Corporate executives can learn a lot from the daring and vision of Elon Musk — just probably not in the way that Musk might prefer. His tenure at Tesla lately has become a living case study in how not to govern a large organization.
That’s been the fundamental problem with Musk for quite some time: he can’t govern the sprawling organization that he has built Tesla to be over the last decade, and Tesla’s board can’t govern him. Those problems finally came to a head with that blitzkrieg enforcement action the SEC brought against Tesla and Musk last week.
The allegations, as outlined in the SEC complaints, are straightforward. Musk committed securities fraud by firing off a tweet on Aug. 7 that he planned to take Tesla private at $420 per share, “funding secured,” when in fact he had no such funding secured. Musk’s subsequent tweets were even more confusing, although they did send the stock price soaring — which neatly skewered the Tesla short-sellers that Musk hates so much.
The allegations against Tesla were even more plain: that the company had no disclosure controls to block intemperate tweets from its CEO. That’s a violation of Section 302 of the Sarbanes-Oxley Act.
Most telling about this whole mess, however, was the tale of negotiations between Tesla and the SEC revealed in a New York Times article on Tuesday. Regulators had been prepared only to force Musk to step aside from his role as board chairman for two years; no monetary penalties against him or the company.
Musk, however, gave Tesla’s board an ultimatum: either reject that offer and back me with a public statement, or I quit.
Tesla’s board caved into Musk’s demands and issued a statement that directors were “fully confident” in Musk’s leadership and integrity. Then the company told the SEC to take a hike.
So the SEC hiked over to the federal courthouse and hit Tesla and Musk with a civil enforcement action on Sept. 27, which sent Tesla stock into a nosedive on Sept. 28, which led Musk and his board to reverse course and settle on Sept. 29.
Final result: Musk is ousted as chairman for three years rather than two. Tesla’s board will add two new independent directors and establish policies to govern Musk’s talkative habits. Both Musk and the company will pay penalties of $20 million each.
First Compliance Lesson: 302 Controls
I’ve been struggling to articulate the most important lessons for corporate compliance officers from this case.
On a practical level, this enforcement action did fire a warning shot to all companies: tweets from named executives officers are subject to disclosure controls just like any other communication that contains material information.
That makes sense. There’s no substantive difference any more in communication via tweet, earnings release, or speech from the podium at an investor day conference. A named executive officer can disseminate material, market moving information via any of those channels.
Tesla should have known all that. The company confirmed in 2013 that it planned to use Musk’s Twitter feed to distribute information about the company, which triggered the Section 302 liability. Yet for whatever reason, Tesla had no policies or procedures in place to govern Musk’s tweets.
But talking about 302 controls is only the first layer of the onion here. It’s easy to say that a company should have proper controls and procedures for CEO tweets — literally, the SEC breezily said Tesla will “put in place additional controls and procedures to oversee Musk’s communications” with no further detail — but it’s much more difficult to define what those controls and procedures actually should be.
Which brings us to the real issue with Tesla: a larger-than-life CEO running around unchecked by his board.
After all, the very nature of Twitter makes 302 controls and procedures difficult to implement. Twitter thrives on immediacy and spontaneity. Tweeters are supposed to show quick wit and personality. If an organization layers on too many review controls, a daring and visionary executive like Musk ends up coming across as stilted as Mitt Romney.
So what’s the best control in that situation? A level-headed CEO with good judgment. Which Elon Musk is not.
Instead, Musk poses the most dangerous risk of all: management override. Even if Tesla did impose a bevy of controls and procedures, Musk has an ego larger than North America, and Twitter is Twitter. He could (and I suspect would) fire off his intemperate tweets anyway. No detective controls would help much after that fact.
Governance as a 302 Control
Given those circumstances, the SEC’s decision to impose two new independent directors on Tesla seems like the best option. Start with the statement that SEC chairman Jay Clayton put out about the case on Saturday (his own statement, not the SEC enforcement release), saying:
It often is the case that the interests of ordinary shareholders — who had no involvement in the misconduct — are intertwined with the interests of offending officials and the company. For example, corporate fines often are financed with funds that could otherwise benefit shareholders, and the skills and support of certain individuals may be important to the future success of a company.
In this specific case, Clayton is not wrong. Firing Musk would create more problems than it solves. Large monetary penalties would take money out of a business that needs it desperately and punish shareholders for the stupidity of one man. And let’s be honest: those investors most committed to Tesla and Musk already knew Musk is nutty. He discloses that material fact every time he opens his mouth.
The very nature of Twitter makes 302 controls and procedures difficult to implement. So what’s the best control in that situation? A level-headed CEO with good judgment. Which Elon Musk is not.
Musk reminds me of Steve Jobs during his first stint at Apple in the 1980s, when the board fired Jobs for the same sort of leadership — all scatterbrained vision, scant business acumen — that Musk exhibits now. Let’s hope a better board brings Musk around, so he can bring vision and acumen to Tesla like Jobs did when he returned to Apple in 1997. It’s just a shame that Tesla’s board dithered so much, for so long, that the SEC had to force the issue this way.
The larger question for securities enforcement is how often Clayton might try to apply this rationale to other cases. He does say, “It is often the case…” Well, if we’re not fining companies for corporate misconduct because that might hurt investors, and not firing executives for bad management because that might hurt investors — exactly how are we supposed to hold companies accountable for misconduct?
Let’s also hope the SEC doesn’t use this Clayton standard of enforcement too often. It’s a dangerous precedent, and most CEOs are just as small as the rest of us.