Tesla shareholders’ vote on Elon Musk’s record $56 billion pay deal could be his ‘last stand’ as CEO, experts warn

Elon Musk may be mounting his last stand as CEO of Tesla when the company convenes its annual shareholder meeting on Thursday, with his Texas headquarters becoming his very own personal Alamo.

The entrepreneur has staked his credibility and that of the entire board on the ratification of his record $56 billion 2018 pay package deemed invalid in January by a Delaware state judge over governance failings.

The gamble doesn’t end there, however, as Musk is also pushing for a change of legal domicile to Texas as a result of the court’s ruling.

Although the totemic CEO has stated his intention to remain at the company as long as he proves useful, a repudiation by even a large minority of shareholders could easily be interpreted as a vote of no confidence, undermining his authority and potentially marking the beginning of the end of his more than 15-year reign at the top of Tesla.

“That would be such a rebuke that you have to leave, because if you don’t, then everybody called your bluff,” says governance expert Jason Schloetzer, an associate professor at Georgetown University’s McDonough School of Business. “It could be his last stand.”

With the high stakes, his backers are pulling out the stops to mobilize every last vote.

Whether it’s his media-shy board chair, Robyn Denholm, emerging from the background to mount a goodwill tour, or longtime Musk investor Ron Baron of Baron Capital taking to the airwaves to voice his support, loyalists argue a ratification is in everyone’s collective interest.

“If Tesla is to retain Elon’s attention and motivate him to continue to devote his time, energy, ambition, and vision to deliver comparable results in the future, we must stand by our deal,” Denholm said this week, calling Thursday’s crunch proceedings “one of the most important votes in the history of our extraordinary company.”

Tesla claims some 6,000 small stockholders owning over 23 million shares—enough to make them collectively the 11th largest owner of the company—flooded the board with unsolicited letters of support.

Many fear the stock price, which has already been down nearly 30% since January, will tumble further if speculation that he might resign from Tesla isn’t swiftly put to bed.

“Given this, we’re not sure why shareholders would vote against the board,” warned sell-side analyst Alex Potter from Piper Sandler.

Like Potter, money manager Gary Black of The Future Fund, a longtime bull, summed it up much more simply: “The alternative is just too hard to fathom.”

That’s partly because there does not seem to be anyone else the company can turn to.

All talk of grooming a successor, first confirmed back in November 2022, has ceased entirely over the past 12 months after Musk removed former finance chief Zach Kirkhorn and powertrain boss Drew Baglino—two top lieutenants best placed to run Tesla in his absence.

With these moves, Musk has ensured that no one of his stature can fill his giant shoes.

Fierce headwinds for Tesla

That’s tough luck for Musk’s detractors, such as early Tesla investor and onetime board director Steve Westly, who otherwise would have the perfect opportunity to topple the CEO from his perch.

Financially, the company has hit a brick wall.

The 50% annual growth rate in vehicle sales has been completely wiped out; Tesla’s operating margin crashed to 5.5% in the first quarter versus a peak of 19% two years prior; and it suffered its first cash drain since the pandemic.

Musk has laid off over a tenth of his 140,000-strong workforce to salvage these cratering metrics.

He also suddenly sacked its entire Supercharger team—which is responsible for one of the company’s greatest assets—while diverting AI training chips to his other privately owned companies in a potential conflict of interest, claiming they would have otherwise collected dust in a Tesla warehouse.

His single biggest sin, however, is simply failing to deliver for shareholders.

Ever since he launched his bid for Twitter in April 2022, the stock has nearly halved in value as both its megacap peers and the equity market more broadly have risen to hit record highs.

While Musk repeatedly talked about Tesla eclipsing the market cap of Apple, Nvidia’s Jensen Huang did it.

Taken together, these issues mean the vote comes at a difficult moment to demand stock worth more than Tesla’s cumulative profits. Proxy advisors like Glass Lewis and Institutional Shareholder Services, which Musk earlier this year mocked as “ISIS,” already felt the compensation—at current stock prices worth $54 billion—was excessive. The two recommend that asset managers and index funds vote against approving his pay.

One high-profile investor that has already signaled it would not support Musk is California asset manager CalPERS, the largest U.S. pension fund for state employees.

