Investors Find Cracks in Tesla’s Governance

    Stockholm (NordSIP) – Although the ‘G’ in ESG harbours many material risks, those issues can often get overlooked by sustainable investors focused predominantly on the environmental and social aspects. Take, for instance, the so-called ‘key-person risk’. Companies can easily face massive problems if they fail to prepare for leadership succession adequately. Yet, many still lack a clear public succession plan or strategy to ameliorate the impacts of a charismatic leader’s possible loss, without anyone challenging them.

    What better example of a key-person risk than the case of Tesla and its erratic CEO Elon Musk? Recently, one of Tesla’s shareholders, Karen Róbertsdóttir, the CEO of Icelandic limited liability company Sumtris ehf, decided to shine a light on the issue at hand. Ahead of Tesla’s next annual general meeting, she submitted a resolution for the shareholders to vote on whether the board should prepare and maintain a key-person risk report. In her motion, she points out that the carmaker has just three named executive officers and no COO and calls for the company to document processes and procedures for the succession of key people and mitigate the financial impact their loss would have.

    Róbertsdóttir is hardly the only Tesla shareholder anxious about the risks related to Elon Musk’s role in the company. One of the investors following the development at Tesla closely is Swedish public pension fund AP7. “We are not alone in having concerns about the governance of the company after recent developments,” comments Emma Henningsson, AP7’s Manager, Active Ownership. “One of the key roles of the board is to ensure that the top executives act in the best interests of the company and give appropriate focus to their work.”

    Several other shareholders were allegedly preparing to put forward proposals, some regarding Musk. Most of them missed, however, the deadline for submitting resolutions as the critical date was buried on page 57 of a 60-page 10-Q filing in October last year under an “other information” heading. Although formally fulfilling the SEC’s legal disclosure requirements, announcing the date in this obscure way is largely perceived as a strategy to avoid uncomfortable questions and shareholder pressure.

    Tesla’s board of directors is indeed facing increasing pressure on many issues. AP7, for instance, has previously joined forces with other investors to file shareholder resolutions, most recently regarding the way Tesla handles workers’ rights. At the AGM in August 2022, however, Tesla’s shareholders voted in line with the board recommendations on most issues, rejecting proposals focused on environment and governance. Among failed resolutions were those arguing for endorsing the right of employees to form a union, asking the company to report its efforts in preventing racial discrimination and sexual harassment annually, as well as reporting on water risk.

    Whether a majority of shareholders will side up with the Icelandic proposal on a key-person risk resolution next time around remains to be seen. However, the question of who might take over after Musk remains highly pertinent.

    Image courtesy of Austin Ramsey on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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