Order striking down Elon Musk’s giant pay package implicates Tesla’s board—and 5 of 6 directors should resign

In a world where the average Fortune 500 CEO makes 350 times the average employee, one might conclude that anything goes. But Musk’s 2018 Tesla pay package exceeded anything previously seen. With a $55.8 billion maximum value and a $2.6 billion grant date fair value, the plan was 250 times larger than the median peer CEO package, and 33 times larger than the nearest comparison—which was Musk’s prior compensation plan.

But size was not the real issue here. Process was. There was apparently no substantive discussion by the board or its compensation committee about the size of the package, no serious evaluation of alternatives, no peer comparison study used to evaluate it. The board claimed to be motivated by concerns Musk might step down, and it probably should have been motivated by the possibility Musk would spend too much time on his many other projects. But no effort was made to tie the exorbitant pay to a requirement that he spend all or even a substantial amount of his time at Tesla.

Then there is the question of director independence. The judge’s conclusion: “Five of the six directors who voted on the grant were beholden to Musk or had compromising conflicts”…most of which were undisclosed. Ira Ehrenpreis, chair of the compensation committee, is a close friend of Musk’s brother Kimball and an investor in his company. Antonio Gracias, a member of the committee, vacations frequently with Musk, has spent holidays with him, and once loaned him $1 million and can’t remember if he charged interest. Robyn Denholm and Brad Buss are dependent on Musk’s companies for most of their net worth. All of them ought to step down in wake of this decision. And as for the one person on the board who appears to be somewhat independent—James Murdoch—the question is: Where was he?

Musk’s assertion that the Delaware court has turned unfriendly to business is absurd. The reason most companies incorporate in Delaware is because the opposite is true. Will this decision change that? I doubt it. Directors of other companies who read this decision will scoff at how ludicrous the Tesla board’s process was, and take comfort theirs isn’t nearly so bad. I’ve always been puzzled by the meaning of the phrase “the exception that proves the rule,” but this may be an example. The only lesson here is that Tesla’s board operates in a different universe, and needs to be brought back to earth.

Other news below

Alan Murray
@alansmurray
alan.murray@fortune.com

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This edition of CEO Daily was curated by Nicholas Gordon.