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Michael Hiltzik: Elon Musk thinks Tesla's investors love him. He's very wrong

Michael Hiltzik, Los Angeles Times on

Published in Business News

No one who has followed the career of that famously self-effacing and modest business leader Elon Musk could have expected him to boast openly about having secured approval from Tesla shareholders for two important initiatives: moving the company's state of incorporation to Texas from Delaware, and "ratifying" his massive 2018 compensation package after it was invalidated by a Delaware state judge.

Ha ha. Just kidding. The day before the votes were formally tallied and announced after the company's annual meeting Thursday, Musk telegraphed the results on X, formerly Twitter, the social media platform he owns.

Both resolutions "are currently passing by wide margins," he tweeted on Wednesday, adding, "Thanks for your support!!" and bracketing that line with a quartet of valentine-red hearts.

Thursday evening, after the votes were in, he tweeted a photo of a cake with the iced legend "Vox Populi, Vox Dei," a Latin phrase meaning "the voice of the people is the voice of the gods," and appending the comment, "Sending this cake to Delaware as a parting gift."

The Tesla board instantly executed the change of incorporation, which is evidently rooted in Musk's conviction that Texas courts, which have little experience in adjudicating corporate governance issues, will be more pliant in his hands than the very experienced Delaware judiciary.

From all that, one might assume that the shareholder votes cleared the legal complexities erected around the 2018 compensation grant by Delaware Chancellor Kathaleen McCormick in January.

That assumption may be wrong, according to several experts in corporate law. The idea that shareholders can retrospectively validate a corporate action overturned in Chancery Court is "divorced from the realities of Delaware law," observed Charles M. Elson, one of he nation's recognized authorities on the topic, in a May 13 legal brief.

That may not be the only issue about Tesla and Musk that is arguably divorced from reality. By many objective standards, the electric vehicle maker is in a bad way. A grim story was told by its first-quarter results, released on April 23. The company disclosed its lowest automotive profit margin, 15.9%, in five years, a major decline from its peak of about 30% in the first quarter of 2022.

That reflected several rounds of price cuts to keep Tesla vehicles moving off the lots, resulting in a decline of $2.42 billion, or 13%, in auto sales during that quarter from the same quarter a year earlier. Tesla delivered 386,810 vehicles in the first quarter, down by 8.5% from the same quarter a year earlier. That includes deliveries of its most highly touted new model, the Cybertruck pickup, which has been ridiculed in the automotive press and on social media for its risibly blockheaded design and mechanical and cosmetic flaws.

Tesla faces stiffer competitive headwinds than it has encountered at any other time in its history. These are coming not only from legacy automakers that are coming to market with hybrid and fully electric models, but the Chinese EV-maker BYD, which overtook Tesla in deliveries in the fourth quarter of 2023, when it sold more than 526,000 all-electric vehicles compared with Tesla's 484,510 in the same period.

More troubling from Tesla's standpoint, BYD is taking steps to expand its market significantly beyond domestic drivers and into Europe and even the U.S.

Tesla also faces more shareholder discontent over Musk's role in the company. In the past, his image as a technological visionary was inextricably linked with Tesla's image and the appeal of its products; a Tesla without Musk at the helm was almost unimaginable. Investor confidence in his leadership was manifest; the share price closed on Nov. 1, 2021, at $407.36, when the company's market value peaked at a stupendous $1.2 trillion.

More recently, Musk's reputation has waned among significant segments of the public, thanks to the increasingly strident, partisan, reactionary and antisemitic viewpoints he has expressed on X. Investors aren't especially happy about the company's waning prospects.

The shares are down by more than 54% from that peak close in 2021, by more than 33% from a year ago, and by nearly 25% year-to-date. As I write, Tesla's market value is less than $600 billion.

One issue roiling the investor cadre is whether Tesla is as important to Musk as it used to be. His corporate universe includes not only X, but SpaceX and an artificial intelligence company dubbed X.AI. Musk has on occasion poached talent and resources from Tesla to benefit his other companies.

The Tesla board has gone along with that, but not all investors feel so tolerant. Two individual shareholders and the Cleveland Bakers and Teamsters Pension Fund sued over the practice on Thursday — filing the case in Delaware right under the wire before Tesla followed through on the reincorporation vote by making itself a Texas company.

They say they're irked because Musk had been touting Tesla as, in his own words, "an AI/robotics company that appears to many to be a car company" and "the biggest AI project on Earth." That's an indication that Musk wishes to capture for Tesla the superior price/earnings multiple enjoyed by high-tech and especially AI companies (at the moment) in comparison with car companies. But if he's shifting his AI efforts out of Tesla, that obviously won't wash.

