Tesla's Board Faces Investor Push for Annual Director Votes

  • Proxy advisory firms recommend the measure as company resists
  • Staggered elections promote long-term thinking, carmaker says

Morgan Stanley Takes a Pause on Tesla With Downgrade

Tesla Inc. recommends annual service inspections on its cars. Some of the electric-car maker’s investors want its board subject to yearly checkups, too.

Shareholders will vote Tuesday on whether Tesla’s directors should face re-election at each annual meeting, rather than serve staggered three-year terms. The measure was proposed by a group of Connecticut pension funds that’s criticized Tesla for filling its board almost entirely with members personally or professional tied to Chief Executive Officer Elon Musk.

The investor push has the backing of two major proxy advisory firms, Institutional Shareholder Services and Glass Lewis. The Connecticut funds also have history on their side -- almost all S&P 500 companies moved to annual elections for board members as of last year, up from just 56 percent a decade earlier, according to a report by executive-search consultant Spencer Stuart.

“The ability to elect directors is the most important use of the shareholder franchise, and all directors should be accountable on an annual basis,” Institutional Shareholder Services said in its proxy analysis ahead of Tesla’s annual meeting in Mountain View, California. Staggering elections can “insulate directors from accountability for their actions.”

Tesla is fighting back, arguing that three-year terms allow directors to think long-term. Without what’s known as a classified board, the Palo Alto, California-based company said it may have ended up a “mere supplier” of electric vehicle components, rather than a maker of battery-powered cars. Tesla also said in its proxy statement that it may not have chosen to build its battery gigafactory or network of stores, service centers and charging stations.

Long Game

“These and other similar decisions were made with a long-term focus” and differentiate Tesla from other companies, the electric-car maker said in the filing. The decisions also are “a significant reason why the company’s stock price has increased by more than 700 percent in the last five years.”

The carmaker rose 2.2 percent Monday to close at $347.32 in New York, an all-time high.

About 58 percent of Russell 3000 companies have declassified boards, data from ISS Analytics show. Tesla has been one of the 100 best performers in the index this year, surging 63 percent.

Tesla’s seven-member board has a track record of corporate governance-related challenges that have persisted even as the stock soars. Some investors took issue with directors’ coziness with the CEO during the lead-up to last year’s merger with SolarCity Corp. Musk’s cousins ran the money-losing solar-panel installer, and Musk owned more than 20 percent of both businesses. More than 85 percent of Tesla shares voted in favor of the deal, according to the company.

The Connecticut Retirement Plans and Trust Funds proposed declassifying Tesla’s board. The funds were among the investors who wrote to Tesla’s lead independent director in April to call for two more independent members on the board. They drew a cagey reaction from the enigmatic Musk.

“This investor group should buy Ford stock. Their governance is amazing,” the CEO tweeted at the time. Ford has faced challenges for years to the founding family maintaining 40 percent of shareholder voting control through a special class of stock. Tesla’s market capitalization surpassed Ford’s earlier that month.

Independent Directors

“Besides,” Musk wrote in another tweet in April, “I already said we’d add more independent members during SCTY merger. Will announce soon, but this group has nothing to do with it.”

Musk has yet to announce additions to the board.

Tesla will be under the microscope this summer with the introduction of its most anticipated vehicle yet, the Model 3 sedan. If Tesla has trouble bringing out its most affordable car yet, only a portion of its directors would have to answer for it a year from now under the board’s existing structure.

“The ability to withhold votes from or vote against directors is a powerful mechanism through which shareholders may express dissatisfaction with company or director performance,” Glass Lewis said in its report. “When companies have classified boards shareholders are deprived of their right to voice opinions regarding the oversight exercised by all of their representatives.”

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