How unembarrassed CEOs have more freedom to be unconventional
Oh, Elon.
Why should public companies be run for the benefit of their shareholders, anyway? It’s not the law, not really. Corporate directors do normally have certain fiduciary duties to shareholders, and shareholders do normally have certain governance rights, but the idea that the sole purpose of a public company is to maximize the stock price for shareholders is mostly a myth. Like many myths, though, it works because it commands widespread belief. If the shareholders believe it, and the directors believe it, and the managers believe it, and the public believes it, then companies will maximize the stock price for their shareholders, and for practical purposes the myth will be true.
There are some enforcement mechanisms, though, to keep the people who don’t believe it in line. If a company’s management doesn’t act in the shareholders’ interests, an activist shareholder can launch a proxy fight and appoint her own directors and change the company’s direction. Or another company can mount a hostile takeover and extract value by running the company in a more shareholder-friendly way. These are blunt instruments, though. They are expensive, and legally complicated, and require way more of the activist’s or bidder’s time and attention and money than most regular shareholders can spare. And in many scenarios, they can destroy as much value as they create. If you have a visionary founder-CEO who doesn’t care about shareholder value and who just pursues his own idiosyncratic interests, but whose idiosyncratic projects nonetheless sometimes create shareholder value, replacing him with a shareholder-focused bureaucrat might just make things worse.
There are lesser enforcement mechanisms. Shareholders can write angry letters, or go on television to complain. They can introduce nonbinding shareholder proposals, or withhold their votes from the company’s directors. The key feature of all of these enforcement mechanisms is that they have no binding effect. If you don’t vote for a company’s directors, they keep being directors just as much as if you do —unless you mount an active proxy fight to nominate someone else.
The only effect of these things is to embarrass the directors and executives. This is not nothing. Indeed it seems to be the principal mechanism of corporate governance. The greatest disaster that can befall most public-company boards of directors, in the ordinary course of things, is that something like 30 per cent of shareholders might vote for a nonbinding proposal that the board doesn’t like. “Oh no, a large minority made a completely symbolic gesture,” say the directors, and promptly change their ways. This makes sense. From a corporate perspective, symbolically disgruntled shareholders become somewhat more likely to support non-symbolic enforcement mechanisms, like proxy fights and takeovers, that would actually toss out the directors. And from a personal perspective, if you are a public-company director, your main objective might be to maximize your public-company directoring, and you are more likely to get on more and better boards if your service on your current board meets with enthusiastic shareholder approval.
But one of the great arbitrages in finance — in life — is being immune to embarrassment. If you are an unembarrassable CEO, you can just do whatever you want. When your shareholders come to you and say “You should really maximize shareholder value instead,” you can reply “Well, where does it say that?” And then they can write angry letters and vote on nonbinding resolutions and you can gleefully ignore them. You are increasing your risk of a proxy fight or a hostile takeover, but in this scenario (a) you are probably enough of a risk-taker that that doesn’t bother you and (b) you have probably come by your immunity to embarrassment honestly — by actually creating shareholder value — so that the risk remains acceptable.
Obviously Elon Musk is up to some things again. And so are his shareholders.
An activist firm representing Tesla Inc. shareholders excoriated the electric-car maker, claiming that it has veered off the path to profit and urges a major overhaul of the Elon Musk-led board.
CtW Investment Group, working with union pension funds that are Tesla investors managing more than US$250 billion, opposes the re-election of three board members who are up for votes during Tesla’s June 5 annual meeting: Antonio Gracias, a private-equity investor and Tesla’s lead independent director; Kimbal Musk, Elon’s brother; and James Murdoch, CEO of Twenty-First Century Fox.
Now, sure, if 30 per cent of shareholders withhold their completely symbolic votes for a public-company director, that will be embarrassing. But when the director is the CEO’s brother, who cares, man, who cares? “We would find it inexplicable if Tesla were anything like a well-run public company,” CtW executive director Dieter Waizenegger said of Kimbal Musk’s renomination, but that sort of begs the question doesn’t it? Yes, if Tesla were a different kind of company, it wouldn’t stock its board with its CEO’s relatives, but it does, which tells you that it isn’t.
Meanwhile here are real words:
Move over, candy and flamethrowers. Elon Musk tweeted plans last week for yet another side venture: alleviating the nation’s housing crisis.
“The Boring Company will be using dirt from tunnel digging to create bricks for low-cost housing,” he wrote in a tweet about his nascent tunnelling enterprise.
A company spokesman confirmed the plans, saying the bricks will come from the “excavated muck,” and that “there will be an insane amount of bricks.” Musk has also suggested he has plans to sell them, and the company said future Boring Co. offices will be constructed from the company’s own bricks.
If Tesla were anything like a well-run company, its CEO wouldn’t also be running a whole other company that appears to consist entirely of a series of Twitter jokes. But here we are! I have often said that I would not want to be Elon Musk’s lawyer, but I kind of do want to be the corporate secretary or whoever will bring him the news that a substantial minority of Tesla shareholders have withheld their votes for his brother to be a director. “Hahahaha, who could possibly care,” Musk would shout, while tossing bricks out of the candy-filled rocket that he is flying to Mars.