And he seems to be doing so. The plaintiffs observe that Musk has poached AI engineers from Tesla to work at X.AI — at least 11 former Tesla employees went over to the new company. Furthermore, according to a report by CNBC cited by the plaintiffs, Musk personally ordered Nvidia, the global leader in AI processing chips, to divert 12,000 units ordered by Tesla to X and X.AI instead, adding months to the delays in "setting up the supercomputers Tesla says it needs" to develop robots and self-driving vehicles.

Even before the shareholder vote, Musk intimated by tweet that he might not be inclined to develop AI capabilities within Tesla, as opposed to at his other companies, unless the Tesla board granted him a 25% voting control of Tesla.

 

This isn't the first time Musk has treated the companies he controls, whether private or publicly-traded, all as arms of his personal satrapy. After taking over X (then Twitter) in 2022, he brought over Tesla engineers to rework the social media platform's software. And in 2016 he orchestrated a rescue of SolarCity, his failing solar power company, by merging it with Tesla. In that case, typically, his acolytes on both boards went along without objection and, evidently, without spending much time on analysis of the deal. (I've asked Tesla to comment on all these issues, but answers came there none.)

That brings us back to the compensation deal and Thursday's votes.

In her 201-page decision issued on Jan. 30, Chancellor McCormick rescinded the 2018 pay package on several grounds. She found that the unprecedentedly large $56-billion package was excessive.

That was especially so given the control Musk exercises over Tesla as its largest single stockholder (with 21.9% at the time of McCormick's ruling and 20.5% as of March 31) and through his personal relationships and influence over several ostensibly independent Tesla board members — relationships which, McCormick found, had not been adequately disclosed to shareholders voting on the pay package.

Musk reacted to McCormick's ruling by proposing to take oversight of Tesla's government out of the Delaware Chancery Court's hands through a reincorporation in Texas. The Tesla board, which had changed somewhat since 2018 but was still supine toward Musk, also asked shareholders in effect to overturn McCormick's ruling by voting on the pay package again.

In setting up the second vote, the Tesla board didn't display much more inclination to examine the pay package than it had the first time around, when the process of developing the package was all but exclusively under Musk's control.

This time, the board established a special committee of two board members. But one resigned early on, and the board never replaced him. In other words, the special committee was a committee of one, Kathleen Wilson-Thompson, a former executive of Walgreens and Kellogg's. According to Tesla, the committee "did not substantively reevaluate the amount or terms" of the 2018 package "and did not engage a compensation consultant."

Nor did the committee renegotiate the pay package with Musk. After all, the company said, the board had decided in 2018 that the package was "fair"; nothing had changed since 2018, so all that needed to happen in light of McCormick's ruling was that there be more disclosure of board relationships.

Is that so?

A lot has changed, obviously. To begin with, the 2018 package incorporated numerous incentive milestones that Musk would have to meet to receive any part of or even the full $56 billion. Tesla actually did reach those milestones, but what further incentives exist to keep Musk engaged into the future?

Musk's threat to take his AI operations out of Tesla unless he receives more voting control obviously point to the need to keep him on board.

"Stockholders should know whether the board's request for a vote is motivated by the threat — and what, if anything, the board plans to do about Musk's threat if he attempts to carry it out," wrote corporate governance experts Lucian Bebchuk and Robert J. Jackson Jr. prior to Thursday's vote. "Strikingly, the board hasn't conditioned holding the vote on Musk withdrawing his threat or committing not to carry it out if stockholders vote to approve."

They add, "the board should recognize the influence of the sword of Damocles hanging over shareholder heads: the outcome of any stockholder vote could well be seriously distorted by Musk's looming threat."

The Tesla board, therefore, has once again behaved as Musk's cat's-paw. That's not surprising, since the board is nothing like truly independent. Its eight members include Musk, his brother Kimball, his longtime friends Ira Ehrenpreis and James Murdoch (a son of Rupert Murdoch), former Tesla executive and former SolarCity board member J. B. Straubel and, as chair, Robyn M. Denholm, who testified that the wealth she has collected as a Tesla director has been "life-changing."

McCormick found that although Denholm didn't have a personal relationship with Musk, her dependence on Tesla almost exclusively as a source of her personal wealth might have compromised her judgment in approving the 2018 package and contributed to her "lackadaisical approach to her oversight obligations."

So assuming that the Delaware court won't step in again to rescind the pay package, Musk is once again getting all he wants from Tesla, with even fewer incentives to perform for the future than he has had in the past.

Good for him. But if Tesla continues its recent decline in market value, its non-Musk shareholders will have no one to blame but its board, and themselves.


©2024 Los Angeles Times. Visit at latimes.com. Distributed by Tribune Content Agency, LLC.

 

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