‘Sad if not damning’: Cathie Wood blasts brokerages who say Elon Musk’s $1 trillion pay packet is way too rich

Wood quoth in Sunday’s post X that it was « sad, if not sad » that proxy firms that make recommendations about how shareholders should vote at corporate annual meetings have so much influence. Wood’s comments came after two of the main brokerages, Institutional Shareholder Services (ISS) and Glass-Lewis, urged shareholders at Tesla’s annual meeting on Nov. 6 to reject a giant pay package that would give the world’s richest man 29 percent of the company, up from about 13 percent now.

Wood specifically criticized the relationship between these brokerage firms and index funds, which have a large influence on voting due to the large number of shares held by their investors. Each shareholder gets a certain number of votes based on how many shares they own. Yet large institutional investors, including index funds, control vast amounts of shares held by their investors, giving them the power to vote.

« Index funds do no basic research, yet dominate institutional voting. Index-based investing is a form of socialism. Our investment system is broken, » he added.

While Wood claims index funds don’t do research, their parent companies definitely do. Managed by the world’s three largest index funds Vanguard, State Streetand BlackRockand all three conduct extensive research on proxy voting decisions and have their own instructions for voting by proxy that they publish. These three funds also contain over $2 trillion tracks the S&P 500 index and represents the majority of retail investors invested in the stock market. Although index funds do not conduct research to select stocks, they use their research base for voting decisions.

Both proxy firms recommended that shareholders vote against Musk’s pay package in part because it dilutes existing investors’ shares and gives Tesla a very rewarding board too much flexibility in terms of the goals Musk must meet to get a full profit, which is roughly equal to the company’s total market capitalization.

In another series of posts, Wood added that ISS and Glass Lewis don’t see the potential in Tesla that ARK Invest does, seemingly suggesting that index funds should be stripped of voting power. The largest holding in ARK Invest’s flagship ARK Innovation ETF is Tesla, making up about 12% of its $8 billion portfolio.

« I think history will decide that Glass Lewis and ISS have been a threat to innovation, enabling passive investors who care about index ‘tracking errors’ but don’t care about much else, » Wood wrote in a post that refers to how closely index funds track indices such as the S&P 500.

Russell Rhoads, a clinical assistant professor of finance at Indiana University, said that while investors in an active fund know that its management may demand changes to the company if it struggles, the same is not true for passive investors who put their money in index funds.

« Usually if I put money into a fund, it’s supposed to mirror an index, it’s a passive investment, » he said. « I’m just investing in the market and I’m not trying to influence any business of other companies. »

Tesla, meanwhile, said in a statement on Monday that the proxy companies will not consider the previous 2018 pay package, which was approved by shareholders on two separate occasions and awarded Musk $56 billion over 10 years. Both ISS and Glass Lewis also recommended voters reject the 2018 pay package.

« Glass Lewis’ one-size-fits-all checklists undermine shareholder interests, including by opposing proposals designed to build long-term value for Tesla, » the statement said.

When reached for comment, representatives from Glass Lewis and ISS referred Luck to Tesla’s power of attorney.

Ahead of the brokerages’ reports, SOC Investment Group, which works with pension funds sponsored by major unions such as the International Brotherhood of Teamsters, as well as a number of parties interested in Tesla, including state finance officials, signed off on the deal letter with the Securities and Exchange Commission urging shareholders to vote no on Musk’s pay package earlier this month.

If Musk’s pay is approved and the three board members are re-elected, « this year may be the last time public shareholders have a meaningful voice in the Company and its leadership, given the dilution likely to occur, » the letter claims.

Tesla shareholder group SOC Investment Group CEO Tejal Patel said although the company claims that Musk needs more incentives to stay with Tesla, Musk’s incentives should already be in line with the company whose stock represents the majority of his holdings. A net worth of $455 billion. SOC has been vocal in its criticism of Tesla and its management over several Musk pay packages for a number of reasons.

« We just don’t think these pay packages really incentivize Mr. Musk to stay at Tesla and not focus on Tesla because of his other business ventures, » Patel said. Luck.

Still, Wood said he’s confident Musk’s pay package will go through, in part because of the backing of private investors, who have about 40% of Tesla’s voting rights.

« Although brokerage 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 that provides additional context on the scope of the research activities of major index funds.)