Tesla: Runaway Board of Directors

Board members have profited heavily from stock awards and other investments, and some of them have even taken drugs with Mr. Musk, a former Tesla director, Mr. Ellison, who advised Mr. Musk to come to his Hawaiian island to relax and stay away from drugs.

According to the Wall Street Journal, members of the board of directors of Tesla Inc. (TSLA), an electric car maker owned by Elon Musk, have been caught in a dilemma.

Steve Jurvetson, a venture capitalist and longtime director of Tesla, left the company after an internal investigation found that he had slept with multiple women in the tech industry and used illegal drugs.

Some of these details were heavily reported in the media in 2017, and according to people familiar with the matter, Tesla's directors privately discussed how they should handle the matter. Some urged Jurvetson to resign.

Fortunately, despite Tesla's designation of Jurvetson as an independent director, he has a good friend with whom he has a deep financial relationship, and also goes to parties with him, using ecstasy and psychedelics, and that person is Musk.

In a private conversation, Musk urged directors to allow Jurvetson to take an unusual leave of absence from the publicly traded company's board of directors before resigning on his own accord in 2020, according to people familiar with the matter. Jurvetson remains a director of Musk's unlisted rocket company, SpaceX.

When asked how the board handled Jurvetson's situation, Antonio Gracias, another former Tesla independent director and good friend of Musk, said in a 2021 court testimony: "The answer is to do nothing and see what happens." Gracias and his venture capital firm have made investments in Musk's companies, which were recently valued at about $1.5 billion.

A number of other directors of the company under Musk's helm have deep personal and financial ties with the billionaire entrepreneur and have profited greatly from that relationship. The relationship has severely blurred the lines between friendship and wealth, raising questions among some shareholders about the independence of the board members who oversee Musk. Such conflicts can violate some of the less stringent rules that regulate the independence of listed companies.

On Tuesday, a Delaware judge overturned Musk's tens of billions of dollars compensation package at Tesla, saying that board members who signed the package in 2018 had benefited from it.

Several current or former directors of Tesla and SpaceX have joined Musk for parties, exotic vacations and hanging out at Burning Man, Nevada's art and music festival.

The directors include venture capitalists Gracias and Ira Ehrenpreis, tech mogul Larry Ellison, former media executive James Murdoch, and Musk's younger brother, Kimbal Musk. Musk and the directors have invested tens of millions of dollars in each other's companies, with Ellison owning billions of dollars worth of Tesla stock, with a stake of about 1.5% in 2022. Some directors have also received support and help from Musk in their careers.

Tesla's board of directors currently has eight members, most of whom have amassed hundreds of millions of dollars worth of stock over the years, significantly more than other companies' board members earn.

Tesla mainly pays directors in the form of stock options, and current board members, excluding Musk himself, have collectively made more than $650 million from the sale of related shares. They also hold options worth nearly $1 billion.

Some directors have agreed to return a portion of their compensation to Tesla to settle shareholder lawsuits against their compensation, while denying any wrongdoing. The judge has not yet approved the settlement.

According to some people who witnessed Musk's drug use or were told about Musk's drug use, some current and former directors of Tesla and SpaceX were aware of Musk's illegal drug use but did not take public action.

I wrote in January that Musk had used drugs, including cocaine, ecstasy, psychedelics and psychedelic mushrooms, and the leadership of Tesla and SpaceX had expressed concern, especially his recreational use of ketamine, which Musk had said he had a prescription for.

The illegal drugs violate Musk's company's strict anti-drug policy and could jeopardize SpaceX's federal contracts and Musk's security clearances.

In recent years, Musk has attended social gatherings with Tesla's board of directors, Airbnb co-founder and friend Joe Gebbia at the upscale Austin Proper Hotel, and has repeatedly smoked ketamine through a nasal spray bottle for recreation, according to people familiar with Musk's drug use and party attendance.

According to witnesses and other insiders, other directors Gracias, Jurvetson and Kimbar Musk had taken drugs with him.

According to people familiar with the matter, Musk and some people close to him, including Kimbar Musk, attended a party at Hotel El Ganzo, a boutique hotel in San Jose del Cabo, Mexico. This hotel is known for its art, music performances, and drug activities.

Some of them said the amount of drug use by Musk and board members was worrying.

