Boards Need To Ask, “What Should CEO Oversight Look Like?”

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The letter from Tesla shareholders to the board regarding Musk's absence raises questions for all directors.

Recent actions taken by Tesla shareholders have some in the investment community challenging corporate boards to ask themselves, “What should CEO oversight look like?”  

Last week, a group of 17 Tesla shareholders penned an open letter to the Tesla board of directors that characterized CEO Elon Musk as so busy running his other companies that the electric vehicle maker has suffered. The letter pleaded for the board to act. “Corporate boards can and should intervene if a chief executive appears to be distracted,” the shareholders wrote.

Musk is the CEO of Tesla, Twitter and SpaceX, three very different companies facing a variety of significant business challenges in an uncertain economic environment. Since last April, Tesla stock has declined from a 52-week high of $333.33 per share to an April 26 closing price of $153.75, which has raised the concerns of shareholders. 

The investor letter went on to state that, “Without a fulltime CEO and a board willing to provide meaningful oversight, we are concerned that Tesla will not be prepared to effectively navigate the increasingly competitive environment for EV sales, the evolving global regulatory landscape, shifting consumer preferences, ongoing supply chain challenges and investors’ expectations.”

On the surface, this may not seem like a huge problem for most boards because most CEOs aren’t trying to run three companies at the same time. However, the point shareholders raised about “meaningful board oversight” is a conversation most boards should have if they don’t want to be chastised by shareholders publicly. Boards are responsible for protecting the shareholders from all risks, including an overly ambitious or ineffective CEO. Since the board works very closely with the CEO it’s not unreasonable to expect directors to provide guidance and oversight that can prevent significant shareholder losses. Many would agree that a 50% drop in share price might have warranted some degree of board oversight action.

Now that Tesla’s shareholders have asked its board to rein-in its CEO publicly, the company will need to craft a public response that satisfies shareholders and the capital markets. There is a great deal of risk tied to the Tesla board’s response to this situation. Boards should work to avoid this type of risk.

What should CEO oversight look like?

Perhaps one of the most delicate things a corporate board must do is come to an agreement with the CEO on how their performance will be evaluated. The parameters regarding what will be measured and how must be established early on so that everyone is in comfortable with the rewards of achievement and consequences of non-performance. Corporate board members must ask themselves, “How do we determine if our CEO is effectively handling their job?” “Is effectiveness only measured through stock price gains or profits?” “What other factors should be included in the evaluation?” Every board will have its own answers to these questions.

Directors deal with periodic evaluations – so should the CEO. Boards will want to challenge themselves to create and implement a mechanism or procedure that everyone agrees can evaluate the CEO “fairly.” Discussions of what constitutes fairness can often cause rifts among members of the board, so an independent third party may need to be consulted to find a system that works.

CEO oversight also involves constant communication with shareholders. Talking to shareholders to find out their impressions of the CEO’s performance will offer critical feedback that can assist the board in knowing when to approach the CEO about a possible change of strategy. It may also help the board avoid being blindsided by open letters from shareholders criticizing directors for not acting in their best interests.

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