Column: If the SEC’s punishment of Elon Musk harms Tesla shareholders, it’s their own fault
A curious, not to say bizarre, line of chatter has emerged in connection with the fight between Tesla Chief Executive Elon Musk and the Securities and Exchange Commission.
The argument seems to be that the SEC is wary of coming down too hard on Musk for his alleged violations of securities law and CEO norms because removing Musk from management — the nuclear option, so to speak — would hurt only Tesla shareholders. That would be true, it’s said, even of any lesser steps by the SEC to rein in his authority at the electric car company.
Among the leading exponents of this argument is Musk himself, which should give you a clue to its pertinence and logic. Musk voiced it via Twitter on Tuesday, apropos of the SEC’s request that a federal court find him in contempt for issuing an inaccurate Feb. 19 tweet about Tesla’s production rate.
I want to be clear. I do not respect the SEC.
— Elon Musk
In response to a follower’s tweet asserting that Musk’s tweet hadn’t affected the price of Tesla shares, but the SEC’s contempt motion did, Musk tweeted, “Exactly…. Something is broken with SEC oversight.”
But he’s not alone in fretting that stiff SEC action would hurt only his shareholders, who are ostensibly innocent parties. Here’s John Coffee, a distinguished expert in securities law at Columbia University, quoted by Yahoo Finance:
“The court is a little bit hamstrung because while they want a strong deterrent they’re supposed to be serving shareholders,” Coffee said. “I don’t think any judge wants to eliminate him from Tesla because a lot of people believe that Tesla can’t survive without him.”
Similarly, Bonnie Hancock, a management expert at North Carolina State University, told the Wall Street Journal, “It’s a situation where it’s hard to say what’s the right thing to do for the shareholders. It’s a horrible distraction that he’s created, but if they ultimately removed him as the CEO, that’s an even bigger distraction.”
A quick recap: In August, Musk tweeted that he had made a deal to take the car company private for $420 a share, a substantial premium over its price at the time. The tweet said funding for the transaction was “secured.” In fact, he had made no such deal and no funding was secured.
The SEC sued Musk and Tesla for misleading investors. The regulators soon reached a settlement in which Musk and the company would each pay a $20-million fine, Musk would give up his post as Tesla chairman though he would remain CEO, and he would agree that he would submit any tweets carrying potentially material information about Tesla to company lawyers for pre-approval.
He didn’t keep his promise. In December, he told “60 Minutes” that his tweets still weren’t being vetted in advance. (“I want to be clear,” he told the interviewer, Lesley Stahl. “I do not respect the SEC.”)
And on Feb. 19, he issued an inaccurate claim about Tesla’s 2019 auto production that also had not been vetted. This week, the SEC made the point that the Feb. 19 statement was a flagrant violation of the settlement, and asked the federal judge overseeing the case to declare Musk in contempt. The judge has scheduled a hearing for March 11 in New York.
Musk was back on Twitter on Wednesday, now posting under the new handle “Elon Tusk.” In a series of rapid-fire tweets he said that “Some Tesla news” would be issued Thursday at 2 p.m. California time. Speculation in the market is that the announcement is related to the rumored Model Y electric SUV. It is unclear if the tweets were pre-approved by Tesla, or if the content was sufficiently material to fall within the settlement terms.
The SEC hasn’t said what punishment it would like to see if Musk is found in contempt of court. That’s where the notion that its hands are tied in pressing for a significant penalty comes from. The underlying notion, obviously, is that Musk and Tesla are so closely identified with each other that the company would crater if he were removed or his authority were significantly constrained. More precisely, its stock would crater because it’s so widely assumed that he’s responsible for Tesla’s success.
As arguments against strict punishment for corporate wrongdoing go, this is amazingly weak.
For one thing, the extent to which Tesla depends on Musk is a dynamic situation — if Musk’s behavior becomes a legal or economic liability for the company, then it will be better for Tesla if he’s ousted. Moreover, to say that Tesla’s success depends on Musk’s presence is tantamount to saying that it’s a lousy company being kept afloat by its CEO’s celebrity.
As it happens, that’s a plausible point. Tesla’s struggles to reach profitability arguably are related to bad decisions made by Musk, including its production infrastructure and the poor manufacturability of some of its cars — the result of design decisions attributed to, yes, Musk. As the company’s quarterly disclosures reveal, much of its reported profit comes not from selling cars but from financial engineering, including the sale of government emissions credits.
Most important, the idea that the SEC should go easy on Musk to protect his shareholders contradicts the common argument against regulations that would promote so-called shareholder democracy — ensuring access to the proxy statement, for example, or reining in excessive executive compensation, or banning stock structures that give founders unassailable control of their company even if they own a minority of the stock.
The idea is that discontented shareholders always can vote with their feet. They don’t like it, they can sell their stock.
That’s true as far as it goes, but doesn’t it also apply when a company CEO runs afoul of the law or the regulators, as Musk has?
Numerous factors go into an investor’s decision to hold a stock, such as an assessment of the company’s future earnings and the extent to which they’re reflected in the share price, the prospect that it will acquire or be acquired, and the capabilities of management.
The last of these surely encompasses whether management will get the company in trouble with the SEC, leading to a fine or a forced restructuring in the corporate suite. Is your CEO inclined to pick a fight with the most important securities regulator in the land? That’s a factor. Does he show an inability to fulfill his legal commitments? That’s a factor. Will he cost the company, say, $20 million in fines, with the prospect of stiffer penalties to come? That’s a factor.
For one reason or another, Tesla shares closed Wednesday at $314.74, or 5.3% higher than their close Feb. 25, when the SEC filed its contempt motion. Investors, in other words, are factoring into their investment decision a bet that the SEC will show itself to be a paper tiger and won’t trample on Musk in court.
They may be right, or they may be wrong. But they’re making a deliberate calculation, and backing it up with their own money. If the SEC demands that Musk permanently step away from Tesla, and the shares tank, should we feel sorry for them? Obviously not. They can’t claim to have been blindsided because the possibility that the SEC will demand harsh redress is on the menu.
They can vote with their feet today or hang in there with their fingers crossed. But none is a prisoner of the system. No one is forcing them to own Tesla shares, and no one is preventing any holder from selling out. (Some may own Tesla via a mutual fund, but if they’re completely ignorant of their exposure, then they probably haven’t been paying attention to their semiannual portfolio reports, and who’s fault is that?)
The SEC may have reasons to go easy on Musk at this moment, and reasons to lower the boom — among the latter, what authority would the SEC and federal courts have against corporate wrongdoers in the future if they allow such a blatant breach of an agreement to pass? Moreover, don’t investors and the market generally have an interest in incentivizing good behavior by corporate executives?
The least of the SEC’s concerns should be that its enforcement of a legal commitment would hurt shareholders. If any investors are still holding Tesla stock when a stiff judgment comes down, it’s their own problem.