Elon Musk’s $1 trillion pay package and the race to the bottom among states with weak corporate governance laws

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Good morning. For Elon Musk, the Texas gambit seems to person worked—great quality for Musk, atrocious quality for shareholders of U.S. companies.

At Tesla’s yearly gathering connected Thursday, shareholders voted successful favour of giving CEO Musk a gargantuan, record-shattering wage bundle that could springiness him banal worthy $1 trillion aft respective years. It’s each upside for Musk; nether the package’s rules helium has thing to lose. But the backstory of however helium got determination is worrisome.

Very briefly: In 2018, the Tesla committee of directors gave Musk a 10-year wage bundle that could bring him, if helium met definite fiscal targets implicit 10 years, arsenic overmuch arsenic $55.8 billion—a caller grounds for CEO wage astatine the time. A Tesla idiosyncratic shareholder sued Musk and the Tesla committee for breaching their fiduciary duties. After years of litigation, a justice successful Delaware, wherever Tesla was incorporated similar astir large U.S. companies, ruled against Tesla and Musk, invalidating the wage package. Other corporations began to fearfulness that Delaware mightiness nary longer beryllium the champion spot to incorporate. In response, Delaware past March passed a instrumentality to marque the authorities much alluring, to which Texas rapidly counter-punched with an adjacent friendlier law. Key feature: Lawsuits against companies similar the suit successful Delaware tin beryllium initiated lone by shareholders who clasp astatine slightest 3% of the company’s shares. The lone idiosyncratic with much than 3% of Tesla is Musk. This summer, Tesla near Delaware and incorporated successful Texas, wherever the company’s committee promptly offered Musk the new, eye-popping wage package.

Supporters of the wage package, which seemingly received 75% of the shareholder votes astatine the meeting, volition reason that it aligns absorption and shareholder interests (to get the trillion-dollar payout, Musk indispensable conscionable a bid of milestones, including boosting Tesla’s marketplace headdress to $8.5 trillion from its existent $1.5 trillion). But what’s bully for corporations and absorption is not ever bully for shareholders, and rules similar the Texas 3% threshold insulate companies from accountability—they whittle distant shareholder protections, specified arsenic the close for immoderate shareholder to writer a company. And successful doing so, they minimize the judiciary’s relation successful overseeing firm conduct, weakening the strategy that has built the bonzer U.S. economy.

This communicative was primitively featured connected Fortune.com