Elon Musk’s SEC Drama: Has He Gone Too Far?

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Wharton's John Paul MacDuffie and Charles Elson of the University of Delaware discuss Elon Musk's recent confrontational behavior with the SEC.

In the latest drama for Tesla CEO Elon Musk, the SEC said this week that it was “stunned“ that he did not seek pre-approval for tweets he posted about the firm in the months since being ordered by a judge to do so, according to the Los Angeles Times.

Over the summer, Musk created a media frenzy and caused stocks to soar when he tweeted that he might take the company private. He later walked back those comments, but they led to $40 million in fines ($20 million to Musk, $20 million to Tesla), the appointment of two independent board directors and the removal of Musk as Tesla’s chairman.

Musk’s October settlement with the SEC also said Tesla would appoint an attorney to pre-approve tweets that referenced the company. Now it turns out that the appointed attorney was monitoring the tweets, but not approving them in advance as ordered. This week the SEC repeated its request that Musk be placed in contempt of court because he failed to abide by the court order.

“Such brazen disregard of this court’s order is unacceptable and unworkable going forward,” the SEC wrote in the filing. It’s possible that the judge could add new fines and controls, or even “suspend or bar Musk from running Tesla — or any public company,“ noted the Times article.

Meanwhile, Tesla’s stock has fallen from about $380 per share in August to about $270 this week. The price of Tesla’s bonds have been falling, too, and after the recent announcement that Tesla would close many of its dealerships and focus on online sales, there were reports that suppliers were getting nervous — and they were only made more jittery by an announcement days later that the company was backing off that strategy.

The SEC had earlier asked that Musk be held in contempt for violating the October agreement due to tweets he posted about Tesla’s production estimates. Musk tweeted that Tesla expected to make 500,000 cars in 2019. Within a half hour, he posted a second tweet clarifying that statement and lowering the forecast for vehicle deliveries to 400,000. The SEC noted in its filing that Musk again has “published inaccurate and material information about Tesla to his over 24 million Twitter followers,” who along with other market watchers, track such statements carefully. Musk’s response was to cite his First Amendment rights to tweet, without the tweet being reviewed by the company, so long as the tweets do not have the likelihood of moving the stock in the markets.

“Why fight with the SEC at this moment when you have all of these other things to focus on?” John Paul MacDuffie

Musk’s business ventures have long been a high-wire act played out in markets — and in the media. Even before the latest controversies there have been headlines such as this one from The New York Times: “In Elon Musk’s World, Brakes are for Cars, not CEOs.” But lately, there has been more drama than usual, some negative and much that is controversial.

Yet, earlier this month came the great success of the SpaceX Crew Dragon capsule’s first test mission — a risky docking with the International Space Station, jointly operated by the U.S. and Russia. The hope is the capsule will soon end U.S. dependence on Russia to move crews from Earth to the station. And late last week, Tesla unveiled its newest car, the Model Y, an electric SUV the company hopes will become a best-seller, given how American buyers favor SUVs so heavily over sedans. While early reviews were tepid, the Model Y is priced for the mass market versus the existing Model X SUV, which costs about $100,000.

The Value of Stability

In the face of these achievements, it appears to some that Musk is picking unnecessary, possibly unwinnable, fights that are — at a minimum– distracting from the core mission.

Generally, the problem with Musk’s behavior is that, for any corporate leader, the markets want “consistency and a sense of stability,” noted Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. When it looks like a corporation is constantly changing gears, and “is not simply adapting to events, that is a concern,” he added. Of course, Musk’s approach has never been orthodox, and Elson pointed out that many would argue that he has done well. Yet, “the more complicated the enterprise becomes, the more standard consistency is valued.“

As far as First Amendment rights are concerned, when it comes to information that could affect investors, the SEC has regulated corporate speech since the 1930s, Elson said. “If it ever were going to be challenged, it probably would have been many years before now. It only adds to a rather concerning view of [Musk] — why are you poking the bear, so to speak?” A basic reason for the existing rules is that full disclosure to investors is in society’s interest. If Musk won that argument, “what happens to your entire system of securities regulation?” Elson asked. “Speech is protected, yes — certain speech, political speech. But commercial speech in a securities market is not protected the same way. It’s different. It has to be different.”

