Vanguard switched from anti stance to help push Musk’s pay package

A shift in opinion by Vanguard, Tesla’s largest outside investor, played a pivotal role in passing a record-setting pay arrangement for CEO Elon Musk during the company’s annual meeting on Thursday, according to Reuters.

The newswire reported that the index investing behemoth voted in favor of CEO Elon Musk’s $56 billion compensation package, citing Tesla's performance as a key factor.

In a note reviewed by Reuters, Vanguard said it initially opposed Musk’s compensation package when it was first proposed and approved by shareholders in 2018. At that time, it was primarily concerned about the potential size of the pay relative to Tesla’s performance metrics.

Musk's compensation package was invalidated by a Delaware judge in January, necessitating a new vote on the issue Thursday. Despite opposition from top proxy advisers and significant investors who said it was excessive, Vanguard voted in support of a massive payday for Musk.

"Given the strong alignment of executive pay with shareholder returns since 2018 and the benefits the board asserted related to the motivational value for the CEO in preserving the original deal," Vanguard-advised funds voted for the compensation package, as per the note.

Vanguard held 232 million Tesla shares as of March 31, representing about 7 percent of the company, second only to Musk's 13 percent stake. While some externally-managed Vanguard funds cast their votes separately, a Vanguard spokesman told Reuters that the note's details applied to most of its funds.

Tesla leveraged its substantial retail shareholder base to endorse Musk's pay and other proposals, including the re-election of two directors and the relocation of the company’s incorporation to Texas. Vanguard, managing assets totaling approximately $9 trillion, and other major index fund managers were pivotal in the voting process.

Vanguard acknowledged that Musk’s pay was "a substantial outlier" among CEOs but justified its support by highlighting Tesla's performance.

"Tesla's shareholder return was in the 98th percentile of all Russell 3000 companies from 2018 through 2023," Vanguard stated. "There are few companies that have created as much absolute market value appreciation as Tesla."

It also supported the proposal to shift Tesla's incorporation to Texas, noting, "we did not note material differences in shareholder rights between the state of Delaware and the state of Texas."

In the leadup to Thursday’s vote, a coalition of stakeholders expressed significant concerns about approving Musk's pay package and the relocation to Texas.

"If these proposals are adopted, they could set a terrible precedent that could encourage others to disregard court rulings meant to protect shareholders from self-serving CEOs and captured boards," the coalition, which included the American Association for Justice, Americans for Financial Reform Education Fund, and Consumer Federation of America, said in a Tuesday statement.

The statement also highlighted other risks, such as the potential for companies to shop for “favorable law” in incorporating, as well as the “mostly untested” experience of judges in Texas and Nevada with respect to shareholder rights.

"This could have deep ramifications for American investors broadly, as the courts in these states could make it more difficult to achieve positive outcomes in private securities cases seeking to enforce investor protections and good corporate governance principles," the statement read.