Tesla’s new chairman must rein in CEO Musk at a key moment


It will not be an easy task.

Whoever becomes the new president of Tesla Motors will face the daunting task of reining in Elon Musk, the charismatic and visionary CEO with an impulsive streak, while helping Musk realize his dream of turning Tesla into a profitable mass producer of ecological products. – environmentally friendly electric cars.

Musk is stepping down as chairman as part of a settlement announced Saturday with the Securities and Exchange Commission. Along with a new chairman, Tesla has also been ordered to appoint two new independent members to its board. A more authoritative board could provide the kind of tighter oversight that many Tesla legal experts and investors say is overdue for a company of Tesla’s market value.

The settlement stemmed from a lawsuit filed by the SEC accusing Musk of misleading investors in August with a tweet saying he had “secured funding” for taking the company private.

Yet a more energetic board, paired with an overbearing CEO like Musk, could create conflict at a risky time for the company. Visionary CEOs such as Apple’s Steve Jobs and Twitter’s Jack Dorsey were ousted by strong boards, though both eventually returned to their companies.

Even with the settlement, Tesla faces an impressive array of challenges.

The Justice Department opened its own investigation into Musk’s Aug. 7 tweet, in which he said he would take the company private at $420 a share. The SEC lawsuit accused the tweet, which sent Tesla shares skyrocketing, of being misleading because it didn’t actually have the funding planned for such a move.

Tesla is also under severe pressure to make a profit as it burns through $1 billion in cash every three months and, at the end of June, it only had $2.2 billion in the bank.

Musk said the company needed to produce 7,000 cars a week to make money, a goal he aimed to achieve in the July-September quarter. The company is expected to release production numbers this week and financial results for this quarter in early November.

Another concern: About $1.3 billion in Tesla debt must be repaid by March, including $230 million in November.

Some investors might want more than a new president. Tesla doesn’t have a chief operating officer, a No. 2 critical executive at most companies. It’s a stark contrast to other startups, such as Facebook, where Mark Zuckerberg hired Sheryl Sandberg as a highly influential COO.

In Thursday’s SEC lawsuit, the agency said it was seeking to remove Musk from Tesla’s leadership altogether. Many investors have argued that keeping Musk as CEO is essential at such a time.

“I don’t doubt Musk’s value to Tesla,” said John Coffee, a Columbia University law professor and corporate governance expert. “Without him, they are just a struggling start-up that is burning through cash at a desperate rate and facing a debt repayment crisis in the near future.

“Musk is an iconic entrepreneur but he needs adult supervision,” Coffee added.

That’s where the new board members come in. The current board, which includes Musk’s brother, Kimbal Musk, is widely seen as subservient to Musk. They have publicly expressed support for many recent initiatives, such as his rejection last week of an early settlement offer from the SEC.

“The board is really the alpha chapter of the Elon Musk fan club,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business.

Teresa Goody, a former SEC attorney and founder of The Goody Group, an advisory firm, said many startups start with a powerful CEO who typically puts “friends” on the board.

As a company grows and becomes more sophisticated, Goody said, more independent directors are usually brought in to provide better oversight.

“It happens a bit later in the life cycle of the company in the case of Tesla,” she said.

Yet Elon Musk is different from many CEOs because he owns around 20% of the company’s stock. This gives him more influence.

“In a typical case, the CEO is a high-priced employee” of the board, Gordon said. “Musk will always be more powerful than the chairman of the board.”

There will be other constraints on Musk’s behavior: Under SEC rules, his tweets and other comments will have to be vetted by the company before they can be made public.

“That humiliation – that Elon can’t get out unless he’s on a leash – that’s what will bother him the most,” Gordon said. He called it an “extraordinary measure”.

Gordon thinks the SEC should have gone further and sought to add up to four new board members and remove some old ones.

Still, Gordon said, “I think this experience has shown him that however smart it is or however powerful it thinks it is, government is also powerful too.”

However, Musk may want to keep an eye on the new president. Musk himself was the chairman of the board, having invested in the company, before firing the chief executive and taking over as CEO.

Tech

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