This week, Tesla announced its 2018 Annual Meeting of Stockholders to be held in June and with it, the company confirmed that shareholders will vote on a few proposals.
Surprisingly, one of those proposals involves replacing Elon Musk as Chairman of the board with an independent director.
Tesla’s shareholder’s meeting generally starts with the official items, which this year includes voting to reelecting 3 board members, ratifying Tesla’s independent registered public accounting firm, and voting on two shareholder proposals.
After that, Musk generally comes on stage for a quick presentation and then he answers questions from shareholders.
But this year, one of the shareholder proposals is to remove Musk from his role as chairman, which he has held since 2004 at Tesla – virtually since the company’s inception.
An owner of 12 Tesla shares named Mr. Jing Zhao from Concord, CA put the proposal together. He is a well-known shareholder activist who has previously pushed other proposals at companies, like Apple and IBM.
He made the argument that combining the role of chairman and CEO might have been beneficial at an early stage at Tesla, but not now that the company is maturing. He specifically brought up Musk’s involvement with SolarCity and SpaceX as examples why he can’t be considered as an independent chairman.
The shareholder added in his proposal:
“An independent chairman of the board of directors is the prevailing practice in the international market, such as in the United Kingdom. In the United States too, many big companies already have or began to have an independent Board Chairman. Tesla should not be exception.”
Tesla was already under pressure last year to add independent board members, which it eventually did, but it never got to the point of asking Musk to give up his position as Chairman.
Unsurprisingly, the board is asking shareholders to vote against the proposal.
Here’s their argument against it published in a proxy statement sent to shareholders:
“The Board believes that the Company’s success to date would not have been possible if the Board was led by another director lacking Elon Musk’s day-to-day exposure to the Company’s business. In light of the significant future opportunities for growth and the careful execution needed in order for the Company to achieve it, the Board believes that the Company is still best served by Mr. Musk continuing to serve as Chairman.
Moreover, the role of the Lead Independent Director protects the Company against any potential governance issues arising from a non-independent director serving as Chairman. This position is vested with broad authority to lead the actions of the independent directors and communicate regularly with the Chief Executive Officer. Additionally, the Company now has seven independent directors following the addition of two additional independent directors in July 2017. The Board believes that the broad authority of the Lead Independen t Director and the presence of six other independent directors ensures that the Board acts independently. This current Board structure also is consistent with majority practice at large public companies: according to the 2017 Spencer Stuart Board Index, 72 % of companies in the S&P 500 do not have an independent board chairman.
The proponent acknowledges that a combined Chief Executive Officer and Chairman is an effective form of leadership for an early-stage company, until it faces increased competition and rapid technological changes. The Board believes that it is precisely during times when a company must quickly adapt to constant change and outside pressures that Board leadership needs to be lockstep with the Company’s operations. Our achievements to date notwithstanding, the Company is still at a point in its development where we must execute well in order to realize our long-term goals, and separating the roles of Chief Executive Officer and Chairman at this time would not serve the best interests of the Company or its stockholders.”
Shareholders will vote on the matter at the meeting, which will be held on June 5, 2018, at 2:30 p.m. Pacific Time, at the Computer History Museum located in Mountain View, CA.
The proposal has very little chance to pass considering Musk is seen by many Tesla investors as an important reason behind the company’s success and he controls a lot of shares, but it will nonetheless be interesting to look at it as a test of confidence in the chairman.
Also, while it is perfectly reasonable to request that a chairman be independent, Jing Zhao didn’t really make a great argument in Tesla’s case.