(Bloomberg) — New York City Comptroller Mark Levine says the unprecedented control that Elon Musk will have over SpaceX represents a new level of disregard for regular shareholders\u2019 rights.<\/p>\n
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\u201cI understand that we are in an era of founders wanting more control,\u201d Levine said in an interview. But what Musk is planning with SpaceX \u201cis way beyond what we\u2019ve seen.\u201d<\/p>\n
\u201cThere\u2019s no precedent for this,\u201d he said.<\/p>\n
SpaceX, which is due to go public this week, is drawing a frenzy of interest from investors desperate to participate in what is set to be the biggest initial public offering ever undertaken. But buying into the company requires accepting a governance structure that gives Musk roughly 80% of the voting rights, while also making him chief executive and chief technical officer, as well as chair of the board.<\/p>\n
SpaceX\u2019s Mission:<\/p>\n
\u201cOur mission is to build the systems and technologies necessary to make life multiplanetary, to understand the true nature of the universe, and to extend the light of consciousness to the stars. To do this, we have formed the most ambitious, vertically integrated innovation engine on (and off) Earth with unmatched capabilities to rapidly manufacture and launch space-based communications that connect the world, to harness the Sun to power a truth-seeking artificial intelligence that advances scientific discovery, and ultimately to build a base on the Moon and cities on other planets.\u201d<\/p>\n
Not investing in SpaceX, which is already forcing markets to adjust around it, isn\u2019t easy for a large, index-tracking investor.<\/p>\n
Levine, whose job entails overseeing about $300 billion in both actively and passively managed portfolios in New York city\u2019s public pension funds, says it would be \u201cvery complicated\u201d to exclude SpaceX.<\/p>\n
\u201cWe\u2019ve never divested from a single company,\u201d he said. \u201cWe\u2019ve done sector-based exclusion only,\u201d so blacklisting SpaceX \u201cwould be unprecedented for us and it is not simple.\u201d<\/p>\n
Instead, Levine says he plans to push for a more democratic corporate governance process from within.<\/p>\n
Musk can\u2019t be allowed to \u201cdisempower\u201d shareholders, he said, adding that investment professionals in New York have told him they want him to \u201ckeep fighting on this.\u201d<\/p>\n
A Bloomberg request for comment from SpaceX, sent by email, went unanswered.<\/p>\n
Levine, along with Marcie Frost, chief executive of California Public Employees\u2019 Retirement System, and Thomas DiNapoli, the State of New York Comptroller, last month raised \u201cserious concerns\u201d about the \u201cextreme governance structure\u201d at SpaceX. Their letter, sent to Musk a week before the May 20 IPO filing, received no answer, Levine said.<\/p>\n
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\u2019s urging SpaceX to \u201creconsider\u201d several governance provisions before completing its offering.<\/p>\n
SpaceX Voting Profile vs. Mag 7<\/p>\n
The SpaceX IPO is already oversubscribed, with the offering expected to price on June 11 and begin trading the following day. The $75 billion being sold this week values the company at roughly $1.8 trillion.<\/p>\n
For some ESG-focused investors, governance concerns have proved a dealbreaker. AkademikerPension, a Danish pension fund with $25 billion in assets, said at the end of May it won\u2019t be participating in the IPO. Not only is SpaceX \u201cgrossly overvalued\u201d but it also has a \u201ccatastrophic governance structure,\u201d AkademikerPension Chief Investment Officer Anders Schelde said on May 29. The fund will also exclude SpaceX via passive, index-tracking investments, he said.<\/p>\n
In the UK, EdenTree Investment Management told Bloomberg it\u2019s expecting to stay away from the IPO. SpaceX\u2019s intended governance structure would \u201creduce the protections available to minority investors,\u201d said Hayley Grafton, senior sustainable investment analyst at EdenTree, which manages around $4.3 billion in assets.<\/p>\n
\u201cThe main question for us is whether we are comfortable allocating clients\u2019 assets to a structure where weak investor protections appear to be the price of admission,\u201d Grafton said. \u201cOn the information available today, the answer is, \u2018No\u2019.\u201d<\/p>\n
B\u00e5rd Bringedal, CIO for equities at Norway-based Storebrand Asset Management, says the investor \u201cnotes that SpaceX\u2019s governance structure raises a number of clear concerns.\u201d<\/p>\n
