Podcasts > Money Rehab with Nicole Lapin > Demystifying Shareholder Activism and Why Some Investors Are Mad at Elon

Demystifying Shareholder Activism and Why Some Investors Are Mad at Elon

By Money News Network

In this episode from Money Rehab with Nicole Lapin, the topics of shareholder activism and investor discontent with Elon Musk are explored. Nell Minow explains how shareholders can influence company policies through proposals, voting, lawsuits, and seeking board positions. She describes far-right groups targeting Berkshire Hathaway with controversial proposals, as well as her vocal opposition to Musk's $58 billion pay package at Tesla.

Minow also discusses the limits of shareholder power compared to leadership control. While shareholders have increased oversight, she criticizes Tesla's board for prioritizing Musk's interests over shareholders. The episode sheds light on shareholder activism mechanisms and how they are shaping corporate governance and practices.

Demystifying Shareholder Activism and Why Some Investors Are Mad at Elon

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Demystifying Shareholder Activism and Why Some Investors Are Mad at Elon

1-Page Summary

Shareholder Activism Mechanisms

Shareholder activism allows investors to influence company policies and performance. According to Nell Minow, shareholders can submit proposals, vote against board members, join lawsuits, or run for board positions to drive change aligned with their interests.

Shareholder Activism at Berkshire and Tesla

Berkshire Targets of Far-Right Groups

Minow reveals Berkshire Hathaway faced extremist proposals from far-right groups disguised as pro-diversity but promoting prejudice. However, savvy shareholders overwhelmingly rejected these discriminatory proposals.

Minow Opposed Musk's $58B Pay, Sold Tesla Shares

Minow vocally opposed Elon Musk's proposed $58 billion pay package at Tesla, deeming it unjustifiably excessive. She also sold most Tesla shares over concerns about Musk's focus being divided across multiple ventures.

Shareholder Power vs. Leadership Control

Proposals Advisory, Not Binding

While shareholders can voice concerns through proposals, Minow notes boards are not obligated to act even on unanimously supported proposals.

Minow explains boards have a fiduciary duty to prioritize shareholders over management. However, she critiques the "utterly useless" Tesla board for aligning with Musk's interests.

Institutional Investors Driving Change

Over time, previously passive institutional investors have become more engaged in shareholder activism to protect their interests. Their increased oversight has improved board practices and corporate governance.

1-Page Summary

Additional Materials

Counterarguments

  • Shareholder proposals, while a mechanism for influence, may not always reflect the best interests of the company as a whole, especially if they come from a minority with specific agendas.
  • The effectiveness of shareholder activism in influencing company policies and performance can vary greatly depending on the size of the shareholder's stake and the company's governance structure.
  • The rejection of extremist proposals at Berkshire Hathaway could be seen as a positive demonstration of the shareholders' ability to discern and act against hidden agendas.
  • The criticism of Elon Musk's pay package at Tesla could be countered by arguing that such compensation is tied to performance milestones that, if met, could greatly benefit the company and its shareholders.
  • Selling Tesla shares due to concerns about Musk's divided focus might overlook the potential for cross-pollination of innovation and strategy across his various ventures.
  • While shareholder proposals are advisory, this does not necessarily mean that boards ignore them; boards may take them into consideration as part of their decision-making process.
  • The fiduciary duty of boards to prioritize shareholders does not always mean siding with shareholder proposals, as boards must consider the long-term health and strategy of the company.
  • Criticism of the Tesla board for aligning with Musk's interests could be countered by the argument that Musk's vision and leadership have been integral to Tesla's success.
  • The increased engagement of institutional investors in shareholder activism could potentially lead to conflicts of interest if their goals do not align with those of smaller shareholders or the long-term vision of the company.
  • Improvements in board practices and corporate governance driven by institutional investors' oversight may not always result in the best outcomes for all stakeholders, including employees, customers, and the community.

Actionables

  • You can start by researching companies you're invested in to understand their governance structures and identify areas where shareholder input could be impactful. Look into the company's annual reports, governance policies, and any recent shareholder proposals to get a sense of what issues are currently being addressed and where there might be gaps. For example, if you notice a lack of diversity initiatives, you could consider drafting a proposal for the next shareholders' meeting.
  • Consider joining or forming an investment club to pool resources and knowledge with other investors. This can amplify your influence as a shareholder and provide a platform for collective action. In the club, you can discuss and analyze company policies, share insights on board member performance, and strategize on how to vote in a way that aligns with your shared values and investment goals.
  • Engage with shareholder advocacy groups to learn more about effective activism and to potentially collaborate on initiatives. These groups often have resources and expertise that can help you understand the nuances of shareholder proposals, the legal framework of shareholder rights, and strategies for engaging with company boards. By participating in these groups, you can gain insights into how to craft persuasive proposals and build support among other shareholders.

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Demystifying Shareholder Activism and Why Some Investors Are Mad at Elon

Overview of Shareholder Activism and Its Different Mechanisms

Shareholder activism is a way for investors to influence a company's decisions and policies to protect their interests and improve performance. There are different mechanisms that shareholders can use to initiate change within a company.

