Tesla is a company that has had at least a 5 year relationship with its CEO Elon Musk. Up until recently Musk was also Chairman of the Board. He was removed from his role as Chairman as part of a settlement with the Securities and Exchange Commission (SEC). The settlement resulted from charges filed by the SEC relating to securities fraud when Musk’s public Tweet on Twitter about taking the company private and that he had “funding secured.” The statement was shown to be a lie (Gaydos, 2018). Musk settled with the SEC and paid a hefty fine and Robyn Denholm replace Musk as Chairman of the Board. Denholm had been a Board member for five years up to that point (Porter, 2018). Thus, up until Musk’s run-in with the SEC in 2018, he had been both CEO and Chairman of the Board—which can serve as a conflict of interest, as Abells and Martelli (2013) have shown. CEO duality, in fact, Abells and Martelli (2013) specifically and explicitly stated that “the blending of positions [of CEO and Chairman of the Board] creates a conflict of interest, which hinders the expectation of maximizing financial returns to the principal” (p. 136). This can certainly be seen in the case of Musk, for a variety of reasons.
As Yang and Zhao (2014) point out, “the main argument against CEO duality (or dual leadership) is based on agency theory, which predicts that CEOs, as agents of shareholders, do not always act in the best interests of shareholders” (p. 1). This can be seen especially in the case of Elon Musk at Tesla. By serving as Chairman of the Board he essentially oversaw the governance operations that were meant to provide oversight of him as CEO of the company. In other words, he was in charge of overseeing himself and he allowed himself to make business operations decisions on behalf of Tesla that really benefitted him and his family—particularly with the bailout of his family’s company SolarCity. Musk was, however, reckless in other ways. Facing mounting pressure from shorts who saw Tesla’s increasing debt burden and negative cash flow as long-term problems, Musk sought ways to enhance the perception among shareholders that the company was a legitimate growth company. The result was a series of PR moves designed to help pump up the price of the stock—which worked as Tesla’s stock price soared, making shareholders happy and rich. However, when sell side analysts began to criticize Musk’s actions and pick apart the company’s revenues and accounting, short interest increased and the stock was hammered back down. In order to provide more incentive among shareholders to increase their purchases of the stock, Musk claimed he had funding secured to take the company private at $420 per share. A short squeeze ensued and the stock soared—only to reverse course once more when it became apparent that Musk had nothing of the sort secured. He was fined $20 million by the SEC and agreed to step down as Chairman of the Board of Tesla, though he was permitted to retain his role as CEO of the company.

Thus, up until last year when the roles were finally split in the company,...…high and its market surges of 20% in a day are more akin to the OTC markets than they are to the NASDAQ. However, in the world of Musk, the stock exists to be pumped and that has been his forte for years.

Obviously Tesla could stand for a new Board and a new CEO because under the current situation, Musk is still influencing the Board. The new Chairman is a long-time Board member and thus one who has already fallen under Musk’s influence. There is no real independence for the Chairman. The point of splitting up the roles is that it helps to ensure better governance of the company—more accountability and increased transparency for shareholders. There should be more disclosure, not less. Yet, even with the roles having been split up since 2018, Tesla continues to practice questionable accounting methods that leave analysts and hedge fund managers baffled by what appear to be nothing more than accounting tricks to help keep the stock price up for one more quarter.

Splitting up the roles of CEO and Chairman at Tesla was a step in the right direction, but the SEC should have been more stringent and required Musk to step down as CEO too. The fact that he was allowed to continue in that role suggests that the SEC did not fully comprehend the power that Musk held and continues to wield over the Board in spite of the fact that he is no longer Chairman. When that type of situation arises, the best thing for the company to do is to replace the CEO.

References

Abels,…