Board members of Elon Musk’s electric carmaker Tesla Inc. were in a dilemma.
Venture capitalist Steve Jurvetson, a longtime Tesla director, left the company after an internal investigation found he slept with multiple women in the tech industry and used illegal drugs.
Some of the details were widely reported by the media in 2017, and Tesla directors privately discussed how they should handle the matter, according to people familiar with the matter. Some have urged Jurvetson to resign.
Fortunately, even though Tesla designated Jurvetson as an independent director, he had a good friend with whom he had a deep financial relationship, with whom he also attended parties and used ecstasy and LSD. This person was Musk.
In private conversations, Musk urged directors to allow Jurvetson to take an unusual leave of absence from the publicly traded company’s board before resigning on his own in 2020, people familiar with the matter said. Jurvetson remains a director of Musk’s unlisted rocket company SpaceX.
Asked how the board handled the Jurvetson situation, Antonio Gracias, another former Tesla independent director and close friend of Musk, said in court testimony in 2021: “The answer is do nothing and see what happens. What happens.” Gracias and his venture capital firm have made investments in Musk’s companies that were most recently valued at about $1.5 billion.
Several other directors of Musk’s companies have deep personal and financial relationships with the billionaire entrepreneur and have profited handsomely from those relationships. The relationship has seriously blurred the lines between friendship and wealth, raising questions among some shareholders about the independence of the board members responsible for overseeing Musk. Such conflicts may violate some of the less stringent rules governing the independence of public companies.
On Tuesday, a Delaware judge overturned Musk’s multi-billion-dollar compensation package at Tesla, saying board members who signed off on the package in 2018 had benefited from Musk.
Several current or former directors of Tesla and SpaceX have partyed with Musk, gone on exotic vacations and hung out at Burning Man, an arts and music festival in Nevada.
The directors include venture capitalists Gracias and Ira Ehrenpreis, tech tycoon Larry Ellison, former media executive James Murdoch, and Ma Musk and the directors have invested tens of millions of dollars in each other’s companies, including Musk’s younger brother, Kimbal Musk, including Ellison’s billion-dollar Tesla holdings. stocks, with a holding ratio of approximately 1.5% in 2022. Some directors have also received career support and help from Musk.
There are currently eight members on Tesla’s board of directors, most of whom have accumulated hundreds of millions of dollars worth of stock through their tenure over the years, significantly more than board members at other companies earn.
Tesla pays directors mainly in the form of stock options, and current board members, excluding Musk himself, have made a total of more than $650 million from selling related stocks. They also hold nearly $1 billion worth of options. Some directors have agreed to return part of their pay to Tesla to resolve shareholder lawsuits over their pay, while denying any wrongdoing. A judge has not yet approved the settlement.
According to some people who witnessed Musk’s drug use or were informed of Musk’s drug use, some current and former directors of Tesla and SpaceX knew about Musk’s illegal drug use but took no public action.
The Wall Street Journal reported in January that Musk had used drugs including cocaine, ecstasy, LSD and magic mushrooms, something leaders at Tesla and SpaceX had said Concerns, particularly regarding his recreational use of ketamine, which Musk has said he has a prescription for, have been raised. The illegal drugs violated Musk’s company’s strict anti-drug policies and could jeopardize SpaceX’s federal contracts and Musk’s security clearance.
In recent years, Musk has attended social gatherings at the upscale Austin Proper Hotel with Tesla board member and Airbnb co-founder Joe Gebbia, as well as his friend Joe Gebbia, according to people familiar with Musk’s drug use and partying. , and repeatedly snorted ketamine recreationally through a nasal spray bottle.
Fellow directors Gracias, Jurvetson and Kimbal Musk used drugs with him, according to witnesses and other people familiar with the matter.
According to people familiar with the matter, Musk and some people close to him, including Kimbal Musk, attended a party at the Hotel El Ganzo, a boutique hotel in San Jose del Cabo, Mexico. The hotel is known for its art and music performances, as well as drug activity.
Some of them said the amount of drug use by Musk and board members was concerning.
Some say Musk created a culture in which some friends, including directors, felt they should take drugs with him because they thought not doing so might upset the billionaire who made them a lot of money. What’s more, they don’t want to risk losing the social capital that comes with being close to Musk, which for some is like being on good terms with the king.
