Tesla's board of directors has failed to protect Elon Musk

Tesla's painting is spectacularly bad at his work – even measured by his own very low bar.

As the charges of securities law violations filed last week against electric car manufacturer and CEO Elon Musk indicate that Tesla administrators failed at work that was supposed to be the top priority of any board – supervising leaders. But they also failed to do what they defined as their highest duty, namely that Musk remains Tesla's undisputed leader as CEO and president. Under the settlement that the company and Musk agreed with the SEC, Musk will step down as chairman of the board.

In fact, Tesla 's board of directors is so horrible in its work that the SEC actually ordered him to undergo reworking under the regulations. Not only must the company replace Musk as chairman, but she must also add two new independent directors to the board. In addition, the SEC found it necessary, as part of its settlement with the company, to order directors to do what they should have done throughout the process, closely monitoring the Tesla CEO.

Tesla would apparently have no Twitter policy for Musk

The SEC's complaints were related to the famous "secured financing" tweets of last month. The agency said Musk knew – or had reason to know – that the statements he posted on Twitter about the possibility of taking the company in camera were false and misleading.

But in the lawsuit against Tesla herself, the SEC made it clear that the board itself was also at fault. In a regulatory filing with the public in 2013, the company informed the agency and investors that it was planning to use Musk's Twitter account to communicate with investors. This meant that anything that Musk or the company published on this account about company information – and there were many – had to meet the same disclosure requirements as the company's official statements such as the company's press releases. press or documents filed with the SEC. .

Despite this, no one in the board of directors or in the company has reviewed Musk's tweets before he displays them, according to the SEC's complaint. Even worse, the company did not have any procedures or rules to ensure that Musk's Twitter statements met the SEC's disclosure requirements.

"Until the tweets of August 7, 2018, Tesla did not have any company policy specifically concerning the use of Twitter by Musk," the SEC accused.

As part of settlements, Tesla and Musk have refused to admit or deny the allegations of the agency. It is equal for the course; when the SEC settles charges against defendants, they rarely recognize their guilt. But you can agree with the company as part of the settlement to pay a $ 20 million fee and shake up its board by tacitly admitting that the board was not doing its job.

The Tesla Board of Directors made its best impression of Nero

It has been clear for a long time that instead of supervising Musk, Tesla administrators felt that it was their duty to follow him and hold him accountable. But the complaint filed by the SEC against Musk added additional details about the board's negligence in the form of a detailed chronology of events that preceded and followed its statements that moving to a private electric car manufacturing company was virtually unreal.

Actors who are remarkably absent from much of this sequence of events: the developers of Tesla. They are also remarkably absent from CNBC's history about the events that immediately led to the SEC's decision to file a complaint, during which Musk allegedly rejected the initial settlement offer of the company. agency, which leaves little time to wonder if he would be able to stay in society at all.

After Musk rejected the offer, the agency filed a lawsuit against him and sought to prohibit him from sitting as an officer or director of a public company. Musk ended up settling with the SEC the next day.

In other words, Tesla was facing what his own directors apparently saw as an existential threat – Musk's departure – but they seemed to do almost nothing to prevent it. Instead, they seemed to be playing the violin while Rome was burning.

Neither Tesla nor Musk publicly commented on the settlements. But in response to the charges that were filed Friday against Musk himself, the jury issued a statement that looked almost like a non-receiver. He did not directly address the SEC's complaint or its possible consequences. Instead, it seemed to indicate that she and the company would continue their activities as usual.

"Tesla and the board of directors have full confidence in Elon, its integrity and leadership in the company, which has helped the most successful American automotive company for over a century," said the advice. "Our goal remains the continued production and delivery of Model 3 for our customers, our shareholders and our employees."

Musk's tweets about Tesla becoming private cause him trouble

Musk is in trouble for a series of tweets sent on Aug. 7 in which he said he was considering privatizing Tesla at a price of $ 420 the action, as funding for such an agreement was already "secure", that investors were on board and that the only obstacle left for the move was a shareholder vote. He also said that the company hoped to structure the deal so that all current investors could remain shareholders of the company, even after being deprived of their choice.

According to the complaint filed with the SEC, Musk had reason to know, when he stated, that most of them were false or misleading. Although he has discussed with the sovereign wealth fund of Saudi Arabia a privatization agreement of Tesla before the tweets, they had not discussed a price and n & # 39; 39 had concluded no formal agreement, according to the SEC. The company has not even begun to work on how it could structure the market, so that ordinary shareholders could remain investors, the SEC said.

At the time of the tweets, the council had not even received a formal proposal for such a transaction, let alone voted to approve it, according to the complaint. And Musk has not spoken to any institutional investor about such an agreement, the SEC said.

