By Gene Munster
If Tesla (TSLA) doesn’t make some changes, starting with the board, it could spell the end for the company. We believe in Tesla and its mission. We want the company to be successful, but Elon Musk‘s increasingly disturbing actions have brought the company to a crossroads.
Musk’s behavior is costing Tesla in ways that may not manifest in the next quarter or two but will if the board and others in his circle can’t rein him in.
There are three ways Musk is hurting Tesla today:
- There’s been a clear drain on talent with 13 key executives leaving over the past year. The narrative about being tough to work with as a demanding manager may or may not be true. What seems more likely is that Musk is difficult to work with because of his personality. Furthermore, these executives are largely leaving Tesla to work at competitors, eroding Tesla’s competitive advantage in autonomy and electric vehicles.
- The impact on talent isn’t just affecting the existing employee base but prospective employees, too. It’s likely that prospective executive-level employees are exposed to Musk’s personality in the interview process, and the publicity around Musk’s actions is likely shrinking the funnel of high-level employees even willing to explore a job at Tesla in the first place. Without talent, Tesla cannot compete, no matter how hard Musk works.
- Musk has built an aura of being a bad-ass billionaire who does what he wants. For the last several years, that’s been great for Tesla. More recently, Musk’s aura has seemed part jerk, part bully and part liar. He surely isn’t winning new fans with how he’s been acting. It’s more likely he’s losing supporters and, since he’s the face of Tesla, that means Tesla is losing supporters.
Tesla still needs Musk
While some may think Musk needs to be fired or resign, Musk is still Tesla. Tesla needs Musk because, to his point a few quarters ago, the company’s sustainable advantage is its ability to innovate faster than anyone else. Musk is the spirit of innovation at the company and, in the face of multiple new entries into the EV space, now is the time Tesla can least afford to lose its spirit of innovation.
But Musk needs to give up chairman role
The best scenario is for Musk to stay at Tesla, but something has to change.
It seems the core problem for Musk and Tesla is that he’s surrounded by people unwilling or unable to stand up to him, as can easily happen with powerful people. At worst, this appears to be true of his board.
We think Tesla’s board needs an overhaul. There are too few independent directors and too many directors with long-term relationships to Musk as investors, overlap with other companies like SpaceX, family or otherwise. There’s no one on the board that has Musk’s ear to truly influence him to fix these self-inflicted wounds.
The easiest, most immediate action would be for Musk to resign as chairman of the board and have one of the non-independent directors resign from the board to bring on a new board member as chairperson. There was a vote earlier in the year to remove Musk as chairman, but the voting structure of Tesla’s stock requires a super majority to pass changes. The motion failed.
Constructing an optimal board
If Musk were to step down and another director gave up his or her seat, the company could explore bringing on a new chairperson with no ties to Musk that may be able to influence him. Al Gore, currently on Apple’s board, could be an interesting fit given his interest in climate change. Former Boeing CEO Jim McNerney would also be a good option as the former chairman at the company.
Beyond the shift in chairman, other board members with close ties to Musk should consider voluntarily stepping down for the good of the company. It’s in their best interest as shareholders and supporters of Tesla to see the company survive and thrive. Tesla’s chances of success are better with a board that can viably influence the CEO.
Consider Apple’s board, which includes Gore, Arthur Levinson (former CEO Genentech), Bob Iger (CEO Disney), James Bell (former CFO Boeing), Sue Wagner (co-founder, former COO BlackRock) and Ronald Sugar (former CEO Northrop Grumman). Apple isn’t the end-all-be-all, but this is what a board that can influence the CEO of a large, global organization should look like.
Time is of the essence
We wrote an open letter to Musk last month that made suggestions that were on the minds of many, but people don’t often change. The things that make Musk great are also what make him flawed. Since it’s hard to change people, the better option for Tesla is to figure out a way to change the board.
Time is of the essence, so the voluntary option is best. Without a voluntary change in the board, supermajority voting rules could spell an indefinite stalemate that doesn’t benefit Tesla’s employees, shareholders, the board or even Musk himself.
Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio.