Tesla’s Governance Issues Keep Coming

Compliance officers, today we all owe a thank you to California state labor regulators. Why? Because we’re always looking for examples of poor corporate governance to discuss, and those regulators served up a stunner at the end of last week: Tesla. 

You may have already heard the basics. Last Thursday the California Department of Fair Employment and Housing filed a lawsuit against the electric car manufacturer, alleging that Tesla allowed racial harassment and discrimination to persist for years at its manufacturing plant in Fremont, Calif. The allegations are awful. 

As early as 2012, the lawsuit says, black Tesla workers complained that Tesla production managers constantly use the n-word and other racial slurs to refer to black workers. They complained that swastikas, “KKK,” the n-word, and other racist writings were etched onto walls of restrooms, lunch tables, and even factory machinery. They complained that black workers were assigned to more physically demanding jobs, paid less, fired more often, denied promotion opportunities, and disciplined more severely. The lawsuit also says managers referred to the factor as the “slaveship” or “the plantation,” and segregated black employees from other workers in a part of the factor soon dubbed “the dark side.”

Equally troubling are the allegations of mismanagement at the corporate level, when black workers did try to complain. For example, the lawsuit says Tesla limits its misconduct investigations to direct employees only, while complaints about temp or contract staff go unaddressed. It says HR employees often tipped off managers when an employee raised a racial harassment complaint against that manager. It says Tesla failed to maintain necessary personnel and disciplinary records as required by law. 

I could go on all day about the allegations against Tesla — but then, that’s precisely the point about its poor corporate governance. We literally could go on all day. Thanks to the addled oversight of the board and CEO Elon Musk, Tesla has that many issues to discuss. 

This Is About the Board, Governance, and Elon

The other telling item to note about Tesla happened last Monday, when the company confirmed that the Securities and Exchange Commission is investigating its compliance with a previous SEC settlement over Musk’s tweeting habits. 

That settlement happened in 2018. The SEC was unhappy with Musk’s intemperate tweeting, most famously his declaration in August 2018 that he might take Tesla private at $420 per share, “funding secured.” Musk never did take Tesla private, and his tweet was dismissed as baloney. Eventually he and the company agreed to pay $20 million each, bring on two new board directors, and hire a securities lawyer whose specific job was to preview Musk’s tweets before he sent them.

Now the SEC is investigating potential infractions of that agreement. For example, the SEC already warned Tesla in 2020 that Musk was ignoring the settlement, such as when he sent a tweet on May 1 of that year that “Tesla’s stock price is too high [in my opinion.”

What does this SEC investigation have in common with California’s lawsuit about racial harassment? Both are symptoms of poor corporate governance, where the CEO is too disinterested to care about ethics and compliance and the board is too feckless to force a change in that behavior.

That’s the real issue for Tesla. It has a larger-than-life CEO who appears not to care one whit about the rules that apply to him, nor about the mundane details of running a giant corporate organization. Moreover, the usual structures to rein in that CEO have been absent for years — at both Tesla and the SEC. 

For example, from a compliance professional’s perspective, the most galling thing about the California lawsuit isn’t the allegations themselves, as terrible as they are. The most galling thing is that this misconduct allegedly went on for years, starting at least as far back as 2012 and continuing into 2019. Where was Tesla’s board throughout that period? How did they exercise their oversight over corporate culture and the control environment? 

For the record, Tesla did release a statement about the lawsuit just before it was filed. Not surprisingly, the company said it opposes discrimination and harassment of any kind, and as proof it also pointed to its 2020 diversity, equity, and inclusion report. Tesla also noted that the California Department of Fair Employment and Housing (DFEH) was asked to investigate discrimination at Tesla dozens of times over the last five years, and in every instance the department closed the investigation without finding any misconduct. 

We can also fault the SEC. When Musk did have his misadventures in tweeting back in 2018, one odd subplot was a statement from then-SEC chairman Jay Clayton, who basically said Musk was so important to the company that firing him would hurt the interests of shareholders, because all the Musk fanboys who invest in Tesla would dump the stock.

As I said at the time, Clayton’s analysis of shareholders’ predicament wasn’t wrong. But it neatly ignores the obvious question: How on earth did everyone — the board, the SEC, shareholders — let matters reach such a precarious point? 

Through weak governance, that’s how.  

In (Limited) Defense of Musk

Let me be clear that I believe Musk is an entrepreneur nonpareil. With vision, focus, and determination (plus a $465 million U.S. government loan in 2010), he pretty much single-handedly brought the electric car industry to the mainstream point it has achieved today. He may well do the same for space exploration or even those kooky computer-brain neuralinks another of his ventures is trying with monkeys.

None of that means Musk is therefore a good CEO for a global corporation. On the contrary, he seems either disinterested or downright grouchy about it, depending on the day. 

Tesla’s corporate culture suffers for that. To what extent, we’re not yet exactly sure, although the California lawsuit paints a damning picture. If we want working conditions for the employees of Tesla to improve — and maybe I’m naive here, but I thought that’s what corporate ethics and stakeholder capitalism were all about — then somebody, somewhere, needs to send a message to Musk that he will actually absorb and take seriously. Who?