Just months after convincing shareholders and the Tesla board to reinstate an unprecedented $44.9 billion compensation package that had been rejected by a Delaware Court, CEO Elon Musk is challenging norms again by convincing company shareholders to ask the Tesla board to invest $5 billion in his AI startup, xAI. If he successfully convinces the Tesla board to invest in his startup, will that encourage other CEOs and board directors to seek “investments” from their companies for private business ventures? Such dealings have generally been considered a conflict of interest.
According to news reports, Musk polled users on his social media platform X, asking if they thought it was a good idea for Tesla to invest $5 billion in his AI startup. When the poll generated a positive response, Musk indicated that he would discuss the idea with the Tesla board. Musk’s startup, xAI, is developing a competitor chatbot to ChatGPT.
Since $5 billion is a sizeable sum, the board would need to demonstrate that significant due diligence was conducted before approving such a deal. The fact that the company CEO, who sits on the board of directors, would receive this sizeable investment puts the entire situation under a higher level of scrutiny. Additionally, CEO Musk’s high-profile brings even more attention to the Tesla board’s decision.
This situation has already attracted the attention of U.S. Senator Elizabeth Warren. In a recent letter, Warren accused the Tesla board of neglecting its corporate governance duties, writing, “As Tesla shareholders assert, the Board ‘has done nothing’ as Musk has diverted value, personnel, data and resources from Tesla to xAI.” The letter points out several issues that Senator Warren believes are conflicts of interest for Musk, and she challenges the board to investigate and respond to these concerns.
Tesla shareholders supportive of the investment wrote in a letter to the board, “The strategic move could position Tesla advantageously in the evolving AI landscape while maintaining focus on its core competencies and near-term objectives.” It’s not yet clear what type of financial return such a deal would deliver for Tesla shareholders.
The critical question regarding this $5 billion investment is: Should corporate boards be willing to invest company funds into enterprises that are wholly or partially owned by the CEO or other board members? What would your board do? Some things to consider:
Would approval of such a deal begin to normalize board members financing business deals for each other? Sometimes the optics of a situation are far more important than the intent. A board of directors approving financing for another board member’s startup company with funds that belong to shareholders has the appearance of favoritism and conflicts of interest. Directors generally have great discretion when making business decisions for the company, but when those decisions have the potential to greatly enrich themselves, accusations of self-interest and self-dealing can be leveled. Such accusations put all board members at risk of personal liability from lawsuits if those “investments” tank. Normalizing this type of practice might encourage directors to opt for voting to have their company finance deals of board members instead of seeking other opportunities that could be equally lucrative for shareholders. While the potential financial benefits to shareholders could be substantial, the risk to the reputation of the board and the legal risk to the company is unacceptable.
Does investing billions of dollars in a startup company that needs financing make sense when its CEO is already running a $627 billion publicly traded company and several other privately-held enterprises simultaneously (including SpaceX, The Boring Company and Neuralink)? Corporate governance experts suggest CEOs shouldn’t sit on more than a few corporate boards because it will affect their ability to focus on their primary organization. If that is a reasonable expectation, then how many companies would CEOs be able to run before it had an adverse effect on their ability to be effective at their main organization? Tesla CEO Elon Musk is running multiple companies already, and now has a startup that he’s working to attract funding for. Observers are asking, “Where is the CEO’s primary interest?” This is why the Tesla board is being questioned about how they are handling concerns about conflicts of interest.
No one questions Musk’s intellect—but running a major corporation is stressful. Musk is running several sophisticated enterprises simultaneously, and stress can lead to health issues. If the board approves investments in one of Musk’s private businesses and he falls ill, what happens to that investment then? While some shareholders will support investing in Musk’s startup because of his great track record of success, others will question whether it is worth the risk. Corporate directors might consider asking themselves, how many other companies would they be comfortable allowing their CEO to run at the same time he/she is running their company?
What business does Tesla want to be in? While Tesla is known widely as an electric vehicle manufacturer, Elon Musk has spent a great deal of time linking the company to advances in artificial intelligence such as self-driving technology. If Tesla wants to become a leader in AI, then perhaps the Tesla board should release its vision as to how it intends to make that happen as part of Tesla’s overall business plan. If Tesla “invests” in xAI, will the company own any portion of the technological advancements the startup creates? Answering questions like these could go a long way in clarifying why a $5 billion investment in xAI might be in Tesla shareholder’s best interests.