Musk and his lawyer, Alex Spiro, did not respond to requests for comment.
Previously, in response to a Wall Street Journal article in January about Musk’s use of illegal drugs, Spiro said that Musk will undergo regular and random drug testing at SpaceX and has never failed a test.
After the above article was published, Musk tweeted that after a marijuana smoking incident in 2018, he underwent random drug testing for three years and no trace amounts of drugs or alcohol were found. He later wrote an article mocking the Wall Street Journal as not even worthy of being used as a poop pad under a birdcage, and wrote: “If drugs can really improve my productivity over time, I will definitely take them!”
Tesla’s general counsel and SpaceX spokesperson did not respond to requests for comment.
Ellison’s proposal
According to people close to Musk, some board members are worried that Musk’s actions will negatively affect the six companies he manages and the approximately $800 billion in assets held by investors.
Despite these concerns, Tesla’s board has not investigated Musk’s drug use or documented their concerns in formal board meeting minutes. Minutes of such meetings may be made public.
According to people familiar with the matter, around the winter of 2022, Ellison, a good friend of Musk and a former Tesla board member, persuaded Musk to go to his Hawaiian island to relax and stay away from drugs.
It comes as Musk’s friends and others close to him worry about his worsening drug use, and some are asking him to go to rehab, some of them said.
Around the same time Ellison made the invitation, Musk attended a party in the Hollywood Hills where he took a bottle of liquid ecstasy, according to a person who was there. Musk’s security guards asked people to leave before he took drugs to protect privacy.
Across Silicon Valley, executives sometimes invest in each other’s companies and venture capital businesses and may have personal relationships with one or two members of a company’s board of directors, especially before the company goes public.
The breadth of Musk’s personal and professional connections on the board, as well as the amount of money involved, make him the most prominent example of the tangled relationship between CEOs and directors. The Journal traced the connections by reviewing hundreds of pages of court documents and testimony, the Securities and Exchange Commission (SEC) and other public records.
Tesla pays its directors significantly more than the average pay for most U.S. corporate boards. The average annual compensation for board members at the 200 largest U.S. companies will be $329,351 in 2023, according to a new report from the National Association of Corporate Directors and compensation consulting firm Pearl Meyer. By comparison, current members of Alphabet’s board hold stock worth about $8 million, and its board members have averaged annual compensation of about $475,000 since 2015.
In addition to receiving board compensation, some Tesla and SpaceX directors have tens of millions of dollars in additional investments in other Musk companies, such as Musk’s brain-computer interface startup Neuralink, his tunneling startup The Boring Co.
Musk has in turn invested in some of the directors’ companies. Tesla and SpaceX board members also invested in Kimbal Musk’s Kitchen Restaurant Group and SolarCity, a company run by Musk’s cousins that was acquired by Tesla.
Longtime board members and board advisers say personal and financial relationships can cloud directors’ views, a rare occurrence among U.S. public companies.
Tesla’s shares are listed on Nasdaq. According to Nasdaq’s trading rules, independent directors cannot be employees of the company, family members, or people whose relationships “could interfere with independent judgment.” Nasdaq requires listed companies to have a majority of independent directors on their boards.
Although rules regarding independent directors are vague across the country, courts have found that public companies often have financial entanglements with independent directors, and some directors who claim to be independent hold investments related to each other.
Amalgamated Bank signed a shareholder letter last year asking Tesla board members to increase “better than no oversight” of Musk. As of last September, Amalgamated Bank managed about $180 million in investments in Tesla.
These investors worry that the close relationship between Musk and several Tesla directors makes it difficult for the board to take actions in the best interests of shareholders.
CEO with room for maneuver
Some directors believe that Musk is a genius with a clever mind and extraordinary means. In pretrial investigations and court testimony, directors have said they view Musk’s leadership as critical to both Tesla and SpaceX and believe in his long-held mission to colonize Mars. He is regarded as the soul of the company and closely related to its success. Tesla’s stock price has risen more than 300% in the past four years, but has fallen about 25% since early January this year.
In overturning Musk’s pay package last Tuesday, a Delaware Chancery Court judge called the process for approving it “seriously flawed” and cited Musk’s extensive ties to some of the directors who negotiated the package. A Tesla shareholder has filed a lawsuit accusing Musk of playing too big a role in determining his compensation.
