While this article waited for the editor to come along and publish it, the world changed. Elon published on August 13, 2018, a new blog post explaining his actions on and before the 7th of August, when he tweeted about taking Tesla private at $420 and sent a letter to Tesla’s employees.
I leave the original article as written, and add an addendum with the consequences of these new revelations.
There is always the same reason for recusing oneself — the possibility of an appearance of a conflict of interest. That means that to discuss a possible recusal of Elon Musk, we have to look into his interests as well as the interests of the board of directors.
First, the interests of Elon Musk: He is a private person who has about a 20% share in the company and intents to keep a 20% share in the company. Besides being a shareholder, Elon Musk is Chairman and CEO of Tesla. As Chairman, he is concerned with the interests of all stakeholders and the strategic goals of the company, and as CEO, with reaching the goals set by the board.
The board of directors represents the shareholders and sometimes other stakeholders, and it is ultimately responsible for looking out for the interests of all stakeholders. The shareholders, followed by the employees, are considered the most important ones. The thought that only the interest of the shareholders are a concern of the board is a very popular one, but not correct. The SEC protects the interests of shareholders, like the EPA protects (or used to protect) the interests of the environment and human health, and like the federal Department of Labor as well as the states’ Labor Relations Boards protect the interests of labor. And they all take the board of directors as being ultimately responsible for what the company does.
The thought that “the whole is more than the sum of its parts” can also be applied to a company. Meaning, the interests of the company are more than the sum of the interests of its stakeholders. In this vision, the company is a separate entity with interests of its own, and the board is responsible for looking after the interests of the company.
When Musk is acting to further the interests of the private person Musk, there clearly can be a conflict of interests. It has been mentioned that his personal aversion of shorts, Wall Street, and the obligations of running a public company are the motivations for taking Tesla private. But Musk is not the only person with these emotions — they are shared by many stakeholders — and I do not see this trio of factors as the sole motivation for his action.
Musk, the shareholder, can be in a conflict of interest when he is placing his interest above the interests of other shareholders or stakeholders, or more generally, when he is placing shareholder interest above other stakeholders’ interests. I have not found any indication that this is happening.
Musk, the Chairman and CEO, can not be in a conflict of interest with the board of directors. This is a really simple situation.
What is left is the situation that Musk is acting as the agent for an external party that is buying influence or architecting a partial takeover of the company. On the other hand, if the dealings of Musk with this third party were in the interests of the Tesla stakeholders, he was acting exactly as the chairman should do.
Looking at the first letter Musk wrote to the employees of Tesla on this topic, explaining what the benefits for shareholders, employees, customers, the products, and the company are, I can only conclude that Musk acted as a responsible chairman.
The board asking Musk to recuse himself would send the wrong message. Asking a chairman who acted in the best interest of the company to recuse himself is saying that you don’t trust your chairman. That is the last thing Tesla needs at the moment. Musk has started this initiative, and he should see it through, leading the board in its deliberations and negotiations with all the external parties that like to have a say in what is going to happen.
Addendum after the blog post on 8/13/2018 (13-08-2018):
This new blog post clarifies a lot. It clarifies that Elon Musk for two years thought it was not the time to take Tesla private, and that now was the time to do so. I think my article about Model 3 being the “get out of jail free” card for Tesla comes close to some of Elon’s thoughts. The letter also appears to show the Saudi Arabian interests getting impatient with their desire to gain a strong stake in Tesla, something which is again likely connected to Tesla’s significant progress with Model 3.
The letter also clarifies why he thought that funding was secured — for anyone who somehow didn’t believe him. The amount needed to go private matches well with my earlier piece on this topic, “How Musk Could Fund Taking Tesla Private.”
The repeated declaration that he was doing it as a private person, “à titre personnel” as it used to be called, is legalese hogwash. It would have been personal if he intended to profit from this as a private person. If his aim was the further advancement of Tesla the company, its shareholders, its employees, and its products, he was acting as Tesla’s Chairman and CEO. I think you can’t fulfill your professional duties as a private person and claim you did not do it in the function of your job. His counterpart assumed Musk would use his chairmanship to close the deal with Tesla the company.
In that case, for all intents and purposes, he acted as Chairman of Tesla. And we are back at my original thought, that Musk should not recuse himself. Given the history of this deal, he should lead the board in working to a solution beneficial for all stakeholders, while delegating all interactions with outside parties to his fellow board members.
Whether he likes it or not, or whether we or anybody else likes it or not, Musk is Tesla. He has to own that. When acting on behalf of Tesla, he never is a private person. He may own 20% of Tesla, but Tesla owns 100% of Elon Musk. [Editor’s note: Maybe more like 50% since SpaceX presumably owns 50% as well. The Boring Company is still not an adult, so cannot legally own anyone.]
As an additional editor’s note, I’ll say that Maarten has also repeatedly been irritated with people’s claims that this was a “leveraged buyout.” I found it interesting and again a good testament of Maarten’s business acumen that Elon emphasized in the new letter that “this would not be like a standard leveraged buyout structure commonly used when companies are taken private.” Elon also clarified what Maarten has repeatedly exclaimed — “reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed.” For more on that do read this article from Maarten. —Zach Shahan
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