by Amber Pavucsko, Staff Writer
In April 2022, Elon Musk announced his plans to purchase the social media company Twitter for 44 billion dollars.[1] However, just three months later, he backed out of the deal stating that Twitter failed to give enough data to determine how many accounts were fake or spam.[2] Twitter subsequently sued Musk to enforce the agreement.[3] After a tumultuous six months and before the suit was set to go to trial, Musk completed the takeover in November and began instituting several changes to the structure of the corporation.[4]
Under a merger agreement, the entirety of Twitter’s nine-member board of directors was ousted and Musk became the sole director.[5] Musk also fired top executives including the chief executive officer, chief financial officer, a legal and policy executive, and general counsel.[6] Musk’s ownership of Twitter, and position as CEO and sole director, raise issues of corporate governance for a large social media company operating with little oversight.[7]
As a corporation grows in numbers so too does its board of directors.[8] The board will generally be made up of a diverse group of individuals who are deemed independent.[9] Now that Twitter is privately owned, it is not required to have a specific number of independent directors.[10] Musk can make decisions about the company without pressure from investors, though there is still pressure from creditors who funded the deal.[11] Musk stated that he believed “the company should be private to go through the changes that need to be made.”[12] By going private, Twitter can focus on executing decisions quickly and focus on a long-term mission as opposed to swings in stock price.[13] It is also less restricted by regulations and required disclosures to regulatory agencies.[14] Additionally, as Musk has alluded, independent directors do not own stock and therefore their “economic interests are simply not aligned with shareholders.”[15] By being the owner of Twitter, Musk has a deep financial interest in making the company profitable.[16]
On the other hand, as a private company, Twitter lacks the same rigorous oversight that public companies are required by law to have.[17] Half of the directors on the boards at public companies must be independent.[18] These independent directors oversee, among other things, the hiring decisions of the CEO and the CEO’s performance, audits, numerous disclosures, and setting executives’ compensation.[19]
As the sole director, Musk has considerable control with little oversight. Normally, decisions that impact the entire company are reviewed by a board of directors. But with Musk as the sole director and CEO, his decision to lay off 50% of staff does not go through the same oversight.[20] Musk’s promises for less restricted speech on the platform had the unintended consequence of “a dramatic uptick in hate speech,” and many companies paused their advertisements on the platform.[21] After the pause, Musk declared a “thermonuclear name & shame” against the advertisers that stopped using Twitter.[22] The pause has only continued as advertisers are worried about brand security and having an outlet to raise their concerns.[23]
Moving forward, Musk will be required by law to have a board of directors.[24] However, in the meantime, both users and regulators are concerned about how Twitter will continue to monitor and measure risks associated with the platform.[25] Particularly, Musk’s decision has brought about Congressional scrutiny for removing misinformation and data privacy safeguards.[26] Therefore, having robust oversight, such as employing a majority of independent boards of directors, can safeguard against issues of corporate governance.
[1] https://www.wsj.com/articles/musk-ousts-twitter-board-named-sole-director-11667234297.
[2] https://www.wsj.com/articles/elon-musk-twitter-trial-delaware-court-11661809622
[3] Id.
[4] https://www.wsj.com/articles/elon-musk-completes-twitter-takeover-11666918031
[5] https://www.wsj.com/articles/musk-ousts-twitter-board-named-sole-director-11667234297; https://www.sec.gov/ix?doc=/Archives/edgar/data/1418091/000119312522272772/d411753d8k.htm.
[6] https://www.wsj.com/articles/elon-musk-moves-swiftly-to-put-imprint-on-twitter-after-takeover-11666978716
[7] https://theconversation.com/elon-musk-argues-twitter-would-be-better-off-in-private-rather-than-public-hands-corporate-governance-scholars-would-disagree-181382
[8] https://www.snopes.com/news/2022/10/06/elon-musk-argues-twitter-is-better-off-without-a-board-of-directors-is-he-right/
[9] Id.
[10] https://corpgov.law.harvard.edu/2022/05/23/private-company-boards-need-outside-directors
[11] https://www.nytimes.com/2022/10/28/technology/twitter-changes.html
[12] https://www.sec.gov/Archives/edgar/data/1418091/000110465922045641/tm2212748d1_sc13da.htm
[13] Musk has stated that: “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders.” “I fundamentally believe that we are at our best when everyone is focused on executing, when we can remain focused on our long-term mission, and when there are not perverse incentives for people to try to harm what we’re all trying to achieve.” https://www.nytimes.com/2018/08/07/business/tesla-stock-elon-musk-private.html
[14] https://www.nytimes.com/2022/10/28/technology/twitter-changes.html
[15] https://www.snopes.com/news/2022/10/06/elon-musk-argues-twitter-is-better-off-without-a-board-of-directors-is-he-right/
[16] See https://www.forbes.com/sites/robertzafft/2022/11/01/elon-musk-hail-to-the-chief-twit/
[17] https://theconversation.com/elon-musk-argues-twitter-would-be-better-off-in-private-rather-than-public-hands-corporate-governance-scholars-would-disagree-181382
[18] Id.
[19] Id.
[20] See https://fortune.com/2022/11/07/former-election-team-manager-elon-musk-layoffs-midterms-concern/
[21] Id.
[22] https://www.businessinsider.com/elon-musk-threatens-companies-pausing-twitter-ads-2022-11
[23] https://www.axios.com/2022/11/06/musk-twitter-marketers-advertisers-brands; https://www.theverge.com/2022/11/7/23445476/elon-musk-twitter-user-growth-all-time-high-advertisers
[24] https://www.nytimes.com/2022/10/28/technology/twitter-changes.html
[25] See https://www.washingtonpost.com/politics/2022/11/14/musk-brushes-off-early-twitter-scrutiny-congress/
[26] See id.
