“It’s simply too, too risky for the type of longevity we want to see in a company,” Marcela Pinilla, director of sustainable investing at Zevin Asset Management LLC, said in an interview ahead of the SpaceX initial public offering.
Zevin is among a group of investors — some niche, some big — publicly voicing their concerns about the norm-breaking governance structure that shareholders of SpaceX will face. The initial public offering gives Musk more than 80% of the voting rights while also making him chief executive and chief technical officer, as well as chair of the board. He is in effect the only person who can remove himself as CEO.
“This is a company that cannot be sued, cannot be sold, cannot be contested,” Pinilla said. “As shareholders, you’d have to own $52 billion in shares of a company — that is about 3% — to raise any issues with the board,” because of the rules that apply in Texas, where SpaceX is incorporated, she said.
Nell Minow, co-founder and chair of ValueEdge Advisors LLC, said the SpaceX IPO “extinguishes shareholder rights entirely, all but eliminating the right to bring a lawsuit for failure to meet fiduciary standards, cutting off access to books and records.”
A Bloomberg request for comment from SpaceX, sent by email, went unanswered.
Zevin joins $25 billion Danish pension fund, AkademikerPension, whose chief investment officer last month said SpaceX is not only “grossly overvalued” but also marred by a “catastrophic governance structure.”
In an interview with Bloomberg Television’s Oliver Crook on Friday, AkademikerPension CIO Anders Schelde said retail interest in the IPO reflects a “fear of missing out” at a time when a sober assessment of the risks is what’s needed.
SpaceX is a “very risky endeavour,” Schelde said. “Over the coming years, many things can and will go wrong,” and good governance “becomes critically important in adverse scenarios.”
In the UK, EdenTree Investment Management has also said it will stay away. SpaceX’s intended governance structure would “reduce the protections available to minority investors,” said Hayley Grafton, senior sustainable investment analyst at EdenTree, which oversees about $4.3 billion.
EdenTree isn’t comfortable allocating client assets “to a structure where weak investor protections appear to be the price of admission,” Grafton said.
In the US, public pension funds have voiced their alarm at the apparent disregard for regular shareholders, they say Musk is showing.
“I understand that we are in an era of founders wanting more control,” New York City Comptroller Mark Levine said in an interview. But what Musk is planning with SpaceX “is way beyond what we’ve seen.”
And on Tuesday, the Council of Institutional Investors sent a letter to SpaceX outlining its concerns about shareholder rights and corporate governance. The nonprofit, whose members include some of the biggest US public pension funds, said it was urging SpaceX to “reconsider” several governance provisions.
Such misgivings add to questions around SpaceX’s valuation articulated by some high-profile individual investors. Veteran short seller James Chanos suggested the size of the IPO “for a company with revenues of $19 billion and negative free cash flow” should give investors pause.
“This is really a hopes-and-dreams IPO,” Chanos said at the iConnections Global Alts conference in New York, at which more than 2,500 institutional allocators and fund managers were gathered.
For now, however, there appear to be more than enough investors willing to pile their money into the company. SpaceX made history on Thursday with the biggest-ever IPO, sending it into the top ranks of the largest public companies and putting Musk on the verge of becoming the world’s first trillionaire.
With less than $1 billion under management, Zevin is far too small to make a dent on the surface of SpaceX’s mega IPO. But Pinilla is framing her warning as one specifically intended for investors for whom the question of stewardship is important. She says SpaceX is the latest example in an ongoing trend in which the rights of smaller shareholders are being overlooked.
Minow of ValueEdge says she’s advising clients asking about the SpaceX IPO “not to buy the stock or the indexes,” because, in her view, the company’s offering “extinguishes shareholder rights entirely.”
Instead, Minow says she’s “recommending that large institutional investors tell their financial institutions to create new indexes” that exclude SpaceX.
There are also concerns that the precedent set by SpaceX may serve to normalise the dilution of shareholder protections.
Natasha Landell-Mills, head of stewardship at Sarasin & Partners, says the asset manager is “deeply concerned by weakening governance standards generally, and SpaceX is only adding to the negative direction of travel.”
She goes so far as to link this trend with a pattern of conduct that presaged the financial crisis of 2008.
“Shareholder accountability was found to be seriously wanting in the financial crisis of 2007/08, spurring over a decade’s worth of reforms to ensure more effective corporate governance and investor stewardship,” Landell-Mills said. “It seems the pendulum has swung back.”
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