declining reputation are particularly worrisome for investors in light of Tesla’s disappointing first quarter, in which the Company produced 46,000 more vehicles than it sold, which according to analysts may be a sign of softening demand.24 With competition in the EV space ramping up, and cheaper and more varied options becoming available to consumers, Tesla and its long-term investors cannot afford to stand by as potential customers are being turned off from the Company due to the Board’s failure to reign in the CEO.25
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Chaotic Legal Landscape and Tesla’s Long Standing Compensation Issues
One goal of a well-designed compensation package is to promote long-term growth and stability, both of which Tesla shareholders need and neither of which would be solved via ratification of the 2018 Pay Package. Corporate law experts, including Tulane law professor Ann Lipton, have raised important questions as to whether ratification of the 2018 Pay Package will expose the Company to additional lawsuits based on the issue of corporate waste. She notes:
“Tesla seems to be trying to have it two ways: this is both a new compensation package, with new board consideration and new shareholder approval, in light of facts that exist today, and an old one. By saying it’s an old one, Tesla can claim there was no need to reconsider the substance of it; by saying it’s a new one, Tesla can claim that the process was done correctly, with an independent board committee and full disclosure to shareholders.”35
Yet it cannot be both ways and this attempt will certainly incur additional litigation costs. Tesla itself states that neither the Special Committee nor its advisors can “predict with certainty how a vote to ratify Musk’s compensation would be treated under Delaware law in these novel circumstances.”36
More fundamentally, ratification of the 2018 Pay Package fails to begin to address Tesla’s issues going forward. At this year’s annual meeting, the Compensation Committee had an opportunity to set a future compensation plan with new metrics but failed to take it. If shareholders ratify the 2018 Pay Package, there could be another plan in 2025. Given Tesla’s history of exponentially larger awards, Musk may well ask for another award. 37
Additionally, one of the unaddressed issues facing Tesla is Musk’s role as effectively being a part-time CEO. In 2018, ISS noted that “one of the primary reasons for the award's design and magnitude is to retain and focus Musk on Tesla's success for the duration of the ten-year term.” If this was one of the primary reasons for the 2018 pay package, then it has been an abysmal failure, as six years later Musk’s outside business commitments have only increased.
The 2018 Pay Package Does Not Serve Tesla Shareholders
In 2018, one could argue about the rigor of the targets, but by now, those goals have all been met. Shareholders should not pretend that this award has any kind of incentivizing effect—it does not. What it does have is an excessiveness problem, which has been glaringly apparent from the start. We note that both major proxy advisors, Institutional Shareholder Services and Glass-Lewis, recommended AGAINST the 2018 Pay Package previously. ISS’ 2018 report noted that it was not clear if “the
oard gave any indication to investors that the magnitude would total in the billions of dollars, the largest-ever of its kind.” It is only through Tornetta that we know that the Board did not even negotiate with Musk about the size of the award, and the Special Committee Report confirms that this lack of negotiation remains unaddressed in this ratification proposal.
Conclusion
In light of these myriad concerns, we urge you to vote against the reelection of Kimbal Musk and James Murdoch and against the ratification of the 2018 Pay Package at the upcoming AGM. It is crucial for us, as shareholders, to ensure that our Board is composed of individuals who can provide effective oversight, independent judgment, and put the best interests of Tesla and its stakeholders first.
Sincerely,
Amalgamated Bank
AkademikerPension
Nordea Asset Management
New York City Comptroller Brad Lander
SHARE
SOC Investment Group
UNISON
United Church Funds
https://www.sec.gov/Archives/edgar/...=operational_trigger&utm_term=quarterlyupdate
