Elon Musk and Power at Tesla

Tesla is a company that has had at least a 5 year relationship with its CEO Elon Musk. Up until recently Musk was also Chairman of the Board. He was removed from his role as Chairman as part of a settlement with the Securities and Exchange Commission (SEC). The settlement resulted from charges filed by the SEC relating to securities fraud when Musk’s public Tweet on Twitter about taking the company private and that he had “funding secured.” The statement was shown to be a lie (Gaydos, 2018). Musk settled with the SEC and paid a hefty fine and Robyn Denholm replace Musk as Chairman of the Board. Denholm had been a Board member for five years up to that point (Porter, 2018). Thus, up until Musk’s run-in with the SEC in 2018, he had been both CEO and Chairman of the Board—which can serve as a conflict of interest, as Abells and Martelli (2013) have shown. CEO duality, in fact, Abells and Martelli (2013) specifically and explicitly stated that “the blending of positions [of CEO and Chairman of the Board] creates a conflict of interest, which hinders the expectation of maximizing financial returns to the principal” (p. 136). This can certainly be seen in the case of Musk, for a variety of reasons.

As Yang and Zhao (2014) point out, “the main argument against CEO duality (or dual leadership) is based on agency theory, which predicts that CEOs, as agents of shareholders, do not always act in the best interests of shareholders” (p. 1). This can be seen especially in the case of Elon Musk at Tesla. By serving as Chairman of the Board he essentially oversaw the governance operations that were meant to provide oversight of him as CEO of the company. In other words, he was in charge of overseeing himself and he allowed himself to make business operations decisions on behalf of Tesla that really benefitted him and his family—particularly with the bailout of his family’s company SolarCity. Musk was, however, reckless in other ways. Facing mounting pressure from shorts who saw Tesla’s increasing debt burden and negative cash flow as long-term problems, Musk sought ways to enhance the perception among shareholders that the company was a legitimate growth company. The result was a series of PR moves designed to help pump up the price of the stock—which worked as Tesla’s stock price soared, making shareholders happy and rich. However, when sell side analysts began to criticize Musk’s actions and pick apart the company’s revenues and accounting, short interest increased and the stock was hammered back down. In order to provide more incentive among shareholders to increase their purchases of the stock, Musk claimed he had funding secured to take the company private at $420 per share. A short squeeze ensued and the stock soared—only to reverse course once more when it became apparent that Musk had nothing of the sort secured. He was fined $20 million by the SEC and agreed to step down as Chairman of the Board of Tesla, though he was permitted to retain his role as CEO of the company.
Thus, up until last year when the roles were finally split in the company, there were mixed outcomes for the company, which enjoyed CEO duality under Musk for a number of years. For example, by overseeing the board and the company directly, Musk was able to exercise total control over the firm’s actions. He orchestrated a buyout of his cousin’s company SolarCity, even though that company was insolvent—and he encouraged shareholders to approve the vote, even though it made no sense financially as it merely saddled Tesla with billions more in debt. However, SolarCity was tied to Musk’s Tesla and SpaceX ventures by way of collateral (in the form of shares) being leveraged to fund operations, and so when SolarCity began to implode, a bailout became necessary. Shareholders are now suing Musk and this information is from the deposition records that have recently been released online.
Had Musk not been Chairman of the Board, it is likely the company would not have been able to find as many investors as it has since 2004 when Musk took over. The fact is that Musk has been great for the company in terms of appealing to consumers and investors who want to believe in the vision for the future that Musk has promoted—i.e., one of sustainability, green energy, and an electric vehicle (EV) revolution. The share price of Tesla has climbed from around $10 to over $300 today. Musk has essentially been responsible for driving Tesla out of a niche market and making the EV an appealing option to many consumers looking for an affordable alternative to internal combustion engines. Musk has essentially bet the house on the Model 3, however. So while the stock has made early investors wealthy, the question is whether Musk operating with CEO duality has actually been good for the company long-term.
