Should we forget poor governance and let Musk get on with it at Tesla?

The electric car firm got this far despite sub-par governance

The appointment of Robyn Denholm as chair of Tesla, part of the SEC’s ruling punishing CEO Elon Musk for his ‘taking it private’ tweet, is unlikely to reassure the critics of the company’s governance, since she was already on the board.

But if the company has become the largest car manufacturer in the world by market capitalisation despite terrible governance, maybe its shareholders should just leave it alone.

A letter from NY state, NY city, CalSTRS, State of Connecticut, Oregon State Treasury and CtW — all committed, long-term investors in Tesla — was sent to the company’s ‘independent’ directors at the beginning of this month.

It called on the company to come up with a robust refreshment plan, including a timeline for director departures, focusing on those directors with very close ties to Musk – Antonio Gracias and Kimball Musk.

It also requested that the company enhance director independence “by engaging with shareholders to create a suitable pool of director candidates”. The new directors, it said, should have specific experience in manufacturing, human capital management, regulatory issues, and corporate governance.

“We believe that the board would benefit from nominees whose skill sets match the company’s strategy and current challenges,” the investors said. “Specifically, Tesla’s board still lacks directors with manufacturing experience.”

They also wanted the recent SEC-mandated separation of the chair and CEO – for only three years at the moment – to become permanent. In addition, proxy access, annual director elections that would declassify the board and stronger clawback provisions were called for.

As CtW’s Executive Director Dieter Waizenegger told me, while most of the signatories have all had meetings and calls with the company either separately or jointly over the years, they feel like they haven’t been heard.

Thus the letter wants “more concrete steps” to show Tesla is taking shareholders’ concerns seriously.

Waizenegger added: “With this letter we are trying to influence the debate, because there are decisions being made by the anchor investors about what kind of people are going to play a role on the board.”

This, of course, is not the first time the signatories have engaged with Tesla. I wrote a piece last year in July, about the Connecticut shareholder resolution calling for two new directors and declassifying the board. And CtW sent a letter on 5 June this year opposing the re-election of the directors Antonio Gracias, the lead independent director, Kimball Musk and James R Murdoch.
At the time of the Connecticut resolution, I asked Mary Phil Guinan, then Assistant Treasurer for Policy, why the state was targeting ‘green’ Tesla but not the ‘gas-guzzling’ Ford and GM.

She replied that it was not an either/or situation and noted that Treasurer Denise Nappier had engaged with both Ford and GM for over a decade.“Tesla has grown at an incredible pace and is currently larger than either Ford or GM,” Guinan continued. “We are long term investors and want Tesla to be a strong company, structured for long-term success. Treasurer Nappier believes, and studies verify, that there is a strong correlation between good governance and a company with strong, long-term value.” So that was the argument for improving governance then.

As for the latest governance push by investors, Waizenegger said: “The question is not so much ‘how far have they come?’, but ‘how far can they get?’.

“And can they get better? We are not arguing for divestment, quite the opposite.

“We believe it can be a better company if it has better governance. This is also an over-tenured board which has served its function. A different board composition would allow a more mature company to come into its own.”

I also asked him about the appointments of James Murdoch and Linda Johnson-Rice, who meet the strict definition of independence while not bringing any of the experience that the signatories are asking for.

Waizenegger replied: “James Murdoch probably brings some global experience to the table, and Linda Johnson-Rice could probably bring a broader consumer experience. But we would have preferred candidates that were independent of the present board’s social and professional networks,” he said, referring to the fact that both individuals were already known to Musk.

“But there seems to be something happening every couple of months that puts the company on the verge of a breakdown,” he added, referring to continued issues with workplace safety, “which is too much drama and spectacle to be conducive to running a sustainable company.

“We want the company to continue to be creative without running off the rails. And there are concerns about senior management expertise, especially in light of the high number of workplace accidents at the company’s plant and the company’s treatment of workers when they are injured. This is just one of the questions that we are dealing with beyond the antics of the CEO.”

Court documents from the SEC investigation showed Musk named a share price of $420 in the tweet announcing he would take the company private “because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend ‘would find it funny, which admittedly is not a great reason to pick a price’.”

Despite all of this, Tesla reported its most successful quarter on record in October.

Musk said in a podcast last month – during which he appeared to be smoking a joint – that his creative process is “like a never-ending explosion”. I’ve heard it said of a lot of maverick CEOs that they ‘just need to be left alone to get on with it’, only to find them going up in smoke a few years or even months later. A little oversight might not be a bad thing.