Almost everything Elon Musk does these days makes headlines. The battle over his 2018 stock option package not long ago is no exception: After the Delaware Court of Chancery, which has jurisdiction over Tesla, invalided his monster option package from 2018, Tesla shareholders voted to give it to him anyway.
Most of the press covered this story as another case of corporate excess and neglected the bigger story it pointed to: that America urgently needs bold leadership and a clear strategy in the electric vehicle sector. The U.S. risks falling behind if we don’t get our act together while other nations—and in particular China—race ahead. A strong, forward-thinking approach is crucial not only for maintaining U.S. leadership but also for combating climate change effectively. But corporate financialization—the obsessive focus on shareholder value and personal gains—threatens investment in the productive capabilities that enable crucial innovation. Financialization has turned many an American powerhouse into a shadow of its former self: see Intel, IBM, General Electric, and Boeing, among others.
Will Tesla be next?
While Musk seeks to stave off corporate raiders by amassing enough shares to block their advances, his own leadership remains in question. Economist William Lazonick offers insights into what’s happening at Tesla and why it matters for our future.
Lynn Parramore: Musk has been making headlines since the presidential debate, and not for good reasons. First, the tweet sexually harassing Taylor Swift, then the “joke” about the assassinations of Biden and Harris. Yet this is the same guy who has managed to run highly successful companies. What’s your view of this contradictory figure?
William Lazonick: His tweets are really a problem, but yes, he’s had tremendous success. Obviously, he has hired lots of people to do lots of things, but he’s the one who had the judgment to hire them. Tesla is impressive, and SpaceX is even more amazing. It broke barriers in terms of just cheapening the cost of making rockets. Reliable rockets, reusable rockets, and stuff like that. No doubt, Musk is kind of obsessive, but this recent stuff is very concerning, for a guy running a public company to be doing this.
LP: And this is a very critical time for Tesla. Can you say a little about the state of play with electric vehicles?
WL: It’s been clear for a long time that the Chinese were going to develop electric vehicles. Tesla certainly, through its success, has speeded that up. It was really a stroke of genius for the Chinese to allow Tesla in 2019 to be the first foreign car company without Chinese partners to come into China and start manufacturing them there because it pushed Chinese companies like BYD, NIO, Geely, and others to speed up the electric vehicle transition. Tesla revved up the market, creating much more interest in electric vehicles.
Tesla’s profitability has a lot to do with all the cars it’s selling in China. Tesla had known since 2018 – we can discuss why in a bit — that it was on the cusp of mass-producing an affordable EV, and once they got into China, that sealed the deal in terms of being a global leader.
But a company like BYD is extremely well-positioned to respond. It started out as a rechargeable battery maker for various devices and then got into cars in 2003. It manufactures its own innovative batteries, which is something that Tesla doesn’t have. It can now produce a car in China for $10,000. Tesla will never be able to do that. Those cars might sell abroad for $20,000.
BYD is capturing a huge share of the global EV market.
LP: So the competition is really out there now.
WL: Yes. Tesla’s strategy was to first produce very high-end cars to get brand name recognition and accumulate learning to set the stage for a high-end, mass-produced car, which was a Model S, which began deliveries in 2012, and then transition to the more affordable Model 3, starting in 2017.
That was Musk’s strategy from the beginning. I think Tesla sped up the electric vehicle transition by several years. Tesla also built its own supercharging network, which makes it possible for many car buyers to choose a pure EV. (Although China has a far bigger charging network than the United States).
But basically, the transition to electric vehicles is on, and it’s going to be about smaller or regular-sized cars. Right now, Tesla is the global leader. So then you have to consider, who’s making decisions for the electric vehicle transition and what does that mean for its future? What does it mean to have Elon Musk deciding Tesla’s strategy, organization, and finance going forward?
LP: Musk has been concerned about hedge fund activists moving in to take over Tesla. What’s going on?
WL: After Tesla was founded in 2003, Musk came in quickly in 2004 and put in some of the initial money to develop and manufacture the Roadster, which they started selling in limited numbers starting in 2008. Then, after rounds of venture finance, Tesla wanted to go public in order to raise more money and did its IPO in June 2010. Musk realized, however, that success might mean that hedge fund activists could come in, change the board of directors, kick him out, and grab the profits. Back in 2003, the SEC had sanctioned changes to the proxy voting system, which gave hedge fund activists more power to loot companies.
With the changes, if you were a hedge fund activist and had a few billion dollars that you could invest in a company’s stock — and it might only be 1% of the company’s outstanding shares – you could line up the votes of the institutional shareholders, with help from proxy advisory firms Glass Lewis and ISS to endorse your strategy and change the board of directors. Or you could convince some of the existing board members that they should side with you, not with the CEO. Or you could just get the CEO quaking in his or her boots and get them to go along with whatever you wanted. There were cases of CEOs being forced to resign at the pinnacle of their careers.
