The SEC is in a difficult quandary as it investigates the ill-advised tweet
BY BETSY ATKINS
Elon Musk’s tweet first, think later approach may suit his daring personality. But casually tweeting that he had “funding secured” to take a $50bn public company like Tesla private unleashed a storm of problems for regulators, investors — and his board.
After the US Securities and Exchange Commission began investigating the legality of his announcement, Mr Musk attempted some damage control in an interview with The New York Times. It essentially amounted to a plea for clemency and mercy from the SEC after an “excruciating” year of work.
We can all applaud Mr Musk’s incredible work ethic, innovative talent and perseverance. These qualities created a company that has revolutionised the electric car sector (and all while Mr Musk works to create a private space industry).
Yet it is important to appreciate the quandary these considerations put the SEC in as a regulator. The commission is in the position of potentially shutting down one of the US’s leading innovators over a blatant public disclosure issue that seems to have violated its regulations and has wildly swung the market.
Typical SEC responses would include sanctions or fines against the company in question, the removal of the offending party from serving on a public board, or even seeking to oust the offender from their position.
If, however, the SEC does not punish Mr Musk, it unleashes a whole new set of dynamics in the public markets. Chief executives might feel free to use social media to move their stock with impunity. The commission cannot apply a regulation selectively; it must be consistent. Giving clemency to the “special circumstances” of a Musk meltdown would mean all public companies should receive the same leniency.
What about the poor, blindsided Tesla board members? They now face a serious damage control effort. A first move that would be well received in the investor community would be to separate Mr Musk’s chief executive role from his Tesla board chairmanship and to designate a new independent chair from within the board.
Many of the current directors are not seen by investors and proxy advisers as being truly independent. The US public pension fund Calstrs last year insisted two new directors be added — Ebony Media chief executive, Linda Johnson Rice, and 21st Century Fox head, James Murdoch. And proxy advisers Institutional Shareholder Services and Glass Lewis recommended investors vote against two out of three directors on Tesla’s most recent board slate.
Another mitigation would be to introduce a policy stating that all tweets of a financial nature need to be reviewed and approved, possibly by creating a chief compliance officer role.
This could also be a golden moment to bring in a chief operating officer so that the company can more effectively focus on operations, freeing Mr Musk up for his best use as a visionary, innovator and strategist for the brand.
Given the intensity of the public scrutiny the company is under, Tesla’s board needs to make fast, bold moves that will help to reassure the SEC. Convincing the regulators (and investors) that the company is in control will be critical for rebuilding confidence and heading off punitive actions.
But such governance decisions would bring long-term benefits too.
Building a reputation for Tesla as not just an entrepreneurial company but a professional, well-run one, will stabilise the business. And the speedy hiring of a respected, well-recognised, manufacturing or automotive industry operator would go a long way to help too. In the immediate future, however, the Tesla board should decide what actions or behaviour on Mr Musk’s part might persuade the SEC to be merciful. The coming days and weeks will certainly be a busy time in Tesla town.
The writer is the founder of Baja Corporation and a member of the board of Volvo Cars