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Tesla Motors (TSLA): Proxy Voting Recommendations

tesla_flagTesla Motors (TSLA) is one of the stocks in my portfolio. Their annual meeting is coming up on 6/3/2014. ProxyDemocracy.org had collected the votes of one fund when I checked and voted on 5/25/2014.  I voted with management 17% of the time.  View Proxy Statement. Read Warnings below.  What follows are my proxy voting recommendations for TSLA.

Compensation

TSLA’s Summary Compensation Table shows Jeffrey B. Straubel, Chief Technology Officer, was the highest paid named executive officer (NEO) at about $467,600 in 2013. However, CEO/Chair Elon Musk was paid $78.2M in 2012. I’m using Yahoo! Finance to determine market cap ($26B) and Wikipedia’s rule of thumb regarding classification. TSLA is a large-cap company. According to Equilar (page 6), the median CEO compensation at large-cap corporations was $19.7 million in 2012, so TSLA is under for 2013 but say over for 2012. TSLA shares outperformed the NASDAQ substantially over the one, two and five year periods.GMIAnalyst

The GMIAnalyst report I reviewed gave TSLA an overall grade of ‘D.’ According to the report I read at GMIAnalyst:

  •  The Tesla Motors board does not include a fully independent compensation committee, raising concerns about the board’s effectiveness in overseeing the company’s CEO and other managers, a key board function, as well as its ability to design sufficiently rigorous incentives for executives.

  • The board has not established a formal clawback policy regarding its executive incentive pay. Such policies allow boards to recoup incentive payouts that may have been the undeserved result of erroneous or fraudulent financial reporting.
  • Unvested equity awards partially or fully accelerate upon the CEO’s termination, characteristic of 90.2% of companies in the home market. Accelerated equity vesting allows executives to realize pay opportunities without necessarily having earned them through strong performance.

  • The company has not disclosed specific, quantifiable performance target objectives for the CEO, in contrast to 73.9% of companies in its home market that have provided such metrics. Disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.

  • The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO and directors may weaken the ability of equity awards to align executives’ interests with long-term value creation.

Because of these issues and the fact that Musk and others already have a huge incentive to perform given their shareownership, I voted against the pay plan, stock plan and, if given the opportunity, would have voted against members of the compensation committee: Ira Ehrenpreis (Chair), Brad W. Buss, and Antonio J. Gracias. Unfortunately, TSLA has a classified board and none of the committee members are running this year. 

GMIAnalyst  

From their report the following were listed as potential areas of concern:  

  • Securities Fraud
  • Independent Board Majority
  • Related Party Transactions
  • Severance Vesting
  • Restatements or Special Charges
  • Social Impact Events

A few highlights from the report stood out:

  • Tesla Motors does not regularly publish a formal sustainability report. It does not currently report on its sustainability policies and practices via the Global Reporting Initiative, a commonly used and highly effective standard for such reporting, nor has it become a voluntary signatory of the UN Global Compact, yet another commonly employed global standard for achieving and maintaining more effective sustainability practices. In the area of workplace safety this company has not yet implemented OHSAS 18001 as its occupational health and safety management system, nor does it actively disclose its workplace safety record in its annual report or other reporting vehicle.
  • The board is elected in separate classes with terms that expire in different years rather having all directors subject to annual reelection. While often touted as a means of ensuring board continuity, a classified board structure severely limits the ability of shareholders to hold directors accountable and serves as a takeover defense. In addition, the company has charter and bylaw provisions that would make it difficult or impossible for shareholders to achieve control by enlarging the board or removing directors and filling the resulting vacancies. This combination is widely associated with inferior board performance and 24.7% of U.S. companies are flagged for this. The combined effect of these mechanisms is to reduce board accountability to shareholders.
  • The Tesla Motors board of directors does not currently include a fully independent audit committee, a serious concern for company shareholders. We note that 99.7% of company boards in this market maintain a fully independent audit committee, which is critical in providing appropriate oversight of financial reporting.
  • The company has a history of significant restatements, special charges, and/or write-offs in the past two years.

Board of Directors 

  • The board is elected in separate classes with terms that expire in different years rather having all directors subject to annual reelection. While often touted as a means of ensuring board continuity, a classified board structure severely limits the ability of shareholders to hold directors accountable and serves as a takeover defense.
  • The Tesla Motors board lacks an independent majority. We note that a minority, only 10.8% of companies in this home market fail to have a majority of independent directors.
  • The company has failed to split the roles of CEO and chairman, which may compromise even further the board’s independence from current management interests. Split CEO and chairman roles are characteristic of 57.8% of companies in the Russell 3000.
  • The company has not adopted a full majority director election standard, greatly limiting the ability of company shareholders to hold members of the board accountable in uncontested elections. Majority voting has been widely adopted in the United States, especially among larger-cap companies, but more than 61.9% of the Russell 3000 remains under a plurality or plurality plus voting standard.
  • Gender diversity concerns. Several recent studies have shown that companies with too few female directors tend to be less effective and even underperform those whose boards are more diverse.

