What's Next for Elon Musk After Judge Voids Tesla Pay Package

1. 0:00 – 1:24

   Delaware judge voids Musk’s $55B Tesla pay package

   1. KSKara Swisher0:00

      Elon Musk suffered a major loss in a Delaware court this week when a judge voided his $55 billion compensation package from Tesla. Uh, Judge Kathaleen McCormick, uh, called the compensation, quote, "An unfathomable sum," and it was unfair to shareholders and the process leading to its 2018 approval was deeply flawed. When you read through the documents, it really, (laughs) it was such a back-scratchy situation among the board members, who are all friends of his. Um, apparently one of them cried how, how much he loved Elon o- on it, which was kind of disturbing. Uh, Elon responded to the ruling on X, posting, "Never incorporate your company in the state of Delaware." Too late, Elon. And also, you should have had, uh, stock that ha- puts you in contro- control of the, uh, dual-class shareholders, which you didn't do either. Um, so too bad. You know, that w- if you had a time machine. Um, were you surprised by the ruling, first of all? The judge, let me, gives you more facts. The judge ordered Tesla to cancel the stock options award to Elon valued at about 51 billion, which is where most of his compensation is. Tesla's directors now have to figure out a new compensation plan that passes legal muster and keeps Elon happy and does it at an arm's length, which is, good luck with that, 'cause this board has shown itself to be a giant rubber stamp for Elon Musk. Um, we haven't heard if he's gonna appeal, but after a poll on X, he's now saying Tesla will hold a shareholder vote to incorporate in Texas. Um, h- uh, anyway, what does the ruling mean for Elon's quest to get that 25%?

2. 1:24 – 2:20

   Why this ruling is rare: courts almost never unwind CEO comp

   1. SGScott Galloway1:24

      I've never, I've never heard of this happening or seen it happen. The fact that I've been on compensation committees of boards, I've never had a shareholder lawsuit against the compensation, the schematic you put in place. But to have a shareholder lawsuit, I've heard of them. Like Martin Sorrell had, uh, shareholder lawsuits constantly around his-

   2. KSKara Swisher1:42

      Yeah.

   3. SGScott Galloway1:42

      ... compensation.

   4. KSKara Swisher1:43

      Mm-hmm.

   5. SGScott Galloway1:43

      But to have it rejected... I mean, effectively, the shareholders decide who the board is.

   6. KSKara Swisher1:49

      Mm-hmm.

   7. SGScott Galloway1:49

      And so if the shareholders, uh, decide who the board is, who decides the compensation, then technically the owners of the company have decided, you know, what, what he or she gets. I'm not a... I don't believe you should limit compensation. I think we live in a capitalist society, and I don't like the idea. I, I do believe that we should have a more progressive tax structure. But anyways, that's another talk show. But this effectively says that this board is so incompetent and so conflicted that any decisions they make might not hold up in court because of the conflicts here. Even if you read the ruling,

3. 2:20 – 2:50

   Process over price: conflicts and weak justification sink the plan

   1. SGScott Galloway2:20

      it, it, they talk about the size of it, but what they talk about is the conflicts and just how, uh, poor the rationalization was for giving him this. 'Cause as much as the compensation was, I mean, just to, just to be fair and try, try and call balls and strikes, him getting incr- an incremental 50 billion if he increases the sh- value of the company 500 billion, that's, that's not... I've seen compensation, uh, plans that on, you know, I mean, it's exceptional, but on a proportionate size or percentage

4. 2:50 – 4:25

   Musk’s response and ‘move to Texas’ threats meet corporate reality

   1. SGScott Galloway2:50

      of value increase, it wasn't outrageous. What this says is, you know what's gonna end up happening here? Uh, h- he's not gonna be able, uh, to reincorporate all this, all these threats, all these jazz hands, all this fake-

   2. KSKara Swisher3:02

      Can you do that? Uh, when I was reading that, I was like...

   3. SGScott Galloway3:04

      I'm not sure you can. I don't-

   4. KSKara Swisher3:06

      Mm-mm.

   5. SGScott Galloway3:06

      Um, you know, uh, b- I should have just said right off the bat, um, I don't, I don't, I don't know. But the no- the notion that... And then he's just, he's just so ridiculous. He says, he, he said, "I want to meet with shareholders and convince them to divest from Tesla or any of its companies ever. They are not welcome." Well, Elon, I don't know if you've heard or you understand corporate structure.

   6. KSKara Swisher3:28

      Mm-hmm.

