A change in board composition and mandatory arbitration agreements might be on the minds of Tesla, Inc. (TSLA) shareholders when they convene for the company's annual meeting on Oct. 7.
The meeting occurs at an interesting juncture in the company's evolution. After years of being a scrappy underdog in the auto industry, Tesla is on the verge of becoming a serious challenger to established car makers. It reported record delivery numbers recently despite a plethora of problems due to the pandemic shutdown. Investors bet their money on Tesla during the pandemic, accelerating the company's share price into top gear and making it the world's most valuable car maker.
That surge has also brought renewed attention on Tesla's board and its workplace culture. In particular, there are two issues that have caught shareholder attention.
- A large proxy advisory firm is opposing the re-election of James Murdoch and Kimbal Musk at Tesla's annual board meeting.
- Activist shareholding firm Nia Impact Capital has submitted a proposal asking Tesla to prepare a report detailing the impact of mandatory arbitration agreements on its workplace culture.
- A jury asked Tesla to pay $137 million in damages to a former employee who was subject to racial abuse while working at the company.
A Focus on Mandatory Arbitration Agreements
Tesla's breakneck growth in the past decade has often come at the expense of workplace culture. Over the years, there have been several sex- and race-based discrimination complaints at the company. For example, a California jury yesterday ordered Tesla to pay approximately $137 million to Owen Diaz, a former employee who was subjected to racial abuse while he worked as an elevator operator at the company's factory in Fremont, California. That order comes less than two months after Tesla paid out $1 million to another African American employee in an arbitration proceeding.
Tesla has been able to largely sidestep repercussions from such cases by its reliance on mandatory arbitration agreements, which employees sign when they are hired. Such agreements prohibit employees from suing the company in public courts and force them to settle their grievances in private arbitration behind closed doors. (Diaz did not sign the agreement when he was hired.)
Nia Impact Capital, a Tesla shareholder, has submitted a board proposal asking the company to prepare a report to study the impact of mandatory arbitration on Tesla's employees and workplace culture.
"The use of mandatory arbitration provisions limits employees' remedies for wrongdoing, precludes employees from suing in court when discrimination and harassment occur, and can keep underlying facts, misconduct or case outcomes secret and thereby prevent employees from learning about and acting on shared concerns," the company stated, adding that Tesla's use of such agreement is "of particular concern given past allegations of sexual and racial harassment and discrimination."
The proposal could effect a change in Tesla's workplace culture and require more disclosure from the company. Unlike other car manufacturers, Tesla does not release workforce composition data. It also does not include diversity and inclusion metrics in its annual report.
Proxy advisory firm Institutional Shareholding Service (ISS) is backing Nia's proposal and has asked shareholders to vote in favor. According to an SEC filing, Nia Impact Capital owns 923 shares of Tesla's common stock. It submitted an identical proposal, which was rejected, last year.
A Change in Board Composition
ISS is also recommending that Tesla's shareholders vote against the re-election of Kimbal Musk, restaurateur and CEO Elon Musk's brother, and James Murdoch, executive chairman of Newscorp Inc. ISS says that both directors have received "sizeable equity grants that lacked pre-set performance criteria." In other words, they've been given significant equity without corresponding performance-related targets.
The firm has also characterized Tesla as a "higher risk" company for board governance because of its board structure and rights. Tesla has nine board members. Kimbal Musk and James Murdoch are listed as independent members.
Tesla's board members have been earlier accused of not being assertive enough in the face of Musk's repeated run-ins and infractions with regulatory authorities. ISS entered a similar proposal in 2018 opposing the election of Murdoch and Antonio Gracias, but Tesla shareholders rejected that measure.