Getting Altmaned (Revised)

When the CEO crosses the line

Apologies for the somewhat garbled version of this note that went out earlier today. Apparently I forgot to delete a bunch of old text following the end of my post, which has now been removed. Sorry about that; hope it didn’t confuse you too much. Thanks to my son Travis—loyal reader—for catching it.

As readers of this blog will know, I think and write often about the topic of corporate governance. I teach a course in which the subject of corporate governance features prominently and I am also on the board of a small public manufacturing company, where I wrestle in the real world with many of the same topics that we study in the classroom. On those rare occasions when my mind wanders from school and work and family to other pressing matters, like the state of our universities or the national polity, I am reminded that notions of responsible governance lie at the heart of much that we all hold dear. But good governance is not something that we can take for granted, as current events regularly demonstrate.

In the corporate sector, governance is not solely the job of the CEO and the board of directors, but that is where much of our focus lies and for good reason. As is so often rightly said, “tone is set at the top”, and sitting at the top of most companies is the CEO and the board of directors. When CEOs and directors set the right tone, the messages drawn from their behavior spread quickly throughout the organization, generally with positive results. Unfortunately, the same thing happens in reverse when the people at the top fail to set the right examples or to communicate and reinforce established corporate norms. It takes time and a lot of hard work to build a good corporate culture, but this same culture can be destroyed very quickly when aberrant behavior at the top goes uncorrected.

Which brings me to the topic of today’s post. What is a corporate board to do when the CEO crosses the line of acceptable behavior, violates company policy and/or behaves as if they are indispensable to the company and therefore immune to corrective action by the board or others?

The answer on paper is simple: The board needs to find a new CEO, as soon as possible, and to articulate the reasons why it is doing so. The answer in practice can be more complicated, however, particularly when the company is performing well and the CEO retains significant support among shareholders or other important company constituencies.

I started thinking about this post back in November, when OpenAI fired its CEO, Sam Altman, and then reversed course a few days later. You will recall that Altman was fired on a Friday, seemingly out of the blue, and then reinstated as CEO early the following week after various company stakeholders expressed their strong displeasure with the board’s decision and employees in protest threatened to walk out en masse. As part of the settlement bringing Altman back as CEO, three of the four independent directors who voted to fire Altman resigned from the board and were replaced with two new outsiders. Altman was reinstated as CEO but not as a board member. OpenAI is now governed by a three-person board, which includes no company executives or shareholder representatives.

The board of OpenAI never articulated publicly what exactly Mr. Altman did (or did not do) which caused them to lose confidence in his ability to continue as CEO. In its statement released at the time, the board said only that "Mr. Altman's departure follows a deliberative review process by the board, which concluded that he was not consistently candid in his communications with the board, hindering its ability to exercise its responsibilities." Although some company executives attempted to spin this as a simple misunderstanding—as much ado about nothing—it seems that Mr. Altman may on multiple occasions have been less than fully transparent with the board about matters it felt were important, which is generally a big no-no in the world of corporate governance. And this was not the first time that Altman had been fired as a CEO, apparently under similar circumstances, which suggests that perhaps Mr. Altman may over time have come to believe that the board of directors worked for him and not the other way around.

I am a bit hazy on the precise corporate structure of OpenAI and its affiliated companies, but my understanding is that the legal owner of OpenAI is a nonprofit entity which appoints all or a majority of the OpenAI board. The charter of this non-profit company states as its primary mission “to ensure that artificial general intelligence (AGI)… benefits all of humanity”. Unlike at most for-profit business corporations, the primary fiduciary duty of the OpenAI board is to serve the public interest (“humanity”), not to maximize value for shareholders. This is an unusual framework for governing a company which is attempting to develop a technology with massive commercial potential—and which has already raised more than $15 billion in risk capital to do so—but this is the ownership and governance structure set up by the company’s founders, including Mr. Altman and ironically Elon Musk (who we will come back to shortly).

The OpenAI story is admittedly a strange one—I have referred to it as a classic ‘man bites dog’ case—and so we should perhaps be cautious about drawing general conclusions from this one highly unusual series of events. But the folks who spend their days pontificating on social media lost very little time in drawing and publicizing their own personal conclusions, on the basis of no more public information than I have summarized above, and their views ranged from emotive endorsements of shareholder capitalism to pious statements of public interest beneficence, with plenty of rampant speculation and conspiracy theories thrown into the mix. Wherever one falls on this ideological spectrum, however, I think we can probably agree that the OpenAI board fiasco was not the finest hour for the promoters of effective altruism. Of course it was not EA’s worst day either, as one Sam Bankman-Fried and his own Silicon Valley enablers can attest.

Among those who seem most concerned by the recent events at OpenAI are certain Silicon Valley founder CEOs, who according to the WSJ are genuinely freaking out, worried that they themselves may be the next ones to “get Altmaned”. In the words of one such entrepreneur: “Am I going to get thrown out of my own company as CEO even if we’re crushing it?” Some of these folks may be genuinely worried about the future of their company in the event they are removed from the helm, but for others the principal concern seems to lie with the possibility of getting fired before their shares and stock options have fully vested, causing them to lose out on great riches if their companies do in fact go on to ‘crush it’. And so these founder CEOs are turning to corporate lawyers and other governance gurus to find clever ways to insulate themselves from the legal authority vested in boards of directors, and in the process perhaps to feather their own nests.