   7. SGScott Galloway3:28

      But CEOs serve at the luxury of shareholders, not vice versa.

   8. KSKara Swisher3:32

      Mm-hmm.

   9. SGScott Galloway3:32

      You don't get to decide (laughs) who your shareholders are. The shareholders-

   10. KSKara Swisher3:34

       Yeah.

   11. SGScott Galloway3:34

       ... get to decide what CEO they want.

   12. KSKara Swisher3:37

       Yeah. Mm-hmm.

   13. SGScott Galloway3:37

       And if... Did you see the movie, did you see Pulp Fiction?

   14. KSKara Swisher3:41

       L- long time ago. Yeah.

   15. SGScott Galloway3:42

       Well, th- there's a scene in it where I think this him, this, this great actor, Ving Rhames, Ving Rhames maybe?

   16. KSKara Swisher3:47

       Yeah, Ving Rhames. Yeah, he was in-

   17. SGScott Galloway3:47

       He is-

   18. KSKara Swisher3:48

       ... it on Mission Impossibles, yeah.

   19. SGScott Galloway3:49

       Yeah. I think he is knocked unconscious. Uh, they put a gag ball on him, and they rape him.

   20. KSKara Swisher3:54

       Oh.

   21. SGScott Galloway3:54

       He had much more domain and dignity than this board has right now. This is, this board has been-

   22. KSKara Swisher4:01

       Wow. (laughs)

   23. SGScott Galloway4:01

       ... just molested.

   24. KSKara Swisher4:02

       It's a visual. (laughs)

   25. SGScott Galloway4:03

       They should show up to the next annual meeting with a gag ball because that's-

   26. KSKara Swisher4:08

       Yeah.

   27. SGScott Galloway4:08

       ... they are... (laughs) I, uh, the fact that a court has said, "You are so incompetent and so conflicted and you are such terrible fiduciaries for shareholders that we're gonna re- just reject this compensation," somewhat because of the size of it, but just because this board-

5. 4:25 – 5:46

   How Tesla’s board got here: extreme coziness and lack of independence

   1. KSKara Swisher4:25

      It wasn't the size. I, I have to sell, uh, uh, you know, 'cause y- you could, uh, make an argument that he deserves it. See, it wasn't how-

   2. SGScott Galloway4:30

      That's right.

   3. KSKara Swisher4:31

      ... the number they got to. Um, you certainly could make a cogent argument he deserves it, it's a lot of money, but still.

   4. SGScott Galloway4:36

      That's right.

   5. KSKara Swisher4:37

      Um, uh, but the, the, the details, like the going on vacation, one of them, uh, I think Antonio Garcia's, they're best friends. The brother is on there. Uh, one s- one of them was a CFO and he cried 'cause he loved Elon so much. I mean, you cannot do... There's no independence a- among any of these people, you know, on this board. And so just was a hands... You know, it's, you're supposed to have... Uh, I mean, boards are cozy, let's be honest. Come on. Like, you know that. Like, they're very cozy with the CEOs and tend to give the CEOs what they want. But at least they have, they pretend that they're not doing quite this. And so th- it, it, it's so bad, it's th- and which is, this is something we've just talked about without any particular knowledge. It's so obvious it's a rubber stamp of a board. They don't stop him from doing damage via his tweets, they didn't control his, um, behavior. They may worry about his drug use, but they don't do anything about it or don't think they can do anything about it. So this is just another... This is the least, the least surprising thing that their pay package was done, uh, you know, by Elon essentially. Elon wrote it and then they rubber stamped it, right?

6. 5:46 – 6:30

   Appeal path and the ripple effect: Musk’s other compensation demands

   1. SGScott Galloway5:46

      Well, the Delaware Chancery Court, he gets to appeal to the Supreme Court of Delaware. It'll get, uh, they will, they will uphold, uh, I think Chancellor McCormick's recommendation. But I mean, this comes on the heels of him deciding that, threatening the board that if they didn't give him $75 billion, didn't give him $75 billion in additional compensation-

   2. KSKara Swisher6:05

      He's still doing that, yeah.

   3. SGScott Galloway6:06

      ... he was gonna steal the IP from the company and start his own (laughs) i- company.

   4. KSKara Swisher6:09

      Hm.

   5. SGScott Galloway6:10

      The, the, the board-

   6. KSKara Swisher6:12

      This board.

   7. SGScott Galloway6:12

      ... th- the, the Delaware Court has said, "Your board, (laughs) your board is incompetent." What, what ultimately ends up happening here though-I mean, all the threats and the jazz hands around moving to, moving to Texas, he's gonna have to replace the compensation committee and get someone to lead the compensation committee who has some credibility.

