An epilogue for a legend or the dawn of a new era for Tesla?
9:48 AM on 7th August 2018 and Tesla CEO, Elon Musk’s, infamous ‘420’ Tweet was about to thrust the startup from Freemont into a world of self-inflicted turmoil: “Am considering taking Tesla private at $420. Funding secured.”
Image Source: CNBC.com/ Twitter
Whereas the first sentence may have been the crux of the message it’s the “funding secured” that proved to be Musk’s nemesis, with the Securities and Exchange Commission (SEC) claiming that he issued "false and misleading" statements and failed to properly notify regulators of material company events.
The SEC’s ruling
While the SEC originally sought to have Musk banned from acting as an officer or director of any public company in the US, a negotiated settlement allowed him to remain CEO of the electric car company but relinquish his role as chairman, within 45 days, for at least three years.
On a personal level this concession was crucial if Musk was to be eligible for the USD 50 Billion potential performance remuneration package payable to the executive in ten years’ time.
As part of the contract the “Consequences of a Termination of Employment or Cessation as Chief Company Executive” demand that:
“If, for any reason, Mr. Musk’s employment terminates or if he ceases to be the Chief Company Executive he will forfeit tranches of the option that are not yet vested. Chief Company Executive is defined in the award agreement as service as either: (i) the Chief Executive Officer or (ii) the Executive Chairman and Chief Product Officer.”
Besides a new chairman, Tesla was also ordered to appoint two new, independent members to its board and establish a committee of independent board members.
Furthermore, after contending that Tesla had failed to exercise disclosure controls and procedures relating to Musk's tweets, the SEC ordered Tesla to pay a $20 million fine, over and above Musk’s $20 million.
Subsequent to the SEC filing its lawsuit Tesla's stock plummeted 14 percent, erasing more than $7 billion in shareholder wealth. Tesla's stock dropped 30 percent since Aug. 7, closing Friday 28th September at $264.77.
The reason for this was the uncertainty surrounding Musk’s tenuous position and the impact his possible departure would have on Tesla. For the last decade, Musk has been inextricable from Tesla. The quixotic executive transformed a tiny car startup into a $50 billion behemoth that is mass-producing electric cars, solar panels, and batteries, eclipsing the market cap of brands such as Ford, and even GM on occasion.
However following the SEC’s ruling Tesla shares soared to pre August levels of around $310 on Monday, largely on the back of Musk retaining the CEO role, but also on speculation that the company was about to exceed expectations for Model 3 deliveries.
Image Source: Google
The market’s vote of confidence would, at first glance, indicate that the majority of investors believe the ruling to be beneficial to Tesla.
If the new chairman is appointed from the existing Tesla board members, who are openly supportive of Musk, it is highly unlikely that there will be any meaningful or disruptive change to the company’s operation or direction. Several news outlets, such as CNBC, suggest that some company directors have proposed that James Murdoch, fellow board member and CEO of Twenty-First Century Fox, succeed Elon Musk in the role.
Would this appease the markets? Possibly not.
But while appointing a new chairman from outside the company, together with the two new independent board members, could provide the kind of tighter oversight that many legal experts, and Tesla investors, say is overdue for a company of Tesla's market value, there is also the danger that a more forceful board, coupled with a domineering CEO like Musk, could create conflicts at a risky time for the company.
Visionary CEOs such as Apple's Steve Jobs and Twitter's Jack Dorsey have been forced out by strong boards of directors, though both eventually returned to their companies.
The challenges of reigning in a visionary
Teresa Goody, a former SEC attorney and founder of The Goody Group, a consulting firm, contests that many startups begin with a powerful CEO who typically puts "friendlies" on the board. However, as a company grows and becomes more sophisticated, Goody said, more independent directors are typically brought on board to provide better oversight. Which hasn’t happened in Tesla’s case.
In light of this, the SEC lawsuit could be viewed as an opportunity, where Musk stepping down as chairman of the board would not only appease many critics on Wall Street but also bring balance to a board often seen as blind to Musk’s short-comings. The ruling creates an opportunity for Tesla to potentially put someone in place that is capable of influencing Musk and helping Tesla reach sustainability.
But possible contenders for the job are extremely difficult to identify: "Given the financial condition of the company, production problems and logistics/ delivery problems, it is unclear how quickly the Board could bring in a seasoned automotive executive even if they wanted to," Cowen analyst Jeffrey Osborne wrote.
And it won't be an easy job. Whoever becomes the new chairman of Tesla will face the formidable task of reigning in Elon Musk, the charismatic, visionary chief executive with an impulsive streak. At the same time, the new chairman will also have to help Musk achieve his dream of turning Tesla into a sustainably profitable, mass-market producer of environmentally friendly electric cars.
And this needs to be balanced against the company’s aspirations and the increased challenge from competitors.
