Tesla’s Submissive Board May Be As Big A Risk As An Erratic CEO - Freeverything.com

Tesla’s Submissive Board May Be As Big A Risk As An Erratic CEO


Inside the SXSW Interactive Conference

Inside the SXSW Interactive ConferenceBLOOMBERG NEWS

With Tesla closer to transitioning from niche electric-car company to high-volume manufacturer than it’s ever been, discipline and focus have never been needed more. And with its ever-expanding need for funds and with billions of dollars of shareholder equity on the line, you’d think the turmoil sparked by CEO Elon Musk’s erratic public comments would have set off an ear-splitting alarm for its board.

You’d be wrong.

After his half-baked plan to take the company private collapsed last month, six of Tesla’s nine directors said, “[W]e fully support Elon as he continues to lead the company moving forward,” despite the fact that his tweets about privatization sparked shareholder litigation and an SEC inquiry. (Musk and brother Kimbal, who are board members, recused themselves from consideration of the plan.)

That occurred as he talked of 120-hour workweeks, camping out in Tesla’s Fremont, California, plant during its push to boost Model 3 output and sleeping little. He’s said in tweets that he might be bipolar, made potentially libelous comments about a British man who aided the rescue of Thai youths, had an earnings call freakout in which he chatted with a fan instead of taking analysts’ questions and smoked marijuana during a podcast. Turnover among high-level engineering and finance executives is also a concern, yet through it all, the board has remained silent.

“Enron while it was collapsing did not have turnover as high as this company does”

Jeffrey Sonnenfeld, Yales School of Management

“The board is completely negligent here,” Jeffrey Sonnenfeld of the Yale School of Management told Forbes. “Enron while it was collapsing did not have turnover as high as this company does. If you go back 18 months, it’s 50 significant people that have left. … Where is the board in terms of looking at exit interviews and what’s being said by those leaving, at this unparalleled level of instability?”

Musk has been an audacious figure with a flare for spectacle ever since Tesla unveiled the speedy electric Roadster at the Santa Monica Airport in July 2006, with celebrity guests including then-California governor Arnold Schwarzenegger in attendance. The company survived near collapse in 2008 and rebounded with a successful IPO in 2010. But it was the Model S sedan launch in 2012, combined with Musk’s world-changing ambitions, that turned him into a hero for many Tesla customers and shareholders. He’s never shown much restraint in public comments, but that habit escalated to an entirely new level this year.

“Sure he’s a creative genius. His role model Nikola Tesla was too and guess what? Nikola Tesla was also unable to handle scale,” Sonnenfeld said.

His advice? Tesla needs a disciplined executive like former Ford CEO Mark Fields, someone who knows how to run complex industrial enterprises but also understands changing technology and markets.

Musk could better serve Tesla as “some sort of chief creative officer and perhaps vice chairman or a non-executive chairman,” Sonnenfeld said. “He’s not at the stage of life where he’s fit to be CEO. At best, he’s still operating the way a startup operates. But he’s not a startup anymore.” 

Early-stage tech companies typically have friendly boards loaded with VC types. But as they mature and expand, their need for strong-willed, independent board members does too. Eight years after its IPO, two-thirds of Tesla’s nine-member board appear to be rock-solid Musk allies. And judging by the lucrative ten-year compensation package Tesla’s board approved for Musk in March that could potentially be worth tens of billions of dollars to the billionaire entrepreneur, it’s decided he’s irreplaceable.

Fidelity and T. Rowe Price, two of Tesla’s largest institutional shareholders, declined to comment on its corporate governance, but investors including CalSTRS, which manages pensions on behalf of California teachers, and CtW Investments are blunt in their desire for a more independent and active board.

Kimbal Musk at the Milken Conference (Patrick T. Fallon/Bloomberg )

Kimbal Musk at the Milken Conference (Patrick T. Fallon/Bloomberg )© 2016 Bloomberg Finance LP

“The board needs to start ensuring he is running the company for the benefit of all shareholders,” said portfolio manager Aeisha Mastagni, who monitors corporate governance for companies CalSTRS invests in. “Unfortunately, this board is not sufficiently independent to properly oversee Elon; the board is ripe with conflicts, including Elon’s brother Kimbal Musk who didn’t take his role as a board member seriously enough to attend at least 75% of the meetings.”