Some say that in the culture that Musk has created, some friends, including directors, feel that they should take drugs with him because they think that not doing so might upset the billionaire who made a lot of money for them. 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 having a good relationship with the king.

Musk and his lawyer, Alex Spiro, did not respond to requests for comment.

Previously, in response to an article I wrote in January about Musk's use of illegal drugs, Spiro said that Musk undergoes regular and random drug testing at SpaceX and has never failed a test.

After the article was published, Musk tweeted that after a marijuana smoking incident in 2018, he underwent three years of random drug testing and did not find even trace amounts of drugs or alcohol. He later posted a satirical article sarcastically that the author was not even worthy of being a pad under a birdcage, and wrote: "If the drugs really improve my productivity over time, I will definitely take them!"

Tesla's general counsel and a spokesperson for SpaceX did not respond to requests for comment.

Ellison's proposal

According to people close to Musk, some board members are concerned that Musk's actions will have a negative impact on the roughly $800 billion in assets held by the six companies he manages and investors.

Despite these concerns, Tesla's board of directors has not conducted an investigation into Musk's drug use practices, nor has it documented their concerns in formal board minutes. Minutes of such meetings may be made public.

Around the winter of 2022, Ellison, a close friend of Musk and a former Tesla board member, advised Musk to come to his Hawaiian island to relax and stay away from drugs, according to people familiar with the matter.

Some of them said that on the occasion, Musk's friends and other close contacts were concerned that his drug use was getting worse, and some asked him to go to a drug rehabilitation center.

According to a person who was present at the time, Mr. Musk attended a party in the Hollywood Hills at about the same time as Mr. Ellison's invitation, where he took a bottled of liquid ecstasy. Musk's security guards asked people to leave the venue before he took drugs to protect their privacy.

Across Silicon Valley, executives sometimes invest in each other's companies and venture capital businesses, and may also have a personal relationship with one or two members of a company's board of directors, especially before the company goes public.

Musk's breadth of personal and professional connections on the board, as well as the sheer amount of money involved, make him the most prominent example of the intertwined relationship between the CEO and the director. I traced these connections through hundreds of pages of court documents and testimony, the Securities and Exchange Commission, and other public records.

Tesla pays its directors much more than the average compensation of the board of directors of most U.S. companies. According to a recent report from the National Association of Corporate Directors and compensation consulting firm Pearl Meyer, the average annual compensation for board members of the 200 largest companies in the U.S. in 2023 is $329,351.

By comparison, the current members of Alphabet's board of directors hold shares worth about $8 million, and its board members have been compensating an average of about $475,000 a year since 2015.

In addition to board compensation, some Tesla and SpaceX directors have tens of millions of dollars in additional investments in other companies under Musk's umbrella, such as Musk's brain-computer interface startup Neuralink and his tunneling startup The Boring Co.

Musk, in turn, has also invested in some of the director's companies. Tesla and SpaceX board members have also invested in Kimbar Musk's Kitchen Restaurant Group and SolarCity, a company run by Musk's cousins that has been acquired by Tesla.

Governance experts, who have long served as board members and board advisors, say personal and financial relationships can confuse directors' views, a rarity among U.S.-listed companies.

Tesla shares are listed on the NASDAQ, and according to the NASDAQ's trading rules, independent directors cannot be employees of the company, family members, or persons whose relationships "would interfere with independent judgment." NASDAQ requires a majority of independent directors in the composition of the board of directors of a public company.

While the rules for independent directors are vague across the country, courts have found that public companies often have financial entanglements with independent directors, and that some supposedly independent directors hold investments that are related to each other.

Amalgamated Bank signed a shareholder letter last year asking Tesla's board members to step up oversight of Musk "better than nothing." As of September last year, Amalgamated Bank managed about $180 million in investments in Tesla.

These investors are concerned that Musk's close relationship with several Tesla directors makes it difficult for the board to act in the best interests of shareholders.

A CEO with room to manoeuvre

Some directors believe that Musk is an unborn genius, with a brilliant mind and extraordinary means. In the pre-trial investigation and court depositions, the directors said they believe Musk's leadership is 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 is closely related to the company's success. Tesla's stock price has risen more than 300% over the past four years, but has fallen about 25% since the beginning of January.

