New Tesla Lawsuit Raises Questions About Independence And Oversight

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Corporate board members observing how the Tesla board is handling Elon Musk may want to ask themselves these questions.

Can a corporate board knowingly aid a CEO in the creation of a competing company without breaching its fiduciary duty to its shareholders?  A new lawsuit filed by Cleveland Bakers and Teamsters Pension Fund in Delaware Chancery Court, Daniel Hazen and Michael Giampietro against Tesla CEO Elon Musk and the company’s board of directors seeks an answer to that question.

According to a report from TechCrunch, the lawsuit claims that Musk created xAI, a company that uses artificial intelligence technology similar to Tesla, and then proceeded to enlist the Tesla board’s help in funneling Tesla’s resources, AI research and employee manpower to the new company with no benefit to Tesla and its shareholders. The lawsuit states, “The Board has allowed Musk—the CEO and largest stockholder of Tesla—to found and lead another AI company; to plunder resources from Tesla and divert them to xAI; and to create billions in AI-related value at a company other than Tesla… the Tesla Board has utterly failed to even attempt to meet its unyielding fiduciary duty to protect the interests of Tesla and its stockholders in the face of Musk’s brazen disloyalty.”

The plaintiffs in this case want the court to force Musk to disgorge his stake in xAI and give it to Tesla. The lawsuit appears to be an attempt by shareholders to hold the Tesla board accountable for diminishing shareholder value by allowing CEO Musk to run multiple entities simultaneously without proper oversight.

Since there is evidence that Musk threatened to develop AI outside of Tesla and then diverted Nvidia AI chips from Tesla to his social media platform X, Tesla shareholders can’t be faulted for being concerned. The attention Musk has shown to companies other than Tesla and the energy he has given them is alarming for those who believe he is spreading himself so thin that it has negatively affected Tesla’s stock price. 

Corporate board members observing how the Tesla board is handling Elon Musk may want to ask themselves the following questions:

How many companies can a board allow a CEO to run before a negative situation develops? Many companies place limits on how many corporate boards a director can serve on because they understand the growing demands that directors have been burdened with. Companies want the full attention of their directors on their company, not another company.  Why wouldn’t the same hold true for CEOs? Musk is currently running or has significant management control of multiple companies including Tesla, SpaceX, Neuralink and The Boring Company. Corporate directors might want to determine where they stand on this issue before they find themselves a defendant in a shareholder lawsuit claiming breach of fiduciary duty.

At what point does a corporate board’s loyalty to a CEO turn into a lack of board independence? The appearance of unethical behavior is always a concern for board directors, and when a company has a CEO with a large personality, questions about board independence are more likely to surface. Directors have the difficult job of striking a balance of pushing back against a CEO’s growth strategies, compensation requests and business objectives in ways that improve the possibility of increasing shareholder value. If it appears that the board is rubber-stamping anything the CEO proposes and approving outsized compensation, shareholders may revolt. A perceived lack of board independence attracts dissident shareholders who may try to remove directors they believe are not independent enough to stand up to the CEO. Directors might want to consider just how independent their board has acted before shareholders launch a campaign to elect board members to replace them.

What are the risks of allowing a CEO to operate with minimal oversight? Corporate boards are responsible for oversight of the CEO and management team and therefore can be held liable for what is approved while they are in charge. Directors are responsible for the good and the bad that happens on their watch, so if the CEO’s actions cause harm to the company or its shareholders, chances are the board members will be named in any lawsuits that result from company losses. Sitting on a board that allowed a company to fail under dubious circumstances is not what any board director wants to be associated with.

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