Article 4: Tesla Shares Plunge after Elon Musk Smokes Marijuana during Interview

Word Count: 103

This article by Bowden (2018) discusses the shareholders’ concern about the management capability of the CEO of Tesla, Elon Musk. The concerns could be attributed to several factors- Elon Musk tweeting about taking the company private, the accounting chief resigning within one month of joining, head of the human resource deciding not to re-join the organisation, several other top executives leaving the organisation, and Elon Musk smoking marijuana in an interview on YouTube. The company is facing manufacturing delays, is subject to a federal investigation regarding the earlier-mentioned tweet. These issues have resulted in a sharp decline in the share price of Tesla.

Article 4: Agency Theory

Word Count: 230

The theoretical framework applied is the agency theory which concerns both the agency problem and solution (Jensen & Meckling, 1976, p. 307). Wasserman (2006, p. 963) argued that owners are different from the managers in many firms, with each having their own interests. In a firm, the relationship between owners and agents is based on a contract (Alchian & Demsetz, 1972, p. 782) and this contract governs how the agents manage the business on behalf of the owners. Whilst the agents are appointed to maximise shareholder value, there may be potential conflicts, which can be termed as an agency problem.

Panda and Leepsa (2017, p. 78) argued that the agency problem is not confined to owners and managers (principal-agent problem) as in an organisation there can be different sets of owners- majority shareholders and minority shareholders. The agents are appointed by the majority shareholders and these agents tend to give priority to the interest of majority shareholders at the expense of minority shareholders. In many cases, the majority shareholders themselves act as the managers and since they have high voting power, they can take decisions which benefit themselves, even if adversely impacts the interest of the minor shareholders. The above is particularly true in case of listed firms where a significant power resides with the majority shareholders (mostly the promotor) and minority shareholders have limited saying in matters of management.

Analysis

Word Count: 212

The article is a case of agency problem- principal (shareholders) are concerned about the management capabilities of Elon Musk (agent). However as suggested by Panda and Leepsa (2017), this is not purely a case of problems between principal and agent as 59.5% of the company is owned by institutional investors (Nasdaq, 2019) who seem to support Elon Musk, even if the market (as seen by declining share prices) is concerned about the behaviour of Elon Musk. It needs to be stated that Elon Musk is the largest shareholder of the company directly and through trust funds as well.

Thus, this is a case of problems between a principal (majority shareholders) and another principal (minority shareholders). Manufacturing delays and top executives leaving the organisation shows problems at the leadership level. However, instead of solving these issues, the CEO is occupied with making sensational statements, like taking the company private or smoking marijuana. It might not be illegal but the CEO should have conducted himself in a better manner- A statement from him might be looked at as the official statement of the company, like going private. In addition, him smoking marijuana and talking about the pressure he is under shows that he lacks the management capabilities to run a dynamic organisation like Tesla.

Conclusion

Word Count: 75

The article analyses the agency problem at Tesla: The Company is facing issues like manufacturing delays and the departure of several top executives. However, instead of addressing these issues, CEO Elon Musk has shown irresponsible behaviour- tweeting about taking company private and smoking marijuana in an interview. This kind of behaviour has impacted the confidence which shareholders (principal) have on the CEO (agent), as a result, the share prices have fallen drastically in recent times.
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