In the highly competitive field of corporate governance, the boardroom of Tesla has come under intense scrutiny. With revelations emerging about Elon Musk’s alleged drug use and the complex web of personal and financial connections that link him to board members, concerns have been raised about the board’s independence and ability to steer one of the world’s most innovative companies. This intricate situation poses a significant challenge: ensuring strong governance and maintaining investor confidence in the face of ongoing controversies.
Musk’s close relationships with Tesla board members
According to a report by the Wall Street Journal, board members at Tesla, Elon Musk’s electric car company, faced a dilemma in 2017 when one of their long-time directors, Steve Jurvetson, became embroiled in a scandal involving sex and drugs. Musk, who has deep personal and financial connections with Jurvetson and other directors, advocated for a lenient approach, allowing Jurvetson to take a leave of absence and then resign in 2020. This case highlights the potential conflicts of interest and lack of oversight at Tesla, where Musk’s friends and allies dominate the board and benefit from his multibillion-dollar pay package. What’s happening
Jurvetson, a venture capitalist who had invested in Musk’s companies since the early days, left his firm after an internal investigation found he had relationships with multiple women in the tech industry and used illegal drugs, as per people familiar with the situation and media reports. Some Tesla directors informally discussed how they should handle the situation, and some urged him to resign, the people said. But Musk, who had attended parties with Jurvetson where they used ecstasy and LSD, defended him and persuaded the board to let him take a leave of absence, some people told WSJ. Jurvetson remained on the board of Tesla until 2020, when he stepped down on his own accord. He also remains a director at Musk’s privately held rocket company, SpaceX, where he has a seat reserved for him by Musk. “The answer was do nothing and see what happens,” said another former independent Tesla director and good friend of Musk’s, Antonio Gracias, in a 2021 court deposition, when asked how the board handled the Jurvetson situation. Gracias and his venture-capital firm held investments recently valued at about $1.5 billion in Musk companies. Why it matters
The Jurvetson case is one of many examples of how Musk’s close ties with Tesla board members raise questions about their independence and ability to oversee the billionaire entrepreneur, who has a history of unpredictable and controversial behavior. Multiple other directors of Musk companies have deep personal and financial ties to Musk and have profited greatly from the relationship. These connections are a significant blending of friendship and wealth and raise questions among some shareholders about the independence of the board members responsible for overseeing the chief executive. Such conflicts could potentially violate the loose rules governing what qualifies as independence at publicly traded companies. On Tuesday, a Delaware judge rejected Musk’s $56 billion pay package at Tesla, saying board members who approved it in 2018 were under the influence of Musk. Several current or former directors at Tesla and SpaceX attend parties with him, go to exotic vacations, and participate in Burning Man, the Nevada arts and music festival. Musk and these directors, including venture capitalists Gracias and Ira Ehrenpreis, tech mogul Larry Ellison, former media executive James Murdoch, and Musk’s brother, Kimbal Musk, have invested tens of millions of dollars in each other’s companies—Ellison held billions of dollars in Tesla shares with about a 1.5% holding in 2022. Some also received career support and help from Elon Musk. Most members of Tesla’s current eight-person board have amassed shares worth hundreds of millions of dollars over the years, significantly more than what board members at other companies make for their service. Tesla pays its directors mostly in stock options, and the current board, not including Musk himself, collectively has made more than $650 million selling shares from those options. They hold additional options valued at nearly $1 billion. Some directors agreed to return a portion of that compensation to Tesla to resolve a shareholder lawsuit about their compensation while denying any wrongdoing. A judge has yet to approve the settlement.
What they’re saying
Musk has defended his board and his pay package, saying they are aligned with the long-term interests of Tesla and its shareholders. He has also dismissed the allegations of his drug use, saying he has a prescription for ketamine and that he does not use illegal drugs. Jurvetson has denied any wrongdoing, saying he left his firm voluntarily and that he had consensual relationships with women in the tech industry. He has also praised Musk and his companies, saying they are changing the world for the better. Some Tesla shareholders have sued the board, accusing them of being rubber stamps for Musk and approving his excessive compensation without proper due diligence. They have also criticized the board for failing to rein in Musk’s erratic and reckless behavior, such as his infamous “funding secured” tweet in 2018 that triggered a securities fraud lawsuit by the SEC. Some corporate governance experts have also questioned the independence and effectiveness of Tesla’s board, saying it lacks diversity, experience, and oversight. They have urged Tesla to add more independent and qualified directors, and to adopt more rigorous and transparent governance practices. Delaware judge Kathaleen McCormick had on Tuesday called the 2018 share-based pay package – the largest in corporate America – “an unfathomable sum” that was unfair to shareholders and found it was negotiated by directors who appeared beholden to Musk. “The process leading to the approval of Musk’s compensation plan was deeply flawed,” McCormick wrote in the colorfully written 200-page decision. “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf.” McCormick specifically cited Musk’s long business and personal relationships with compensation committee chairman Ira Ehrenpreis and fellow committee member Antonio Gracias. She also noted that the working group working on the pay package included general counsel Todd Maron who was Musk’s former divorce attorney.“In fact, Maron was a primary go-between Musk and the committee, and it is unclear on whose side Maron viewed himself,” the judge wrote. “Yet many of the documents cited by the defendants as proof of a fair process were drafted by Maron.”Elon Musk’s Neuralink implants brain chip in first human
What’s next
The Delaware judge’s ruling on Musk’s pay package could have significant implications for Tesla and its board, as it could expose them to more legal challenges and scrutiny from shareholders and regulators. The ruling could also affect Musk’s compensation and incentives, as well as his control and influence over the company. Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, said the court ruling was so scathing and far-reaching that it could prompt even Tesla’s top investors to change their stance. “The ruling will certainly give the reformers more influence. These people (the board directors) were eviscerated by the judge,” Elson said. The board may also face more pressure to address the issues raised by the Jurvetson case and other controversies involving Musk and his companies, such as his drug use, his conflicts with the SEC, his involvement in the SolarCity acquisition, and his plans to take Tesla private or merge it with SpaceX. The board may also have to deal with the challenges and opportunities posed by the rapidly changing and competitive landscape of the electric vehicle and clean energy markets, where Tesla faces rising competition from both established and emerging players, as well as regulatory and environmental uncertainties. The board may also have to balance the interests and expectations of Tesla’s diverse and loyal fan base, which includes both retail and institutional investors, customers, employees, and enthusiasts, who have supported and rewarded Musk and his vision, but who may also demand more accountability and responsibility from him and his board. (With inputs from agencies)
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