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Elon Musk has reached a settlement with the United States Securities and Exchange Commission following charges of securities fraud after he took to Twitter to announce his intention of de-listing Tesla, which resulted in the price of shares soaring to the detriment of short-sellers hedging on the stock’s decline.
The agreement will see Musk pay a fine of $20 million, as well as step down as the chairperson of Tesla within 45 days. The Securities and Exchange Commission has also ordered the company to add two independent members to the board.
According to a statement from the Securities and Exchange Commission, Musk was guilty of creating a misleading impression that taking Tesla private was subject only to his choosing to do so and not a shareholder vote.
While the news that Musk was permitted to remain chief executive of Tesla came as a relief to many investors, his recent erratic behaviour and the apparent inability of the Tesla board of directors to rein him in suggests that the chairperson’s disregard for the shareholders of Tesla presents a risk to the long-term sustainability of the company.
The strength of the executive board is an important aspect of governance – one of the three pillars of a company’s environmental, social and governance (ESG) profile. The depth, diversity and experience of a board are all criteria believed to indicate a quality company, because a strong board of directors is able to help management navigate a company through the harshest of times.
The key purpose of a board is to ensure that the company’s affairs are conducted ethically by holding management and board members accountable, while meeting the appropriate interests of its shareholders and other stakeholders.
According to a study of Thomson Reuters ESG dataset by Bank of America Merrill Lynch, companies with high ESG scores had lower subsequent price and earnings volatility than companies with low ESG scores. The study has revealed how diverse executive boards – an indicator of good management – between 2005 and 2016 had higher subsequent 1-year return on equity (ROE) than companies with less diverse boards nearly every year over the same decade.
Musk’s contempt for Tesla shareholders is not a new phenomenon. It was also apparent the day he described the questions by Wall Street analysts’ – representing the interests of investors – at a recent meeting as “dry”, “boring” and “boneheaded”.
In my opinion, this was a watershed moment for Tesla – an incident that strongly resembles the moment Jeff Skilling, the chief executive of Enron and once darling of Wall Street, insulted an analyst for asking why Enron refused to provide a balance sheet prior to a shareholder meeting.
Investors should consider the non-financial indicators such as governance just as meaningful as financial indicators when measuring performance. ESG scores are an integral part of good risk management and should be scrutinised as much as balance sheets and earnings statements, because they are one of best predictors of long-term sustainability and company performance.
While the clean-energy electric-car maker is a company any socially responsible investor should love to invest in, the lack of action taken by the board in response to Musk’s recent behaviour highlights a potential problem with the management of Tesla and presents a significant governance risk to investors.
• Chris Potgieter is head of private client securities at Old Mutual.
