The biggest risk that will determine Tesla’s fate: Elon Musk himself

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Tesla‘s Model 3 launch highlights the need for a succession plan, especially if the top executives are spread too thin.

As the late-July launch of Tesla’s make-or-break mass-market Model 3 sedan neared, CEO Elon Musk allowed himself an unguarded momenton Twitter: “The reality is great highs, terrible lows and unrelenting stress,” he wrote, momentarily agreeing with speculation that he might even be bipolar, before adding that he didn’t literally mean it. “When you buy a ticket to hell, you can’t blame hell.”

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The moment illustrates that even world-changing entrepreneurs like Musk battle stress. And having an irreplaceable, overstretched founder is a legitimate concern for any fast-growing business if there is no strong team in place as a backup should something happen to the visionary leader.

“When it’s your own money, fine,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “When you take other people’s money or public capital, the obligations change.”

Even so, many of the management challenges Tesla faces as it morphs from a niche automaker into a global renewable-energy one-stop shop apply to less-exalted businesses, from small manufacturers to midsized service companies.

Management experts have a playbook for scaling up management of growing companies, and Tesla is learning similar lessons on the fly. And in some cases the company isn’t there yet, by textbook standards. But the company is taking key steps on its path to growth. Most notably, it has locked and loaded Musk in an incentives-based compensation planthat gives him a low salary, no cash bonus or incentives until he hits targets related to stock price and brings products to market. Tesla also added independent board members in July to diversify its brain trust.

Here are important steps every company should take to ensure there is no disruption in business if something should happen to their most important asset: the visionary founder and CEO.

1. Have a succession plan.

With Musk only 46, Tesla can be forgiven for not planning much for when he’s not around — but Apple‘s Steve Jobs was 49 when he got his first cancer diagnosis, years after he hired his eventual successor Tim Cook as Apple’s operations chief. Life comes at people fast, and business leaders need to prepare more than most people, said Andrew Sherman, a Washington-based partner at law firm Seyfarth Shaw LLP.

“Not doing it not only puts the founders’ families at risk but also people who work there and the whole supplier ecosystem,” Sherman said. A plan can also bridge gaps between baby-boomer business owners and millennials who will help run the business soon, he said.

Musk has said he expects to be around Tesla for years to come. He has even joked about succession, as when he was asked if he would go on a Mars space mission through his SpaceX rocket company.

“I’d have to have a really good succession plan, because the likelihood of death is very high,” he told a questioner after a 2016 speech. “And I’d like to see my kids grow up and everything.”

2. Have key-executive insurance.

If Tesla has coverage on Musk, it’s not disclosed in the company’s annual 10-K report to the Securities and Exchange Commission — or in its yearly proxy statement, which discloses executive pay (Tesla declined to add detail). Experts say that’s OK for Tesla — Musk’s value runs into the billions of dollars, so he’d be all but impossible to insure for what he’s worth. But for more-mortal executives running prosaic businesses, it’s a must.

“It’s usually correlated more with closely held partnerships,” said Stuart Tauber, partner at corporate insurance consultant Meltzer Group.

Key-exec plans can protect either the company or the families of founding partners, Tauber said. If an owner’s family doesn’t want to stay involved in the business, it’s common to buy enough insurance to let surviving partners buy them out. Alternatively, the insurance can pay the company for hiring and paying a replacement, or reimburse for value lost when a partner dies, Tauber said. A million dollars of life insurance coverage can typically be had for about $1,000 a year, with another $5,000 to insure against disability, Tauber said. Policies should also be revisited every few years as roles different executives play in a business change, he added.

3. Put in place a well-rounded executive team.

How well Tesla has done on this is a matter of debate. One sore point is that perceptions of Tesla’s quality has slipped since the initial Model S’s rave reviews — a J.D. Power report this year said fit and finish of recent models isn’t competitive with BMW and Mercedes. (That contradicted a December 2016 Consumer Reports survey that rated Tesla’s customer satisfaction the industry’s highest, a company spokeswoman noted.) Analysts, short sellers and CNBC’s Jim Cramer have also noted Tesla’s propensity to miss production forecasts and push deadlines for new products.

But a fleshed-out management team is essential to business continuity planning if the boss gets sick or injured — and it will keep everyone sane even when the boss is healthy, Sherman said.

Tesla works without a COO, and Musk’s manufacturing knowledge was mostly learned on the job, at Tesla and his SpaceX rocket company, where he is also CEO. (In May 2016, Tesla confirmed it had hired Audi veteran Peter Hochholdinger as vice president of manufacturing.) SpaceX has a president and COO, Gwynne Shotwell, despite being a fraction of Tesla’s size.

Tesla’s investor-relations website only bills three executives — Musk, chief financial officer Deepak Ahuja and chief technical officer JB Straubel — as corporate officers. Combined with Musk’s obsession with getting details right, strains on management have contributed to Musk’s keeping a sleeping bag at Tesla’s factory as production deadlines approach.

That’s a recipe for a stressed-out boss, Sherman said, though many companies don’t specifically have a COO. One point of being the boss is being able to enjoy success — including taking vacations sometimes, knowing the business works when the CEO’s away, Sherman said.

“I intend to be actively involved with Tesla for the rest of my life,” Musk said earlier this year. “That doesn’t mean I should be CEO forever. I think my main — the most valuable thing I could contribute — is kind of product design and technology, but that’s my forte; that’s what I like doing, and that’s what I imagine doing in the sort of very long term.”

4. Communicate the plan to everyone on your team — employees, customers, investors and lenders.

Even Tesla admirers give the company relatively low marks here. “I don’t have any notion of how their bench strength is,” said Theodore O’Neill, an analyst at Ascendiant Capital Markets. “It would be better for them if they were more transparent.”

At Tesla, lack of clarity about the team leads to Musk facing questions about management turnover, which he said on Tesla’s second-quarter earnings call is less than at comparable companies. (The question came amid departures, including the company’s former chief financial officer and the head of its autonomous-car research effort.)

Many companies put off this planning and communication and even get away with it. By most measures, Tesla has — it’s built a $60 billion market cap and is expected to boost sales next year to $20 billion as Model 3 production scales up, from $11.8 billion in 2017. “People with car experience have been pooh-poohing Elon Musk for 15 years and been proven wrong,” O’Neill said.

But at big companies like Apple, down to more mundane businesses that turn to lawyers like Sherman, careful planning lets workers and partners breathe easier and plan their own futures.

“It’s a good governance approach that also pays cultural dividends,” Sherman said.

— By Tim Mullaney, special to CNBC.com

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