7. 6:30 – 7:21

   Reincorporation risk: moving to Texas could trigger new investor lawsuits

   1. KSKara Swisher6:30

      And also doesn't want to be lawsuit... There's a, there's a story from Reuters about this that said, "Legal experts said Musk would almost certainly be sued by investors if he tried to move the state of incorporation to Texas, particularly if it was seen as a move to secure his pay package rather than-"

   2. SGScott Galloway6:43

      Yeah.

   3. KSKara Swisher6:43

      "...obtain some benefits for Tesla."

   4. SGScott Galloway6:45

      For those shareholders.

   5. KSKara Swisher6:45

      It's so-

   6. SGScott Galloway6:46

      (laughs)

   7. KSKara Swisher6:46

      ...it's so in plain sight. Uh, "Elon Musk's plan to change Tesla's state of incorporation to Delaware, Texas, is typical behavior for an entrepreneur who always looks for an alternative if he can't gets what he wants. Um, shareholders need to take a hard look at how transitioning out of Delaware might impact their rights and the company's governance." These shareholders aren't going away. Um, y- you know, and, and this is the same judge who (laughs) oversaw the lawsuit, um-

   8. SGScott Galloway7:09

      Twitter, yeah.

   9. KSKara Swisher7:10

      ...with, with the Twitter. He had to buy it. This judge is showing him, um... He's looking for a nicer judge, right? Uh, in Texas. Um-

   10. SGScott Galloway7:19

       Or maybe his brother could b- get on the Chancery Court of Delaware.

   11. KSKara Swisher7:21

       Yeah. Yeah. Yeah.

8. 7:21 – 8:42

   Fiduciary duty explained: what boards owe the other 85%

   1. SGScott Galloway7:21

      I mean, at the end of the day, I, I love the term fiduciary.

   2. KSKara Swisher7:26

      Yeah.

   3. SGScott Galloway7:27

      And fiduciary is very simple. When you, wh- when you get to a point in your life where you're worried about, uh, all right, once I'm sick, once I die, I need someone to represent my interests. And so you appoint a fiduciary for your estate. And it's a wonderful term, and one of our abilities as a, as humans, as a species, is we can trust other people to serve our interests, maybe when it doesn't serve their own, 'cause they agree to be fiduciaries. And boards are supposed to be fiduciaries for all stakeholders. And I think he owns about, I don't know, 12 or 15% of the company, which means that they are supposed to represent the other 85%. They're supposed to represent the community, they're supposed to represent national security. And this board is... I, I mean, th- they're just horrible fiduciaries. They have absolutely... They represent or have tried to represent one stakeholder and one stakeholder only, and Delaware has just said, "You, when you're a public company and you sell shares to retail investors, you have certain obligations." And this board isn't living up to it. He's... Uh, all roads lead to the same place. He is going to have find, thread a needle between, by finding someone credible who also he thinks will do anything he wants.

   4. KSKara Swisher8:40

      Right.

   5. SGScott Galloway8:40

      And those two are in direct contradiction with each other.

9. 8:42 – 9:08

   What happens next: rebuild the compensation committee with credibility

   1. KSKara Swisher8:42

      Well, it's not clear that Texas judges will be, roll over, not necessarily. Like, that, it's a big risk. But whatever, he likes-

   2. SGScott Galloway8:48

      No, no, I'm not-

   3. KSKara Swisher8:48

      ...to do this.

   4. SGScott Galloway8:48

      I don't think that's gonna happen. He's not gonna incorporate in Texas.

   5. KSKara Swisher8:51

      Yeah.

   6. SGScott Galloway8:51

      He's not... Uh, all roads lead to the same place.

   7. KSKara Swisher8:54

      65% of companies are incorporated in Delaware 'cause of their law, you know, their friendly, business-friendly laws and stuff.

   8. SGScott Galloway8:59

      He's gonna have to get, he's gonna have to appoint new people to the board who serve on... And one of them's gonna have to serve on the compensation committee, and such that-

10. 9:08 – 9:44

    Why people will still join: power, protection, and D&O insurance

    1. KSKara Swisher9:08

       Ugh, can you imagine? I'd be like, "No, thank you."

    2. SGScott Galloway9:11

       Well, I, I, I actually think he'll be able to... I think there's a lot of people... It's like, no one ever said that anyone would be in Trump's cabinet. I think-

    3. KSKara Swisher9:17

       Yeah, true.