Often quoted as an example of the companies instability, Tesla’s cash burn is probably largely due to the small company’s ambitious product rollout, as illustrated by the company’s comparative R&D spend:
Image Source: Statista
With Model 3 well on its way to achieving the forecast sales volumes Tesla is still faced with the industrialization costs to bring the Semi and new Roadster to production as well as developing the Model Y.
Consequently, any draconian short-term profit measures may very well harm or even destroy the company that for all intents and purposes seems set to turn a profit in the not too distant future.
While there has been much debate around Musk’s importance to Tesla as a brand it is important to not lose sight of what got the company to this low-point – the CEO’s propensity for ad hock tweets.
To safeguard investor confidence the SEC has demanded certain constraints be placed on all communication with the public as part of the settlement: All tweets and other comments will have to be vetted by the company before they can be released.
While these may be trying times for Elon Musk, he’s not the only talented visionary to have faced challenges largely of his own making.
Learning from Steve Jobs
Jennifer Chatman, a management professor who specializes in organizational culture at the University of California, Berkeley’s Haas School of Business, believes there’s a lesson to be learnt from Steve Jobs.
Steve Jobs founded Apple in 1976, and almost ran it into the ground before he was pushed out. After running NeXT and Pixar, he returned to the troubled firm as Apple’s CEO in 1997, turning it into what it is today. But something had changed about Jobs in the interim, notes Chatman.
“Steve Jobs was known to be caustic, unpleasant to his people, and drove the company into the ground a couple of times before he was asked to leave,” she says. “But he eventually learned how to be a better leader. I think he was still narcissistic, but he learned how to channel his creative genius into organizational effort.” Jobs, crucially, cultivated a team of 13 executives with complementary skills, like current CEO Tim Cook, who stuck with him between 1998 until he stepped down in 2011. “I put Elon Musk in the Steve Jobs category,” says Chatman.
Musk could follow in the path of Jobs, stepping down from roles where a steadier hand would better serve, entrusting Tesla’s operations to talented deputies, and infusing the carmaker with the creative brilliance that made it so compelling in the first place.
It’s not as if Tesla’s CEO is not capable of delegating or selecting talented leaders, his other major company, rocket-ship maker SpaceX, has a clear team of well-qualified executives in the background executing his vision.
But doing so would require a U-turn for Musk, and it's unclear whether strong-willed Musk would be prepared to entrust his vision to a team.
According to corporate branding expert Rob Frankel: “Musk is very dynamic and very strong, and I think his visions are pretty much encoded in the DNA of all of his companies."
“He’s 100 percent the face of all of his interests, everything from flamethrowers to rocket ships,” Frankel said. “I would say he’s probably got higher public awareness than some of his own brands. That’s by design. That’s a big issue.”
Tesla delivered 18,449 Model 3 sedans in the second quarter, according to the company's last shareholder letter. Goldman Sachs analyst David Tamberrino, who has a sell rating on the stock, says the 83,500 vehicles (55,840 of which were Model 3s) delivered in the third quarter of 2018 could mean that Tesla is on the verge of closing the books on its long era of losses.
It's likely to do that against long odds, said Bob Jorth of Kalamazoo, Mich., who ordered his Model 3 in February 2017 and picked it up on Saturday.
"Big auto and big oil want him to fail. There's a lot of corporate interest in him not succeeding," according to Jorth, who gave up his gasoline-electric hybrid to trade up to an all-electric Tesla. "It's a natural progression away from the internal combustion engine, and I'm very excited."
And as further proof of strong branding Tesla enjoys, in Bellevue, Wash., Janet Beach finally got behind the wheel of the Model 3 she ordered 18 months ago.
"I bought it without driving it, that's how much confidence I have," Beach said. She hasn't lost faith in the company that made it, or in Musk. Controversy is to be expected. "There's to be a little bit of negative commentary as he pursues his dream of changing the world."
With all these positives in the business it is extremely unfortunate that in its finest hour the company now faces this self-inflicted penalty. Whereas it would probably have made these changes in due course, it is now forced to implement what is a significant change in a relatively short time.
After all is said and done I believe that, despite the challenges facing the company, it will weather the storm as it enters a new era - having learnt from the experience.
- Dana Hull; Bloomberg; After settling with SEC Musk tries to answer other question; October 2018; https://www.bloomberg.com/news/articles/2018-09-30/at-hopping-tesla-outlets-musk-s-volunteer-army-is-out-in-force
- The Associated Press; New York Times; Musk Out as Tesla Chair, Remains CEO in $40M SEC Settlement; October 2018; https://www.nytimes.com/aponline/2018/09/30/us/ap-us-sec-elon-musk.html
- Simon Alvarez; Teslarati ; Tesla starts strong recovery amidst Musk’s SEC settlement Model 3 delivery estimates; October 2018; https://www.teslarati.com/tesla-stock-tsla-surges-q3-optimistic-model-3-delivery-numbers/
- Joseph Bachelder, Andy Tsang; Harvard Law School Forum; Elon Musk’s Compensation; May 2018; https://corpgov.law.harvard.edu/2018/05/22/elon-musks-compensation/