LP: And as you’ve shown, once the hedge fund activists – the corporate raiders - get hold of a company, they often start focusing solely on extracting value for themselves by jacking up the company’s stock price through shenanigans like stock buybacks, cutting jobs, suppressing wages, and price gouging.
WL: Right. So Musk was saying, if I’m going to put all my work into building this company, I don’t want to be kicked out by corporate raiders (whom he would later call “dubious interests”) once we go public.
LP: And Musk had a clever strategy for defending himself from hedge fund activist takeovers.
WL: Yes. He amended Tesla’s certificate of incorporation to lower the threshold for blocking such activists, allowing him to be invulnerable to attack with only 33.4% of voting shares instead of the usual 50.1%. Tesla had a very simple certificate of incorporation in 2003 before Musk even arrived. In 2009, as they were preparing to do the IPO, they threw in a bylaw, right at the end, that says that any substantial change at Tesla, including board membership, would need a supermajority of 66.7%.
LP: They sort of snuck it in there.
WL. Yeah. That kind of move has upsides and downsides. If people had confidence in Musk – and at the time he seemed very on top of his game and focused – then potential investors might think it was good that that he couldn’t be kicked out as easily. But there was a downside, too, because the IPO might not go as well if investors did not have confidence in him. But in this case, it seems to have worked out for Musk.
The other thing to know is that Musk was chairman of the board at three specific times in 2009, 2012, and 2018 when the directors awarded him big stock option packages—potentially worth, respectively, 8%, 5%, and 12% of Tesla’s outstanding shares. These option plans were designed not to compensate him, but to give him more shares to increase his voting power, largely contingent on Tesla achieving its goals of producing EVs. In the end, the value of the shares that he has acquired from exercising stock options has made him among the richest people in the world.
It might seem self-serving for Musk to claim, even before Tesla’s success, that he aimed to prevent dubious activist shareholders from gaining influence. This stance also conveniently helps justify the stock option packages that, in combination with shares he purchased for $292 million, have enabled him to beneficially own 20% of Tesla’s shares outstanding if his 2018 options remain intact, and 13% if they don’t.
He deftly used what looked like compensation packages to allocate a substantial proportion of Tesla’s shares to himself.
LP: 2018 was the last time he got one of these big packages that gave him lots of shares. But he hit a legal hurdle.
WL: Right. In 2018, he got a stock option package that turned out to be possibly worth $50 billion (depending on the prevailing stock price when he would exercise the vested options) once the company was successful. At the time he was awarded the package, the grant-date value of the shares was about $2.3 billion, but what was important was not the $2.3 billion, but the fact that he stood to reap 12% of the shares outstanding if, for the shares to vest between 2018 and 2013, Tesla achieved various performance criteria, including car sales. So it wasn’t for a foregone conclusion that he was going to get the shares.
In the United States, performance criteria for the vesting of option grants are unusual. Usually, all you need to do is wait, and if the current stock price exceeds the grant-date price, you exercise your option and realize gains. But with Tesla, Musk had to meet the criteria, and it was done in 12 stages up through 2023. By 2023, almost all the requirements had been met.
The board’s justification for giving him that stock package was that he was running the company well and they wanted him to stick around.
LP: But a Delaware court actually rescinded the package. On what grounds did the court do that?
WL: A guy bought nine Tesla shares and hired a lawyer to bring a lawsuit in the Delaware court, which has legal jurisdiction over Tesla, arguing that the 2018 option package was unfair to shareholders not named Elon Musk.
The court’s decision, handed down last January, was not that the 2018 option package was something that Tesla didn’t have the right to do, but that it was kind of incestuous – the board members weren’t independent, the shareholders weren’t informed, etc. Musk was chairman of the board at the time, so he was granting the options to himself as CEO. As it turned out, in 2019, he was forced by the SEC to relinquish the chairmanship for three years after he tweeted about taking the company private. After that, he decided not to become chair again. Instead, he installed another director as chair, who now has reaped $353 million from her own stock options just by sitting on the board.
LP: Musk went back to his own board and got the package reinstated. Wouldn’t that be a violation of the court’s decision? What’s at stake for Musk now?
WL: Yes, Tesla is trying to get the Delaware court’s decision overturned. Last June, after much campaigning from Musk and his other directors, Tesla shareholders overwhelmingly voted to re-ratify the 2018 stock option package and also change the legal jurisdiction of the company to Texas. Right now, Musk’s lawyers are trying to convince the Delaware court to vacate its ruling that the 2018 option package is null and void. They are trying to convince the judge that problems of insider influence and lack of transparency in the original granting of the package in 2018 have been fixed.
