The latest Tesla kerfuffle is an indication of what can happen when you have an iconic, larger than life entrepreneur, leading a public company whose corporate governance checks and balances haven’t caught up with public company standards and norms.
The whistle blower allegations by Martin Tripp highlight some serious concerns on vehicle safety (battery cells improperly installed,) lowering of vehicle manufacturing/design standards as well as misrepresenting the company’s manufacturing volume to Wall Street.
The company responded by accusing the whistle blower of sabotage and stealing proprietary company information.
When looking at this messy melee of cross accusations, there is a clear process Tesla’s board ought to immediately look into. An established best practice for any board in a situation like this is to form a Special Committee of independent directors to look into the allegations of the whistle blower. To form a Special Committee you have to determine the scope of the committee and the charter for the committee. Are they investigatory fact finders only, or do they make recommendations for the whole board to review and make a business judgement on?
For a Special Committee to be effective, they need to be independent which means they must select and hire their own unaffiliated legal counsel. It is always a good idea to get a written proposal from outside counsel and have this be competitively bid so you are able to set a firm budget or you can get enormous scope creep and have the expenses to the company and shareholders run wild. It’s also important to have a time frame goal to complete and investigation.
In a situation where there are cost claims; the company in this case, claimed sabotage by the employee, it is important to separate the topics being investigated. In other words you could in fact have a valid whistle blower situation where the company put pressure on the employee and tried to intimidate other employees not to come forward. In parallel there could additionally be findings that the employee did inappropriately access confidential material.
The take away lessons from the latest Tesla misstep are:
- Be sure there is a whistle blower escalation process in place that works for your company as per the SOX mandate.
- Check that you actually have appropriate IT security and compliance measures.
- Review HR policies for exiting employees.
These are things that large cap mature companies have a standard processes, but high growth companies going through a maturation phase, often lag in putting in place and truly operationalizing the checks and balances.
It looks like Tesla is an example of a company whose corporate processes may be lagging what investors would expect of a company that has raised $19 B and there is concern about financial representations being made by management of the volume of production being overstated.
It’s always easy to look in hind sight at someone else’s painful learning curve and I think there are a few learnable moments from Tesla’s latest misstep. You have to ask yourself has Tesla moved from SNAFU to FUBAR?