Elon Musk’s ‘bonehead’ moment shows tensions between visionary CEOs and short-sighted shareholders
Stephen Vines says it’s hardly unusual that an entrepreneur like the Tesla and SpaceX CEO would clash with investors, who have become conditioned to expect near-term reward in their dividend payments, while Musk wants to invest in the future
There was something rather magnificent or maybe simply annoying about Tesla CEO Elon Musk’s explosion during the latest quarterly earnings call when he castigated an analyst for asking “boring, bonehead questions”.
The analyst wanted to know whether Tesla would be seeking to raise more capital, an arguably reasonable concern as the company is burning through US$1 billion per quarter with the prospects of profitability somewhere on the far horizon.
Musk’s response triggered an equally explosive response in the stock market, causing Tesla’s share price to plunge by almost 6 per cent in a single day.
— Reuters Top News (@Reuters) May 3, 2018
So, what’s happening here? Musk, a visionary, who made the launch of electric cars a commercial reality and has now set his sights on space travel, is a big-picture guy. He is impatient with pesky analysts who want to see a rapid return on investment and are far more interested in the financials than they are in the vision.
Were it the case that Musk was all vision and no commercial sense, the calculator wielders might have a better point. However Musk has already delivered some stylish vehicles, which are in high demand – so high that Tesla’s current production problems with a new, cheaper model are frustrating many potential customers.
There is another qualifying point here, which is that unlike most of the other promising, but slow to get off the ground start-ups (Amazon comes to mind here), Tesla has heavy capital requirements because vehicle production requires a great deal of costly plants and machinery.
Musk is frustrated because market folk are focused on the share price and possibly dividend income, while he is focused on the long term and believes that what can be created in this longer term should not be at the mercy of those whose sole interest is short-term gain.
This struggle between the interests of shareholders and the companies they invest in is hardly new and manifests itself in a number of ways.
One of the most damaging is the pressure that shareholders exert for bigger dividend payments, payments that deprive corporations of the cash they need for investment. In this context, it should be noted that Japanese companies, which became world famous, traditionally offered minimal dividends on the grounds that money earned needed to be ploughed back into new products. They were fortunate that Japanese investors fully appreciated this point of view and were vindicated over time.
Nowadays stock markets are gripped by the conflicting pressures of excessive excitement over hi-tech shares and unrealistic expectations of easy money flowing from their investments. Unsurprisingly, the casualty rate among hi-tech stocks is high, but then again, so is share price appreciation.
Somewhere in all this the old adage of “high risk, high reward” has been forgotten and investors seem to be expecting low risk for high reward. That ain’t going to happen.
In an ideal world, public companies might take the view that their share price is of no relevance because once the shares are in the market, the capital has been raised and a higher or lower share price changes nothing. However, company bosses tend to obsess over the value of their company’s shares, especially in Hong Kong, where they are also the biggest owners of these shares.
Further, precisely because they are public entities, this entails giving equity holders rights and a legitimate interest in the way their companies are run.
The problem comes when that interest is limited to no more than the share price and dividend payments.
No wonder Musk is frustrated. His bigger picture is one where patience needs to be exercised but where, at least as he sees it, every setback is seized upon without any recognition that pioneering forms of endeavour inevitably encounter problems.
Many entrepreneurs shun stock markets because they do not want to be beholden to the whims of shareholders and, although this sounds paradoxical, they have less interest in the financials than they do in the products. I have known many entrepreneurs who take the view that the financials will sort themselves out in the long run as long as their products can be successfully developed. Sometimes, this relaxed attitude to the bottom line can prove to be fatal.
But the bottom line is of widespread concern in stock markets and the markets can be cruel in dishing out judgment and punishing companies that fail to meet expectations generated by the kind of analysts who encountered Musk’s wrath last week.
Musk might be better off heeding the advice of a veteran company boss who told me that he was every bit as “enamoured” by the “wise” thoughts of market analysts as they were by his caution but never felt the inclination to mention this when meeting them.
Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster