Can Any Tesla Director Be Independent?

5 Min Read By: Bruce Dravis

Subject to court approval, Tesla will appoint two additional new independent directors in connection with its settlement of fraud charges brought against Tesla CEO Elon Musk and settlement of other charges against the company. 

Tesla at present has nine directors. One is Musk, who will step down as chairman of Tesla for at least three years as part of the SEC settlement; one is Musk’s brother; and the other seven directors are independent under NASDAQ independence standards, according to Tesla’s most recent proxy statement. 

Of those seven independent directors, however, three have ties to SpaceX, the private rocketry company also founded by Musk. Accordingly, five of nine Tesla directors are either Musk family members or have connections to other Musk projects beyond Tesla Board of Directors membership. The board may, technically, have a majority of directors who are independent, but it also has a majority of directors with actual or potential conflicts of interest.

Director independence in any company is not valuable for its own sake. Independence is a proxy for what investors actually need: decision makers with integrity, whose judgments on behalf of the company and its shareholders are rendered after thoughtful and fair consideration of the salient facts, untainted by favoritism, or undue deference to management.

In Tesla’s circumstances, regardless of whether specific exchange standards for independence are met, it is fair to consider whether any director can truly be independent.

After all, Musk’s vision, personality and history of business success have driven the company.  Musk has a unique ability to bring capital, engineering talent, and a grasp of an emerging market into a package that investors will value. Tesla lists its dependence upon Musk as a Risk Factor in its Form 10-K.  And Musk owns more than 20% of the company.

Can any board really be expected to fire Musk as CEO, or take disciplinary steps that might cause him to leave the company? And if a board doesn’t have that level of freedom in its oversight of CEO, is the board truly independent?

The short answer: maybe.

Compared to CEOs at other companies, who lack Musk’s celebrity and wealth and who are not visionary genius founders with a huge stock position, Musk has more leverage in negotiating with the Tesla Board of Directors over matters such as business strategy, personnel, pay, and similar issues.

However, it is possible that at this point in Tesla’s development, Musk is no longer an indispensable figure. The market for electric vehicles is proven, and key technologies have been developed. If Tesla’s remaining business issues are dealing with supply chain and financial questions, while maintaining cutting edge research and engineering into the future, genius may be less important than execution.

If Musk’s chief contribution to the company now is the ability to use his celebrity to generate publicity that Tesla doesn’t have to pay for, the board may have greater freedom, and success, in demanding that Musk meet the standards for CEO behavior that apply to everyone else.

At a minimum, the Tesla Board of Directors needs to ensure that the company has a succession plan in place and an organizational structure that permits Tesla to survive the departure of Musk, with or without a continuing relationship. Such business planning, as a question of sustainability, would be part of planning against a sudden death of visionary founder anyway.  Anything that is in Musk’s head and hasn’t already been reduced to paper, or that is kept as trade secret, needs to be made available to the next generation of leaders. 

Other tech companies with visionary founders have transitioned to operating without them. HP continued beyond Hewlett and Packard. Microsoft weathered Bill Gates’ departure from an operational role. Apple survived the first departure of Steve Jobs in the 1990s, and then after his return survived his death.

Two independent directors, by themselves, do not ensure that Musk will no longer engage in the behavior that gave rise to the SEC charges in the first place. The board acts as a group, and no individual director can act alone to rein in a CEO whose behavior is, at a minimum, erratic regardless of whether it rises to the level of fraud.  

Tesla’s need for capital, more than the independence of its directors, may provide the board the upper hand.  Musk didn’t build a company by himself.  To be realized, his vision needed engineers, designers, marketing personnel—and, most of all, investors. As Tesla’s recent stock price in the public market has shown, regardless of whether the  board is willing or able to hold Musk accountable, investors don’t like reckless behavior. 

The SEC brought serious charges against Musk: securities fraud, specifically, sending out knowingly false Twitter comments whose purpose seemed to be inflicting economic punishment on Tesla short sellers. Musk’s behavior not only generated a combined $40 million in SEC fines for him and the company, it also exposed Tesla to economic damage from private securities claims. 

A board cannot allow dishonest or illegal behavior by an executive to go without consequences, regardless of whether the SEC steps in. An oversight body that ignores erratic executive behavior or tolerates executive dishonesty has failed in its duties. That means Musk’s next misstep will not be just a problem for him, it will be a problem for the board. 

Which might be enough to keep them truly independent.

ABOUT THE AUTHOR

Bruce Dravis

Bruce Dravis has more than 30 years of experience representing clients in corporate and securities matters with an emphasis on corporate governance, contracts, finance,…

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