Meet the Tesla Board Being Tested Like Never Before by Musk

(Bloomberg) -- Leave it to a flamethrower peddler to redefine the trope about boardroom hot seats.

Tesla Inc. Chairman Elon Musk thrust his eight fellow directors into an unprecedented situation this week by tweeting that he might take the electric-car maker private. Six of them issued a three-sentence statement in response that failed to extinguish a blaze of questions, including how the deal would be funded, in what way it could be structured and how likely it is that the company pulls it off.

The directors are probably used to close examination by now. Tesla’s board came under fire this year as the company was struggling to meet production goals for the Model 3 sedan and burning through billions in cash. A shareholder pushed for the election of an independent chairman, and an activist investor group waged a battle against the reelection of three directors who were up for vote. While the board prevailed, its independence and competence in serving as a check on the CEO are about to be tested like never before.

“The board has to assert themselves,” Betsy Atkins, a director at companies including Wynn Resorts Ltd. and Volvo Cars, said Thursday on Bloomberg Television. “The board is responsible for the CEO and they are the oversight mechanism for the shareholders. If they have a cowboy, they’ve got to reel him in.”

A Tesla spokesman declined to comment, and directors didn’t respond to requests for comment. Shares of the Palo Alto, California-based company fell 3 percent to $359.18 as of 10:21 a.m. Thursday in New York, well below the $420 price at which Musk said shareholders would be bought out.

The six directors said Wednesday that Musk, 47, began a conversation last week with the board about going private and discussed how it could be better for the company’s long-term interests. They also said that the chief executive officer “addressed the funding for this to occur,” shedding little additional light on Musk’s initial tweet in which he claimed to have secured funding.

“That seems like a very carefully phrased statement,” said Adam Pritchard, a professor of securities law at the University of Michigan. “They’ve added some credibility” so that Musk “doesn’t look like a nut job,” and gave him cover by explaining that there’s “apparently something more to it than him just thinking out loud.”

Until there’s a formal proposal for the sale of the company, the board doesn’t have to make any further public disclosures, Pritchard said. Next steps include setting up an independent committee and a formal structure to evaluate the sale -- and one that isn’t beholden to Musk.

That could be tricky. Several of Tesla’s directors have close business or personal ties to the chairman and CEO. That includes Antonio Gracias, who serves as lead independent director but isn’t classified as independent by either of the major proxy advisory firms, Institutional Shareholder Services or Glass Lewis.

“Having a strong independent board is extremely important for us and the funds we work with to ensure that this has been looked at through independent eyes,” said Dieter Waizenegger, the executive director of CtW Investment Group, which represents union pension funds. The group mounted the offensive against the three directors who were up for a vote in June.

Gracias, a Tesla director since 2007, founded Valor Equity Partners and participated along with the private equity firm in funding rounds and a debt raise that Tesla conducted before its 2010 initial public offering. He’s also backed Musk ventures PayPal Holdings Inc., Solarcity Corp. and Space Exploration Technologies Corp. Musk gifted him the second Roadster sports car that Tesla ever built.

Brad Buss, who served as a SolarCity chief financial officer before Tesla acquired the company in 2016, is another director that the electric-car maker deems to be independent despite not meeting ISS or Glass Lewis’s criteria.

“The board looks a little bit not ideal. You’ve got a lot of co-investing, cross-relationships,” Atkins said. “That’s not what you look for in a company that’s been public for eight years.”

The director most clearly lacking independence is Kimbal Musk, a food entrepreneur and Elon’s brother. He founded a fast-casual eatery called The Kitchen that’s modeled after Chipotle Mexican Grill Inc., where he’s also a director.

“Having your brother on the board, it’s a red flag,” Waizenegger said.

Elon and Kimbal Musk both were left off the statement that Tesla directors released Wednesday, as was Steve Jurvetson, who’s been on leave from the board since he parted ways with the venture capital firm he co-founded, DFJ. The exit in November of last year was precipitated by accusations of misconduct that he’s denied, and Tesla hasn’t addressed whether he’ll return as director.

Tesla’s other directors include Ira Ehrenpreis, a venture capitalist and SpaceX investor; and Robyn Denholm, the chief operating officer of Telstra Corp., Australia’s largest telecommunications company. Its newest members are Linda Johnson Rice, who leads the Johnson Publishing Company, known for Ebony magazine; and James Murdoch, the CEO of Twenty-First Century Fox Inc.

ISS and Glass Lewis questioned ahead of Tesla’s shareholder meeting in June whether the son of News Corp. Executive Chairman Rupert Murdoch would devote adequate time to his role as director at the electric-car maker, citing his role as Fox CEO and his seats on four other companies’ boards.

“Having a strong and independent board and a board who can dedicate its time to it to oversee a situation like that is extremely critical,” Waizenegger said.

For more on Tesla, check out the Decrypted podcast:

--With assistance from Dana Hull and David Westin.

To contact the reporter on this story: Rebecca Greenfield in New York at rgreenfield@bloomberg.net

To contact the editors responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, Kevin Miller

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