It’s not just about the vision.

Elon Musk is Tesla’s most valuable asset. It may sound hyperbolic to say that the fortunes of a company worth over $50 billion are tied closely to one man, but investors only have to imagine the market reaction if Musk were to leave. How much would that shave off the Tesla share price?

The irony, however, is that Musk has also shown himself to be one of the greatest risks to the company. The bizarre earnings call he held earlier this year when he called analysts’ questions “boring” and “boneheaded”, followed by the announcement that he had secured funding to take Tesla private seriously called his leadership into question.

The latest incident, which led to the US Securities and Exchange Commission (SEC) taking action against Musk and Tesla, was ultimately one step too far for many people. It confirmed in their minds that Musk’s unfettered control of the company had to be curtailed.

As both chairman and CEO, Musk had always effectively been his own boss. The lack of real independence on the board had also created a situation where there was little genuine oversight of what he was doing.

The ruling by the SEC, which Musk has had no option but to accept, forces him to step down as chairman for at least three years. Tesla will also have to appoint two new, independent directors.

It is an arrangement that appears designed to please everybody. It does, however, highlight how poor corporate governance can be allowed to carry on for too long in cases where a powerful individual personality and a company become conflated.

The problem with visionary leaders

“It shows how there can be a problem as a company matures from the vision sold to early investors,” says Chris Potgieter, head of Old Mutual Wealth Private Client Securities. “If you think of how a company like Tesla came to be, it was up to an individual to have a vision and to sell that vision to angel or venture capital investors. I don’t think you can prevent that, because, ultimately, people buy people.”

In the early stages of a business, this is to be encouraged. The great entrepreneurial successes in the US in particular have often been propelled by huge personalities – the likes of Musk himself, Steve Jobs at Apple, Facebook’s Mark Zuckerberg and Jeff Bezos at Amazon.

By making their companies their own and running with their ideas, these individuals have been critical factors in their success. However, companies do not stay start-ups forever.

Tesla is now a major listed company, with 8 000 employees. Facebook, where Zuckerberg is also under scrutiny for serving as both chairman and CEO, is one of the five largest companies in the world by market capitalisation. They cannot continue to run on the same lines they did in their early days.

Scaling up

“At some point governance has to become more important,” Potgieter argues. “The business has been scaled up, it is impacting the lives of many, many people – employees, those using its products and services, and shareholders invested through a public market. At some point, governance does become a critical factor. Tesla is in it, Facebook is seeing it happen, and it is a pattern that will repeat itself.”

What happens when the personality and the company effectively become synonymous is that two critical factors of corporate governance become compromised. It happened with Musk, just as it appears to have happened in South Africa with Markus Jooste and Steinhoff, although on a very different scale.

“Independent oversight is one of the first principles that is breached,” says Potgieter. “The second relates to it, and that is that you don’t see the segregation of duties that is necessary for a corporate to function. A corporate is a complex organism and you need independent oversight and segregation of duties to ensure that it remains functional.”

It’s true that this doesn’t always happen. You could argue that Bezos and Amazon are in a similar situation, but the concerns are not as severe as Bezos is a different type of character. That is not, however, something investors should have to depend on.

“The rules of corporate governance are put in place so that we don’t have to rely on a single person’s character for the proper functioning of an organisation at the top level,” says Potgieter.

Governance and returns

These rules are only going to become more important as more investors recognise that good corporate governance is not just a ‘nice to have’, but a key indicator of a company’s future success.

“There are a lot of studies that show a strong correlation between a company’s ESG [environmental, social and governance] score and what one can expect as investment returns,” says Potgieter.

These are, after all, real risk factors. Certainly when it comes to governance, what has been seen on the JSE in the cases of African Bank and Steinhoff, and more broadly in many of South Africa’s state-owned enterprises, should leave no doubt as to how significant this is.

“If investors haven’t learnt the lesson locally, there are lessons to be learnt internationally,” Potgieter concludes. “It’s not a fad, but a very fundamental thing. In five years’ time people probably won’t even have to talk about it, because it will be so embedded in how investment is done.”

Source: MoneyWeb – Patrick Cairns