A group of Tesla investors thinks the electric-car maker needs more than just a little new blood — and that a ban on Elon Musk holding the chairman’s job for three years while also acting as chief executive should become permanent.
In a letter to three independent directors of Tesla’s board released Thursday, officials with five state or municipal pension funds and the executive director of an investor group affiliated with unions called for even more comprehensive governance changes than what a recent settlement with the U.S. Securities and Exchange Commission required. They requested disclosure of a “refreshment plan” for Tesla’s board, more engagement with shareholders, a permanent separation of the CEO and chairman’s job and several other governance provisions.
The settlement, which followed a securities fraud charge from the SEC over Musk’s tweets about taking Tesla private, would make Tesla appoint two new independent directors, prevent Musk from serving as chairman for three years, establish a new board committee and add controls for overseeing Musk’s communications, as well as pay penalties.
Yet in the letter, the group of investors, which combined hold about $322 million in Tesla stock, said that the addition of new independent directors “does not by itself amount to a robust and credible commitment to change the board’s composition” and that “more concrete steps are needed to demonstrate to shareholders that the company is taking these concerns seriously.”
“It’s time for a serious overhaul of the governance of the company,” said Dieter Waizenegger, the executive director of CtW Investment Group, an activist group that works with union-sponsored pension funds. Appointing two new directors, he said, is great, but “there needs to be more changes.”
New York City Comptroller Scott M. Stringer, who is custodian of the city’s pension fund and also signed the letter, called Tesla’s board “insular” and “unresponsive to investor demands,” saying “a truly independent and refreshed board with directors from diverse backgrounds would be able to provide the strong oversight the company clearly needs. Tesla has a chance now, in the wake of the SEC agreement, to restore investor confidence and rebuild the company’s relationship with long-term shareholders.“
In addition to Stringer and CtW, officials associated with public employee or teacher pension funds in New York, Oregon, Connecticut and California also signed the letter. It calls for Tesla to lay out timelines for the departure of directors Antonio Gracias and Kimbal Musk, as well as the removal of director Steve Jurvetson, “given the unexplained length of his absence from the board.”
Kimbal Musk is Elon’s brother and is the only other director besides Musk that Tesla, in its proxy, says does not meet independence standards as defined by Nasdaq. Gracias is an investor the influential proxy adviser Institutional Shareholder Services said this summer it would not support, partly because of concerns about his independence; Jurvetson is a venture capitalist who has been on leave from Tesla’s board following allegations of personal misconduct last year.
“While meeting the technical definition of independence, five of eight current non-executive directors have professional or personal ties to Mr. Musk that, in light of recent events, appear to have put at risk their ability to exercise independent judgment,” the letter states. “As the SEC has recognized, Tesla’s board needs directors who go beyond the technical definition of ‘independence,’ and fulfill the spirit of the term."
(A spokesman for Tesla declined to comment; in its proxy, Tesla states that the board “undertook an analysis for each non-employee director and considered all other relevant facts and circumstances, including the director’s commercial, accounting, legal, banking, consulting, charitable and familial relationships.” An email to Jurvetson’s new investment firm was not immediately returned. )
The letter, which also calls for Tesla to adopt annual director elections, strengthen its “clawback” provisions for recouping executive bonuses, and add more demographic and expertise diversity to the board, comes as Tesla is expected to name a new independent chairman in the coming weeks. Waizenegger said he will be watching who is named, looking for someone who is “not part of Musk’s social or business circles” and who can be seen as a mentor to the automaker’s erratic, unconventional leader.
In a tweet on Monday, for instance, Musk said he was now the “Nothing of Tesla,” writing that he’d deleted his titles last week “to see what would happen.” He then followed that up with another tweet saying “legally required officers of a corporation are president, treasurer & secretary. Guess I have to keep 1st one or it will confuse the authorities.” A few days earlier, he appeared to suggest the tweet related to the SEC case was “worth it,” then said the same evening he was “signing off Twitter for a few days.”
“The appointment of the chairman will be a first test of whether they are really trying to make a serious change or whether it’s going to be business as usual,” Waizenegger said. (CtW works with pension funds sponsored by affiliates of Change to Win, a federation of unions. Waizenegger said it has no relationship with the United Auto Workers, which has reportedly sought to organize Tesla workers in the past.)
The letter may not change much, particularly in light of the SEC-recommended changes and the company’s recent earnings report, in which Tesla posted a record $312 million in profit, its first profitable quarter since 2016. Investors seem happy: The stock has soared some 20 percent since the news. This summer, before Musk’s infamous tweets, CtW mounted a “vote no” campaign against several directors that was supported by proxy advisers, including Gracias and Musk’s brother, but investors ultimately backed their reelection. Such investor efforts don’t often succeed at capturing a majority of votes.
Still, said Charles Elson, who directs a corporate governance center at the University of Delaware, such public letters are intended to have the effect of publicly shaming boards into taking action, or raising the attention of other shareholders. Their suggestion of refreshing the board and making the CEO-chairman split permanent are “totally called for,” Elson said.
“You shouldn’t be chairing the group that’s overseeing you,” he said. “This is an oversight issue. I don’t think it’s going to happen, but if it calls attention to the problem, maybe it will be a catalyst for some change.”