Elon Musk must be fired as Tesla CEO, shareholders say as company struggles

As Tesla struggles, many shareholders are looking to oust Elon Musk and three of the board’s directors – but they’ll have a fight on their hands

PUBLISHED : Monday, 04 June, 2018, 3:00am
UPDATED : Tuesday, 03 July, 2018, 8:22pm

With Tesla in trouble, some investors think it’s time to shake up the board of directors: on Tuesday, shareholders will vote whether to replace Elon Musk as board chairman and dump three directors.

The campaign to reform the board has been spearheaded by CtW Investment Group, a specialist in managing union-sponsored pension funds.

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In a written argument to shareholders, CtW said Tesla’s “strategic and operational challenges” and “deteriorating financial performance” warrant a major change on the board of directors, and the board has been “unduly deferential” toward Musk.

Corporate governance advisory group Glass Lewis is advising shareholders to vote no for three Tesla board members up for reelection: 21st Century Fox CEO James Murdoch; venture capitalist Antonio Gracias; and Musk’s younger brother, Kimbal.

Glass Lewis also supports a nonbinding resolution to appoint an independent board chairman to replace Musk, with Musk keeping his job as CEO.

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Meanwhile, shareholder adviser Institutional Shareholder Services (ISS) opposes re-election of Murdoch and Gracias but supports Kimbal Musk.

ISS recommends a yes vote on removing Elon Musk as chairman. That proposal was put forth by shareholder activist Jing Zhao, who said: “I believe a big company cannot depend totally and so heavily on one person.”

The concerns boil down to two main issues.

They are whether the board’s independent directors are truly independent, and whether Murdoch and Chief Executive Musk are so busy with other matters that they can’t devote sufficient time and energy to Tesla at a crucial stage in the company’s history.

“It is important that the board of directors take steps to ensure that management remains focused on resolving the manufacturing challenges, and that the CEO and other executives do not get distracted by outside business interests or Twitter fights,” said Institutional Shareholder Services in a report to clients.

The company’s financial position “has deteriorated along every dimension,” CtW said.

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Few, if any, expect the votes to pass. In past years, shareholders have overwhelmingly supported the company against activists. And Musk owns 21.9 per cent of Tesla voting shares.

But some advocates – concerned about a lack of independent voices on the board – expect the number of “dump” votes will be big enough to force Musk and Tesla to pay more attention to investor concerns.

“I don’t know if anyone will be voted out of office,” said Kern McPherson, senior director of North American research at Glass Lewis.

“But I think there’s a very good chance that Tesla will have to respond to elevated ‘vote against’ levels.”

Tesla declined to comment or make board members available. Company comments can be found in the proxy statement covering the issue.

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Tesla has posted only two profitable quarters in its 14-year history, and losses have increased lately.

Model 3 production problems are the prime cause of Tesla’s financial distress. Musk himself regards the all-electric saloon, which went on sale in July 2017, as crucial to the company’s success.

Musk had forecast an annual production level of about 400,000 Model 3s by now, but Tesla is struggling to achieve a quarter of that.

Capital spending was set to support 400,000 cars, but revenues have fallen far short of projections, so the company’s cash-burn rate is rising with no earnings available for replenishment.

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Musk promises profits in the year’s second half, and he rejects the notion that Tesla will need to raise new equity or debt in 2018.

Tesla has said in government filings that the board is focused on the company’s “long-term” performance.