As the press continues to focus on whether Elon Musk (pictured) and Mark Zuckerberg will ever trade blows in a cage fight, a battle of another kind is under way for the governance of corporates with “superstar” CEOs.
In the latest round of debate, a leading academic calls on US states to initiate laws that would stop executives such as Musk from insuring their own company directors, and insists that directors and officers (D&O) insurance should come from “independent and disinterested insurers”.
The message comes amid debate on how to provide proper oversight for leaders that appear to achieve extraordinary corporate, political and public influence—or, put another way, “superstar” chief executives.
Two events have raised concern, particularly in relation to Musk. First was the now notorious 2018 tweet by Musk—“Funding secured!”—in which he trailed efforts to take Tesla private. Regulators didn’t like it. They fined him $20m and forced Musk to step down as Tesla’s chair.
However, a claim brought to court by shareholders for losses incurred failed, with a jury finding Musk was not personally liable.
Premiums for D&O insurance for the Tesla board then spiked and Tesla declined to renew, prompting Musk to provide the insurance himself.
Angela Aneiros, a professor at the Centre for Law and Ethics at Gonzaga University school of law in Spokane in the US, writes Musk’s behaviour is a “prime example” of how superstar CEOs “jeopardise corporate governance”, because of obvious conflicts of interest, and argues D&O insurance has a major role to play in ensuring oversight, if it comes from the right source.
“To protect and maintain oversight duties, shareholders and corporations,” writes Aneiros, “states should expand their corporate laws to prohibit directors or officers from personally ensuring the companies they serve—requiring ‘independent and disinterested insurers’.”
Aneiros says one possible option is a law which states: “Any person who would benefit from the purchase and maintenance of insurance provided by a corporation is prohibited from personally insuring the corporation.”
Paying the piper
Aneiros argues that allowing “corporate fiduciaries” to personally insure their board “undermines many of the advantages of having D&O insurance and reinstates the moral hazard problem—effectively hindering directors from carrying out their fiduciary duties.”
She adds it creates a “situation” where a board may have to consider whether to “faithfully” carry out their oversight duties over the very executive providing them with insurance.
Previous warnings about “superstar” leaders have focused on whether they should have dual-class shares.
Some observers caution boards working with superstars may take action late, either when they lose the faith that their chief execs will “outperform”, or when “abusing their power” appears to “exceed” their contribution.
It has to be said that, according to some research, “risk” caused by superstar CEOs is not a major concern of risk officers and board members.
Research by law firm Clyde & Co shows in North America that the chief threat to D&O is cyber risk, followed by legislative and regulatory change and economics. In the UK, climate change figures as a leading threat for D&O.
Though governance surrounding individuals like Musk may be a topic for post-board meeting drinks, the issues it raises currently touch on few companies. That may mean law makers are less likely to get involved, unless they see the companies involved as systemically important.
For that reason, Musk’s brow-raising D&O solution may go unanswered for some time to come.