Can shareholders influence Elon Musk's trillion dollar pay package?

0:01NPR.

0:11This is The Indicator from Planet Money. I'm Adrienne Ma. And I'm Waylon Wong. We had some news come out last week about Tesla that made me do a spit take. I'm talking spring morning coffee all over my laptop screen. Tesla has proposed a new pay package for CEO Elon Musk that would award him anywhere from $88 billion to about a trillion dollars if he hits certain goals. This would be unprecedented compensation for a CEO. It's not a done deal, though. Tesla shareholders have to vote on this proposal in November, And that's when the company holds its annual meeting. A shareholder vote might sound like a great exercise in, you know, corporate democracy, a chance for a Tesla investor to have their say.

0:51But it's not that simple. Today on the show, we look at what it takes for a shareholder to get their voice heard and the shifting power dynamics between shareholders and corporate leaders. Plus, we talk to one Tesla investor agitating for changes at the company.

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1:57Luckily, the Dell PC helps you get it all done. Get yours at Dell.com slash holiday. This message comes from Mint Mobile. Starting at$15 a month, make the switch at mintmobile.com slash switch. $45 upfront payment for three months. Five gigabyte plan equivalent to$15 a month. Taxes and fees extra. First three months only. See terms. Earlier this year, Elizabeth Steiner composed a strongly worded letter to the chair of Tesla's board of directors. Let's just say she had some notes. Tesla value continues to plummet. And there are very good reasons. And one of them is the lack of an effective board who holds Mr.

2:38Musk accountable. Elizabeth is the treasurer for the state of Oregon. She oversees$140 billion in assets, mostly the retirement fund for public employees. About 1 % of Oregon's investments are in Tesla. And she's been concerned about the company for a while now. It's gone from bad to worse. Her next step was to team up with some other like-minded institutional investors. Together, they own around 8 million shares in Tesla. And they all signed a group letter about deficiencies they saw in how the board was overseeing Tesla. They used the letter that I wrote originally as the basis for the group letter because it was a good letter.

3:16I have a good team. Take the credit, Elizabeth. So humble. I know, right? Anyway, the letter asked for a number of changes, including appointing an independent director to the board and limiting board members' commitments at other companies. We want it on the record that we tried really hard to get the chair of the board to pay attention to what investors were saying. We proposed solutions. We tried to be part of the solution, right, and not just complain because that's unproductive. This group letter was sent in May and they did not hear back. The silence is indicative of how hard it can be to affect real change as a shareholder, even an institutional shareholder like a pension fund that might hold millions of dollars worth of Tesla shares.

4:03Brian Chuffins is a professor of corporate law at the University of Cambridge. He says just because shareholders own stocking companies doesn't mean they have influence. It's misleading to think about shareholders as actual owners of companies. They have a crucial bundle of rights in terms of their ability to vote who's put on the board. But to call them owners is, as a form of shorthand, is too conclusory and potentially misleading about what they're actually about. So, for example, take Netflix. Even if you were to own 100 shares or even 1 million shares of Netflix, your stake would still be microscopic because there are around 425 million shares of Netflix outstanding.

4:46Yet remember Elizabeth Steiner and the group of investors and their 8 million Tesla shares? That sounds like a lot, but it's actually less than a third of 1 % of Tesla's outstanding shares. That said, there are investors with meaningful stakes. Brian says there's really just three with this distinction. They are BlackRock, Vanguard, and State Street. He says that collectively, the big three will often own a quarter of the shares in a public company. So these are the investors that can hold sway with corporate leaders. But Brian says they don't typically stick their noses in what companies are doing.

5:19They're not sending letters like Elizabeth Steiner in Oregon. You can think of investors like Elizabeth as helicopter parents. You know, they're hovering over their kids at the playground, making sure they're playing nicely with others and not like throwing gravel everywhere. The big three institutional investors are more like those free-range parents who let their kids go to the playground by themselves. Their powerful default setting is not to be active. And this is quite rational. BlackRock, for example, owns shares in thousands of public companies. They have about 35 or 40 people who oversee governance.

5:56It's impossible under these circumstances for them to study the affairs of each of these publicly traded companies in sufficient detail in order to offer company-specific input. it. The free-range parents aren't storming their city council meetings to ask for safer playground equipment. But the helicopter parents, like Elizabeth in Oregon, if they want to ask for a change in how a company does something, they do have one tool at their disposal. They can submit proposals that got voted on during annual shareholder meetings. The executives of publicly traded companies do not like these. Others might view it as the shareholders having their voice, But they view them as irksome.

6:38Investors have used these proposals to try and nudge companies on environmental or social issues over the last 10 years. For example, they've asked companies to disclose data on greenhouse gas emissions and gender pay gaps. Initially, these investors had some success. But enthusiasm for these kinds of proposals has lately dimmed. One problem is that the investors behind these proposals haven't gotten much buy-in from the big three. Vanguard, for example, didn't vote yes on any environmental or social proposals during the most recent season of shareholder meetings. So it's like helicopter parents asking the free-range parents to sign up as playground monitors.

7:15The free-range parents aren't interested. No, they're just scrolling on their phones. JK, JK, I have also been that parent. And now the Trump administration might be making it even trickier for investors with concerns to voice them. Earlier this year, the Securities and Exchange Commission issued new guidance that will make it harder for certain kinds of proposals to even make it to a vote. You have commissioners in place now that are more sympathetic to the idea that they want to make it more difficult, if I can put it that way, for shareholders to bring these forward. Because that will reduce the inconvenience that the executives of these publicly traded companies face.

7:56Now, for Elizabeth Steiner of Oregon, she remains undeterred. And she says her efforts to get changes at Tesla are not about politics. It's about whether the state's investment in Tesla is delivering returns. The company's share price fell sharply in the spring, and it's since recovered, but is still down around 8 % for the year. Whether or not you believe that what Mr. Musk was doing with this Department of Government Efficiency was the right thing to do, that led to a lot of people saying, I don't want to buy a Tesla anymore. That lack of consumer confidence in the firm is reflected in the share price, and that affects our ability to earn money from owning Tesla stock, right?

8:43This is a rational thing for us to be concerned about. As for this new compensation proposal for Elon Musk, Elizabeth ran the numbers. She says that if you look beyond the headline one trillion figure, Musk could be rewarded for growing Tesla's share price at a rate that's actually below the market average. In other words, Musk would receive the highest compensation package of any CEO in history for sub-average performance at a company that he's only dedicating a fraction of his time to, given his other business interests. When Tesla holds its annual shareholder meeting in November, Elizabeth says she'll be voting no on this proposal.

9:25This episode was produced by Corey Bridges with engineering by Kwesi Lee. It was fact-checked by Sierra Juarez and edited by Patty Hirsch. Kicking Cannon is our show's editor and the indicator is a production of NPR.

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