Cash-rich companies behaving badly



Last week I commented on the eye-watering compensation package that the board of electronic vehicle (EV) manufacturing company Tesla had given its former chairman and current CEO Elon Musk. At $55.8 billion, the stock options had been agreed upon by the Tesla board and accepted by the shareholders back in 2018. Last month, the Chancellor of the Chancery Court in Delaware Judge Kathaleen McCormick put electronic brakes on the deal terming it “an unfathomable sum” that was unfair to shareholders.

The complainant in this landmark case was Richard Tornetta, a shareholder who held the princely amount of 9 Tesla shares and who, media reports, was a former heavy metal rock band drummer. Whether the case was filed of his own rocky motion or whether he was a proxy for another investor, the case enabled the Chancery Court to send a strong signal to Delaware incorporated company boards that they were willing to lift the veil on intertwined board relationships that compromised the directors’ fiduciary responsibilities and undermined minority shareholder interests.

A visit to the corporate governance section of the Tesla website is quite illuminating. The board consists of eight members including Elon Musk who, until 2018, was the board chair. Other than Elon, his brother Kimbal and JB Straubel, a Tesla co-founder, the other five directors are marked as independent directors on the website.

A tweet by Musk in August 2018 on the platform formerly known as Twitter, claiming that he had secured funding to take Tesla private was found to be false and aimed at defrauding the investing public.

Consequently, the US capital markets regulator the Securities and Exchange Commission (SEC) entered into a decree settlement where Musk and Tesla would each pay $20 million to 3,350 eligible shareholders who had lost value in their Tesla shareholding due to the volatility caused by Musk’s tweet.

Furthermore, Musk was required to step down as board chairman and would let a Tesla lawyer approve some of his Twitter posts.

Robyn Denholm, an Australian chartered accountant and finance career professional who had joined the board in 2014, stepped up as Tesla board chairperson in November 2018. A Financial Review article by John Smith published in January 2024 cites Judge Kathaleen’s withering criticism of the chairperson’s leadership. “Denholm does not appear to have had any personal relationship with Musk outside of her service on the board. [She] derived the vast majority of her wealth from her compensation as a Tesla director,” the judge wrote.

The judge said Ms Denholm’s compensation from Tesla between 2014 and 2017 was about $17 million when it was issued, and that she ultimately received $280 million ($426 million) through sales of options in 2021 and 2022, noting that Ms Denholm has described this transaction as “life-changing”.

Both she and fellow board member Brad Buss were over-reliant on their Tesla earnings while director James Murdoch was not independent due to his long-standing personal friendship with Mr Musk, including taking family holidays together.

This would be a good point to mention that the other “independent” board member is James Murdoch, son of media mogul Rupert Murdoch. Elon and James took family holidays together to Israel, Mexico and the Bahamas according to the Financial Review article. James was invited to join Tesla’s board after a Bahamas holiday with two other board members. The other “independent” director is Ira Ehrenpreis, a Silicon Valley venture capitalist who, according to CNN Business journalist Allison Morrow in an article published on February 5, 2024, has invested millions of dollars personally, and through his venture capital firm, into companies related to both Elon and his brother Kimbal.

Finally, Todd Maron, the Tesla general counsel during the compensation package negotiations, was Elon Musk’s personal divorce lawyer.

Judge McCormick trained her scathing gun sights on this personal relationship saying she could not distinguish whose interests the company lawyer had been representing. She found that Todd Maron was beholden to Musk and that Todd’s admiration for Musk “moved him to tears” during both his deposition and trial testimony.

The Tesla board has been under great scrutiny by institutional shareholders. According to the same Financial Review article cited above, last year Tesla agreed to settle with a Detroit pension fund that complained about excessive board pay.

As part of the settlement, board members repaid $735 million in stock and cash to shareholders from their own compensation packages and were also required to take no fees for the 2023 financial year.

It bears noting that this company gave a return of over 1,000 percent to its shareholders in terms of value grown between 2018 and January 2024. Which begs the academic question: where poor governance is coupled with astronomical returns for all shareholders, is this really a bad thing?

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