In overturning Musk's compensation package last Tuesday, a judge in the Delaware Court of Chancery called the process for approving the package "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 much of a role in determining his own compensation.

Court of Chancery Justice Kathaleen McCormick wrote in his opinion that Musk "had a close relationship with the directors responsible for negotiating on Tesla's behalf and led the process of getting the board to approve his compensation plan." She called Tesla Chairman Robyn Denholm "not aggressively enough" in the way he fulfilled his oversight obligations.

Tesla board members can appeal this ruling to the Delaware Supreme Court. After the ruling was announced, Musk posted on X that he would "never incorporate a company in Delaware" and said that Tesla would hold a shareholder vote to decide whether to transfer the company's domicile to Texas.

The compensation agreement was signed by board members in 2018, valuing it at up to $55.8 billion. According to governance data firm Equilar, this is the largest compensation package ever made by a CEO of a U.S. public company.

While negotiating the compensation package, Musk emailed Tesla's lead lawyer to explain how he would use the additional compensation. Musk wrote in the email: "This salary is just so that I can spend as much money as possible on the Mars program, so as to minimize the risk of survival." Elan Prees, a friend of Musk's longtime friends, served as chairman of Tesla's board of directors for compensation.

Company directors often give Musk a lot of leeway on a variety of issues, big and small.

For example, after acquiring Twitter in 2022, Musk asked Tesla employees to evaluate the social media platform's engineering talent. According to the Wall Street Journal, it was also during that time that SpaceX unusually agreed to give its CEO Elon Musk a $1 billion loan.

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 a new committee of independent board members to oversee Musk's public filing.

But according to court documents, Denholm said at the time that Musk "will self-monitor" compliance, and some directors also said they do not review Musk's tweets.

Tesla disclosed in 2022 that it had received a subpoena from the SEC asking for information on how the company complied with the settlement agreement.

Musk's freewheeling statements on Twitter (now known as X) and in interviews have often caused volatility in Tesla's stock price and affected his other companies.

In 2020, Musk tweeted that he thought Tesla's stock price was too high, and Tesla's stock price closed down more than 7% on the day. Last year, several large companies stopped advertising on X after Musk described an antisemitic post on X as "the truth."

For decades, investors have pressured companies, especially public companies, to hire independent directors, because it provides checks and balances on management and close-track oversight of what's happening within the business.

Under a set of rules introduced in 2002 known as the Sarbanes-Oxley Act, public 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 finances amid improper board oversight.

Stock exchanges will often specify how the independence of the board and other expectations will be defined. In private companies, there is no requirement for the number of independent directors or the composition of independent directors.

On the NASDAQ, if a public company does not comply with its independent director majority requirement, the NASDAQ will give the company one year or make changes before the next shareholder meeting, and may be delisted if it fails to do so.

Doubts about the independence of directors of listed companies have gone to court, and judges have sometimes found issues related to deep financial relationships.

The Delaware Supreme Court ruled in 2016 that a majority of the board of directors of game developer Zynga were not independent. One reason was that a venture capital firm for which the two directors worked had invested in a start-up co-founded by the CEO's wife, and another director and her husband owned a private jet with the CEO.

Following the court's ruling, Xingjia expanded its board of directors and established a special litigation committee to investigate insider trading allegations. Xingjia settled the case in 2019 for $11 million.

"The real question for me is: Can you make a fair, objective decision without being influenced by the relationship?" Lawrence Hamermesh, former director of the Delaware Institute of Corporate and Business Law at Widener, said. He also served as Senior Special Counsel to the SEC's Corporate Finance Division.

Surrounded by friends

When Tesla wanted someone to replace a departing director, the company turned to a familiar face — JB Straubel. People familiar with the board's thinking said the board believes Musk would listen to the company's former chief technology officer, whom Tesla sees as a co-founder, who could fill Ellison's vacancy and who has technical expertise.

Last year, before voting to approve Straubel's join, some shareholders objected because of his close ties to the company, saying that if he joined, at least five of the eight members would lack independence.

But Straubel was elected. A Nasdaq spokesperson said Nasdaq did not comment on specific companies, and said Tesla should respond to the author's question about how Straubel could be classified as an independent director.

In the process of building his business empire, Musk has long surrounded him with close friends. He turned to them for advice on new business investments and day-to-day operational assistance.

