On Tuesday, June 5 shareholders of Elon Musk’s Tesla voted to keep the CEO as the company’s chairman of the board. Tesla shareholder, Mr. Jing Zhao who owns 12 shares of the company’s stock, proposed that the Chairman of the Board of Directors, currently held by Musk, be an independent director. His proposal states, “although the current leadership structure, in which the positions of Chairman and CEO are held by one person, could provide an effective leadership for Tesla at the early state, now in this much more highly competitive and rapidly changing technology industry, it is more and more difficult to oversee Tesla’s business and senior management (especially to minimize any potential conflict) that may result from combining positions of CEO and Chairman.”
These frustrations began to arise earlier this year when production was stalled on the new mainstream Model 3 sedan amidst large sums of money pumped into its construction. CNN Money also reports that “Tesla has never made a full-year profit as its grown into a major force in the auto industry.” However, investors, lenders, and customers are big believers in their charismatic CEO who, as The New York Times reports, is defined by his “moonshot mentality.” The shareholders subsequently rejected Zhao’s proposal and stated according to Business Insider Tesla’s “success to date would not have been possible if the Board was led by another director. The Board believes that it is precisely during times when a company must quickly adapt to constant change and outside pressures that Board leadership needs to be lockstep with the Company’s operations.”
But challenges for Tesla are continuing to pile up. The New York Times reported on June 13 that Tesla was laying off around 9 percent of its workforce in an attempt to conserve funds. Still, shareholders and board members continue to stand beside their Chairman of the Board and CEO. Reuters reports that shareholders are “making a bet on Elon Musk.” One top-20 investor on Tesla’s Board of Directors compared Musk to Steve Jobs, saying, “These people are geniuses. You either believe him or you don’t.”
Did Tesla’s Board Make the Right Decision?
The question that remains is if Tesla’s shareholders made the right decision to keep the CEO and Chairman of the Board positions unified. This controversy surrounding corporate governance best practices is often debated in boardrooms around the globe. According to Harvard Law, “just over half of companies in the S&P 500 index are led by a dual Chairman/CEO, down from 77 percent 15 years ago.” 50 percent is still quite a significant number, especially when Harvard continues, “separation of the chairman and CEO roles is not unambiguously positive.” There is little research to support or require the separation of these roles. However, Corporate Compliance Insights suggests, “Concerned shareholders often urge that a unified role leads to lack of oversight and diminishes the independence of a board.”
The Case for Chairman of the Board/CEO Separation
Although little research suggests separating the role of CEO and Chairman of the Board promote better governance, the positives are appealing as we have seen from Tesla shareholder Zhao’s proposal. One reason to separate the positions is a conflict of interest. Characteristically, the board of directors is tasked with overseeing, hiring, and firing the CEO. Instilling an independent Chairman of the Board could alleviate this conflict. Independent directors are able to effectively address the performance of the CEO and any abuse of power or funds that may be taking place. Corporate Compliance Insights continues, “An independent Chairman of the Board can create an independent source of authority with tangible authority to address the concerns of the board.” This sentiment is echoed in the CBS News article addressing Tesla’s decision and citing a misuse of Musk’s talents: “The company would be best served if Musk would give up his chairman role and focus on running the company rather than corporate governance.” However, the negatives to separating the roles of CEO and Chairman of the Board seem to put companies at greater risk for lack of transparency and day-to-day involvement.
A Unified Front
When considering the future and day-to-day operations of a company, combining the roles of CEO and Chairman of the Board are irrefutable. The duality of these positions creates a unified front in accordance with company vision as we have seen with the statements from Tesla’s Board of Directors. Corporate Compliance Insights continues, “This unified leadership structure creates efficiency by allowing the unified executive to operate in both capacities at once.” The board can then be confident that the Chairman of the Board/CEO understands the company’s strengths, weaknesses, and what issues should be addressed in the future. Unification of these roles also greatly increases communication channels and transparency in the company. The Chairman of the Board/CEO position can provide the board with superior knowledge of daily operations congruent with an acute vision for the future.
The choice to separate Chairman of the Board and CEO positions is never easy and with any decision, balance is necessary for effective leadership. Corporate Compliance Insights concludes, “Whether a corporation chooses to unify or separate the Chairman and CEO roles, it remains essential to have an independent, engaged and inquisitive board that actively involves itself in the business in order to safeguard shareholder interests.” Tesla seems to be doing just that with their recent vote.
Interestingly enough, Harvard Law goes on to report that pressure to separate these roles centers exclusively on large companies. “…Shareholders target to advocate for independent board leadership might not necessarily be those with the most egregarious governance problems but instead those that are the most visible public targets.” The Tesla Corporation has had its fair share of trials, but as InvestorPlace shares, “It’s abundantly clear that [Musk] cares deeply about Tesla’s mission” and goes on to attribute his innovation and creativity to the essence of the American dream. Energy level, ambition, and passion are the cornerstones of every successful leader including Elon Musk. Musk’s dynamic ability to lead Tesla into the future as both Chairman of the Board and CEO is indisputable and essential to the growth and evolution of the corporation.
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