Ties of friendship between corporate directors and CEOs can compromise firms’ integrity, but public disclosure of the ties can make the problem worse, according to research in the American Accounting Association’s Accounting Review. In a study of 56 board members, 46% of those who were asked to imagine being directors of a fictitious firm whose CEO was a friend said they’d be willing to substantially cut R&D if it meant triggering a hefty bonus for the chief executive (compared with 6% of those who were asked to imagine that the CEO wasn’t a friend). Those who imagined disclosing the friendship were willing to cut 66% more than those who imagined keeping the friendship secret—apparently because disclosing the friendship gave directors the feeling they had a moral license to reward the CEO, the researchers say.
Social connections drive board appointments and more than two-thirds of directors in the 200 largest public companies are on the board of multiple companies.
Now let’s move to a specific situation.
The Tesla board of directors that created the largest compensation package in history for CEO Elon Musk was stocked with friends of Musk, according to court testimony this week.
“Yes we’re friends,” former Tesla board member Antonio Gracias said after a long line of questions about his relationships with Elon Musk and his brother Kimbal Musk, who is also on Tesla’s board. “Yes, I mean, yes, yes, yes, yes.”
This potential conflict of interest may be problematic as Tesla says its board of directors has a legal responsibility for shareholders’ money in addition to overseeing management, which includes Elon Musk.
The Wall Street Journal ’s article describing Musk’s history of recreational drug use and ongoing consumption of ketamine is the latest in a long line of tests for a board packed with the CEO’s acolytes — several of whom agreed less than six months ago to return $735 million to settle a lawsuit alleging they had excessively compensated themselves.
Tesla’s longest-serving directors are Musk, 52, and his younger brother, Kimbal — both have been on the board since 2004. Kimbal’s reelection to the board has gotten pushback in recent years from an investor critical of his lack of relevant industry experience and a proxy adviser concerned about objectivity.
Proxy advisers also opposed the 2022 reelection of Ira Ehrenpreis, a venture capitalist who has been on the board since 2007. They cited concern about the amount of borrowing against Tesla stock by Musk and other directors, and a half measure the board took in response to a shareholder proposal for annual director elections that got majority support in 2021.
The only other relatively long-tenured director on the board is Robyn Denholm, who joined in 2014 and became chair in 2018. Months after her elevation to the position, which was linked to the SEC suing Musk and Tesla over his take-private tweeting, she praised Musk’s use of the social media platform.
Tesla’s four other directors are James Murdoch, the former 21st Century Fox CEO appointed in 2017; Kathleen Wilson-Thompson, the former human-resources chief of Walgreens Boots Alliance Inc. who joined in 2018; and Joe Gebbia and JB Straubel, who were elected to the board last year. Gebbia co-founded Airbnb Inc., and Straubel is a co-founder of Tesla.
Musk has close relationships with Murdoch, Gebbia and Straubel.
Food for thought.
I wonder if GM’s CEO Mary Barra has friends on her board of directors.
Her 10 year tenure as CEO has been lackluster.
Her board does have more women than men.
Hm girl power board rather than a good old boy board. LOL