For that reason, the $145 billion asset manager has \u201cno plans to invest in SpaceX in our actively managed strategies,\u201d he said. However, the company \u201cdoes not meet our exclusion criteria,\u201d meaning Storebrand\u2019s \u201cindex-tracking strategies may still gain exposure if the company is included in relevant benchmarks,\u201d Bringedal said.<\/p>\n
SpaceX is set to be fast-tracked into the Nasdaq 100 Index, after Nasdaq Inc. changed its rules to accommodate the company. S&P Dow Jones Indices\u2019 index committee, meanwhile, won\u2019t drop its requirement that companies generate positive net income for at least a year before they can join the S&P 500 Index.<\/p>\n
Fast-tracking SpaceX into indexes is not \u201cprudent,\u201d Levine said. \u201cThe whole idea of having a waiting period is that stocks tend to be volatile in the early days because they\u2019re unproven. I think it would be prudent to take a little bit of time and see where it stabilizes at.\u201d<\/p>\n
Nell Minow, co-founder and chair of ValueEdge Advisors LLC, says she\u2019s advising clients asking about this week\u2019s SpaceX IPO \u201cnot to buy the stock or the indexes,\u201d because, in her view, the company\u2019s offering \u201cextinguishes shareholder rights entirely.\u201d<\/p>\n
Instead, Minnow says she\u2019s \u201crecommending that large institutional investors tell their financial institutions to create new indexes\u201d that exclude SpaceX.<\/p>\n
For the most part, however, governance concerns aren\u2019t preventing investors from lining up for a piece of SpaceX. And any ESG advisers telling CIOs to stay away from SpaceX might find they just sent a \u201ccareer-ending memo,\u201d according to one former UK-based sustainability manager who asked not to be identified by name discussing such a sensitive matter.<\/p>\n
The ESG considerations around SpaceX are \u201chighly complex,\u201d says Nick Gaskell, senior sustainability investment manager at Aberdeen Investments. \u201cTaking a balanced view, there is clear value from SpaceX operations,\u201d he said.<\/p>\n
SpaceX announced in February that it had acquired Musk\u2019s xAI, which includes the chatbot, Grok, and the social media platform, X. The deal gave SpaceX a valuation of $1 trillion at the time, and xAI a value of $250 billion, Bloomberg News reported at the time.<\/p>\n
Grok was recently the target of widespread criticism after it was used to generate sexualized images of people without their consent. In January, California Attorney General Rob Bonta launched an investigation into \u201cthe proliferation of non-consensual sexually explicit material produced using Grok.\u201d xAI has since applied some restrictions and blocking mechanisms to prevent users \u201cundressing\u201d real people.<\/p>\n
At the same time, the energy and water consumption of the data centers powering artificial intelligence has drawn criticism from climate activists. Musk\u2019s efforts to build data centers in Tennessee and Mississippi, for example, are currently being fought by local communities worried about the ramifications for regional water supply, prices and pollution.<\/p>\n
AI is expected to be a major driver behind the rise in global electricity demand toward 2030, the International Energy Agency said last year. However, much of that demand will be filled with low-carbon energy sources, the IEA also noted, adding that the computational capability of AI may actually help expedite efforts to cut planet-warming emissions.<\/p>\n
SpaceX recently amended its IPO prospectus to include water scarcity and drought as potential risk factors to its data center projects. And Musk has famously said he plans to put data centers in space, in order to rely on solar power and not place any burden on Earth-based grids. The technology behind that plan, however, remains unproven.<\/p>\n
Gaskell of Aberdeen says SpaceX is helping to improve the supply-chain efficiency of the International Space Station, while Starlink plays a role in providing easier internet access in remote areas.<\/p>\n
Miranda Beacham, head of responsible investment at Aegon AM, says she would expect SpaceX to provide shareholders with \u201cthe usual information\u201d on metrics such as climate and greenhouse gas emissions.<\/p>\n
And \u201cwe would expect further details on the strategy for sourcing renewable electricity and carbon offsetting strategy,\u201d she said.<\/p>\n
However, given the \u201clack of accountability built into the governance structures of SpaceX,\u201d she said, \u201cthe normal avenue of stewardship activities to improve these matters may be of limited use.\u201d<\/p>\n
(Adds comment from Council of Institutional Investors, in 13th paragraph.)<\/p>\n
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