Tesla Inc. CEO Elon Musk dances onstage during a delivery event for Tesla's China-made Model 3 cars in Shanghai, China on Jan. 7, 2020.ALY SONG/Reuters
Grant McGlaughlin and Richard Steinberg are lawyers at Fasken. This article reflects the opinions of the authors and not of their firm.
In the 1987 movie Wall Street, Gordon Gekko (played by Michael Douglas) delivered the line the film is famous for: “Greed, for lack of a better word, is good.” Mr. Gekko was praising the innovative spirit of Corporate America and what drives owners to build businesses.
Mr. Gekko’s comments remain relevant today, including during the media storm surrounding the Delaware Court of Chancery’s recent rescission on Elon Musk’s US$55.8-billion equity compensation plan as chief executive officer of Tesla.
Against this backdrop, we believe two clarifications are appropriate. First, superstar CEOs can indeed be paid like it. Second, where warranted, they should be.
When Tesla’s compensation plan was approved by its board and shareholders in early 2018, it was described as a moonshot given the astronomical market capitalization and operational targets the company would need to hit for Mr. Musk to fully cash in. The New York Times noted many experts would contend the milestones were “laughably impossible.”
Although the plan was approved by 73 per cent of Tesla’s TSLA-Q shareholders, a shareholder holding just nine shares challenged the plan, alleging Tesla’s directors had breached their fiduciary duties to the company in awarding it. The Delaware court asked: “Was the richest person in the world overpaid?” Much colourful reading and 201 pages later, it answered, “Yes.” Mr. Musk lost the entirety of the equity he’d earned under the plan.
But what’s critical to appreciate is the court’s ruling doesn’t condemn the plan strictly on its terms. Rather, the court rescinded the plan primarily for numerous serious deficiencies surrounding its approval, including the lack of independence of Tesla’s compensation committee, process flaws in the committee’s development of the plan and inadequate disclosure to shareholders in advance of their vote on the plan.
The committee also should have taken into account Mr. Musk’s existing incentives given his (then) 21.9-per-cent equity stake and the lack of any credible threat that he would leave Tesla if the plan wasn’t approved.
The overall significance is that had the plan been the product of a more impartial, robust and transparent process – including with third-party compensation advisers and a benchmarking analysis tied to comparable companies – its fate could have been different.
More over, given the essential similarity of Delaware and Canadian common law regarding principles of corporate governance, the same should be the case north of the border.
So where does this leave superstar CEOs, compensation committees and shareholders in Canada?
The first (and obvious) lesson is dutifully respecting corporate laws’ applicable guardrails and checks and balances. But just as important, in our view, is that the Tesla-Musk saga shouldn’t detract from the possibility, and in some cases the advisability, of rewarding superstar executives with supersized pay packages where merited (although, admittedly, not necessarily on the same scale as the Tesla plan).
In 2017, Tesla’s market capitalization hovered around US$50-billion, it was at risk of bankruptcy, and it was the U.S.’s most shorted stock: The market was betting decisively against Tesla and Mr. Musk. But by October, 2021, and on the heels of executing an incredibly aggressive strategic business plan, Mr. Musk had propelled Tesla to stratospheric valuations exceeding US$1-trillion. Despite the initial skepticism of almost every analyst and industry expert, the moonshot had landed.
Performance of this nature should be applauded, not derided. Society is better off when we embolden visionaries to go beyond what the market believes is realistic and, if achieved, to reward them handsomely.
It’s easy to read the Delaware ruling and be distracted by the unprecedented and enormous magnitude of the Tesla-Musk plan. The better focus, we think, is the court’s acknowledgment that “Musk was uniquely motivated by ambitious goals and that Tesla desperately needed Musk to succeed in its next stage of development.”
Mr. Musk himself viewed his compensation package at Tesla as the means to achieve his goal of “making life multiplanetary by colonizing Mars.”
Whatever motivates a business leader, whether purely personal financial considerations as per Gordon Gekko of Wall Street, or a desire to safeguard humanity, we’re confident most investors would agree that encouraging the pursuit of ambitious growth is ultimately good for everyone.