Shareholder Activism: Influencing Company Decisions and Policies

Shareholders Can Submit Proposals, Vote, Sue, or Run for the Board to Push For Change

Shareholders who are unhappy with company policies have several options at their disposal. They can choose to be proactive rather than selling their stock. Shareholders can write letters to the company, attend the annual meeting to vote against board members, file a shareholder proposal if they own more than $2,000 worth of stock, join a lawsuit, or they may even run for a position on the board themselves. These actions allow shareholders to contribute to the direction and values of the company.

Goal of Shareholder Activism: Protect Interests, Improve Performance

The ultimate goal of shareholder activism is for shareholders to protect their ow ...

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Overview of Shareholder Activism and Its Different Mechanisms

Additional Materials

Clarifications

  • Proxy voting in shareholder activism involves shareholders delegating their voting rights to a third party, like a broker or index fund manager, to vote on their behalf during company decisions or board elections. Proxy policies are guidelines or rules that these third parties follow when casting votes on behalf of shareholders, outlining their approach to voting on various issues based on the interests of the shareholder ...

Counterarguments

  • Shareholder activism can sometimes prioritize short-term gains over long-term stability and growth, potentially harming the company's future prospects.
  • The effectiveness of shareholder proposals is often limited, as they are non-binding and management may not be compelled to act on them.
  • Running for the board or engaging in activism can be resource-intensive and may not be feasible for smaller shareholders with limited time and capital.
  • Shareholder activism may lead to adversarial relationships between shareholders and management, which could disrupt company operations and negatively impact company culture.
  • The interests of activist shareholders may not always align with those of other stakeholders, such as employees, customers, or the community, leading to decisions that benefit a few at the expense of many.
  • Proxy voting through brokers or fund managers may not always reflect the individual investor's views, as these entities often follow their own guidelines or the rec ...

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Demystifying Shareholder Activism and Why Some Investors Are Mad at Elon

Shareholder Activism at Major Companies: Berkshire Hathaway, Tesla

Far-right Groups Propose Agendas to Berkshire Hathaway

Proposals With Rejected Discriminatory Elements by Many Shareholders

Nell Minow discusses how Berkshire Hathaway is facing extremist proposals from far-right activist groups that masquerade as supportive of diversity but actually harbor prejudice. She reveals that three right-wing shareholder proposals targeted the company, suggesting that diversity and inclusion programs are about quotas. However, Minow emphasizes that these initiatives aim to expand the applicant pool and not to impose quotas. In response to these insidious proposals, Minow has voted against them, and notes that savvy Berkshire shareholders have followed suit, as seen with similar proposals at companies like Disney, where one received less than one percent of the vote.

Shareholders Ensure Companies Aren't Hijacked by Extremist Interests

Minow asserts that shareholders have the ability to influence corporate governance by questioning how mutual or index funds vote on proxy issues, including executive compensation plans. She argues that shareholder engagement is key as it leads boards of directors to pay more attention to their concerns when they know their decisions are being observed and possibly contested.

Tesla Scrutinized Over CEO Musk's Pay and Focus

Nell Minow Opposed Musk's $58 Billion Pay, Deeming It Unjustifiably High

Nicole Lapin introduces Nell Minow’s vocal criticisms of Elon Musk, particularly regarding his pay package. Minow asserts that she opposed Musk's proposal for a $58 billion pay, considering it unjustifiably high. She criticizes the Tesla board as "serial killers of shareholder value" and states that no one, including Musk, deserves such an exorbitant pay package. Minow also implies that such a massive compensation package is not a good investment for shareholders, comparing its return unfavorably to a piggy bank. She voices her belief that Musk’s investment in Tesla already serves as a sufficient motivator and the large pay risk creates imbalance.

Minow Sold Tesla Shares Over Concerns About Musk's Focus on Company Leadership

Minow criticizes Musk's involvement in multi ...

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Shareholder Activism at Major Companies: Berkshire Hathaway, Tesla

Additional Materials

Clarifications

  • Far-right groups proposing agendas to Berkshire Hathaway involves extremist organizations putting forth suggestions or demands to the company. These proposals may touch on various aspects of the company's operations, such as diversity and inclusion programs. The intent behind these proposals can sometimes be disguised, leading to scrutiny and potential rejection by shareholders and corporate governance experts. Such actions can spark debates on corporate governance, shareholder activism, and the influence of external interests on major companies.
  • Nell Minow is a well-known corporate governance expert and shareholder activist. She is recognized for her vocal criticisms of executive compensation and corporate governance practices at various companies. Minow's influence stems from her advocacy for shareholder rights, challenging excessive executive pay packages, and promoting transparency and accountability in corporate decision-making. Her actions often involve voting against controversial proposals and engaging with companies to address shareholder concerns.
  • Nell Minow criticized Elon Musk's $58 billion pay package at Tesla as unjustifiably high, considering it a poor investment for shareholders. She opposed the proposal, highlighting concerns about the board's decision-making and the potential negative impact on shareholder value. Minow sold most of her Tesla shares due to worries about Musk's focus on various projects and his role in the company's leadership, indicating a lack of confidence in Tesla's management under his leadership. She emphasized the importance of shareholder vigilance in holding company executives accountable for decisions that may not align with shareholder interests.
  • Elon Musk, the CEO of Tesla, is known for his involvement in various ventures beyond Tesla, such as SpaceX, his aerospace company, and Neuralink, a neurotechnology company. These projects reflect Musk's diverse interests in advancing technology and exploring new frontiers, showcasing his entrepreneurial spirit and vision for the future. Musk's engagement in multiple projects has sometimes raised concerns among invest ...

