Tesla’s Musk Steps Down as Chairman Following SEC Charge

By Eve Tahmincioglu
September 28, 2018


Is it time to review top management’s social media use?

CEOs tweet. This is today’s reality. But how they use social media to talk about their companies is the question, and it’s unclear if boards are watching.

Apple CEO Tim Cook tweeted recently about the company’s new products that:

“This is what inspires us — after so much hard work by so many, getting to share Apple’s latest innovations with you. Hope you love them as much as we do!”

And last week the CEO of Salesforce.com Marc Benioff tweeted:

“In a world where tech is taking us over, we all have a higher responsibility, to ask ourselves 'what is truly important to us?  What is our highest value?’ At salesforce, nothing is more important than the trust we have with all of our stakeholders.”

Both men were tweeting about their companies, but clearly these tweets won’t get the Securities and Exchange Commission breathing down their backs. But potentially misleading tweets that impact a company’s stock can, and did in the caase of Tesla CEO and former Chairman Elon Musk.

On Thursday, the SEC announced it was charging Musk with securities fraud, in part, because of a series of tweets he sent on Aug. 7 about the potential of taking the company private and that he secured funding for such a move: “Am considering taking Tesla private at $420. Funding secured.” And two days later, the SEC announced Musk has settled the case, agreeing to pay a fine and to relinquish the chairman role, a position he can not stand for reelection for three years. He will stay on as CEO.

According to the SEC, the settlement requires that:

  • Tesla will appoint a total of two new independent directors to its board;
  • Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
  • Musk and Tesla will each pay a separate $20 million penalty.  The $40 million in penalties will be distributed to harmed investors under a court-approved process.

“The total package of remedies and relief announced today are specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, in a statement.

Right after Musk's August tweets there were reports of a potential SEC investigation and rumblings that there was unrest in the boardroom over the claims.

The SEC complaint posted late Thursday, “alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies.” And that “Musk’s tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.”

Tesla’s stock took a hit Friday following the SEC announcement, and the fallout should raise questions in the boardroom about what top managers are doing in social media, and whether there should be policies in place for the folks in the corner office, similar to what rank-and-file employees have to abide by.

The key to the SEC settlement complaint that should be of interest to boards is the company was called out for not having procedures in place to monitor Musk's social media use, despite having filed an 8-K form with the agency in 2013 alerting investors that the CEO was going to tweet company information.

The complaint states that Tesla "did not have disclosure controls or procedures in place to assess whether the information Musk disseminated via his Twitter account was required to be disclosed in reports Tesla files pursuant to the Exchange Act within the time periods specified in the Commission’s rules and forms. Nor did it have sufficient processes in place to ensure the information Musk published via his Twitter account was accurate or complete."

Why wasn't there someone watching the chief executive? 

When I was a labor reporter for NBCNews.com, I wrote more than one story on how companies were creating policies to make sure their workforces weren’t doing nefarious things in social media, whether it was divulging company secrets or dogging their employers online.

But since I’ve taken on the role of executive editor and digital director at Directors & Boards I’ve been amazed at how few directors have thought about social media policies for executives and how few even know what their CEOs are doing online. It’s not totally surprising since the average age of directors in the United States is 60 plus, and many weren’t immersed in all things digital like their younger counterparts.

Given the fall out with Musk, the first reaction may be to ban CEOs from Twitter and other social media platforms. That’s probably not a great idea given the positives of executives spreading the word about a company in the digital world; and also there’s research that correlates better stock performance among companies whose chief executives tweet.

According to a report released earlier this year by Ruder Finn, “THE SOCIAL CEO How High Performing CEOs Use Social Media”: 50% of high-performing CEOs have 2 or more accounts (Facebook, LinkedIn or Twitter) versus only 28% of low-performing CEOs, while 72% of low-performing CEOs had 0 or 1 accounts.”

The authors of the report concluded that: “To be competitive, CEOs need to find their ‘voice’ on social media, while carefully navigating the most important topics in the world today and staying relevant to their core business.”

The balance, however, is figuring out what’s relevant and what can get a CEO and a company in hot water.

“I think the SEC’s [Musk] suit reinforces the idea that public company officers and directors should speak to counsel before making any public announcements regarding their companies,” maintains public company lawyer JR Lanis, a partner with Drinker Biddle & Reath.  “The ‘what’ and ‘when’ of SEC disclosure is not to be taken lightly, and can result in criminal prosecution if not addressed in advance.”

Social media training for both management and directors is also a good option.

“Boards can sometimes assume that their C-suite also knows when and how to appropriately use social media for corporate purposes, which is not always the case,” according to an article published earlier this month by the National Association of Corporate Directors titled: “When CEOs Go Rogue: Director Oversight of Corporate Goodwill and Social Capital.” “An executive-level training covering social media use policies, as well as policies for communicating with outside constituents, generally is often beneficial to all involved.”

It’s also a good idea to review what the SEC sees as proper social media announcements. The agency came up with guidance following debate over another CEOs social media use about five years ago. Reed Hastings, Netflix’ CEO, used his personal Facebook page to write about the company’s subscribers data and that brought on an SEC investigation.

The agency didn’t take any action against Hastings given the uncertainty over how existing regulation – Regulation FD and its 2008 guidance on the issue – applied to social media, but it clarified the overall approach:

Although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” within the meaning of Regulation FD.

The SEC took pains to make clear that management’s use of social media is a reality of today and an integral part of how companies promote their products and service. But, the basics of securities law still apply.

“Taking care to provide truthful and accurate information is among a CEO’s most critical obligations,” wrote Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, in the statement about Musk’s charge.  “That standard applies with equal force when the communications are made via social media or another non-traditional form.”