Corporate Governance at Tesla

What to do about Elon's side hustles?

Breaking News: Just as I was about to hit ‘send’ on this post, composed earlier today, my wife sent me this Washington Post article, which says that Musk has launched a poll asking Twitter users if he should step down as CEO (of Twitter). I am not aware that Musk has ever asked this same thing of the Tesla board, but if he were to do so I’m pretty sure I know what the answer would be. To learn why, read below.

Put yourselves in the shoes of Robyn Denholm, the current board chair at Tesla. Ms Denholm succeeded Tesla’s previous chair, Elon Musk, who in 2018 was forced by the SEC to step down from that role in settlement of securities fraud charges filed against Musk and the Company after his ill-advised going private tweet. Mr. Musk remains Tesla’s CEO and Chief Product Officer (or ‘Technoking’) and a member of the Tesla board of directors, but he is no longer the board chair. You are.

And your phone has lately been ringing off the hook with callers asking you variations of the same basic question: WTF is Elon doing at Twitter and why isn’t he working full-time at Tesla?

These calls are coming from Tesla shareholders, executives, employees, and customers, as well as the press. The calls have been triggered by Musk’s decision to acquire Twitter and to serve indefinitely as its CEO and sole director, a job which appears to be consuming his time, attention and emotional energy pretty much 24/7. Not to mention $24 billion or so of his personal cash, funded largely through his unexpected (and unhelpful) sale of Tesla shares into a falling stock market.

Unfortunately, this is all happening at the same time as the Company and its directors are actively defending themselves in court against legal claims filed by Tesla’s own shareholders relating to Musk’s most recent multi-year compensation package, awarded in 2018. At that time, the Company granted Musk a package of 10-year options on 300 million Tesla shares with an exercise price of $23. (All numbers have been adjusted for Tesla’s subsequent stock split in August 2022.) These options vest (become exercisable by Musk) in 12 tranches upon the Company’s achievement of certain financial and operational milestones, but only in the event that Musk remains employed as Tesla’s Chairman, CEO or Chief Product Officer. At the time of the grant, the up-front cost to the Company of the options package was estimated at over $2 billion, a truly staggering sum even for someone as talented as Musk.

For better or worse, however, the effective cost of Musk’s options compensation has turned out to be far in excess of $2 billion due to the strong performance of Tesla’s share price. At Tesla’s current share price, the ‘intrinsic value’ of Musk’s 2018 options—the difference between the market share price and the option exercise price, multiplied by the number of option shares—is about $40 billion. And a year ago, before the recent fall in Tesla’s share price, the intrinsic value of the options was in excess of $100 billion.

Which seems like an awful lot of money to pay for the services of a man who, despite his continuing CEO role, no longer feels compelled to devote his full time and attention to the Company.

As the Tesla board chair, you and your fellow directors have a fiduciary duty to your shareholders to provide responsible governance and oversight of the activities of the Company’s senior management team, including the CEO, who is hired, fired and paid by the board. And so your job is one of great responsibility, but also one of intermittent frustration given the volatile (and voluble) behavior of your CEO. Since taking the job as board chair, you have had to deal with the aftermath of Musk’s going private fiasco, the conflicts posed by his continuing involvement at SpaceX (where he is also CEO), his forays into crypto world (with the Company’s cash), his incessant and increasingly polarizing tweets, and now his decision to buy Twitter and to act indefinitely as its full-time CEO and Chief Twit. Which is not at all what you and the rest of the Tesla board had in mind in when you approved Musk’s generous compensation package back in 2018.

In hindsight, perhaps the Tesla board overcompensated Elon, perversely altering his economic incentives and diluting instead of concentrating his focus on Tesla. At last year’s peak stock price, shortly before he started buying Twitter shares, the value of Musk’s entire Tesla stake was in excess of $250 billion, of which $100 billion or so was attributable to the 2018 options grant. And this incredible windfall may go a long way to explain why Musk no longer feels compelled to give Tesla his full time and attention. He may not like it when other employees pretend to work remotely, but he seems to think it is OK for himself, and with a big payday to boot.

Tesla’s stock price has fallen 60% or so since Musk began buying Twitter shares, and over 30% since he completed the acquisition and became Twitter’s CEO, with no end in sight for his more or less full-time commitment to Twitter. Musk’s personal brand seems to have been tarnished quite a bit by his Twitter activities and this is beginning to rub off on Tesla’s brand value as well. Not surprisingly, Tesla shareholders are increasingly upset and vocal about all of this, which comes at a particularly bad time given the pending shareholder litigation.

But as Tesla board chair, what do you propose to do about it?

Elon Musk has by all accounts been instrumental to the past success of Tesla. But is this still true today? If so, must he remain CEO or can he give up his CEO responsibilities and focus his efforts on some other important role which does not require as much of a full-time commitment to the Company? And if not, are you and the rest of the board prepared to acknowledge this publicly and take decisive action to sort things out?

There are many days on which you ask yourself: “Why did I ever agree to take this job?” But wisely or not you did agree to take it and you too have received a generous stock options grant in exchange for your continued commitment to the Company. And so every day you get up early, go to work and try to do your absolute best for Tesla and its shareholders. Which is a lot more than you can currently say for your CEO.

Things are quickly coming to a head, however, and you and your fellow directors may soon be forced to step up and take some tough decisions regarding Elon and his side hustles. This will not be an easy situation to resolve, of course, but that is why the Tesla shareholders pay you millions of dollars a year for what is supposed to be a part-time job, unlike the CEO role.

Of course if Tesla paid its board chair the really big bucks, like Elon, perhaps you too could spend your days playing around with social media. And unlike Elon, you might even save civilization in the process.

Links:

Tesla Stock Drops as Concern about Musk’s Twitter Focus Grows, Washington Post, December 15, 2022

Tesla Proxy Statement, October 2021, SEC.gov

Musk, Tesla Board to Defend 2018 Pay Deal in Court, WSJ, November 13, 2022