Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Imagine a company, several of whose board directors used to go on family holidays with its chief executive and who recruited another director after he took a break with them. Imagine that they then granted the CEO a package of share options that turned out to be worth $55.8bn, with hardly any negotiation. This is not a dream, because the company is Tesla, and its leader is Elon Musk.
Musk has been so successful as a visionary co-founder and entrepreneur at companies including Tesla and SpaceX that the usual rules of business hardly seem to apply to him. He certainly behaves as if most of them should not. A judge in Delaware disagreed with him sharply this week, declaring that Tesla’s astonishing 2018 pay deal with its billionaire CEO was unfair, and scrapping it.
The ruling came from a small court that oversees most large US public companies, thanks to so many of them being incorporated in the city. Musk was duly irate, promising a shareholder vote on moving Tesla’s incorporation to Texas, where the company is already based. Texas last year created its own business court, although it has a long way to go to rival Delaware.
It is an exciting moment for scholars who follow Delaware’s chancery court, which is hardly a revolutionary outfit by nature. Most of the time, it intentionally gives plenty of leeway to directors, so long as they follow basic governance edicts and do not steal money. “This has just not happened before. It is extraordinary,” Charles Elson, a governance expert at the University of Delaware, told me this week.
The corporate culture of the US is that many CEOs receive pay packages worth tens, and sometimes hundreds, of millions of dollars and can also chair their boards. The court, which traces its origins to the King’s Chapel in feudal England, does not contest this, and is usually pretty wary of second-guessing business judgments.
Nor was the ruling delivered by a renegade: Kathaleen McCormick is the court’s chancellor, and thus its most senior figure. So when she writes, quoting one of her predecessors, that Tesla’s directors behaved “like supine servants of an overweening master” in granting Musk 12 per cent of the company’s equity — mainly because he wanted it — her verdict carries weight.
This is a pivotal event for US corporate governance, recalling the last time the court came close to such a momentous step. That was 20 years ago, when it criticised the directors of Walt Disney for waving through a $140mn pay-off for Michael Ovitz when he was ejected as its president. That sounds like peanuts now, and although the court grumbled it eventually let it through.
Musk is not big on boundaries, and the one that he and his eight-member board ignored is that between private venture-backed companies and public ones. Silicon Valley’s cult of the founder means that leaders are paid juicily and indulged by their boards as long as they produce outstanding financial returns, which Musk unquestionably did at Tesla, until recently.
Tesla’s infatuated board treated him as a genius whom it would be dangerous to defy, and I know why. I was in the audience at the New York Times DealBook summit in November when he made an expletive-filled attack on X’s advertisers and there was a dark atmosphere. “My mind often feels like a very wild storm,” he reflected then; it was easy to believe.
One director of Tesla, whose board currently includes Musk’s brother and the media investor James Murdoch, said that they awarded him the options in stages to give him the regular “dopamine hits” that they thought he needed. The fact that Musk already held 22 per cent of Tesla’s shares only encouraged them to keep on doling out regular economic stimulants.
A reasonable person might ask where this would end (not being reasonable, Musk has demanded another award to make up for the billions of dollars of equity he sold to buy X in 2022). As McCormick noted, the idea that he was insufficiently incentivised to keep Tesla growing was far-fetched, given that for each $50bn it rose in value, he gained $10bn anyway.
The bigger issue than paying a CEO billions, strange as this feels to write, is the board’s lack of independence. It seems to have regarded its role as to keep ensuring that Prometheus had as much fire as he fancied. As to negotiating in a disciplined fashion on behalf of Tesla and other shareholders, it took a holiday from its duties.
So it is not surprising that Delaware’s chancery court has had enough. Indeed, the board might have got away with a similar outcome if it had just taken a bit more care about it. “It’s a striking decision but I’m not sure how much of a precedent it will set because everything Elon Musk does is sui generis,” says Ann Lipton, associate professor of law at Tulane University.
There is one lesson for public company boards, though: no matter how stridently a chief executive insists that no one challenges him, that is part of directors’ jobs. Tesla could move to Texas in search of greater indulgence, but is it really a good idea?