At Tesla's annual meeting Tuesday, CEO and chairman Elon Musk will face shareholder votes on two issues shareholders say will boost the independence of the electric-car company's board and challenge Musk's hold on the company, with a proposal to split the chairman and CEO roles.
It's rare for investors to win a majority of votes on such matters, particularly at a company where the CEO himself owns more than 20 percent of shares. Indeed, according to data from Proxy Insight, the average uncontested director at companies in the S&P 500 stock index gets elected with 97 percent of votes cast in their favor, and only one director fails each year, on average, to get a majority of investors' votes.
But Tesla's unique storm of circumstances -- concerns from Wall Street that the company could have to raise funds (Musk has said it will not have to do so), struggles to meet production goals, negative headlines following auto crashes, a CEO who has called analyst questions "boneheaded" and sounded off on Twitter attacking journalists -- could mean investors' efforts get higher-than-usual support, some experts say.
"The elephant in the room, and why this really matters, is Tesla is way behind on vehicle production," said Gregory Shill, a law professor at the University of Iowa who studies corporate governance. "It’s hard for investors not to see that risk exacerbated" by a board that's been criticized by some as needing to be more independent.
But even in cases where investors only succeed in getting a large minority of shareholders to vote against the company's wishes, it can still amp up the urgency for companies to change. Even high minority vote tallies -- those in the 30 to 40 percent range -- can "be embarrassing for the company, and embarrassing for directors," Shill said. "It can all be a part of applying pressure."
At Tesla, CtW Investment Group, an activist group that works with union-sponsored pension funds, has mounted what's known in corporate governance circles as a "vote no" campaign to get investors to vote against the three Tesla directors who are up for election at this year's meeting, arguing they either are not independent enough or lack expertise they believe the board needs. Meeting its production goals "isn’t going to be improved with a board comprised of people close to Elon Musk," said CtW's research director, Richard Clayton.
In a letter addressed to Tesla shareholders, CtW urged investors to vote against Antonio Gracias, a venture capital investor it said has "multiple ties" to Musk and serves as Tesla's lead independent director; board member Kimbal Musk, who is Musk's brother; and 21st Century Fox CEO James Murdoch, a recent addition to the board who the group says lacks experience in manufacturing or engineering fields. "Now that Tesla’s IPO is eight years in the past, a modernization of the Tesla board is long overdue," the group wrote in its letter.
(CtW works with pension funds sponsored by affiliates of Change to Win, which is a federation of unions. Though the United Auto Workers, which is reportedly seeking to represent Tesla workers, has been affiliated with Change to Win, Clayton said CtW's campaign is not related to organizing efforts and is focused on board accountability, effectiveness and independence.)
Separately, another investor is urging the company to split the roles of chairman and CEO, arguing that "it is more and more difficult to oversee Tesla's business and senior management" by someone who holds both roles. While many companies have separate CEOs and board chairs, it's rare to see companies make the change after an investor revolt. The average vote in support of proposals to split the jobs this year was just 31 percent, according to Proxy Insight, and one hasn't gotten majority approval since 2015.
One factor that could boost the shares cast against Tesla is that two proxy advisory firms, which offer guidance to investors on how to vote on issues at stake during annual meetings, have sided against Tesla on some of the votes. Glass Lewis is advising investors to vote against all three directors and in favor of splitting Musk's jobs, while Institutional Shareholder Services is also advising in favor of an independent chair and a vote against two of the directors.
"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 wrote in its report, and "help to ensure that the CEO is not overly distracted by his duties and interests in unrelated companies, or by long-term plans for future Tesla products."
A Tesla spokesman pointed to Tesla's proxy, where the company outlines how it determined the independence of its directors, with the exception of Musk and his brother. The proxy also notes that the remaining directors meet the definition of independence as set by Nasdaq listing standards, and says 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."
Some analysts said it's unlikely that mutual fund giants like Fidelity or T. Rowe Price, two of Tesla's largest shareholders, would come out in opposition. Neither fund company has deviated much in the past from the votes recommended by the company.
"The Tesla stock story isn’t about how many Model 3s they’re going to deliver in the next quarter, it’s about what does the company look like in 2025, or far out in the future, and the architect of that vision is heavily centered on Elon," said David Whiston, an analyst who covers Tesla for Morningstar. "I'm sure they've been aware of all these issues for a long time and must be okay with it if they hold, in Fidelity's case, almost 10 percent of the stock. I'm not saying they're happy with it, but it's not worrying them enough to hold off on buying the stock."