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Tesla valuation is at an all-time high and its brilliant creator, Elon Musk, recently announced that he had tested positive for COVID-19. It was, luckily, a mild situation. But for hundreds of other executives of publicly traded firms, that has not been the case. Directors of these organizations are now wondering: what are we going to do if our top leader gets very sick and can no longer lead? What’s our roadmap for succession? And why haven’t we got one?
In August 2018, after a tweet saying that he had raised financing to take Tesla private at 20 percent above the current stock price, the Securities and Exchange Commission regulators launched an investigation into Elon Musk. On this report, Tesla’s stock soared. It turned out the tweet to be untrue. The SEC’s lawsuit argued that Musk violated the federal securities laws’ antifraud clauses, which could bar Musk from serving as an officer or director of a public corporation if proved valid. To settle the lawsuit, Musk paid $20 million and decided to have his public appearances supervised by Tesla attorneys. For Musk, the settlement was a win because it allowed him to remain the CEO of Tesla.
There was a conundrum awaiting federal investigators. Forcing Musk to resign as CEO sends a clear warning to other business officers not to make public disclosures that are intentionally false. But removing highly successful CEOs from businesses with no discernible succession plans will hurt shareholders, and could bankrupt the company in the case of Tesla. If there is no smooth transition between top corporate leadership, shareholders, staff and clients are affected.
Even without a pandemic, if there is no strong team, investors naturally worry about start-up companies with irreplaceable founders should anything happen to the visionary chief. After Steve Jobs, its charismatic leader, died of cancer at the age of 56, the stock market was concerned about Apple. Recently, Musk bragged that “even if I were to die, the company (Tesla) would still do really well for a long time.” Despite Musk’s assertion that Tesla could survive his death, the financial reports and board of Tesla regularly recognize this primary risk factor: “We are highly dependent on the services of Elon Musk, our Chief Executive Officer and largest stockholder.”
For transforming the auto-industry, Elon Musk has garnered worldwide attention, and we marvel at his abilities. Obviously, he is closely watched by regulators. But shareholders and consumers are also. Musk deserves praise for his inventiveness, challenging of orthodoxy and courage. But no leader is immune from facing their inevitable exit, particularly when there is so much creativity and value on the line.
Elon Musk Should Learn About Succession Planning By Studying The American Mafia
The American Mafia should be studied by Elon Musk and his Board of Directors to learn about the importance of intentional succession planning. The young, energetic U.S. by 1987, In a series of hearings, New York Southern District Attorney Rudy Giuliani and his staff won over a hundred Mafioso convictions. Eventually, before the trials finished, the head of every single New York City Mafia family would be indicted, in jail, or dead. Such a major expulsion of the entire senior management of the Mafia families would not only cripple, but finish them, one would imagine. However, they continued to survive and even prosper. The Mafia gained approximately $50 billion annually at an estimated expense to the American economy of $18 billion in economic production, according to a 1986 report. The New York Police Department’s 1990 report noted that New Yorkers wagered more than $1 billion annually with NYC families on the Super Bowl. Forty sports-betting outlets that grossed over $300 million a year and profits of $45 million were run by one enterprising NYC Mafioso. By relentlessly following a thoughtful succession planning process, the Mafia guarantees its existence in part. In maintaining their names, companies and consistent money-making schemes, there is massive self-interest. Their succession planning provides legitimate managers like Musk with useful insights to consider and then apply.
With succession plans consisting of deep benches of “made” persons, vetted individuals officially and steadily admitted to the family, the Mafia families survived the legal Giuliani juggernaut. To serendipity, they left none. The five NYC Mafia families were each run by a boss and a boss. There were captains under the bosses who ran teams of “made” men. Each “made” man had a crew of friends, not yet accepted to the family by criminals. Gambling, loan sharking, adultery, union corruption, hijacking, and so on, these crews specialized in a specific vice. Usually, crews retained 70 to 80 percent of their ill-gotten profits and transferred the balance to the captain and superiors who offered bribe-based police security and assisted the families of imprisoned men.
The most popular and loyal “made” men were promoted to captain, and when the current boss died or was incarcerated, the captains typically named one of their own to boss. It was a true meritocracy where only “made” men who were good and moved up. The associates waited years to become “made” men, and only after the nominee for the boss was sponsored by his captain. For the rest of the life of that captain in the mob, that captain then assumes responsibility for the new “made” man.
The System of Meritocracy
The Meritocracy Structure of the Mafia created comprehensive succession plans. During the 1970s, each of the five families at their height may have as many as 500 men and associates “made”. So, there was no lack of future leaders to fill a jailed captain or manager with an empty chair. It was a highly decentralized model of decision making to contribute to the Mafia’s meritocracy succession planning. Each man and his crew determined what heists to commit or whether to lend money to a specific desperate borrower. The captain was also not consulted. Rarely did the supervisor intend crimes. Instead, he maintained family peace and made high-level decisions to promote “made” men to captains. In one way or another, “Made” men who botched their vice were removed, and only those who endured and prospered remained to assume leadership roles.
Contrast Elon Musk and Tesla with the Mafia. CNBC interviewed 35 current and former Tesla employees in 2018, describing CEO Elon Musk as a sometimes-polarizing figure who inspires to an extreme, but micromanages. Musk refuses his people the chance to shine or fail by keeping too many crucial decisions. It becomes more difficult to pick out the high performers from the low performers. It is becoming less predictable to find the next ranks of emerging Tesla leaders. This hampers the ability of Musk to recognize possible successors and schedule succession. High turnover levels within the top executive ranks at Tesla are also said to be shackling Musk’s succession planning. A Los Angeles Times article from 2019 records a 44 percent turnover over a nine-month period of Musk’s direct associates. This compares to Snap, Uber, Lyft, Airbnb, Netflix and Amazon’s average 9 percent direct report turnover over 11 months. Before Rudy Giuliani, Mafia families faced no turnover. In order to accept their unique cultures while securing their security, revenue, and respect, Mafioso wanted to remain in the family. It was only when death or prison interfered that they quit. They were not recruited by other Mafia families. But Musk sees himself, for years into the future, as the sole leader running Tesla. “I will continue to run the company in a way that I think will enable us to make great products that people love, and provide those products all around the world and just kind of complete the roadmap that we’ve laid out, for many years,” Musk said.
We want Elon Musk and Tesla to thrive, but without succession plans and a conscious design, it is not self-evident that it will happen. Tesla is a disruptive company that is forcing major changes in the automotive industry. We hope to watch as Musk helps place a human being on the surface of Mars one day. But Tesla’s survival and sustained growth will only happen if Elon draws some insights on the habits and expertise of mobsters who have much to teach all of us.
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