Tesla's directors are right to give Elon Musk, a truly once-in-a-generation visionary, a long rope. But they need to maintain some minimum guardrails so that he does not go entirely off the rails.
The 52-year-old has popularised electric cars, a potentially planet-saving change in transportation. SpaceX, the privately held aerospace company, dominates the market for spacecraft and satellite launches, edging out incumbents such as Boeing.
The ultimate goal of the company is transformational and then some, nothing less than to enable human settlements on Mars. Then there's Neuralink which seeks to enable brain-computer interface to help those with crippling disabilities.
Musk is clearly in the Steve Jobs and Edison mould and might well surpass the former when it comes to the scale of achievements. Such a man, Tesla's board appears to have decided, needs to be freed from the humdrum concepts of corporate compliance regimes.
For those who came in late, in a lengthy story published over the weekend, the Wall Street Journal detailed extensive linkages between directors in various companies owned by Elon Musk. One sort of linkage described in the piece is par the course in what, in India, we would call promoter-driven companies. The directors have extensive financial ties and have benefited from their relationship with the Musk empire. The other facet of the relationship will surely dominate headlines, and no doubt a flood of memes, in the next few days.
The occupants of Tesla's top echelons apparently have a culture of recreational drug use. The characters depicted appear to be straight out of Mad Men — though the intoxicant of choice in the iconic show tended to be alcohol.
Remarkably, rather like teenagers, some of the directors feel social pressure to attend parties where the sun king does drugs, according to the WSJ story.
Musk has denied any drug use, pointing out that he has cleared random drug tests. SpaceX is a large contractor for NASA, and Musk's alleged drug use could potentially endanger his security clearance and the contracts.
The gravamen of the WSJ story is that Tesla's independent directors are not really independent. Their ability to supervise the charismatic CEO appears impaired, perhaps in more ways than one.
The tales of Elon is a conundrum that lies at the heart of any regulatory regime. In most large economies, including India, regulatory regimes have become increasingly onerous, regulating all manners of relationships and transactions. These include pay and perquisites, related-party transactions, disclosures of all possible conflicts of interest, including romantic relationships, and so on.
The result is a proliferation of committees. Some, such as the audit and remuneration-setting ones, consist of directors. Committees keeping an eye on workplace conduct tend to be internal. Directors are appointed by owners and /or top management, while members of other committees report to the top brass. In both cases, there is a conflict of interest.
Compliance regimes have grown in complexity in response to scandals. The implosion of Enron and Worldcom led to the Sarbanes-Oxley law in the US. The 2008 financial crisis led to tougher capital requirements for banks.
In India, stock market scandals eventually led to the creation of the National Stock Exchange (which has seen its own scam) and a robust infrastructure for trade settlement. Scams such as Satyam and Infrastructure Leasing & Financial Services (ILFS) have led to reforms. And absolutely no one is recommending a return to a Mad Men-style workplace when it comes to gender relations.
Yet, all regulatory regimes need to make exceptions. Musk is surely a test case.
One way to analyse this is to use the 'rules versus principles' framework. Rules are rigid and have to be followed. In a rules-based regime, boards can't turn a blind eye to alleged drug-taking by key management personnel (KMP).
Principles are more like a broader framework to suggest appropriate actions in various situations.
Using this framework, it is, in fact, quite reasonable to conclude that Musk's eccentric lifestyle does not pose any material risks to Tesla. Musk's personal habits do not really appear to pose any threats to Tesla's performance or, for that matter, to SpaceX, though the latter is a privately held company.
Nor do his forays into politics. Musk, for instance, is a relentless critic of President Joe Biden. That's not a risk in the US political system.
Investors, for instance, have largely ignored an earlier WSJ story on Musk's drug-taking. Independent directors and investors appear to be of the view that the so-called 'key man' risk is not having Musk in charge.
Of course, all this could change if Tesla's performance lags. In recent weeks, Tesla has been an underperformer among the so-called magnificent seven stocks as EV sales have stalled in the US.
The actions of Tesla's independent directors will be under the scanner as they evaluate Musk's bid to raise his stake in Tesla. He wants to raise his voting rights to 25% of Tesla stock before the automaker ventures into AI and robotics. Otherwise, he has threatened to develop these technologies outside Tesla.
The picture could still get hazy.
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