Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School.
At the end of a long trial, a massive option grant that Tesla awarded in 2018 to its CEO Elon Musk was invalidated by a Delaware court, which (as the New York Times described) cast “a harsh light on the behavior of … Tesla’s board of directors.” Tesla’s Board, however, did not react to the decision with contrition and an attempt to improve its governance. Instead, the Board seems to be following an approach of dismissal and defiance.
To begin, a well-governed board should take a highly critical court decision with the seriousness that it deserves, according a high priority to addressing the problems identified by the decision. But the Tesla Board chose not to do so. For example, as discussed in an earlier post I co-authored with Rob Jackson, because the court concluded that various Tesla directors displayed a lack of independence, the Board should have addressed this concern by adding candidate(s) that are “indisputably independent” (a term used by the court) for election in the annual meeting taking place this week; yet no such director was added to the slate for the upcoming annual meeting.
Similarly, as discussed in detail in another earlier post co-authored with Rob Jackson, the court explained that, in negotiating the terms of Musk’s award, the Board failed to include (or even attempt to discuss with Musk) a contractual commitment that would limit the amount of time and effort that Musk would spend on endeavors outside Tesla. Given that the Board cited a desire to get Musk’s time and attention as a major objective, one would have expected the Board going forward to seek such a commitment before providing Musk with a large compensation award. However, the Board elected to not negotiate for a new pay package with terms that would not be structurally defective. Instead, the Board is seeking stockholder support for a proposal to ratify and thus reinstate the invalidated grant exactly as it was, without even trying to obtain from Musk a time-and-attention commitment as a condition for bringing such a proposal to a vote.
Most disconcerting might well be how Tesla has been misdescribing the court’s decision in its efforts to obtain stockholder votes for the ratification proposal. In seeking such support, Tesla has been criticizing the court’s opinion in ways that could be viewed as unfair, dismissive, and disrespectful.
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