Musk, Tesla no longer the darlings they once were

The recent settlement between the Securities and Exchange Commission (SEC) and Elon Musk sets a few critical precedents.

In its initial demands, the SEC sought to restrict or remove Elon Musk as CEO of Tesla (a reach rarely seen before in its suits), largely over the tweets he sent suggesting that Tesla could be taken private for a whopping $420 a share.

{mosads}After some negotiation, the SEC agreed to a settlement in which Elon Musk and Tesla each pay a $20-million penalty, and Elon agrees step down as chairman of the board but can remain on as CEO. This case offers investors and company officers some important lessons. 

1. Social media is taken seriously: Even as people use Twitter for jokes and to share unbelievable thoughts, when a company CEO tweets, it is company disclosure, even if the stock price mentioned by Musk was an overt reference to marijuana.

As part of the settlement, Tesla, the firm, has also agreed to oversee Musk’s communications. The SEC is making it clear that communications, even on Twitter, count, especially when markets move.

2. High-profile CEOs beware: By removing Musk from the chairman role, the SEC made Musk take on a boss. In particular, the new chairman is expected to be independent. It is a big change to the corporate governance of Tesla.

Surely, funds that own Tesla look favorably on the possibility of having a chairman that can check, challenge and even remove Musk, CEO of Tesla, if needed.

Musk’s earlier comments in the New York Times stating the “excruciating toll” of running the firm has impacted him personally are surely making investors ask about successors. Now, Tesla shareholders can look to a new board chairman.

3. Investors should feel newly empowered: In some ways, Musk’s tweets could have been taken as a joke or even boastful aspirations. Maybe with the right friends in Washington, the tweets would have been taken lightly or ignored. However, the SEC intervened because it heard from investors and markets.

Even though Musk owns 22 percent of Tesla and is the founder, the SEC gave a nod to the underrepresented investors in what was a firm controlled heavily by Musk.

In the settlement, the SEC showed that it is focused on investors’ interests, and this case sets some important precedents on how and when the SEC will intervene on behalf of investors going forward.>

4. SEC looks to strengthen corporate governance: In addition to removing Musk as chairman, Tesla must appoint two independent board members as part of the settlement. This is clearly a move to dilute Musk’s control over the board.

In so doing, the SEC brings greater influence (rightfully) to the investors through governance review. Going forward, all firms, especially those in which the CEO is the founder and a major shareholder, should revisit the corporate governance that is acceptable to the SEC and investors.

5. Market turmoil is a concern: In its press release on Thursday, the SEC specifically referenced the price increase that Musk’s tweets caused and the “significant market disruption” that resulted.

Clearly, the SEC is also concerned about flash crashes, misinformation, fake news and what these threats can do to an old bull market that might be ripe for retreat.

6. Darlings are not special now: Just a few years ago, Tesla was a darling. It offered a promise of environmental sustainability and U.S.-based manufacturing, and Tesla buyers enjoyed highly favorable tax credits when buying its vehicles.

Tesla and Musk seemed to be darlings in both Silicon Valley and Washington. Not so much now, as tax credits are phased out, and Washington casts a suspicious eye toward the technocrats.

“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,” SEC Enforcement Division Co-Director Stephanie Avakian said in the settlement release Saturday. “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.” 

Expect more demands of Tesla going forward, from investors, creditors and Washington.

Russell Walker is a professor at the Kellogg School of Management at Northwestern University.