John Paul MacDuffie, a Wharton management professor and director of Wharton’s Program on Vehicle and Mobility Innovation, agreed. “Why fight with the SEC at this moment when you have all of these other things to focus on? Musk is really being stubborn about not adapting.”

MacDuffie and Elson made their comments on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

On the dealership issue, Musk unexpectedly walked back the announcement regarding the closures, saying that the company would close only a small number of stores and instead raise the cost of its vehicles an average of 3%. Some observers suggested that a key reason for the change was the realization that many of the dealerships have multi-year leases that cannot be canceled. When Tesla first opened the dealerships, they were key to the kickoff of the Tesla brand, said MacDuffie. “People didn’t know the brand or the product. But now they do. And it’s an open question how many people still want to do a traditional test drive.” So leaving aside how much Tesla needs them, the erratic announcements “unfortunately fit the other narrative with the SEC of an inconsistent and somewhat unstable leader,” MacDuffie added.

If Tesla falls, it’s “everyone else’s problem.”–Charles Elson

The main concerns regarding Musk relate to Tesla’s investors, because he controls his other operations. “Whether [the other ventures] rise or fall would be [Musk’s] problem,” said Elson. If Tesla falls, it’s “everyone else’s problem” — not just investors, but dealers, landlords and employees, too. The erratic decisions on dealerships will give employees pause. “Why in the world would you tie your future to an enterprise like that as an employee? You would say, ‘Gee, I think I am going to a normal dealership that I know will be around.” Similar thinking would surround recruitment, he added. “If I work there, do I get my paycheck next week? What about my pension? What about my health insurance?” The same might go for landlords in the future.

MacDuffie pointed out that there has been a recent rash of top executives at Tesla heading for the exits. The company’s top lawyer recently stepped down after two months, “which presumably had something to do with discomfort“ about the way Musk was approaching the SEC requirements.

“So imagine that beside whatever workload and stress he puts himself under, you have a depleted executive team around him … and maybe a lot of discouraged people who aren’t on board as much anymore.” One would have thought that whoever was in charge of sales would have uncovered the misstep on dealership leases before the first announcement about closing stores, MacDuffie added. “Whether or not they care that much about landlords and leases, they should certainly care about the morale of the people selling the cars,” MacDuffie said. What’s more, the dealerships also sold solar power systems for Solar City from the showrooms. Salespeople were making the transition to the new products, but now they might be shaken. “He needs them on board.” If they lose confidence, as some investors are, that “would be a severe impediment.“

A Powerful Vision

As someone who has studied auto manufacturing for years, MacDuffie said he always thought that the question of whether Tesla could get better at Model 3 production “was a huge stretch.“ The dealership issue is not nearly as complicated, he said, but discussion of Tesla’s nitty gritty business issues have taken a back burner to “the broader Musk crazy narrative.”

Musk is a great entrepreneur with great idea — but he does not execute well, said Elson.

True Tesla believers have stuck with Musk through thick and thin, noted MacDuffie. And while Musk may go “off the cliff and lose a lot of supporters,” people talk about “story investors” or “narrative investors.” They don’t follow the day-to-day business, but have “bought powerfully into the narrative,” MacDuffie pointed out.

He further noted that a quick scan of the world of autos today finds that many vehicle makers seem to be going all-in on electric vehicles. “The electric vehicle, at least from the supply side … seems to be a reality,” MacDuffie said. “The consumer demand isn’t there by any means yet, and that is part of Musk’s vision. And some people would say if Tesla didn’t exist, none of that would have happened. So the people who believe in that future are looking not only at Tesla’s troubles, but also at the progress of that vision in the broader world.”

Photo by Maurizio Pesce from Milan, Italia – Elon Musk, Tesla Factory, Fremont (CA, USA), CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=38354348

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