Tesla: What Happens Next

We have covered the global auto industry since 1991, and Tesla’s surprise settlement with the Securities and Exchange Commission this weekend reminds us a lot of the 1992 General Motors board revolt. The points of comparison:

• After 6 years of seeing GM’s performance deteriorate, outside board member John Smale led a surprise coup with other non-employee directors to shake up a deeply entrenched management team. Bob Stempel, CEO and Chairman, lost the latter title and Smale took on that role. Two GM executives were removed from the board as well.

• In the wake of Elon Musk’s ill considered “take private” tweet, the company has agreed with the SEC to split the Chair/CEO positions and add two independent directors to its board. Musk, while still a major shareholder, will have to answer to an independent Chairperson and an enlarged, more independent board of directors.

From the narrow perspective of “Does all this make TSLA a buy?” the GM comparison is a useful one. The 1992 board revolt put the company on a sounder management footing, and thanks to both a strong US economy and some clever financial engineering the stock worked reasonably well through 1994 and later. Some fresh blood at Tesla could remake the story here too.

At the same time, we would caution that the TSLA narrative remains incomplete, even with its SEC agreement. For example:

#1. Who will Tesla name as the new Chair? In the case of GM, Smale had the advantage of being the well-respected former Chair/CEO of Proctor & Gamble. In that role he engineered an impressive turnaround based on both acquisitions and organic growth. Wall Street knew him and respected his track record. A similarly credentialed person as Tesla’s new board Chair could engender similar confidence. A poorly considered choice would be a major disappointment and missed opportunity.

#2. Who will be the 2 new outside directors at Tesla and how will they work with the current board, stacked with insiders? Smale wasn’t alone when he took on the challenge at GM. He had the backing of several high profile board members, including past/then present Chairs of JP Morgan, Marriott, CBS and Pfizer. As with the prior point, the Street will be judging who takes on these new positions at TSLA.

#3. How will this enlarged/reconstituted board work with Elon Musk? The biggest difference between GM in 1992 and Tesla in 2018 is that shareholders didn’t really own General Motors for its management team. By contrast, Tesla’s faithful still attach themselves to Musk’s deeply personal vision of electric vehicles, charged with clean energy, and (one day) driven autonomously. In the best of all worlds, a new board Chair will let Musk get on with the business of making cars. In the worst case, the two will clash. Publically and often.

The upshot here is that despite the SEC-mandated board changes, Tesla remains very much a work-in-progress. The Commission’s goals are clear enough: bring Musk to heel when it comes to both shareholder communication and board accountability. That will either prove very successful (as it did with GM) or fail miserably. We don’t see any middle ground.