In addition to Musk serving as a director of Tesla, his younger brother Kimbar Musk is also a member of the board of directors. Kimbal, who served on SpaceX's board of directors, 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 parties.

Ellen Pree, who chairs two of the four committees of Tesla's board of directors, has been designated as an independent director by Tesla and has been close to Musk for many years.

The venture capitalist has the right to buy the first Tesla Model 3, and some people salivate over the car just to show it off. Around Musk's 46th birthday in 2017, Ellen Pres gifted the power to Musk, tweeting, "With love and respect for everything you do." ”

Ellen Pres has invested in many of Musk's ventures, both personally and through his venture capital firm, DBL Partners, totaling about $70 million.

On Tesla's board of directors, Ellen Preece made more than $220 million on shares from the sale of directors' compensation and has additional options worth more than $200 million at the latest price.

James Murdoch, the former CEO of 21st Century Fox, is also listed as an independent director of Tesla. His friendship with Musk dates back to around 2006, when he spent vacations with Musk and his family, including trips to Israel and Mexico.

In his 2022 court testimony, Musk said he didn't know James very well, although James affirmed his friendship with Musk in his earlier testimony.

James Murdoch said in court testimony that he considered himself independent and described directors as "members of a public company with the ability to think independently in terms of governance and oversight". James Murdoch is the youngest son of Rupert Murdoch, who is chairman emeritus of News Corp, the parent company of The Wall Street Journal.

Court records show that James Murdoch invested $20 million in SpaceX, and a company he controls 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 had no personal investments in other companies owned by Musk.

Denholm's decade-long tenure on Tesla's board of directors has earned her more than $625 million worth of company equity. Denholm has exercised about half of its options, making more than $280 million from the stock sale.

James Murdoch, a member of Tesla's board of directors, and a company he controls have invested about $70 million in SpaceX

Robyn Denholm, chairman of Tesla's board of directors, made a profit of more than $280 million by selling the shares she won on the board

Denholm held Tesla's board of directors into an informal, family-style meeting. According to people familiar with the board, directors sometimes ask Musk questions that don't hurt, such as the color of future Tesla products.

At the same time, according to one of the people familiar with the matter, Musk sometimes arrives two hours late, or a few hours early, and then blames the employees for not getting him to the venue at the appropriate time.

According to a 2018 interview with "60 Minutes," Mr. Musk said he had handpicked Denholm. Under an agreement between Musk and the SEC, Denholm replaced Musk as Tesla's chairman in 2018.

Musk said in interviews that he is Tesla's largest shareholder, so the idea of having Denholm spy on him is "unrealistic," adding, "I can do what I want by just calling for shareholders to vote." Musk then tweeted that the show had misleading clips of the interview. A spokesman for "60 Minutes" said the show stuck to its reporting.

Gebbia is the co-founder of Airbnb and a friend of Musk's. He joined Tesla's board of directors in 2022 and he lives in Texas and is designated as an independent director.

Kathleen Wilson-Thompson, a former Walgreens Boots Alliance executive who joined Tesla's board of directors in 2018 and is designated as an independent director, has no public relations with Musk.

Dealing with a relationship with an ex-girlfriend

On the boards of Tesla and SpaceX, there are three current and former directors who have been Musk's closest personal and financial partners.

Ellison, the co-founder and current CTO 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 have entertained Musk on his own island of Lanai, Hawaii, many times.

When Musk revealed his plans to buy Twitter in 2022, Ellison pledged $1 billion while he was still on Tesla's board of directors, an amount that exceeded the investment of many venture capital firms involved in the deal.

Gracias, who was appointed by Tesla as the company's lead independent director between 2010 and 2019, has been a close friend of Musk for more than 20 years. According to a 2021 court confession, Musk turned to Gracias for support after the death of his infant son in the early 2000s.

He is also one of the friends with whom Musk attends private parties around the world and sometimes consumes illegal drugs with Musk.

In his 2022 court testimony, he called Musk "extraordinary," "an amazing engineer," and "a product genius."

With his position on Tesla's board of directors, he made more than $100 million from the sale of the shares he earned.