That’s just too many important issues. To send a message that reform is needed, I voted against all directors.  

Other Proxy Issues

I voted to ratify the auditors. Of course, I voted in favor of my proposal (James McRitchie) to reduce supermajority requirements. Currently, TSLA has supermajority vote requirement (66.67%) to amend certain charter and certain bylaw provisions. Like the Council of Institutional Investors, whose members have $3T in assets, I believe a majority of shares voted should be sufficient. Their Policies on Corporate Governance includes the following:

3.6   Voting Requirements:  A majority vote of common shares outstanding should be sufficient to amend company bylaws or take other action that requires or receives a shareowner vote. Supermajority votes should not be required. A majority vote of common shares outstanding should be required to approve:

  • Major corporate decisions concerning the sale or pledge of corporate assets that would have a material effect on shareowner value. Such a transaction will automatically be deemed to have a material effect if the value of the assets exceeds 10 percent of the assets of the company and its subsidiaries on a consolidated basis;
  • The corporation’s acquisition of five percent or more of its common shares at above-market prices other than by tender offer to all shareowners;
  • Poison pills;
  • Abridging or limiting the rights of common shares to:  (1) vote on the election or removal of directors or the timing or length of their term of office or (2) nominate directors or propose other action to be voted on by shareowners or (3) call special meetings of shareowners or take action by written consent or change the procedure for fixing the record date for such action; and
  • Issuing debt to a degree that would excessively leverage the company and imperil its long-term viability.
CorpGov Recommendations Below – Votes Against Board Position in Bold

#

PROPOSAL TEXT

CorpGov

CALVERT 

1.1

Elect Director Elon Musk

Withhold

Withhold

1.2

Elect Director Stephen T. Jurvetson

Withhold

Withhold

2

Ratify NEO Compensation

Against

Against

3

Amend Omnibus Stock Plan

Against

Against

4

Ratify Auditors

For

For

5

Reduce Supermajority Vote Requirement

For

For

Mark your Calendar

Stockholders may present proper proposals for inclusion in Tesla’s proxy statement and for consideration at the next annual meeting of stockholders by submitting their proposals in writing to Tesla’s Corporate Secretary in a timely manner. In order to be included in the proxy statement for the 2015 annual meeting of stockholders, stockholder proposals must be received by Tesla’s Corporate Secretary no later than December 25, 2014, and must otherwise comply with the requirements of Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Issues for Future Proposals

 Looking at SharkRepellent.net: 
  • Classified board with staggered terms.
  • Plurality vote standard to elect directors with no resignation policy.
  • Board is authorized to increase or decrease the size of the board without shareholder approval.
  • Directors may only be removed for cause.
  • No action can be taken without a meeting by written consent.
  • Shareholders cannot call special meetings.
  • Supermajority vote requirement (66.67%) to amend certain charter and certain bylaw provisions.
From Yahoo! FinanceTesla Motors, Inc.’s ISS Governance QuickScore as of May 1, 2014 is 10. The pillar scores are Audit: 10; Board: 9; Shareholder Rights: 8; Compensation: 8. Brought to you by Institutional Shareholder Services (ISS). Scores range from “1” (low governance risk) to “10” (higher governance risk). Each of the pillar scores for Audit, Board, Shareholder Rights and Compensation, are based on specific company disclosures.

Warnings

Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime).I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003.

Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs.

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4 Responses to Tesla Motors (TSLA): Proxy Voting Recommendations

  1. Julian Cox June 4, 2014 at 6:46 am #

    Idiot.

    If you hate the company/want it to operate like every other dumb corporation why be a shareholder?

    Do you honestly imagine that a shareholder’s committee could run the company better?

    The concentration of excellence in this CEO and this board and the preservation of that excellence from the dumb herd i.e. the likes of you is exactly what makes this company special.

    Go invest in something else.

  2. James McRitchie June 4, 2014 at 7:47 am #

    Julian: Ah, intelligent debate; that’s a start. I wasn’t asking for a shareholder’s committee. I asked that supermajority requirements be eliminated. Must owns about 30% of the company, so he would need to get at least 20+% of other shares voted in order to hold back any changes he doesn’t like. I don’t see any reason for such outrage.

  3. Julian Cox June 6, 2014 at 5:21 am #

    Thankfully for the sake of the company the point is moot.

    For the record a more supportable proposal would be to gift Musk voting rights over all common shares in perpetuity. That is how one would guarantee that the ultimate vision and worth of Tesla and its stock is not screwed over, trying to undermine his authority is to row in precisely the wrong direction.

  4. James McRitchie June 9, 2014 at 12:20 pm #

    My proposal to eliminate supermajority requirements at Tesla won 41% vote, so independent shareowners supported the measure by a wide margin. See Form 8-K for all the voting results @ http://www.sec.gov/Archives/edgar/data/1318605/000119312514228961/d738939d8k.htm

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