Counterarguments

  • Shareholder proposals, even if they come from far-right groups, may raise legitimate concerns about corporate policies and should be evaluated on their merits rather than dismissed based on their origin.
  • Diversity and inclusion programs, while generally positive, should be carefully designed to ensure they promote equal opportunity without leading to reverse discrimination or tokenism.
  • Executive compensation, including Elon Musk's pay package, can be justified if it is tied to performance metrics that significantly benefit the company and its shareholders in the long run.
  • High compensation packages for CEOs like Elon Musk could be seen as a reflection of the value they bring to the company, especially if their leadership has led to substantial growth and innovation.
  • Elon Musk's involvement in multiple projects could be viewed as a sign of a dynamic and innovative leader who brings diverse experiences and perspectives to the company, potentially driving cross-industrial synergies.
  • Selling shares due to concerns about a CEO's focus might overlook the broader team and governance structures in place that ensure the company's operations continue effectively even if the CEO i ...

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Demystifying Shareholder Activism and Why Some Investors Are Mad at Elon

Balance of Power: Shareholders and Leadership

Nell Minow discusses the complex dynamics between corporate shareholders and company leadership, expressing concerns about current practices within this framework.

Shareholders Can Voice Concerns, but Boards and Executives Often Have the Final Say

Given the advisory nature of shareholder proposals, Minow points out that a company is not obligated to act on them, even if they receive unanimous support.

Shareholder Proposals Are Advisory and Can Be Ignored Despite Majority Support

Minow highlights the frustration with corporate narratives around shareholder activism. She clarifies that shareholders do not have the power to run the company, contrasting the common mischaracterization that they are attempting to do so.

Boards' Fiduciary Duty to Shareholders vs. Management Interests

Minow explains that shareholders have raised significant concerns to leaders like Elon Musk regarding issues like his brother's inclusion on Tesla's board. However, due to his controlling stock share and board influence, Musk can largely ignore these investor inputs.

Directors are legally bound by a duty of care and loyalty, Minow continues, which means they should prioritize shareholders over management. Nevertheless, she criticizes the Tesla board as "utterly useless," implying they are not fulfilling this duty and suggesting a tendency to align with management interests instead.

Institutional Investors Are More Engaged and Sophisticated in Company Oversight

Over the years, previously passive shareholders have become more active and engaged in company oversight. Minow describes this shift as a response to protect their interests against corporate raiders and insiders' abuses.

Investors Probe Executive Pay, Board Makeup, and Governance Issues

Minow discusses how shareholder proposals have led to improvements in director conflict of interest issues and restrictions on serving on multiple boards. She notes that board performa ...

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Balance of Power: Shareholders and Leadership

Additional Materials

Clarifications

  • Greenmail is a financial tactic where investors buy shares in a company to threaten a hostile takeover, leading the company to repurchase the shares at a premium to prevent the takeover. This practice was prevalent in the 1980s, with investors like T. Boone Pickens and Sir James Goldsmith using it to make profits. Greenmailing involves pressuring companies into buying back shares at a higher price, often resulting in losses for the company and its shareholders. Legal restrictions and counter-tactics have reduced the prevalence of greenmail since the early 1990s.
  • Proxy voting is a method where a person delegates their voting rights to another individual, known as a proxy, to vote on their behalf. This practice is common in various decision-making bodies, including corporate settings, to allow for voting when the voter is unable to be present. Proxy voting can help form a collective voting bloc to influence decisions and is often utilized by investment advisers in the United States for client accounts. Companies may engage proxy solicitation agencies to help secure votes through p ...

Counterarguments

  • Shareholder proposals, while advisory, can exert moral and reputational pressure on boards, potentially influencing decisions indirectly.
  • Shareholders, through collective action and voting rights, can influence company policies and leadership decisions, especially in companies without a controlling shareholder.
  • Boards may sometimes prioritize management interests if they believe doing so aligns with the long-term interests of the shareholders and the company.
  • Elon Musk's influence, while significant, is still subject to legal constraints and the potential for shareholder litigation if fiduciary duties are breached.
  • The Tesla board, despite criticisms, may have legitimate reasons for their decisions, which could be aligned with the company's strategic goals and shareholder value in the long term.
  • Institutional investors, while more engaged, may still face challenges such as limited resources for deep engagement with every company or potential conflicts of interest.
  • Executive pay and board governance are complex issues, and changes in these areas may not always lead to improved company p ...

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