Digital Strategy, Leadership, Risk Management

Lessons from SEC’s settlement with Elon Musk and Tesla

1 Oct , 2018  

The recent settlement between the SEC and Elon Musk shows precedence. In its initial demands, the SEC sought to restrict or remove Elon Musk as CEO of Tesla (a reach rarely seen before in its suits), largely over the tweets he sent suggesting that Tesla could be taken private for a whopping $420 a share. After some negotiation, the SEC agreed to a settlement in which Elon Musk and Tesla each pay a $20 million penalty, and Elon agrees step down as chairman of the board, but can remain on as CEO.

This case offers investors and company officers some important lessons.

  1. Social Media is Taken Seriously: Even as people use Twitter for jokes and to share unbelievable thoughts, when a company CEO tweets, it is company disclosure, even if the stock price mentioned by Musk was an overt reference to marijuana. As part of the settlement, Tesla, the firm, has also agreed to oversee Musk’s communications. The SEC is making it clear that communications, even on Twitter count, especially when markets move.
  2. High Profile CEOs Beware: By removing Musk from the chairman role, the SEC made Musk take on a boss. In particular, the new chairman is expected to be independent. It is a big change to the corporate governance of Tesla. Surely, funds that own Tesla look favorably on the possibility of having a chairman that can check, challenge, and even remove Musk, CEO of Tesla, if needed. Musk’s earlier comments in the New York Times stating the “excruciating toll” of running the firm has impacted him personally are surely making investors ask about successors. Now, Tesla shareholders can look to a new board chairman.
  3. Investors Should Feel Newly Empowered: In some ways, Musk’s tweets could have been taken as a joke or even boastful aspirations. Maybe with the right friends in Washington, the tweets would have been taken lightly or ignored. However, the SEC intervened because it heard from investors and markets. Even though Musk owns 22% of Tesla and is the founder, the SEC gave a nod to the underrepresented investors in what was a firm controlled heavily by Musk. In the settlement, the SEC showed that it is focused on investors’ interest and this case sets some important precedence on how and when the SEC will intervene on behalf of investors going forward.
  4. SEC Looks to Strengthen Corporate Governance: In addition to removing Musk as chairman, Telsa must appoint two independent board members, as part of the settlement. This is clearly a move to dilute Musk’s control over the board. In doing so, the SEC brings greater influence (rightfully) to the investors through governance review. Going forward, all firms, especially those in which the CEO is the founder and a major shareholder have should revisit the corporate governance that is acceptable to the SEC and investors.
  5. Market Turmoil is a Concern: In its press release of September 29, the SEC specifically references the price increase that Musk’s tweets caused and the “significant market disruption” that resulted. Clearly, the SEC is also concerned about flash crashes, misinformation, fake news, and what these threats can do to an old bull market that might be ripe for retreat.
  6. Darlings are Not Special Now: Just a few years ago, Tesla was a darling. It offered a promise of environmental sustainability and US manufacturing, and Tesla buyers enjoyed highly favorable tax credits when buying its vehicles. Tesla and Musk seemed to be darlings in both Silicon Valley and Washington. Not so much now, as tax credits are phased out, and Washington casts a suspicious eye towards the technocrats.

“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 the recent SEC announcement. Steven Peikin, Co-Director of the SEC’s Enforcement Division said, “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”

Expect more demands of Tesla going forward, from investors, creditors, and Washington.

This article originally appeared in The Hill.

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From Big Data to Big Profits: Getting the Most from Your Data and Analytics”

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About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University. He has worked with many professional sports teams and leading marketing organizations through the Analytical Consulting Lab, an experiential class that he founded and leads at Kellogg.

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His most recent and award-winning book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data through digital strategies. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

You can find him at @RussWalker1492 and russellwalkerphd.com

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Russell Walker helps companies develop strategies to manage Risk and harness value through Analytics and Big Data. As Clinical Professor at the Kellogg School of Management of Northwestern University, Russell Walker has developed and taught leading executive programs on Big Data and Analytics, Strategic Data-Driven Marketing, Enterprise Risk, Operational Risk, and Global Leadership. He founded and teaches the popular Analytical Consulting Lab and Risk Lab, experiential classes, which bring Kellogg MBAs together with real-world projects in Analytics and risk evaluation. His is the author of the book From Big Data to Big Profits: Success with Data and Analytics (Oxford University Press, 2015) which examines data monetization strategies and the development of data-centric business models in the new digital economy. He is also the author of the award-winning text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management as a competitive advantage. Dr. Walker consults with firms on the topics of Big Data and Analytics, Risk Management, and International Business Strategy. Russell Walker can be reached at: russell-walker@kellogg.northwestern.edu @RussWalker1492 russellwalkerphd.com



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