There may be an early indication of just how committed shareholders are to the concept of stakeholder capitalism when Tesla chair Robyn Denholm comes up for re-election at the company’s annual general meeting, which was recently postponed. When the meeting is ultimately convened, shareholders will have to decide if the board chair deserves ouster for poor governance practices or a vote of confidence for guiding the company to outsized share price appreciation. Corporate directors should watch the outcome of this vote closely.
Institutional Shareholder Services (ISS), the largest proxy advisory service in the world, opposes Denholm’s re-election because under her leadership, director compensation at the company has reached levels that some would consider excessive. Last year, Kathleen Wilson Thompson was paid $7.4 million in compensation, Larry Ellison was paid $5.9 million, Denholm received $2.7 million and Steve Jurvetson was paid $1.2 million. According to ISS Analytics, those sums were considered “significant outliers” compared to director compensation at other companies. The median total annual compensation for directors of S&P 500 companies in 2019 was $285,000.
ISS also opposes Denholm because, on her watch, Tesla directors and executives were allowed to use company stock for personal borrowing at what it viewed as abusive levels. ISS Analytics reported that about 4.9 million shares of Tesla stock had been pledged as collateral for $7.9 billion in investments. That equals approximately 10.4% of the company’s outstanding shares, which some experts say opens the company up to unnecessary risk. “The number of pledged shares as a percentage of the total shares outstanding is excessive,” ISS Analytics said in a report, noting that if large amounts of the pledged shares had to be sold for any reason, Tesla’s stock price could be adversely impacted.
Since Denholm is the board chair, sits on the compensation committee and also chairs the audit committee, she bears the most responsibility for approving Tesla’s compensation levels and share pledging policy. The higher than average compensation and the expanded use of the share pledging program give the appearance that the board is allowing self-dealing among its directors and other executives. Tesla hasn’t yet offered any satisfactory explanation to justify that paying higher director compensation and allowing 10% of its shares to be used as collateral is in the best interest of all of its stakeholders.
Tesla’s board will need to address ISS’s opposition to the re-election of its chairperson before shareholders vote at the annual meeting. Perhaps the best defense Denholm has is the company’s strong performance over the last year while she has been chairperson. Tesla’s stock price rose 330% from $223.64 per share on June 24, 2019 to $960.85 per share on June 24, 2020. Normally, shareholders would be delighted about such share price appreciation, and vote in favor of the directors who were responsible.
A letter to shareholders highlighting the strong performance and emphasizing how the board’s vision for the company’s future will continue the growth that has been already achieved might help shift votes in Denholm’s favor. It will be important to mention how all stakeholders will benefit from the board’s future plans. Pledging to monitor director compensation and risk better going forward might be a more helpful step to take.
In the past, shareholders would rarely vote against directors who delivered outsized stock performance. But with the concept of stakeholder capitalism advancing in the U.S., things may be changing. Are shareholders really ready to put the interests of all stakeholders ahead of shareholder profits? Denholm’s re-election is a valid test. With ISS suggesting that Tesla directors could be responsible for enriching themselves, it will be interesting to see if shareholders keep Denholm for stock performance or vote her out on governance.