Activist Firm Waging Proxy War To Overhaul Tesla’s “Musk Friendly” Board

Elon Musk may soon have a new level of accountability to hold himself to – that is, if Tesla shareholders get their way. CtW Investment Group, which is working with $250 billion in pension funds, many of which are Tesla investors, has pushed for a long overdue ousting of some of Tesla’s most unqualified and possibly conflicted board members. A  Bloomberg article out on Wednesday morning wrote:

An activist firm representing Tesla Inc. shareholders has excoriated the electric-car maker, claiming that it’s veered off the path to profit and urging a major overhaul of the Elon Musk-led board.

CtW Investment Group, working with union pension funds that are Tesla investors managing more than $250 billion, opposes the re-election of three board members who are up for votes during Tesla’s June 5 annual meeting. The firm calls for shareholders to cast ballots against Antonio Gracias, a private-equity investor and Tesla’s lead independent director; Kimbal Musk, Elon’s brother; and James Murdoch, CEO of Twenty-First Century Fox Inc.

Poor accountability and lack of governance at Tesla have been issues raised by us throughout the past year: there was this Harvard Law blog about whether Musk “dominates” his Board, analysts calling for accountability for Musk’s recent statements and promises of no need for capital and cash flow positive that have been looked upon with increasing skepticism. CtW further goes on to point out many “obvious” critiques of the Board that have long since been pointed out by skeptics of the company, including the board potentially being “beholden” to CEO Musk:

“Tesla has failed to hit critical production milestones and has consequently seen its past progress toward profitability sharply reverse,” Dieter Waizenegger, CtW’s executive director, writes in a letter the firm plans to file Wednesday with the Securities and Exchange Commission. “But instead of recognizing the need for independent and effective board leadership, Tesla has re-nominated three directors who exemplify the company’s failure to evolve.”

The letter escalates long-held criticisms of a board that CtW and several investors have faulted for being beholden to Musk, Tesla’s chief executive officer. The company has burned through almost $4 billion during the past year while scaling up operations for the Model 3, intended to be its first mass-manufactured car. The sedan has missed several production targets and stoked concerns about whether the company has enough cash.

Among the critiques remains the odious Solar City acquisition – currently the subject of a lawsuit and Harvard Law Blog that both draw the same conclusion: Elon Musk may have had full control over his Board and his company when Tesla agreed to acquire Solar City:

While praising Tesla as a “successful innovator with an environmental mission,” CtW’s Waizenegger writes that the company’s prospects for continued success are “more tenuous than ever” and that the board needs to “raise its game.”

The wide-ranging letter raises concerns with matters including Musk’s combative earnings call with analysts last week, safety issues at Tesla’s California assembly plant, fatal crashes involving the driver-assistance system Autopilot and litigation related to the company’s controversial acquisition of SolarCity Corp.

The fact that Musk is tied up with several companies – not just Tesla – is also a point of contention:

“In response to these considerable financial and operational challenges, the Tesla board has been unduly deferential toward Chairman and CEO Elon Musk,” Waizenegger writes. “Mr. Musk’s peripatetic focus — he is also CEO of SpaceX, a proponent of the hyperloop, and apparently about to start a candy company — is exacerbated, rather than contained, by a board most of whose members have family or non-Tesla ties to him, lack industry experience, and have no track record of effective independent board service at a public company.”

CtW also takes exception to the fact that board members like (hilariously titled “independent director”) Kimbal Musk, Elon’s brother, and Antonio Gracias all have ties to Elon Musk outside of Tesla.

Other board members simply have no experience in the automotive industry:

Gracias, a Tesla director since 2007, has both personal and professional ties to Musk, 46. The founder of Valor Equity Management invested in Paypal Inc., which Musk co-founded, and participated along with Valor in funding rounds and a debt raise that Tesla conducted before its 2010 initial public offering. Musk gave Gracias the second Roadster sports car that the company built. He’s also on the board of Space Exploration Technologies Corp.

“The lead independent director should be leading a process of renewing and modernizing the board by recruiting well-qualified, diverse, and independent directors with a combination of industry and governance experience,” Waizenegger writes. “Given his longstanding conflicts, we see no likelihood that Mr. Gracias will change course and initiate this long overdue process.”

CtW was among the group of influential investors that pressed Tesla in April 2017 to add new directors who didn’t have ties to Elon Musk, citing concerns about the lack of independence on the board. The carmaker named longtime media executives James Murdoch, the son of News Corp. Executive Chairman Rupert Murdoch; and Linda Johnson Rice, chairman of Johnson Publishing Co.