On Thursday (June 13), Tesla CEO Elon Musk’s $56 billion compensation plan was approved at the shareholders’ meeting, with Vanguard, the largest external investor that initially opposed the plan, eventually providing support by casting a favorable vote.
According to a report from Reuters, Vanguard had previously voted against Musk’s massive compensation plan in 2018, citing concerns about its potential size not being justified by performance metrics.
However, considering the close link between executive compensation and shareholder returns since 2018, and the board’s claims that the incentives provided to the CEO retained the original deal’s value, Vanguard voted in favor of the plan at Tesla’s annual meeting on Thursday.
On Friday (June 14), Vanguard issued a statement on its website to over 50 million investors in the management company, explaining its decision.
As of March 31, Vanguard held 2.32 billion shares of Tesla, approximately 7% of the company, second only to Musk’s 13% stake. While some externally managed Vanguard funds voted individually, a spokesperson stated that the statement covered the majority of their funds.
When the compensation plan was initially approved at the shareholders’ meeting in 2018, it had a high approval rating of 73%. However, the plan faced an uncommon rejection by a Delaware judge in January of this year. The judge ruled that Musk had too much influence over the board, prompting the cancellation of the compensation plan.
This led to a second shareholder vote on Thursday. Tesla had hoped that its significant retail shareholders would help approve Musk’s compensation plan, along with other initiatives such as re-electing two directors and relocating the company’s headquarters to Texas.
Large index fund management companies like Vanguard, with assets totaling around $9 trillion, likely played a crucial role in this vote. Vanguard’s competitor, BlackRock, did not publicly state its position on Thursday, but as Tesla’s second-largest investor, the company expressed support during the first vote in 2018.
Tesla did not disclose the exact voting results on Thursday and is expected to do so in the coming days.
In its statement, Vanguard highlighted that Musk’s compensation is “truly exceptional” among CEOs, but from 2018 to 2023, Tesla’s shareholder return exceeded 98% of companies in the Russell 3000 Index. Few companies have been able to generate such significant absolute market value appreciation.
In recent years, Tesla has faced challenges of slowing growth and increasing competition, particularly from Chinese companies. Prior to Thursday’s shareholder meeting, top executives at the company emphasized Musk’s crucial role in Tesla’s success.
The board stated that the world’s richest person deserves a $56 billion compensation package because he has achieved all ambitious targets for the company in terms of market value, revenue, and profitability. Furthermore, the compensation plan is essential to maintain Musk’s loyalty to Tesla.
Vanguard also stated that its funds supported the proposal to relocate Tesla’s headquarters to Texas, as they did not see significant differences in shareholder rights between Delaware and Texas.
The approval on Thursday did not resolve the ongoing lawsuit in Delaware against Musk’s compensation plan, and some legal experts believe the litigation could continue for several months.
If the appeal is unsuccessful, the decision to relocate the company’s headquarters to Texas could allow the board to attempt reinstating the compensation plan in Texas, where the court may be more favorable to Tesla.
Two key allies of Musk on the board, his brother Kimbal Musk and former CEO of 21st Century Fox James Murdoch, were also successfully reelected on Thursday.