Tesla’s tight-knit executive team gets spotlight in court – CNN | Wonder Mind Kids


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The Tesla board of directors, which put together the largest compensation package in history for CEO Elon Musk, was filled with friends of Musk’s, according to court statements this week.

“Yes, we’re friends,” former Tesla board member Antonio Gracias said after a long series of questions about his relationships with Elon Musk and his brother Kimbal Musk, who also sits on the Tesla board. “Yes, I mean, yes, yes, yes, yes.”

That potential conflict of interest can be problematic, as Tesla says its board has a legal responsibility for shareholders’ money, in addition to overseeing management, which includes Elon Musk.

However, plaintiff Richard J. Tornetta has alleged on behalf of Tesla shareholders that Musk used his control of the company’s board of directors to secure the compensation package, valued today at $50.9 billion, and his plans to colonize Mars finance. The 2018 compensation package helped propel Musk from 41st on the world’s richest list to 1st.

The week-long trial will take place at the Delaware Court of Chancery in Wilmington. Tornetta accuses Tesla’s board of violating its duty to shareholders. Tesla says its board members should manage potential conflicts of interest and act in the best interests of Tesla and its shareholders.

The plaintiff’s attorneys have highlighted Musk’s close ties to some board members to raise questions about their independence. Testimony is expected to be completed on Friday, but Chancellor Kathaleen McCormick may not make a decision for weeks or months.

Tesla’s board of directors approved Musk’s unprecedented salary package without negotiating how many shares Musk would receive under the plan, according to Gracias’ testimony Wednesday. The failure of the negotiations could indicate that the board is not independent from Musk.

One board member, Ira Ehrenpreis, said he was investigating ways to limit the plan’s disclosed public value. An interest in not disclosing the value of a pay package to shareholders could be interpreted as having a greater interest in maximizing executive pay than in helping shareholders evaluate executive pay.

Tesla’s board of directors’ pay package awarded Musk large sums of stock whenever Tesla met certain milestones, including earnings and share price targets.

But when the board got shareholder approval for the package, it didn’t consider publicly revealing that Gracias said Tesla’s internal projections were for three milestones to be reached in about 18 months. That conflicts with earlier statements at this week’s hearing, in which Tesla executives described the plan as difficult to achieve.

“While I believe deeply in Tesla, I felt that the difficulty level of these milestones was such that I didn’t find this a compelling incentive plan on a personal level for a mere mortal like myself,” said Deepak, former Chief Financial Tesla officer Ahuja testified earlier this week.

Musk’s pay package was also unusual because, according to Tesla board member Ira Ehrenpreis, there wasn’t a traditional benchmarking study conducted by Tesla to compare Musk’s pay to other executives.

Vivek Wadhwa, a former Distinguished Fellow at Harvard Law School and Carnegie Mellon University’s College of Engineering before retiring, told CNN Business that it’s common for Silicon Valley executives like Tesla to give it to them appropriate checks and balances are lacking. CEOs often have too much control over their boards and companies.

“It’s an incestuous relationship. It’s a serious problem,” Wadhwa said in a phone interview he conducted while charging his Tesla. He has referred to himself as a “Tesla fanboy” in the past.

A plaintiff’s attorney questioned Gracias Wednesday about his relationship with Elon Musk and Musk’s brother Kimbal Musk, who remains on Tesla’s board of directors.

Gracias described vacationing with Elon Musk’s family in the Bahamas and has had an annual tradition for eight to 10 years of spending the President’s Day weekend with Elon, Kimbal and their families. They’ve attended birthday parties for each other’s children, and Gracias has spent Christmas at Kimbal’s home. Gracias also said he was best man at Kimbal’s wedding.

In this sketch, former Tesla CEO Antonio Gracias testifies in court.

Elizabeth Umphress, a University of Washington business school professor who studies ethical decision-making, says friendships between board members and CEOs are worrisome. Research has shown that personal relationships can affect the quality of pay and performance decisions.

She said this is an issue at all levels of organizations but can be particularly problematic at higher levels, as high-status individuals are more likely to believe they are immune to conflicts of interest.

“If you have these friendships,” Umphress said. “You are compromised.”

James Murdoch, who testified that he has been a friend of Elon Musk since 2006, described joining Tesla’s board of directors in 2017 after being approached by Gracias. (Murdoch is the son of media titan Rupert Murdoch.)

Murdoch, Gracias and Elon Musk vacationed in the Caribbean with their families just before Murdoch joined the board. Murdoch said he also spent time with Musk and his family in Jerusalem and Mexico.

Ira Speedwell, left, is questioned by plaintiff's attorney Gregory Varallo, who stands right as Chief Judge Kathaleen McCormick, center, looks on.

Ehrenpreis, a Tesla board member who chairs the automaker’s compensation committee, has exchanged messages with Musk referring to things like “Love you man,” he testified earlier this week. Speedwell also had the rights to the first Model 3, Tesla’s breakout product, but gave it to Elon Musk as a birthday present.

Speedwell is also the Tesla board member who asked advisors if Tesla could hypothetically reduce the disclosed cost of Musk’s compensation plan.

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