By Chris Irons, Quoth the Raven Research
What could happen to Tesla (TSLA) stock if Musk moves out of the CEO role?
What about if he leaves the company altogether?
In a previous article, I outlined why I thought there was a very real chance that Tesla CEO Elon Musk could wind up in a non-executive chairman role by 2019. I think the chance of Musk leaving the company outright is low, but I do think the chance of him stepping out of his CEO role is a bit more pronounced. This is all my opinion based on his erratic behavior over the last six months and based on my experience with the SEC suing company executives civilly.
Certainly, I believe that if Musk is not made to move out of his position, that the Board of Directors is failing to do its job and protect the interests of shareholders. I said as much on this webcast I did about a month ago, where I went more into depth about why the Board of Directors needs to do their job, even if it is inconvenient for them at a company where Musk is heralded as savior.
Today I wanted to address the next obvious question that comes up that I did not address in my previous article: what could happen to Tesla's stock price if Musk were to step down as CEO?
I believe if Musk were to leave the company outright and not stay on in some type of non-executive role, it would be devastating for the stock. It would absolutely crush the "Elon Musk call option premium" that many, including myself, believe is the reason that the stock is still valued as high as it is today. Musk leaving the company outright could simply result in a stock price much lower, in my opinion.
But him staying on in a non-executive role might actually be viewed by the market as a favorable (if not the most favorable) scenario. I think bond investors would find it to be a good move, at the very least. Bonds are often the "smart money" that winds up eventually leading the equity. I think responsible investors would praise such a move. They would get the benefits of having Musk still working at the company, with his name tied to the technology, but they wouldn’t have to suffer the direct liabilities and consequences of Musk's actions. Furthermore, Musk moving out of his CEO role would open up an immense opportunity for the company to either bring in a seasoned automobile executive or an executive with extensive public market experience – either one of these, I believe, would prove to be a large positive for the company and would likely result in the share price moving higher.
Think about it: if Musk leaves his role as CEO and somebody with Wall Street experience takes his place, you get the best of both worlds. You get to keep some of the Elon call option because he will be there to innovate, and it would also help exude more confidence when it comes to the routine everyday procedures that need to take place as a public company.
Of course, there are several other situations that are possible. One of those situations is Elon Musk staying on as CEO and hiring a COO. Interviews with three auto industry veteran executives show they all believe that the company needs more top level talent and that Elon needs a COO.
Based on several years of executive departures, I’m not sure that this method would work (with Musk staying as CEO). From the outside looking in, to me, it seems like you are either a Musk enabler or you are out the door. It has been extremely difficult to find other current executives and board members at Tesla that have criticized Musk for his actions (at least publicly). However, there have been no shortage of executives who have reported to Musk or have been subordinate to him who have left the company over the last couple of years. Most recently, over the past week, both the Chief Accounting Officer and VP of Worldwide Finance.
To me, this has always indicated that Musk may not be the best person to work for and that the company may not be the most organized workplace.
For example, the Chief Accounting Officer who recently resigned after less than just a month on the job gave up a $10 million equity package when he resigned. "In leaving the accounting chief job, Morton walked away from a $10 million new-hire equity grant that would have vested over four years," Bloomberg wrote after he left.
On the scales of decision making, when you have $10 million on one side, whatever is on the other side must carry significant weight to upset that balance. People don’t just walk away from $10 million equity awards without good reason.
Whether the Tesla board understands that it is not time for another Band-Aid, but rather time for a larger change, remains to be seen.
The last potential scenario is everything staying exactly the way it is right now: Musk remains CEO and continues to be the head decision maker on all fronts while loyal shareholders, and maybe even the Board of Directors, start to potentially realize the situation that they have gotten themselves into. In a situation where Musk stays as CEO and no other executive changes are made, I believe it’s difficult to predict a scenario where the company does anything other than what it has been doing over the last six months, which, in my opinion, has been nothing short of just embarrassing itself.
The obvious conclusion here is that not all of the scenarios involving Musk stepping down would be negative. In fact, the opposite. This isn’t an article proposing only situations where I believe shareholders would see the value of their stock decline. Rather, I’m trying to inject common sense into the discussion and help people realize that Musk stepping down from CEO may not be the worst thing in the world. In fact, it might be the company's best strategic option right now, especially given the reported SEC investigation.
To me, it feels like there’s an outside chance that the company is already preparing for Musk to stand down. There’s a small part of me that feels like Gene Munster's recent comments to the company, combined with Musk's recent antics, telegraph that the company may be willing to subject Musk to an officer or director bar as part of an SEC settlement regarding the "funding secured" fiasco. Of course, I’m not a securities attorney and I am only guessing here, but in my previous article I did note that an officer or director bar would be a catalyst that could move Musk out of his CEO role in short order.
On a public relations front for the company, it would be much easier to move him out now and then agree to an officer and director bar a couple months from now, than it would be to shock the market by surprising them with such a bar up front.
I still stand by my prediction that Musk will not be CEO in 2019. Whether it is a result of an SEC mandated change, or simply the Board of Directors just coming to their senses remains to be seen.
Long investors should try to put their loyalty to Musk aside and consider why such a scenario may be their best option. Shorts and skeptics are probably praying that Musk stays on in the same capacity and continues to usher in one controversy and problem after the next, as it seems he has been doing this year.