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John Engle
John Engle
Articles (210) 

Tesla’s Board Is on Very Thin Ice

The embattled directors are facing mounting pressure to do their job

September 13, 2018 | About:

Tesla’s (NASDAQ:TSLA) board of directors has come under intense scrutiny in recent weeks.

For many years, the electric vehicle maker has been a one-man show in the form of CEO and Chairman Elon Musk. Now, the board of directors, who are ostensibly responsible for overseeing Musk and his management team, are in the spotlight. And even bullish analysts and commentators are now calling for them to get the boot.

Let’s talk about why the board is getting raked over the coals.

From overseers to enablers

As we discussed in a previous research note, the board has played the role of pliant enabler, allowing Musk to do as he likes without the conventional oversight expected of a board of directors. The proximate cause of the new scrutiny is Musk’s increasingly erratic behavior, but it has been intensifying ever since the mercurial CEO issued his impulsive (and now infamous) take-private declaration via tweet.

As it became abundantly clear that Musk’s tweet (and subsequent efforts to backfill the statement with action) were the actions of a rogue CEO acting without regard to conventional corporate governance. The board made efforts to distance themselves from Musk to a degree, while still treating the half-baked go-private push as if it were something other than a serious, and potentially disastrous, misstep.

Unsurprisingly, the rapid collapse of Musk’s efforts to take Tesla private and subsequent stock price implosion have resulted in increased scrutiny from analysts, the media and regulators.

Jobs under threat

Things have changed a lot since Tesla’s annual shareholder meeting in June. At the time, shareholders were largely happy to reconfirm Tesla’s do-nothing board (which includes such heavy-hitters as Musk’s restaurateur brother, Kimbal). Now, many erstwhile supporters are out for blood.

Gene Munster, managing partner of Loup Ventures, is one of the most vocal Tesla bulls calling for the board’s heads. In an article published by CNBC, and in a subsequent interview on the network, Munster delivered an unequivocal condemnation of Tesla’s current corporate governance:

“If Tesla doesn't overhaul the board right now, it could spell the end for the company.”

Munster is calling for a seismic change of Tesla’s board, including the removal of Musk as chairman and the defenestration of all but two of the other sitting directors.

Interestingly, Munster likes the idea of independent director Antonio Gracias, a private equity operator by profession, staying on. Yet, recent news has thrown his “independence” into doubt, with he and Musk photographed attending a weekend sports event together. Independent directors are crucial to good corporate governance. That is doubly true for a company run by an individual with such a high degree of control in the hands of one person.

Rats on a sinking ship

The board’s troubles do not end there. Directors of public companies are usually protected from class-action lawsuits and other external costs by directors and officers insurance. Yet Tesla has admitted in its corporate filings that it maintains comparatively little D&O coverage. With potentially billions of dollars in civil liability, as well as penalties levied by the Securities and Exchange Commission, the directors are undoubtedly sweating.

We expect resignations of directors to start in the next few months. We had thought previously that desertions were imminent, but the quick collapse of the go-private effort appears to have created a bit of a lull. But that will not last long as operational and financial stresses intensify and as the SEC investigation and various class-action lawsuits ramp up.

Some directors may already be creeping toward the exit. Various sources have reported that Robyn Denholm, head of the board’s audit committee, may be on the cusp of jumping ship. Others, such as James Murdoch, will likely not be far behind.

Verdict

Some directors appear to be true believers, committed to Musk and Tesla to the end. But those with independent reputations and careers to worry about will not be so willing to fall on their swords for Musk’s benefit.

The storm that has been brewing on the horizon for some time is about to break loose. Investors would be wise to seek safe harbor elsewhere.

Disclosure: Short TSLA via long-dated put options.

About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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