CtW, which manages pension funds for unions, has been among the biggest advocates for a new Tesla board, though its latest effort to do so was roundly voted down at the annual shareholder meeting in June. “Most of the board members are long-time friends and business partners and there’s his brother,” said Dieter Waizenegger, CtW’s executive director.

Those allies include investor and pal Steve Jurvetson, co-founder of Draper Fisher Jurvetson. However, he’s been on leave from the board since November 2017, when he also left his former venture capital firm due to a sexual harassment investigation. There’s no indication whether his Tesla seat will be given to someone else.

“The fact that we have this vacancy on the board, it just shows that the board hasn’t made a decision on what to do about that either,” Waizenegger said. 

Take a look at the rest of the supposedly “independent” board:

Ira Ehrenpreis, founder and managing partner of Silicon Valley venture capital firm DBL Partners, is a long-time Musk friend and Tesla and SpaceX investor. He joined Tesla’s board in 2007. Last year, Ehrenpreis passed up an opportunity to take the first Model 3 Tesla produced, giving it instead to Musk as a 46th birthday present.

Antonio Gracias

Antonio GraciasValor Equity Partners

Antonio Gracias, the “lead independent” board member, is another long-time friend who’s backed Musk since his PayPal days through his firm Valor Equity Partners. He was given the second Tesla Roadster ever produced as a gift in 2008. He’s also been targeted by activist investors who want him off the board because of those close ties.

Brad Buss, former SolarCity CFO. He joined the board in early 2017 as an independent director. But his independence is questionable given that Musk was SolarCity’s biggest investor and chairman, and the company was run by two of his cousins. Buss got his board seat after Tesla’s controversial acquisition of the solar power company that Musk had advocated.  

Robyn Denholm, COO of Australia’s Telstra Corp, has been associated with Musk companies since 2014, when she joined SolarCity’s board as an independent member. Like Buss, she moved to Tesla’s board when it acquired SolarCity in 2017.

Universal Music Group and Ebony Honor Sen. Kamala D. Harris during 2017 CBCF ALC

Universal Music Group and Ebony Honor Sen. Kamala D. Harris during 2017 CBCF ALCKris Connor/Invision/AP

Linda Johnson Rice, chairman of Chicago-based Johnson Publishing Co., which produces Ebony and Jet magazines, is one of the first non-Silicon Valley or tech industry people to serve on Tesla’s board and is its first African-American member. The appointment of Rice and 21st Century Fox CEO James Murdoch in 2017 coincided with efforts by activist shareholders for more board diversity and members with no previous business connections to Musk.

Over the years, shareholders have sued Musk and Tesla repeatedly for a number of issues. Most recently that includes investors shorting the stock who believe privatization Musk’s tweets were an attempt to manipulate the share price. For the most part, with the exception of a suit filed over the acquisition of SolarCity, legal actions haven’t been directed at Tesla’s board. But that could change.

“A shareholder could bring a derivative action that basically says the board is not exercising its duty of care”

Lawyer Peter Haveles, Pepper Hamilton LLP
21st Century Fox CEO James Murdoch.

21st Century Fox CEO James Murdoch.2017 Getty Images

“A shareholder could bring a derivative action that basically says the board is not exercising its duty of care, seek damages resulting from that and seek changes in corporate governance,” said lawyer Peter Haveles, a partner at Pepper Hamilton LLP, which doesn’t have any active litigation against Tesla.

“That’s a hard road. It’s not an easy one to get,” at least not for now, he said.

“Let’s say the company gets in a situation because of this whole embarrassment where come January they can’t refinance their debt and it’s an unmitigated disaster. You’re more likely to see derivative actions happen at that time.”

Sonnenfeld, who has studied corporate management for decades and even knew Steve Jobs, a Musk hero who had his own management challenges, doesn’t expect the board to really change until that happens.

“They have to feel some personal jeopardy,” he said. “They are violating a duty of care. They have a reckless disregard for facts and for operational, financial and communications failures.”





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