The reason this question has to be asked is that Tesla has rarely shown a quarterly profit over all the years it has been in business. It also now faces stiff competition from a number of other auto manufacturers, such as VW, BMW, Porsche, Ford, Chevrolet, and numerous others—all of whom have produced or are producing their own line-up of EVs. This means Tesla, which was once at the forefront of the EV revolution is now facing considerable headwind. It is a similar situation to what Netflix is now seeing, what with Disney, HBO, Amazon, Apple and others all offering streaming services, which will put pressure on Netflix to stay relevant in an increasingly competitive market that it at one time had stood alone in unchallenged.
So it can be seen that in one way the structure of CEO duality worked well for shareholders who benefited from a dramatic rise in share price under Musk. On the other hand, share holders who are buying in now or who bought in at $380 per share last year following Musk’s “funding secured” tweet when he was still CEO and Chairman of the Board, may feel that Musk had too much power within the company and was recklessly attempting to keep the stock price inflated to the detriment of the company’s brand and reputation.
Now that the roles of Chairman of the Board and CEO have been split at Tesla, there should be more oversight placed upon Musk as CEO and more independent governance from the Board. However, this is unlikely to be the case because Musk has packed the Board with his own friends and family members and there is very little real independence on the Board—which means that there will continue to be very little accountability. It was even a condition of Musk’s settlement with the SEC that the Board oversee Musk’s Twitter usage, yet that never happened and Musk has continued to Tweet without regard for compliance, and the Board has yet to take any action towards their world-famous CEO.
The advantages of separating the roles of CEO and Chairman of the Board are that it “enhances monitoring and reduces the likelihood that managers will engage in activities that maximize their personal wealth to the detriment of shareholders” (Dickens, 2010, p. 35). At least that is how it should work out in theory. At Tesla, the problem is that even with Musk out as Chairman, the Board still sees him as the final authority in the company and will not do anything to cross him. Musk has wrapped the Board around his finger for a decade and a half and now it is too late for meaningful governance to take place. The crossing of the Rubicon moment was the buyout of SolarCity—an obvious action meant to protect his family from the margin call they were facing.
Tesla’s stock has been acting much like the stock of companies that list on the Pink sheets in the OTC markets—i.e., penny stocks. Its volatility has been high and its market surges of 20% in a day are more akin to the OTC markets than they are to the NASDAQ. However, in the world of Musk, the stock exists to be pumped and that has been his forte for years.
Obviously Tesla could stand for a new Board and a new CEO because under the current situation, Musk is still influencing the Board. The new Chairman is a long-time Board member and thus one who has already fallen under Musk’s influence. There is no real independence for the Chairman. The point of splitting up the roles is that it helps to ensure better governance of the company—more accountability and increased transparency for shareholders. There should be more disclosure, not less. Yet, even with the roles having been split up since 2018, Tesla continues to practice questionable accounting methods that leave analysts and hedge fund managers baffled by what appear to be nothing more than accounting tricks to help keep the stock price up for one more quarter.
Splitting up the roles of CEO and Chairman at Tesla was a step in the right direction, but the SEC should have been more stringent and required Musk to step down as CEO too. The fact that he was allowed to continue in that role suggests that the SEC did not fully comprehend the power that Musk held and continues to wield over the Board in spite of the fact that he is no longer Chairman. When that type of situation arises, the best thing for the company to do is to replace the CEO.
References
Abels, P. B., & Martelli, J. T. (2013). CEO duality: how many hats are too many?. Corporate Governance: The international journal of business in society, 13(2), 135-147.
Dickins, D. (2010). CEO and COB duality: Does it matter. Internal Auditing, 25(4), 35-38.
Gaydos, R. (2018). Elon Musk may have violated Tesla’s conduct and ethics code after smoking up in podcast interview: report. Retrieved from https://www.foxnews.com/tech/elon-musk-may-have-violated-teslas-conduct-and-ethics-code-after-smoking-up-in-podcast-interview-report
Porter, J. (2018). Tesla has found a new chairperson to replace Elon Musk. Retrieved from https://www.theverge.com/2018/11/8/18074800/tesla-new-chair-2018-robyn-denholm-elon-musk
Yang, T., & Zhao, S. (2014). CEO duality and firm performance: Evidence from an exogenous shock to the competitive environment. Journal of Banking & Finance, 49, 534-552.