Tesla Inc (TSLA) Longs: Don’t Rock the Boardroom Too Much!

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Tesla stock - Tesla Inc (TSLA) Longs: Don’t Rock the Boardroom Too Much!

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Whether investors want to admit it or not, one of the most fascinating parts of the Tesla Inc (NASDAQ:TSLA) story is CEO Elon Musk. He’s brilliant and brash, intelligent yet immature, and frank while frightening. He’s not unlike shock-jock DJ Howard Stern. And both TSLA stock owners — and non-owners — love to follow the saga just because they have no idea what Musk might say or do next.

Tesla Inc (TSLA) CEO Elon Musk actually knows what he's doing

There are times, however, where the best thing to say is absolutely nothing at all.

Last week was one of those times.

It will blow over; it always does. But Musk probably should have thought it out before tweeting “This investor group should buy Ford stock. Their governance is amazing” to a group of Tesla stock holders concerned that the company’s board of directors isn’t quite independent enough.

While Tesla’s (and Musk’s) usual fans quickly came to his support, the comparison to Ford Motor Company (NYSE:F) not only showed a lack of discretion — it opened the door to closer scrutiny of governance at Tesla.

A Brilliant Comparison to Make

Musk’s tweet was in response to a letter he received on Monday from an ad hoc group of Tesla stock owners — presumably institutional investors — pointing out the conflicts of interest built into the board. The group’s specific concern:

“We expect that as companies make the transition to publicly-traded status, the governance structures and practices in place at the time of the IPO will evolve to align with the company’s changing strategy. However, Tesla’s seven-member board is largely unchanged from its pre-IPO days.”

His reference to Ford’s governance may not have been coincidental, taking a shot at the uncanny amount of influence the Ford family has over the company.

Each “family” share of Ford is granted 16 votes on all matters that require shareholder involvement (like selecting directors), as opposed to just one vote per share of ordinary Ford stock. This effectively means the family controls about 40% of the company’s voting power, even without owning anywhere near 40% of outstanding shares.

Non-family shareholders have attempted to change Ford’s lopsided control structure, but not surprisingly, have failed to get enough votes to do so.

From that angle, Musk may have a valid point about being left alone; it could be worse. Nevertheless, such a comment only draws even more attention to the matter, giving the Tesla stock owner base a reason to look more closely at the company’s ownership allocation … and the board.

More investors may not like what they find.

Keeping It in the Family

As of the latest look, Musk — who is the chairman of the board as well as the Tesla’s CEO — owns roughly 22% of outstanding TSLA stock by himself. Other board members include Elon’s brother and former SolarCity (which Tesla acquired last year) CFO Kimbal Musk, Steve Jurvetson, Robyn Denholm, Gracias Ehrenpreis, and Ira Ehrenpreis. Both Ehrenpreis’s are investors in another of Elon Musk’s venture, SpaceX (Gracias runs it, in fact), while Jurvetson is also a director of SpaceX.

Director Brad Buss doesn’t seemingly have any familial ties or inappropriate business links to Tesla or Musk. But a closer look at his dossier reveals he was previously CFO of SolarCity, and like Musk, benefited greatly from the acquisition. (Elon was also a 22% owner of SolarCity.)

So, from that perspective, the group of concerned investors may have a valid point. A bunch of people on the board are in one way or another beholden to Musk. Never mind the fact that he’s the chairman as well as the chief, and is only, ultimately, held accountable by himself.

Bottom Line for Tesla Stock

To his credit, following Wednesday’s tweet Musk added that the company was looking to add two more directors to the board. Although he denies the pressure from the group of investors has anything to do with it — and it probably doesn’t — this isn’t likely the first time he’s heard the concern. He knows it’s only a matter of time before more owners jump on the bandwagon and apply even more pressure.

All the same, it remains to be seen how “independent” those two directors will be. Odds are, Musk will somehow maintain a high degree of control in the boardroom.

Does it inherently make Tesla stock a sell? No, it doesn’t. Whether appropriate or not, the structure works in this particular case because it caters to Musk’s amazing vision. Either you’re okay with it, or you’re not. The near 800% gain TSLA shares have mustered since the end of 2012, however, says maybe investors might be just as well off leaving things alone.

At least for the time being.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/tesla-inc-tsla-longs-dont-rock-the-boardroom-too-much/.

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