Elon Musk’s Twitter role puts the Tesla board of directors to the test

Since Elon Musk took over Twitter last month, his leadership of the social network has been one of turmoil, intrigue and plenty of questions. Here’s one: How much time does he spend as CEO of electric carmaker Tesla?

Robyn Denholm, Tesla’s chairman, testified in court last week that while she didn’t know the answer, she wasn’t concerned. “The quantum of time is not a measure that concerns me,” she said. “It’s more the results that he can drive.”

But with Mr Musk consumed by Twitter, Tesla has faced a number of threats to its business and its stock price has fallen. Some corporate governance experts say Tesla’s board of directors needs to make sure the company has a boss who isn’t distracted.

“You’re violating your fiduciary responsibilities if you don’t address this issue head-on,” said William Klepper, a professor of management at Columbia Business School.

Tesla’s board has long been criticized by shareholder groups for its lack of independence from Mr Musk. When Tesla’s stock price soared and the company seemed to have most of the electric car market to itself, that argument didn’t get much traction.

Now Tesla faces much tougher competition, particularly in China, a huge market for the company, and it’s still struggling with supply chain issues and verification of safety issues with its driver-assistance systems. The stock has fallen almost 60 percent since its peak a year ago; Since Mr. Musk bought Twitter last month, the S&P 500 stock index is up 4.5 percent, but Tesla stock is down 25 percent. Mr. Musk has sold about $30 billion worth of Tesla stock this year and last, in part to fund his Twitter acquisition.

“I would expect a good board to do whatever it takes to ensure a CEO has enough focus on their company,” said Brianna Castro, senior director of US research at Glass Lewis, a shareholder advisory firm. “And in similar situations to Tesla, a good board would worry about why their stock is going down when the market is going up and do whatever it takes to address problems.”

Some corporate governance experts worry that board members’ views may be clouded by their personal ties to Mr Musk. Mr Musk’s brother Kimbal is a member, and other directors such as James Murdoch, a media executive and son of Rupert Murdoch, are longtime friends of Mr Musk. Some Tesla board members have financial ties to Mr Musk’s other companies, such as rocket company SpaceX.

Another factor: Tesla directors receive compensation that’s almost entirely in stock and is several times higher than directors of other large companies, allowing some of them to amass fortunes over the years.

“When the pay is compelling enough to motivate the director to do whatever is reasonably possible to keep this gravy train going,” said Marc Goldstein, head of US research at ISS Governance, a shareholder advisory group. “Will that interfere with the director exercising independent oversight over the management team.” ISS has recommended voting against the re-election of certain Tesla directors.

Mr Musk and Tesla did not respond to requests for comment.

Ms Denholm’s testimony in the Delaware Court of Chancery last week stemmed from a salary deal Mr Musk received in 2018 that ended up earning him tens of billions of dollars in Tesla stock. A shareholder filed a lawsuit alleging that the payout was excessive and that the board did not act with sufficient independence in approving it.

Mr. Musk was both CEO and chairman of Tesla until he was forced to resign as chairman in 2018 as part of a settlement with the Securities and Exchange Commission settling allegations of securities fraud.

Ms. Denholm, a former telecom executive who has taken over as chair, made huge sums of money as director. Her compensation, which consisted almost entirely of stock options, was $5.8 million in 2020, well above the average salary for a director at a large public company.

A study by Steven Hall, a compensation consultant, showed that executive salaries in 2020 averaged just over $300,000 at large companies. At the high end, John L. Hennessy, the chairman of Alphabet, Google’s parent company, had $620,000 in compensation last year.

And Tesla securities documents show the company has awarded Ms. Denholm compensation since 2014, paid almost entirely in Tesla stock options and valuing the company at more than $30 million. As Tesla’s shares rose in value, she was able to sell her shares for substantial profits. She has sold $280 million worth of Tesla stock since 2020, according to securities documents. Ms Denholm did not respond to requests for comment.

In the shareholder lawsuit trial, attorneys for the plaintiff seeking the cancellation of Mr. Musk’s 2018 salary deal sought to show that Tesla’s board of directors was more like a private club than a committee of seasoned professionals dedicated to finding shareholders. Tesla directors detailed their personal connections to Mr. Musk and sometimes to each other.

Some of them pointed to the sharp rise in the company’s share price since 2019 as evidence that Mr. Musk had done an excellent job and was invaluable to the automaker.

Ira Ehrenpreis, an investor who chairs Tesla’s compensation committee, has been close to Mr Musk for years. According to court documents, he helped Mr. Musk design the 2018 pay deal, which paid out about $40 billion worth of stock at Tesla’s current share price after Mr. Musk met 11 of 12 performance targets.

In 2018, Tesla paid Mr. Ehrenpreis almost $10 million, almost entirely in stock options, for three years to serve on the board. He did not respond to requests for comment.

Antonio Gracias, an investor who was on Tesla’s board of directors until last year, admitted in court that he had known Mr Musk for more than 20 years and that the two went through “a lot of tough times” together, which brought them closer . He admitted that he and Mr. Musk vacationed together, visited each other’s homes, ate together and talked about their children. Mr. Gracias also admitted that he attended Mr. Musk’s second wedding and Kimbal Musk’s wedding and that he was friends with Mr. Musk’s mother and sister. Mr Gracias admitted to ski touring with Mr Musk and described James Murdoch as “a great skier”.

Mr Gracias said he was able to maintain his independence while on vacation with Mr Musk because of their “trusting and respectful relationship.” Mr. Gracias did not respond to requests for comment on this article.

In court, Mr Murdoch said he met Elon Musk in the late 1990s when Mr Musk was working at a digital advertising business. The two got back together after Mr Murdoch, who was then living in the UK, bought one of the first Tesla vehicles sold in Europe and Mr Musk thanked him. Mr Murdoch said he had been to Jerusalem and Mexico with Mr Musk and his family. He also admitted to attending Kimbal Musk’s wedding, dining with Kimbal Musk and his wife, and personally investing in SpaceX. Mr Murdoch also said he bought shares in Tesla before joining the board.

Since joining the board in 2017, Mr. Murdoch has received $11 million, primarily in the form of stock options, for having been a Tesla director and is valued at the company according to estimates based on Tesla’s securities disclosures of more than 200 million US dollars involved. Mr Murdoch did not respond to requests for comment on his Tesla holdings and whether the board was doing enough to ensure Mr Musk was not distracted.

Mr Murdoch testified in the Delaware court that a board committee was monitoring the situation at Twitter, adding that Mr Musk had identified a potential successor at Tesla in recent months but did not say who it was.

In court last week, Mr. Musk tried to draw conclusions that Tesla’s board of directors is an elite club of friends. When asked about his holiday with Mr Murdoch, he said his free time was less about leisure and more about getting work done, describing it as “email with a view”.