July 20, 2024

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Elon Musk's future at Tesla hangs on a shareholder vote on his pay package

SAN FRANCISCO — For weeks, Tesla CEO Elon Musk has waged a campaign to convince Tesla shareholders to take back his $50 billion pay package, the largest “ever in the public markets,” according to the Delaware judge who invalidated it.

The company released a video instructing shareholders on how to cast their votes and featuring Optimus, Musk's humanoid robot. Those who voted were offered the chance to win a tour with Musk at the company's Gigafactory in Austin. Musk repeatedly tweeted about the vote on X, his social media platform, where he predicted victory this weekend: “Public sentiment is unequivocally supportive.”

But as voting concluded Thursday at the company's annual shareholders meeting in Austin, the outcome appeared far from certain. Major shareholders are divided over whether Musk, one of the world's richest men and a sometimes distracted leader, deserves such a reward. That means the outcome could depend on the votes of individual investors, many of whom bought shares because of Musk's public image as a generational genius.

The outcome will have major implications not only for Musk's fortunes but for the future of Tesla, which has been suffering from weak sales, global competition and mass layoffs. If shareholders deny him a compensation package, Musk has threatened to leave the company and build future technology, including robotics and artificial intelligence, elsewhere. If shareholders approve the package, Musk will gain more control over Tesla's board of directors through stock options.

In a letter to investors earlier this month, Tesla CEO Robin Denholm urged investors to back Musk because he is “not a typical CEO” and motivating him “requires something different.”

“Elon’s unique contributions have built Tesla from what in 2018 was an ambitious, loss-making company with significant obstacles and challenges to overcome to become what it is today — a company that is literally changing the world,” she wrote. “These contributions must be respected.”

But Brad Lander, the New York City comptroller whose office owns about 3.4 million shares of Tesla stock and invests on behalf of public employees, said the package is unreasonable given Tesla's struggles and Musk's insistence on dividing his interest among a group of companies, including a new company. The artificial intelligence endeavor is called xAI.

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“We need a full-time CEO who is focused on growing the company and delivering great returns for shareholders, not allowing distractions or chasing shiny new things,” Lander said.

When a majority of Tesla shareholders agreed to compensate Musk in 2018 — a $56 billion package of stock options in lieu of salary — it catapulted Musk from eccentric CEO to the richest person in the world, boosting his bets on exploring the universe and digitizing the brain. Human and get “actual city square” on Twitter. But some shareholders filed a lawsuit, claiming the process was improper.

Earlier this year, a Delaware judge agreed. She dished out the salary package, calling it an “unfathomable sum” — “more than 33 times larger than the closest comparison to the plan, which was Musk’s previous compensation plan” — and noting that it had been approved by a board full of friends Musk veteran and former divorce lawyer.

The board is now asking shareholders to restore the pay package, which would increase Musk's voting power to nearly 25 percent and allow the company to move its corporate headquarters from Delaware to Texas.

It is unclear which way the vote will swing: while some major investors have pledged to oppose the package, others have remained silent. Vanguard Group, BlackRock and State Street Corp, which together own about 17% of Tesla shares, have not publicly stated their positions. No one responded to requests for comment.

Meanwhile, about 40% of Tesla is owned by non-institutional investors, including individual retail investors. Many are Musk's fans, like billionaire Ron Barron, who called Musk indispensable to Tesla and said his compensation should acknowledge that fact.

“Our answer is clear, loud and unequivocal: Tesla is better with Elon. Tesla is Elon,” Baron said.

But others have become increasingly disillusioned with Musk as the company's performance has faltered. “Enough is enough,” said Leo Kooguan, one of Tesla's largest individual shareholders, adding that he would vote against the proposal.

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In recent weeks, a coalition of seven large institutional investors, including the New York City Comptroller and Amalgamite Bank, urged shareholders to vote against the package, citing a “material failure in governance.” Dealer advisory firm ISS called the package excessive despite Tesla's success, noting that it was not clear it would “increase Musk's focus on Tesla.”

Marcy Frost, CEO of the California Public Employees Retirement System, which represents the state's 2.2 million public employees and is among Tesla's largest shareholders, said she, too, would vote against the package, as she did in 2018. Frost said the vote was not against the lawsuit. Musk “characterizes”, arguing that his “huge” compensation could instead go to shareholders.

“It's really important that we as shareholders get a return on the capital we allocate to these public companies,” Frost said.

A vote in favor of the proposal would be a “strong statement” that shareholders want Musk to be fully involved in the company, and that they “can,” said James Park, a professor at the University of California School of Law who studies securities regulation and corporate law. I can't imagine Tesla without it. However, a no vote would reflect dissatisfaction with Musk's leadership and the company's current state.

In Denholm's letter to investors this month, she noted that Musk had led growth in the company's size and profitability over the past six years, and said ratifying the pay package was “more important than ever.”

“If Tesla is to keep Elon interested and motivate him to continue devoting his time, energy, ambition, and vision to achieving similar results in the future, we must stand by our agreement,” she wrote.

In a tweet in January, Musk emphasized his desire for more control over the company.

“I am uncomfortable with Tesla developing into a leader in AI and robotics without approximately 25% voting control,” he wrote. “Enough to be influential, but not so much that I can't be brought down.”

Musk and Tesla did not respond to requests for comment.

A no vote could slow down AI efforts

The high-profile vote comes at a sensitive time for Tesla, which has lost more than 30% of the value of its shares since the beginning of the year. In April, the company reported a larger-than-expected 55% drop in first-quarter profits due to slowing sales. To allay investors' fears, Musk made lofty promises about launching a fully autonomous “robot taxi” in August, an ambitious timeline that left many observers skeptical about how he would actually implement it.

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Park, the University of California professor, said the current economic backdrop will greatly influence voters' choices.

“There may be a group of retail investors who are very committed to Musk who are willing to overlook some of these events and may not know about them and may vote for the package,” Park said. “And there may be others who are disappointed and disillusioned with Musk.”

Adam Jonas, an analyst at Morgan Stanley, said that if Musk does not achieve his goals, Tesla shareholders should be prepared for a significant slowdown in its efforts in the field of artificial intelligence.

Some seem willing to take this risk. Nell Minow, vice president of ValueEdge Advisors, said she donated a majority of her Tesla shares to charity after voting “no” on the pay package. As an individual investor, she said she soured on Musk, calling the company's corporate governance “catastrophically bad.”

“There is no way you can consider this board independent,” Minow said. “If he doesn't have enough incentives from his current holdings, I don't know if that huge amount of money will make a difference.”

Kevin Smith, a software engineer who said he owns a few Tesla shares, added that he was dismayed by the excessive campaigning by both Musk and Tesla, who appeared to view the vote as an opportunity to make a statement about the court's ruling. Instead of simply focusing on how much money should be paid to Musk.

“It appears to be a symbolic gesture against the court,” Smith said. “So my symbolic vote is no.”

Julian Mark and Aaron Schiffer contributed to this report.