Share purchases, board seats, poison pills…oh my!
If the saga of Elon Musk’s quest for Twitter was a rollercoaster, it would rank among Six Flags’ finest.
In less than 30 days’ time, Musk went from buying a 9.2% share of the company to joining the board of Twitter to not joining the board of Twitter to surviving the Twitter board’s “poison pill defense” to purchasing the social media giant outright for $44 billion. In the wake of the deal’s consummation, we spoke to Patrick McGurn, a corporate governance and ESG expert who served as special counsel and managing director of Institutional Shareholder Services for 25 years, about the impact Musk’s latest acquisition could have on Tesla and its board.
Directors & Boards: How does Tesla’s board keep Elon Musk focused on the company's business once he acquires Twitter?
Patrick McGurn: Breathless commentators have lamented Elon Musk’s planned buyout of Twitter as the proverbial straw that will break the Tesla Technoking’s back with respect to his frenetic workload. In reality, Musk’s dance card reached the tipping point years ago. Musk has served as Tesla’s CEO since 2008 and as a board member since 2004. During that period, he also served as CEO, CTO and chair at SpaceX (since May 2002), and he founded tunnel-driller The Boring Company and brain-machine interface developer Neuralink. While Musk’s sleep reportedly suffered from this hectic schedule, these entities appear to have thrived over this period despite the time-share arrangement.
The real fear for Tesla’s directors is not Musk suddenly spreading himself too thin, but that he shifts his priorities to his shiny new toy from the mundane tasks required to keep the electric vehicle maker on its current trajectory amid growing competitive challenges. Tesla is a classic COLT — that’s my shorthand for a unicornish corporate creature that’s half “CO-mpany” and half “cu-LT” of personality. As with other COLTs, a significant portion of the company’s inflated market cap has been driven by many investors’ hero worship of Musk as a market visionary. Without Musk wedged in the jockey saddle, this hard-charging COLT would probably pull up lame.
To avoid such an outcome, the Tesla board needs to get Musk some help in getting to the finish line. Tesla directors must focus on building out the company’s top management. The goal isn’t to find a replacement for the 50-ish Musk or even to build a bench, but to deepen and broaden Tesla’s starting lineup. In addition to the Technoking, Tesla’s website lists just two other senior execs: Master of Coin (no, I’m not making these titles up) Zachary Kirkhorn, who has served in various finance positions continuously (except for a break to attend business school) since joining the company in 2010, and senior VP, powertrain and energy engineering Andrew Baglino, who has served in various engineering positions since joining Tesla in March 2006. That’s it. Such a tight-knit and insular C-suite team may have worked in Tesla’s early days, but it won’t cut it going forward as Tesla loses its first mover’s advantage. The board must get Musk’s buy-in for this executive expansion, but it can’t afford to wait.
D&B: What risks does the Tesla board invite by getting tied up in Elon Musk's financing of his bid for Twitter?
PM: The fates of Tesla and Twitter will be connected at the hip because of Musk’s plans to finance his highly leveraged buyout by using a significant portion of his remaining unencumbered Tesla stock as collateral. Musk's offer puts the value of the takeover at $43 billion, including the 9.2% of shares that he already owns. While some debt financing will be provided by a Morgan Stanley-led bank syndicate, Musk will take on much of the burden himself with $21 billion in equity financing and putting up more than 60 million Tesla shares as collateral for a loan.
Pledging shares and margin loans are risky in good times, but they can prove fatal in bad times. Some Elon watchers guesstimate that when the Twitter deal is done and dusted, Musk will have pledged as collateral the lion’s share of his Tesla shares. Given the talk of a Y2K-style tech bubble and growing odds of a recession, risk will ratchet up for Musk in lockstep with his leverage. A sustained downturn could force the sale of some of Musk’s Tesla shares, putting pressure on the share price and lowering the collateral value further. Given these risks, it’s not surprising that some of Musk’s fellow Tesla shareholders ran for the exits upon announcement of the deal’s terms.
