How Elon Musk’s Compensation Saga Could Cripple Tesla’s Future

Elon Musk’s compensation package has sparked a whirlwind of legal battles and criticism that threatens to haunt Tesla for years. As lawsuits pile up, many are left wondering whether this could spell trouble for the electric car giant. With Tesla’s annual shareholders meeting just around the corner, all eyes are on the shareholder vote concerning Musk’s controversial package and Tesla’s incorporation move to Texas.

One critical element fueling the tension is the belief among shareholders that the upcoming vote will settle the issue. However, the reality is far from that. Even if shareholders vote in favor of Musk's compensation package, this will merely serve as evidence of continued shareholder support during the appeal process, which remains months away.

The proposed move of Tesla’s incorporation to Texas is another contentious issue. Some shareholders speculate this could sidestep the Delaware judge's decision. However, Tesla has reassured the judge that litigation will continue in Delaware, putting a damper on escape hopes.

Legal Battles and Uncertainty

The next legal hurdle is a hearing over the shareholder's demand for a massive $6 billion in compensation. While this amount will likely be slashed by the judge, it's almost certain that the plaintiff's lawyers will walk away with a substantial payout, attracting even more lawsuits towards Tesla. Just last week, a new lawsuit emerged, accusing Musk and Tesla’s directors of insider trading and breaching fiduciary duty.

The growing number of lawsuits suggests that Tesla's governance is under a microscope, fueled by the company's and Musk's responses to the ongoing legal battles. Interestingly, Musk has threatened to halt AI product development at Tesla if he doesn’t secure 25% control over the company, despite insisting Tesla is worthless without AI. This ultimatum has not sat well with many shareholders.

A Closer Look at Governance

It’s hard to ignore how Elon Musk's actions have impacted Tesla. His decision to sell shares to purchase Twitter didn’t help his credibility, especially as he had previously vowed not to sell. These actions left a bitter taste for many shareholders. While under normal circumstances, it’s Musk’s prerogative to do what he wants with his money, the credibility damage is significant.

The much-debated 2018 compensation plan brings additional worries. Many are skeptical about Musk’s real motives for demanding 25% control, speculating he may repeat the poorly planned share dumps. Despite impressive work at Tesla, especially between 2018 and 2021, Judge McCormick's decision to invalidate the package spotlighted Tesla’s governance issues.

The Lawsuits' Fallout

Lawyers saw a prime opportunity for litigation, enlisting a Tesla shareholder owning just 9 shares. The underlying cause? Questionable governance. The Tesla board presented Musk's package as negotiated by independent board members. However, the investigation proved otherwise.

Robin Denholm was the solitary quasi-independent director on the compensation committee, although her lucrative package raised eyebrows. Elon’s influence loomed large, from his divorce lawyer doubling as Tesla’s general counsel to the lack of genuine negotiation.

Instead of facing governance issues, Tesla, likely steered by Musk, has projected the narrative of political motivations behind the judge's decisions. However, there’s scant evidence supporting this theory.

Moving forward, Tesla could significantly benefit from addressing these governance concerns, crafting a genuinely negotiated compensation deal, and seeking shareholder approval anew. Such actions could negate costly, prolonged litigation, lifting the dark cloud looming over Tesla.

Yet, there seems little interest from Musk in establishing robust governance, perhaps due to his unsuitability for a public company officer role—an issue evident in his failed attempt to privatize Tesla.

Rumors suggest Musk prefers leaving the decision to shareholders: proper corporate governance or Elon Musk. A tough choice, indeed.