Will Elon Musk quit Tesla over pay package? Here's what Tesla board had to say to shareholders

Tesla's board of directors has pushed all its chips on Elon Musk. Now investors must decide whether to back the biggest bet in company history.

Shareholders will vote Thursday on the stark choice presented by the board: pay Musk up to $878 billion in company stock or take the risk he will leave, potentially driving down the company’s stock. The decision, experts say, amounts to a referendum on whether traditional corporate-governance rules apply to the world's richest man.

The board and many investors argue that only Musk can deliver on his promises to transform Tesla into an artificial-intelligence juggernaut delivering millions of self-driving robotaxis and humanoid robots. If Musk hits all the board’s performance goals within a decade, Tesla’s market value will have grown to $8.5 trillion – with Musk owning about a quarter of the stock.
That is exponentially more compensation than any other CEO, and Musk would still collect record payouts – tens of billions – if he misses most performance goals. Many investors are not blinking at the eye-watering sums.

“If the stock is going to go up sixfold – and that’s a requirement here – then I’m going to make a lot of money,” said Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, a Tesla investor. “Why do I care what kind of money he makes if he’s affecting the change and the vision?”

Other major shareholders and executive-pay experts warn that the proposal represents an enormous risk to investors. The package, experts said, flouts governance principles not only because of its size but because the board is so explicitly staking Tesla’s future on one leader, with myriad conflicts of interest, who stands to consolidate unchecked power over the company. Responsible governance, they argue, requires boards to remain open to a competitive market for the best available CEO at any given time.

Musk did not respond to requests for comment. A spokesperson for Tesla's board declined to comment.

THE LEVERAGE OF BOLD PROMISES

Musk’s leverage over the board and shareholders lies largely in Tesla’s current stock-market value, which far exceeds the current financial fundamentals of its declining electric-car business. Tesla’s $1.5 trillion market capitalization, rather, rests almost entirely on Musk’s longstanding promises that Tesla will dominate the future of self-driving vehicles and humanoid robots.

The threat of Musk leaving now, causing a collapse in Tesla's stock, gives him enormous power to make unprecedented compensation demands, some corporate governance experts say. Board chair Denholm suggested as much in an October 27 letter to shareholders: "Without Elon, Tesla could lose significant value, as our company may no longer be valued for what we aim to become.”

From a purely economic standpoint, the board’s position on retaining Musk is understandable, said David Larcker, director of the Corporate Governance Research Initiative at Stanford University’s business school.

“If you think that Musk would potentially leave and the Tesla stock would crater, that’s not something you want to have happen on your watch,” he said.
Gautam Mukunda, a lecturer at Yale School of Management, said Musk already owns enough Tesla stock to make him the world's first trillionaire if he meets the board's performance goals and hardly needs the incentive of a "second trillion" from company investors. The board, he said, should not be cowed by threats to leave from the person with the most to lose if Tesla's stock falls - its biggest shareholder.

"This is a guy who's holding a gun to his own head, saying: 'Give me a trillion dollars,'" Mukunda said. "It's not the job of the board of directors to just nod like a bobblehead doll when the CEO asks them for something."

VOTES IN HAND

Musk faces Thursday’s vote with a potentially decisive voting bloc in hand – his own 15% stake. Musk did not vote his shares in previous pay packages, when Tesla was incorporated in Delaware. But the board said in its current pay proposal that the CEO could do so under the law in Texas, where Tesla reincorporated after Musk’s last pay package was tossed by a judge in response to a shareholder lawsuit.

The Delaware judge called Musk’s 2018 compensation package – originally valued at $56 billion and worth $128 billion now – an “unfathomable sum” resulting from negotiations with directors conflicted by their close ties to Musk and their own excessive compensation.

Tesla has appealed and agreed to give Musk stock currently worth $40 billion as a "first step" toward honouring the 2018 package. That award would be forfeited if Delaware courts reinstate the pay plan.

Texas law makes it harder for shareholders to sue under a provision passed in May that allows companies to require investors suing directors or executives to have a collective 3% stake, which Tesla has done.

The bigger threat to Tesla’s board comes from Musk himself – the threat to leave the company. Charles Whitehead, a Cornell University business law professor, said Tesla’s board faces a “classic holdup.” The burning question the board has not addressed, he said, is “who is on the bench to backstop this CEO if he walks away or, God forbid, if something happens to him.”

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