‘Novel and extreme’: Analysts calls out SpaceX governance days before IPO
Analysts and major institutional investors have expressed alarm over the corporate governance of SpaceX as its Wall Street debut creeps closer.
The concerns from institutional investors, in particular public pension funds, over corporate governance at Elon Musk’s space tech company “run deep”, with firms in New York and California deeming the structure “novel and extreme”.
Danish pension fund, Akademiker Pension, also opted to exclude SpaceX as a potential investment, denouncing its “catastrophic governance structure” alongside its “grossly overvalued” price tag.
Pension funds cited the board being seen as too close to Musk to effectively challenge on behalf of minority shareholders and related-party transactions which includes deals between SpaceX and other Musk controlled entities, raising red flags in terms of conflicts of interest.
Investors also question the decision to incorporate in Texas, where corporate laws are seen to hand greater powers to managers at shareholders’ expense as their reasons for mistrusting SpaceX.
These frustrations have previously been echoed by shareholders of Musk’s other public company, Tesla.
Dual share concerns
Morningstar’s director of institutional content, Lindsay Stewart, warned that SpaceX’s dual class share structure must be “the focus of attention” for institutional investors going forward, in the research firm’s latest insights, as the firm’s listing inches closer.
Unlike Tesla, SpaceX intends to list with a dual class share scheme which will grant Musk, alongside a few other SpaceX insiders, 10 votes per Class B share they hold, instead of the single vote applicable to each Class A share which is sold to the public, createing a power imbalance between ownership and voting power.
Stewart said: “Dual class share schemes have long been a point of consternation for governance-focused institutional investors, and the issue seems to keep coming back onto the agenda.
“I first covered this issue five years ago… observing that dual class share schemes allow management to control a company with only a thin sliver of the equity.
“Musk has long expressed a desire for greater control of Tesla, so it appears that he has got his way this time with SpaceX.”
The Council of Institutional Investors, a US asset owner group, has previously called out this model, arguing it allows “founders to wield control far beyond their equity stake”, with others arguing the structure can “damage long-term value creation”.
Insider concentration
At first glance, it appears SpaceX has copied the model used at tech giants Alphabet and Meta, who are the owners of Google and Facebook respectively.
Both also have a 10:1 voting ratio for Class B shares owned by founders, but at SpaceX Class B shares account for a larger proportion of the overall share count, compared to Alphabet and Meta.
At SpaceX it amounts to 44 per cent of the share count, compared to seven per cent at Alphabet and 13 per cent at Meta.
Stewart said: “The effect of this is such that in one scenario… Musk could sell 51% of his total stake in SpaceX, worth as much as $445 billion at the company’s targeted valuation, or $195 billion at Morningstar’s analysts’ estimate, and still retain control of the company alongside the other Class B shareholders.
“Consequently, we regularly see very high support from independent shareholders for resolutions calling for the termination of dual class share schemes.”
Stewart also anticipates shareholder opposition to the structure at the first public shareholder meeting, alongside “other perceived governance shortcomings”.
Valuation slashed
Morningstar also threw SpaceX into the spotlight last week, after slashing its valuation to less than half of what the firm is seeking.
Analysts pinned their decision on concerns of its AI capabilities and “technological uncertainties” which fall out of the company’s control including problems with Starlink and telecommunications.
Stewart said: “There’s a wide range of approaches being taken here, and no obvious “right” answer.
“But institutional investors will doubtless be watching closely to see the net effect of all this on SpaceX’s and the wider market’s performance in the coming months and years.
And they will have concerns over whether any perceived success with SpaceX’s unconventional approach to corporate governance would serve as a signal to other companies to follow the same path.”