Tesla board member Gracias and his venture capital firm have made investments in Musk's company, which were recently valued at about $1.5 billion

Steve Jurvetson, a former member of Tesla's board of directors who emerged in 2016 and is now a member of SpaceX's board, is one of the directors who used illegal drugs with Musk, according to witnesses and other people familiar with the matter

In his court confession, Gracias said he lent Musk $1 million when he needed cash. But it is not clear when he gave the money or what it was used for. Musk also personally invested about $10 million in Gracias' Valor Equity Partners.

Gracias denied when asked in a court confession whether his close friendship and business relationship with Musk had affected his ability to serve as an independent director of Tesla, particularly in relation to Musk's 2018 compensation plan. "Otherwise, I wouldn't have done it then," he said. ”

Gracias stepped down in 2021 after serving on Tesla's board of directors for more than a decade, in response to pressure to improve corporate governance. He remains a director of SpaceX.

Jurvetson is one of Musk's closest friends, and the two have been intertwined with friendship and business relationships over the years. Jurveston was an early investor in SpaceX, and the two used psychedelics and ecstasy together.

An amateur rocket enthusiast, Jurvetson often hosts parties to entertain Musk and Kimbal Musk at his home in Half Moon Bay, a small seaside town south of San Francisco.

The 2017 scandal led Musk and Jurvetson to fight to keep Jurvetson's seat on Tesla's board, and an incident soon after, showing how intricately intertwined personal and business relationships revolve around Musk.

Tesla's general counsel at the time, Todd Maron, was Musk's divorce lawyer, and according to emails I saw between the company and Keri Kukral, one of Jurvetson's ex-girlfriends, Maron helped negotiate an understanding with Kukral.

As part of the 2018 arrangement, Maron allowed Kukral to review and approve the release of external information, including press releases, related to Jurvetson and his seat on Tesla's board of directors, according to the email. After Maron left Tesla, Jonathan Chang, who replaced him as general counsel, continued to communicate with her, according to the email.

In return, while Jurvetson was moving around trying to keep his seat on the board, Kukral wrote a professional letter of recommendation for him to Tesla.

Corporate governance experts say it is highly unusual for a company's chief counsel to intervene in such private matters of board members, or to give outsiders the power to view company information.

Musk also tried to convince board members to let Jurvetson vote while he was on vacation, people familiar with the conversations said. Kimbar Musk, Murdoch and Denholm objected, the people said.

Linda Johnson Rice did not continue to run for Tesla's board of directors

Before leaving Tesla's board of directors in 2020, Jurvetson made more than $9 million by selling Tesla shares he acquired as a director, according to documents seen by the Wall Street Journal.

At least two former board members are unhappy with the company's lack of corporate governance and its aggressive approach to Musk.

Linda Johnson Rice, a former Tesla board member, doesn't have a close relationship with Musk or other directors outside of work, though she sometimes meets fellow director Gracias, both of whom work in Chicago, at Chicago events.

According to the author, she was dissatisfied with Musk's erratic behavior, including drug use, and served as a director of Tesla for less than two years and did not participate in the 2019 board reelection. She asked the board informally whether it should conduct an investigation, and the results were perfunctory.

"She finished her tenure and that's it," Musk said of Rice on Twitter. "Linda has no grievances!" Musk's remarks followed an article in January about Musk's drug use.

Coincidentally, Hiromichi Mizuno, the former chief investment officer of Japan's Government Pension Investment Fund, left Tesla in 2023 after serving on the board of directors for three years, in part because he felt he was incapable of improving Tesla's governance-related practices.

According to people familiar with Tesla's board, the controversy is that the board is at the mercy of Musk, who has different priorities for Tesla.

Mizuno found that Tesla's board of directors operated more like a family business with territory than a public company with strict rules and regulations, even though the company usually ran well. In order to remain objective, Mizuno Hiromichi has developed the habit of avoiding close relationships with others as much as possible in his work.

According to the aforementioned insider, Mizuno 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 over Tesla. He currently holds a stake of approximately 13% of the company.

Musk posted on X in mid-January that he was not sure that the electric car giant would be at the top spot in AI and robotics if he did not have about 25% control of Tesla's vote. At that time, the Delaware court had not yet ruled on Musk's compensation package.

Musk wrote: "Unless that's the case, I'd rather build a product outside of Tesla. ”

The tweet was actually an ultimatum to Tesla's board members to reconsider Musk's compensation. To date, Tesla's board of directors has not taken action.