What should regulators do about Elon Musk, the mercurial chief executive officer of Tesla Inc.?
Mr. Musk is unquestionably an accomplished innovator and a visionary. Perhaps more than anyone else, he has fired up consumer and investor enthusiasm for electric vehicles by building them with dynamic engineering and design élan. Meanwhile, in his spare time, he’s created SpaceX – his own private fleet of rocket ships that seem to bend the laws of physics by executing balletic pinpoint upright landings.
Yet, he’s also a serial miscalculator of delivery targets and profitability. Under his management, Tesla’s assembly line manufactures chaos almost as often and quickly as it bolts cars together. And Mr. Musk has flirted continuously with corporate insolvency, sometimes bending the laws of securities regulation using not-so-upright tweets that seem designed to mislead investors.
Prosecutors at the U.S. Securities and Exchange Commission (SEC) are rightly peeved about this. They don’t give a flying filigree that Mr. Musk is this century’s equivalent of Archimedes, Da Vinci and Edison. There are rules to protect investors and the SEC insists, with appropriate impartiality, that those rules apply to everyone – including influential geniuses.
So, when Mr. Musk falsely mused on Twitter last year that he was about to take Tesla private, the SEC came down hard. The regulator didn’t just extract a pair of US$20-million fines from him and Tesla. It also forced him to resign as chair of the company’s board of directors.
Now, after publicly heaping scorn on the SEC, he’s tweeted what could be a material false statements about Tesla’s production levels while defying an undertaking to have lawyers vet all such communications. The SEC can’t ignore it. Graver consequences ought to follow in order to protect the market. He could be banned from serving as a corporate officer or director of any issuer, including Tesla, for a time. Possibly a long time.
But here’s the conundrum: The world faces enormous environmental and economic challenges. We need inventor-entrepreneurs like Mr. Musk not only to bring forth new ideas for solutions to those daunting challenges, but also to supply the drive and energy required to turn their extraordinary notions into reality.
That rare combination of vision and verve isn’t found in minds rooted to the existing order of things. Fundamentally, it takes a nonconformist mindset to conceive of something that nature and science have never yet managed to produce – and still more audacious idiosyncrasy to find a way to conjure it up.
So, even though the SEC is absolutely right to insist that Mr. Musk must obey the law and pay a heavy price for repeatedly breaking it, the regulator is somewhat misguided if it considers the public interest will be best served by forcing him and his ilk into strict conformity with the law’s requirements and limitations.
It doesn’t make a whole lot of sense to force innovative dynamos out of their companies when they act like the nonconformists we need them to be. The higher good may lie in recognizing that compliance with conventional rules isn’t always best – or maybe even possible – for some purposes.
This principle can be illustrated with a little story about, of all things, fecal transplants. (Believe it or not, they’re used for treating certain intestinal conditions). Years ago, some researchers in this field applied for a grant to buy a few blenders, as their work required them to mix the “donations” they had harvested for transplantation. It surprised the grant foundation’s governors that the application proposed getting simple kitchen blenders off the shelf at Walmart . Doesn’t this require something more sterile, they asked? To which one of the researchers famously replied: “It’s feces. It’s not going to be sterile.”
Tesla might well say something similar. It has embraced a Kennedy-esque call to do the truly hard things necessary to reach a more wondrous future. And its driving force is Mr. Musk. He’s not going to conform to the SEC’s model of a CEO. He can’t do that and still be renegade enough to be a catalyst.
However, no amount of brilliance entitles him to a pass – especially not when his social media ruminations can misdirect and trample thousands of investors so easily. Market integrity is non-negotiable. But what price should we pay to keep it intact? Is it worth stifling innovation that could make the world a better place for those same investors and many other people worldwide?
Perhaps we need to approach the issue by accepting an essential truth about invention: Breakthroughs don’t happen without things getting broken. Sometimes the things that get broken are orthodoxies; sometimes they’re rules and laws. But that’s okay. We can replace the rules and laws, if we’re wise, with new ones flexible enough to accommodate the creative needs of society’s most fertile minds.
That’s exactly what some securities commissions are doing by instituting so-called regulatory sandboxes – notional containment rooms in which fintech startups can build innovative products and services experimentally without first having to jump through many of the legal hoops governing market access and registrable activity.
Maybe we need to broaden that program. Perhaps we should consider similar regulatory light-touch zones for more mature public companies engaged in research and development in any field key to our survival.
Also, let’s consider looking beyond conventional rule makers to foster innovation while protecting investors. Regulators are good at what they do, but they’re not the only people who can take on this task – and they may not even be the best ones to do it.
Why not bring together innovators and investor advocacy groups in stakeholder councils? Let them take a crack at designing practical ways to keep the Elon Musks of this world sufficiently unshackled and investors adequately protected at the same time.
They probably won’t always be able to agree, but where they do, they’ll be positioned to present regulators with working schematics for some of the rules and laws we’ll need to reach a brighter tomorrow.
Meanwhile, maybe someone should do Mr. Musk a favour and just delete his Twitter account.
Neil Gross is president of Component Strategies, a capital markets policy consultancy based in Toronto.