Elon Musk is out as Tesla's chairman — but some big questions for the board still remain (TSLA)

01.10.2018 23:53

Elon Musk will no longer serve as chairman of Tesla's board of directors as part of the CEO's settlement with the Securities and Exchange Commission.
Four of the board's nine members could still have conflicts, though, according to proxy-firm Glass Lewis.
In an interview, Glass Lewis' head of environmental, social, and governance research explained the problems facing Tesla's board.

After a dramatic weekend, Elon Musk agreed to step down as chairman of Tesla's board and pay a $20 million fine to settle a lawsuit brought by the Securities and Exchange Commission regarding his failed bid to take the electric-car maker private in August.

But even with Musk out, there are still some major issues facing Tesla's board of directors, according to Glass Lewis, one of the largest and most influential proxy advisor firms. The firm had previously raised its concerns ahead of Tesla's annual shareholder meeting in May — but many of its recommendations were not passed.

In an interview with Business Insider, Glass Lewis' head of environmental, social, and governance research explained why the SEC settlement pushes Tesla's board into uncharted waters, and that many of these problems would have been more easily fixed if it had gone about them on its own time.

"It gets challenging when it gets to this point," Courteney Keatinge, head of ESG at Glass Lewis, told Business Insider on Monday.

"Once a company has had so many scandals and there are leadership issues, it can get challenging to change that dynamic. This would have gone over easier if it were something the board had determined on its own with the support of Elon Musk. Ultimately, this is getting at what we think is best for the company and for shareholders."

Still, many of the board seats are held by directors that Glass Lewis says aren't adequately independent. Tesla discloses two directors — Elon Musk and his brother Kimbal — as non-independent, meaning they have connections that could deem them insiders. Two others, however, deserve this distinction and contribute to Glass Lewis' concerns: Antonio Gracias and Brad Buss.

"What's particularly concerning regarding director Gracias, is that he is on the audit committee which is a committee we really want unquestionably independent directors to be sitting on," Keatinge said. Gracias is the CEO of Valor Management, a private-equity firm that has received past commitments from a revocable trust owned by Elon Musk. Additionally, VMC has been paid consulting fees by Tesla in the past, Glass Lewis said.

Brad Buss found himself on Tesla's board thanks to the SolarCity merger back in 2016. Tesla considers him independent, but Glass Lewis says this connection makes him unfit for the board's audit committee.

To be fair, the duo's connections on paper don't necessarily mean Gracias and Buss can't vote independently in the board room. "What's important to remember is that boards are a big group of people," Keatinge explained.

"And there are differently personalities and traits that people have. However, we're not in the board room, so it's hard for us to understand how the board is working if there is an actual check on Elon Musk and his behavior."

Even if Musk's removal as chairman is a wake-up call for shareholders, replacing nearly half of the directors won't be something investors can do in a single vote thanks to the staggered terms used by Tesla.

"Not every director is up for election every year, which serves to entrench the board," Keatinge said. "So shareholders were not able to vote on whether or not they should continue to remain on the board and will serve a three-year term."

Going forward it all comes down to who the board chooses to replace Musk as chairman.

"Things can change drastically even in a year," said Keatinge.

"It will depend on what Elon Musk's relationship and what the board member's relationship with the independent chair looks like and that's really going to determine how effective this individual can be. It is an entrenched board and there are a lot of personal ties to Musk, so its hard to tell if they will that director the deference it will require."

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