Elon Musk’s $56 billion remuneration package for Tesla has sparked significant controversy, drawing attention due to its sheer size and Musk’s ‘superstar CEO’ status. The package was rejected for a second time in December, despite 72% of shareholders voting in favour of Musk’s historic payday. But, despite attempts to justify the package through shareholder approval, the underlying judicial concerns remain: the process was marred by significant governance flaws.

The governance flaws were first addressed by Delaware judge Kathaleen Saint Jude McCormick, who rejected the proposal in January 2024. Musk’s influential role in the negotiations was exposed and it raised questions about conflicts of interest, compromising the independence of the board.

Judge McCormick also highlighted that the process was marred by “multiple, material misstatements” in Tesla’s proxy statement, which misled shareholders and compromised the approval process. According to the court’s decision, these failures reflected a breach of the board’s fiduciary duty to act in the best interests of all shareholders.

Tesla’s attempt to address the judge’s initial rejection with a second shareholder vote feels like a separate and somewhat deflective argument. By itself, the premise that shareholders, rather than judges, are the rightful decision-makers for companies, has merit—especially when the 72% shareholder vote in favour of the package is considered.

Yet shareholder approval alone cannot override prevailing directors’ duties and validate a process riddled with conflicts and misstatements. Boards cannot sidestep accountability simply because a majority of shareholders vote “Yes”. Minority shareholders, too, have rights, and courts exist to ensure that fiduciary duties are upheld for the protection of all investors.

When confronted with such an excessive remuneration figure, it’s no wonder questions about the fiduciary responsibility of directors have emerged. To put it into context, even if Musk earned $1 million every single day, it would still take more than 150 years to accumulate such earnings. The sheer scale of such an excessive sum, notwithstanding that it was based on extremely hard-to-reach targets, raises issues about proportionality and the independence of the board’s judgement.

Pay checks and balances

Directors and shareholders might believe they can agree to any arrangements by majority vote, but when minority shareholders object, directors must demonstrate that proper checks and measures were in place. They need to ensure that proper process has been correctly followed and that they have appropriately discharged their duties at all times. Unfortunately for Musk, the courts have found that this was not the case here.

The overwhelming vote majority demonstrates Musk’s immense influence, which has been both a blessing and a liability for Tesla. While Musk’s leadership is often seen as indispensable, it also makes him a magnet for controversy. Musk’s outspoken and unorthodox approach has entangled him in controversies of his own making, including conflicts of interest, governance challenges and clashes with the US Securities and Exchange Commission.

The implications of this ruling go beyond Tesla and the unparalleled reward Musk would be receiving. It brings into question the broader issue of how public companies determine executive compensation. Robust governance processes—including transparency, independence and accountability—are essential to safeguard shareholder interests and maintain trust.

Without these processes in place, companies risk undermining corporate governance procedures, trust and the law. In this case, it shows that neither money nor influence can override the rule of law.

While a $56 billion pay package is an extreme case, the lessons from Tesla’s missteps are universal, particularly against the background of escalating executive remuneration proposals elsewhere. Boards must resist undue influence, prioritise process integrity and ensure that decisions are made with due care and independence.

Regardless of how ambitious or unprecedented the performance targets may be, directors’ duties cannot be compromised.

Failure to maintain integrity and accountability risks not only costly legal challenges but also the effectiveness of the very incentives that are put in place to encourage executives to drive performance. If they believe that such incentives may not hold water if put to the test, executives may lose confidence in them altogether.

Bernadette Young is director and co-founder of consultancy Indigo Governance