A FUTURE WITHOUT MUSK?
Possibility of Tesla CEO’s ouster casts a pall on rocky quarter, sends shares on steep slide
It’s nearly impossible to imagine Tesla without Elon Musk, its chairman, CEO, largest shareholder and public face.
But a U.S. Securities and Exchange Commission lawsuit has raised questions about the executive’s future at the clean-energy company, sending shares spiralling. The agency accuses Musk, 47, of misleading investors with his infamous Aug. 7 tweets about taking Tesla private. The two sides reportedly came close to a settlement before Musk backed out and the SEC filed a complaint seeking to ban him from serving as a director or officer.
The possibility of Musk’s ouster, however remote, casts a pall on the final days of a rocky quarter and is likely to renew concerns about Tesla’s lack of an operating chief or other clear No. 2.
This weekend was supposed to be one for celebratory milestones, with thousands of Model 3 sedans finally making their way to customers at delivery centres across the country as the company makes a final push to achieve sustainable profits. Instead, drama surrounding Musk is once again taking centre stage.
“If Elon Musk resigns or is not the CEO, Tesla is a fundamentally different company that is less attractive to us,” said Ross Gerber, chief executive officer of Gerber Kawasaki in Santa Monica, Calif., which holds Tesla stock.
Tesla shares slumped almost 14 per cent to US$264.77 on Friday.
Musk pulled out of a settlement with the SEC in which he and Tesla would have had to pay a nominal fine, CNBC reported, citing sources it didn’t identify.
While the CEO wouldn’t have had to admit any guilt, Musk would have been barred from being chairman for two years, and Tesla would have been required to appoint two new independent directors, CNBC said.
“He needs to settle, and the Tesla board needs to force him to settle,” said John Coffee, director of the Center on Corporate Governance at Columbia Law School.
“My own belief is that the SEC would not have asked for a bar” if Musk had settled, Coffee said. “One can view the proposed bar as a nuclear threat to induce him to settle.”
After the SEC sued, Musk remained recalcitrant.
In a statement, he called the regulator’s decision an “unjustified action” that had left him “deeply saddened and disappointed.”
It’s not unusual for the SEC to lay the trump card of a lawsuit on the table when it can’t persuade a target under investigation to settle.
In 2010, the agency famously accused Goldman Sachs Group Inc. of peddling a mortgage security without telling investors that a hedge fund had helped design the asset and was betting that it would fail. The case was dropped in the middle of the trading day; predictably, Goldman shares plunged.
Like Musk, Goldman was initially defiant, arguing the allegations were unfounded and pledging to fight them “vigorously.” But as the weeks went by and investors got more nervous about the lack of a resolution, Goldman settled, agreeing to pay a fine of US$550 million.
Aside from the drama surrounding Musk’s tweet saying Tesla may go private — and his decision less than three weeks later to stay public — the company has been grappling with the departure of several top executives, most recently its vice-presidents of global supply chain management and worldwide finance.
The Justice Department has also opened a fraud investigation.
Tesla and its board “are fully confident in Elon, his integrity, and his leadership of the company,” directors said in a joint statement Thursday. “Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders and employees.”
Tesla has recently emerged from months of what Musk called “production hell” and now finds itself in what he’s said is “delivery logistics hell.” The company is in a race to get its key Model 3 vehicles to customers by the end of the third quarter, which will likely lead to “huge” sales figures just as some investors flee with the SEC suit, Gerber said.
“Tesla is going to blow the sales numbers out of the water, but Elon’s stress and meltdowns over these past months have had a real impact on the company,” he said.
Musk was uncharacteristically silent on Twitter on Thursday, but said in an emailed statement that “this unjustified action by the SEC leaves me deeply saddened and disappointed.”
Tesla’s board, which includes Musk’s brother Kimbal Musk, is closely aligned with the CEO. The company itself wasn’t targeted in the lawsuit.
“This was clearly a self-inflicted wound and it comes at a time that is critical for Tesla, which doesn’t need any more challenges,” said Michelle Krebs, senior analyst with researcher Autotrader. “They ’re under financial pressure to turn things around and facing an onslaught of new competitors.”
Earlier this year, shareholders rejected a proposal to split Musk’s role as chairman and CEO and awarded him an unprecedented compensation package that paves the way for him to stay at the company.
“There’s a 50-50 chance Musk gets removed as CEO but there’s a 95-per-cent chance that he stays at the company,” said Gene Munster, a managing partner at venture capital firm Loup Ventures. “I think the SEC lawsuit has scared people. This may give the board the backbone to put Musk in a visionary role. Shareholders want him to stay on as the visionary.”
Tesla makes the Model S sedan, Model X SUV and the Model 3 at its lone auto plant in Fremont, Calif.
The company has huge ambitions to disrupt not just the auto industry but the energy markets by selling large batteries to utilities.
Musk has a laundry list of big, capital-intensive projects on his to-do list: to construct a factory in China, build a semi truck and Model Y crossover vehicle, deploy self-driving technology and finish developing a solar roof product.
Tesla is going to blow the sales numbers out of the water, but Elon’s stress and meltdowns over these past months have had a real impact on the company.