Our views

Tesla – barbarians at the wheel?


Tom Johnson, Responsible Investment Analyst

30 August 2018

When is the truth not the truth?
If you’re a maverick US leader with a cult following, the answer seems to be, fairly often. Elon Musk might have very different views from Donald Trump on things such as climate change, but both men share loyal fan-bases and tweets whose veracity the world’s media have spent plenty of time dissecting.
Some would say that Tesla’s CEO has been rather liberal with the truth over the last few weeks. 
First came the announcement that funding was secured to take the company private, proclaiming that the company was worth $420 per share with no discernible evidence to back it up. Then came the media blitz to plead a case for forgiveness for his transgressions. It was noted that the Tesla Board had little knowledge of any bid and the US watchdog, the Securities and Exchange Commission (SEC) is investigating the entire affair. 
It was a wild 17 days, but now that the dust has settled, and Tesla remains a public company for the foreseeable future, there are a number of important governance questions in need of answers.
Our sustainable funds, which seek out investments in companies which look to solve society’s most intractable problems, first looked at Tesla in the late spring of 2015. Three years on, the attraction we saw in the stock thanks to its disruptive influence on the automotive industry is already being felt. Tesla has been at the forefront of a wave of electrification at mainstream car manufacturers. 
And three years ago, after considerable debate, we turned the company down. Although the firm’s products and services looked like a great fit, the firm’s corporate governance and the influence of its founder led us to screen the company out. We did this for three key reasons:
The first was the outsized influence of Elon Musk, a major shareholder who served as both Chairman and CEO, while also serving as Chairman of SpaceX. And while he might be sleeping on the floor of Tesla’s Gigafactory, he wasn’t making it all the way to the boardroom, failing to attend certain board meetings.
The second was the lack of checks and balances on this influence. Even after investor pressure following the takeover of Solar City in 2016 (now subject to a lawsuit), five of the six directors on the board had personal or business connections to Mr. Musk.
Finally, there were poor remuneration practices, which were only amplified in March this year thanks to a pay scheme. If its stretching performance targets were met this would award Mr. Musk with $3.7 billion over several years, increasing his shareholding to around 28%. If all executive remuneration schemes paid out, independent shareholders would see their holdings diluted by around 25%.
When taken in aggregate, these risks simply outweighed the positive impacts which Tesla might one day achieve and so the company didn’t pass our sustainable screening process.
Fast forward three years and amidst the flurry of news, we’ve been left considering whether the attempted privatisation was the potential panacea Elon Musk was hoping for? We’re not so sure.
A sceptic might ask whether, with the company already run at such odds with best governance practices, why Mr. Musk felt the need to go private? A cynic might ask whether the new private shareholders, while sharing in his vision, would really have been more forgiving than public markets. Realists might have pointed out that even if the equity went private, Tesla’s bonds would have kept trading in public markets. This would mean that the company would still have to file some public disclosures with the SEC, leaving Mr Musk open to scrutiny from commentators and having to answer analyst questions. Short sellers could have still take a view, albeit only on those bonds. 
So as potential investors who passed on the stock and observed its fluctuations up and back down since then with interest, we think it remains a shame that one of the 21st century’s most innovative companies also has poor governance. 
The flirtation with privatisation is over, for now. What happens next for Tesla, only time will tell.

When is the truth not the truth?

If you’re a maverick US leader with a cult following, the answer seems to be, fairly often. Elon Musk might have very different views from Donald Trump on things such as climate change, but both men share loyal fan-bases and tweets whose veracity the world’s media have spent plenty of time dissecting.

Some would say that Tesla’s CEO has been rather liberal with the truth over the last few weeks. 

First came the announcement that funding was secured to take the company private, proclaiming that the company was worth $420 per share with no discernible evidence to back it up. Then came the media blitz to plead a case for forgiveness for his transgressions. It was noted that the Tesla Board had little knowledge of any bid and the US watchdog, the Securities and Exchange Commission (SEC) is investigating the entire affair. 

It was a wild 17 days, but now that the dust has settled, and Tesla remains a public company for the foreseeable future, there are a number of important governance questions in need of answers.

Our sustainable funds, which seek out investments in companies which look to solve society’s most intractable problems, first looked at Tesla in the late spring of 2015. Three years on, the attraction we saw in the stock thanks to its disruptive influence on the automotive industry is already being felt. Tesla has been at the forefront of a wave of electrification at mainstream car manufacturers. 

And three years ago, after considerable debate, we turned the company down. Although the firm’s products and services looked like a great fit, the firm’s corporate governance and the influence of its founder led us to screen the company out. We did this for three key reasons:

The first was the outsized influence of Elon Musk, a major shareholder who served as both Chairman and CEO, while also serving as Chairman of SpaceX. And while he might be sleeping on the floor of Tesla’s Gigafactory, he wasn’t making it all the way to the boardroom, failing to attend certain board meetings.

The second was the lack of checks and balances on this influence. Even after investor pressure following the takeover of Solar City in 2016 (now subject to a lawsuit), five of the six directors on the board had personal or business connections to Mr. Musk.

Finally, there were poor remuneration practices, which were only amplified in March this year thanks to a pay scheme. If its stretching performance targets were met this would award Mr. Musk with $3.7 billion over several years, increasing his shareholding to around 28%. If all executive remuneration schemes paid out, independent shareholders would see their holdings diluted by around 25%.

When taken in aggregate, these risks simply outweighed the positive impacts which Tesla might one day achieve and so the company didn’t pass our sustainable screening process.

Fast forward three years and amidst the flurry of news, we’ve been left considering whether the attempted privatisation was the potential panacea Elon Musk was hoping for? We’re not so sure.

A sceptic might ask whether, with the company already run at such odds with best governance practices, why Mr. Musk felt the need to go private? A cynic might ask whether the new private shareholders, while sharing in his vision, would really have been more forgiving than public markets. Realists might have pointed out that even if the equity went private, Tesla’s bonds would have kept trading in public markets. This would mean that the company would still have to file some public disclosures with the SEC, leaving Mr Musk open to scrutiny from commentators and having to answer analyst questions. Short sellers could have still take a view, albeit only on those bonds. 

So as potential investors who passed on the stock and observed its fluctuations up and back down since then with interest, we think it remains a shame that one of the 21st century’s most innovative companies also has poor governance. 

The flirtation with privatisation is over, for now. What happens next for Tesla, only time will tell.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.