In December, a Delaware judge upheld her January decision to annul the staggering $56 billion compensation package awarded to Elon Musk by Tesla’s board in 2018.
Summary: Many directors at American companies are failing in their responsibilities. Serving on the board of a large American corporation is both a lucrative and thankless role. It’s lucrative because, when things are going well, directors can earn around $300,000 annually in cash and stock for attending well-catered meetings every six weeks. However, it’s thankless because they rarely receive credit for successes but are quick to be blamed for failures, which occur with alarming frequency.
Take two recent incidents as examples. On December 2nd, Intel’s board dismissed its ineffective CEO, Pat Gelsinger, who had lost $150 billion in shareholder value during his three-and-a-half years at the helm, even as other chip companies thrived due to soaring demand for computing power driven by the AI revolution. While his departure was welcomed, the delay in action raises questions about the board’s responsiveness.
On the same day, the Delaware judge reiterated her ruling to annul the controversial $56 billion compensation package for Elon Musk, which had been approved by Tesla’s board. This decision is contentious, especially since Tesla shareholders have recently benefited from a surge in the company’s stock price. In June, 75% of shareholders voted to endorse the massive pay package and to relocate the company’s incorporation from Delaware to Texas, which is seen as more management-friendly. Tesla has labeled the ruling as “wrong” and plans to appeal. This situation highlights that the supposedly independent directors who approved Musk’s compensation may not have acted in the best interests of shareholders.
The cases of Intel and Tesla illustrate how boards can fail to fulfill their duty to represent investors and hold management accountable. Tesla’s situation reveals how directors may feel pressured to cater to a dominant figure, whether a controlling shareholder or an overbearing CEO, potentially compromising their fiduciary responsibilities. Conversely, as seen with Intel, independent directors may lack sufficient motivation to take action. In both scenarios, the outcome is a troubling passivity.
Certain aspects of American capitalism exacerbate these issues. An increasing number of companies are going public with ownership structures that favor certain shareholders over others. Jay Ritter from the University of Florida tracks businesses that adopt dual-class share structures. When Google implemented this model two decades ago, it was uncommon. In the 2000s, such structures represented less than 10% of initial public offerings on American exchanges, but in the past five years, they have accounted for more than a quarter.
