SAN FRANCISCO -- The largest proxy advisory firm is recommending that investors reject two of Tesla Inc.'s board members, while also supporting a proposal to split the role of chairman and CEO -- jobs now held by Elon Musk, the public face of the electric-car maker.
By opposing directors Antonio Gracias and James Murdoch, and seeking to install an independent chairman, Institutional Shareholder Services is ratcheting up the pressure on Tesla to reform its nine-member board in the wake of production delays on its mass-market Model 3.
"Shareholders would benefit from the strongest form of independent board oversight in the form of an independent chair," ISS wrote in a report to clients.
Three of Tesla's nine directors are up for re-election when shareholders meet at their annual gathering June 5: private equity investor Gracias; Murdoch, the CEO of Twenty-First Century Fox and son of media mogul Rupert Murdoch; and Kimbal Musk, a food entrepreneur who is Musk's younger brother.
ISS is urging a vote against Gracias over concerns about the executive-pay program's lack of performance-based elements, and against Murdoch because he is "overboarded" by serving on too many other boards. They believe that a vote for Kimbal Musk is warranted.
"Gracias was previously categorized as independent, but he is now categorized as non-independent because Valor Management Corp., of which Gracias is CEO and majority owner, provided consulting services to Tesla in 2017," ISS wrote, noting that VMC provided Tesla consulting services relating to "operational optimization" and was reimbursed over $34,000 for those services.
ISS notes that Tesla has struggled to mass manufacture the Model 3 sedan and the company's own filings state that "failure to achieve cost and volume targets for Model 3 production, as well as quality expectations, could have a material adverse impact on the company's business, prospects, operating results and financial condition."
"In these circumstances, it is important that the board of directors take steps to ensure that management remains focused on resolving the manufacturing challenges, and that the CEO and other executives do not get distracted by outside business interests or Twitter fights," wrote ISS. "This is one factor that drives ISS to recommend support for the shareholder proposal calling for an independent board chair."
The CtW Investment Group, an activist group that works with union pension funds and which previously laid out a case against all three directors up for re-election, supported the ISS recommendations in an email Saturday.
"This is a wake up call for Tesla's board," said CtW Investment Group Executive Director Dieter Waizenegger. "To fulfill the company's great promise, the board needs to refresh to effectively oversee manufacturing, human capital management and regulatory challenges."