I’d say rather it was despite Musk being at Tesla. My point was just to agree with the idea that, generally, the Cybertruck is doing a decent job. That doesn’t mean that Elon is.
Inaccurate characterization. Matt Levine, bolding added:
The plaintiffs here argued, and the judge agreed, that the shareholder vote was not “fully informed,” “because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process.”10 The economic terms of the options grant were fully disclosed; shareholders did knowingly approve exactly the options that Musk got. But they were apparently misinformed about the process by which he got them. So, despite the shareholder approval, the entire fairness standard applies, and the judge gets to second-guess the deal.
Cite (sub req): Elon Musk Is Overpaid - Bloomberg
That answers your question, but Levine notes that his simplified version of the judge’s decision involves 4 steps. Step 2 is above, I’ll relate step 3 for entertainment purposes and add bolding:
The entire fairness standard asks if there was a fair process, and a fair price. On process, I mean, ideally what you’d want is an independent board of directors (or a special committee made up of independent directors) that was empowered to negotiate against Musk, that took its job seriously, and that tried to get the best possible deal for shareholders. I think it goes without saying that you are not going to get that at Tesla! “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf,” says the judge, and one’s “admiration for Musk moved him to tears during his deposition.”11 And “given the collection of people tasked with negotiating on Tesla’s behalf, it is unsurprising that there was no meaningful negotiation over any of the terms of the plan.” One director “testified that he did not view the negotiation as an adversarial process.” Musk just asked for the pay package that he wanted — he explained that it was “just so that I can put as much as possible towards minimizing existential risk by putting the money towards Mars if I am successful in leading Tesla to be one of the world’s most valuable companies” — and the board gave it to him.
Those are the guys representing minority shareholders in TSLA. So yeah, I think the judge’s decision was well-grounded.
Maybe I’m ungrateful Strangelove: it is indeed an honor to reside on the same planet as Elon Musk, a man who successfully asked for a loan from Space-X to buy Twitter - a one billion dollar loan! Because sure why not? Anything that keeps Elon happy keeps us all happy.
Back to the OP. Was this pay package fair? Was it just? Was it a good idea? Given the antics involved in the original vote, Delaware Chancery Court Chief Judge Kathaleen St. J. McCormick was mandated to apply a fairness review. Here is the reasoning from her > 200 page decision:
Why did Tesla have to “give” anything in these circumstances? Musk owned 21.9% of Tesla at the time of the Grant. If the goals were retention, engagement, and alignment, then Musk’s pre-existing equity stake provided a powerful incentive for Musk to stay and grow Tesla’s market capitalization. After all, he stood to benefit by over $10 billion for every $50 billion increase. His equity stake was also a powerful incentive to avoid allowing Tesla to fall in what Musk might consider to be incapable hands. Moreover, Musk was not going anywhere. He stated publicly at the outset of the process and repeated throughout this litigation that he was a lifer who intended to stay at Tesla for the remainder of his days (or until he becomes “too crazy”), with or without the Grant.
The principal defect with Defendants’ give/get argument (indeed, their fair price argument as a whole) is that it does not address the $55.8 billion question: Given Musk’s pre-existing equity stake, was the Grant within the range of reasonable approaches to achieve the Board’s purported goals? Or, at a minimum, could the Board have accomplished its goals with less, and would Musk have taken it?
Defendants’ primary response is to reduce the issue to a straw man, stating that “Plaintiff’s allegations boil down to the position that Musk should be happy to work for free.” They make a similar point elsewhere, stating that if Musk “fell short of achieving some or all of the [Grant’s] milestones, the stockholders retained the benefit of any increase in Tesla’s stock price, while Musk risked receiving nothing.” For free? Receive nothing? Defendants’ arguments ignore the obvious: Musk stood to gain considerably from achieving the Grant’s market capitalization milestones (over $10 billion for each $50 billion increase in market capitalization).
Well argued, your honor.
ETA: Agree in full with hajario below. But I have to insist that the position Musk relayed to the Delaware judge was comical. I say there are serious problems with US corporate governance, but that’s a matter for legislation and in the end Musk’s actions were lawful. Comical, but lawful.
No lies, no deception, the deal is totally public, the shareholders overwhelmingly approved it. It’s not theft. It’s not a heist. It might be a bad call. I have no idea. Time will probably tell.
Like this one…
I appreciate the cite. I hadn’t see the exact reasoning the judge used.
However, it makes the decision even weaker, IMO. Why is the process relevant at all? The shareholders are voting based on their economic self-interest. And the judge admits that this was fully disclosed.
The shareholders had the same information about Musk’s behavior and incentives. I.e., that he was likely to stay regardless. Although–perhaps–not with quite the same incentive to make Tesla profitable as rapidly as possible. Regardless, they voted in favor anyway.
