Investor Cathie Wood, a longtime Tesla bull known for first investing in the company a decade ago at $13 a share, decried growing opposition to Tesla CEO Elon Musk’s potential $1 trillion pay package. Over the weekend, the CEO of ARK Invest suggested that the problem lies with the financial system, which allows it to be countered, rather than a company that wants to make the world’s richest man richer on such a scale.
Wood told X on Sunday that it was “sad, if not reprehensible” that proxy advisory firms, which make recommendations on how shareholders should vote at annual company meetings, have such a large influence. Wood’s comments came after two major proxy firms, Institutional Shareholder Services (ISS) and Glass-Lewis, called on shareholders at a November 6 meeting. at Tesla’s annual meeting to reject a massive pay package that would have given the world’s richest man a 29% stake in the company, down from his current 13%.
Wood was particularly critical of the relationship between these proxy firms and index funds, which have significant voting power because of the large number of shares held by investors. Each shareholder gets a certain number of votes based on the number of shares he owns. But large institutional investors, including index funds, control vast amounts of shares held by investors, which gives them voting power.
“Index funds do not perform fundamental research, but dominate institutional voting. Index-based investing is a form of socialism. Our investment system is broken,” she added.
While Wood says index funds don’t do research, their parent companies absolutely do. The three largest index funds in the world are managed by Vanguard, State Street and BlackRock, and all three conduct extensive research on proxy voting decisions and have their own proxy voting guidelines that they publish. In addition, these three funds have more than $2 trillion in assets tracking the S&P 500 index and represent the majority of retail traders investing in the stock market. Although index funds do not conduct research to select stocks, they use their research base to make voting decisions.
Both proxies recommended that shareholders vote against Musk’s pay package, in part because it dilutes existing investors’ shares and gives Tesla’s highly paid board too much flexibility when it comes to the goals Musk must meet to receive the full payout, which is roughly equal to the company’s total market cap.
In another series of announcements, Wood added that ISS and Glass Lewis don’t see the potential in Tesla that ARK Invest does, and appeared to suggest index funds should be stripped of their voting rights. ARK Invest’s flagship ARK Innovation ETF’s largest holding is Tesla, which makes up about 12% of its $8 billion portfolio. USD portfolio.
“I think history will dictate that Glass Lewis and ISS threatened innovation by enabling passive investors who care about ‘following the bugs’ in their indexes but don’t care about much else,” Wood wrote in his post, referring to how closely index funds track indexes like the S&P 500.
Russell Rhoads, a clinical assistant professor of financial management at Indiana University, said that while investors in an active fund know that managing it can spur a company’s turnaround if it’s struggling, the same is true for passive investors who put their money in index funds.
“In general, if I put money into a fund, it should reflect the index, it’s a passive investment,” he said. “I just invest in the market and I don’t try to influence the activities of other companies.
For its part, Tesla said in a statement on Monday that the authorized companies are not considering the previous 2018. a pay package approved by shareholders on two separate occasions that paid Musk $56 billion over 10 years; Both ISS and Glass Lewis also recommended voters reject 2018. salary package.
“Glass Lewis’ one-size-fits-all checklists are detrimental to shareholder interests, among other things, at odds with proposals designed to create long-term value for Tesla,” the statement said.
Representatives for Glass Lewis and ISS said when reached for comment Fortune to the relevant Tesla proxy documents.
Before filing the proxy statements, SOC Investment Group, which works with pension funds backed by major unions such as the International Brotherhood of Teamsters, as well as several parties interested in Tesla, including state finance officials, signed a letter with the Securities and Exchange Commission urging shareholders to vote against Musk’s pay package earlier this month.
If Musk’s pay is approved and the three board members are up for re-election, “this year could be one of the last times that public shareholders have a meaningful voice in the Company and its management, given the potential level of dilution,” the letter said.
Tejal Patel, chief executive of Tesla shareholder group SOC Investment Group, said that despite the company’s claim that Musk needs more incentives to stay with Tesla, Musk’s incentives should already be in line with the company, whose shares make up most of his $455 billion. part of the net worth of USD. SOC has been vocal in its criticism of Tesla and its corporate governance over Musk’s multiple pay packages for several reasons.
“We just don’t believe that these pay packages will really motivate Mr. Musk to stay at Tesla and not focus on Tesla over his other business endeavors,” Patel said. Fortune.
Still, Wood said she was confident Musk’s pay package would pass, in part because of the support of retail investors who own about 40% of Tesla’s voting shares.
“While proxy firm ISS has recommended against the package, retail investors are likely to dominate the vote again. America!”
[This report has been updated to include a paragraph providing additional context on the extent of the major index funds’ research activities.]
This story originally appeared on Fortune.com
