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Elon Musk Threatened To Quit As CEO If Board Didn't Fight SEC & Publicly Back Him

Most people were baffled when they found out the terms of the original SEC settlement that Elon Musk turned down. Hearing that Musk had turned down a two-year director bar, leaving him as CEO, and just a $10 million fine, garnered a lot of attention in the industry and left many wondering why the CEO, and more importantly why Tesla’s board, would waste their time trying to fight the SEC instead of putting the matter behind them for such a pittance.

Now, a new report out from the New York Times explains this in depth. Apparently, the company was ready memorialize their carefully crafted settlement with the SEC, until Elon Musk reportedly called his board of directors and threatened to resign as CEO on the spot if the company entered into the prepared settlement. In addition, he demanded that the Board of Directors “publicly extol his integrity”. This led to the baffling statement that the Board of Directors made to the public, after Musk was sued, claiming at the time:

“Tesla and the board of directors are fully confident in Elon, his integrity, and his leadership of the company, which has resulted in the most successful U.S. auto company in over a century. Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders, and employees.”

This type of negotiating not only speaks to Musk’s control over the Board of Directors, but is a dangerous game of Russian roulette with regulators.

Jeffrey Sonnenfeld, a professor at the Yale School of Management, stated on Friday: “What it tells us is this board, as a strategic plan, must be using the Jim Jones-Jonestown suicide pact. They are drinking the Kool-Aid of the founder. It is completely as self-destructive as Musk is.

After the company refused the settlement at the last minute, the SEC was forced to file the lawsuit against Mr. Musk. It was only one day later that Tesla’s lawyers were reportedly back at the SEC “groveling for a second chance” at the behest of Mr. Musk.
Musk apparently changed his mind after watching Tesla stock get destroyed, losing 14% in the trading session that followed the SEC complaint. If true, this serves as further proof that Musk makes his major decisions based on what the stock price is doing.

Last weekend, Musk finally gave in and settled – not for a two year bar and a $10 million fine, but for a three year bar and a $20 million fine. Ah, the art of the deal.

As part of the SEC settlement, Tesla is required to being on two independent directors and appoint a new independent chairman. Everybody seems to be in agreement that Elon needs parental supervision now, including the SEC.

John C. Coffee Jr., a professor at Columbia Law School, stated:

“Rejecting such a favorable settlement is proof that he needs monitoring. He didn’t have a legal leg to stand on, and I’m sure his lawyer told him that. But he got very touchy about not being able to proclaim his innocence.”

And so with the suit now behind him, Tesla stock has rallied back to over $300 per share, where it was prior. The board is supposed to now be closely monitoring Musk’s interactions on social media and with investors, however it may not be working this far. The morning after the settlement was signed, Tesla blog electrek leaked an internal memo that Musk had sent to employees about being “very close” to profitability.

Musk also, seemingly as a response to the SEC’s suit, Tweeted out a music video by “Naughty by Nature” on the following Monday with a “wink” emoji.

According to the Times report, James Murdoch is being considered as the possible new independent chair of the board. It hasn’t been reported that he has discussed it or that he is interested. A second person familiar with the matter stated that no serious discussions of who will be chairman have taken place yet. The board has 45 days to adopt a new Chairman. 

Lucian Bebchuk, a professor at Harvard Law School and an expert in corporate governance, told the NY Times:

“Adding two independent directors can be expected to help, but its impact is likely to be limited. As courts and governance researchers have long recognized, the presence of a dominant shareholder is likely to reduce the effectiveness of independent directors as overseers of the C.E.O.’s decisions and behavior.”

Reportedly one of the biggest problems Musk had with the settlement was that he wasn’t going to be able to publicly proclaim his innocence after agreeing to it. Extolling his integrity, as he made the Board of Directors do and as he did with the Sierra Club months back, seems to be one of the things that Musk is great at getting people to do. Now, if he could only motivate his employees to manufacture quality vehicles with the same vigor…

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