Does anyone legitimately think that had shareholders known more about the process, they’d have voted the other way? Certainly not now.
I feel exactly the same way. I’ve never put down a deposit on a Tesla but I did at one point think there was some chance a Tesla might be my next car. The chances of that are now zero, and Elmo is the whole reason for it. The availability of good quality EVs and plug-in hybrids at lower prices whose future is not subject to the whims of a crazed sociopath just makes that conviction even stronger. At a time when Tesla is facing increasing competition, Elmo is personally a stain on the brand and a strong reason to avoid it.
Matthew Levine of Bloomberg is fantastic: he really drills into the details. You just asked for point 1 of 4:
Generally speaking, a board’s decision about how much to pay its chief executive officer is almost completely unreviewable in court, “the quintessential business determination subject to great judicial deference.” In Delaware corporate law, the “business judgment rule” provides that a court generally will not second-guess a board’s decisions about how to run the business. But there is an exception for transactions between a company and its “controlling shareholder,” and that is a somewhat vague concept. Musk, when he got this pay package, owned 21.9% of Tesla’s stock: not a majority, but a lot. And combining that with his role as founder-CEO, his importance to the company and his power over the board, the judge decided that he was the controlling shareholder.9 For transactions with the controlling shareholder, the standard is not “business judgment” (a court won’t second-guess the board’s decision), but “entire fairness” (the court will second-guess the board’s decision).
Speaking generally, US protections for minority shareholders are a very good thing. They typically exceed protections in other advanced democracies, which is also a very good thing as our form of capitalism relies more heavily on equity markets. Where our system fails is that shareholders lack sufficient incentive here to apply responsible oversight. Proxy pamphlets are very long and who has the time?
One thing I didn’t know until 10 minutes ago is that retail shareholders own almost half of Tesla’s shares. That’s high. Most companies are around a quarter or lower.
Gifted NYT article for those interested:
Graph from article:
I’ll read the article later if I can bypass the paywall.
It’ll be interesting to see how it goes from here. The rules seem designed to encourage board independence, or at least provide a check in case the board isn’t independent. But it’s clear that the vote here is a kind of referendum on Musk himself. And I think that applied back in 2018 as well, but it’s even more clear now. So why is board independence crucial?
Put another way, suppose there was no board at all; that the compensation proposal somehow went directly from Musk to the shareholders, so there’s not even the pretense of further negotiation. Would that have changed the outcome at all? I don’t think so.
And yes, Tesla has a very high proportion of retail investors. I believe it’s over half if you exclude insiders (or at least very close). I meant to mention it earlier since I’ve been emphasizing their important role in the outcome and the strong get-out-the-vote effort by various third parties. It would not surprise me if the recent vote set some kind of record for retail investor participation since, as you mention, proxy pamphlets aren’t exactly widely-read.
It would have not changed the outcome, because shareholder democracy in the US is a joke. Evidence: news articles drilling down into proxy battles are few and far between. So shareholders aren’t in the habit of viewing them critically, both as cause and effect. That’s shifting over time. Vanguard now has a proxy steward committee which issues an annual report for example. Starting this year, Vanguard’s shareholders are given the option to choose one of two proxy policies. These are baby steps: the underlying problem is a stubborn one.
That said, the Judge still made the right decision. Because misrepresenting a director as independent when he is not is a big deal. It can affect the perspective of a reasonable and conscientious shareholder voter. Moreover, it puts up a roadblock to the sort of crony capitalism that is typical abroad. Delaware is chosen as home of Fortune 500 companies because it is very corporate friendly. But there are limits, especially with large companies with unbalanced ownership structures.
ETA: GIfted Levine article from January, good for 7 days only:
True but this proxy vote was super well publicized and people who voted knew what they were doing.
I just ignore them, not that I am holding any substantial amount of anything. My financial planner buys and sells for me and I am hands off. I had some stock last year that had something controversial. I got lots of emails and phone calls. I asked the financial planner what would be best for me and he said that it didn’t matter so the next time someone called to remind me that I hadn’t voted yet I told them that I’m not going to vote and I didn’t care what happened which stopped the nagging.
As you indicated, it’s almost always perfunctory.
Well that’s it really: if you don’t like the company, you sell the stock. There’s no good reason to muddle with proxies as a retail investor, except as a hobby. So companies have insufficient oversight and pay packages balloon: it’s a market failure.
The solution in my view is to take a share of the SEC tax and award it to proxy voting companies. Then have each shareholder choose a voting company and/or company voting policy. That’s still a big ask on people’s time, but I think it would be a reasonable and incremental improvement. Institutions could probably do this without too much sweat.
PS: The reminding phone callers are usually hired by management. They will often ask, “Do you plan on voting with management?” IME replying anything but, “Yes”, reduces phone calls from all companies. That includes, “I’ll have to read the proxy first”: bad answer. Or: “I generally like to keep the roles of CEO and Chairman of the board separate”: really bad answer. At least in the experience of myself and my father.