Tesla's board of directors is largely absent from the SEC's schedule

The SEC's complaints against Musk and Tesla are largely focused on the actions of Musk himself, but they give insight into what happened inside the company after his tweets . Some 35 minutes after Musk sent his initial "secured loan", Deepak Ahuja, Tesla's chief financial officer, sent him a text message asking him if Ahuja and the other Tesla leaders were to send a message to Musk. for the benefit of employees and investors, explaining the reasons for this decision. moving. Musk sent this email later in the day.

Meanwhile, minutes after the first tweet, Tesla's Investor Relations Manager sent his own text to Musk asking him to check the tweet. The head of international relations, as well as the chief of staff of Musk and Musk himself, then responded to numerous requests from journalists, investors and analysts for clarification on the tweets.

Nothing in the complaints indicates that Tesla's directors said anything about Musk or reacted to it in any particular way.

And it's strange, because if the complaints of the SEC are correct, they – as much as Musk – had reason to suspect that at least some of the tweets were fake. They knew, for example, that more was needed to complete a private transaction than to obtain a shareholder vote, according to the SEC. At least one of them, according to the complaint, seemed to know that structuring such an agreement so that daily shareholders could remain investors was questionable – and that the board had not even considered a formal proposal on how to do it.

One could also think that the jury would have immediately tried to get explanations from Musk about his tweets, because the idea that an agreement was largely concluded would have come to their knowledge, as indicated. clearly the complaint.

Despite this, nothing in the complaints shows that the jury confronted Musk about the tweets or encouraged him to correct the file quickly. Tesla representatives did not respond to an email asking for information about any discussions that the board of directors might have had with Musk about his tweets or his negotiations with the SEC.

Whatever the case may be, counsel has certainly not clarified Musk's alleged misrepresentations. Instead, this allowed these statements to stay in place for almost a week.

The council had reason to know that Musk had serious problems

It was not until August 13 that Musk himself resumed his tweets, acknowledging that there was no formal proposal to take over the private company and that nothing was going on. had been introduced to the board. On August 24, he publicly abandoned his efforts in an article on his blog, recognizing for the first time that there were potential obstacles to the ability for current shareholders to remain investors after the privatization of the company. business.

The SEC reportedly opened an investigation into Musk's tweets the day after it was released and allegedly sued the company's directors in a matter of weeks. So the directors had every reason to know that Musk and Tesla faced serious legal problems shortly after making these statements. Complaints filed with the SEC may result in the extraction of executives and even criminal prosecution by the Department of Justice.

Tesla's directors would be expected to do everything in their power to reassure the SEC and urge Musk to settle the case in the most favorable conditions as soon as possible, especially if these conditions allowed him to retain its president and president. CEO titles.

That's because the directors made it clear that keeping Musk in the company was paramount to them. Earlier this year, explaining why he needed to award him a share that could earn him up to $ 55.8 billion, the directors explained that he was a crucial part of the company.

"The Board believes that having the active and engaged services of Mr. Musk is important to Tesla's continued growth and long-term interests," said the directors. "While the Board acknowledges that Tesla has many valuable employees who have been instrumental in the success of Tesla, the Board believes that Mr. Musk's leadership has been at the root of many of Tesla's successes."

When Musk rejected the SEC's initial settlement offer, there was a good chance that he would be forced to leave any leadership role within the company. Despite this threat, nothing in the reports indicates that Musk negotiated with the SEC that the board played an active role in advising its CEO during this period.

In the board's own words, the settlement is a big loss for Tesla

Musk has finally agreed to step down as president, pay a $ 20 million fine, and ensure his communications with investors are overseen by the company. In addition, Tesla has agreed to add new board members and pay his own fine of $ 20 million.

Although these sanctions are a little tougher than what the SEC originally proposed, they still look a lot like a slap on the hook compared to what the agency could have obtained if it brought the case to justice. After all, Musk stays in the company.

But in the board's own words, his dismissal as president is a blow to Tesla. This spring, the shareholders proposed that the company bar Musk or whoever holds both the titles of CEO and President. In opposing the proposal – about which investors eventually rejected the vote – the Tesla Board of Directors emphasized how important it was for the company that Musk retain both roles.

"The board believes that the success of the company to date would not have been possible if the board was headed by another director lacking Elon Musk's daily exposure to the company's business," he said. The council continued:

"The board believes that it is precisely when a company must adapt quickly to constant changes and external pressures that its leadership must be closely linked to the company's operations. Despite our achievements to date, the company is still at a stage of development. where we have to execute well in order to achieve our long-term goals, and separating the roles of CEO and Chairman at this stage would not serve the best interests of the corporation or its shareholders. "

Now, due to the lack of supervision of Musk by the board of directors, Tesla will face his uncertain future without assuming both roles. In other words, while the directors of the company helped repel an investor proposal to prevent Musk, their inability led him to lose his crucial role as president.

So, great job, Tesla Administrators. Not only are you detrimental to shareholder interests, but you are not even able to protect your CEO. And now, the company, the investors and Musk have all paid the price – and may have to continue paying for it.