Tomorrow is election day for Elon Musk. Tesla shareholders will vote on whether to re-approve his 2018 pay package (valued at $46 billion) after it was rejected by a Delaware court in a shareholder lawsuit. The outcome is hard to call, but it could have an impact on not just Tesla but corporate governance practices across corporate America.
Although the focus is on Musk’s eye-popping payday, it’s the role of the Tesla chair, Robyn Denholm, that is far more interesting for what it reveals about the role of the board as a guardian of shareholder interests.
Denholm’s letter to Tesla shareholders captures the argument in favor of Musk’s pay. It’s notable for its defiant tone (“we are accustomed to the naysayers”), and it is a direct defense of Musk’s performance as CEO and the pay plan set five years ago. It also shows a worrisome belief in Tesla’s uniqueness and Musk’s singular genius:
Elon is not a typical executive, and Tesla is not a typical company. So, the typical way in which companies compensate key executives is not going to drive results for Tesla. Motivating someone like Elon requires something different.
She would not be the first board chair to believe in the superpowers of the CEO, of course, but her role as chair is to assure shareholders that their interests are served by the pay plan. On that score, the letter falls short.
There is no mention in the letter of the board’s role, no explanation of the process it used to determine Musk’s compensation, and no description of the actions it took to safeguard shareholders. Indeed, there is no discernible board “voice” in the letter at all, only a defense of Musk’s abilities and the pay to which he is now entitled.
The letter also provides no assurance that the directors were sufficiently independent of Musk to make a dispassionate judgement on his compensation, which was the issue at the heart of the Delaware court’s objection. Indeed, some have questioned whether Denholm can be independent given her enormous compensation as a Tesla director.
Of course, the core argument in favor of the plan is that it will ensure Tesla benefits from Elon’s attention rather than his competing corporate responsibilities:
What we recognized in 2018 and continue to recognize today is that one thing Elon most certainly does not have is unlimited time. Nor does he face any shortage of ideas and other places he can make an incredible difference in the world. We want those ideas, that energy and that time to be at Tesla, for the benefit of you, our owners.
Here, too, Denholm’s letter simply warns of this risk rather than saying what actions the board took to address it. The board could have, for example, set requirements to ensure Musk devotes sufficient time and attention to Tesla.
Yet despite its drawbacks, the letter does have the virtue of a simple message: that a deal’s a deal. Fairness, Denholm argues, should compel shareholders to support a plan that they first approved in 2018. It is a powerful and easy-to-understand message, especially when measured against the shareholder value Musk created.
That simple message could be enough to swing the vote, especially among individual investors, who make up 44% of the shareholder base and are less troubled by governance details than big institutions.