He could have been banished for securities fraud, but the government feared the consequences for Tesla's shareholders...
Last Wednesday, Tesla CEO and chairman Elon Musk rejected a settlement with the Securities and Exchange Commission over claims he lied on Twitter about having “secured” funding to take the automaker private at $420 a share. Under the settlement, Musk and Tesla would’ve paid fines of tens of millions of dollars, Tesla would’ve added a couple of independent board members, Musk wouldn’t have had to admit guilt, and he would’ve lost his chairmanship for two years.
Three days later, Musk agreed to a settlement on mostly the same terms, only he’ll have to step down as chair for three years.
In between those 72 hours, the SEC filed a thoroughly detailed lawsuit against Musk showing that funding for a takeover offer was in no way secured. Musk “had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a ‘special purpose fund,’ and had not confirmed support of Tesla’s investors for a potential going-private transaction,” according to the suit.
The SEC determined that Musk made materially false statements, leading to significant run-ups in the stock price, which subsequently crashed when Musk backtracked. This is securities fraud, and the lawsuit sought a heavy penalty, prohibiting Musk from acting as a director or officer of any public company, permanently. But days later, the SEC reverted to nearly the same settlement Musk had turned down, with a slap-on-the-wrist fine, a little adult supervision from the board, and prescribed monitoring of his tweets (seriously).
If you have a CEO this dead to rights on securities fraud, why let him continue as CEO? According to the SEC, Musk was indispensable. In a statement, SEC Chair Jay Clayton said “holding individuals accountable is important and an effective means of deterrence,” but that he must take the interests of investors into account, and “the skills and support of certain individuals may be important to the future success of a company.”
This is mistaken and counter-productive - even dangerous. No one man or woman is or should be so vital to a company’s existence that they cannot be punished for wrongdoing. This is essentially the principle of too big to fail, brought into every corporate boardroom. If you have a reckless CEO who can’t be fired because it would hurt the company, then you don’t really have a company; you have a cult.
You could say that removing Musk’s chairmanship and giving him a boss represents some deterrent. But the SEC’s own actions are a hint to whoever becomes Tesla’s chair that Musk cannot be held fully accountable because he is too important to the company and its shareholders. The agency has tied the hands of the chairman - which, with enough support from the board of directors, could oust him - before the position is even filled.
How did we get to this cult of the CEO? It has grown in tandem with the shareholder value theory, the idea that companies operate solely to maximize stock returns. Shareholders are not the only ones with a stake in a company’s success: workers, communities, and the government all play a role. But if investors are the only stakeholders recognized, any disruption to a company, even if it might improve long-term performance, cannot be abided if it would drop the stock price. That means punishing a CEO for fraud is disallowed; or at least, the punishment must be balanced by an interest in keeping the stock stable, as in the SEC’s conception.
Then you have the media’s treatment of CEOs as masters of the universe who are singularly responsible for making companies grow. Steve Jobs was treated as such, but engineers built the iPod and iPhone, designers created its look, and marketers made it attractive to consumers. Thousands of people contributed to those products, not one guy in a turtleneck. Apple hasn’t shrunk into irrelevance after Jobs’s death because a successful company relies on more than a charismatic CEO and ineffable qualities like “leadership.”
The valorization of CEOs creates several distortions. First and perhaps most important, it fuels their obscene pay packages, which are 361 times the pay of the average worker at companies in the S&P 500. Second, it ascribes brilliance to their decision-making even when it’s lacking, and increases the potential for con artistry; the cult of the CEO is how we ended up with Theranos’ Elizabeth Holmes.
In the case of Musk, he’s now been given license to continue his recklessness. “Naughty by Nature,” he tweeted early Monday, after reaching the deal with the SEC on Saturday. Tesla’s stock jumped 17 percent on Monday.
Effectively immunizing risk-taking CEOs can hurt investors far more than it helps them. Under Musk, Tesla violated labor law by threatening worker stock options if they unionized. It has a mountain of debt as it burns through cash to reach production goals. To achieve this, Tesla built thousands of cars under a tent in the parking lot of its factory, with questionable quality control. Tesla’s drive to produce enough cars has led to unendurable parts and service delays; it can take weeks to get one of its cars fixed.
All these actions, potentially fatal to Tesla over the long term, are by-products of a single-minded, irresponsible CEO who views the law and product quality as a trifling interference on the road to profitability. It’s not good for investors to have someone with this mentality in charge. But Musk has inspired such a celebrity following that he’s inextricably linked with Tesla in the public consciousness, such that dislodging him for fraud was never seriously considered, it seems.
Extrapolate that out, and there are time-bomb CEOs scattered throughout the economy. This builds hubris into the corporate class and further severs the justice system in two, with one arrangement for the powerful and another for everyone else. It doesn’t create better products and stronger companies, just more entitled CEOs willing to set money on fire, harm workers and consumers, and laugh in the aftermath. Plus, it can make corporations fragile and introduce unnecessary risk. Losing a CEO should not create a panic, but when the CEO is a cult leader, it surely does. And that makes the stock market an incredibly hazardous place to invest money.
Regulators should hold corporate officers to the same set of rules as everyone else. This wouldn’t harm stock investments but strengthen them, forcing companies to focus on institutional capacity and selling good products and services at a fair price. The way to end the cult of the CEO is to treat workers and managers as equal contributors in corporations’ economic success.