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Tesla Gets a Second Chance

The regulatory settlement calls for a new chairman to oversee Tesla Inc. Chief Executive Elon Musk.
The regulatory settlement calls for a new chairman to oversee Tesla Inc. Chief Executive Elon Musk. Photo: patrick t. fallon/Reuters

Who wants to supervise Elon Musk?

The Securities and Exchange Commission has settled the fraud charges against Tesla Inc.’s embattled leader. The settlement calls for, among other things, the installation of a new chairman to oversee Mr. Musk. The settlement will allow him to remain as chief executive.

That is clearly a big win for shareholders in the short term, considering Mr. Musk’s outsize role at the company. The stock should bounce back Monday, and it is possible the shares get a further boost when Tesla reports third-quarter deliveries later this week. If the company takes the governance overhaul seriously, Tesla has a chance to create a stronger organization in the long term as well.

However, the new chairman will have  a lot of work to do, including reining in Mr. Musk’s more problematic impulses, figuring out why senior executives keep leaving the company and helping install strong replacements. The entire board will have to perform better and clearly show its independence from Mr. Musk. The first test could occur in the coming months because Tesla will likely need to shore up its balance sheet by raising fresh capital.

Most importantly, Tesla needs to fix the capricious manner in which Mr. Musk runs his company, which is what caused trouble with regulators in the first place. There is reason to be skeptical he can do it. Just last Thursday, he called the SEC fraud lawsuit “unjustified” in a statement.

“Integrity is the most important value in my life and the facts will show I never compromised this in any way,” he said, before settling fraud charges less than two days later.

Mr. Musk’s poor judgment continued over the weekend when he emailed employees to say the company is “very close to achieving profitability” in the third quarter. While he has said in the past that the Tesla would earn a profit in the quarter, it wasn’t a good idea to send an email like just as he was settling with the SEC for driving up the stock with his tweet about going private.

Great companies set realistic operational goals they can actually meet, don’t disseminate material information via internal emails and don’t taunt short sellers on social media. A first step toward winning back investor trust would be to issue realistic financial guidance for 2019. The lack of that information this late in 2018 is a curious omission for a company that plans to dominate the global automotive industry over the long term.

The SEC settlement closes an ugly chapter in Tesla’s history. Monday should be a good day for the stock price, but the real work is only just beginning.

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