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Tesla’s Corporate Governance Overview

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Tesla’s Corporate Governance Overview
Table of Contents
  1. Introduction
  2. Price Cuts and Share Price Plunge
  3. Erratic Behavior
  4. Corporate Governance Decisions
  5. Conclusion
  6. References

Introduction

Tesla Incorporation is an American automobile organization that produces electric cars and explores clean energy. It was founded in 2003 and has grown significantly over the past two decades. However, recent events at the firm have left investors and other stakeholders worried with regard to the company’s leadership stability and corporate governance. Occurrences such as the CEO’s misleading tweets, employee turnover, fraudulent dealings, price cuts, share price plunges, poor corporate governance, and the founder’s erratic behavior have affected the company negatively.

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Price Cuts and Share Price Plunge

In 2019, Tesla reported record output during the fourth quarter, which represented a 13 percent increase from the previous period. However, investors responded with a sell-off and analysts described the gains as a disappointment (Boudette, 2019). The company cut the price of all models by $2000 after a federal government’s tax credit on electric vehicles. However, critics argued that the company was insulating itself against decreased demand after its initial mass-market offering of the Model 3 (Boudette, 2019). Moreover, the firm experienced serious supply chain challenges while delivering cars to customers. Slow deliveries compelled Tesla to acquire three tracking companies to speed up the process (Boudette, 2019). Despite the challenges, the company reported increased profits during the third quarter.

Erratic Behavior

Musk’s behavior in recent years has caused unease among investors. For instance, during an appearance on the Joe Rogan show, he smoked marijuana. This came at a time when the company’s chief accounting officer (Dave Morton) had resigned after working at the firm for a period of less than a month (Bomey, 2018). These incidents raised concerns regarding the stability of Tesla’s leadership. As a result, they led to the decline of the firm’s share price by 6.3 percent (Bomey, 2019). The CEO has been urged repeatedly to focus on speeding up the production of electric vehicles to meet the high demand. Earlier, Musk had claimed on Twitter that he was planning to take the company private and that he had secured funding to facilitate the move. Morton said that the attention placed on Tesla and the pressure to deliver within the company necessitated his resignation (Bomey, 2019). The compulsion to succeed was one of the major causes of the high turnover at the corporation. Musk says that pressure is imperative in order to ensure that the company achieves its goals.

Corporate Governance Decisions

The company’s CEO has engaged in several decisions that have been questioned by investors and the Securities and Exchange Commission (SEC). In a 2018 filing, Tesla disclosed that Musk had spent $10 million in the purchase of shares and that he intended to spend a further $20 million to acquire a bigger stake (Maidenberg, 2018). He bought about 30,000 shares using a trust and increased his ownership of the company to approximately 20 percent. He had been accused by the SEC of fraud, and a settlement deal with the agency cost him and the company $20 million each in fines (Henning, 2018). Musk was required to step down as the company’s chairman for the next three years and find a replacement. He has been accused of focusing primarily on his critics and ignoring more important matters that are pertinent to the company’s future (Goldstein, 2018). For example, he has been advised to focus on increasing production capability in order to meet the company’s high number of orders.

The SEC had accused Musk of misleading investors by claiming that he had secured funding to take Tesla private. It was unethical for the CEO to manipulate investors through claims of taking a publicly-traded company private. In a Twitter post, he had claimed to have the money to conduct a buyout of the company and would offer investors $420 a share (Goldstein, 2018). He had initially refused to settle but later agreed to more stringent terms that had a lenient penalty (Goldstein, 2018). For example, the new terms doubled the penalty and barred him from the company’s chairmanship for three years, compared to two years in the initial (Henning, 2018). The decision was an indication of the SEC’s commitment to compelling companies to change how they operate. The penalty was a positive move toward supporting the alignment of the company’s governance for the future. The settlement eliminated uncertainty among investors as Musk leads other companies. It allowed him to retain the chief executive position.

At the beginning of 2019, Musk surprised investors by naming Zach Kirkhorn, a 34-year old vice president of finance, as the company’s chief financial officer. Kirkhorn would replace Deepak Ahuja who joined Tesla in 2008. He had left in 2015 after serving for 7 years, only to return in 2017 after the then CFO Jason Wheeler resigned (Higgins, 2019). The announcement of Kirkhorn’s appointment came as a surprise to investors, and it led to the decline of the company’s share price by 4.5 percent (Higgins, 2019). The announcement was made during the close of a conference call with analysts, further casting doubts on Musk’s leadership.

Conclusion

Elon musk has engaged in erratic behavior and made questionable decisions that have left investors worried. His involvement in fraud, the high rate of turnover, his doubtful decisions regarding the appointment of top executives, and the company’s uncertain governance have affected the firm negatively. The share price has been adversely affected by these moves and analysts are attributing the outcome to his unpredictable behavior that could destabilize his leadership and compromise the corporation’s governance.

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References

Bomey, N. (2018). Musk’s behavior, turnover at Tesla worry investors. Arizona Republic. Web.

Boudette, N. E. (2019). Tesla reports record output, but cuts prices, and its shares plunge. The New York Times. Web.

Goldstein, M. (2018). Elon Musk steps down as chairman in deal with S.E.C. over tweet about Tesla. The New York Times. Web.

Henning, P. J. (2018). How the S.E.C. is trying to push traditional corporate governance upon Tesla. The New York Times. Web.

Higgins, T. (2019). Elon Musk’s surprise pick for Tesla CFO is a relative unknown. The Wall Street Journal. Web.

Maidenberg, M. (2018). Musk spends $10 million on Tesla shares, plans to spend $20 million more. The Wall Street Journal. Web.

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