Trouble at Tesla: How the company can survive Elon Musk

The last week or so has demonstrated yet again that Tesla Inc.’s board of directors has some serious corporate governance problems.

On Dec. 13, Wired Magazine described CEO Elon MuskElon Reeve MuskFriend, foe or unknown force flying overhead? Congress should find out Did Bezos just save NASA's Project Artemis moon mission? Hillicon Valley: Instagram cracks down on anti-vaccine tags | Facebook co-founder on fallout from call to break up company | House Dems reintroduce election security bill | Lawmakers offer bill requiring cyber, IT training for House MORE as a “Dr. Elon and Mr. Musk,” in an excellent investigative journalism piece describing Musk’s wild misbehavior toward employees and Tesla managers. Just prior, CBS’ “60 Minutes” program aired an interview with Musk, in which Musk spoke about his ongoing compliance with his U.S. Securities and Exchange Commission (SEC) consent order; his supervision by the board of directors and newly installed chairperson; and his views on the SEC in specific.

It’s a must watch for any student of corporate governance — on "Opposite Day." 

ADVERTISEMENT
Musk made fairly clear that he is not in compliance with his SEC consent orders. Required after the infamous $420 acquisition tweet, which turned out to be intentionally false, Musk was supposed to turn over his Twitter account for review before posting tweets concerning Tesla that could result in market movement. Did he? No. 

When asked, in essence, if this complied with the SEC consent order, Musk responded, “Well, I guess we might make some mistakes. Who knows?” He followed that up by stating, “I want to be clear. I do not respect the SEC. I do not respect them.”

Elon, here is a tip: Waive red meat at a guard dog, and you might get bitten; even if the SEC is a poodle.

With regards to why Robyn Denholm, the new chairman of the board, has not tightened control over Musk’s impulsive conduct, he noted that he hand-picked her and that it would be “not realistic” for her to control the board: “I am the largest shareholder in the company. And I can just call for a shareholder vote and get anything done that I want,” he said.

His view stands in stark contrast to the law, which views him, as both CEO and controlling shareholder, as a fiduciary to the remainder of the shareholders, under longstanding Delaware law, the state where Tesla is incorporated.

Tesla employees have suffered as well. Known colloquially as “rampages,” Musk “would terminate people; other times he would simply intimidate them. One manager had a name for these outbursts — Elon’s rage firings — and had forbidden subordinates from walking too close to Musk[.]

While Musk viewed his 24/7 presence at the factory as a demonstration of his leadership, he reportedly walks the floor telling staff “excellence was a passing grade, and they were failing; that they weren’t smart enough to be working on these problems; that they were endangering the company[.]”

Having completed this summary of all things wrong with Tesla’s corporate governance, let’s now talk about what Tesla’s board of directors is actually obligated to do.

ADVERTISEMENT

First and foremost, each member of the board of directors owes two fundamental duties under Delaware law: The duties of care and loyalty.

Applying these concepts to Tesla, with regards to the duty of care, directors have an “affirmative duty to protect the interests of the corporation, but also an obligation to refrain from conduct which would injure the corporation and its stockholders. ... In short, directors must eschew any conflict between duty and self-interest.”

With regards to the duty of loyalty, directors cannot “consciously and intentionally disregard their responsibilities, adopting a "we don’t care about the risks" attitude concerning a material corporate decision.”  

As the former assistant inspector general for the SEC, its chief investigator, I have seen many examples of board members (and controlling shareholders) breaching their fiduciary duties. Never, however, have I seen the same person appear to do so as many times, or on such a frequent schedule.

The reality is that as part of the Sarbanes-Oxley (SOX) Act of 2002, Congress attempted to require boards of directors to enhance governance over their respective corporations, to protect investors and the public at large, as there are many stakeholders of public corporations beyond equity holders.

SOX included mandatory creation of audit committees, which were supposed to have overall control regarding insider management of a company, such as the CEO. At Tesla, that audit committee chair is none other than Robyn Denholm, who was hand-selected by Musk to also serve as the chairman of the board.

The board of directors, and Denholm in particular, need to enhance their oversight over Musk. That includes prohibiting him, for example, from getting into Twitter fights with the press, making false statements of mergers or stating on television that he refuses to comply with a federal court order governing his conduct.

They also need to comply with federal court orders. More importantly, they must get their CEO to become a true leader, a person who leads by example, such as by treating his employees with respect and showing that his conduct is beyond reproach.  

Doing so here would go a long way to supercharge Tesla’s future.

David P. Weber is an attorney and certified fraud examiner. He is the former assistant inspector general for investigations at the SEC. He teaches ethics, corporate governance and fraud examination in the MBA, MS and undergraduate programs at the University of Maryland’s Robert H. Smith School of Business. He drives a Tesla Model 3.