Thursday , June 8 2023

Tesla’s board failed to protect Elon Musku from himself

Tesla's board is spectacularly bad in his work – even measured with its very low grass.

While the allegations of securities violations lodged last week against the electric car company and CEO Elon Musk show, Tesla's directors failed in the work allegedly being the top priority of any board: overseeing senior executives. But they also failed to do what they had set as their top task – ensuring Musk remains the undisputed leader in Tesla as its leader and leader. As part of the settlement, the company and Musk agreed with the SEC, Musk will resign as chairman of the board.

In fact, the Tesla board is so awesome in its work that the SEC effectively ordered it to be subjected to a shakeup as part of settlements. Not only does the company have to replace Muskin as chairman, but also need to add two new independent directors to the board. Moreover, the SEC found it necessary in its resolution with the company to order directors to do what they should do at all times: to keep close observations on Tesla's CEO.

SEC: Tesla had no Twitter policy for Musk

The SEC's complaints related to Musk's famous messages, "secured funding" from the previous month. The agency accused Musk of knowing – or had reason to know – that statements that posted on Twitter about potentially getting the private company were fake and misleading.

But in the appeal filed against Tesla himself, the SEC made it clear that the board itself was at fault. In a public regulatory statement in 2013, the company announced the agency and investors planning to use the Musk Twitter account to communicate with investors. This meant that whatever Musk or the company posted on that account had to do with the information about the company – and there were many things – they would have to meet the same disclosure requirements as the company's official statements such as press releases or documents submitted to the SEC.

Nonetheless, no one on board or in the company reviewed Musk's tweets before posting them, according to the SEC's appeal. Worse, the company had no procedures or rules in place to ensure that Muskut's Twitter statements met the SEC's disclosure requirements.

"Until the tweet of August 7, 2018, Tesla had no corporate policies specifically addressing the use of Twitter by Musk," the SEC accused.

As part of settlements, Tesla and Musk refused to accept or deny the agency's allegations. This is the par for the course; when the SEC solves the charges with the defendants, the latter rarely accept the guilty plea. But you can get the company's deal as part of the deal to pay a $ 20 million fee and to shake its board as a silent admission that the board was not doing its job.

The Tesla board was making Nero's best impression

It is clear for a long time now that instead of supervising Musk, Tesla's directors saw it as their work to push and empower him. But the SEC's complaint against Musk added extra details about the board's negligence in the form of a detailed deadline for the events that led to its statements that a move to take over the private car company was just a deal.

Actors who are largely absent from most of this event: the directors of Tesla. They are also missing in CNBC's history of events that immediately lead to the SEC decision to file a lawsuit during which Musk allegedly rejected the initial agency bid offer – a measure that for a short time doubted whether he would be able to stay at the company at all.

After Musk dismissed that offer, the agency filed a lawsuit against him and demanded forever to prevent him from serving as an officer or director of a public company. Musk ended the settlement with SEC the next day.

In other words, Tesla was facing what her directors seemed to consider an existential threat – leaving Musk – however they did not seem to do anything to prevent it. Instead, they seemed undecided while Rome was burning.

Neither Tesla nor Musk have publicly commented on settlements. But in response to charges filed on Friday against Musk himself, the board issued a statement that almost read as a non-sequel. It did not directly address the SEC's complaint or its possible consequences. Instead, it seems to indicate that the company and it would continue with the business as usual.

"Tesla and the Board of Directors are completely confident in Elon, his integrity and company leadership, which has resulted in the US's most successful auto company in more than a century," the board said. "Our focus remains on the continuous diversion of Model 3 production and delivery of services to our customers, shareholders and employees."

Muscat's messages about Tesla's going private made him into trouble

Musk is in trouble for a series of tweets sent on August 7 in which he stated that he was receiving Tesla's privacy with a $ 420 share price, that funds for such an agreement were already "secured", which investors were on board and that the only obstacle left in motion was a joint stock vote. He also said the company hoped to structure the deal so that all current investors could remain shareholders in the company even after it went private if they chose.

According to the SEC's complaint, Musk had reason to know when he made statements that many of them were false or misleading. Though he had talked to Saudi sovereign wealth fund about an agreement to get private Tesla before tweets, they had not discussed a prize and had no formal signing agreements, according to SEC. The company did not even begin to work on how to structure the deal so that day-to-day shareholders could remain investors, the SEC said.

By the time tweets, the board had not even received a formal proposal for such a transaction, much less voted to approve it, according to the complaint. And Musk had not spoken to any institutional investor for such an agreement, the SEC said.

The Tesla Board is largely absent from the SEC's deadline

The SEC's complaints against Musk and Tesla are largely focused on Musk's own actions, but they give some insight into what happened inside the company after its tweets. About 35 minutes after Musk sent his first secured funds, Deepak Ahuja, Tesla's chief of finance, sent a text message asking if Ahuja and other Tesla executives had to create a message for Musku. send employees and investors who explained the reason for the Movement. Musk sent that email later in the day.

