Elon Musk, chief executive officer for Space Exploration Technologies Corp. (SpaceX) and Tesla. Photographer: Patrick T. Fallon/Bloomberg
A tried and true platitude for many entrepreneurs is they learn more from mistakes than success. The maxim may prove especially true when it comes to automotive and aerospace billionaireElon Musk and his $45 billion electric car giant
In August, Musk used his
account to float a buyout of the company for a price of $420 a share, stating he’d secured funding for the take-private and had shareholder support. The price, as it turns out, was a veiled drug joke to Musk’s then-girlfriendGrimes and was pulled mostly out of thin air. No surprise, the tweet sent Tesla into a frenzy as the company tried to cover for his misleading claim. In the ensuing six weeks, Musk caused confusion among his loyal shareholder base, drew the wrath of the Securities and Exchange Commission, and set a new low in management behavior absent blatant fraud.
On Friday, Tesla and Musk were rocked when the SEC charged the billionaire with fraud, accusing him of manipulating markets by tweeting out the speculative and incredible buyout offer. Shares in the carmaker plunged over 13% to 2018 lows as the SEC sought to strip Musk of his chief executive and chairman role at the company. Few investors or employees can imagine a Tesla without Musk as ringmaster of the circus.
As it turns out, Musk is getting away with a slap on the wrist for his lies to the investing public. He and Tesla will pay a fine of $20 million apiece to resolve the SEC’s fraud charges, putting an end to a probe that could have prompted Tesla’s demise. Better yet, the SEC’s other non-monetary penalties may be the best thing to happen to Tesla and Musk in some time.
Tesla has agreed to strip Musk of his chairmanship, and appoint two new independent directors to its board. In addition, Tesla will now have to manage Musk’s often confusing and misleading communication habits, mostly on social media. The SEC is basically seeking Musk take a timeout from Twitter when it comes to Tesla (Good advice for us all).
These penalties may fix critical weaknesses for Tesla that have long lingered or been remedied by its current board and base of investors. Presently, Tesla’s board is among the weakest of large public companies; it consists of cronies and family members, only a few directors even have the semblance of independence. This lack of control has given Musk free reign to over-promise to investors and customers, get distracted in fights with the media and public celebrities, and stretch his focus far beyond Tesla’s principal businesses of electric car and battery production. It’s also put far too much responsibility on Musk’s plate; including the negotiation of a prospective take-private with a Middle Eastern wealth fund.
That will all change with the SEC’s strict, but not overly punitive sanctions.
A new chairman can help Musk with strategic planning and in setting achievable goals for the company. Additional independent directors can help in studying solutions when issues like production bottlenecks emerge, or in mediating management conflict. Turnover of Tesla’s executive ranks is so high it rekindles memory of companies like Lehman Brothers and Enron.
While Musk has lost a lot due to his tweets — tens of millions of dollars and absolute power at Tesla — he may find the sanction ameliorates obvious problems that could have led to Tesla’s quick downfall.
About its sanction, the SEC took an unusual tone. Instead of just penalties, it specifically sought to punish the company in a way that could help.
“The total package of remedies and relief announced today are specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” said Stephanie Avakian, co-Director of the SEC’s Enforcement Division, in a statement. The SEC did also take a more ominous tone. Added enforcement co-director Steven Peikin, “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”
All told, Musk has proven to be a brilliant entrepreneur. But for all of his success, money-losing-Tesla remains a speculative company. The entrepreneur’s biggest blunder yet in what’s been a whirlwind eight year-run on public markets may turn into the best lesson he’s received as CEO.