Back in 2018, Tesla was confronted by hedge funds as short sellers who were trying to drive the stock price down. The company still needed to raise money on the stock market at that time to get to the last stage of mass production. Tesla has achieved that goal, and from 2021 through the first half of 2024 recorded $35.8 billion in profits. Now the hedge fund activists could be eyeing those profits, seeking to get Tesla to do stock buybacks to give manipulative boosts to its stock price.
The recent June vote on his option package may have been a signal to the hedge fund activists that Musk can mobilize the small shareholders to support him, whereas it is much easier for the activists to mobilize the institutional shareholders. It’s very hard to get the scattered votes of small shareholders, who own about 40% of the company’s shares outstanding. Tesla created a special website and a campaign to get their votes.
LP: What does all this potentially mean to the future electric vehicles, which are important for dealing with climate change?
WL: Hedge fund activists coming in could do a lot of damage – massive buybacks, big layoffs, price gouging, etc. All the stuff that falls under the umbrella of financializaton and has damaged so many other once innovative U.S. firms.
Musk is actually doing some of that with his layoffs. He’s not doing buybacks, but I could see him doing $30-$40 billion per year if Tesla should become super profitable, averaging, say, $70 billion in profits a year, as Apple had done over the past decade. For one thing, in wasting Tesla’s money to manipulate its stock price, Musk would also be increasing his proportional voting power by taking shares off the market.
Ultimately, the whole system of corporate governance in America is corrupt – not just at Tesla, but in general.
LP: Is Tesla any different from typical cases you’ve been studying?
WL: Yes and no. Companies where all the financialization is going on are companies that used to be innovators, like Apple and Microsoft. Intel gave in to financialization until recently. The asset stripping, layoffs, and other measures that come with predatory value extraction destroy their innovative capabilities.
LP: So Tesla is at a tipping point between continuing innovation and succumbing to financialization.
WL: Yes. It could go in that direction.
LP: Would it be better for Musk to stay?
WL: That’s questionable. If someone put me on the board, I would look for a guy like Pat Gelsinger, who now runs Intel. He’s trying to help the company recover from all its buybacks - $108 billion worth from 2005 through 2020 under the three previous CEOs, who were all finance guys. He’s interested in making the company productive. Tesla has some issues – the EV car market has slowed. They’ve laid off about 14% of the labor force in 2024 – it’s far from clear if that was necessary. If I were on the board, I would question doing mass layoffs on what seems to be a whim. It certainly makes no sense that Musk fired the whole supercharger group – a group responsible for a critical part of their strategy for the EV transition going forward. Getting these high-speed charging stations put in place isn’t easy. It requires intense negotiations and so on.
Then there’s Musk ruining the name of the brand, supporting a president who calls climate change a hoax. One who says we should get rid of all electric vehicles. That’s kind of “bonkers” rhetoric (to use Musk’s own term about a state of mind that might justify his removal as CEO).
From the U.S. point of view, Tesla is a company that got a lot of subsidies, and a lot of support from being in the United States. It’s another one of these critical technologies, like silicon chips, where the U.S. has been a leader, but, with an impetuous, narcissistic, and sociopathic person at the driving wheel, Tesla could quickly fall behind. In this case, there’s a danger posed by the personality of the CEO who exercises strategic control. In that way, Tesla is different from the usual case. No one would say that Tim Cook is off his rocker, although, as CEO of Apple with its $701 billion in buybacks since October 2012, he has directed the greatest looting of a corporate treasury in history.
It’s a serious problem. There aren’t any other companies in the U.S. coming up that could replace Tesla as global competitors in the EV transition. Tesla’s success led the board at General Motors, for example, to downplay the electric vehicle transition. They can see they aren’t going to dominate it, and so they’re making their money from gas guzzlers. They’re busy doing massive buybacks—as Matt Hopkins and I noted in an INET article published in December 2023.
LP: So like it or not, if we want electric vehicles, our fate, for now, is tied to Elon Musk and Tesla.
WL: Yes, as Americans, that is the case.
LP: You’ve advocated for banning stock buybacks, this innovation-killing activity. How do things stand currently in Washington?
WL: Reining in stock buybacks was certainly on Biden’s policy agenda before he became president, but I don’t know about Harris. It is not a topic in the current campaign, although many Democrats in Congress would like to get rid of buybacks. Patience may be a virtue here. Let’s first make sure that Elon Musk’s new buddy who used to occupy the White House does not get back there again.