Which brings me at long last to the subject of Elon Musk. Whatever one thinks of Elon Musk—and I for one try to think of him as little as possible—you have to admit the man has chutzpah. Among his many other accomplishments, he has developed audacity into an art form. He posts a false tweet about taking Tesla private and then blasts the SEC for trying to “muzzle” him, after he is forced off the Tesla board in settlement of securities fraud charges (along with a fine of $40 million, half paid by the company). He negotiates with his self-selected Tesla directors for an extraordinarily generous multi-year compensation package— potentially worth $50 billion or more— and then after most of the options have vested he scales back his time commitment to Tesla, spending increasingly large amounts of time and energy on his various side hustles, most notably Twitter, which he buys with the proceeds from Tesla shares that he had vowed not to sell, in the process contributing to a 50% decline in the share price. After buying Twitter, he then becomes an increasingly prominent and divisive feature on social media, jumping head first into the raging culture wars, blasting the very advertisers who fund his business and alienating a large number of Tesla customers in the process. He smokes dope live on the Joe Rogan show and posts all sorts of stupid weed jokes on social media, and then bridles when the Wall Street Journal calls him out on his alleged drug use, issuing on Twitter a less than fulsome denial which claims only that he has never failed a random drug test. Which in the world of non-denial denials is right up there with Bill Clinton’s famous line about his own marijuana use in college: “I never inhaled”. (You can get your own Bill Clinton “Inhale to the Chief” pot poster on Amazon, here.)

And now, in the wake of the Sam Altman firing and just six months after the agreement by current and former Tesla board members (including Musk) to return more than $700 million to the company in settlement of accusations that they grossly overpaid themselves, and without having resolved the pending shareholder litigation over Tesla’s 2018 stock option grant, Musk appears to be attempting publicly to shake down the company once again.

As reported by the WSJ—read here and here and here—Musk is demanding that Tesla grant him additional equity which would double his current ownership stake, from 13% to 25%, at which point he would consider himself to have effective negative control over the company, making it worth his while to come back to work and oversee the next phase of the company’s development, including its various AI initiatives. This is of course a huge ask, even in the world of outrageous executive compensation awards. By my very rough calculations (please check me), Musk seems to be demanding another $50 billion or so from the company, most likely in the form of shares not options, which would put his total compensation over a 12-year period above $100 billion, which if amortized is over $8 billion per year. Not bad for what appears to be part-time work.

What if Tesla won’t meet Musk’s demands? In that case, Elon says he is prepared to develop AI technology of importance to the future of Tesla through one of his other privately owned ventures, presumably his xAI company which is reported to be in the market seeking to raise $1 billion at an implied value of $15-20 billion. Which raises some interesting questions not only for the Tesla board but also for potential xAI investors. How will any future value created by Elon’s various AI initiatives be allocated among his various entities? Who will make these decisions and resolve any conflicts? How much of any future AI value creation will flow to Elon personally and how much will be left for the other investors who put up most of the money? And how much of this potential future AI value is already reflected in the current valuations of Tesla and xAI?

As portrayed in this press, Musk’s compensation demands at Tesla would appear to be corporate extortion of the crudest sort, in blatant conflict with his fiduciary duties as CEO. And it is taking place in plain sight for all to see. But if history is any guide, Musk may well get away with it. The Tesla board, which has rarely missed an opportunity to line Musk’s pockets or turn a blind eye to his egregious behavior, may well come up with some creative way to give Musk most or all of what he is asking for, once the smoke clears from the pending shareholder litigation. It has now been six years since Musk’s last options grant, during which time Musk has worked as Tesla’s CEO essentially without salary, in recognition of his $55 billion compensation award in 2018. But those options have now vested and so Musk is in some sense currently working for free.

Many of you devoted WSJ readers will know the work of editorial board member Holman W. Jenkins, someone whose views I don’t always agree with. But I am largely in sync with Jenkins’ latest comments on Elon Musk, published this weekend under the heading Lovable Elon Pulls a Fast One, which I encourage you all to read. Jenkins is wrong when he says in his opening line that “You have to love the temerity of Elon Musk”. I don’t love Elon Musk’s temerity and you don’t have to either. But I think Jenkins is right when he says that “Mr. Musk has conducted himself in a way that wouldn’t be tolerated of another CEO”. Can you imagine the outrage if Jamie Dimon asked for a $50 billion compensation package? [For the record, Dimon’s 2023 compensation was around $36 million, which is admittedly a big number, but that’s $36 million with an ‘m’, not $36 billion with a ‘b’.]

So who is to blame for this sad state of affairs? Yes, of course, there is Elon Musk himself, first and foremost. But according to Jenkins—and I would agree with him— there is plenty more blame to go around: among the Tesla board, Tesla shareholders, the SEC, the legal system, Musk’s co-investors, the press and no doubt many of Musk’s 160 million followers on X, the site formerly known as Twitter. (Which in case you are wondering, is twice the number of followers that Donald Trump has on Truth Social but only 30% of what Taylor Swift has across all her platforms.) And I would add to this list a badly broken executive compensation system in this country, which rewards CEOs far in excess of their contributions to shareholder value or to the social welfare.

So what is to be done about Elon? The simple answer of course is for the board of Tesla to ‘just say no’ to his extortionate demands. And if in retaliation Musk then follows through on his threats to divert Tesla-relevant AI business opportunities to his other private companies, or if he continues to violate the company’s drug or other policies, the board should fire him and claw back a big chunk of his previously issued compensation. Yes, I know, this will never happen, and if it did the Tesla share price would likely take a big hit, causing many Tesla shareholders to revolt and possibly even replace the board. Which of course is exactly how the system is supposed to work.

But not apparently in Musk world.