The corporate governance community will likely be very interested in the voting results of several shareholder proposals at Tesla’s November 4th annual general meeting. Tesla’s board and the company’s shareholders seem to be at odds over what corporate governance at the automobile maker should look like, and votes on several shareholder proposals may shed some light on what the company’s governance structure will look like going forward. The voting results may also give other corporate boards insight into how investors feel about some ESG-related concerns that may affect their company in the future.
How much opposition to shareholders makes for good governance?
Shareholder proposal voting may take on added significance during Tesla’s annual meeting this year. Shareholders no doubt recall that a proposal asking to declassify the company’s board—making each director stand for election every year—that received a majority of votes last year has not been implemented. The board’s willingness to disregard results of a shareholder vote may motivate investors to vote for greater accountability by approving more of this year’s proposals.
At its AGM, Tesla shareholders will vote on the following:
• A proposal seeking annual reporting on anti-discrimination and harassment efforts
• A proposal seeking annual reporting on board diversity
• A proposal seeking reporting on lobbying efforts
• A proposal seeking greater proxy access
• A proposal regarding reporting on employee arbitration
• A proposal regarding the adoption of a freedom of association and collective bargaining policy
• A proposal requesting additional reporting on child labor
• A proposal requesting additional reporting on water risk
Tesla has asked shareholders to vote against all eight of these shareholder proposals.
It will be interesting to see if the Tesla board’s open and aggressive opposition to shareholder concerns produces a benefit for the company. Shareholders argue that the board’s lack of attention to some of these issues has left the company open to unnecessary risk. At some point the Tesla board will need to explain why it is so resistant to making changes and how the company will benefit from that opposition. Already, some negative consequences of opposing its shareholders are becoming evident:
• Lawsuits are piling up. Multiple news organizations have reported that Tesla faces multiple lawsuits from employees and shareholders alleging discrimination. The California Department of Fair Housing and Employment and the U.S. Equal Employment opportunity Commission have also filed multiple lawsuits alleging sexual harassment and racial discrimination against the car maker. All of these lawsuits cost millions in court costs and lawyers’ fees to defend and could end with millions more due in settlements. That is not good for the company’s bottom line.
Also, publicly opposing measures that could help curtail similar allegations from occurring in the future doesn’t help fight the current lawsuits. It also gives the impression that the company believes everything is operating smoothly. Public opinion sometimes matters in issues such as these. Opposing reporting on matters on which the company is being sued might seem out of touch to investors and the public.
• Proxy advisors are recommending voting against the re-election of directors. Tesla’s refusal to enact proposals that won a majority of votes from its shareholders has come under scrutiny by proxy advisory firms. Glass Lewis and Institutional Shareholder Services have recommended that shareholders vote against the reelection of Ira Ehrenpreis and Kathleen Wilson-Thompson because as members of the nominating and governance committee, they failed to implement a proposal to declassify the board that was approved by a majority vote of shareholders last year.
Proxy advisory firms and large institutional investors have stated that they would recommend voting against board members if certain governance measures were not implemented. This proves that the proxy advisory firms will look to unseat directors under certain circumstances. Is this type of opposition worth a board seat?
• Employee relations at Tesla are being strained. When employees see lawsuits alleging discrimination and harassment piling up and the company publicly working against putting measures in place to address the allegations, it gives the impression that the company is unwilling to protect them. Many employees who feel uncomfortable will look to exit the company, potentially draining the company of critical human capital that its competitors could acquire. The company also risks gaining a reputation for having a hostile workplace, which will deter other potential employees from working there.