Others include Europe’s Nordea Asset Management and the City of New York, which has been particularly critical of the CEO stuffing the board with friends and family.

Vanguard, the largest shareholder after Musk with 230 million shares, or 7.2%, hasn’t indicated what it would do, but since it voted against the package in 2018, it’s reasonable to expect the bar to reverse that is high.

By comparison, T. Rowe Price, one of Tesla’s 10 largest investors, has written to Denholm assuring the board of its support.

“With >40% retail ownership—and with a few institutions in both the ‘yea’ and the ‘nay’ camps—we’re not sure what will happen,” Potter of Piper Sandler concluded.

Appeal to fairness

Tesla is not leaving the vote to chance.

Despite being notorious for not advertising, the EV maker has bought spots to promote Musk’s pay package.

These often redirect visitors to a landing page with explicit instructions on voting.

Denholm, meanwhile, is arguing the restoration of Musk’s deep-in-the-money call options on 304 million shares is only fair.

After all, he achieved every single one of the 16 milestone targets laid out in his contract, no matter how challenging.

The problem with the package for investors is that rewarding past performance with that amount of stock priced at an 87% discount could be litigated as a case of corporate waste.

Moreover, fairness itself isn’t exactly a concept that has much weight in corporate boardrooms—and it’s one that Musk himself readily ignores.

The tycoon did everything he could to withdraw from a $44 billion contract he signed to buy Twitter.

When he finally bought the company after the justice system made clear he would be forced to follow through with his offer, Musk went out of his way to deprive CEO Parag Agrawal of his severance, devising a meticulously timed plan the entrepreneur’s own official biographer described as “ruthless.”

Musk now seems so eager for support that he’s been personally thanking major supporters. Last week, he expressed his appreciation to venture capitalist Chamath Palihapitiya after the latter endorsed Musk’s performance live on CNBC, apparently not realizing that the comments shared on social media were from April 2019.

He also appears to be back to making big promises, proclaiming this week he was on the cusp of reaching his number one goal—solving full autonomy.

He promised that once bugs were ironed out, it would be more than a year between driver interventions.

His track record on this front gives reason to doubt this will happen, at least in the near future.

When confronted two years ago with the question why all his predictions to this end have proven wrong, he shrugged and remarked: “I don’t want to blow your mind, but I’m not always right.”

Without skipping a beat, he then went on to incorrectly predict Tesla would solve self-driving in 2022.

Renegotiation poses risks

There is one strong argument why Musk’s detractors could hold their nose and vote in favor of the deal, beyond simply the fear of a further drop in the stock.

If the vote fails and the board is forced to negotiate fresh terms, a new pay deal could prove prohibitively expensive.

Tesla accountants estimate the same package valued at today’s price rather than that of 2018 would cost investors more than $25 billion. This would be on top of the original $2.3 billion of stock-based compensation already expensed.

While Musk would almost certainly have to dial down his expectations in such a scenario, according to the company, a new deal would only be earnings neutral if he agreed to a package less than a tenth of the size currently up for a vote.

Moreover, the shares are subject to a five-year lockup period starting with the date he exercises his options. This means he retains a strong incentive to ensure the company outperforms market expectations over the longer term.

Just as a sizable vote against would undermine Musk and Denholm—whose authority as chair would also be diminished—anything remotely approaching the 73% of disinterested shareholders (i.e., excluding the CEO and his brother, Kimbal) that approved it six years ago would be a resounding triumph for the duo.

Nevertheless, this too holds potential for controversy, according to Schloetzer.

Massive support could further embolden Musk’s worst tendencies, and the broader business community would also view it as rewarding his brand of poor corporate governance and lax board oversight.

“I would be concerned about the precedent it sets,” warns the Georgetown professor. “If I as a CEO see that large institutional investors are fine with Musk running the board the way he has, that SEC rules don’t seem to matter and recommendations from the likes of Glass Lewis and ISS are irrelevant, why wouldn’t I want to emulate that?”

In other words, there’s little reason to believe the outcome of the vote on Thursday marks the end of this story.

Like the famous siege of the Alamo that became a rallying cry for Texan independence, June 13 may likely serve as merely the opening prologue, setting the stage for more drama to come.

This story was originally featured on Fortune.com