Tesla's Board Keeps Facing Investor Grievances: QuickTake

(Bloomberg) -- Tesla Inc. is facing renewed criticism over its corporate governance a week after Chief Executive Officer Elon Musk refused to answer questions about the company’s finances on an earnings call. While Musk calling analysts’ questions “boring” and “dry” was unusual, the billionaire and his board drawing fire from some investors is far from unprecedented.

1. Who’s attacking the company now, and why?

CtW Investment Group is working with union pension funds that it says are Tesla shareholders managing more than $250 billion. The firm is urging Tesla investors to vote against three directors who are up for re-election to the board: Antonio Gracias, a private equity investor; Musk’s brother Kimbal Musk; and James Murdoch, CEO of Twenty-First Century Fox Inc. CtW says Gracias and Kimbal Musk lack independence and are “incapable or unwilling to contradict” Elon Musk. The firm’s common critique of Kimbal Musk and Murdoch relate to their lack of experience in autos, manufacturing or engineering and their performance as directors on other company boards.

2. Does the firm disapprove of any other directors?

CtW also excoriates Tesla and Gracias, the board’s lead independent director, for keeping Steve Jurvetson on a leave of absence and failing to completely oust him from the board. Jurvetson’s status has been in limbo since his November departure from DFJ, the venture capital firm he co-founded. He resigned weeks after the firm announced it was investigating him for misconduct. Keeping Jurvetson on leave “signals an extraordinary unwillingness to accept the need to change,” Dieter Waizenegger, CtW’s executive director, writes in a letter the firm plans to file with the Securities and Exchange Commission on Wednesday.

3. Is the board affecting Tesla’s financial performance?

CtW thinks so. The firm argues that entering 2017, shareholders could have “reasonably” believed that Tesla was on the path to profit. Instead, the company has continued to rack up losses and has burned through almost $4 billion during the past year. Waizenegger says the board has been “unduly deferential” toward Musk in response to financial and operational issues. The latter category of problems include safety issues at Tesla’s assembly plant and repeated failures to achieve production goals for the Model 3 sedan. While Musk has said the company will be cash-flow positive if he can get Model 3 output up to 5,000 cars a week.

4. Does CtW have a history with Tesla?

In April 2017, CtW was among the group of investment firms that pushed Tesla to add independent directors. The company did about three months later, though Musk tweeted that the board expansion was planned and had nothing to do with pension funds’ urging. It’s also worth keeping in mind that CtW is affiliated with Change to Win, a federation of unions that’s been assisting efforts to organize the carmaker’s factory in Fremont, California.

5. Why is SolarCity getting brought up again?

Tesla’s 2016 acquisition of SolarCity was rife with controversy. Musk and Gracias both owned shares in each of the companies, and Musk co-founded SolarCity with his cousins. In making the $2 billion purchase, Tesla inherited $2.9 billion in SolarCity debt, and a chunk of those obligations are soon coming due. Tesla shareholders are challenging the acquisition, and a Delaware judge ruled in March that they had produced enough evidence showing the deal may have been flawed by conflicts. “Developments in the litigation that followed Tesla’s acquisition of SolarCity has only emphasized the need for greater board independence,” Waizenegger writes.

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