Autos

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Here is a chart showing the stock price of a company with some real governance issues:

Issue? What Issue?
Tesla's stock closed at an all-time high earlier this week
Source: Bloomberg

As Bloomberg News reported on Tuesday, Tesla Motors Inc. received a letter earlier this week from several shareholders or their representatives seeking a meeting to talk about the company's board. In particular, they want Tesla to appoint two new directors without links to Chairman and Chief Executive Officer Elon Musk and to eliminate staggered elections, which shield boards from being turfed out wholesale and are an increasingly rare feature among large U.S. companies. Among the shareholders signing the letter are such heavyweights as the California State Teachers' Retirement System and New York City's Bureau of Asset Management.

In response, Tesla says it is seeking fresh blood for a board which, right now, would make a great ad for LinkedIn: Only one out of the seven directors isn't either Musk himself or connected to him in some way either personally or professionally.

This search for new independent directors is progress of sorts. CtW Investment Group, a shareholder activist firm which is coordinating efforts to get Tesla to engage on the issue, sent a letter last June with a longer list of similar recommendations to change the board. That one didn't get any response at all, says Etelvina Martinez, a manager at CtW.

The difficulty here, of course, is that when a company's stock is soaring as high as Tesla's and that trajectory owes more to faith in the CEO's vision than the numbers, it is tough to make a case for reining him in.

After all, last year's acquisition of SolarCity Corp. was a textbook example of a questionable deal involving two companies with multiple connections, compounded by flimsy governance. Proxy-advisory firm Glass, Lewis & Co. called the deal a "thinly veiled bailout" while even International Shareholder Services Inc., which recommended it, did so while also recognizing Tesla's "sub-optimal governance structure." And yet the deal passed with 85 percent of Tesla's shareholders (other than Musk) voting yes -- not the near-unanimous result often accorded such deals but still a landslide. Indeed, according to data compiled by Bloomberg, institutions have, on the whole, moved deeper into Tesla's stock since news of the SolarCity deal first broke last June.

Along For The Ride
Since news of the SolarCity deal first surfaced, institutions have tended overall to increase their exposure to Tesla rather than cut it
Source: Bloomberg
Note: Data show change in various metrics related to institutional ownership of Tesla's stock since June 19th, 2016. Data for number of buyers, sellers, new buyers and selloffs reflect activity in the past week compared with activity in the week ending June 19th, 2016.

That Tesla has chosen to respond to this latest call for engaging on board reform is, therefore, an interesting development. After all, Tesla's latest rally has made it more valuable than either Ford Motor Co. or General Motors Co. Meanwhile, the signatories to the letter collectively manage more than $700 billion of assets but own only about one or two percent of Tesla between them, a stake which pales against the five percent just acquired by Tencent Holdings Ltd.

It is possible that, behind the scenes, other shareholders have also nudged Tesla toward acting. Equally, with a big test for the company coming up -- namely, the crucial launch of the Model 3 car -- adding a couple of extra independent directors to an expanded board offers Tesla's management some insurance against potential disappointment without Musk really giving up much control.

As long as large investors don't withhold support when it counts, though, governance concerns just aren't likely to weigh on the stock, which in turn reduces further the incentive for shareholders to rock the boat. The shares actually traded lower on Wednesday. It's impossible to say if that had anything to do with news of the letter but, equally, the prospect of reforms certainly didn't provoke a rally. Tesla's seeming invincibility is simultaneously its major selling point and its biggest risk.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net