Tomorrow we find out: Is Elon Musk a slave to Tesla or its savior?
The upcoming proxy vote will determine a lot of things regarding Tesla's future
Tesla will have its 2024 shareholder meeting and proxy vote—the most consequential in the company’s history—Thursday, June 13, which is tomorrow as I’m writing this. Shareholders will be asked to ratify the 2018 deal CEO Elon Musk made as to his compensation. The result of that vote will largely determine the company’s future.
The photo above was taken in 2011, with a younger Musk standing next to a prototype Model S. When that fully-electric car and its huge touchscreen premiered, it was the highest-rated vehicle Consumer Reports had ever tested. Nobody had ever seen anything like it, and Musk led the company through “production hell” to get its cheaper successor, the Model 3, on roads all over America, and the world. In 2018, Musk, with Tesla’s board backing, got shareholders to approve a stock grant as compensation if the company hit some very aggressive share price targets. Musk hit them. The deal is now worth some $56 billion.
But Judge Kathaleen St. Jude McCormick, senior judge in the Delaware Court of Chancery, where Tesla is incorporated, decided the deal was no bueno. She called the process used to approve the deal “deeply flawed” and believed that Tesla’s board lacked independence—they were just chairs filled with Musk loyalists. Perhaps. But who fills their own board of directors with skeptics? (Certainly not Sam Altman.)
In 2011, Tesla was worth around $3 billion. In 2018, the company’s value had shot up to about $50 billion. At its peak in November 2021, Tesla was worth $1.2 trillion, rivaling AI-chip champ NVIDIA’s current market capitalization. Compared to those heady days, Tesla is now worth a paltry $565 billion, a market cap that puts it above every other carmaker in the world—more than the rest of the top five: Toyota, BYD, Ferrari, and Mercedes-Benz, combined.
This is because Tesla is priced as more than just a car company. It’s a tech giant, pursuing advanced battery manufacturing, solar, and AI. And Musk has centered many of his future terrestrial plans on Tesla, versus his other ventures like Neuralink, or SpaceX (or, God save us, X.com and xAI). But now that Musk has been promised essentially nothing for a decade’s worth of work building Tesla, the company might be stripped back to its founding value—making cars. And that will end Tesla’s dominance.
The question to be decided tomorrow is more than just if a company will ratify a deal made six years early to give its CEO unbelievably rich compensation. It is a decision on whether Musk’s brain should be slave to Tesla, or to be its savior.
As a carmaker alone, Tesla is getting long in the tooth. It has (not counting the roadster, the semi, the Cybertruck, and the now-cancelled Model 2) four main models: Model S, Model X, Model 3 and Model Y. All of these have been on the road for at least three years, and, at least in my city, are as ubiquitous as Toyotas. I can order a Model 3 today and lease it for under $400. Basically, it’s like buying a Subaru. The new “Highland” Model 3 is not an advance—it incorporates features that are in my Kia EV6 (and other EVs) which I bought in 2022.
Tesla makes some good EVs, and as a BEV manufacturer, is still the “gold standard.” But it’s no longer “best in class” in all categories. What’s propping up the company’s value is the mind of Elon Musk and his future plans. Self-driving, robo-taxis, home robotics, and a whole list of other things that pop out of Musk’s head have always been assumed—and priced—as part of Tesla’s value. But if shareholders reject the 2018 deal, all that is likely gone.
Musk has signaled this is the case when it was revealed he told NVIDIA to prioritize AI processors for X and xAI in shipments slated for Tesla. He has also remarked that he needs to own 25% of Tesla to feel comfortable using it for his new business ideas. Musk currently owns 12.89% of the company, which will increase to over 20% if the deal is approved.
Retail shareholders make up about 44 percent of Tesla’s ownership, a higher percentage than most large public companies. After Musk, Vanguard and Vanguard Index Funds are the biggest shareholders, comprising 12.25%. If Musk can convince 90% of individual shareholders to side with him in a proxy vote, he doesn’t need any institutional investor approval. But it’s going to be close, as some wealthy owners like Leo Koguan (who owns 0.9%) are against the deal.
But let’s assume, for the sake of argument, Musk gets his way. Let’s also assume he gets his way in reincorporating Tesla in Texas (which has a higher bar to pass, in that a majority of all outstanding shares must approve it, versus voted shares, but in this item the institutional investors may be more on Musk’s side). The company can then go back to Judge McCormick and claim her ruling is moot. Or they can ask Texas to flex and file suit against Delaware (Texas Attorney General Ken Paxton has sued other states over much more frivolous counterfactuals).
McCormick could reject the new deal. She could make life difficult for Musk (as she did with the Twitter purchase). She could hold Musk liable for fiduciary breach if he punishes shareholders by putting more of his essence into his other ventures.
