After reports that directors of Elon Musk’s various companies felt an expectation to use drugs with him, Tesla shareholders may feel less inclined to support his threat to shift the company’s incorporation from Delaware to Texas.
Musk’s many fans have tended to enthusiastically back his behaviour, regarding it as an indication of his remarkable genius. They have not taken lightly the regulatory rebukes that come his way and see these as attempts to rein in his amazing natural skills. But it seems, as the Wall Street Journal account of his substance abuse suggests, Musk has moved beyond maverick to feral. This may not dull his innovative powers in the short term. But longer term, who knows?
It might be that it’s best for Musk and his millions of shareholders that someone like judge Kathaleen McCormick is imposing restraint. (McCormick was also behind Musk’s realisation that he couldn’t walk away from his $44bn Twitter acquisition.)
And good not just for Musk shareholders. As Ann Lipton, an associate professor of law in the US noted soon after McCormick, chancellor of the Delaware Court of Chancery, announced her opinion on the Tornetta vs Musk compensation case: “Legal standards have a societal function of professionalising large, powerful companies in a way that is important even to non-stockholders, regardless of their specific impact at Tesla.”
McCormick’s 200-page opinion is full of accounts of Tesla’s appalling governance, which is probably a concept scoffed at by those shareholders Musk has made rich, but, as Lipton points out, what would happen to the corporate world and society without some kind of standards?
Tesla’s sloppy governance gave the lawyers behind shareholder Richard Tornetta scope to have the $55.8bn payment rescinded by McCormick. Had Tesla been able to boast even slightly rigorous governance standards, it’s likely that Musk would still have a claim to the 6.4% shares he was granted in the 2018 remuneration plan.
But because of a lack of independence between the controlling shareholder, Musk, and members of the board, in particular the compensation committee, McCormick held that the pay plan was not “entirely fair” to Tesla shareholders. Musk had proposed the plan and had controlled the board’s consideration of it; indeed the directors at all times seemed keen to co-operate with their CEO on it.
Tesla’s sloppy governance gave the lawyers behind shareholder Richard Tornetta scope to have the $55.8bn payment rescinded
An additional fault was that the proxy statement sent to Tesla shareholders contained material misrepresentations and omissions. It described Tesla’s compensation committee as independent and did not explain how intimately Musk was involved in drawing up the plan.
The frustrating fact for Musk’s fans is that it’s unlikely that many of the 73% of shareholders who voted in favour of the plan in March 2021 would have voted otherwise had they been formally informed of the boardroom ties and Musk’s involvement in his pay plan. While it is an outrageous amount of money, most Musk fans are happy with a 6.4% dilution for the associated boost in the company’s market cap.
McCormick, who dwells at some length on Musk’s extraordinary achievements, struggles to determine why the Tesla board agreed to “the largest compensation plan in the history of public markets” without getting an undertaking from Musk that he would be fully committed to the company, or without attempting to negotiate a smaller sum. After all, with his pre-grant stake of 21.9%, his investment would be worth an additional $11bn for every $50bn hike in market capitalisation.
It’s not inevitable that Musk would have accepted something more modest. He explained he needs huge sums for his plan to make a “good future for humanity”, which involves space colonisation that will save humanity. McCormick is supportive: “A good future for humanity is a really good thing.” But adds: “Some might question whether colonising Mars is the logical next step”, before pointing out space exploration is no business of Tesla’s.
Tesla, which can appeal or submit an altered plan for shareholder approval, deserved to be slapped down for appalling governance. The only director whose reputation isn’t in tatters is Linda Johnson Rice, who was appointed in 2017 to improve the board’s diversity but resigned less than two years later without exercising her Tesla options. The Wall Street Journal intimates this could have been related to Musk’s substance abuse.
For all the indignation, Musk’s “unfathomably” big pay award is easier to contemplate than all that money paid to former Naspers CEO Bob van Dijk, or former Woolworths CEO Ian Moir, or the many very wealthy executives who left their companies poorer off.
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