Institutional Shareholder Services (ISS) has issued a recommendation urging shareholders to vote against the re-election of Robyn Denholm as Tesla’s board chair. The advisory stems from growing concerns surrounding the pledging of company stock by CEO Elon Musk and his brother, Kimbal Musk, without adequate oversight.
The practice of pledging shares as collateral for loans can expose Tesla investors to heightened risks, especially considering the substantial number of shares that have been pledged by the Musk siblings. Since reaching a record high in November 2021, Tesla’s stock has experienced a sharp decline, losing nearly 60% of its value. This decline has raised questions about the potential consequences of pledged shares for shareholders and the overall stability of the company’s stock.
An alarming 58% of Elon Musk’s ownership in Tesla is currently tied up in the form of pledged shares. Although such a practice can be a legitimate financial strategy to obtain loans for various purposes, it also raises concerns over Musk’s financial exposure to his own company and the potential implications for shareholders.
To safeguard the interests of Tesla investors and address the pledged stock concerns, ISS has suggested electing Elon Musk himself and JB Straubel, the company’s co-founder, to the board. It is worth noting that Straubel’s nomination has received a cautious stance from another proxy advisory firm, Glass Lewis. The latter has recommended voting against Straubel’s board seat due to concerns about his independence, stemming from his previous role as Tesla’s chief technology officer until 2019.
Tesla’s board chair, Robyn Denholm, who has held the position since 2018, faces mounting pressure from ISS’s recommendation. With ISS being a leading voice in corporate governance matters, their stance is likely to be taken seriously by Tesla’s shareholders when making their voting decisions.
Pledged shares are a common practice among company executives, allowing them to access liquidity without selling their shares outright. However, the maximum loan amount for pledged shares is usually capped to mitigate potential risks to the company and its stakeholders. For Tesla, this cap has been set at $3.5 billion or 25% of the total value of the pledged stock.
As the annual meeting approaches, shareholders will need to weigh the pros and cons carefully before casting their votes. The outcome of the vote will not only determine the board’s composition but also signal the level of concern among Tesla’s investors regarding the pledged shares issue and its potential impact on the company’s financial stability and future growth prospects.