MarketWatch First Take: SEC settlement forces Tesla to give Elon Musk adult supervision

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The Securities and Exchange Commission didn’t want to potentially damage Tesla Inc. by permanently barring Elon Musk from the company he has built from virtually nothing, but had to do something to punish him for foolish and misleading tweets that manipulated the financial markets and ensure it did not happen again.

The regulators hope a settlement announced Saturday between the SEC, Musk and Tesla TSLA, -13.90%  achieves those goals by putting more independent adults in the room to oversee Musk while taking $20 million directly from the executive. The key question is if Musk will learn his lesson and take the advice of outsiders, or continue to act recklessly on Twitter and needlessly endanger Tesla investors.

The current Tesla board stood by as Musk’s Twitter habit devolved into attacking journalists, calling a cave diver who helped save trapped Thai children a “pedo” and eventually claiming he received funding for a deal to go private, which led to the market-moving tweets that caused the settlement. Musk will not be able to lead that board for three years under the deal — splitting the chairman and CEO roles, as most corporate governance experts recommend — and at least two new independent members must be named. The board currently consists of nine members.

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Steve Diamond, an associate professor of law at Santa Clara University School of Law who has advised the CtW (Change to Win) Investment Group in efforts to get more independent directors on Tesla’s board, said Saturday that the deal should have a positive effect on Tesla’s governance.

“It will have an impact on the culture of the board, which won’t just be a cabal of Musk cronies,” Diamond said in a phone interview. “He’ll be forced to respond to a broader array of questions and concerns, and it could strengthen the monitoring and oversight.”

However, Diamond pointed out that Musk still will have a lot of sway on the board, since he will remain Tesla’s largest shareholder, with more than 20% of the company’s shares. That will give him a persuasive say on the new board members and who will get the chairmanship. He may be able to retain his board seat even while not being chairman.

If the SEC wants this settlement to work and prove that its enforcement powers can be used to deter bad actions by an executive while not harming the investors of Tesla, it will have to ensure that the new board members are independent and will be heard. After all, it is doubtful that none of the current members of the board — which includes Musk’s brother and many like-minded investors — at least suggested to Musk that he tone it down on Twitter as he descended toward the “funding secured” tweet.

See also: Tesla investors complained to the SEC — and here’s what they said

In an effort to ensure Musk is a good boy, Tesla will also have to establish guidelines for proper social-media usage for Musk, and hire a securities lawyer who will oversee any statements that could be material. That is exactly the type of supervision that should have been put in place well before Musk sent Tesla shares on a roller coaster with his August tweets, and hopefully will help avoid a sequel.

The goal for all involved should be a corporate framework that guides the chief executive through a crucial time for the auto maker, and will penalize him further in if he endangers Tesla’s progress with more immature behavior. The SEC settlement at least establishes what that framework looks like, but leaves plenty of opportunity for Musk to avoid the intended result.

Tesla stock plunged 13.9% Friday, after the SEC’s lawsuit was announced Thursday evening. For the year, shares have declined 15% as the S&P 500 Index SPX, +0.00%  has gained 9%.

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