Analysis-Tesla activist investors to seize on Elon Musk pay ruling

By Ross Kerber

(Reuters) - Activist investors who have for years accused Tesla's board of failing to rein in Elon Musk say this week's court ruling on the electric vehicle maker CEO's compensation could give them the shareholder support they need for reforms.

These investors have offered various resolutions at Tesla annual shareholder meetings on corporate governance issues such as director term lengths or voting thresholds for new bylaws, but so far they have won few changes.

Now, Tesla's critics say a Delaware judge's ruling voiding Musk's record-breaking $56 billion stock compensation was so critical of its board for being beholden to Musk, they hope to win more of the support needed from big index funds and other investors to prevail in shareholder votes.

"People are going to be looking to rein in what's going on," said John Chevedden, an independent activist investor. He has put forward a resolution at Tesla's upcoming shareholder meeting expected this spring that would replace a requirement for major corporate changes to gain support from two-thirds of all shares outstanding with a simple majority vote.

Tesla has not yet set a date for the meeting, which last year was held in May.

Only a few of Tesla's eight directors will be up for re-election this year, because the company has a "staggered" board where every director faces re-election once every three years.

Based on past disclosures, directors who would need re-election this year include Musk's brother Kimbal and media investor and former 21st Century Fox CEO James Murdoch, whom the Delaware judge said lacked independence because of their close personal ties with the CEO.

Uncontested directors typically get re-elected with 90%-plus shareholder support. Three years ago, Murdoch and Kimbal Musk were re-elected with 70% and 80% of the votes cast, respectively, after proxy adviser Institutional Shareholder Services (ISS) recommended investors withhold support over what it argued was excessive compensation to executives and directors.

Some activist investors believe ISS and Glass Lewis, another influential proxy advisory firm, will gain more ammunition from the ruling to recommend against Tesla's board. ISS and Glass Lewis declined to comment.

"ISS has consistently called for votes against these two (directors) over pay concerns. This year should certainly be no different," said Rich Clayton, research director for SOC Investment Group, a labor-affiliated pension adviser.

Tesla did not respond to requests to comment or make Elon and Kimbal Musk or James Murdoch available for interviews. Efforts to reach Murdoch and Kimbal Musk separately were unsuccessful.

Another shareholder resolution submitted this year would require all of its directors to face re-election every year.

Musk, Tesla's largest shareholder, has a 12.9% voting stake and a strong personal following among many investors. To prevail, shareholder critics would need to gain support from big mutual fund holders of the stock such as BlackRock and Vanguard.

In some cases major investors have sided with Tesla's board. When ISS last year recommended shareholders withhold support from board chair Robyn Delhom's re-election bid because of concerns about the board's oversight, BlackRock and Vanguard backed her, and she kept her seat with 74% of the votes in her favor. Those firms, however, have sometimes opposed the election of other directors in the past.

BlackRock and Vanguard declined to comment.

WAKE-UP CALL

The judge in the Delaware case, Kathaleen McCormick, said neither the compensation committee nor the Tesla board acted in the company's best interests when negotiating Musk's compensation plan.

"In fact, there is barely any evidence of negotiations at all," she said in the court ruling.

Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, said the court ruling was so scathing and far-reaching that it could prompt even Tesla's top investors to change their stance.

"The ruling will certainly give the reformers more influence. These people (the board directors) were eviscerated by the judge," Elson said.

The Delaware judge has asked the Tesla shareholder who challenged Musk's compensation to work with his legal team on a new pay plan. It is unclear what that will be and if it will come to a shareholder vote. The ruling could be appealed to the Delaware Supreme Court, and Tesla and Musk have not said if they will seek to do so.

Andrew Poreda, senior research analyst for Sage Advisory Services and an investor in Tesla through exchange-traded funds, said no matter the impact on Musk's pay, the ruling should motivate critics of the company's corporate governance.

"The judge's ruling should be a wakeup call (for Tesla shareholders) that things have gotten out of hand," Poreda said.

(Reporting by Ross Kerber in Boston; Additional reporting by Jody Godoy in New York; Editing by Greg Roumeliotis and Jamie Freed)