Chancery Court Justice Kathaleen McCormick wrote in the opinion that Musk “had close relationships with the directors responsible for negotiating on behalf of Tesla and led the process that led to the board’s approval of his compensation plan.” She said Tesla Chairman Robyn Denholm’s approach to fulfilling her supervisory obligations was “not aggressive enough.”
Tesla board members can appeal the ruling to the Delaware Supreme Court. After the ruling was announced, Musk posted on X, “Never register a company in Delaware” and said Tesla would hold a shareholder vote to decide whether to transfer the company’s registration to Texas.
Board members signed the compensation agreement in 2018, which valued Tesla at up to $55.8 billion. It’s the largest pay package ever for a CEO of a U.S. public company, according to governance data firm Equilar.
While negotiating the pay package, Musk emailed Tesla’s lead lawyer to explain how he would use the extra pay. Musk wrote in the email: “This salary is just to allow me to spend as much money on the Mars project as possible, thereby minimizing the risk of survival.” Musk’s long-term friend Ellen Press once served as Tesla Chairman of the Compensation Committee of the Board of Directors.
Company directors often give Musk significant leeway on issues large and small.
For example, after acquiring Twitter in 2022, Musk asked Tesla employees to evaluate the social media platform’s engineering talent. It was also during that time that SpaceX unusually agreed to provide its CEO, Musk, with a $1 billion loan, the Wall Street Journal reported.
After Musk tweeted that he planned to take Tesla private, he reached a settlement with the U.S. Securities and Exchange Commission (SEC) in 2018 that required Tesla to establish more controls and create an independent board of directors. A new committee of members has been formed to oversee Musk’s public postings. But Denholm said at the time that Musk “will self-monitor” compliance, and some directors said they did not review Musk’s tweets, according to court documents.
Tesla disclosed in 2022 that it had received a subpoena from the SEC, which requested information about how the company complied with the settlement agreement.
Musk’s freewheeling comments on Twitter (currently known as In 2020, Musk tweeted that he believed Tesla’s stock price was too high, and Tesla’s stock price closed down more than 7% that day. Last year, several major companies stopped advertising on X after Musk described an anti-Semitic post on the site as “truth.”
For decades, investors have pressured companies, especially public companies, to hire independent directors because they provide checks and balances on management and provide close oversight of what’s going on inside the company.
According to a set of rules called the Sarbanes-Oxley Act introduced in 2002, listed companies must have independent directors, including independent directors on their audit committees. The rules came after the collapse of energy trading giant Enron, which was later found to have concealed its financials amid inadequate board oversight.
Stock exchanges often specify how board independence and other expectations are defined. In unlisted companies, there are no requirements on the number or composition of independent directors. On Nasdaq, if a listed company does not meet its independent director majority requirement, Nasdaq will give the company a year or until the next shareholder meeting to make changes; if the company does not do so, it may Delisted.
Questions about the independence of public company directors have made their way to the courts, with judges sometimes finding issues related to deep financial ties.
The Delaware Supreme Court ruled in 2016 that a majority of game developer Zynga’s board of directors were not independent directors. One reason was that two directors worked for a venture capital firm that had invested in a startup co-founded by the wife of Xingjia’s CEO, and that another director and her husband owned a private jet with Xingjia’s CEO.
After the court ruling, Xingjia expanded its board of directors and established a special litigation committee to investigate the insider trading allegations. Xingjia settled the case for US$11 million in 2019.
“To me, the real question is: Can you make fair, objective decisions independent of relationships?” said the Institute of Delaware Corporate and Business Law at Widener University. said Lawrence Hamermesh, former head of Business Law. He also served as senior special counsel in the SEC’s Corporate Finance Division.
surrounded by friends
When Tesla looked to replace a departing director, the company turned to a familiar face – JB Straubel. The board believes Musk will listen to the company’s former chief technology officer, whom Tesla considers a co-founder, who can fill Ellison’s shoes and has the technical expertise, according to people familiar with the board’s thinking.
Last year, before voting to approve Straubel to join the board, some shareholders raised objections due to his close ties to the company, saying that if he joined the board, at least five of the eight members would lack independence. But Straubel was elected anyway. A Nasdaq spokesman said that Nasdaq does not comment on specific companies and said that the Wall Street Journal’s question about how Straubel could be classified as an independent director should be answered by Tesla.