D&B: What experiences, qualifications, attributes and skills in the boardroom does Tesla need to keep the company on the road to success?
PM: Tesla’s board festered for years until late 2018 when Oracle founder, chair and CTO Larry Ellison and then-Walgreens HR head Kathleen Wilson-Thompson joined the board as “independent” directors to satisfy part of a settlement with U.S. securities regulators over Musk’s ill-considered 420 tweets about taking the company private. Musk also agreed to step down as chair with Robyn Denholm, the former chief operations officer of telecommunication firm Telstra named to lead the board in November 2018. In early 2019, Tesla announced plans to shrink the board down by more than one-third by 2020, a move that resulted in the exit of some of Musk’s close advisers and friends.
The resulting eight-member board is too small, especially when two directors serve on zero key committees. Musk’s brother, Kimbal, fills one of the seats despite being unable under stock market listing rules to serve on any of the key committees because of his familial ties. Ellison, who openly acknowledges his “very close” friendship with Musk, also serves on none of the key outside committees.
This smaller pool forces the other directors to take up the slack, especially Denholm. In addition to heading the board, she is chair of the audit panel committee (as well as a financial expert) and a member of the nom/gov and compensation committees. She also chairs the disclosure controls committee that oversees Musk’s “Twitter Sitter” settlement with regulators. Denholm, a director since August 2014, also now runs a venture capital firm. Prior to Telstra, Denholm served finance stints at Juniper Networks, Sun Microsystems and Toyota Motor Corporation Australia (the board’s only and very tenuous tie to its own industry).
Wilson-Thompson also does triple duty by serving on the nom/gov, compensation and Twitter Sitter panels. She brings a wealth of HR experience — albeit in tangential industry sectors — that will help in the aforementioned build-out of Tesla’s leadership team. Prior to Walgreens, Wilson-Thompson held various roles at Kellogg from July 2005 to December 2009, including most recently as its senior vice president, global human resources.
ESG is a boardroom strength with two directors appearing to share Musk’s “Save the Planet” prime directive. Ira Ehrenpreis, who chairs both the nom/gov and compensation committees, is founder of DBL Partners, an impact investing venture capital firm. DBL, currently managing more than $1 billion of capital, invests in companies that can deliver both top-tier financial returns and social/environmental change. Hiromichi Mizuno, the newest member of Tesla’s board, is the former CIO of Japan’s trillion-plus dollar pension fund, and he serves on a number of government advisory boards, including the board of the PRI and World Economic Forum’s Global Future Council.
Denholm, Wilson-Thompson, Ehrenpreis and Mizuno form a highly diverse core of key boardroom competencies, but they lack recent or relevant experience in the sectors (with the exception of clean tech) in which Tesla operates. That leaves the board’s two former CEOs, but they also lack direct sectoral expertise.
It’s hard to say what Ellison has to offer as an independent director, but he’s the second largest individual holder (behind only Musk) with roughly 1.5 percent of Tesla shares, and that counts for something. Musk has made some well-publicized flights to seek insights from the “Oracle of Lana’i.” As the longtime poster exec for share pledging and excessive compensation (that’s how he bought the aforementioned Hawaiian island), however, he’s hardly a great role model for Musk. Ellison carries a wealth of tangential tech sector experience, however, having served as Oracle’s CEO from June 1977 to September 2014.
It’s much harder to see what value Tesla gets from independent director James Murdoch, who joined the board in July 2017. James, the younger of Rupert Murdoch’s two sons, has managed to rehab his reputation in the wake of his failed oversight role in News Corp’s phone-hacking scandal. That career comeback came via his roles at entertainment firm 21st Century Fox. While Murdoch serves on the nom/gov, audit and Twitter Sitter committees, he lacks industry-specific expertise in the company’s core arenas — autos, industrial manufacturing, clean tech and global supply chain. Perhaps Musk could tap Murdoch’s expertise at Twitter and open a seat on Tesla’s board for someone else (maybe several new somebodies) with relevant experience.