    4. SGScott Galloway9:17

       ...the seduction to be near the seat of power is too huge for people.

    5. KSKara Swisher9:20

       True. Also-

    6. SGScott Galloway9:20

       And-

    7. KSKara Swisher9:21

       ...the threat of lawsuits if you're sh- if you're a d- I wouldn't be a director at that company, save my life. I mean, it's just-

    8. SGScott Galloway9:25

       Yeah, but here's the bad news, Kara, someone who's served on a lot of boards. You get D&O insurance. There's only... Do you realize the people, the people who served on Enron's board, uh, they had to give some of their compensation back? You basically have to murder people to get in trouble as a board member.

    9. KSKara Swisher9:41

       Yeah, I agree.

    10. SGScott Galloway9:41

        You just... They're so protected, and of cour-

11. 9:44 – 10:33

    Governance precedent: retroactive rejection and a message on CEO pay

    1. KSKara Swisher9:44

       That's why this ruling's amazing, don't you think?

    2. SGScott Galloway9:47

       This is... I have-

    3. KSKara Swisher9:48

       That's why, 'cause it's usually-

    4. SGScott Galloway9:49

       I have-

    5. KSKara Swisher9:49

       ...so cozy.

    6. SGScott Galloway9:49

       ...never seen this before.

    7. KSKara Swisher9:51

       So cozy.

    8. SGScott Galloway9:51

       I have never seen a, a, um, a compensation package rejected, and it's, it's retroactive.

    9. KSKara Swisher9:59

       Mm-hmm.

    10. SGScott Galloway9:59

        He's not gonna lose money because he hasn't exercised the options.

    11. KSKara Swisher10:02

        Mm-hmm.

    12. SGScott Galloway10:02

        But not only is he not getting the additional 75 billion he's been trying to blackmail-

    13. KSKara Swisher10:06

        Mm-hmm.

    14. SGScott Galloway10:06

        ...the board from... I mean, there's no way they can give him that money now (laughs) . I mean, they'd look so stupid.

    15. KSKara Swisher10:11

        Yeah.

    16. SGScott Galloway10:12

        He's gonna have to, he's gonna have to appoint something resembling an independent director to the compensation committee. Otherwise, the next comp package is gonna be rejected. This, this chancellor, uh, Chancellor McCormick, I think that's how you refer to her.

    17. KSKara Swisher10:26

        Mm-hmm.

    18. SGScott Galloway10:28

        She's just not impressed by Elon.

    19. KSKara Swisher10:30

        No.

    20. SGScott Galloway10:31

        She's like, "No, I'm gonna look at the law."

12. 10:33 – 12:09

    Musk’s public conduct and legacy: ‘cautionary tale’ vs. visionary builder

    1. KSKara Swisher10:33

       He's attacking her, of course, 'cause she's a woman.

    2. SGScott Galloway10:34

       And I'm gonna-

    3. KSKara Swisher10:34

       Just pushing back on him.

    4. SGScott Galloway10:35

       I'm gonna look at the law, and, and I'm gonna interpret the law. And I need to send a signal to every board, even the board of hot companies with a guy who tweets all day, that they have an obligation to be fiduciaries. This is, this is a good ruling for corporate governance and for other corporations, because CEO pay has accelerated from 27 times an average, uh, worker salary to over 350 in the last 40 years. And some of it is the coziness you talk about. Some of it is just, um, people are more comfortable with people making billions of dollars, whatever it might be. But this is... Yeah, this is... I, I love this ruling, and I think she's fantastic.

    5. KSKara Swisher11:15

       Yeah, she is. She's great. She can... Just, it has a sense of like, "I'm over you. I'm not... I never was under you, but I'm way over you," kind of thing. Um, anyway, we'll see what goes on. He's gonna do his antics, his loud mouth. He's like... How many rules can you just keep breaking and pretend you're a, you know, a, a... You know what drives me crazy? This idea that he's some bold, uh, speaker of truth. Says my wife, that's her expression. He's not a bold speaker of truth. He's just a toddler. He's a badly behaved toddler.

    6. SGScott Galloway11:42

       He is turning into, he's turning into a cautionary tale, 'cause he is... There's just no getting around it. He is a bold, visionary genius when it comes to products and risk-taking. Uh, I think on the whole, he's been good for the world. I wouldn't want to press a button where he just, you know, never immigrated to America. He's gonna be... Uh, you know, you gotta give the guy his due. But he's just totally... He's a cautionary tale.

Episode duration: 12:09