‘Sad, even damning’: Cathie Wood slams proxy firms that say Elon Musk’s $1 trillion pay package is just too rich

Wood said in an article published Sunday on Wood’s comments come after two of the largest proxy firms, Institutional Shareholder Services (ISS) and Glass-Lewis, urged shareholders at Tesla’s Nov. 6 annual meeting to reject the massive pay package that would give the world’s richest man 29 percent of the company, up from about 13 percent currently.

Wood was particularly critical of the relationship between these proxy firms and index funds, which have outsized influence over voting because of the large number of stocks they control for their investors. Each shareholder has a certain number of votes depending on the number of shares they own. Yet large institutional investors, including index funds, control massive amounts of shares owned by their investors, giving them influence over voting.

“Index funds do no fundamental research, but dominate institutional voting. Index investing is a form of socialism. Our investment system is broken,” she added.

Although Wood says index funds don’t do research, their parent companies absolutely do. The world’s three largest index funds are managed by Vanguard, State Street and BlackRock, and all three conduct extensive research on proxy voting decisions and publish their own proxy voting guidelines. Additionally, these three funds hold over $2 trillion tracking the S&P 500 Index and represent the vast majority of retail traders invested in the stock market. Although index funds do not conduct research to select stocks, they use their research base to make voting decisions.

Both proxy firms have 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 on the goals 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 Tesla’s potential the way ARK Invest does and apparently suggested that index funds should be disenfranchised. The largest holding in ARK Invest’s ARK Innovation ETF is Tesla, which makes up about 12% of its $8 billion portfolio.

“I believe history will decide that Glass Lewis and ISS have been threats to innovation, enabling passive investors who worry about ‘error tracking’ in their indexes but don’t care about much else,” Wood wrote in an article referencing how index funds closely track indexes such as 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 its management can push for changes in a company if it is in trouble, the same is not true for passive investors who put their money in index funds.

“Typically 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 anything on what other companies are doing in business terms.”

Tesla, for its part, said in a statement Monday that proxy firms did not take into account the previous 2018 compensation plan approved by shareholders twice and which allocated $56 billion to Musk over 10 years. ISS and Glass Lewis also recommended that voters reject the 2018 wage plan.

“Glass Lewis’ universal checklists harm shareholder interests, including opposing proposals designed to create long-term value at Tesla,” the statement said.

When contacted for comment, Glass Lewis and ISS representatives ordered Fortune to their respective Tesla proxy documents.

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

If Elon Musk’s compensation is approved and all three board members are re-elected, “this year could be one of the last times that public shareholders will have a meaningful voice in the company and its management, given the level of dilution that is likely to take place,” the letter states.

Tejal Patel, executive director of Tesla shareholder group SOC Investment Group, said Although the company says Musk needs more incentives to stay engaged with Tesla, Musk’s incentives are already expected to align with those of the company whose shares make up the bulk of his $455 billion net worth. SOC has sharply criticized Tesla and its corporate governance for several of Musk’s compensation packages for several reasons.

“We just don’t think these salaries are really going to incentivize Mr. Musk to stay at Tesla, or to focus on Tesla at the expense of his other business activities,” Patel said. Fortune.

Wood nevertheless expressed confidence that Musk’s salary plan would pass, in part thanks to the support of retail investors, who own about 40% of Tesla’s voting shares.

“Even though proxy firm ISS came out against the package, retail investors are expected to once again dominate the vote. America!”

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