The real question that will vex both Judge McCormick and Tesla shareholders will be what happens if the compensation deal is rejected, or if McCormick plays a full-court defense. Can they force Musk to sacrifice his ideas that he could implement at xAI or X (formerly Twitter), or force him to make those ideas run at Tesla, for no money?
I thought slavery was illegal in America. Forcing Musk to work for Tesla, at the expense of his other businesses, for nothing, is wrong. But it’s also wrong to hold shareholders hostage after they purchased the company valued due to Musk’s ideas for the future. Two wrongs don’t add up to a right, but in this case, how can they be reconciled?
Musk, at heart, is a gamer. Everything is a game. Not in the sense of being frivolous, but in the sense of having a definite way to defeat a problem using first principles of the particular discipline, whether its finance, corporate governance, M&A, or physics. He will game this out and play according to the events. That means, if Tesla’s shareholders spurn him, the company will be the most efficient version of the biggest electric carmaker in the world, but no more.
Elon will slash (has slashed, but may add again) staff, keep the “hard core,” and work out new vehicle designs to compete with the world. But he will no longer trust Tesla as the cradle for his AI and robotics ideas. It’s all about trust, and when Elon loses trust in a group, it’s very difficult to earn back.
One thing, I think is rather certain. Musk will not allow himself to be a slave to Tesla, or to its shareholders, or to Judge McCormick. Either he will get paid, or he will take his brain elsewhere. Nothing can force him to do otherwise. Nor should anyone attempt to make a CEO a slave, no matter how opulent the compensation deal originally proffered.
Either Musk will be Tesla’s savior, as he has been since 2011, or he will be (mentally) gone. Make your investment plans accordingly.
Former TSLA shareholder here. (Bought in early '10s and sold around 2018, when Elon started going off his rocker accusing the diver rescuing kids of being a pedophile. Didn't make as much as I could had I held, but I'm also not going to complain about a 22x return.) Some thoughts:
1. On the value of Elon's "ideas", he is not a creative genius that will make or break Tesla. He's not an AI or robotics expert (contra movie cameos, he is no Tony Stark), and is hardly the only person thinking about robot taxis. Price those "ideas" accordingly.
2. As the Cybertruck debacle demonstrates, Tesla needs to be less focused on introducing crazy new concepts (that no one was asking for), and more focused on being a reliable automobile manufacturer. Tesla's reputation for quality has sunk DRAMATICALLY since the days of those early glowing Consumer Reports reviews. At this point Tesla needs more of a Tim Cook figure than a Steve Jobs running things.
3. The Supercharger firing fiasco illustrates to what extent Elon is a chaos agent within his companies for no discernible benefit. The further he can be pushed away from day-to-day decision-making in all of his companies will only benefit those enterprises, as they already have solid competent leaders in place, who need to focus on running their businesses, and not managing ketamine tantrums.
4. Elon made a big mistake inserting himself in the center of a bunch of culture wars. At this point, he may be the only thing propping up TSLA's valuation on Wall Street (I expect it would collapse should he leave), but he's turned off significant markets for TSLA's products with his X and culture war shenanigans. The man is free to hold a public opinion, but he's terrible at judging what effects his words will have on the things other people are working on that he's associated with.
5. Elon argues that he hit significant share milestones and is correct on that front. However, it's worth asking whether those milestones were hit because of anything he did, or whether TSLA was one of the biggest beneficiaries of a lot of COVID stimulation funds going to retail investors who bid the price of the stock up more on the basis of the free money they just received from Uncle Sam instead of any drastic changes or improvements in the company's fundamentals.
6. The talk about "forcing" Elon to work for Tesla is pretty laughable. The relationship's flowed in the other direction, such as when he brought in Tesla engineers to right the Twitter ship (after Elon fired the folks that knew how to run that company), and he's recently been caught having Nvidia re-prioritize his xAI company for GPUs that were originally intended for Tesla. The question that should be asked is to what extent should Tesla shareholders be forced to subsidize Musk's other enterprises, with no consideration or reward provided when Musk decides unilaterally to shift those resources onto another one of his pet projects?
If I did still hold TSLA shares, I would be a firm NO vote on the compensation package. Tesla's value has been untethered to any underlying fundamentals since before I exited my position, and awarding Musk the 56 billion pay package - especially after the loss in equity since those heady days of plentiful stimulus checks and zero percent interest rates - is just rewarding bad behavior and a signal that TSLA is more interested in remaining a meme stock than an actual company with actual performance targets, fundamentals, and justifiable value.
Fascinating conversation back and forth guys; really. TSLA and all of its nuances is well outside my wheelhouse. Both takes have merit, both leave me with the question i had before today's column: "Is Elon an idiot savant or is he just an narcissistic idiot?
I know that sounds awful, but clearly his genius puts him in the savant category. Unfortunately his stock manipulations border on sinister/questionable and the question regarding insider trading is an obvious one. The way he treats employees is a whole other discussion.
Let me think about it this way: Bill Gates? or Elon Musk? Is it even freaking close?