My opinion of Musk is mixed. He has made some important innovations, and has convinced many people that he will continue to bring value over the next ten years. Certainly he knows how to sell sizzle.
Do I think he is worth this enormous amount of money? Tesla has been profitable but in the future these profits might depend on keeping more competitive Chinese companies out of as many wealthy markets as they can. I know people who love their Tesla, but that is obviously a separate thing from valuation. However, it’s not my call.
I think it is up to the shareholders to comment on executive pay, and they seem to have done so aware of the issues. Withdrawing so much money from the company will not by itself help it succeed in the future, since these opportunity costs are so significant. I read the lawyers involved in originally reducing Musk’s pay packet wanted five billion for their troubles, but perhaps this is a joke, of sorts.
It’s not like Tesla is the only overvalued stock. Big pay packets reduce the value of a company. The shareholders know this. So do the people who also profit from approving these things.
I’m completely baffled and mystified by the reasoning that caused shareholders to approve this debacle. Imagine for the sake of argument that instead of giving $55 billion to Elmo, $35 B was comitted to funding R&D over the next decade, and $20 B was committed to shareholder dividends. What would be the result? A literal wealth of capital available for research and innovation, and the stock price soars both because of that and because of the dividend income. And if Elmo gets pissed off and quits in a huff, even better! Astute observers would buy up even more stock in anticipation of competent management, putting even more upward pressure on the price!
@wolfpup when he heard the news…
That might have been my reaction if I’d held any shares of TSLA. But I didn’t, never have, and never will. The chances of my holding any shares in TSLA are exactly the same as the chances of my owning any of its products, or any shares in DJT. Interestingly the principals behind the two entities have very similar authoritarian neo-Nazi inclinations.
Nope! There is literally nothing in my portfolio that hasn’t done that; it’s pretty much “meets expectations.” Some examples…
June 2014
MSFT: $41
AAPL $22
AMZN $16
NVDA $0.48
NFLX: $63
June 2024
MSFT: $442
AAPL: $210
AMZN: $184
NVDA: $132
NFLX: $669
That’s not based on a sophisticated strategy. I basically stick with companies in the Top 20 of the SP500 by market cap, and pretty much any of those would do the same over that period; it’s how I wound up with Tesla. My only losers were Boeing and Intel. I sold Tesla because, as his profile rose, I liked him less and less.
That was my opinion yesterday. Now it’s true that Tesla R&D has been a relatively small $17.4 billion over the past 10 year, small relative to Musk’s $55 billion pay package. But remember Tesla is paying out stock options to Musk, not cash. Musk’s winnings come out of the stock price, not company coffers. Sure, this unnecessary gift to Musk dilutes each stockholder’s ownership. And yeah, it was designed by a wholly captive board and misrepresented to shareholders. And ok, most shareholders don’t pay much attention to proxies, figuring that they wouldn’t own the company if they didn’t trust management, a delicious reversal of cause and effect. Those who have thought deeply and carefully about the pay package (specifically the court of Delaware) found it wholly unnecessary.
But the money is coming out of the shareholders’ pockets, not TSLA R&D or capital expenditure. (Right?)
You might own TSLA via the S&P 500. Most do, if only through their pensions.
Maybe. But if I indirectly own TSLA through some aggregate fund whose components I have no control over, I’m not going to waste my energy getting outraged about it. I’ll just be happy about the fact that the scam stock DJT has virtually no institutional investors. At least TSLA makes useful products even if it’s run by a fucking lunatic Nazi.
I read the Bloomberg article (thanks for that) and I don’t see much discussion of one particular point: the aspect of controlling shares.
The court seemingly focused a great deal on the package as an incentive. And indeed that was a strong component. But another component was simply giving Musk greater control over the company.
Tesla is (apparently) incorporated in a way that they can’t simply invent a class A+ share that’s worth a million normal shares in voting rights and gift a few of those. So the money and the power go hand in hand.
Even if the court decided that the package was a larger incentive than required, that doesn’t address the power aspect, because that isn’t related to incentives at all. It’s just a referendum on whether he should have greater relative influence. And, needless to say, the retail investors have great confidence in him and surely support that aspect of the package. Recent events like the temporary ouster of Sam Altman undoubtedly reinforce this position.
[quote=“epbrown, post:156, topic:1002838”]
Nope! There is literally nothing in my portfolio that hasn’t done that; it’s pretty much “meets expectations.” Some examples…
June 2014
MSFT: $41
AAPL $22…[/quote]
You need to start a Doper Investment Club!
I’ll sign up…
And I’d say your Apple stock did more than “meet expectations.”
On a percentage basis, those who held Apple stock over the past 10 years earned a 916 % return.