Like all billionaires, Elon Musk is accustomed to doing pretty much as he pleases. Best known as the leader of electric car company Tesla and the social media website now called X, along with other ventures like SpaceX, Musk has locked in his status as one of the true visionaries of the early 21st century.
Because of his successes, it’s a surprise when he makes an obvious mistake. He’s come in for plenty of criticism, for example, for the way he runs X, formerly Twitter, but he owns the company and can do with it as he wishes.
Another error in judgment that has gotten much less attention is the way the Tesla board of directors set up a pay plan for Musk that turned out to be excessively generous, to the tune of $56 billion. A judge in Delaware has called him on it, and he ain’t happy.
Court of Chancery Judge Kathaleen McCormick ruled in favor of a Tesla shareholder who sued the company, claiming the board ignored its fiduciary duty to shareholders when it set up the pay plan for Musk in 2018. The agreement gave Musk stock worth up to 1% of the company’s value each time that Tesla hit a series of 12 operational and financial goals.
The company hit all 12 goals over time, and as its stock price rose, so did the value of what Musk received. The $56 billion was by far the highest pay package for a chief executive officer in American history.
Companies often try to align a CEO’s interests with the company’s. But the shareholder lawsuit contended that Musk owned 22% of Tesla stock before the 2018 incentive plan, and didn’t need any further incentive to raise the stock price.
This is where the board’s fiduciary duty comes in. Basically, the board members are required to act in the best interest of the company’s shareholders. It’s easy to make the case that this didn’t happen when the pay plan allowed Musk to amass another 8% or more of Tesla stock.
Those rewards greatly increased the number of Tesla’s shares, which in turn left the other shareholders with a smaller percentage of ownership in the company. To put it in simpler math, if you own one share in a company that has four shares total, you own 25% of the company. But if the board creates an extra share for someone else, there are now five shares, and your ownership has decreased to 20%.
The judge in Delaware ruled that Musk’s control over Tesla’s board of directors led it to give him a bonus plan that was unfair to other shareholders, and she voided the deal.
Musk, predictably, responded that he will ask Tesla shareholders to move the company’s incorporation from Delaware to Texas, where he lives. Someone should tell Musk that the board of directors, not the CEO, must first agree to ask shareholders to move the incorporation. Of course, if the board does that, it’s one more sign that the judge’s ruling was accurate.
Few would dispute that Musk deserves to be properly paid for Tesla’s success — by the billions. But the true mystery is why none of the company’s attorneys, or no one on the board of directors, insisted that reasonable caps be set on any bonuses. That would have rewarded Musk while protecting the interests of all shareholders.
Musk may think no one can tell him what to do, and he’s almost correct. Right now, the only person who can boss him around is Judge McCormick — who, interestingly, also heard the case that forced Musk to buy Twitter after he tried to back out of that deal.
It’ll never happen, but McCormick should be voted on to Tesla’s board. It clearly needs a voice of reason to avoid such poor decisions.
