The Journal. - Money, Drugs, Elon Musk and Tesla's Board

Episode Date: February 5, 2024

Elon Musk and some members of Tesla's board of directors have deep personal and financial ties. The connections are an extreme blurring of friendship and fortune and raise questions among some shareholders about the independence of the board members charged with overseeing Musk. WSJ's Rebecca Elliott reports. Further Reading: - The Money and Drugs That Tie Elon Musk to Some Tesla Directors  - Elon Musk’s $55.8 Billion Tesla Pay Package Struck Down by Judge  - Elon Musk Has Used Illegal Drugs, Worrying Leaders at Tesla and SpaceX  Further Listening: - Elon Musk's 'Demon Mode'  - Elon Musk on Why He Wants More Robots and Less Government  Learn more about your ad choices. Visit megaphone.fm/adchoices

Elon Musk is the wealthiest man in the world. Much of that wealth comes from his shares in Tesla and the Tesla stock he earns as CEO. But before Musk can get paid, his compensation needs to be approved by Tesla's board of directors. And that board is supposed to be independent. So Tesla trades on the NASDAQ, which defines an independent director as someone who is not an employee, a family member, or someone whose relationship, quote unquote,

would interfere with the exercise of independent judgment. And NASDAQ requires that the majority of the board be independent. That's our colleague Rebecca Elliott, who covers Tesla. And last week, a Delaware judge threw out a huge pay package for Musk that the board had approved. The judge said that Tesla's board wasn't independent enough in this matter and that Musk had too much influence over them. This question of Elon's control over Tesla's board has really hung over the company for years.

In the past, it has not come to a head quite like this. But in this case, we had a Delaware judge saying this was not OK. For months, Rebecca and a team of reporters have been digging deeper into Musk and Tesla's board. And they found some of the relationships are complicated, involving deep personal and financial ties. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh.

It's Monday, February 5th. Coming up on the show, is the relationship between Elon Musk and Tesla's board of directors too close? Put your hands together for Lady Raven. We'll be here today. Josh Hartnett. I'm in control. And Salika as Lady Raven. This whole concert, it's a trap. Trap, directed by M. Night Shyamalan. Only in theaters August 2nd. At the center of the Delaware court case is a pay package the Tesla board agreed to in 2018.

A huge pay package. The board was trying to figure out how to incentivize this very unusual CEO in the breadth and extent of his other business interests, how to incentivize him to focus on Tesla. Musk was splitting his time between a lot of companies, SpaceX, Neuralink, The Boring Company, and Tesla. They wanted to figure out how to motivate Elon, how to ensure that he would invest in, focus on Tesla. And they also wanted something that would only pay out if Tesla did very, very well. And so they devised this pay package that would vest only if Tesla hit certain milestones. What kind of milestones?

Those milestones were a combination of market capitalization milestones. So Tesla had to increase in value a certain amount, and also operational milestones, earnings and revenue. Basically, if Tesla was really successful, Musk would be rewarded with a pay package worth up to $56 billion, the largest CEO pay deal for a publicly traded company ever. the largest CEO pay deal for a publicly traded company ever. Not long after the deal was announced, it landed in court in Delaware, where Tesla is incorporated. So in 2018, a shareholder sued over this compensation package. If we can get a little nerdy here, it's a derivative lawsuit. So that essentially means that a shareholder is suing on behalf of the company, saying that, you know,

in this case, the compensation that Tesla granted to Elon ought to be returned to the company. granted to Elon, ought to be returned to the company. And what was the argument in the lawsuit? The plaintiff argued that Elon exerted too much control, was too influential in deciding his own pay, and also that the board wasn't fully transparent with Tesla shareholders about the nature of this compensation package or how it came together. Who is the plaintiff in this case? The plaintiff is a man by the name of Richard Tornetta.

There's not a whole lot we know about him. He was not a feature at trial or anything like that, but he used to be a heavy metal drummer, and he was in this band called Dawn of Correction in the mid-2000s. Musk and Tesla tried to fight off the lawsuit, but eventually it went to trial in November 2022. How did the board respond to this? The board contested this idea that Elon had too much influence. They pointed to the success of Tesla since the package was approved. shareholders signed off on this in 2018, Tesla was valued at less than $60 billion.

Today, of course, it's valued closer to $600 billion. And so board members and their attorneys essentially said, okay, look at this performance, right? Yes, Elon has done extraordinarily well for himself under this pay plan. Shareholders have too. We succeeded in motivating Elon to create extraordinary value for those who have invested in this car company. And last week, the judge made a ruling. Within the 200-page decision, the judge says the case forces the question, does Musk control Tesla? In her ruling, she answers that question with respect to Musk's pay package.

She sided with Ternetta, the shareholder. She sided with Ternetta, the shareholder. So the judge ruled that this whole $56 billion pay package should be tossed. A really extraordinary decision that centered on this idea of Musk's influence over the board. According to the judge's decision, in what ways did Musk influence the board? She focused a considerable amount on his influence over the timing of the board's consideration process, right? Saying, you know, this was like based on Elon's whim, right? She also called out issues like whether this package was even really necessary to motivate Elon to focus on Tesla. And remember, that was one of the board members' key arguments

as to why this was necessary. She also talked about the close ties with directors, the close ties between directors and Elon, and said that Tesla didn't sufficiently disclose those either when it presented this package for shareholder approval. Tesla's board hasn't commented on whether they would appeal the ruling and how they will move forward with Musk's pay.

