Tesla Shareholder Vote Highlights Concerns Over Index Fund Influence,CEO Pay
WILMINGTON,DE – A looming shareholder vote on Elon Musk‘s proposed $56 billion compensation package is sparking debate about the power of index funds and the structure of executive pay,with some arguing the current investment system is “broken.” The vote, expected to take place this week, comes after a Delaware judge initially invalidated the 2018 package, leading to a re-vote.
The controversy centers on the increasing influence of passive investment vehicles – index funds that track benchmarks like the S&P 500 – in corporate governance. Cathie Wood, founder of Ark investment Management, argues that these funds, while not conducting fundamental research, can dominate voting outcomes simply by virtue of their size. Wood has characterized this dynamic as a form of “socialism.”
The situation with Tesla illustrates this point. When Musk’s initial package was approved in 2018, Tesla represented a smaller portion of the S&P 500, giving index funds less voting power. In a subsequent vote ”forced through by an activist judge in Delaware,” Tesla’s weighting had increased to 1.2 percent of the S&P 500, contributing to the package’s approval. Currently, Tesla comprises 2.4 percent of the index, a level Wood believes is still insufficient for index funds to sway the vote, predicting Musk’s new package will “win clearly.”
Proxy advisory firm Institutional shareholder Services (ISS) recommended voting against the package on Friday, citing concerns that it would “lock in extraordinarily high payout opportunities over the next ten years” and “reduce the board’s ability to adjust future salary levels,” according to Reuters.
Despite ISS’s recommendation, Wood anticipates strong support from retail investors. “Although the proxy company ISS has recommended voting down the package, retail investors will probably dominate the voting again. America!” she stated.
norway’s Oil Fund, which holds a 1.14 percent stake in Tesla, has not yet announced its voting intention. However, in a June 2023 column in E24, director of Ownership and Compliance Carine Smith ihenacho criticized previous Musk pay packages as “disproportionately high, with too much dilution of the shareholders, and it has the wrong structure in relation to what is the target for payment.”
