A Delaware Court found yesterday that Elon Musk’s $50 billion compensation package was, in legal terms, freaking bonkers. Chancellor Kathleen McCormick concluded that the process the company used to develop the compensation plan was deeply flawed, primarily because Elon Musk ran Tesla as not only president, CEO, and main media liaison to boot, but also that he maintained close relationships with his board of directors that made impartial assessment of the compensation plan impossible. This is worth looking at as a matter not just of why the richest man in the world got that way by being dishonest, but, more generally, as a matter of what happens when corporate governance fails.
What’s the story?
Elon Musk, the global playboy and general dipshit who handily outseated Martin Shkreli as the most hated man in the world (and who regularly competes with Trump for this dubious honor), came under fire from even longtime Tesla bulls when his details of his compensation package were made public. The package would be awarded to Musk at a fixed value if Tesla’s stock was above a certain point for a certain amount of time. Investor Richard Tornetta sued on behalf of all Tesla investors, arguing that Musk did not deserve such a lucrative payout, and that he and other investors were wronged by the CEO receiving so much money.
Wrote Chancellor McCormick of the plan:
“With a $55.8 billion maximum value and $2.6 billion grant date fair value, the plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan’s closest comparison, which was Musk’s prior compensation plan.”
Shareholders sue companies all the time, usually immediately following some announcement that effects a serious stock swing. But Tesla has seen a number of lawsuits over everything ranging from FSD crashes to, well, the stupid stuff that the CEO tweets. While lawsuits in general aren’t uncommon, Tesla’s are surprisingly prolific– a four-figure number of cases, as of the last count, hundreds of which are in China, where the company has taken a particularly savage stance against litigants.
For a case like this to even go to trial in the United States, though, a judge has to look at that request and determine that the investor has standing. So, it speaks well that at least someone in our judicial system isn’t going to write off an individual for raising such a question about the effects of a company’s lavish executive compensation on all investors.
It’s especially interesting because of the fact that the compensation package was negotiated with the board of directors, who, McCormick points out in her ruling, are pretty cozy with Musk to the point that they cannot be expected to render impartial or objective judgments on questions of money. Were we to need more evidence that this was the case, we can look back at a previous court ruling that demanded that Tesla’s board pay back $735 million— that’s not a typo- in compensation that they approved for themselves. You know, the cars crash, people get locked inside them, but let’s talk more about how you deserve that $50 billion, bud.
Clearly, my blog isn’t exactly popular among the Teslarati, but I also don’t think my blog is popular enough that I’ll start getting death threats from the Musk Stans. Rather, I’m mentioning this because it’s an interesting illustration of an insane level of governance failure in an era when we’re supposed to be improving governance through things like better transparency and a laundry list of reference cases from the Supreme Court around how businesses are supposed to behave. Indeed, a lot of important law governing corporate behavior was written not by the legislature but by the judiciary. This speaks volumes to the character of the fabulous cult of the free market in which we’re all meant to worship, of course, but it’s also just interesting to see how court cases gradually refine and guide corporate behavior.
It’s also interesting how many terrible court cases have been decided, notably by appointees of aspiring fascists, or what have you. I’m thinking about the infamous Citizens United (2010), which basically allowed corporations unfettered access to political power while demanding no accountability. There are less famous cases– AT&T Mobility LLC v. Concepcion (2011), for example, in which a conservative majority undermined consumer rights by justifying the increased entrenchment of forced arbitration. The expectation that corporations must work to maximize shareholder value, for example, was actually established by a ruling of the Michigan Supreme Court as early as 1919. It’s not a law, of course, and there are plenty of interpretations of it (including, even among credible grown-ups, the idea that it’s kinda ridiculous).
But. Every B-school bro parroting that alleged truth? You can blame Michigan. Still think voting doesn’t matter?
Another precedent? 1988’s Basic v. Levinson, which more or less established an obligation of corporations to tell the truth, given the expectation that public information would influence investor sentiment and thereby stock price. If only Mr. Musk had familiarized himself with that before, you know, getting himself mired in a legal war over his compensation package. Or any of the other thousands of lawsuits the company currently faces. Or when he fabricated the idea of taking the company private and had to settle with the SEC and his own investors over it.
Another interesting concept with which Mr. Musk should probably familiarize himself is the GAAP standards on lawsuits. These state that a company must account on its balance sheet for what is called a “contingent liability”– a potential expense- if there’s a 50% or more probability of the liability being realized. For Musk’s track record of evaporating tens of billions of dollars in value for Twitter, settling, by now, billions of dollars in fines, clawbacks, and settlements. It’s not clear to me as an outside observer how much of these will actually be accounted for. But it also suggests that I’m unlikely to buy a Tesla any time soon. Maybe there will be a fire sale on all of these rusting Cybertrucks soon enough and I can pick up a deal?