Mastering The Proxy Statement, Part V (The Electric Boogaloo)

In part one of this series, we learned all about the importance of the annual proxy statement as a “no spin zone” where you can find raw facts, uncompromised by hype or clutter. In later parts, we learned about the kinds of questions that an investor should be asking when reviewing proxy materials. But theory is one thing, and the real world is another. Now let’s take a look at two companies in the wild: Tesla and Rivian. On the surface, the two companies seem very similar, but our proxy analysis will reveal that the two founders chose very different ways to build their similar car companies.

By The Sick Economist

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It’s plain to see: there is not much at all about Elon Musk that one could call “standard.” Between his eleven children by five different women, his stated desire to “die on Mars,” and, yes, his pioneering electric vehicles, God only made one Elon Musk. But would you be surprised to find out that the ownership structure of his company, Tesla, is actually very conventional?

Well, for starters, despite the media’s obsession with Musk and his critical role as Salesman in Chief, Tesla is actually not his company. He has outsized influence for a number of reasons, but his control over the company is not ironclad, and there are conceivable scenarios where he could be fired and/or replaced. All of this information is plainly available in the proxy statement. As of 2023, he owned only 20% of the company, and there was only one class of shares. So on a one share, one vote principle, it would not be impossible for Elon to be outvoted on critical corporate matters, including his own continued employment as CEO. He owns a whole lot of Tesla shares, but there is nothing intrinsically special about his shares that give him an entrenched advantage over somebody else.

As a practical matter, it would be tough to overrule or get rid of Elon at Tesla. It’s a similar situation with Jeff Bezos, who only owns 12.7% of Amazon. There are a few reasons for this

First, although Elon does not own an absolute majority of the votes, he does own much, much more than anybody else. If you check the proxy chart listed above, you will see that Elon alone owns almost triple the percentage of shares of the next largest shareholder, which is the Vanguard Group (6.9%). Elon, alone owns much more than the rest of the board and management combined. So, in a voting situation, Elon’s 20% stake could be overruled, but almost all of the other shareholders would have to vote against him (keeping in mind that millions of shareholders don’t even participate in the voting at all). Elon could be overruled mathematically, but he would really, really have to be wrong on a topic. His 20% ownership, when almost no one else even owns 1%, gives him effective mathematical control, even if not full legal control.

The other reasons why it would be exceedingly hard to overrule Elon would be because he packed the board of directors long ago with his hand picked flunkies. This can also easily be discovered by reviewing the Proxy Statement. Notoriously, of the nine person Board of Directors, there are TWO Musks (Elon and his brother Kimball) and a bunch of big name executives who don’t know much of anything about electric cars or engineering (James Murdoch, the Fox News Scion, one of the co-founders of Airbnb etc). Elon has used his outsized influence over the years to fill the board with his cronies who typically rubber stamp all of his whims. Elon is supervised by his own brother!

(Should be noted that, over the years, Tesla shareholders have enjoyed legendary financial returns, so many are quite content with Elon’s total domination of management).

Lastly, Elon would have a hard time getting fired because….well….he is Elon. His personal brand is very, very closely associated with Tesla. Even the least competent board of directors would have to unearth some pretty disturbing facts before attempting to part ways with one of the world’s most famous executives. So, a Tesla without Elon is pretty unlikely. (However, NOT impossible, as should be noted for later comparison).

RJ Scaringe, AKA “Elon 2.0”

Sometimes it’s not even best to be the first guy who charges into battle. Sometimes it’s better to let somebody else charge into battle, observe their successes and failures, and then charge in after them, having learned from the first sucker’s mistakes. That may well be a good description of Rivian founder RJ Scarvinge.

Watching Elon make history with his first generation electric sedans, RJ learned two lessons. First, while Tesla dominated the burgeoning market for high end electric sedans, they left the market for SUVs wide open. Second, being a standard common stock holder sucks, even if you own a lot of it.

RJ took both lessons to heart. Today, his company Rivian, builds some stunning, premium luxury electrified Sports Utilities Vehicles. And secondly, Rivian really is RJ’s company, even if he has been very sneaky about achieving this goal.

First, RJ fools 95% of all investors by simply making Rivian look like a regular publicly traded company. He has other C-Suite Executives, he has vice presidents, he has a board of directors. The company’s common shares even trade freely on the Nasdaq exchange, and anyone can buy them. He owns 1.4% of the company through these common shares. All very standard stuff.

But what really matters is what you cannot buy on the open market. These are the second, tightly controlled special class of shares, called Class B Shares. Where would an investor find out about the existence of these “secret” shares? You guessed it….Proxy Statement!

RJ may seem a lot like Elon, but when you check out his proxy statement and compare it to Tesla, you see a world of difference. Tesla’s ownership structure is simple and plain. Rivian is all over the place. You will immediately see a variety of different tables, all necessary to explain a complicated ownership structure designed to leave RJ with exclusive control of a company that is mostly owned by the public. CNBC Explains:

Rivian, which is based in Irvine, California, has two classes of stock. Scaringe owns just 1% of Class A shares, or those held by the broader investor base and available for trading. But he owns 100% of Class B shares, and each one has 10 times the amount of voting control as a Class A share.

Add it all up, and Scaringe, who is also chairman of the board, has 9.5% voting control. His veto power is even greater. That’s because in order to make any major changes at the board level or in the company’s bylaws, the holders of at least 80% of Class B shares would have to go along with the move.

So, RJ commands with an iron fist, at a company where he only holds 1.5% overall ownership! Quite a trick. Many investors would not go along with this arrangement if they knew. But it’s all legal, because the ownership structure is all disclosed clearly on the proxy statement. 95% of investors never bother to look, and even if they do look, they certainly don’t read the fineprint next to the chart that explains the magical abilities of RJ’s 100% ownership of the class B shares. Many would say that RJ purposely designed a baroque, complex ownership structure designed to fool your average investor into thinking that RJ is just an average guy. But then again, is it RJ’s fault if most investors don’t bother to read what is plainly printed on the page?

In the last part of this post, we will see how different incentives have lead directly to a different suite of actions by these two leaders. An experienced investor could have seen it all coming just by reviewing the proxy statements and asking the right questions.