‘Sad, if not damning’: Cathie Wood slams proxy companies who say Elon Musk’s $1 trillion pay package is too rich

Wood saying in a Sunday post on Wood’s comments come after two of the largest proxy firms, Institutional Shareholder Services (ISS) and Glass-Lewis, urged shareholders during Tesla’s annual meeting on November 6 to reject the mammoth pay package that would give the world’s richest man 29% of the company, up from 13% currently.

Wood was particularly critical of the relationship between these proxy companies and index funds, which have enormous influence over voting due to the large number of stocks they control for their investors. Each shareholder gets a certain number of votes based on the number of shares he or she owns. However, large institutional investors, including index funds, control massive amounts of shares held by their investors, giving them influence over voting.

“Index funds do not do fundamental research, but they dominate institutional voting. Index investing is a form of socialism. Our investment system is broken,” he added.

While Wood says index funds don’t do research, their parent companies do. The world’s three largest index funds are managed by Vanguard, State Street and BlackRock, and all three conduct extensive research for proxy voting decisions and have their own index funds. proxy voting guidelines that they post. Furthermore, these three funds maintain more than 2 billion dollars They track the S&P 500 index and represent the vast majority of retail traders who invest in the stock market. While index funds don’t conduct research to select stocks, they use their research base to make voting decisions.

Both proxy firms recommended shareholders vote against Musk’s pay package, in part because it dilutes existing investors’ shares and gives Tesla’s highly compensated board too much flexibility when it comes to the targets Musk must meet to get the full payout, 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 sees and apparently suggested that index funds should be stripped of their voting power. The largest holding in ARK Invest’s flagship ETF, ARK Innovation, is Tesla, which makes 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 worry about the ‘tracking errors’ of their indices but don’t care about much else,” Wood wrote in a post that references how closely index funds track indices like the S&P 500.

Russell Rhoads, an associate clinical professor of financial management at Indiana University, said that while investors in an active fund know that their management can drive changes in a company if it is in trouble, the same is not true for passive investors who put their money in index funds.

“Generally, if I put money into a fund, it’s supposed to mirror the index, it’s a passive investment,” he said. “I’m just investing in the market and not trying to influence what other companies are doing in terms of business.”

Tesla, for its part, said in a statement Monday that proxy firms are not considering the previous 2018 pay package approved by shareholders on two separate occasions that allocated $56 billion to Musk 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 drive long-term value at Tesla,” the statement read.

When contacted for comment, representatives from Glass Lewis and the ISS directed Fortune to their respective Tesla representation documents.

Ahead of the proxy firms’ reports, SOC Investment Group, which works with pension funds sponsored by major unions like the International Brotherhood of Teamsters, as well as several Tesla stakeholders, including state financial officials, signed a letter and the Securities and Exchange Commission urged shareholders to vote no on Musk’s pay package earlier this month.

If Musk’s salary is approved and all three board members are re-elected, “this year may be one of the last times that public shareholders will have a meaningful say in the Company and its leadership, given the level of dilution that will likely take place,” the letter argued.

Tejal Patel, CEO of Tesla SOC Investment Group, saidEven though the company claims that Musk needs more incentives to remain committed to Tesla, Musk’s incentives should already align with those of the company whose shares represent the majority of his business. net worth of 455 billion dollars. SOC has openly criticized Tesla and its corporate governance for multiple Musk pay packages for multiple reasons.

“We just don’t think these pay packages are going to really incentivize Mr. Musk to stay at Tesla, or focus on Tesla above his other business projects,” Patel said. Fortune.

Still, Wood said he was confident Musk’s pay package would pass, in part thanks to support from retail investors, who hold around 40% of Tesla voting shares.

“Although proxy firm ISS has recommended against approving the package, retail investors are likely to dominate the vote once again. America!”

(This report has been updated to include a paragraph providing additional context on the scope of research activities of major index funds.)