Governance and culture at the heart of Tesla’s Annual Meeting (TSLA)

A change in board composition and mandatory arbitration agreements would affect Tesla, Inc. (TSLA) in mind when they meet for the company’s annual board meeting on October 7.

The meeting takes place at an interesting moment in the evolution of the company. After years of being the underdog in the auto industry, Tesla is poised to become a serious challenger to established automakers. It recently reported record numbers, despite a plethora of problems from the pandemic. Investors are betting their money on Tesla during the pandemic, pushing the company’s stock price into high gear and making it the most valuable automaker in the world.

That wave has also drawn renewed attention to Tesla’s governance and workplace culture. There are two issues in particular that have caught the attention of shareholders.

A focus on mandatory arbitration agreements

Tesla’s rapid growth over the past decade has often come at the expense of workplace culture. Over the years, there have been several complaints of gender and race discrimination within the company. For example, a California jury yesterday ordered Tesla to pay about $137 million to Owen Diaz, a former employee who was the victim of racial abuse while working as an elevator operator at the company’s factory in Fremont, California. That order comes less than two months after Tesla paid out $1 million to another African-American employee in an arbitration proceeding.

Tesla has largely sidestepped the consequences of such cases by relying on mandatory arbitration agreements, which employees sign when hired. Such agreements prohibit employees from suing the company in public courts and force them to resolve their grievances in private closed-door arbitration. (Diaz did not sign the agreement when he was hired.)

Nia Impact Capital, a Tesla shareholder, has submitted a board proposal asking the company to prepare a report to study the impact of mandatory arbitration on Tesla’s employees and workplace culture.

The use of mandatory arbitration provisions limits employees’ remedies for misconduct, prevents employees from suing when discrimination and harassment occurs, and can keep underlying facts, misconduct or the outcome of a case secret and thereby prevent employees from learning about shared concerns and acting on it,” the company stated, adding that Tesla’s use of such an agreement “is of particular concern given past allegations of sexual and racial harassment and discrimination.”

The proposal could change Tesla’s workplace culture and require more disclosure from the company. Unlike other automakers, Tesla does not release workforce composition data. It also does not include measures of diversity and inclusion in its annual report.

Proxy consulting firm Institutional Shareholding Service (ISS) supports Nia’s proposal and has asked shareholders to vote in favour. According to an SEC filing, Nia Impact Capital owns 923 shares of Tesla’s common stock. It submitted an identical proposal, which was rejected last year.

A change in the composition of the board

ISS also recommends that Tesla’s board of directors oppose the re-election of Kimbal Musk, brother of restaurateur and CEO Elon Musk, and James Murdoch, executive chairman of Newscorp Inc. performance criteria.” In other words, they have gained significant equity with no associated performance targets.

The company has also characterized Tesla as a “higher risk” company to board governance because of its governance structure and rights. Tesla has nine board members. Kimbal Musk and James Murdoch are listed as independent members.

Tesla board members have previously been accused of not being assertive enough in the face of Musk’s repeated clashes and violations with regulatory authorities. ISS made a similar proposal against the election of Murdoch and Antonio Gracias in 2018, but Tesla shareholders rejected that move.