Musk has long been surrounded by close friends as he builds his business empire. He turns to them for advice on new business ventures and help with day-to-day operations.
In addition to Musk serving as a Tesla director, his brother Kimbal Musk is also a board member. Kimbal has served on the SpaceX board and has advised Musk on many ventures, including whether to start OpenAI and Neuralink. He and Musk also have a good personal relationship and often attend the same events and gatherings.
Ellen Press, who chairs two of the four committees on Tesla’s board of directors, is designated as an independent director by Tesla and has been close to Musk over the years.
The venture capitalist had the rights to buy the first Tesla Model 3, and some people coveted the car just for show off. Ellenpreis gave Musk the power around Musk’s 46th birthday in 2017, tweeting: “Lots of love and respect for all you do.”
Ellenpreis has invested a total of about $70 million in many of Musk’s ventures, either personally or through his venture capital firm DBL Partners.
On Tesla’s board of directors, Ellenpreis made more than $220 million from the sale of stock received in director compensation and has additional options worth more than $200 million at the latest price.
Former 21st Century Fox CEO James Murdoch is also listed as an independent director by Tesla. His friendship with Musk dates back to around 2006, when he went on vacations with Musk and his family, including to Israel and Mexico.
In 2022 court testimony, Musk said he did not know James well, although James had affirmed his friendship with Musk in earlier testimony.
James Murdoch said in court testimony that he considers himself independent and described directors as having “the ability to think independently on governance and oversight as part of a public company.” James Murdoch is the youngest son of Rupert Murdoch, chairman emeritus of News Corp, parent company of The Wall Street Journal.
Court records show that James Murdoch invested $20 million in SpaceX and a company he controlled invested about $50 million in the space exploration company.
Denholm, who is designated as an independent director, is based in Australia and is not familiar with Musk. She said in court testimony that she has no personal investments in other companies run by Musk.
Denholm’s decade-long tenure on Tesla’s board was lucrative, earning her an equity stake in the company worth more than $625 million. Denholm has exercised about half of its options, earning more than $280 million from the stock sales.
Denholm turned Tesla’s board of directors into an informal family meeting. According to people familiar with the boardroom, directors sometimes ask Musk troubling questions, such as the color of future Tesla products.
Meanwhile, Musk would sometimes arrive as much as two hours late for meetings or arrive hours early and then blame employees for not getting him to meetings at the right time, according to one of the people familiar with the matter.
According to a 2018 interview on “60 Minutes,” Musk said he handpicked Denholm. Denholm replaced Musk as Tesla chairman in 2018 under an agreement reached between Musk and the SEC.
Musk said in the interview that he is Tesla’s largest shareholder, so the idea of having Denholm monitor him is “unrealistic.” He also said, “I can just do what I want by calling on shareholders to vote.” Want to do.” Musk later tweeted that the show had edited the interview in a misleading way. A spokesman for “60 Minutes” said the program stood by its reporting.
Gebbia is the co-founder of Airbnb and a friend of Musk. He joined Tesla’s board of directors in 2022. He lives in Texas and is designated as an independent director.
Former Walgreens Boots Alliance executive Kathleen Wilson-Thompson, who joined Tesla’s board of directors in 2018 and was designated as an independent director, has no public relationship with Musk.
Dealing with the relationship with the ex-girlfriend
On the boards of Tesla and SpaceX, three current and former directors have been Musk’s closest personal and financial partners.
Ellison, the co-founder and current chief technology officer of Oracle, served on Tesla’s board of directors from 2018 to 2022 and was designated as an independent director. He has said that he and Musk are “very close friends” and has hosted Musk on his island of Lanai, Hawaii many times.
When Musk revealed plans to acquire Twitter in 2022, Ellison pledged $1 billion while still a member of Tesla’s board of directors, an amount that exceeded the investment of many venture capital firms involved in the deal.
Gracias was appointed by Tesla as the company’s lead independent director from 2010 to 2019, and he has been a close friend of Musk for more than 20 years. According to a 2021 court deposition, Musk sought support from Gracias after the death of Musk’s infant son in the early 2000s.
He is also one of Musk’s friends who attends private parties around the world and sometimes smokes illegal drugs with Musk.
In court testimony in 2022, he called Musk “extraordinary,” a “terrific engineer” and “a product genius.”
Using his position on Tesla’s board of directors, he made more than $100 million by selling shares he earned.
