Tesla Company: Who Is Doing The Steering?

Posted: Apr 16, 2018 10:55 AM
Tesla Company: Who Is Doing The Steering?

This is the final of a four-part series about why the portfolios that I work on had a zero weighting on Tesla even before the string of scandals (and stock price reductions) which have hit the company year-to-date.

I wrote about the company last year (http://insights.videntfinancial.com/blog/the-case-against-investing-in-tesla) and the points about governance still remain.

The way shareholder capitalism is supposed to work is that the shareholders are in charge of the board (electing the board in a way analogous to the way citizens elect members of a nation's government) and then the board appoints a CEO who works for that board. That's the way it's all supposed to work. But often, this chain of authority is upended and functions in the opposite manner.

For example, a CEO can pack the board with cronies, people who are personally loyal or who are dependent on the CEO for business dealings. In these cases, often the CEO is the chairman of the board, which means the CEO reports to…himself. In addition, boards, which are supposed to be held accountable to the actual owners of the company often rig the game (in legal ways) so as to weaken the power of shareholders over the board.

There's no reason for me to re-write what I said fourth months ago here, as the structural problems are persistent.

"Tesla showed problems in every one of the relationships listed above. Musk is both Chairman of the Board and CEO at the same time, therefore he leads the entity to which he must report as an employee. This is not an unusual breach of good practice, but it is a breach. There are also problems with related party transactions (including the Solar City acquisition alluded to above) which tend to circumvent the normal hierarchy of authority with the CEO accountable to the board and not the other way around.

And Tesla also has structural problems when it comes to the board being answerable to shareholders. There are a number of structural impediments to shareholder voting power; for example, no cumulative voting, so it is harder for dissident shareholders to concentrate their support so as to get even minority representation on the board. Also, Tesla has what’s called a classified board policy, which staggers representation in a way which delays the expression of shareholder preferences. Additionally, shareholders are impeded in their ability to sell their shares at market value to large investors who could use the shares to challenge management, and owners are prevented from changing by-laws or convening meetings without the permission of the board which is supposed to work for them."

The bottom line is that this is a company which is built to keep one person in the driver's seat and one person only. And that person is Mr. Musk, and not either Mr. or Mrs. Shareholder. Its structure is as exquisitely designed to that purpose as its cars are to theirs. Come to think of it, even more exquisitely designed than the cars are, because keeping Mr. Musk is charge is the one plan in this company which is actually working.