The Tesla board recently received a letter from a group of its shareholders that asks for several corporate governance changes that may spark new conversations about the relationship between the board and its shareholders and whether there should be new standards of fiduciary duty set for corporate directors and the CEO.
The shareholders, which are represented by institutional investors that hold 7.9 million shares, contend that actions by CEO Elon Musk and Tesla’s board have caused the company’s stock price to fall by more than 24 percent since December 2024, a sales decline of 13 percent in the first quarter this year, calls for divestment in Europe and in the US, and long-term damage to the Tesla brand. In their letter, the investors have challenged the Tesla board to rein in CEO Elon Musk, whose appointment as head of the U.S. Department of Government Efficiency and CEO of multiple private companies has taken his attention away from Tesla, leading to significant problems for the company. They have proposed the following governance changes (edited for length):
- Establish clear time commitments for any new CEO compensation plans. Any new compensation plan offered to CEO Musk should include a commitment to devote a minimum of 40 hours per week to the management of the company.
- Adopt and disclose a clear succession plan for management. We believe the company’s current disclosure regarding the CEO succession plan does not assure investors that the board is adequately prepared, if necessary, to bring on a new individual with the appropriate skillset to execute Tesla’s business plans.
- Adopt and disclose an over-boarding policy for directors that specifically limits outside board commitments at both public and private companies. We therefore suggest that director over-boarding be limited to no more than four total public or private company boards. For any director that is an executive at Tesla, the over boarding policy should be limited to no more than one director position at an outside public or private company board and no more than one executive position at an outside public or private company.
- Appoint at least one new truly independent director with no personal ties to other board members. Tesla’s current board members have extensive business and personal relationships with the CEO, compromising the board’s independence.
It can be a worthwhile exercise for corporate boards to examine how other companies are approaching governance challenges to determine if anything competitors are doing might be useful to implement in their own organization. The governance changes proposed at Tesla might inspire corporate board members to ask some of the following questions about their own governance:
- Does the idea of tying executive compensation to actual hours worked make sense in an environment where more responsibilities are heaped upon CEOs and boards?
- Does our company have a succession plan process that is clearly defined with specific internal and external candidates who could lead the company into the future in mind?
- Does our current board and CEO have an over-boarding problem? And does our company need to set limits on the number of outside boards directors and key executives can serve on?
- Does the background of our current directors give the appearance of having so many close ties to the CEO that investors could accuse the board of being less than independent?
It will be interesting to see how the Tesla board reacts to their shareholders’ proposed governance changes over the next few months. It is never a good sign when a significant number of shareholders publicly question the board’s stewardship of the company. How Tesla’s board handles this situation will hold valuable lessons for most boards, because due to challenges Tesla has faced over the last six months, the issues these proposals address are now on the minds of all shareholders. Expect to see these concerns repeated at different companies in the near future.