Musk and his lawyer didn't respond to requests for comment. But Musk did launch a poll on X, asking if he should move Tesla's place of incorporation from Delaware to Texas. And the poll came out in favor of moving a state of incorporation. Is that going to happen? a state of incorporation. Is that going to happen? Well, he said he's going to put it to a shareholder vote, so I suppose we will see.

But Rebecca and her colleagues have been digging into Musk's relationship with members of the Tesla board. And they have found close ties. That's next. Seth and Riley's Garage Hard Lemonade. A delicious classic with a vibrant taste of fresh lemons. The perfect balance of sweet and sour with a crisp, zesty edge.

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There are a lot of financial ties between Elon Musk, Tesla, and the company's board members. Tesla board members are paid significantly more than board members of most other public companies. Collectively, they've made more than $650 million selling Tesla shares, and they have another $1 billion in stock options. And their ties go beyond Tesla. Musk and some of the board members have invested tens of millions of dollars in each other's companies. Tesla's board is unusually close. Many of the directors have either close personal ties or deep financial ties to Elon or both. And that has been true over the course of many years through the present. The reporters dug into the people on the board, starting with a man who helped craft Musk's huge pay package.

His name is Ira Aaron Price. So Ira Aaron Price is a venture capitalist in Silicon Valley. He joined Tesla's board back in 2007 before the company went public. 2007 before the company went public. And he has chaired the compensation committee for the vast majority of the time that he has been on the board. What's his relationship like with Elon Musk? The two men have been close. They've been friends for years. One episode that stands out was back when Tesla released its Model 3 car. Aaron Price had the rights to buy the first Model 3,

and he gifted those to Elon around Elon's birthday. gifted those to Elon around Elon's birthday. So that to you was a sign of just like that these two men are tight. Yeah. Aaron Price has been on Tesla's board since 2007, and he heads the board's compensation committee. He has invested, personally or through his VC firm, about $70 million in Musk's ventures.

In 2018, Aaron Price tweeted at Musk, Another independent board member has been a close friend of Musk's for over two decades and called him extraordinary and a, quote, product genius. When another board member got in hot water, Musk helped him out. Musk intervened to keep him from being ousted from the board after a drug and sex scandal. Many of these folks had known Elon for years, been longtime friends. had known Elon for years, been longtime friends. Others had made a considerable amount of money from their service on Tesla's board. Is that true for other companies? Yes, though I think it's fair to say that the extent to which this is the case at Tesla is unusual, particularly for the stage that the company's in, right?

You might see directors very close to the CEO at a startup in Silicon Valley or something like that. But we're talking about a company with a valuation of around $600 billion that trades publicly and has done so for many years. These connections between Musk and his board are an extreme blurring of friendship and fortune. And they raise questions among some shareholders about the independence of the board members charged with overseeing the CEO. Because Tesla is a publicly traded company, such conflicts could run afoul of the rules governing board independence.

The reporting team found some overlap between Musk's drug use and certain members of the board. Musk famously smoked marijuana publicly on the Joe Rogan Experience podcast. You probably can't because of stockholders, right? I mean, it's legal, right? It's totally legal. Musk has also said he has a prescription for ketamine, a psychedelic-like drug. And a Wall Street Journal investigation in January found that Musk has used LSD, cocaine, ecstasy, and psychedelic mushrooms, often at private parties around the world. The reporting team found that Musk has consumed drugs with multiple current or former members of Tesla's board.

Those members are Antonio Gracias, Steve Jurvetson, and Kimball Musk, Elon Musk's brother. That's according to people who have witnessed their drug use and others with knowledge of it. Elon Musk and his attorney have said that he has never failed a drug test at SpaceX. Others at Tesla have worried that the board isn't doing enough to rein in Musk's drug use. There's been concern for years about whether Tesla's board was sufficiently standing up to Elon or putting up guardrails around what is certainly highly unusual behavior for a CEO. My colleagues reported earlier this year about Elon's use of illegal drugs. And this is something that some at his companies have been concerned about over the years. And a real question is, what has the Tesla board done in response? What has the board done in those situations?

Some board members have worried about how Musk's behavior will affect the many companies he oversees. And this is according to people who are close to Elon. However, Tesla's board hasn't investigated his drug use or recorded any of that concern into official board minutes. After the reporting and the lawsuit, there is no public sign that Musk's role as CEO or his relationship with the board of directors is changing. You have to remember that Tesla is really at the center of his financial empire. While Elon has ranked as the world's wealthiest person in recent years, most by selling tens of billions of dollars worth of shares, partly to acquire the company that was then known as Twitter, or by borrowing against his stake in Tesla. And I mention all of that because if he were to walk away, right, he would really risk tanking Tesla's

shares and with it dramatically affecting his own personal financial situation. What's your takeaway? If this were another company, I would start thinking about, okay, does the board get overhauled? This decision is a pretty stinging indictment of the board's level of independence. Given that it's Tesla, though, I'm not so sure that's going to happen. Why not? I'm not so sure that's going to happen. Why not? It all goes back to how close so many of the board members are to Elon.

That's all for today, Monday, February 5th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Emily Glazer, Kirsten Grind, and Coulter Jones. Thanks for listening. See you tomorrow.