Tesla Shareholder Conflicts May Give Insight Into Proxy Season 2022

New developments show that shareholders are shifting their views on a number of issues that could affect corporate boards next year. A rundown of what to expect.

The shareholders at Tesla have provided some insight into the types of issues corporate boards might expect to be challenged on during proxy season 2022.

In spite of the fact that Tesla shares have skyrocketed in value during the pandemic, shareholders have expressed dissatisfaction over several matters at the car manufacturer and have indicated that they want change.  Some developments that came out of the company’s recent annual meeting include:

• Calvert Research and Management submitted a shareholder proposal asking Tesla to produce a detailed report on its diversity and inclusion efforts that won majority support with 57 percent of the vote. Tesla had opposed the proposal.

• Two Tesla board members, who were opposed by Institutional Shareholder Services (ISS), received less support than the 90 percent of votes directors up for re-election typically receive. Kimbal Musk, CEO Elon Musk’s brother, received support from 80 percent of votes cast and James Murdoch, former director at News Corp. received 70 percent of votes cast. ISS raised concerns about the ability of both directors to provide effective oversight.

• Activist shareholder Nia Impact Capital’s proposal asking Tesla to prepare a report on the impact of its use of mandatory arbitration agreements to settle workplace complaints of sexual harassment and discrimination received 46 percent support – a similar proposal in 2020 only garnered 27 percent support. Shareholder concern about the company’s workplace culture may have increased since a jury awarded $137 million to a Tesla elevator operator this year over a lawsuit charging the company with racism.

These developments show that shareholders are shifting their views on a number of issues that could affect corporate boards next year:

• Boards should expect support for diversity-related and racial equity-related proposals to increase. As calls for board diversity and the implementation of diversity, equity and inclusion measures at corporations grow, shareholders are likely to file more proposals asking for diversity and inclusion transparency reports and other racial equity related concerns.

In a recent post on CorporateCounsel.com, Debo Adegbile, a partner and chair of the Anti-Discrimination Practice at the WilmerHale law firm in New York said that the overall average support for racial equity-related proposals increased from 13.4 percent in 2020 to 23.9 percent in 2021. He sees this as a growing trend. If a company has received one of these proposals recently, it should expect a similar proposal in 2022. The shareholder proposal for a diversity and inclusion report at Tesla won majority support – it is likely more proposals similar to it will win majority vote support next in 2022.

• Board accountability will also be a major theme during next year’s proxy season. Proxy advisor ISS and many of the largest institutional shareholders have put directors on notice that they will withhold votes for their re-election if specific actions related to board diversity and other concerns are not taken. For example BlackRock has stated that it will consider voting against directors “if a board failed to exercise sufficient oversight over material Environmental, Social and Governance risk factors.” More scrutiny concerning board oversight will be evident in 2022, especially related to ESG issues, because shareholders are beginning to lose trust in the board’s commitment to look out for what they want. Just as the two Tesla board members received weaker support, expect directors at other companies to receive weaker support for re-election next year, which may lead to some losing their seats.

• Expect more harassment and discrimination lawsuits. Expect shareholders that have unsuccessfully tried using shareholder proposals to force changes in workplace culture to begin using lawsuits to motivate companies to change. Million-dollar judgements for wrongdoing at a company, especially when it comes to sexual harassment and discrimination, are great motivators for change, but horrible publicity for the company’s reputation. The price Tesla now has to pay to rehabilitate its image in the minds of millions of potential customers and workers far exceeds the $137 million judgement for discrimination. If employee complaints are not handled in a fair manner through internal systems, they generally end up in lawsuits or whistleblower investigations where outside regulators or courts step in to try and fix the problem. No organization wants that.

Shareholders are sending signals to boards about what to expect in the coming proxy season. Directors that engage shareholders and are responsive can avoid the worst outcomes.