Kimbal Musk, Elon's brother, is one of the directors of Tesla.
Fred Prouser / Reuters

Meanwhile, a few minutes after that first tweet, Tesla's investor relations leader sent his text to Musk asking him to verify the tweets. IR head, along with chief of staff at Musk and Musk himself, then posed multiple questions from journalists, investors, and analysts seeking clarification about tweets.

There is no indication of the complaints that Tesla's leaders told Musq for anything or reacted to them in any particular way.

And this is odd, because if the SEC's complaints are correct, they – as far as Musk – had reason to suspect that at least some of the tweets were false. They know, for example, that more should be done to complete a private transaction by going than merely acquiring a shareholder vote, according to the SEC. At least one of them, according to the complaint, seems to know that structuring such a deal so that day-to-day shareholders could remain investors was questionable – and that the board had not even considered an official proposal for how to do this.

Someone would also think that the board would immediately try to get an explanation from Musk about his tweets, as the idea for a deal would most likely come as news to them, as the complaint makes clear.

However, however, there is no sign of complaints that the board faced Muskun about tweets or encouraged it to correct the record in a short time. Tesla's representatives did not respond to an email requesting information about the discussions the board might have had with Musku about his tweets or his negotiations with the SEC.

Despite this, the board certainly did not clarify the alleged Muskut statements themselves. Instead, it allowed those statements to remain in place for almost a week.

The board had reason to know that Musk was in serious trouble

It was not until August 13 that Musk himself began to walk behind his tweets, admitting that there was no official proposal to take the private company and nothing was presented on board. On August 24, he publicly abandoned efforts on a blog post, acknowledging for the first time that there were potential obstacles to allowing current shareholders to remain investors after the company went private.

SEC reportedly opened an investigation into Muskat's tweets until the day after he posted them and appealed to the company's directors for the matter within a few weeks. So the directors had all the reasons to know that Musk and Tesla faced serious legal problems as he made statements. The SEC's complaints may and may lead to the removal of directors and even criminal charges from the Department of Justice.

One could expect Tesla's directors to do all they could to calm the SEC and push Mushu to resolve the issue with as favorable conditions as he could, as soon as possible, especially if these conditions were allowed to keep his chairman and CEO titles.

This is because directors have made it clear that keeping Musk in the company has been paramount to them. Earlier this year, in explaining why he had to issue a stock price for what could pay him $ 55.8 billion more, directors explained that he was an important component for the company.

"The Board believes that having active and engaged Mr. Musk's services is important to Tesla's continued growth and long-term interests," the directors said. "While the board recognizes that Tesla has many valuable employees that have been a critical part of Tesla's success, the board believes that many of Tesla's past successes were significantly fueled by Mr. Musk's leadership."

When Musk rejected the initial SEC settlement bid, there was a real chance that he would be forced out of any leading role in the company. Despite this threat, there is no indication in the reports about Muskut's negotiation with the SEC that the board played an active role in advising its director during this period.

Under the terms of the board, the solution is a big waste for Tesla

Musk eventually agreed to resign as chairman, pay a $ 20m fine and have communications with the investors supervised by the company. In addition, Tesla agreed to add new members of the board and pay its $ 20 million fine.

Though these penalties are somewhat tougher than what the SEC provided initially, they still look a lot like a slap in hand, compared to what the agency might have had if it took the case at trial. After all, Musk remains in the company.

But by the very words of the board, his removal as chairman is a significant blow to Tesla. This spring, shareholders suggested that the company Musk Bar or anyone else hold the headlines of the CEO and the chairman. Arguing against the proposal – that investors ended up voting down – Tesla's board stressed how important it was for the company to keep Musk two roles.

"The board believes that the company's success to date would not be possible if the board was run by another director who did not have the daily exposure of Elon Musk in the company's business," he said. The Board continued:

"The board believes that exactly in those cases when a company needs to quickly adapt to the ongoing changes and external pressures that board leadership has to be clogged with company operations. Despite our achievements, the company is still at a point in developing where we have to perform well in order to accomplish our long-term goals and sharing the roles of the chief executive and the chairman at this time will not serve the best interests of the company or its shareholders. "

Now, thanks to the lack of oversight of Musk, Tesla will have to face its uncertain future without holding both roles. In other words, while the company's directors helped avoid an investor's proposal to deny the Musku, their lack of concern led to the loss of the chief role of his chairman.

So, good job, the directors of Tesla. Not only are you bad at looking at shareholders' interests, nor have you been good at protecting your key CEO. And now the company, investors and Musk have paid the whole prize – and maybe they should continue to pay.

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