Recent news reports about executive departures and erratic CEO behavior at Tesla underscore the board’s fundamental obligation to exercise oversight of the CEO and senior management in operating the company’s business.
According to multiple news reports, in recent weeks the CEO has:
- Engaged in accusatory communications with certain segments of the investor sector
- Made erratic comments in an interview with The New York Times
- Issued a tweet about possibly taking the company private, which prompted an inquiry from the SEC (concerned that he was misleading investors)
- Reportedly refused to heed board directions to stop communicating by Twitter
- Appeared to smoke marijuana in an interview posted on YouTube
In addition, the company’s newly hired chief accounting officer quit after barely a month on the job (citing discomfort with the public attention on the company and its pace), and the head of human resources declined to return after the end of a leave of absence. Earlier this year two other senior executives departed, and the company has experienced notable turnover at the vice presidential level. Furthermore, various board members have hired outside counsel to advise them in connection with some of this turmoil.
Monitoring and evaluating the CEO’s performance and overseeing talent development are two particularly critical board functions. Their importance is not lessened when the CEO is well known and widely regarded as a visionary, as is Mr. Musk. Indications of erratic and undisciplined CEO behavior, and evidence that such behavior is creating material distractions for the company and possibly affecting its value and reputation, are warning signs that may prompt a board to take action. While the range of possible action is at the board’s discretion, the oversight responsibility in such circumstances can be seen as unequivocal.