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E-MailLucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School. Kobi Kastiel is Professor of Law at Tel Aviv University and Senior Fellow of the Harvard Program on Corporate Governance.
SpaceX is planning to go public in mid-June with a governance structure that would free Elon Musk from constraints on his power. Many investors regard Musk’s talents so highly that they might be willing to overlook this lack of constraints. In their view, freeing Musk from constraints would not be a bug but a beneficial feature. However, the loosening of constraints on Musk’s power should be viewed as troublesome even by his most fervent admirers.
(We wrote a post earlier about this subject based on media reports published prior to the release of the SpaceX prospectus. Now that the prospectus has been released, the discussion below updates and further develops our earlier critique.)
To understand the governance problems of SpaceX, it is important to distinguish among different types of investor beliefs about Musk. One set of investors views Musk as having the best ability to maximize the size of the SpaceX pie (that is, the total value that the company will generate to be shared among its shareholders). Such investors might favor governance provisions that would enable Musk to set company strategy with minimal interference from outsiders.
However, there are at least four aspects of the IPO structure that should nonetheless trouble these Musk admirers. First, a belief that Musk knows best how to maximize the pie does not necessarily imply any belief about how Musk would split that pie between public investors and himself.
A major role of corporate rules and governance arrangements in public companies is to constrain the extent to which insiders can split the pie in their favor. The design of the SpaceX IPO — namely, the company’s incorporation in Texas combined with the wide array of provisions in its charter — would give Musk expansive freedom not only to set the company’s strategy as he sees fit but also to allocate the pie as he wishes.
Among other things, Musk would be free (by an explicit provision of the charter) to take for himself any business opportunities presented to SpaceX. He would also be able to arrange related-party transactions that would benefit himself at the expense of public investors, sell himself a large fraction of SpaceX’s assets at a favorable price, and secure giant pay awards. Musk would be able to make such decisions in ways that would confer very large private benefits on him; he would then obtain a substantially disproportionate slice of the pie, leaving public investors with considerably less than their pro rata share.
Second, a strong belief that Musk is by far the best leader for SpaceX now and in the coming years does not imply that he will remain so forever. The pages of business history are full of individuals who were at the very top of their game at one time but later turned subpar and value-destroying.
Accordingly, even the most fervent fans of Musk should worry that Musk’s control is so deeply hard-wired into the SpaceX structure. Can they be certain that Musk, who is 54, will still be a fitting leader at 74 or 84? And if he were to pass away, or become incapacitated or incompetent, control would presumably pass to his heirs or to those managing the trusts through which he holds his superior-voting shares. The prospectus does not disclose who these individuals are, making any assessment of this risk difficult.
Third, even if Musk were to remain the most fitting leader for decades, his incentives would matter. For any given leader, performance could be affected substantially by how closely his interests align with those of public investors. It is therefore important to recognize that the SpaceX structure would enable Musk to cash out any fraction of his equity stake without weakening his lock on control. If Musk were to move to a small-minority controller structure, public investors would be significantly harmed. (For a detailed analysis of the value-reducing costs associated with such a structure, see our article The Perils of Small-Minority Controllers.)
Fourth, no matter how exceptional a leader is believed to be, his performance will likely depend on the time and attention he devotes. At Tesla, despite Musk’s massive pay package, he was not required to limit his outside activities or commit any specific amount of time and attention to the company. Musk took advantage of that freedom by spending substantial time away from Tesla during the months in which he focused on the Twitter acquisition and subsequently on leading DOGE. Importantly, although the IPO design of SpaceX includes an ironclad commitment not to remove Musk from the CEO and Chair positions, Musk would be entirely free to choose how much time and effort to spend elsewhere.
Of course, none of these risks is certain to materialize. But they are all serious risks. Even investors who believe that Musk walks on water should give these risks significant weight when assessing how much they are willing to pay for SpaceX shares.
