SEC slap has unintended consequences, forcing institutional investors to determine how to get more reliable adults into the Tesla room.
Elon Musk bent federal rules and the SEC blinked. That’s really the only way to frame the weekend settlement that effectively admits that he committed securities fraud and lets him keep running Tesla.
Evidently CEOs aren’t bound to strict definitions of truth any more, provided that they’re willing and able to spend $20 million to correct the record.
That’s no problem for his fans. It’s a real challenge for those of us who direct other people’s money, but it’s also a long-term opportunity.
Settlement settles nothing
Let’s start with our own disclaimers. Sure, Elon Musk is a visionary. If you’re a fan, I agree, he’s a great person to start one of the most brilliant entrepreneurial ventures in recent history.
He’s got the big dream and the ironclad confidence to push that dream toward actually changing the world, making investors rich along the way.
But now that there’s $45 billion rolling through the Tesla dream, different rules apply and different viewpoints are needed.
At a glance, Musk only controls 20% of the stock, which leaves $36 billion here that’s technically other people’s property. Until recently, most of those people have been fans to one degree or another.
But now the institutional investors own three times as much Tesla as Musk does, and they rarely play by go-go start-up rules.
If something goes wrong inside their portfolios, they’re the ones who get blamed. They need confidence that the view insiders give them accurately reflects corporate reality.
Musk may be a visionary but he’s demonstrated that he’ll stretch the truth to suit his moods. The SEC settlement doesn’t change that. It only sets a few organizational speed bumps to make it a little harder for him to do it again next time.
Someone will review the Twitter account. Maybe there’ll be a slight delay or a smoothing filter on his most off-the-cuff statements, an extra safe harbor disclaimer on the account.
But he’s still CEO. If he wants to do it again, he’s shown that rules won’t stop him. And because he’s still CEO, the investment community has to be able to trust him.
This is a guy who makes up numbers to impress his girlfriend on a deal that isn’t anywhere near finalized. Maybe he’ll never do it again. Maybe he will.
The thing that should terrify every investor is that we just don’t know.
As for the $20 million fine, it’s more joke than deterrent. The recent crisis of confidence around Tesla has probably cost Musk personally $4 billion in paper wealth.
What’s a few million more? It’s not going to change his behavior or his temperament.
“You’re locked in here with me”
What this looks like is that Tesla is just big enough for the SEC to consider it too big to fail.
Nobody else can run this company. There is no succession plan and very little meaningful delegation of strategy.
It’s Musk’s $45 billion dream. The rest of us are literally just along for the ride. If he changes the world, it’s a profitable ride for everyone.
But there’s a non-zero chance the company just won’t make it. The numbers might not work out. They can run out of cash before scale hits the magic sweet spot of sustainability.
In that scenario, $45 billion evaporates. Musk has a learning experience. The investors who don’t head for the exit early are out of luck.
Giving investors all the information they need to make up their own minds is what securities disclosure rules are all about. The boilerplate is onerous but it smooths the ride.
Visionaries hate it. But institution-quality managers accept it as part of the cost of staying in business.
Tesla has a real problem keeping managers around. They just hired a chief accounting officer a month ago and he lasted a month.
Reading between the lines, he ran screaming, giving up $10 million in stock options in exchange for his freedom.
That’s not a vote of no confidence in the dream. It’s just a basic conflict of temperament. Musk hasn’t built a structure that supports detail-oriented number crunching. He’s more of a big picture guy.
But part of the point of the details is that they keep the big picture on track. When the details start adding up in the wrong direction, you correct course.
Somebody’s got to have open eyes and the authority to turn the wheel. Otherwise everything depends on the big picture guy to have thought everything out in advance.
Musk has a lot riding on the success of this company. If he hits his targets, his stake can easily swell beyond $50 billion.
Doing that requires evolving beyond being a big start-up. In order to pay out for him, Tesla needs to become a $650 billion institution, bigger than 30 companies the size of Ford today.
That’s big. It’s a big gamble.
I look around and see big firms tiptoeing away from the gamble now. They aren’t dumping Tesla positions. They’re just scaling back.
Morgan Stanley. T. Rowe Price. Vanguard. These aren’t “short shorts” looking to make a buck on disaster. They’re grown-up investment managers who’ve weighed the odds of success a little less generously.
After all, Musk isn’t going away. The SEC couldn’t get rid of him. All losing the chairman title does is make it a little harder for him to claim the big payout for success — it doesn’t lower the odds of failure one bit.
If they’d banned him from running a public company, Tesla would’ve folded over the weekend. He’s the company. A bet on the company is still a bet on him.
Those who believe in him are having a great time this morning. That’s great. If he achieves his goals, it’s going to rock the world.
But for people whose job it is to cut through “belief” to the world of cold fact, the future of this company remains nebulous. Musk has gotten erratic. The quarterly conference call details bore him.
He won’t play the game. That’s okay. Wall Street will decide whether it wants to play his game instead.
And everyone needs a succession plan. The more indispensable you are, the more you need it. It isn't for you. It's for your personal stakeholders -- clients, investors, family.
Not acknowledging the reality of that necessity is a visionary gesture. The accountants sigh.