Gracias said in his court deposition that he lent Musk $1 million when he needed cash. But it was unclear when he gave the money or what the money was used for. Musk has also personally invested about $10 million in Gracias’ Valor Equity Partners.
When asked in a court deposition whether his close friendship and business relationship with Musk affected his ability to serve as an independent director at Tesla, specifically regarding issues related to Musk’s 2018 compensation plan, Gracias denied it. . “Otherwise, I wouldn’t have done it,” he said.
Gracias stepped down in 2021 after serving on Tesla’s board for more than a decade, responding to pressure to improve corporate governance. He remains a director of SpaceX.
Jurvetson is one of Musk’s closest friends, and the two have had an intertwined friendship and business relationship over the years. Jurveston was an early investor in SpaceX, and the two used LSD and MDMA together.
Jurvetson, an amateur rocket enthusiast, often hosted parties for Musk and Kimbal Musk at his home in Half Moon Bay, a seaside town south of San Francisco.
An incident not long after the 2017 scandal led Musk and Jurvetson to fight to retain Jurvetson’s seat on Tesla’s board showed how intricately intertwined the personal and business relationships surrounding Musk were.
Tesla’s general counsel at the time, Todd Maron, had been Musk’s divorce attorney and helped negotiate the understanding with Kukral, according to emails between the company and Keri Kukral, one of Jurvetson’s ex-girlfriends seen by The Wall Street Journal. .
The emails show that as part of the 2018 arrangement, Maron allowed Kukral to review and approve press releases and other external releases related to Jurvetson and his Tesla board seat. Emails show that after Maron left Tesla, Jonathan Chang, who succeeded him as general counsel, continued to communicate with her.
In return, Kukral wrote a professional letter of recommendation to Tesla for Jurvetson as he campaigned to keep his seat on the board.
Corporate governance experts say it is highly unusual for a company’s general counsel to intervene in such private matters of board members or to give outsiders access to company information.
People familiar with the conversations said Musk also tried to persuade board members to put Jurvetson on the ballot while he was on leave. Kimbal Musk, Murdoch and Denholm objected, these people said.
Before leaving Tesla’s board of directors in 2020, Jurvetson made more than $9 million by selling Tesla stock he received as a director, according to documents reviewed by The Wall Street Journal.
At least two former board members were dissatisfied with the company’s lack of corporate governance and compliance with Musk’s demands.
Former Tesla board member Linda Johnson Rice was not close to Musk or the other directors outside of work, although she sometimes saw fellow director Gracias at work events in Chicago, where they both worked. .
According to the Wall Street Journal, she served as a Tesla director for less than two years and did not participate in the 2019 board reelection due to dissatisfaction with Musk’s erratic behavior, including drug abuse. Her informal inquiries to the board about whether there should be an investigation were met with a perfunctory response.
“She served her term and that’s it,” Musk said of Rice on Twitter. “Linda has no dissatisfaction!” Before Musk’s remarks, the Wall Street Journal published an article about Musk’s drug use in January.
Coincidentally, Hiromichi Mizuno, the former chief investment officer of Japan’s Government Pension Investment Fund, left Tesla’s board in 2023 after three years on the board, in part because he believed he was incapable of improving the situation. Tesla’s governance-related practices. At issue, according to people familiar with Tesla’s board of directors, is that the board takes orders from Musk, who has different priorities for Tesla.
Mizuno found that Tesla’s board of directors operated more like a family business with a fiefdom than a public company with strict rules and regulations, although the company generally ran well. In order to remain objective, Mizuno Hiromichi has developed the habit of trying to avoid close relationships with others at work. According to the aforementioned people familiar with the matter, Mizuno Hiromichi is sometimes invited to have a drink with Musk, but he has never attended Musk’s private parties or events.
Musk has recently been seeking further control of Tesla. He currently holds approximately 13% of the company’s shares.
Musk posted on X in mid-January that if he does not have about 25% of voting control over Tesla, he is not sure that the electric car giant will take the top spot in the field of AI and robotics. At that time, a Delaware court had not yet ruled on Musk’s compensation package.
“Unless that happens, I’d rather build products outside of Tesla,” Musk wrote.
The tweet was effectively an ultimatum to Tesla board members to reconsider Musk’s compensation. Tesla’s board of directors has so far taken no action.
2024-02-06 07:15:00
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